In certain fields, employers have found that attracting and retaining talented employees is a highly competitive business that necessitates providing certain perks to employees in their work environment. As the type and size of perks changes, the IRS is reevaluating if it should treat more of those perks as fringe benefits that are taxable to the employee.
Perks are especially prevalent in technology and software development companies. In those industries, consumers are highly interested in when the next version of a product will hit the marketplace. Therefore, leaders set work deadlines according to the public commitments for release dates.
This means employees with the right skillsets are highly valued, as they can help companies hit those date commitments. Once a company obtains the talents of those workers, they need to take steps to retain them, in spite of the long work hours and imposition on traditional work-life balance. Workplace perks are one of the ways employers seek to differentiate themselves.
As perks have become more valuable and provided more consistently, the IRS is considering if many perks are now in fact taxable fringe benefits.
Line Separating Workplace Perks and Fringe Benefits a Gray Area
The IRS defines fringe benefits as a type of payment for services in addition to a normal salary or hourly wage. The IRS considers fringe benefits as taxable income except where they have specifically defined the fringe benefit as excluded from taxation.
In general, for an employer to exclude a fringe benefit from taxable income, the benefit must relate to the employer’s business, the employer must maintain records of the business use, and the benefit must be deductible from the employee’s income tax if the employee had paid for the benefit.
Despite these rules, the definition of what constitutes a workplace perk versus a taxable fringe benefit is open to interpretation that comes down in large part to who benefits from the item.
“To what extent is this intended as a perk, a form of compensation, for the benefit of the employee, or to what extent is this just another way the employer gets the employee to work harder and longer and do things for the benefit of the employer?” said David Gamage, a tax professor with the University of California, Berkeley.
Employers who see these items as perks note they are commonly things that the employee would not commonly have time to do on their own, given the hours demanded of their jobs. Such perk items include onsite laundry facilities and barber services. The most common workplace perk may be free food provided by an onsite cafeteria. In some cases, the food may even be delivered to employee’s desks.
On one hand, free food may appear to be a fringe benefit, because it is provided to the employees on a regular basis and it has a value that would not be deductible from income tax if the employee paid for that food. However, employers who provide free food to their employees argue that food is a perk necessary to maintain the health of their employees, given the long hours expected of their employees who commonly work through lunch and would not otherwise have time to get something to eat.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.