When your employer calculates your net pay, you often see several entries for taxes deducted from your gross pay. Your payroll tax deductions are mandatory contributions under the Federal Insurance Contributions Act, or FICA. Your payroll taxes support Social Security and Medicare. This tax is a fixed rate of 7.65 percent of your gross wages. Normally, you won’t pay FICA taxes on most common fringe benefits.
Federal income tax is a second tax deduction you'll always see. The amount your employer withholds depends on your wages and your tax filing status. However, the Internal Revenue Service also requires your employer to withhold federal income tax on some types of fringe benefits.
Common Fringe Benefit Categories
Health and accident insurance, along with life insurance, are common fringe benefits that many employers offer their employees. These benefits might be fully paid by your employer or partially paid by you both. Employers also offer fringe benefits such as tuition reimbursement, fitness memberships, company vehicles, paid flights, vacation trips and entertainment perks, such as concerts and sports events.
Other fringe benefit options depend entirely on the largesse of your employer. Any of these categories of fringe benefits can result in more federal income tax. However, the fair market value of the benefit determines what your employer can exclude from your federal income tax withholding.
FICA Fringe Benefit Exclusions
The IRS excludes employer-provided health insurance from FICA payroll tax deductions.
Your employer can exclude reimbursements to you for $5,000 of your expenses for the care of your dependents, if you needed the care in order to work. Employer tuition assistance, up to $5,250 per year, is another fringe benefit that the IRS excludes from FICA payroll taxes. Life insurance policies with a value of $50,000 or less are excluded too. Amounts greater than the limit are added to your wages and subject to FICA payroll taxes.
The IRS also allows your employer to exclude up to $270 in transportation costs from FICA taxes. The exclusion applies to parking, ridesharing transportation and passes for public transit systems. Use of a fitness center on your employer’s premises and employer-provided business cell phone are not subject to FICA taxes. Your employer can also exclude 20 percent of employee discounts, and this exclusion applies to company products and to employer arrangements with retailers.
Taxable Fringe Benefits
Some employer-provided benefits will not be eligible for exclusion from FICA taxes. Adoption expense benefits that your employer reimburses you for are not included in the FICA exclusion provisions. The IRS does not treat employer-provided stock options as wages. At the time you exercise your stock option, your employer’s valuation of your stock options determines whether you are eligible for the exclusion from FICA taxes.
Income Taxes on Fringe Benefits
Fringe benefits that are excluded from payroll taxes don’t always receive exemptions from federal income taxes. In addition to profit from stock options, your employer might provide you with a leased vehicle for company business. The IRS regulations require your employer to use specific rules to assign a monetary value to your personal use of an employer-provided vehicle. If the value exceeds any available exclusion, your employer must report it as wages on your W-2 form, and it becomes taxable income.
Carol Luther has published feature articles in print magazines, ghostwritten blogs, and produced digital content since 2007. She has published personal finance and small business articles for the Houston Chronicle, Mahalo, the Nest, USA Today, Wahm, and Zacks. Carol has designed, implemented and managed multi-year, multimillion-dollar domestic and international projects services for higher education, nonprofits, and small to medium businesses for more than 20 years.