What Are Fringe Benefits for Tax Purposes?

For U.S. federal income tax purposes, a fringe benefit is considered a form of pay for the performance of services, and is taxable unless the tax law specifically excludes it from taxation. Persons who perform services include employees, independent contractors, partners, and directors. Fringe benefits could also include payments or other benefits for not performing services, such as under a covenant not to compete, for example.

Provider of Fringe Benefits

The company or person for whom you perform services (your employer or the company that contracts you) is considered the provider of the fringe benefits and is responsible for including the fringe benefits in your compensation and withholding income tax. This is the case even though the benefits themselves may be furnished by a third party, such as an insurance company or health care provider, or one of your employer’s customers or clients, for instance. And, as the person who is performing the services, fringe benefits provided to a member of your family, or other dependent or beneficiary, are taxable to you.

General Rule on Taxability

Fringe benefits are taxable to the extent they are not specifically excluded under the income tax law, and to the extent you do not pay for them. In addition to income tax, fringe benefits are subject to employment, or payroll taxes (social security and Medicare) if you are an employee, unless they are specifically excluded.

Where Fringe Benefits Are Reported

The value of fringe benefits that you receive as an employee are included in box 1 of your Form W-2, Wage and Tax Statement, and may also be reported separately in box 12 with the appropriate code. If you are an independent contractor, the value of the fringe benefits would be included in your Form 1099-MISC, and if you are a partner, in Schedule K-1 (Form 1065).