Taxability of Employee Benefits

Some benefits provided to employees are subject to taxation. Other benefits may qualify for exclusion from income tax. This information below is provided to the university to help guide management in providing information to Financial Services and for staff to understand the reason for taxation.

Overview

Certain benefits provided to employees may be subject to taxation. An employee benefit is any property, service, or cash compensation provided to an employee in connection with the performance of services for the university, and in lieu of or in addition to regular taxable wages.

Some benefits qualify for exclusion from the employee's taxable income. In addition, some benefits can be either taxable or non-taxable income, depending on the use of the benefit. Any personal use of an employer-provided benefit is subject to taxation.

Taxable employee benefits are governed by the Internal Revenue Code and California law. These policies include requirements regarding record keeping and valuation of benefits.

Internal Revenue Code, section 132, provides statutory exclusions for broad categories of commonly provided fringe benefits. A benefit is not excludable under IRC section 132 if another section of the Internal Revenue Code provides rules for the tax treatment of the general type of benefit. See the next section below for further discussion of employee benefits not subject to taxation.

Valuation

In order to determine the amount of tax to withhold, benefits need to have an established value. The general rule for valuation is fair market value, which would be the amount that the employee would have to pay a third party in an arm's-length transaction to buy or lease the particular benefit.

Reporting

Benefits subject to taxation must be treated as taxable wages for employment tax and information reporting purposes. The State Controller's Office requires the University to report all taxable income from fringe benefits at the time the employee is reimbursed and/or receives the benefit or value. The university must withhold applicable federal and state taxes, and the value of the benefit must be reported as wages on the employee's Form W-2. Benefits that are properly excluded from an employee's wages are not subject to income tax withholding and reporting.

Exclusions to Taxation of Employee Benefits

Benefits provided to employees are taxable as wages unless the benefit is excluded by the Internal Revenue Code Section 132. The business use of benefits is considered to be an integral part of the employee's job, and is therefore not subject to taxation. The following section describes those benefits that are generally excluded from taxation.

De Minimis Fringe Benefit Exclusion

A de minimis fringe benefit refers to any property or service whose value is so small as to make accounting for it unreasonable or administratively impractical. De minimis fringe benefits are excluded from taxable income. This exclusion is intended to give administrative relief to employers when benefits to an employee are of nominal value and infrequently provided. Neither Federal nor State regulations set a defined dollar amount for nominal value. Examples of de minimis fringe benefits include occasional parties or picnics, traditional holiday gifts of property with a low fair market value, and refreshments.

There are certain benefits that can never qualify as de minimis fringe benefits. These include cash, gift cards, savings bonds, and similar items that could easily be exchanged for cash. Please note that season tickets to sporting or entertainment events and club memberships in a private country club or athletic facility do not qualify under the de minimis exclusion.

Working Condition Fringe Benefit Exclusion

The university provides property or services to employees to be used in the conduct of their job. Certain property and services are considered working condition fringe benefits when these items would be allowable as tax deductions, as ordinary and necessary business expenses, if the employee were to purchase the property or service. The Internal Revenue Code indicates that these items are excluded from taxable income when used for business purposes. It is important to note that personal use will result in taxable income.

The use of the property or service must relate to the employee's duties at the university in order for its value to be excludable as a working condition fringe benefit. In certain instances, adequate records must substantiate the business use of the property or services with sufficient evidence corroborating an employee's own statement. Employees are required to maintain records substantiating business use, and the university is to routinely validate these records to ensure that only business use occurs.

Employee personal use of employer-provided property or services results in taxable and reportable income. The amount of taxable income equals the fair market value (FMV) of the asset attributable to personal use. FMV is the amount the employee would pay to acquire the asset.

The following is a listing of property and services that are considered working condition fringe benefits.

Communication Equipment (Mobile Phones and Pagers)

Generally, the costs associated with university-assigned mobile phones are considered a non-taxable fringe benefit as long as the phone is only used for business purposes. Any personal use would be considered a taxable benefit and the employee may be responsible for a portion of the fair market value of the phone and the monthly service.

