As 2025 draws to a close, employers should review whether they have properly included the value of common fringe benefits in their employees’ — and where applicable, 2% S-corporation shareholders’ — taxable wages. With remote and hybrid work arrangements continuing to be common, this remains a critical review area for year-end tax compliance.
Fringe benefits are forms of payment for the performance of services that a company provides to its employees as a benefit. Their value must be included in an employee’s pay unless specifically excluded by law. The actual value of those benefits must be determined before December 31 to allow for timely withholding and deposit of payroll taxes.
Failure to properly report includible fringe benefits to the recipient and the IRS (via Form W-2 or Form 1099) by January 31 may result in penalties. Employers bear the burden of proving that tax-free treatment of fringe benefits was appropriate.
This alert provides a review of rules around the identification and proper tax-reporting treatment for several fringe-benefit categories that employers commonly offer.
Remote Workforce Fringe Benefits
Transportation & Travel to the Office
Many businesses continue to offer flexible work-location arrangements (e.g., home, office, hybrid). Employers must assess whether expenses incurred by employees traveling between their personal residence and employer-provided office constitute commuting (typically non-deductible, and if reimbursed may be taxable) or bona fide business travel.
Importantly, commuting expenses paid by the employer are nondeductible to the employer even when included as taxable compensation to the employee.
Home Office Expenses
When an employer reimburses an employee’s expenses for working from home (desk, chair, internet, utilities, etc.) under an “accountable plan”, the reimbursements may be tax-free. IRS rules require: (1) the expenses must be for business, not personal; (2) employees must provide receipts for amounts above a de minimis threshold; (3) the home workspace must be used exclusively for business, and for the convenience of the employer. Reimbursements made under a non-accountable plan (no substantiation, no requirement to return excess) must be treated as taxable wages.
Meals for Remote Employees
Employers often provide tax-free meals or snacks in an office setting. Extending similar tax-free treatment to remote employees is more complex. The IRS will insist on fact-specific analysis: the business purpose must be clear, and the provision must advantage the employer (not simply convenience for the employee). Meals supplied to remote employees may not qualify as tax-free unless properly structured.
Common Employee Fringe Benefits
Employer-Paid Group Term Life Insurance
Up to $50,000 of group term life insurance coverage may be excluded from tax for employees. Coverage above that amount must be included in taxable wages, subject to Social Security and Medicare taxes (FICA). The cost must be reported in Boxes 1, 3, and 5 of Form W-2 and in Box 12 with code “C”.
Group Long- and Short-Term Disability Insurance
If premiums are paid with pre-tax dollars, disability proceeds are generally taxable. If paid with after-tax dollars, proceeds may be tax-free. These rules remain complex and depend on plan design.
Employee Business Expense Reimbursements and Allowances
Payments or allowances that fail substantiation (receipts, written accountings) are treated as taxable wages under a non-accountable plan. Reimbursements under accountable plans (with adequate accounting and return of excess) remain excludible. Employers must scrutinize reimbursements to remote workers for home-office expenses or travel to ensure correct classification.
Employer-Paid Educational Assistance
For active employees: job-related training may qualify as a working condition fringe benefit (tax-free). Under Sec. 127 plans, up to $5,250/year may be excluded if the plan meets nondiscrimination and written-plan requirements.
Update for 2025: The COVID-19 relief provision that expanded §127 to include student-loan repayments is scheduled to expire December 31, 2025 (i.e., repayments must be made by that date to qualify). After that date, student-loan repayments may lose tax-free status under §127.
For prospective employees (pre-employment): direct payment of tuition in advance commonly must be treated as taxable wages since the individual is not yet an employee and may have a future employment requirement (loan-forgiveness or similar) rather than current services.
PTO Leave Donation / Leave-Sharing Plans
With evolving remote/hybrid work norms, many employees are taking fewer PTO days, risking forfeiture. Some employers allow unused PTO donations to charity or other employees. If structured incorrectly, donors or recipients may incur taxable income. A properly drafted leave-sharing program should: set donation limits, specify eligible recipient criteria (medical emergencies, disasters, etc.), and ensure usage for specified events. Donors cannot direct the recipient; recipients generally exhaust their own PTO first.
Charitable Contributions Through Leave Donation
As of 2023-24, certain wildfire relief contributions by employers in exchange for forgone PTO were not taxable to employees per IRS Notice 2023-69. Employers seeking similar relief must check if a qualifying disaster period is in effect. Note: employer payments are deductible as business expense or charitable contribution (not taxable to donor-employees), but recipients must be qualified organizations. Donor-employees cannot claim charitable deduction for donated leave.
