Working Condition Fringe Benefits

April 13, 2006

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You don't have to include the value of property or services you provide to your employees as part of their taxable compensation, if they could deduct the cost of the property or services as a trade or business expense if they had paid for them.

What kind of property and services are included in this category? Job training, educational assistance programs, meals that are provided for the convenience of the employer, and employer-provided vehicles used for business are among the common working condition fringe benefits for most small businesses. Vehicles that employees are not likely to use more than minimally for personal purposes because of their design (for example, a delivery truck with seating for the driver only, or tractors and other special purpose farm vehicles), also qualify as working condition fringe benefits for employees that use them.

The kinds of items that don't qualify as nontaxable working condition fringe benefits include the following:

expenses that an employee can deduct under sections of the tax laws other than as trade or business expenses or depreciation
physical exams, even if they're mandatory for all or just some of your employees
cash payments you make to your employees unless you require your employee to use the money for expenses that are deductible in a specific or prearranged activity as trade, business, or depreciation expenses, you verify the that the money is used for such expenses, and the employee returns any unused money to you
services or property offered through a flexible spending account

For purposes of the working condition fringe benefit, an employee includes:

an individual currently employed by you
a partner who performs services for your partnership
a director of your company
an independent contractor who performs services for you

Educational assistance programs. For an educational assistance program to qualify as a working condition fringe benefit, the cost of the education must be a job-related deductible expense for your employee. That is, the payment must be for education that allows the employee to maintain skills needed or advantageous on the job, but that does not qualify the employee for a new occupation.

If the education does not bear the required relationship to the job, it may still be excluded from taxable income if it meets the requirement of a special law provision. This provision says that an employee can exclude from taxable income up to $5,250 of employer-provided educational assistance annually if the program meets certain nondiscrimination requirements (basically that you have a written plan that is for the exclusive benefit of employees).

From 2002 through 2010, the exclusion applies to both undergraduate and graduate-level courses. Before 2002, the exclusion applied only to undergraduate courses.