A common way of attracting and retaining physicians is through benefits. Providing a competitive and well-rounded benefits package for physicians can go a long way toward fostering employee engagement. Yet, you want to ensure you know what benefits are considered fringe benefits, and which ones are taxable and non-taxable. Understanding fringe benefits will help you stay compliant for W-2 purposes.

What are Fringe Benefits?

A fringe benefit is any perk or allowance that an organization provides its employees in addition to their annual salary or other wages. Typically, any fringe benefit you provide to your employees is taxable and you must report it on their W-2 unless the law expressly excludes it. Here, we will take a look at the common non-taxable and taxable fringe benefits.

Non-Taxable Fringe Benefits

Tax-free fringe benefits do not need to be included in the employee's compensation. For employees who are not owners of the business, these benefits are not subject to payroll taxes and are not reported on Form W-2. Some examples of tax-free fringe benefits are:

• Health insurance (if part of a Section 125/Cafeteria plan)
• Accident/ Disability insurance
• Health Savings Accounts (HSA)
• Dependent care assistance
• Group Term Life Insurance Coverage – limits apply based on the policy value
• De minimis fringe benefits (low-cost benefits like low-value birthday gifts, event tickets, coffee, and soft drinks)

Taxable Fringe Benefits

Taxable fringe benefits must be reported on the employee's W-2 and are subject to withholding. Here are some examples of fringe benefits that are taxable to the employee:

1. Mileage / Automobiles

Reimbursements to an employee for business-related driving in their car that exceed the IRS standard mileage rate are taxed. If the business provides an automobile that is used by employees or owners, any portion driven for personal use is a taxable fringe benefit.

2. Student Loan Repayments

It is becoming more common for employers to pay off student loan debt to attract and recruit new/younger physicians. The value of the loan repayments made should be added to the provider’s W-2 compensation.

3. Excessive Education Reimbursements

Payment for educational assistance not related to the job or exceeding the allowable IRS exclusion is taxable.

4. Moving Expenses

Moving expenses or expense reimbursements should be included in an employee's wages; they must treat the benefit as compensation and pay tax on the amount received.

5. Employee Gifts & Awards

Employees who get cash, gifts, or rewards from their employer are taxed based on the value of the benefits. The occasional meal, money, or fare to allow staff to work outside of usual hours is excluded. If the company provided any employee discounts in excess of 20% or more for goods or services, the amount in excess of 20% is taxable income.

6. Other

Fringe benefits transferred in cash, such as reimbursement, bonuses for travel, or other expenses, are taxable. Keep in mind an employee must provide adequate accounting for any expense reimbursement, or it will be taxable income.

7. S-Corporation Shareholders

Individuals who own greater than 2% of an S-corporation are subject to different taxable fringe benefit rules. For example, they cannot participate in a Section 125 Cafeteria plan and 100% of H.S.A. contributions or health insurance premiums paid for on behalf of the shareholder are included in their gross compensation and reported on their W-2.

How Lutz Can Help

The rules for calculating and reporting fringe benefits properly can be tricky. For more information on taxable fringe benefits, or if you have questions about your employee fringe benefits, please contact us. You can also learn more by reading our Accounting Guide for Private Medical Practices.