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As a small business owner, you have the freedom to offer almost any fringe benefit you like to your employees. Many owners find that offering some unusual, special benefits can help to improve employees' job satisfaction and to increase the employees' sense of identity with the business. You may also find that in your particular business, a certain type of benefit will be more valuable than it would be to the average business. For instance, if you are located in a rural area, the ability to use a company car may be very valuable to your workers, while employers in urban areas may find that free public transportation passes are highly desirable.
What is considered a fringe benefit? Almost any property or service provided by an employer to an employee as compensation for the employee's performance of services is considered a "fringe benefit." For example, fringe benefits include the following items:
- an employer-provided vehicle
- a free or discounted commercial airline flight through your frequent flyer miles
- a discount on services or property
- a ticket to a sporting event or other entertainment
- a membership in a country club or social club
Which fringe benefits are taxable? In general, your employees must pay payroll taxes on the value of any fringe benefits you provide in their income unless the fringe benefits are specifically excluded from income under the federal income tax laws.
For example, if you let your sales representatives use a company car for personal purposes, the value of this noncash fringe benefit must be included in the sales representative's wages as part of his compensation.
Except for certain fringe benefits subject to special valuation rules, a general valuation rule is used to figure out how much employees include in their income.
Corporations and partnerships. If you don't have any employees, should you care about fringe benefits? Well, if you have no employees per se, but you do business as a corporation or as a partnership, you may be able to take advantage of some of the deductions available for the fringe benefits that your business provides.
Nontaxable fringe benefits. While you generally must treat fringe benefits as being part of your employees' taxable wages, there are certain fringe benefits that are excepted from this rule. The major advantage to offering the benefits on this list is that you can still take a business deduction for their cost even though your employees (or you, if you're an employee of your own corporation) don't have to pay tax on them. The nontaxable fringe benefits are the following:
- no-additional-cost services
- qualified employee discounts
- working condition fringe benefits
- very minimal fringe benefits
- qualified transportation fringe benefits