What are Fringe Benefits?

Section 119 of the Internal Revenue Code offers a series of exclusions, where employers can offer fringe benefits to their employees without incurring increased tax liabilities. If employee benefits are not formulated correctly, both employers and employees may incur increased tax liabilities because income was not reported. Sections 119 and 132 offer employers a way to provide fringe benefits without having the value of these benefits count as income for their employees, the following is a short list of exclusions:  meals provided on the job to employees, employee discounts, reimbursement of employee moving expenses and even qualified retirement planning services.
However, employers should use caution when offering employees payments in cash because as the Supreme Court in Commissioner v. Kowalski, 434 U.S. 77 (1977) found, §119 does not include cash payments of any kind. Kowalski was decided before the tax code was revised in 1986 and the current code allows employers a way to offer cash payments to their employees under §125. Section 125 of the Internal Revenue Code allows employers the option of setting up a "Cafeteria Plan." A "Cafeteria Plan" offers employees the option of choosing between receiving fringe benefits or cash and the cash received by the employees would not be counted as income. All of this depends on strict adherence to the requirements of §125. For more information about fringe benefits or other tax issues, please visit www.tonyfamlaw.com or call (214) 872-6406.