Employee compensation can include a variety of perks and non-cash payments known as fringe benefits. While these benefits can significantly enhance an employee's total rewards package, they also come with specific tax reporting rules.
This guide covers what makes a benefit taxable, examples of common fringe benefits, and information on how to report them correctly.
⚠️Note: This information is for informational purposes only and does not constitute formal tax, legal, or compliance advice. Always consult with qualified tax advisors, legal counsel, and your organization’s internal teams for guidance specific to your situation. Additional regulations may apply. For the most accurate and up-to-date information, refer to official government resources and regulatory agencies.
Fringe benefits are a form of payment for services an employee provides. They can include property, services, cash, or cash equivalents that you give to an employee in addition to their regular wages. The general rule is simple: unless a benefit is specifically excluded by law, it is taxable.
If a benefit is taxable, its value must be included in the employee's income. This amount is generally subject to federal income tax withholding, Social Security and Medicare taxes (FICA), and Federal Unemployment Tax (FUTA), unless a specific rule says otherwise. You must report the value of the benefit on the employee's Form W-2.
The key is to determine the fair market value (FMV) of the benefit. The FMV is the amount an employee would have to pay for the benefit on the open market.
Fringe benefits can be complicated, so here’s a structured, accessible cheat sheet for the most common W-2 fringe benefits. Please note: this list is not all-inclusive of every fringe benefit. Please refer to the IRS Publication 15-B for more details and a comprehensive list of fringe benefits.
Jump to a fringe benefit:
When you pay for employees’ medical, dental, or vision coverage under a qualified group health plan, the employer-paid portion is generally not taxable. However, the IRS still wants employees to see the total cost. This is information only—not taxable to most employees.
W-2 reporting cheat sheet:
If / then scenarios:
🔍 Double-check this with the IRS: See “Accident and Health Benefits” and code DD in Publication 15-B.
Any personal use of an employer-provided vehicle—commuting, errands, weekend trips—is a taxable fringe benefit. The value of the personal portion must be added to the W-2 as taxable wages.
W-2 reporting cheat sheet:
If / then scenarios:
🔍 Double-check this with the IRS: See “Employer-Provided Vehicles” in Publication 15-B (2025).
Dependent care benefits—FSA contributions, on-site daycare—can be tax-free up to the IRC §129 annual limit ($5,000 per year or $2,500 if married filing separately). Show the total in Box 10; excess above the limit is taxable wages.
W-2 reporting cheat sheet:
If / then scenarios:
Note: There’s a law that raises the DCAP limit to $7,500/$3,750 starting with tax years after December 31, 2025—so W-2s for 2025 still use the $5,000/$2,500 cap; the higher limit hits 2026 and later.
🔍 Double-check this with the IRS: See “Dependent Care Assistance” in Publication 15-B.
Under a Section 127 plan, you can provide up to $5,250/year for qualifying education-tax free per employee. Anything above that is generally taxable unless it qualifies as a “working condition fringe.”
W-2 reporting cheat sheet:
If / then scenarios:
🔍 Double-check this with the IRS: See “Educational Assistance” and “Working Condition Fringe” in Publication 15-B, and IRS Educational Assistance FAQs.
Most moving expense reimbursements are taxable today (post-2018 law), except for active-duty military moves on orders.
W-2 reporting cheat sheet:
If / then scenarios:
🔍Double-check this with the IRS: See “Moving Expense Reimbursements” in Publication 15-B.
Adoption assistance under a qualified plan is tax-free up to the annual IRS exclusion limit. You report all adoption benefits in Box 12, code T, but only the taxable portion over the limit appears in wage boxes.
W-2 reporting cheat sheet:
If / then scenarios:
Note: For the 2025 tax year, the credit is capped at $17,280 per eligible child. The credit starts to phase out for taxpayers at specific modified adjusted gross incomes (MAGI). Also, for 2025, up to $5,000 of the Adoption Tax Credit is a refundable credit.
🔍 Double-check this with the IRS: See “Adoption Assistance” in Publication 15-B and W-2 Instructions.
Employer-paid group-term life insurance is tax-free up to $50,000 in coverage. Calculate the imputed cost of excess coverage—add it to the W-2 as wages and show it in Box 12, code C.
W-2 reporting cheat sheet:
If / then scenarios:
🔍 Double-check this with the IRS: See “Group-Term Life Insurance” in Publication 15-B.
Transit passes, vanpooling, and parking are tax-free up to a monthly dollar limit. Excess is taxable and must be included as wages.
W-2 reporting cheat sheet:
If / then scenarios:
🔍 Double-check this with the IRS: See “Qualified Transportation Fringe Benefits” in Publication 15-B.
Employee discounts can be tax-free, but only within limits—generally the gross profit percentage for goods or up to 20% for services. Deeper discounts get taxed.
W-2 reporting cheat sheet:
If / then scenarios:
🔍 Double-check this with the IRS: See “Qualified Employee Discounts” in Publication 15-B.
For every scenario above, always consult the latest IRS guidance to ensure compliance. You can read more in the IRS Employer's Tax Guide to Fringe Benefits.
Navigating fringe benefits is a key responsibility for every employer. Misclassifying a benefit or failing to report its taxable value can lead to penalties and compliance issues. The best practice is to understand the rules ahead of time and establish a clear process for tracking and valuing benefits throughout the year.