Understanding Fringe Benefits

What ministries need to know about the tax impact of employment perks

As ministries search for ways to enhance employee compensation packages, ministry leaders and employees should understand the tax repercussions of fringe benefits. 

The following information provides a basic understanding of alternative forms of compensation. However, ministry leaders should discuss fringe benefits with their locally licensed attorney or certified public accountant before adding them to their ministry’s compensation packages.

What are fringe benefits?

According to the IRS, a fringe benefit is "a form of pay for the performance of services."¹ Fringe benefits can range from clothing allowances to company cars. Here are some common examples: 

• Use of a business vehicle to commute to and from work
• Membership to a health club (or other social club)
• Cell phones
• Clothing allowances
• Health plans
• Tuition assistance
• Some meals
• Vacations

What is the tax effect of fringe benefits?

Any fringe benefit an employee receives is taxable and must be included in the employee's pay (gross income), unless the law specifically excludes it. Any benefit not excluded under the rules is taxable.

• The benefits are subject to income tax withholding and employment taxes.²
• Taxing of fringe benefits varies by state. Ministries should consult with a locally licensed attorney or a certified public accountant.

How are fringe benefits valued?

In most cases, the general valuation rule determines the value of a fringe benefit. However, in special cases, the IRS uses the special valuation rule to determine the value of certain benefits.¹

• Under the general valuation rule, the value of a fringe benefit is its fair market value.
• The fair market value of a fringe benefit is the amount an employee would have to pay a third party to buy or lease the benefit.
• Facts and circumstances determine the benefits' fair market value, not the employer’s cost to acquire the benefit.

Here's how to determine the fair market value of some common fringe benefits:¹

Employer-provided vehicles

• In general, the fair market value of an employer-provided vehicle is the amount the employee would have to pay a third party to lease the same or similar vehicle at the same or comparable terms in the geographic area where the employee uses the vehicle.
• A comparable lease term would be the amount of time the vehicle is available for the employee's use, such as a one-year period.
• Employer-provided vehicles are not exempt from taxation.

Cell phones

• Exempt from taxation if provided primarily for non-compensatory business purposes.
• See Cell Phone Reimbursement Policies.

Educational assistance

• Up to $5,250 in benefits each year is exempt from taxation.

Dependent care assistance

• Up to $5,000 a year may be exempt from taxation.
• The limit is $2,500 for married employees filing separate returns.

Additional Resources

• Does Your Cell Phone Reimbursement Policy Fit the Bill?
• Preventing Payroll Mistakes  

1. IRS Publication 15-B
2. IRS Employee Benefits