Corporate executives often receive extraordinary fringe benefits that are not provided to other corporate employees. Any property or service that an executive receives in lieu of or in addition to regular taxable wages is a fringe benefit that may be subject to taxation. In 1984, the Internal Revenue Code (“Code”) was amended to include the term “fringe benefits” i n the definition of gross income found in §61. A fringe benefit provided in connection with the performance of services, regardless of its form, must be treated as compensation includible in income under §61.

Whether a particular fringe benefit is taxable depends on whether there is a specific statutory exclusion that applies to the benefit. For example, when §61 was amended to include the term “fringe benefits”, §132 was added to provide exclusions for certain commonly provided fringe benefits that had previously not been addressed in the Code. Section 132 provides exclusions for working condition fringes, deminimis fringes, noadditional cost services, qualified employee discounts, qualified moving expenses, qualified transportation fringes, and qualified retirement planning services.

Although it is clear that fringe benefits are taxable, employers may not treat them as wages for income and employment tax purposes. Employers may classify a taxable fringe benefit under expense accounts other than compensation, resulting in a failure to subject the fringe benefit to income and employment taxes.

Because the tax treatment of fringe benefits can vary depending on the facts and circumstances under which they are provided, it may be helpful to follow a 3-Step analysis when examining a particular item an employer gives or makes available to an executive.

  • First, identify the particular fringe benefit and start with the assumption that its value will be taxable as compensation to the employee.
  • Second, check to see if there are any statutory provisions that exclude the fringe benefit from the executive’s gross income.
  • Third, value any portion of the benefit that is not e xcludable for inclusion in the executive’s gross income. Fringe benefits are generally valued at the amount the employee would have to pay for the benefit in an arm’s length transaction.
Executive Compensation – Fringe Benefits Audit Techniques Guide