Publication 5137 (Rev. 10-2022) Catalog Number 66216W Department of the Treasury Internal Revenue Service www.irs.gov
Fringe Benefit Guide
Tax Exempt & Government Entitites
OFFICE OF FEDERAL, STATE
& LOCAL GOVERNMENTS
Contents
Introduction .............................................................................................................................1
Reporting and Withholding on Fringe Benefits ......................................................................3
Working Condition Fringe Benefits ........................................................................................8
De Minimis Fringe Benefits .....................................................................................................8
No-Additional-Cost Services ................................................................................................12
Qualified Employee Discounts .............................................................................................13
Qualified Transportation Fringe Benefits .............................................................................13
Health and Medical Benefits ................................................................................................17
Travel Expenses ........................................................................................................................18
Transportation Expenses ......................................................................................................... 25
Moving Expenses ......................................................................................................................... 28
Meals and Lodging................................................................................................................30
Reimbursements for Use of Employee-Owned Vehicles ....................................................34
Employer-Provided Vehicles .................................................................................................36
Equipment and Allowances ..................................................................................................43
Awards and Prizes .................................................................................................................45
Professional Licenses and Dues ..........................................................................................49
Educational Reimbursements and Allowances ...................................................................50
Dependent Care Assistance .................................................................................................... 57
Group-Term Life Insurance ...................................................................................................58
Fringe Benefits for Volunteers ..............................................................................................59
Fringe Benefits for Independent Contractors .....................................................................61
Index ......................................................................................................................................64
1
Introduction
The Internal Revenue Service (IRS) created this publication to help government entities
determine the correct tax treatment of employee fringe benefits, including using the appropriate
withholding and reporting procedures.
This publication covers:
How to determine whether specic types of benets or compensation are taxable.
Procedures for computing the taxable value of fringe benets.
Rules for withholding federal income, Social Security and Medicare taxes from taxable fringe
benets.
Reporting of the taxable value of fringe benets on Forms W-2, Wage and Tax Statement, and
1099-MISC, Miscellaneous Income.
How to contact the IRS with questions on taxation and reporting requirements.
What Is a Fringe Benefit?
A fringe benefit is a form of pay (including property, services, cash or cash equivalent) in addition
to stated pay for the performance of services. Under Internal Revenue Code (IRC) Section 61,
all income is taxable unless an exclusion applies. Some forms of additional compensation are
specifically designated as “fringe benefits” in the IRC; others, such as moving expenses or
awards, are addressed by statutory provisions providing for special tax treatment but are not
designated as fringe benefits by the IRC. This publication uses the term “fringe benefit” broadly
to refer to all remuneration other than stated pay for which special tax treatment is available.
The definition of fringe benefits for this purpose generally applies to services of independent
contractors and employees; however, unless otherwise indicated, this guide applies to fringe
benefits provided by an employer to an employee. (For a discussion of whether a worker is an
employee or independent contractor, see Publication 15-A, Employer’s Supplemental Tax
Guide.) Fringe benefits for employees are taxable wages unless specifically excluded by a
section of the IRC. IRC Sections 61, 61(a)(1), 3121, 3401
More than one IRC section may apply to the same benefit. For example, education expenses up
to $5,250 may be excluded from tax under IRC Section 127. Amounts for additional education
expenses exceeding $5,250 may be excluded from tax under IRC Section 132(d).
A benefit an employer provides on behalf of an employee is taxable to the employee even if
someone other than the employee, such as a spouse or a child, receives the benefit. Treasury
Regulation (Treas. Reg.) Section 1.61-21(a)(4)
NOTICE
This publication provides basic information on the tax treatment of fringe benefits. It reflects the IRS interpretation of
tax laws, regulations and court decisions. The explanations in the publication are for general guidance only and are not
intended to provide a legal determination for a particular circumstance. The text includes citations to legal authority you
can use to research an issue. You may also want to consult a tax advisor for your situation.
2
Types of Tax Treatment of Fringe Benefits
The IRC may provide that a fringe benefit is taxable, nontaxable, partially taxable or tax-
deferred. These terms are defined below.
Taxable – Includible in gross income, not excluded under any IRC section. If the recipient is an
employee, this amount is includible as wages and reported by the employer on Form W-2 and
generally is subject to federal income tax withholding, Social Security and Medicare taxes. For
example, bonuses are always taxable because they are income under Section 61 and no IRC
section excludes them from taxation.
Fringe benefits that do not meet any statutory requirements for exclusion are fully taxable.
Although there are special rules and elections for certain benefits, in general, employers report
taxable fringe benefits as wages on Form W-2 for the year in which the employee received
them. No tax reporting is required for benefits that meet the accountable plan rules. IRC Section
451(a); Announcement (Ann.) 85-113, 1985-31 I.R.B. 31
If an employee’s wages are not normally subject to Social Security or Medicare taxes (for
example, because the employee is covered by a qualifying public retirement system), these taxes
would not apply to fringe benefits the employee received. However, the value of the benefits
must still be reported for income tax withholding purposes.
Nontaxable (excludable) – Excluded from wages by a specific IRC section; for example,
qualified health plan benefits are excludable under IRC Section 105.
Partially taxable – Part is excluded by an IRC section and part is taxable. Benefits may be
excludable up to dollar limits, such as the public transportation subsidy under IRC Section 132.
Tax-deferred – Benefit is not taxable when received, but subject to tax later. For example,
employer contributions to an employee’s retirement plan may not be taxable when made but
may be taxed when the employee receives a distribution.
General Valuation Rule
Generally, taxable fringe benefits are included in wages at their fair market value (FMV). FMV is
the amount a willing buyer would pay an unrelated willing seller, neither one forced to conduct
the transaction and both having reasonable knowledge of the facts. In many cases, the cost and
FMV are the same; however, there are situations in which FMV and cost differ, such as when
the cost an employer incurs to provide the benefit is less than the value of the benefit to the
employee. Treas. Reg. Section 1.61-21(b)
The taxable amount of a benefit is reduced by any amount paid by or for the employee. For
example, an employee has a taxable fringe benefit with a FMV of $300. If the employee pays
$100 for the benefit, the taxable fringe benefit is $200.
Special valuation rules apply for certain fringe benefits. These rules are covered in other sections
of this publication.
IRC Sections Excluding Fringe Benefits
The following IRC Sections provide a statutory basis for specific benefits that may apply to
public employees. Each of these IRC Sections is discussed later in the publication.
