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Four Noteworthy Highlights on the Taxation of Fringe Benefits

This article should interest employers that offer fringe benefits to employees in addition to regular pay. An updated IRS publication outlining how employers should tax certain fringe benefits (IRS Publication 15-B) was released on December 26, 2019. Normally, the changes to Publication 15-B consist of little more than updates to certain statutory limits, like the mileage reimbursement rate, but we noticed several changes that could affect a lot of employers. Following is a brief rundown:

Payments to Independent Contractors

Starting with payments made in 2020 (that will normally be reported with a 2021 filing), payments to independent contractors, including regular payments for services and the value of certain fringe benefits, are to be reported on a newly created IRS Form 1099-NEC instead of the IRS Form 1099-MISC. Technically, all payments to “nonemployees” are to be reported in this form, including payments to nonemployee directors and legal services provided by outside counsel. If you handle 1099 reporting in-house, start updating your systems. If you do not, contact that vendor to confirm the vendor will be updating its systems.

Qualified Nonpersonal Use Vehicles

The changes we noticed with the tax-free use of vehicles mainly impact public safety departments (law enforcement, fire, and ambulatory services) that allow employees to take their vehicles home, and schools or other entities that allow bus drivers to take their vehicles home. While the prior version of publication 15-B gave a blanket exclusion to marked public safety vehicles, the current form clarifies that the employer must have a policy in place that prohibits personal use other than for commuting. Unmarked law enforcement vehicles have always been subject to greater scrutiny than their marked counterparts. The current publication adds to the 2019 form, which only required official authorization of personal use, to also require that the use be “related to law-enforcement functions, such as being able to report directly from home to an emergency situation.” The change affecting school buses (and other buses if they can carry at least 20 passengers) seems less drastic by comparison, with the change being a blanket statement that the fringe benefit exclusion “applies only to the driver, not to riders.” It seems that if the bus driver picks up fellow employees, that may be a taxable fringe benefit to the riders unless another exclusion, such as a vanpooling program, applies. Public safety departments that allow marked vehicles to be taken home by employees should adopt policies prohibiting personal use other than commuting. Authorizations for the personal use of unmarked vehicles should clarify the expectation or need for such employees to report directly from home in an emergency situation. Organizations allowing buses to be used for commuting purposes should determine whether the buses are used for carpooling or ride-sharing purposes, and take appropriate actions.

Employee Discounts

This benefit generally arises when an employer provides a product or service to its employees “at cost.” The 2020 Form 15-B clarifies that this benefit can be provided through third parties. Therefore, it appears that if employers reimburse employees for third-party purchases of employer products, that reimbursement may avoid taxation.

No-Additional-Cost Services

This benefit generally arises when an employer provides a service to its employees for free or at a reduced price when the employer does not incur a substantial cost for the service. Free flights for airline employees who “fly standby” and allowing college employees to audit classes that are not filled are common examples of this benefit. We did not notice any drastic changes between the 2019 and 2020 form on this issue, but stress the following commonly misunderstood points: (i) revenue an employer forgoes in order to provide the service to an employee must be considered in determining whether the employer incurred a substantial cost; (ii) while employers can arrange with other employers to provide no-additional-cost services to employees, this is only permitted if neither employer incurs significant costs (which includes the forgoing of revenue); and, (iii) in assessing whether substantial costs were incurred, amounts paid by employees for the service is ignored. For example, while college employees may generally audit classes free of charge if seats are unfilled, they should not be allowed to pay a nominal fee to reserve a seat in the class.

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About this Author

Lowell Walters, employment Lawyer, Carlton Fields

Lowell Walters helps employers minimize their risks while offering meaningful benefits to employees. He minimizes risks by addressing Internal Revenue Code and ERISA issues facing employee benefit plans, including reviewing documents and provider contracts to point out “problem areas;” addressing concerns raised by the employer or another advisor; assisting with the fiduciary obligations of hiring service providers (through RFPs or otherwise); and representing employers whose plans are being investigated or audited by the Department of Labor or Internal Revenue Service. Lowell helps...