Publication 15 B - Employer'S Tax Guide To Fringe Benefits

Increase in adoption plan exclusion. Beginning with

If the recipient of a taxable fringe benefit is your em-

2002, the amount of payments and reimbursements that

ployee, the benefit is subject to employment taxes and

can be excluded under an adoption assistance plan in-

must be reported on Form W –2. However, you can use

creases to $10,000 for each eligible child. This amount

special rules to withhold, deposit, and report the employ-

also applies to special needs adoptions. For more informa-

ment taxes. These rules are discussed in section 4.

tion, see Adoption Assistance in section 2.

If the recipient of a taxable fringe benefit is not your

employee, the benefit is not subject to employment taxes.

However, you may have to report it on one of the following

Introduction

information returns.

This publication supplements Publication 15, Circular E,

If the recipient

Employer’s Tax Guide, and Publication 15-A, Employer’s

receives the benefit as:

Use:

Supplemental Tax Guide. It contains specialized and de-

An independent contractor . . . Form 1099 – MISC

tailed information on the employment tax treatment of

A partner . . . . . . . . . . . . . . Schedule K – 1 (Form 1065)

fringe benefits.

An S corporation shareholder Schedule K – 1 (Form 1120S)

For more information, see the instructions for the forms

listed above.

1. Fringe Benefit Overview

A fringe benefit is a form of pay for the performance of

Cafeteria Plans

services given by the provider of the benefit to the recipient

of the benefit. For example, you provide an employee a

A cafeteria plan is a written plan that allows your employ-

fringe benefit when you allow the employee to use a

ees to choose between receiving cash or taxable benefits

business vehicle to commute to and from work.

instead of certain qualified benefits for which the law pro-

Performance of services. A person who performs ser-

vides an exclusion from wages. If an employee chooses to

vices for you does not have to be your employee. A person

receive a qualified benefit under the plan, the fact that the

may perform services for you as an independent contrac-

employee could have received cash or a taxable benefit

tor, partner, or director. Also, for fringe benefit purposes,

instead will not make the qualified benefit taxable.

treat a person who agrees not to perform services (such as

Generally, a cafeteria plan does not include any plan

under a covenant not to compete) as performing services.

that offers a benefit that defers pay. However, a cafeteria

Provider of benefit. You are the provider of a fringe

plan can include a qualified 401(k) plan as a benefit. Also,

benefit if it is provided for services performed for you. You

certain life insurance plans maintained by educational in-

may be the provider of the benefit even if it was actually

stitutions can be offered as a benefit even though they

furnished by another person. You are the provider of a

defer pay.

fringe benefit your client or customer provides to your

Qualified benefits. Qualified benefits include the follow-

employee for services the employee performs for you.

ing benefits discussed in section 2.

Recipient of benefit. The person who performs services

•

for you is the recipient of a fringe benefit provided for those

Accident and health benefits (but not medical sav-

services. That person may be the recipient even if the

ings accounts or long-term care insurance).

benefit is provided to someone who did not perform ser-

•

Adoption assistance.

vices for you. For example, your employee may be the

•

Dependent care assistance.

recipient of a fringe benefit you provide to a member of the

employee’s family.

•

Group-term life insurance coverage (including costs

that cannot be excluded from wages).

Are Fringe Benefits Taxable?

Benefits not allowed. A cafeteria plan cannot include

the following benefits discussed in section 2.

Any fringe benefit you provide is taxable and must be

•

included in the recipient’s pay unless the law specifically

Archer medical savings accounts.

excludes it. Section 2 discusses the exclusions that apply

•

Athletic facilities.

to certain fringe benefits. Any benefit not excluded under

•

the rules discussed in section 2 is taxable.

De minimis (minimal) benefits.

•

Including taxable benefits in pay. You must include in a

Educational assistance.

recipient’s pay the amount by which the value of a fringe

•

Employee discounts.

benefit is more than the sum of the following amounts.

•

Lodging on your business premises.

1) Any amount the law excludes from pay.

•

Meals.

2) Any amount the recipient paid for the benefit.

•

Moving expense reimbursements.

The rules used to determine the value of a fringe benefit

•

are discussed in section 3.

No-additional-cost services.

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Publication 15 B - Employer'S Tax Guide To Fringe Benefits - 2002 Page 2

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