105 - Benets received through employer health or accident insurance
106 - Health insurance premiums paid by employer
117(d) - Qualied tuition reductions
119 - Meals or lodging provided for the employer’s convenience
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125 - Cafeteria plans
127 - Educational assistance program
129 - Dependent care assistance program
132(b) - No-additional-cost service
132(c) - Qualied employee discounts
132(d) - Working condition fringe
132(e) - De minimis benet
132(f) - Qualied transportation fringe
132(g) - Qualied moving expense reimbursements
132(j)(4) - On-premises athletic facilities
132(m) - Qualied retirement planning services
132(n) - Qualied military base realignment and closure fringe
137 - Adoption assistance programs
Reporting and Withholding on Fringe Benefits
In general, taxable fringe benefits are subject to withholding when they are made available. The
employer may elect to treat taxable noncash fringe benefits as paid in a pay period, or on a
quarterly, semiannual or annual basis, but no less frequently than annually. Ann. 85-113
Alternative Rule for Income Tax Withholding
The employer may elect to add taxable fringe benefits to employee regular wages and withhold
on the total or may withhold on the benefit at the supplemental wage flat rate of 22% (for tax
years beginning after 2017 and before 2026). Treas. Regs. 31.3402(g)-1 and 31.3501(a)-1T
Special Accounting Period
Under a special rule, benefits provided in November and December, or a shorter period in the
last two months of the year, may be treated as paid in the following year. You may only treat the
value of benefits provided during the last two months as paid in the subsequent year. You don’t
have to notify the IRS that you’re using this special accounting rule. Ann. 85-113; Treas. Reg.
1.61-21(c)(7)
An employer may use this rule for some fringe benefits and not others. The special accounting
period doesn’t need to be the same for each fringe benefit. However, if an employer uses the
special accounting period rule for a particular benefit, it must use the rule for all employees
who receive that benefit.
Employer’s Election not to Withhold Income Tax on Vehicle Use
In general, an employer does not have a choice whether to withhold on taxable fringe benefits.
However, an employer may elect not to withhold income taxes on the employee’s taxable use of
an employer’s vehicle that is includible in wages if the employer:
Noties the employee, and
Includes the benet in the employee’s wages on Form W -2 and withholds Social Security
and Medicare tax.
Note: This election is available only for employer-provided vehicles. IRC Section 3402(s)(1)
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Nontaxable Benefits Provided Under an Accountable Plan
Under an accountable plan, allowances or reimbursements paid to employees for job-related
expenses are excluded from wages and are not subject to withholding. An allowance or
reimbursement policy (not necessarily a written plan) is considered an accountable plan if:
There is a business connection to the expenditure.
There is adequate accounting by the recipient within a reasonable period of time.
Excess reimbursements or advances are returned within a reasonable period of time. IRC
Section 62(c); Treas. Reg. Section 1.62-2(c)(2)
Business Connection
“Business connection” means the employee must have paid or incurred allowable business
expenses while performing services as an employee. The reimbursement or advance must be
payment for the expenses and must not be an amount that would have otherwise been paid to
the employee as wages. Treas. Reg. Section 1.62-2(d)
Wage Recharacterization
Generally, wage recharacterization occurs when the employer structures compensation so that
the employee receives the same or a substantially similar amount whether or not the employee
has incurred deductible business expenses related to the employer’s business. If an employer
reduces wages by a designated amount for expenses, but all employees receive the same
amount as reimbursement, regardless of whether expenses are incurred or are expected to be
incurred, this is wage recharacterization. If wage recharacterization is present, the accountable
plan rules have not been met, even if the actual expenses are later substantiated. In this case, all
amounts paid are taxable as wages. For more information, see Revenue Ruling 2012-25.
Example: A government entity employs workers who occasionally incur expenses for travel.
The employees receive the same total hourly compensation regardless of whether they incur
travel expenses. When an employee incurs travel expenses, the employer will treat a portion
of the hourly compensation paid to the employee as a nontaxable per diem allowance for
travel expenses and treat the remainder as wages. If the employee doesn’t incur any travel
expenses, the employee will receive the same total amount of hourly compensation, but
the employer will instead treat the whole amount as wages. This is not an accountable plan
because the amount of the reimbursements is not based on actual expenses incurred and
substantiated. Treas. Reg. Section 1.62-2(d)(3)(i); Rev. Rul. 2012-25
Adequate Accounting
The employee must verify the date, time, place, amount and business purpose of expenses.
Receipts are required unless the reimbursement is made using per diem rates (per diem rates
are only available for certain expenses). Treas. Reg. 1.62-2(e), IRC Section 274(d) and Revenue
Procedure (Rev. Proc.) 2011-47
Employees generally should have documentary evidence, such as bills, receipts, canceled
checks or similar items to support their claimed expenses. This rule does not apply to:
Meal or lodging expenses that you reimburse on a per diem basis (discussed later), at a rate at
or below the allowable maximum, under an accountable plan.
Individual expenditures (except for lodging) of less than $75.
Expenditures for transportation expense for which a receipt is not readily available. IRC
Section 274(d)
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Timely Return of Excess Reimbursements
The employee must return any excess reimbursement within a reasonable period of time.
The determination of the length of a reasonable period of time will depend on the facts and
circumstances. The regulations provide “safe harbors” for meeting the test of timeliness. Treas.
Reg. 1.62-2(f)(1) and 1.62-2(g)
Nonaccountable Plan
A nonaccountable plan is an allowance or reimbursement program or policy that does not meet
all three requirements for an accountable plan. Treas. Reg. Section 1.62-2(c)(3)
Payments, including advances, reimbursements, allowances and so on, made under a
nonaccountable plan are taxable wages subject to all withholding when paid or constructively
received by an employee. Treas. Reg. Section 1.62-2(c)(5)
Employers may have multiple expense allowance policies and may have both accountable and
nonaccountable plans for different types of reimbursements. Employers may establish more
restrictive conditions for the plan than imposed by the IRS accountable plan requirements.
Employees cannot compel the employer to treat nonaccountable plan payments as if they were
paid under an accountable plan. Treas. Reg. Section 1.62-2(c)(3)
Travel Advances
To prevent a financial hardship to employees traveling away from home on business, employers
often provide advance payments to cover the costs incurred while traveling. Travel advances
may be excludable from employee wages if they are paid under an accountable plan. (Allowable
travel expenses are discussed in Transportation Expenses) There must be a reasonable timing
relationship between when the advance is given to the employee, when the travel occurs and
when it is substantiated. The advance must also be reasonably calculated not to exceed the
estimated expenses the employee will incur. Treas. Reg. Section 1.62-2(f)(1)
Accountable Plan Advances
Travel advances made under an accountable plan are not treated as wages and are not subject
to income and employment taxes when they’re paid. The advances must be paid for travel
expenses related to the employer’s business, substantiated by the employee, and any excess
returned in a reasonable period of time. Treas. Reg. Section 1.62-2(c)
If an employee does not substantiate expenses or timely return excess advances, the advance
is includible in wages and subject to income and employment taxes no later than the first payroll
period following the end of the reasonable period. Treas. Reg. Section 1.62-2(c)(3)(ii), (h)(2)
Nonaccountable Plan Advances
Advances from nonaccountable plans to the employee are subject to withholding when the
advances are made to the employee. Treas. Reg. Section 1.62-2(h)(2)(ii)
When Advances are Included in Income
Advances become taxable, to the extent they are not substantiated by the employee, no later
than the first payroll period following the end of the reasonable period of time. A reasonable
period may end in the year after the advance was made. After the end of the calendar year, any
amounts previously reported in wages cannot be reversed unless the amount was erroneously
treated as wages at the time it was included. Treas. Reg. Section 1.62-2(h)(2)
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Example: A small state agency pays a monthly mileage allowance of $200 to certain
employees. The agency does not require the employees to substantiate their expenses or
return any excess. The mileage allowance does not meet the rules for an accountable plan
and therefore is a nonaccountable plan. The $200 allowances are taxable wages to the
employees when paid to them; therefore, the employer should withhold Social Security,
Medicare and income taxes, and pay employer shares of these taxes.
