The IRS updated Publication 15-B for 2021, the Employer’s Tax Guide to Fringe Benefits. This publication provides an overview of the taxation and exclusion rules applicable to employee benefits such as accident and health benefits, dependent care assistance, providing a car, cell phone, health savings accounts, group term life insurance coverage, etc.
In general, fringe benefits are taxable to employees as wages unless a specific exclusion is provided for in the Code. Fringe benefits are generally valued at fair market value for tax purposes. Fringe benefits may be completely taxable (e.g., bonuses are always completely taxable), non-taxable (e.g., medical care premiums paid by the church), partially taxable (e.g., benefits with specific dollar exclusions such as the public transportation subsidy), or deferred taxation (e.g., retirement benefits under a 403(b) plan).
The Fringe Benefit Guide includes a discussion of the following:
- Accounting Rules – In general, taxable fringe benefits are reported when received by the employee and are included in employees’ wages in the year the benefit is received. However, there are many special rules and elections for different benefits. The Guide includes a discussion of the following:
- Accountable Plans
- Safe Harbors for Substantiating Expenses and Excess Reimbursements
- Nonaccountable Plans
- Withholding requirements
- Travel advances
- De Minimis Fringe Benefits – These benefits include property or services provided by the church for an employee that has small value and accounting for it is unreasonable or administratively impractical; thus, the value of such benefits are generally not includable in income. The value of de minimis fringe benefits is determined by the frequency provided to each individual employee, or if this is not administratively practical, by the frequency provided to the whole workforce.
- No-Additional-Cost Fringe Benefits – In general, services provided to employees that do not impose any substantial additional cost to the church may be excludable as a no-additional-cost fringe benefit, such as qualified employee discounts.
- Travel and Transportation Expenses – Qualifying expenses for travel are usually excludable from an employee’s income if they are incurred for temporary travel on business away from the general area of the employee’s tax home. Transportation expenses, which are distinct from commuting costs, are costs for business travel and are also generally excludable from income. Topics addressed by the Guide include:
- Travel Expenses
- Tax Home
- Away From Tax Home – The Overnight Rule
- “Temporary” vs. “Indefinite” Travel Assignments
- Reimbursements for Travel Expenses
- Excludable When Under Accountable Plan
- Per Diem Rules, Federal Per Diem Rate, Other Per Diem Methods
- Transportation Expenses
- Substantiation Methods – Transportation Expenses
- Transportation Expenses and Commuting
- Moving expenses – In general, moving expenses incurred to change residences are considered personal expenses and are to be included in an employee’s wages unless the move is directly related to work and the expenses meet the criteria in the Code.
- Meals and lodging – In general, the fair market value of meals or lodging furnished to an employee by the church may be nontaxable to the employee if the rules of Code section 119 are met. Included in the Guide is a discussion of the following:
- Meals and Lodging in General
- “On the Business Premises” of the Church
- Meals: “Convenience of Employer”
- Lodging: “Convenience of Employer”
- Lodging: “Required as Condition of Employment”
- Lodging for Educational Institutions
- Meals or Lodging Furnished With a Charge
- Meals While Traveling
- Meals as Entertainment
- De Minimis Exclusion for Occasional Meal Reimbursement
- Substantiating Employee Meal Expense Reimbursements
- Use of Employee Vehicle – In general, an employer’s reimbursement of an employee’s business automobile expenses is excludable from the employee’s income, if it is made under an accountable plan. Otherwise, it may be taxable as wages.
- Church-Provided Vehicles – In general, a church-provided vehicle that is used 100% for business purposes has no tax consequences or reporting. Business use does not include commuting. Topics discussed include:
- Valuing Personal Use of Church-Provided Vehicle
- General Valuation Rule
- Three Special Automobile Valuation Rules
- Automobile Lease Valuation Rules
- Vehicle Cents-Per-Mile Rule
- Commuting Valuation Rule
- Qualified Nonpersonal Use Vehicle
- Safe-Harbor Substantiation Rules for Church-Provided Vehicles
- Qualified Transportation Fringe Benefits – In certain circumstances, transportation benefits provided by an employer to an employee for the employee’s personal transportation, such as commuting to and from work, maybe excludable up to certain levels. The Guide discusses:
- Commuter Vehicle Transportation
- Transit Passes
- Qualified Parking
- Salary Reduction Agreements
- Other Local Transportation Benefits
- Independent Contractor Expenses – The treatment of reimbursements paid to independent contractors is similar to that for employees. However, different withholding and reporting requirements apply. Subtopics include:
- Board and Commission Members
- Worker as Employee and Independent Contractor
- Misclassification of Workers
- Equipment and Allowances – In general, as with ordinary and necessary business expenses, allowances paid or reimbursed by the church on behalf of an employee are excludable to the employee, if payments meet the rules of an accountable plan. Included is a discussion of:
- Work Clothes and Uniform Allowances and Reimbursements
- Safety Equipment
- Mileage Allowances
- Cell Phones/Electronic Devices/Computer
- Awards and Prizes – Generally, the value of an award or prize given by the church is taxable to the employee as a wage. Included is a discussion of:
- Nontaxable Prizes or Awards Transferred to Charities
- Nontaxable de minimis Awards and Prizes
- Employee Achievement Awards
- Taxability of Employee Achievement Awards
- Taxable Prizes and Awards
- Source-of-Funds Implications
- Educational Reimbursement/Allowances – Churches frequently pay or reimburse an employee for an education course. Whether or not the cost or value of the course is excludable from wages to the employee depends on various factors. Subtopics discussed in the Guide include:
- Working Condition Fringe Benefit – Educational Reimbursements
- Qualified Educational Assistance Programs
- Qualified Tuition Reduction
- Tuition Waiver for State Employees
- Scholarships and Fellowships
With increased attention being paid to the taxation of fringe benefits by the IRS, churches should carefully review the rules related to fringe benefits to ensure the proper exclusion from income by employees or the proper inclusion, withholding, and reporting in the cases where fringe benefits are taxable.
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (888) 421-0101
Fax: (888) 876-5101