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Is There Such a Thing as a Free Lunch?

By Jacob Dean

October 25, 2017

Many of us have heard the stories of life as a Silicon Valley employee -- free food, on-site yoga, arcades, nap pods, pets at work, etc. And while not many of us have experienced a work culture like this, we have (hopefully) all enjoyed workplace benefits to some degree. Whether as the employer or employee, additional "fringe benefits" can be an important part of an overall compensation package and are important in attracting and retaining talent in the workplace. Decisions about such benefits are not made without repercussions, however. Both employers and employees should be aware that fringe benefits may be taxable to individual employees.

 Determining when such benefits are taxable is not always an easy task. The Internal Revenue Code starts with the presumption that all income from any source is taxable. Because fringe benefits are treated as a form of compensation for services, they are therefore presumed to be taxable – unless an exception applies. These exceptions are outlined in the Internal Revenue Code and its associated regulations. Adding to the confusion, however, is that the law contains exceptions to these exceptions. It is easy to see how one can quickly become lost in determining the taxability of common fringe benefits such as: health benefits, adoption assistance, use of athletic facilities, educational assistance, employee discounts, employer-provided cell phones, meals, lodging, and moving expense reimbursements, to name a few. And once an item is determined to be taxable, the question of how much of the benefit is taxable can be as equally confusing. Note that the Internal Revenue Service has published a 32-page manual just summarizing for employers tax issues related to fringe benefits.

This IRS guide highlights the complexity of the issues, but also illustrates another important point. The IRS has published this guide for employers because fringe benefit issues should be of equal (or greater) importance to employers as they are to employees. This is because an employer is responsible for withholding the appropriate amount of tax from its employees’ wages. If an employer ignores the potential taxability of certain fringe benefits, it could face its own tax problems with the IRS for failing to withhold the proper amount of taxes on its employees’ paychecks. Thus employers need to be vigilant in ensuring that they understand and are following the laws relating to these fringe benefits.

So is there such a thing as a free lunch? When it comes to the tax code, it depends. If you have any questions about these rules, please contact one of the tax attorneys at Critchfield, Critchfield & Johnston, Ltd. for guidance.

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