Complimentary Tickets to Athletic and Entertainment Events

Employees can receive complimentary tickets to university functions, where tickets are sold to the general public. These functions include athletic, artistic, and entertainment events. If an employee is required to use the complimentary tickets to entertain persons having a business relationship with the university, then the tickets may be excluded from taxation as a working condition fringe benefit. In order to qualify as a working condition fringe benefit, the employee must maintain adequate records showing that the tickets were used for business purposes.

The value of the tickets would be considered taxable income when the tickets are used to entertain the employee's spouse, family members, or personal acquaintances.

Dues, Memberships, and Licenses -- Professional Organizations

Some dues and membership fees are paid by the university on behalf of the employees. These are groups that are organized exclusively for business purposes, and include professional organizations, business leagues, trade associations, chambers of commerce, and civic or public service organizations. The determination of the taxability of these payments is based on whether membership is required for completion of the employee's duties and/or advances the business interest of the university. To qualify as non-taxable income, there must be a logical connection between membership in the organization and the employee's job. If the business connection can be established, the payment of the dues and membership fees is excludable income as a working condition fringe benefit.

Some employees maintain professional licenses, such as certified public accountants, and University funds are used for payment. To qualify as non-taxable income, the license must have a logical connection between maintaining the license and the performance of the employee's job.

Dues and Memberships -- Clubs

Certain club memberships and dues are associated with membership organizations established for entertainment or recreation. The principal purposes of these organizations are to conduct entertainment for members or guests, or to provide their members or guests with access to entertainment facilities. These clubs include social, sporting, golf or country clubs, athletic clubs, airline or hotel clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussion.

The portion of club memberships and dues directly related to business purposes is excluded as taxable income as a working condition fringe benefit. Sufficient documentation is critical in supporting the business portion of club membership and dues. If records are not maintained documenting the business portion, then the entire value of this benefit will be taxable income.

The personal portion of club memberships and dues are included as taxable income and are subject to payroll withholding. Personal use of memberships purchased in the university name should be included as taxable income of the employee who benefits from the membership.

Electronic Devices -- Personal and Laptop Computers, and Internet Access

Generally, the costs associated with university-assigned computers, that are used away from the University, are considered a non-taxable fringe benefit as long as the computer is only used for business purposes. Any personal use of the computer would be considered a taxable benefit.

Fee Waiver and Reduction Program (Educational Assistance) -- Employee

The value of fee waivers and reductions associated with enrollment in undergraduate and graduate courses is not taxable income, up to an annual limitation set by the IRS. Fee waivers that exceed the annual limitation are considered taxable income.

Employees receive educational assistance for work-related or career-development courses. Fee waivers apply only to CSU general fund courses, and employees are limited to a maximum number of courses or units per term. In accordance with state regulations, certain fees are eligible to be fully waived, while other fees can only be reduced.

Fee Waiver and Reduction Program (Educational Assistance) -- Spouse, Domestic Partner, or Dependent Child

Eligible employees can transfer the benefits of the fee waiver and reduction program to their spouse, domestic partner, or dependent child. These individuals must be enrolled in courses toward completion of a degree or teaching credential. The following summarizes the taxation of these benefits:

Non-taxable Income

Spouse and dependent child taking courses at an undergraduate level

Taxable Income

Spouse and dependent child taking courses at a graduate level

Domestic partner taking courses at an undergraduate or graduate level



Vehicles

The university can provide employees with vehicles that can be used for both business and personal use. The value of a vehicle can be excluded as taxable income when used in the performance of the employee's work-related duties. The value of any personal use of the vehicle must be included in the employee's taxable income. The employee is also required to include the cost of gasoline related to the personal use of the vehicle. The IRS considers the commute between the employee's home and work place as personal use.

Qualified Employee Discounts Exclusion

If certain services are offered to employees at a discounted price, then that service could be considered a non-taxable benefit, as long as certain conditions are met. This is a very limited exclusion provision, and generally only applies to ticket sales to educational events.