Example: An agency has an accountable plan that requires employees to account for their
business mileage and return any excess allowance. Two of the employees account for their
mileage but fail to return the excess. The mileage allowance meets the requirements of an
accountable plan; however, because the excess allowance was not returned, the excess is
wages to the two employees and is subject to withholding for income, Social Security and
Medicare taxes. The withholding is required no later than the first payroll period following the
end of the reasonable period.
Late Substantiation or Return of Excess
If an employee substantiates expenses and returns excess advances after the employer has
treated amounts as wages, the employer is not required to return any withholding or treat
amounts as nontaxable. Treas. Reg. Section 1.62-2(c)(3)
Safe Harbors for Substantiating Expenses and Excess Reimbursements
If an employer uses either the fixed date method or periodic statement method, the requirements
of timely substantiation and return of excess advances/reimbursements will be considered met.
Treas. Reg. Section 1.62-2(g)
Fixed Date Method
If the fixed date method is elected:
The advance must be made within 30 days of when an expense is paid or incurred,
The expense must be substantiated within 60 days after it is paid or incurred, and
Any excess amount must be returned to the employer within 120 days after the expense is
paid or incurred. Treas. Reg. Section 1.62-2(g)(2)(i)
Under this method, the maximum number of days for repayment of an advance is 150 (up to 30
days in advance plus 120 days maximum for settlement).
Periodic Statement Method
If this method is used, substantiation and the return of excess must be made within 120 days
after the employer provides the employee with a periodic statement (at least quarterly) stating
that any excess amounts must be returned. Treas. Reg. Section 1.62-2(g)(2)(ii)
Under this method, the maximum number of days for repayment of an advance is 210 (90 days
for the calendar quarter plus 120 days maximum for settlement).
Other Reasonable Method
An arrangement that does not conform to one of the safe-harbor methods may still be
considered timely if it is reasonable based on the facts and circumstances. Treas. Reg. Section
1.62-2(g)(1)
Example: An employee on an extended travel assignment might have a longer period to
substantiate expenses and return any excess allowance than an employee on a brief overnight trip.
7
Form W-2 Reporting
Payments an employer made under an accountable plan may be excluded from the employee’s
gross income and are not reported on Form W-2. However, cash advances, allowances and
reimbursements that do not fall under the accountable plan rules become wages subject to
the reporting rules. If the employer pays a per diem or mileage allowance and the amount paid
exceeds the amount the employee substantiated under IRS rules, you must report the excess
as wages on Form W-2. The excess amount is subject to income tax withholding and Social
Security and Medicare taxes. Report the amount substantiated (the nontaxable portion) in box
12 using code L. (See the Forms W-2 and W-3 Instructions.)
Note: This chart refers to the 2019 Form W-2. If you are considering another year, check the
instructions for that year. The box numbers and codes are subject to change.
Type of Reimbursement Employer W-2 Reporting*
Under an Accountable Plan
Actual expense reimbursement:
Excess returned
No amount reported.
Actual expense reimbursement:
Excess not returned
The excess amount is reported as wages in boxes
1, 3 and 5. Taxes withheld are reported in boxes 2, 4
and 6.
Per diem or mileage allowance up to the
federal rate:
Excess returned
No amount reported.
Per diem or mileage allowance up to the
federal rate:
Excess not returned
The excess amount is reported as wages in boxes
1, 3 and 5. Taxes withheld are reported in boxes 2,
4 and 6. The allowance up to the federal rate is
treated as substantiated and reported only in box 12,
Code L - it is not reported in boxes 1, 3 and 5.
Per diem or mileage allowance exceeds the
federal rate:
Excess reimbursement over federal rate not
returned
The excess amount is reported as wages in boxes
1, 3 and 5. Taxes withheld are reported in boxes 2, 4
and 6. The allowance amount up to the federal rate
is reported only in box 12, Code L - it is not reported
in boxes 1, 3 and 5.
Under a Nonaccountable
Plan
Either adequate accounting or return of
excess, or both, not required by plan
The entire amount reported as wages in boxes 1, 3
and 5. Taxes withheld are reported in boxes 2, 4 and
6.
No Reimbursement Plan The entire amount reported as wages in boxes 1, 3
and 5. Taxes withheld are reported in boxes 2, 4 and 6.
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Working Condition Fringe Benefits
Working condition fringe benefits include property or services that, if the employee had paid for
the property or service, the cost would have been allowable as a business expense deduction to
the employee. That is, if the cost of an item is an allowable business expense deduction for the
employee, it may be excludable from the employee’s wages as a working condition fringe benefit
if provided by the employer. IRC Section 132(d)
If the Internal Revenue Code provides an exclusion from income for a specific benefit, the rules
regarding working condition fringe benefits under Section 132 do not apply to that benefit. Treas.
Reg. Section 1.132-1(f)(1)
General Rules for Working Condition Fringe Benefits
To be excludable as a working condition fringe benefit, all the following must apply:
The benet must relate to the employer’s business,
The expense would have been an allowable business expense deduction to the employee if
the expense had been paid personally, and
The business use must be substantiated with records.
Any expense that meets these tests can be a working condition fringe benefit. It is not necessary
that a specific statute addresses that type of expense.
Definition of Employee
All the following are considered employees for purposes of working condition fringe benefits:
Current employees
Partners
Board of directors of the employer
Independent contractors
Treas. Reg. Section 1.132-1(b)(2)
Although not employees for most employment tax purposes, independent contractors are
treated as employees for this purpose and are, therefore, eligible to receive nontaxable
reimbursements as working condition fringe benefits. Taxable fringe benefits for independent
contractors are generally reported on Form 1099-MISC.
Cash payments or cash equivalents are not working condition fringe benefits; however, they may
be excludable if they represent reimbursements paid under an accountable plan.
De Minimis Fringe Benefits
De minimis fringe benefits include any property or service, provided by an employer for an
employee, the value of which is so small in relation to the frequency with which it is provided,
that accounting for it is unreasonable or administratively impracticable. The value of the benefit
is determined by the frequency it’s provided to each employee, or, if this is not administratively
practical, by the frequency provided by the employer to the workforce as a whole. IRC Section
132(e); Treas. Reg. Section 1.132-6(b)
Example: An employer provides an employee daily taxi fare valued at $5 for travel to and from
work (and the taxi isn’t provided for safety reasons). Although small in amount, the benefit is
provided on a regular basis and is, therefore, taxable as wages.
9
Example: An employer provides a meal daily to one employee, but not to any other employee.
