Fringe benefits are paid by the employer to their employee for their performance of services in the form of pay other than money. These fringe benefits are taxable except some fringe benefits that are exempted from taxation as per the tax law. This ‘income-tax on fringe benefits’ is a new tax introduced by Finance Act 2005, with effect from 01-04-2006. The Income tax on fringe benefits shall be levied at the rate of 30%.
Taxable Fringe Benefits
Some of the Fringe Benefits that are taxable are as follows. The expenses incurred in the above cases are taxable.
- Clothing: Clothing provided to employees that are suitable for street wear.
- Awards and Prizes: Cash awards are charged to tax unless they are given to charity. Non-cash awards are also charged to tax unless nominal in value or given to charity.
- Moving expenses: Reimbursement of moving expenses are taxable if an employee moves less than 50 miles.
- Excessive mileage reimbursements: If an employee is paid for expenses (that exceed the IRS Standard mileage rate) incurred on business-related driving in his own car, those Excessive mileage reimbursements are taxable.
- Excessive education reimbursements: If any payments for education that exceed the allowable IRS exclusion are done that are not related to the job, those reimbursements are taxable.
- Working condition fringes: A working condition fringe benefit paid for an employee is tax-free if he uses the benefit 100% for work. If not, he/she must pay tax on the value of any personal use of a working condition fringe benefit. That value must be included in the employee’s compensation. The value of the personal use is determined according to the benefit’s fair market value.
- Example: Mr. Minguk, the owner of a firm, leases a computer and gives it to his employee Mr. Manse to perform design work at home. It is tax-free if Mr. Manse uses the computer 100% for his work. But if he uses it only 50% for work and 50% for personal purposes, he would have to pay income tax on 50% of its value.
Tax-free Fringe Benefits
Compared to taxable fringe benefits there are more Tax-free fringe benefits that are not included in the recipients’ compensation. The fringe benefits that are not taxable are as follows.
- Accident insurance.
- Educational assistance.
- Health insurance (up to a certain amount)
- Health Savings Accounts.
- Dependent care assistance.
- Group term life insurance coverage (limits apply based on the policy value)
- Employee stock options.
- Moving expense reimbursements.
- Lodging on your business premises.
- Achievement awards.
- Employee discounts on the goods/services the employer sells.
- Commuting benefits.
- Supplemental unemployment benefits.
- Qualified employee benefits plans, including stock bonus plans,profit-sharing plans, and money purchase plans.
- de minims (low-cost) fringe benefits such as holiday gifts or low-value birthday gifts, traditional awards (such as a retirement gift), event tickets, coffee and soft drinks, and other special occasion gifts.
- Working condition fringe benefits: Services and property provided to an employee by an employer so that the employee can perform his/her job.
- Cafeteria plans which allow employees to choose among 2 or more benefits consisting of qualified benefits and cash.
The complete information about all the rules applicable to these fringe benefits are in IRS Publication 15-B. Any benefits that are not included in the above are taxable for the employee. For example, meals given to an employee who is required to be away from home overnight for rest are a tax-free fringe benefit. But non-overnight meals do not comply with this rule and are therefore taxable.
Example for Working condition fringe benefits:
One of the common working condition fringe benefits is a company car. If an employee uses a company car for personal driving, the value of that personal use must be included in the employee’s income and is charged to tax. The value of the use of a car is determined by an employer using several methods. The common method is to report a percentage (%) of the cars annual lease value determined by IRS tables. For the complete information regarding these valuation rules, refer IRS Publication 15-B.
Liability to Pay
The liability to pay this Fringe Benefit Tax is to be borne by the employer including
- a firm.
- a company.
- a local authority.
- an AOP (association of persons) or BOI (body of individuals) excluding any trust or fund or institution eligible for exemption under section 10(23C) or 12AA.
- an artificial judicial person.
The Fringe Benefit Tax (FBT) was withdrawn in Budget 2009-10.
FBT which was earlier taxed for employees, has been withdrawn and now the employer will be liable to pay tax on this. Whereby, it will not give any relief to the employees.
After the fringe benefit tax (FBT) has been withdrawn from the Assessment Year commencing from 1st April 2010, the government has shifted the burden of ESOPs (employee stock ownership plans) on individual taxpayers, who may have to pay as much as 30% tax in the highest bracket.