Taxable Fringe Benefits

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Policy Number:  8.7
Effective Date: February 27, 2023
Revision History:  May 2, 2019
Policy Contact:  Director, Payroll and Benefits

I.Purpose and Policy Statement

The purpose of this policy is to provide Georgia Gwinnett College requirements on taxable fringe benefits in compliance with the Board of Regents Business Procedures Manual section 5.3.17 Taxable Fringe Benefits. The procedures ensure good stewardship of College resources and ensure those who direct and expend resources on behalf of the College have heightened awareness and exercise diligence in adhering to the policies and procedures set forth by the College’s governing bodies and the Internal Revenue Service.

II. Scope

The policy applies to all employees and all GGC employees should be aware of this policy.

III. Definitions

Fringe benefit: Generally, any property or service that an employee (including certain independent contractors) receives in lieu of, or in addition to, regular compensation. Fringe benefits can take many forms. Examples include (but are not limited to) such items as gift certificates, athletic tickets, certain club memberships, spouse/companion travel, automobiles, housing, meals, awards, clothing, or prizes.

Working condition fringes: Generally defined as any property or services provided by an employer that, if paid by the employee, would be deductible as an ordinary and necessary business expense under IRC §§ 162 or 167.

De minimis fringe benefits: Benefits in which the value is so small in relation to the frequency in which it is provided that accounting for it is unreasonable or administratively impracticable. For purposes of the de minimis exclusion, the term “employee” means any recipient of a fringe benefit. Reg. § 1.132-1(b)(4).

IV.Guidance

This policy provides an understanding and requirements regarding the tax treatment of clothing and gifts, prizes and awards, as well as the reporting and withholding rules that must be followed as the employer.