The benefit is “frequent” for that employee and is, therefore, not de minimis even though the
benefit may be “infrequent” with respect to the entire workforce. Treas. Reg. Section 1.132-
6(b)(2)
The law does not specify a value threshold for benefits to qualify as de minimis. The
determination will always depend on facts and circumstances. The IRS has given advice at least
once, in 2001, that a benefit valued at $100 did not qualify as de minimis. However, this technical
advice addresses a specific situation and cannot be relied upon in addressing another specific
situation. Chief Counsel Advice 200108042
Definition of Employee for De Minimis Fringe Benefits
Any individual receiving a de minimis fringe benefit is treated as an employee for purposes of
applying these rules. Treas. Reg. Section 1.132-1(b)(4)
Examples of Excludable De Minimis Fringe Benefits
All the following may be excludable de minimis fringe benefits if they are occasional or
infrequent, not routine:
Personal use of photocopier (no more than 15% of total use)
Group meals, employee picnics
Theater or sporting event tickets
Occasional coffee, doughnuts or soft drinks
Flowers or fruit for special circumstances
Local telephone calls
Traditional birthday or holiday gifts (not cash) with a low FMV
Commuting use of employer’s car if no more than once per month
Employer-provided local transportation
Personal use of cell phone provided by employer primarily for a business purpose
Treas. Reg. Section 1.132-6(e)(1); Notice 2011-72
Special rules apply to occasional meals and local transportation.
Benefits That Do Not Quality as De Minimis
Common examples of benefits that do not qualify as de minimis:
Cash - except for infrequent meal money to allow overtime work
Cash equivalent (for example, savings bond, gift certicate)
Certain transportation passes or costs
Use of employer’s apartment, vacation home, boat
Commuting use of employer’s vehicle more than once a month
Membership in a country club or athletic facility
Private Letter Ruling (PLR) 200437030; Treas. Reg. Section 1.132-6(e)(2)
Some of these benefits may be excludable under other provisions of the law. For example, the
use of athletic facilities on the premises of the employer by current or former employees, or
their family members, may be excludable from wages under section IRC Section 132(j)(4). See
Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
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De Minimis Exclusion for Occasional Meal Reimbursements
Regularly provided meal money does not qualify for the exclusion for employer provided de
minimis fringe benefits. Occasional meal money can meet an exception and be excludable if
three conditions are met:
1. Occasional basis - Meal is reasonable in value and is not provided regularly or frequently.
2. Provided for overtime work - Overtime work necessitates an extension of the employee’s
normal work schedule.
3. Enables overtime work - Provided to enable the employee to work overtime.
Meals provided on the employer’s premises that are consumed during the overtime period, or
meal money expended for meals consumed during that period satisfy this condition. Treas. Reg.
Section 1.132-6(d)(2)
If meal reimbursements are provided as part of a company policy or union contract, they are
not excludable as de minimis benefits because the benefit is required and is not occasional.
The employer would normally have the opportunity to set up the administrative procedures for
reporting the benefit, so accounting for it does not meet the “administratively impracticable”
standard for de minimis benefits.
Meal money calculated based on number of hours worked (for example, $5 per hour for each
hour worked over 8 hours) is never excludable as a de minimis fringe benefit. Treas. Reg. Section
1.132-6(d)(2)(i)
Example: A commuter ferry breaks down and engineers are required to work overtime to
make repairs. After working 8 hours, the engineers break for dinner because they will be
working for an additional 3 hours. The supervisor gives each employee $10 for a meal. The
meal is not taxable to the engineers because it was provided to permit them to work overtime
in a situation that is not routine.
Example: An employer has a policy of reimbursing employees for breakfast or dinner when
they are required to work an extra hour before or after their normal work schedule. The
reimbursements are taxable because the employer has a policy that indicates the benefit is
provided routinely. In addition, the meal reimbursement does not enable the employee to work
overtime but is an incentive to do so.
Note: Meals provided by the employer on the business premises and for the convenience of the
employer may be excludable under IRC Section 119. See Meals and Lodging.
De Minimis Transportation Benefits
Local commuting transportation fare an employer provides to an employee on an occasional
basis and to enable the employee to work overtime may be excluded as a de minimis fringe
benefit. Whether the transportation provided is “occasional” depends on the frequency it’s
provided to the employee. Overtime work must be an extension of the employee’s normal work
schedule. Treas. Reg. Section 1.132-6(d)(2)(i)
Special Valuation Rule for Unusual Circumstances and Unsafe Conditions
Local transportation for commuting an employer provides to an employee because of unusual
circumstances and unsafe conditions is taxable to the employee as wages at a rate of $1.50
each way; any additional value is excludable. Treas. Reg. Section 1.132-6(d)(2)(iii)(A)
11
Determining if “unusual circumstances” exist with respect to the employee receiving the
transportation is based on all facts and circumstances. Treas. Reg. Section 1.132-6(d)(2)(iii)(B)
Example: Unusual circumstances include an employee temporarily working outside their
normal work hours or an employee temporarily making a shift change.
“Unsafe conditions” is determined by a history of crime in the geographic area surrounding
the employee’s workplace or residence and the time of day during which the employee must
commute. Treas. Reg. Section 1.132-6(d)(2)(iii)(C)
Special Valuation Rule for Commuting – Unsafe Conditions
Under a special rule, transportation provided for commuting (occasionally or regularly) to a
qualified employee solely because of unsafe conditions, may be valued and included in wages
at $1.50 per trip, with the remainder excludable. For this purpose, “unsafe conditions” exist
if a reasonable person would, under the facts and circumstances, consider it unsafe for the
employee to walk to or from home, or to walk or use public transportation at the time of day the
employee must commute. Treas. Reg. Section 1.61-21(k)
A “qualified employee” for this purpose is one who:
Performs services during the year;
Is paid on an hourly basis;
Is not exempt under the Fair Labor Standards Act (FLSA) of 1938;
Is within a classication to which the employer actually pays, or has specied in writing that it
will pay, overtime pay of at least 1 ½ times the regular rate provided in FLSA Section 207; and
Received pay of not more than a specied dollar amount for the year ($130,000 for 2020
Treas. Reg. Section 1.61-21(k)(6)
To use this rule, the following conditions must be met:
The employee would ordinarily walk or use public transportation for commuting;
A written policy is in place under which transportation is not provided for personal purposes
other than commuting because of unsafe conditions; and
The employee does not use the transportation for personal purposes other than commuting
because of unsafe conditions. Treas. Reg. Section 1.61-21(k)(1)
Example: Alison is a qualified employee under the requirements for the commuting valuation
rule and works as a data-entry clerk for the state revenue department. Her normal hours of
work are 11 p.m. to 7 a.m. Public transportation, the only means of transportation available to
her, is considered unsafe by a reasonable person at the time she is required to commute from
home to her workplace. The employer hires a car service to pick her up at her home each
evening to transport her to work and to return her to home each morning when she finishes
her shift. The amount includible in Alison’s income is $1.50 for the one-way commute from
home to work each evening, because public transportation is considered unsafe at that time
of day. However, the fair market value of the commute from work to home each morning is
includible in Alison’s income, because unsafe conditions do not exist for this trip.
This benefit is not available to individuals considered control employees.
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No-Additional-Cost Services
A service provided to employees that does not impose any substantial additional cost on the
employer may be excludable as a no-additional-cost fringe benefit. A “no-additional-cost
service” is a service the employer offers to its customers in the ordinary course of the line of
business in which the employee performs substantial services, and the employer incurs no
substantial additional cost (including foregone revenue) in providing the service to the employee.