The maximum qualified employee discount is 20% of the price at which the services are offered to the general public. For example, CSUS staff could pay $6 to attend a musical performance, while general admission is $7. The $1 discount does not exceed 20% of the ticket price and is therefore excluded as taxable income.

No-Additional-Cost Services Exclusion

The university offers non-instructional services to students, employees, and the general public. These services include athletic, musical, and dramatic events. Employees can attend these events at no cost or at a reduced fee. If certain conditions are met, this fringe benefit is excludable from taxable income. The university must incur no substantial additional expense in providing the service to the employee. The university must give consideration to any foregone revenue as a consequence of providing free or reduced fees.

An example of this benefit would be if the university provided free tickets to employees for a Sac State basketball game. The university would not incur additional costs by providing free tickets to employees, as long as there was excess seating capacity for sale to the general public.

This tax exclusion does not apply to educational assistance, or the use of "listed property" such as the university's computer or telecommunications systems for personal use.

Group Term Life Insurance Coverage Provided by the CSU

The university provides group-term life insurance coverage for certain employees. The cost of providing up to $50,000 of group-term life insurance coverage is excluded from the employee's taxable income.

The value of CSU-paid life insurance provided to CSU MPP and executive employees exceeding $50,000 is reportable as wages. This insurance is not subject to Federal or State income tax withholding. However, Social Security and Medicare taxes must be withheld.

Qualified Awards for Length of Service and Safety Achievement

Employee achievement awards are tangible personal property provided to employees for length of service or safety. These awards are bestowed during a meaningful presentation. The taxation exclusion applies to the value of the tangible personal property given to an employee. Please note that the following types of awards are always subject to taxation: cash, cash equivalents, vacations, meals, lodging, or season tickets for entertainment or sporting events.

In order to retain the tax-exempt status of the award, an employee may receive awards that only cost up to $400 in any calendar year. Awards that exceed this maximum limitation are subject to taxation.

Length of service awards may be made only once every five years and never during the first five years of employment. Safety achievement awards cannot be given to managers, administrators, or clerical employees.

A gift presented as a traditional award for lengthy service, such as a watch given at a retirement ceremony, would not be subject to taxation, as long as annual valuation amounts are not exceeded. The employee is entitled to receive tax-free awards up to a $400 value annually. Amounts exceeding $400 represent taxable income.

Qualified Moving and Relocation Expense Reimbursements

A qualified moving expense reimbursement is any amount received by the employee from the university as payment for or as reimbursement of expenses that would be classified as deductible moving expenses under the Internal Revenue Code. Deductible moving expenses are limited to the reasonable costs of moving household goods and personal effects, the cost of lodging while traveling between the former and new residences if the distance is at least 50 miles, and the federal moving expense mileage rate. The employee is required to meet certain federal time and distance standards for these benefits to be non-taxable income.

Please note that certain reimbursable expenses are considered taxable income, subject to withholding. These expenses include meals connected with the move, pre-move house hunting expenses, temporary living expenses, real estate expenses, storage more than 30 days after moving into the residence, mileage reimbursement in excess of the federal moving expense mileage rate, and moving expenses that do not meet the time or distance standards.

Qualified Transportation Fringe Benefits

The costs for certain benefits provided to university employees for their personal transportation can be excluded from taxable income. These benefits include:

  • Transportation in a commuter highway vehicle between the employee's home and work place
  • Transit passes
  • Employer-provided parking

The IRS establishes the annual exclusion rates for qualified transportation fringe benefits, and the Chancellor's Office issues annual policy memorandums. Amounts exceeding these exclusion rates are taxable and reportable income. Personal use of the commuter highway vehicle is also reportable as taxable income.

Taxable Employee Benefits

Benefits provided to employees are normally taxable as wages. The following section describes those employee benefits that are generally subject to taxation.

Awards, Bonuses, Incentives, or Gifts

This document addresses the taxability of awards, bonuses, incentives, and gifts, but does not address the appropriateness of the source of funds used to purchase these items. Please refer to the appropriate university policies regarding the source and use of funds.