1. The guidance below will discuss the general rules, as well as many common situations encountered. References to the Internal Revenue Code (IRC) and Treasury Regulations (Reg.) are provided, along with other IRS guidance that may be helpful. However, the information is not intended to be all-inclusive.
2. Taxability of Fringe Benefits
   1. Fringe benefits are taxable, unless specifically excluded by law. IRC §61; Reg. §1.61-21. For a fringe benefit to be taxable, it need not be furnished directly to the employee by the institution, as long as the benefit is provided in connection with the performance of services for the institution. A fringe benefit may be taxable to a person even though the person did not actually receive it. Reg. §1.61-21(a)(4).
   2. Example: (1) A vendor may provide clothing or other items as part of a contract with the institution. (2) An employee’s spouse may receive the fringe benefit that is taxable to the employee even though the employee did not receive it. 
   3. In general, a fringe benefit is any property or service that an employee receives in lieu of, or in addition to, regular compensation. Fringe benefits may include (but are not limited to) such items as gift certificates, athletic tickets, certain club memberships, automobiles, housing, meals, awards (such as Top Claw or Annual Awards), clothing, or prizes.
3. Valuation
   1. The general valuation rule applies to most fringe benefits. Under this rule, the value of a fringe benefit is its fair market value (FMV). This is the amount an individual would have to pay a third party in an arm’s-length transaction to buy or lease the benefit. Neither the employee’s subjective perception of the value, nor the employer’s cost, determines the FMV of the benefit. Reg. §1.61-21(b)(2).
   2. In many cases, the cost and FMV are the same; however, there are also situations in which FMV and cost differ, such as when the employer incurs a cost less than the value to provide the benefit.
4. Tax Withholding and Reporting
   1. Taxable fringe benefits for employees will be reported as taxable wages on IRS Form W-2. Most taxable fringes are subject to federal and state income tax withholding, as well as Social Security and Medicare taxes. Taxable fringes for non-employees are not subject to tax withholding, but may be reportable on IRS Form 1099-MISC.
   2. Student workers are considered employees for purposes of this section if they meet common rule requirements and therefore receive a W-2. There are very stringent exceptions, but in most cases students employed by GGC as student workers cannot also be employed as contractors.  All vendors, including vendors who are students, must have the requisite insurance
5. Clothing/Uniforms
   1. Regardless of the funding source, clothing/uniform expenses and allowances are taxable fringe benefits, unless an exclusion applies as outlined below. At GGC, clothing for employees require (1) Vice President approval via the Clothing Request form and (2) a purchase order prior to committing funds for a clothing purchase. Any persons committing expenditures outside the scope of policy are considered unauthorized and may be held personally liable.
   2. Clothing purchase will be subject to tax unless the purchase meets an exception outlined below; therefore approved requests for clothing must be submitted no later than December 1 to Purchasing. The Clothing Request Form may be obtained by contacting the office of the Assistant Controller.
   3. Clothing purchases will be closely monitored by Purchasing and Accounting. There must be a specific business purpose for all clothing purchases such as job requirement, safety, etc.
   4. Working Condition Fringe Exclusion: IRC §132(d); Reg. §1.132-5
      1. The Tax Court has established three criteria for the cost of clothing/uniform to be considered an ordinary and necessary business expense: TC Memo 2016-79.
         1. the clothing/uniform is required or essential in the individual’s employment;
         2. the clothing/uniform is not suitable for general or personal wear; and
         3. the clothing/uniform is not so worn (for general or personal wear).
      2. An employer’s expense, direct or through reimbursement, in providing employee clothing/uniforms that meet all of the above criteria is considered a working-condition fringe benefit, and is not includable in employee wages.
      3. Examples of clothing items that may be excluded as working condition fringes:
         1. Uniforms worn by police officers, health care professionals, delivery workers, letter carriers, transportation workers; chef’s coats; and student athletic uniforms.
         2. Protective clothing such as safety glasses, hard-hats, work gloves, steel-toed work boots, and other clothing required by OSHA regulations.
         3. Uniform/clothing that is rented and/or returned to the College and is maintained in a central area where the clothing is issued to the employee. The clothing must be kept and cleaned on College property and reissued on a regular basis. The employee may not assume personal possession of the clothing.
         4. Uniforms for grounds, maintenance, custodial, farm and field operations and research and food service that meet the characteristics of “torn or stinky” (Madsen v. Commissioner), “bulky, utilitarian in fashion and unsuitable for personal use” (Jackson v. Commissioner) or “dirty and stained” (Cross v. Commissioner).
   5. An employment contract requiring certain clothing to be worn does not meet the requirement for job exemption taxable benefit for IRS purposes. Items such as polo shirts, windbreakers, etc. although required by the institution as a uniform would not meet the requirements for job exemption taxable benefit.
6. De Minimis Fringe Exclusion: IRC §132(e); Reg. §1.132-6
   1. For GGC’s purposes, clothing items of nominal value ($75 or less cumulative annually/calendar year) and provided infrequently (no more than two times per calendar year) may be excluded from taxation as a de minimis fringe benefit.
   2. If either the value or frequency limits are exceeded, the entire value of the benefit (not just the excess amount) is taxable. Reg. §1.132-6 (d)(4).
   3. Examples of clothing items that may be excluded as de minimis fringes:
      1. Low-value clothing bearing the University or department name
      2. T-shirts provided to employees to wear to promote a campus event
   4. An apparel allowance, or the value of merchandise credit provided to certain employees that allows them to acquire apparel and goods directly from an outside vendor, is a taxable fringe benefit. The de minimis fringe exclusion above would apply if the above criteria for such are met.
   5. There must be a specific business purpose for all clothing purchases such as job requirement, safety, etc.
7. Gifts, Prizes, and Awards
   1. Cash and cash equivalents, including gift cards, gift certificates, credit/debit cards, etc. are considered taxable income to the employee regardless of the value and must be included on the employee’s W-2 regardless of value.
   2. Example: The IRS has ruled that wellness program cash rewards or premium reimbursements must be treated as taxable wages. IRS Memorandum 201622031.
   3. Guidance for the Incentive Compensation and Rewards Program outlined in the Human Resources Administrative Practice Manual (HRAP) must be followed for cash awards.
   4. Non-cash gifts, prizes, and awards are generally considered taxable income to the employee unless they qualify to be excluded as either
      1. Employee achievement awards,
      2. or de minimis.
   5. De minimis is defined by the State of Georgia Governor’s Executive Order dated March 30, 2017 as $75. Employee achievement awards for length of service and safety must comply with the State of Georgia defined de minimis amount in order to not be in violation of the State gratuity clause.
   6. For non-cash gifts, prizes and awards above $75 that are part of a qualified plan award program and are funded with non-institutional resources, the institution will follow IRS taxable fringe benefits guidelines. (IRS Publication 5137)

V. Related Regulations, Statutes, Policies, and Procedures

BOR Business Procedures Manual 5.3.17 Taxable Fringe Benefits
IRS Pub. 15-B Employer’s Tax Guide to Fringe Benefits
IRS Pub. 5137 Fringe Benefit Guide