IRC Section 132(b)
No-additional-cost services occur frequently in industries with excess capacity services.
Examples include transportation tickets, hotel rooms, entertainment facilities and so on; they
may also occur with governmental facilities (for example, a municipal golf course or recreation
center). Treas. Reg. Section 1.132-2(a)(2)
To determine whether the employer incurs any substantial additional cost, include lost or
foregone revenue as a cost. An employer is considered to incur substantial additional costs if
the employer or employees spend a substantial amount of time in providing the service to the
employee receiving the service, even if their time spent would otherwise be idle or if the service
is provided outside normal business hours. Determine whether an employer incurs substantial
additional cost without regard to any amounts paid by the employee for the service. Treas. Reg.
Section 1.132-2(a)(5)
Employee
For purposes of this exclusion, an “employee” may be a current employee; a former employee
who retired or left on disability; a widow or widower of an individual who died while an employee,
or who retired or left on disability; or certain leased employees. Treas. Reg. Section 1.132-1(b)(1)
Reciprocal Agreements
A no-additional-cost service provided to your employee by an unrelated employer (for example,
another government entity) may qualify as a no-additional-cost service if all the following apply:
You and the employer providing the service have a written reciprocal agreement under which
a group of employees of each employer, all of whom perform substantial services in the same
line of business, may receive no-additional-cost services from the other employer.
The service is the same type of service generally provided to customers in both the line
of business in which the employee works and the line of business in which the service is
provided.
Neither you nor the other employer incur any substantial cost either in providing the service or
because of the written agreement. Treas. Reg. Section 1.132-2(b)
Highly Compensated Employees
No-additional-cost benefits made available only to highly compensated employees are not
excludable. Treas. Reg. Section 1.132-8
For more information on no-additional-cost benefits and restrictions that apply to them, see
Publication 15-B.
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Qualified Employee Discounts
An employee discount allows employees to obtain property or services from their employer at a
price below that available to the general public. When these amenities are offered to the public
for a fee and the same amenities are offered to an employee at a reduced price, the benefit may
be taxable to the employee. However, the benefit is excludable if it meets the requirements of a
qualified employee discount.
For the benefit to be excludable, the property or service must be offered to the public in the
ordinary course of business.
An employee, for this purpose, includes individuals that qualify for no-additional-cost fringe
benefits.
An excludable “qualified employee discount” generally cannot exceed:
For merchandise or other property, the employer’s gross prot percentage times the price
charged to the public for the property. IRC Section132(c)(1)(A)
For services, no more than 20% of the price charged to the general public for the service. For
this purpose, the price charged to the general public at the time of the employee’s purchase is
controlling. IRC Section 132(c)(1)(B); Treas. Reg. Section 1.132-3(b)(2)(iii)
The exclusion for a qualified employee discount applies whether the property or service is
provided at no charge (in which case, only a portion will be excludable as a qualified employee
discount) or at a reduced price. The exclusion also applies if the benefit is provided through a
partial or total cash rebate of an amount paid for the property or service. Treas. Reg. Section
1.132-3(a)(4)
The exclusion is not available for discounts on real property or personal property of a kind
commonly held for investment. Treas. Reg Section 1.132-3(a)(2)(ii)
Unlike no-additional-cost services, the exclusion for a qualified employee discount does not
apply to property or services provided by another employer under a reciprocal agreement. Treas.
Reg. Section 1.132-3(a)(3)
You cannot exclude from the wages of a highly compensated employee any part of the value of a
discount that is not available on the same terms to all your employees, or a group of employees
defined under a reasonable classification that does not favor highly compensated employees.
Treas. Reg. Section 1.132-3(a)(6)
For more information on qualified employee discounts, see Publication 15-B.
Qualified Transportation Fringe Benefits
The Tax Cuts and Jobs Act, Section 11047, suspends the exclusion of qualified bicycle
commuting reimbursements from your employee’s income for any tax year beginning after
December 31, 2017, and before January 1, 2026.
This section discusses rules that apply to benefits provided to an employee for the employee’s
personal transportation for commuting to and from work. IRC Section 132(f)(1); Treas. Reg.
Section 1.132-9(b)
Qualified Transportation Fringe (QTF) benefits include:
Commuter transportation in a commuter highway vehicle
Transit passes
Qualied parking
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Qualied bicycle commuting reimbursements (not an exclusion for tax years beginning after
December 31, 2017, and before January 1, 2026)
Employers may provide an employee with any one or more of these benefits at the same time.
Employer-provided QTFs with FMV that does not exceed monthly excludable limits, set annually,
are:
Exempt from withholding and payment of employment taxes,
Not reported as taxable wages on the employee’s Form W -2, and
Not included in gross income.
The exclusion from income for this benefit applies only to employees; former employees and
independent contractors are not eligible to receive this benefit. IRC Section 132(f)(5); Notice
94-3; Treasury Decision 8933; Treas. Reg. Section 1.132-9(b)
Valuation
Generally, transportation benefits, under the general rule for fringe benefits, are valued at FMV;
exceptions are noted where applicable.
Cash Reimbursements for Transportation Expenses
Cash reimbursements for qualified transportation expenses can be excludable if the employer
establishes a bona fide reimbursement plan (but see special rule for transit passes). This
means there must be reasonable procedures to verify reimbursements and the employees must
substantiate the expenses. IRC Section 132(f)(3)
Cash Advances
Cash advances for transportation benefits are not considered reimbursements and are treated
as taxable wages. Treas. Reg. Section 1.132-9(b) Q-16
Nondiscrimination Rules
Nondiscrimination rules that apply to other benefits do not apply to QTFs – these benefits are
exempt even if provided exclusively to highly compensated employees. Treas. Reg. Section
1.132- 8
Dollar Limitations
The exclusion is available whether an employer provides only one, or a combination, of these
benefits to employees. The total benefits cannot exceed the statutory dollar limitations, or the
excess is taxable as wages to the employee. The benefit may also be offered in the form of
a pre-tax payroll deduction for employees. See “Salary Reduction Agreements” below. IRC
Section 132(f)(4)
For 2020, the maximum nontaxable value per person is limited to:
$270 per month for combined commuter highway vehicle transportation and transit passes.
$270 per month for qualied parking.
IRC Section 132(f)(2) (annual limits can change each year due to cost of living adjustments; see
Publication 15-B for annual limits).
Salary Reduction Agreements
A salary reduction agreement is a way to provide QTF benefits pre-tax to employees, without
additional cost to the employer. An employee can choose between receiving a fixed amount of
taxable cash or QTF for a specified future period. A QTF salary reduction plan need not be in
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writing; but the election by the employee must be in writing or another permanent form, such as
electronically. IRC Section 132(f)(4); Treas. Reg. Section 1.132-9 Q&A 11-15
Note: QTFs are prohibited benefits under cafeteria plan rules. You cannot include these benefits
as part of a cafeteria plan. IRC Section 125
The election under a salary reduction agreement must contain the:
Date of the election
Amount of compensation to be reduced
Period for which the election is valid
The salary reduction may not exceed the statutory monthly dollar limits for QTFs.