Cash, cash equivalents, and non-cash gifts, or prizes, provided as an award, bonus, or incentive are reportable and taxable income. Cash and cash equivalents are always taxable. Cash equivalents represent items that are easily convertible to cash, such as savings bonds, gift cards, and stock awards. Non-cash gifts or prizes are taxable at their fair market value, unless the items are determined to have nominal value. Nominal value gifts are considered as de minimis fringe benefits and are not taxable.

Documentation and notification are critical. All cash payments must be processed through the Human Resources Payroll Office. Accounts Payable will report non-cash awards to Payroll. Non-cash awards include reimbursement through the Direct Payment program and purchases made using a Procurement Card. The recipient must be identified (name, address, social security number, and amount/value of the award).

Certain employee achievement awards for length of service and safety may qualify as non-taxable income. We refer the reader to the prior section on exclusions for details.

Benefits Received from the University

Any benefit received from the university by an employee, or a member of their family, is generally taxable to the employee. These benefits could include gym memberships, various allowances, personal use of university-provided vehicles, and various reimbursements the university may provide outside IRS (business-related) guidelines.

Housing Allowances

Certain employees receive funds classified as a housing allowance. These funds are used to offset the cost of maintaining a residence. The amount of a housing allowance received by employees is taxable and reportable income.

Loan Programs

There are taxability issues related to employer-paid loans. Loan amounts paid by the employer to discharge the loan are taxable income. Interest forgiven for loans greater than $10,000 is taxable income. CSU offers two loan programs that discharge indebtedness in exchange for specific lengths of employment. These are the Forgivable Loan and Doctoral Incentive programs.

Meal Reimbursements -- Travel Less Than 24 hours

Meal reimbursements are taxable income for employees who are on travel status for less than 24 hours, the travel does not require an overnight stay, and the employee requests reimbursement for breakfast and/or dinner. To receive reimbursement for breakfast, the travel must begin before 7:00 a.m., and to receive reimbursement for dinner, the travel must extend past 6:00 p.m. The expense generally must be incurred more than 25 miles from the University. Employees who travel for less than 24 hours may not claim any lunch allowance.

Meal Reimbursements -- Overtime Meals

Overtime meal reimbursements are reportable and taxable income. When an employee is required to work overtime, the employee may receive an overtime meal allowance for actual expenses supported by a receipt. The meal allowance cannot exceed the maximum daily lunch reimbursement amount. To be eligible for this allowance, the employee must be required to report to work at least two hours prior to or be required to remain at least two hours past their regularly scheduled work day.

Mileage -- Call Back, Overtime, Court Appearances

Mileage reimbursements paid to employees for non-business travel are always taxable income. This includes personal mileage that is incurred due to being called back to the office after a normal work shift ends, overtime, or coming to work on a normal day off.

Vehicle Allowances

The amount of a vehicle allowance received by employees is taxable and reportable income. The amount of the vehicle allowance is determined by the CSU Chancellor's Office.

Benefits Received from Third Parties

Any benefit received by an employee, or a member of their family, from a third party in connection with the performance of services for the university should be treated as taxable income to the employee. This includes cash, cash equivalents, and non-cash gifts, prizes, or discounts. Additional third party-provided benefits are discussed below.

Dues and Memberships -- Clubs

Certain club memberships and dues are associated with organizations established for entertainment or recreation. The principal purposes of these organizations are to conduct entertainment for members or guests, or to provide their members or guests with access to entertainment facilities. These clubs include social, sporting, golf or country clubs, gyms/athletic clubs, airline or hotel clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussion.

The personal portion of club memberships and dues are included as taxable income and are subject to payroll withholding. Personal use of memberships purchased in the university name should be included as taxable income of the employee who benefits from the membership.

The portion of club memberships and dues directly related to business purposes is excluded as taxable income as a working condition fringe benefit. Sufficient documentation is critical in supporting the business portion of a club membership and dues. If records are not maintained documenting the business portion, then the entire value of this benefit will be taxable income.

