Re-Thinking Fringe Benefits for Your Newly-Remote Workforce? Do You Know Whether They’re Taxable? (The IRS Will…)
While there has been some improvement in the spread of COVID-19 in the US, the daily count of new cases remains high. As a result, many large employers have extended their remote working policies through the fall, with others extending theirs through 2020 or into 2021. Some employers have even given their employees the option to work from home permanently.
With telework likely to continue for the foreseeable future, employers may wish to take a fresh look at their fringe benefit offerings and evaluate the impact those benefits have on remote workers’ productivity and well-being. Whether they simply tweak current benefits or offer brand new ones, employers must determine whether a perk is taxable or nontaxable to the employee.
Improperly classifying a taxable fringe benefit could result in underreporting of taxable wages on the employee’s Form W-2, leading to a failure to withhold sufficient income tax and employment taxes, and, potentially, to the imposition of tax penalties (or worse) on both the employer and its employees.
Background: All Fringe Benefits Are Taxable – Unless They’re Not
First – let’s clarify what we mean by “fringe benefits.” A fringe benefit is any form of pay (including property, services, cash or cash equivalents) an employer provides to employees in addition to their regular salary or wages.
Under the Internal Revenue Code (the Code), unless an exclusion applies, the value of a fringe benefit must be included in an employee’s taxable wages.1 The Code contains exclusions for the cost of employer-provided health coverage or medical reimbursements; certain educational costs; small, infrequent non-cash benefits; on-premises athletic facilities; and various other expenses.2
Fringe Benefits for the Teleworking “New Normal”
When re-thinking their fringe benefit offerings, employers may try to replicate some of the perks they offered before the rapid move to telework necessitated by the COVID-19 pandemic. Alternatively, they may decide new fringe benefits are needed for work-from-home employees.
Virtual Mental Healthcare Services. Stress levels among US workers have surged due to the strain of adapting to new remote work environments while living with the uncertainty and anxiety caused by the pandemic. Given the seeming success of using telehealth services to provide medical care, employers are mulling over whether to offer stand-alone teletherapy services to employees to help them cope with the difficulties of teleworking during the world health crisis.
Taxable or Nontaxable? Nontaxable. Mental healthcare is considered healthcare, and employer-provided health care benefits are nontaxable to employees. Employers sponsoring high-deductible health plans (HDHPs) should, however, consider whether offering teletherapy services will affect employees’ ability to contribute to health savings accounts (HSAs).3
Gym memberships. Employers that provided on-site gyms or other athletic facilities to their employees as a pre-pandemic wellness benefit may wish to pay for gym memberships or virtual trainer services for work-from-home employees.
Taxable or Nontaxable? Taxable. While the value of an employee’s use of an employer-provided on-site gym or athletic facility can generally be excluded from the employee’s wages, there’s no corresponding exclusion for the cost of employer-paid gym memberships or similar online services. The employer’s cost for such services must be included in the employee’s wages.
Private Tutoring or Similar Services. Parents working remotely during the pandemic may be juggling not only their own work responsibilities, but also managing their children’s online schooling routine. Employers may wish to provide working parents with access to private tutors or teachers, or to tutor/teacher referral services, to help ease the dual burdens those employees may be facing.
Taxable or Nontaxable? Taxable. While employers may offer certain educational assistance benefits to employees, those benefits generally do not extend to an employee’s dependents. That said, Code §117(d) does permit nonprofit educational institutions (e.g., colleges and universities) to offer nontaxable tuition reduction benefits to employees and their spouses and dependents. Those benefits do not, however, extend to costs for K-12 education. Further, employer-provided tutoring or other teaching services do not constitute dependent cares services payable under a dependent care assistance program.4
“Good Job,” Holiday or Birthday Gifts, and Similar Items. To bolster remote workers’ morale, employers may consider occasionally providing them with small gifts, such as t-shirts, water bottles, or employer-branded merchandise. (Branded face masks, anyone?)
Taxable or Nontaxable? Probably nontaxable – but be careful. Under the Code, employers can exclude the value of “de minimis” (minimal) benefits from an employee’s taxable wages. For this purpose, a de minimis benefit is any item or service provided to an employee that has so little value (when the frequency of how often such items are provided is factored in) that it would be unreasonable or administratively impracticable to account for it. In that case, the value of the item/service need not be included in the employee’s wages.