This election may not be revoked after the employee is able to receive the cash or after the
beginning of the period for which the QTF is to be provided. Any unused QTF may not be
refunded. However, the unused portion may be carried over to subsequent periods and used to
provide QTFs if the amount expended does not exceed annual limits.
Negative Election
An employer may allow for an employee to make a negative election to decline participation in
a salary reduction plan, if the employee receives adequate notice that a salary reduction will be
made and is given adequate opportunity to choose to receive cash compensation instead of the
QTF. A negative election means that no response is treated as a “Yes” vote; that is, the employee
is presumed to want the QTF and does not choose the cash. Treas. Reg. Section 1.132-9(b) Q-12
Example: Agency Y maintains a QTF benefit arrangement. Y’s employees are paid twice per
month, on the 10th and 25th day of the month. Employee Q elects, before the first day of the
month, to reduce his compensation in return for QTFs totaling $200 per month through the
year (for qualified parking). Because the election was made before he could receive the cash
and the election is for a specific period, the arrangement satisfies the requirements for a valid
salary reduction.
Example: In the above example, if employee Q revoked his election on the 10th of the month,
it would be effective for the second pay period, since the revocation cannot be effective
during a current pay period. It must be for a future period.
Effect on Deferred Compensation Plans
Employees participating in a deferred compensation plan are limited to a percentage of their
compensation that they may contribute annually. In computing what is considered compensation
for purposes of the limitation, an employer may exclude certain fringe benefits, including QTFs.
IRC 314(e); IRC 403(b)(3); IRC 414(s)(2)&(3); IRC 415(c)(3); IRC 125
Transportation in a Commuter Highway Vehicle
To exclude the value of transportation in a commuter highway vehicle, the following must apply
to the vehicle:
It is provided by an employer, or by a third party for the employer;
It is used for travel between an employee residence (or parking lot) and the workplace;
It has seating capacity for at least six adults (excluding the driver);
Half of the seating capacity (excluding the driver) is occupied by employees; and
The employer must reasonably expect that at least 80% of the mileage is used for transporting
employees between residences, the workplace or parking area.
IRC Section 132(f)(5)(B); Treas. Reg. Section 1.132-9(b)
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Commuter transportation may include vanpools, and the vehicles may be owned and operated
by transit authorities or employees.
Valuation
Automobile lease valuation, vehicle cents-per-mile rule, or commuting valuation rules (discussed
in Equipment and Allowances) may be used in lieu of FMV. If one of these methods is used, the
employer must use the same valuation rule to value the use of the commuter vehicle by each
employee who shares the use. Treas. Reg. Section 1.132-9(b), Q&A-21, and 1.61-21(d), (e) & (f)
Substantiation Requirements
Only cash reimbursements by employers for use of a commuter vehicle need to be substantiated
with actual proof of the commuter vehicle use by the employee. Treas. Reg. Section 1.132-9(b)
Q&A 16(c)
Transit Passes
A transit pass is any pass, token, fare card, voucher or similar item (including an item
exchangeable for fare media) entitling a person to transportation. The pass must be used for
transportation on a public or privately-owned mass transit system, or on transportation provided
by a person in the business of transporting people in a vehicle, seating at least six adults,
excluding the driver.
Valuation
For transit passes sold at a discount, the discounted price rather than the face amount of the
transit pass can be used to figure the exclusion if the discount is available to the general public.
Treas. Reg. Section 1.132-9(b) Q&A 9
Example: 10 tickets cost $17.50 if purchased separately, but a packet of 10 tickets is available
to the public for $15, or $1.50 each. Only $15 counts against the annual maximum exclusion.
Example: Each month during 2020, the state health department distributes transit passes
with a face amount of $300 to all employees. These same passes can be purchased from the
transit system by any individual for $250. Because the value does not exceed the statutory
monthly limit of $270 for 2020, no portion of the transit pass is includible as compensation.
Substantiation Requirements
If the employer distributes the transit passes, there are no substantiation requirements. Treas.
Reg. Section 1.132-9(b) Q&A 18
Cash Reimbursements - Special Rule
Cash reimbursements for transit passes are nontaxable only if no voucher or similar item is
readily available for direct distribution to employees. A voucher is readily available for direct
distribution only if an employee can obtain it from a voucher provider that does not impose
fare media charges or other restrictions that effectively prevent the employer from obtaining
vouchers. IRC Section 132(f)(3); Treas. Reg. Section 1.132-9(b), Q-16-19
Example: Maddy buys a transit pass for $200 each month in 2020. At the end of each month,
she presents her used transit pass to her employer and certifies that she purchased and used
it during the month. The employer reimburses her $200. Lulu also purchases a monthly transit
pass for $200 but presents it to her employer at the beginning of the month and certifies that
she purchased it and will use it during the month. Her employer reimburses her at the time
17
she presents the transit pass. In both situations, the employer has established a bona fide
reimbursement arrangement for purposes of excluding the $200 reimbursement from the
employee’s gross income in 2020.
Qualified Parking
Qualified parking is parking provided to employees on or near the business work premises, or
parking on or near a location from which employees commute to work by commuter highway
vehicle, mass transit or vanpool. IRC Section 132(f)(5)(C)
Qualified Bicycle Commuting Expenses
The Tax Cuts and Jobs Act, section 11047, suspends the exclusion of qualified bicycle
commuting reimbursements from your employee’s income for any tax year beginning after
December 31, 2017, and before January 1, 2026. See Publication 15-B.
For tax years prior to 2018, employees could exclude reimbursements paid by employers for
qualified bicycle commuting expenses. The maximum exclusion was $20 times the number of
months the employee used a bicycle for commuting to work. Allowable expenses included the
purchase, maintenance, repair and storage expenses related to bicycle commuting. IRC Section
132(f)(1)(D)
The bicycle commuting expense exclusion could not be claimed for an employee for any period
in which that employee claimed either the exclusion for public transit passes or qualified parking.
IRC Section 132(f)(1)(F)(iii)(II)
Health and Medical Benefits
Under IRC Section 106, employer provided accident and health coverage, including insurance,
is excluded from the income of an employee, spouse or dependent. Under IRC Section
105, amounts received from employer provided accident and health coverage, including
reimbursements, are excluded from the income of the employee, spouse or dependent.
