Are Employee Benefits Taxable?

Are Employee Benefits Taxable?

Many employee benefits are taxable, while others are nontaxable, partially taxable, or tax-deferred. The term tax-qualified refers to the fact that they benefit from some kind of tax advantage. Let’s look briefly at each.

• Taxable. If benefits are taxable, they will be included in employees’ W2 forms as part of their wages. As such, they will be subject to federal taxes, Social Security taxes, and Medicare taxes.
• Nontaxable. Benefits that are nontaxable will be excluded from gross wages before the wages get paid. This gives them the appearance of being pre-tax to the employee, though they are actually non-tax to the employee. The distinction is subtle. The benefits are tax-deductible to the employer instead. Health insurance is an example of a benefit that is commonly nontaxable.
• Partially taxable. Partially taxable benefits are excluded from taxation only up to a certain amount of their value.
• Tax-deferred. Tax-deferred benefits are not taxable when received, but will be taxable later on. Many retirement plan benefits, for example, are tax-deferred.

Any taxability of a benefit is reduced by any amount that an employee contributes to it. For example, a benefit with a value of $50 per month in which the employee contributes $30 will be taxed on only $20 of it.

A variety of rules and regulations apply to the tax issues of employee benefits. The IRS has guidelines to help you understand the hows and the whys of each type. The employer must also follow guidelines, and they usually include regulations from non-IRS federal agencies. They may also include state agencies.