Non-Qualified Moving and Relocation Expenses

Certain reimbursable expenses related to moving and relocation are considered taxable income subject to withholding. These expenses include meals connected with the move, pre-move house hunting expenses, temporary living expenses, real estate expenses, storage more than 30 days after moving into the residence, mileage reimbursement in excess of the federal moving expense mileage rate, and moving expenses that do not meet the time or distance standards.

Vehicles

The university or a third party can provide employees with vehicles that can be used for both business and personal use. The value of any personal use of the vehicle must be included in the employee's taxable income. The employee is also required to include the cost of gasoline related to the personal use of the vehicle. The IRS considers the commute between the employee's home and work place as personal use. The portion of the value of a vehicle used in the performance of the employee's work related duties can be excluded as taxable income, as long as adequate records are maintained.

The value of the personal use of vehicles provided to employees by third parties is taxable income. Third parties include CSU Foundations, booster clubs, and automobile dealerships.

Determination of Taxability

Generally, benefits that are directly related to an employee's job function are not taxable. Any personal use of a university-provided benefit may be subject to taxation. Departments should inform Financial Services of the benefits provided to staff. A review will be performed to determine the taxability and value of the benefit. Financial Services may be able to help the department structure the benefit to reduce or eliminate the tax liability. Once taxable employee benefits have been identified, the department will contact Payroll Services so that the necessary forms can be completed.

Withholding and Reporting

Employee benefits subject to taxation must be treated as taxable wages for employment tax and information reporting purposes. The State Controller's Office requires the University to report all taxable income from fringe benefits at the time the employee is reimbursed and/or receives the benefit or value. The university must withhold applicable federal and state taxes, and the value of the benefit must be reported as wages on the employee's Form W-2.

Each employee benefit must be addressed separately to determine which taxes are applicable. Benefits may be subject to the following taxes:

  • Federal Unemployment Tax Act (FUTA)
  • Social Security/Medicare Federal Insurance Contribution Act (FICA)
  • Federal Income Tax (FIT)
  • California Unemployment Insurance (UI)
  • Employment Training Tax of California (ETT)
  • State Disability Insurance (SDI)
  • California Personal Income Tax (PIT)

Additional Information and Resources

Internal Revenue Service (IRS)

Internal Revenue Code

Internal Revenue Code -- Title 26

Section 61: Gross Income Defined

Section 74: Prizes and Awards

Section 79: Group-Term Life Insurance Purchased for Employees

Section 117: Qualified Scholarships

Section 127: Educational Assistance Programs

Section 132: Certain Fringe Benefits

Section 162: Trade or Business Expenses

Section 217: Moving Expenses

Section 274: Disallowance of Certain Entertainment Expenses

IRS Publications

Publication 15-A: Employer's Supplemental Tax Guide

Publication 15-B: Employer's Tax Guide to Fringe Benefits

Publication 463: Travel, Entertainment, Gift, and Car Expenses

Publication 521: Moving Expenses

Publication 525: Taxable and Nontaxable Income

Publication 535: Business Expenses

Publication 970: Tax Benefits for Education

State of California

California Law

Revenue and Taxation Code

Unemployment Insurance Code

Employment Development Department (EDD)

State Controller's Office

Manuals

State Controller's Office: Payroll Procedures Manual

California State University

Policies/Coded Memoranda

Executive Order #712: Delegation of Authority and Procedures for the Administration of Fee Waivers and Reductions for Employee Training and Career Development

HR/Benefits 2011-14: CSU Employee Fee Waiver and Reduction Program

HR 2012-02: Updated Moving and Relocation Policy and Updated CSU Internal Procedures Governing Moving and Relocation Expenses

HR/Benefits 2010-15: Tax Information Changes to Moving and Relocation Expenses

Technical Letter, HR/Benefits 1998-13: Meal Reimbursements for Travel Less Than 24 Hours

California State University, Sacramento

University Policy Manual

University Travel Policy and Procedures

Information Resources & Technology (IRT)