The following are examples of employer provided accident and health coverage:
Employer contributions to health plans - Contributions to the cost of accident or health
insurance, including qualified long-term care insurance paid by an employer, are excludable from
the income of employees. This includes employer contributions to an Archer Medical Savings
Account (MSA) or to a health savings account (HSA). See Publication 969, Health Savings
Accounts and Other Tax-Favored Health Plans, for more information on these plans. IRC
Section 106
Direct reimbursement or payment - An employer may pay qualifying employee medical
expenses, or reimburse those expenses, without the payment resulting in taxable income to the
employee. This includes payments for specific injuries or illness, but not payments based on
work missed (for example, sick pay). IRC Section 105
Health Reimbursement Arrangement (HRA) - An HRA is a written plan to provide employer
payment or reimbursement for qualifying medical or health benefits. It may provide for the
carryover of unused benefits from year to year and may specify the types of medical benefits
that are covered. An HRA can only be financed by employer contributions and cannot involve an
employee election to participate in a cafeteria plan provided under Section 125. These payments
are excludable from income. For more information, see Publication 969. IRC Section 105(b); IRC
Section 106; Notice 2002-45 and Notice 2007-22
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Flexible Spending Arrangement - Under a written employer plan, the employee may
choose to reduce salary and contribute to an account for medical expenses on a pre-tax
basis. Amounts in the account may be used to pay for qualifying medical expenses, generally
only within that calendar year. Long-term care benefits are not excludable from income tax
but are excludable from Social Security and Medicare taxes. IRC Section 106(c)(2)
Cafeteria plan - A cafeteria plan, which may include a flexible spending arrangement,
is a written benefit plan that meets the requirements of IRC Section 125. Under Section
125, employees can choose from among cash and any qualified benefits the plan offers,
including:
Accident and health benets (but not Archer MSA or long-term care insurance)
Adoption assistance
Dependent care assistance
Group-term life insurance coverage
Health savings accounts
If the employee elects qualified benefits, employer contributions are excluded from wages
for income tax and withholding if the benefits elected are excludable from gross income
under a specific section of the IRC (other than scholarship and fellowship grants under
Section 117 and employee fringe benefits under Section 132). IRC Section 125
For more information, see Publication 15-B, Publication 963, Federal-State Reference
Guide, and the Cafeteria Plans FAQ. IRC Section 125
Travel Expenses
Reimbursements received by employees who travel on business outside the area of their
tax home may be excludable from wages. This section covers key concepts related to
determining whether travel-related expenses are excludable, including:
Tax home
The denition of “away from home” (overnight/sleep or rest rules)
Temporary vs. indenite travel assignments
Substantiation methods
Reimbursements for travel expenses
Qualifying expenses for travel are excludable if they are incurred for temporary travel on
business away from the general area of the employee’s tax home. To be excludable from
wages, the travel must be substantially longer than an ordinary day’s work, require an
overnight stay or substantial sleep or rest. IRC Section 162(a)(2); U.S. v Correll, 389 U.S.
299, 302-303 (1967); Rev. Rul. 75-170
Travel expense reimbursements may include:
Costs to travel to and from the business destination
Transportation costs while at the business destination
Lodging, meals and incidental expenses
Cleaning, laundry and other miscellaneous expenses
Reimbursements for allowable expenses are excludable from wages if the accountable
plan rules are met.
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Example: An employee works for an agency in Detroit and travels to Denver to conduct
business for an entire week. The employee incurs the cost of travel to and from Denver,
as well as lodging and meals while there. Because the employee is traveling away
from their tax home on the employer’s business for substantially longer than a day,
the employee is considered in travel status. Reimbursements for substantiated travel
expenses the employee incurs are excludable from the employee’s gross income and are
not required to be reported as wages on the employee’s W-2.
Tax Home
Identifying the employee’s tax home is critical because the employee must be considered
away from their tax home for reimbursements of travel expenses to be excludable. In most
cases, the employee’s tax home is the general vicinity of their principal place of business.
The employee may receive excludable travel reimbursements while temporarily away
from their tax home for business. Regardless of whether the employee’s tax home is the
employer’s business office or the employee’s residence, the tax home includes the entire
metropolitan area; therefore, the employee is not away from home unless they leave the
metropolitan area. Rev. Rul. 73-529; Rev. Rul. 93-86; Rev. Rul. 56-49; Rev. Rul. 75-432
One Regular or Main Place of Business
Generally, the tax home is the employee’s regular place of business or official duty station,
regardless of where the employee maintains a family home.
Example: An employee lives and works in New York. The New York area is considered
the employee’s tax home.
Example: An employee lives in New York but works permanently in Philadelphia. Even
though the employee lives in New York, Philadelphia is considered the employee’s tax
home.
More Than One Regular or Main Place of Business
If an employee has more than one regular place of business, the tax home is the
employee’s main place of business. The main place of business is generally determined by
the time worked, degree of business activity and income earned in each location. Rev. Rul.
54-147, 1954-1 C.B. 51
Example: An hourly employee works in his employer’s office in Portland three weeks
a month and in a satellite office in Seattle for one week a month. Portland is the
employee’s tax home.
No Regular or Principal Place of Business
Employees may have a tax home even if they don’t have a regular or main place of
business. If an employee works in the general area of the residence where they regularly
live, the general area of that residence is the tax home. Rev. Rul. 73-529; Rev. Rul. 93-86
Example: A forestry worker has a home in a remote location and works at various forest
sites in the general area. Her employer does not have an office where the employee
works or reports. The general area of her residence may qualify as the employee’s tax
home.
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Tax Home Election for State Legislators
IRC Section 162(h) provides that state legislators whose district is more than 50 miles from the
capitol building may elect to treat their residence within the legislative district they represent
as the tax home. IRC Section 162(h); TD 9481; Technical Advice Memorandum (TAM) 9127009;
Treas. Reg. Section 1.162-24
Away From Tax Home
For a reimbursement of an expense, including meals and lodging, for business travel to be
excludable from income, a taxpayer must temporarily travel in the pursuit of business.
The statutory phrase “away from home” has been interpreted by the U.S. Supreme Court to
require a taxpayer to travel overnight, or long enough to require substantial “sleep or rest.” Thus,
merely working overtime or at a great distance from the taxpayer’s residence does not create an
exclusion for reimbursements for travel expenses if the employee returns home without spending
the night or stopping for substantial “sleep or rest.” U.S. v Correll, 389 U.S. 299, 302-303 (1967);
Rev. Rul. 75-170; Rev. Rul. 75-432
Example: An employee is required to travel from Milwaukee to Madison to work on a project.
She leaves home at 11:00 a.m. on Monday, with plans to return home the same day. She
is unable to complete the project on Monday, so she spends the night in Madison. After
completing the project the next day, she returns to Milwaukee by 10:30 a.m. Even though the
employee had not planned to spend the night and is gone for less than 24 hours, she has met
the “away from home” rule because she spent the night away from her tax home on business.
Example: An employee is required to travel from Dallas to Austin to work for the day. The
employee leaves home at 6:30 a.m. and returns that night at 10:00 p.m. On the trip home the
employee stops for dinner and rests in the car for two hours. Even though the employee has
been away from home for substantially longer than her normal workday, she is not considered
to be in travel status. The courts have ruled that stopping for a meal or a rest in a car does
not meet the substantial “sleep or rest” rule.
Example: A government agency supplies office equipment to other agencies within the state.
An employee drives a tractor-trailer with equipment from the warehouse in Sacramento to
an agency in San Diego. After 10 hours the driver stops and rents a room at a rest stop for a
4-hour nap before completing the round trip. Because the driver rented a room to sleep, he is
considered to have met the “sleep and rest” rule. Reimbursements for meals and lodging are
not taxable to the employee if the accountable plan rules are met.