Personal Use of Company Car or Aircraft
If an employer-provided vehicle or aircraft is used for personal travel, the value of that use must generally be treated as additional wages (imputed compensation) unless the employee reimburses the employer. For automobiles, employers can elect a valuation method using a 12-month period (e.g., Nov 1 prior year to Oct 31 current year) if appropriate employee notice is given and Form W-2 is timely filed. Cash car allowances without substantiation are fully taxable. For aircraft, personal use is subject to FICA, FUTA, FITW, and SITW. Entertainment-related use by officers/directors that exceeds inclusion value may be non-deductible to the employer.
Benefits That Exceed De Minimis Exclusion
De minimis benefits (small-value, infrequent items) may be excluded from employee income. However, there is no statutory threshold (e.g., “under $25 always de minimis” is incorrect). Larger items (e.g., employer-paid country club memberships, employer-provided vacation homes, large gift certificates) do not qualify. Gift cards or certificates that are cash equivalents must be included in wages. While snacks or meals may qualify, frequent or extravagant provisions may trigger IRS challenge; employer deduction of employer-provided meals is often limited to 50% (except for qualified employee-recreation events, which are 100% deductible when primarily for rank-and-file employees).
Employee Achievement Awards, Gifts and Prizes
Cash or gift cards to employees generally must be included in wages (FICA, FIT, FUTA, SITW). For non-cash awards under a written “qualified plan” recognizing length of service or safety: can exclude up to $400 per employee (nonqualified plan) or $1,600 (qualified plan). Requirements: meaningful presentation, at least five years of service, and no award to the same employee in prior four years.
Job-Related Moving Expenses Paid by Employer
Moving expenses paid by an employer during 2025 must be included as taxable wages unless the employee is an active duty U.S. Armed Forces member moving due to a permanent change of station. The moving-expense exclusion under § 217 is scheduled to be reinstated Jan 1, 2026.
Qualified Transportation Fringe Benefits
Qualified transportation (commute) and parking benefits remain excludible up to statutory monthly limits. For 2024, the limit was $315/month (combined transit & parking). For 2025, employers should verify the IRS-announced limit (which may increase) and ensure any excess is included in taxable wages. Bicycle commuting benefits remain taxable through 2025 (deductible by employer though). Employers should also confirm local and state mass-transit-benefit mandates (e.g., DC, CA cities).
Noncompensatory Cell Phones (and Other Devices)
Employer-provided cell phones, tablets or devices that are provided primarily for a business purpose (and the business use dominates) may be excluded from income as a working-condition or de minimis fringe benefit. Items provided to attract employees, as bonuses or for personal use, are taxable. Personal use of employer-provided devices (where not business-required) must be treated as imputed compensation.
Special Rules for 2% S-Corporation Shareholders
For shareholders owning more than 2% of the outstanding stock (or more than 2% of voting power) of an S-corporation (or LLC taxed as an S-corporation): many benefits that are excludible for other employees must be included in the shareholder’s taxable wages. These include employer-paid health premiums, cafeteria-plan benefits, and qualified transportation/parking.
Key points:
- Health, dental, vision and LTC insurance premiums paid by the S-corporation on behalf of a 2% shareholder are subject to FITW and SITW (but not FICA or FUTA).
- Such shareholders cannot participate in § 125 cafeteria plans; if they do, the plan may lose its tax-qualified status and all participants may suffer adverse tax consequences.
- Group term life insurance coverage for a 2% shareholder is fully taxable (not just the excess over $50,000); cost must be included in wages.
Failure to include these benefits properly may render the S-corporation’s deduction disallowed or may create mismatches that result in higher tax burdens.
Final Thoughts
As year-end approaches, employers should:
- Review all fringe-benefit programs and ensure valuations are complete before December 31. Fringe needing to be added to payroll must be submitted prior to the final December payroll.
- Confirm proper classification of benefits (tax-free vs taxable) and whether they meet IRS requirements for accountable plans or special exclusions.
- Ensure that W-2 (or 1099) reporting and employer withholding/tax deposits reflect all includible benefits.
- Pay special attention if you have remote/hybrid employees, 2% S-corporation shareholders, or evolving benefits such as educational assistance, device reimbursements, transportation benefits, or remote work allowances.
- Consult your tax advisor if there is any doubt regarding treatment of a fringe benefit or program design — missteps can trigger employer liability, denied deductions, or audit risk.
To learn more about how our payroll services can support your compliance efforts or any other human resource management services, please contact Katelyn Parks at (334) 321-4729 or leave a message below.
