7 Tax-Free Benefits for Employees
Employee rewards Uncle Sam can't touch
Tax season sharply reminds employees how much cash Uncle Sam takes from their paychecks - and accounting firm staff are even more aware of this. Many already take advantage of benefits such as tax-exempt health savings accounts, group term-life insurance and even tax-deferred benefits in retirement plans. Some fringe benefits, however, are lesser known for their tax-exempt status. Here, compiled by our colleagues at Employee Benefit News, are seven tax-free benefits that keep cash in employees' pockets, as well may provide attractive deductibles for employers. (Images: Thinkstock)
Employees who fly often on business can earn miles tax-free when they pay with a personal credit card for reimbursed corporate travel. When used as a rebate, the IRS permits employees to exclude frequent flyer benefits from taxable compensation. IRS Announcement 2002-18 specifically states: "This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax-avoidance purposes."
There are three types of non-cash awards from employers that the IRS allows employees to exclude from their income. First, certain employee achievement awards that are part of a "meaningful presentation" are tax-free as long as the gift doesn't appear to be disguised wages. Certain prizes or awards transferred to charities are tax-exempt, as are "de minimis awards and prizes," which are not cash or cash equivalent, of nominal value and provided infrequently.
Under IRS guidance issued in September 2011, tax-free treatment is applicable to cases where employers provide cellphones to employees or where employers reimburse their employees for the business use of their personal cell phones without burdensome recordkeeping requirements. However, the guidance does not apply cellphone use that is not primarily business-related, as such arrangements are generally taxable.
Meals are excludable from employee wages if they are provided on an employer's business premises and for the employer's convenience. Lodging also can be tax-free for employees if it is provided at the worksite, for the employer's convenience, and is a condition of employment.
Even though, through Congress inaction, pretax commuter benefits decreased for the 2012 tax year, employees can still contribute $125 a month tax-free for public transportation, $240 per month for qualified parking, or $365 per month for both public transportation and qualified parking.
Generally, an employee can exclude from gross income up to $5,000 of benefits received under a dependent care assistance program each year. However, the exclusion cannot be more than the smaller of the earned income of either the employee or the employee's spouse.
When an employer pays for tuition or educational expenses for an employee under an educational assistance plan, the costs are excludable from employee wages, if certain IRS requirements are met. Education may be at undergraduate or graduate level and is not required to be job-related. However, an employer must have a written plan, which does not offer alternative benefits to education. The employee cannot receive more than $5,250 per calendar year from their employer. The plan also cannot discriminate in favor of highly compensated employees.