The IRS has informally stated that non-monetary awards with a fair market value of more than $100 cannot be de minimis fringe benefits. The IRS has also provided that an employer’s policy of treating non-cash gifts with fair market values of $50 or less might be used as a rule of convenience. The Code does not contain a specific limit for determining whether an item constitutes a de minimis fringe benefit, however. Rather, that determination depends on all the facts and circumstances. Importantly, gifts of cash or cash equivalents (such as most gift cards and gift certificates), regardless of amount, do not constitute de minimis benefits, and must always be included in the employee’s wages.
Subscription Services. In order to help keep remote employees’ morale high and to elevate overall wellness and team cohesion, some employers may be considering giving their work-from-home employees monthly “fun” subscriptions. This might include subscriptions to Netflix, HBOMax, Audible, or other similar services or monthly gift “boxes,” such as Barkbox, Birchbox, Dollar Shave, etc.
Taxable or Nontaxable? Taxable. While these sorts of subscription services may seem like de minimis benefits, employers offering them will need a way of tracking the employees receiving them – e.g., determining whether a subscription has been paid for a month, canceling it for terminated employees, etc. Thus, the employer will need a way of administratively accounting for the benefit. Plus, even if the monthly cost of these subscription services may be relatively low, they’re likely to be fairly expensive (over $100) on an annual basis. As a result, they won’t be treated as de minimis fringe benefits, and their value should be included in the employees’ taxable wages.
(An employer might try to avoid accounting for an annual subscription by giving employees gift cards covering a month or two of a particular subscription service. The employer will run into the issue noted above – gift cards, regardless of amount, generally aren’t de minimis benefits and must be included in an employee’s taxable wages.)
Corporate Discounts. An employer may work with a service provider to offer its employees access to discounts at various retailers, hotels, car rental agencies, amusement parks, movie theatres, etc. In such cases, the employer will pay the provider a monthly or annual fee to curate the discounts offered to employees, ensuring they are for products or services the employees will likely use.
Taxable or Nontaxable. Nontaxable. Although the employer may pay a monthly or annual fee to the service provider, it will not be paying any portion of the discount directly to or on its employees’ behalves. Further, the per-employee cost of providing these discounts will likely be low. Employee use of any particular discount will likely be difficult for the employer to track. Accordingly, offering these sorts of corporate discounts will likely constitute a de minimis benefit excludable from employees’ taxable wages.
Prepared Meals. Pre-COVID-19, employers might have provided employees with coffee, sweets, or occasional parties or other meals in order maintain morale. Similarly, the employer might have purchased pizza for employees working overtime at the employer’s request, etc. Such employers may now be considering sending prepared meals to remote workers to boost the employees’ morale and productivity.
Taxable or Nontaxable? It depends.5 If meals are delivered relatively infrequently, and are of relatively small value, they might be categorized as de minimis fringe benefits (as discussed above), and their value excluded from the employees’ taxable wages. However, even if the cost of the meals is relatively low, if they are delivered regularly (daily? weekly?), the employer may find it difficult to argue that accounting for the meals is administratively difficult. In that case, the value of the meals should be included in the employee’s wages.
As the COVID-19 pandemic rages on, a sizable portion of the US workforce to likely continue to work remotely for the foreseeable future. As they have in the past, employers will use fringe benefits and perks to motivate and retain those workers and enhance their productivity. While the types of fringe benefits may evolve to meet a remote workforce’s needs, employers must properly categorize those perks as a taxable or nontaxable fringe benefits. Failing to do so may result in tax headaches for both the employer and its employees.
1 See Code §61(a)(1).
2 See, e.g., Code §§105, 106, 117, 127, 132.
3 The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) permits (through the end of 2020) HSA-compatible HDHPs to offer cost-free telehealth (including mental health) services to plan members before the HDHP’s annual deductible is met. (Generally, HDHP participants must satisfy that deductible before benefits can be paid by the HDHP.) See our prior articles, here and here, for more information. Employers should consider the impact adding stand-alone teletherapy services may have on their HDHPs after the CARES Act relief expires.
4 See Code §129, discussing an employer’s options for directly (or indirectly) helping employees pay the cost of dependent care.
5 This article was written by a lawyer. At least one answer had to be “it depends.”