Questions concerning the sleep or rest rule have been addressed in numerous court cases and
IRS rulings over the years. Each case addresses a specific situation and should not be relied
on in another situation, but each provides an illustration of the development of law in this area.
Some of the major cases and IRS rulings in this area are listed below, and some of these cases
are referred to in the following discussion.
Sleep/Rest Test Not Met - Reimbursements Taxable
U.S. v Correll, 389 U.S. 299, 302-303 (1967)
Barry v. Commissioner, 27 AFTR 2d 71-334, 435 F2d 1290 (CA1 1970)
Coombs v. Commissioner, 608 F2d 1269, 1276 (1979)
Fife v. Commissioner, 73 T.C. 621(1980)
21
Rev. Rul. 68-663, 1968-2 C.B. 71
Matteson v. Commissioner, T.C. Memo 1974-96
Unger v. Commissioner, T.C. Memo 1986-64, 51 TCM 455
Siragusa v. Commissioner, T.C. Memo 1980-68
Bissonnette v. Commissioner, 127 T.C. 124 (2006)
Sleep/Rest Test Met - Reimbursements Not Taxable
Williams v. Patterson, 286 F.2d 333 (5th Cir. 1961)
Rev. Rul. 75-170, 1975-1 CB 60
Anderson, David, (1952) 18 TC 649
Don W. & Sally W. Weaver v. Commissioner, (1953) PH TCM 54001, 12 CCH TCM 1421, 1953
Tax Ct. Memo LEXIS 17 (U.S. Tax Court Memos 1953)
Rev. Rul. 75-168, 1975-1 CB 58
Johnson, Mose, (1982) TC Memo 1982-2
Rev. Rul. 75-432, 1975-2 CB 60
Bissonnette v. Commissioner, 127 T.C. 124 (2006)
Williams v. Patterson
A railroad conductor regularly rented a hotel room near a railroad station where he slept and ate
during a 5-hour layover as part of an 18-hour workday. He could deduct his meals and lodging
costs because his layover was long enough to obtain sleep or rest and he was required by his
job to do so.
Barry v. Commissioner
A consulting engineer worked with clients in a three-state area by making one-day trips to each
client. She frequently left home at 6:30 a.m. and did not return until midnight. During the day,
she would stop in a rest area and close her eyes for 20 minutes to refresh herself for the drive.
She could not deduct the cost of her meals on these trips because she was not away from home
long enough to obtain substantial sleep or rest.
Unger v. Commissioner
A truck driver’s “safety breaks” which consisted of resting or sleeping at the wheel of the truck
for periods ranging from 45 minutes to 3 ½ hours, were considered by the courts to be mere
pauses from his daily work routine and consequently did not constitute a substantial amount of
sleep or rest. Therefore, the truck driver was not considered to be away from home.
Temporary vs. Indefinite Travel Assignments
Reimbursements of travel expenses for “temporary” assignments away from the tax home
at a single location are generally not taxable to employees. If the assignment is “indefinite,”
the employees are considered to have moved their tax home to the new work location.
Reimbursements of travel expenses for “indefinite” assignments are taxable.
The employer must determine whether an assignment is realistically expected to last less than
one year when the assignment begins.
An assignment is generally considered temporary if it is realistically expected to be, and does
in fact, last one year or less.
An assignment is generally considered indenite if it is realistically expected to last for more
than one year.
The above are the general rules. All relevant facts must be considered to determine whether the
travel assignment was intended to be temporary or indefinite. Rev. Rul. 93-86; Rev. Rul. 99-7
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Return Home From Temporary Work Location
If employees go home on days off from a temporary location while traveling away from their tax
home, the allowable expense for those days is the lesser of:
1. Travel expenses home, or
2. The cost of staying at temporary assignment.
Rev. Rul. 54-497, 1954-2 C.B. 75
“Temporary” Travel Assignment Becomes “Indefinite”
If an assignment away from home at a single location initially is realistically expected to last one
year or less, and then later is realistically expected to last longer than one year, the assignment
is considered temporary until the date the expectations change. At that time, the travel is
considered “indefinite” and any travel reimbursements from that date on are taxable.
Example: Joan accepts a 6-month work assignment away from her tax home, intending to
return to her tax home at the finish of the temporary assignment. The assignment lasts for
6 months and Joan returns to her regular job at her tax home. Joan’s reimbursements are
excludable because the assignment was intended to last, and did last, less than 1 year.
Example: Joan accepts a 6-month assignment away from her tax home, intending to return
to her tax home at the finish of the temporary assignment. After 4 months at the temporary
job assignment, Joan agrees to stay for an additional 14 months. Joan is not taxed on
employer reimbursements for travel expenses paid or incurred during the first 4 months of her
temporary assignment. Joan will be taxed on reimbursements for the additional 14 months
because the assignment has now become an indefinite assignment. If there had been a
reasonable basis at the start of the assignment to believe that it would be extended, then it
would have been considered indefinite from the start. Rev. Rul. 73-578; Rev. Rul. 93-86
Example: Joan accepts an assignment away from her tax home for 15 months. After 7
months, the employer cancels the assignment and Joan returns to work at her tax home.
Although Joan’s assignment lasted less than 1 year, it had been realistically expected to last
for more than 1 year when the assignment began. Therefore, the assignment was considered
“indefinite” and the reimbursements for the 7 months are taxable. Rev. Rul. 93-86
Reimbursements for Travel Expenses
For reimbursements for ordinary and necessary business expenses incurred while traveling away
from the employee’s home overnight to be excludable from taxable wages, the reimbursements
must be made under an accountable plan. An accountable plan requires that expenses have
a business connection, adequate documentation of expenses and a timely return of excess
reimbursements. An accountable plan may include per diem rates for certain expenses. Rev.
Proc. 2011-47; IRC Section 274(d) and (e)(3)
Per Diem Reimbursement
A per diem is a daily allowance to pay for lodging, meals and incidental expenses while traveling
on business. The amount of the expenses reimbursed using per diem rates will be deemed
substantiated without receipts, provided the requirements of the regulations are met. Treas. Reg
Section 1.62-2(e)(2); Treas. Reg. Section 1.274-5(g)
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Federal Per Diem Rate
Federal per diem rates include separate rates for lodging and for meals and incidental expenses
(M&IE). These rates apply to employees of the federal government and establish the maximum
amounts for different geographical areas that can be excluded per day for lodging and M&IE.
An annual notice provides per diem rates for expenses incurred while traveling away from
home. This includes alternate per diem rates, including a special transportation industry rate,
an incidental expense only rate and rates for a high-low substantiation method. Current and
previous per diem rates may be found on the GSA per diem rate page; see Rev. Proc. 2011-47
and Notice 2019-55 for special rules.
Lodging includes only the cost of the lodging itself. Room tax and energy surcharges are not
considered part of the lodging cost.
M&IE includes meals, tips and fees for food and luggage-handling services.
An employer is not required to reduce the M&IE even if meals are provided in-kind to the
employee, if the employer reasonably believes that the M&IE will be incurred.
Employers may use lower per diem rates than the federal rates. The accountable plan rules
apply in the same manner in these cases. If a rate higher than the federal rate is used, the
excess is taxable as wages.
Per Diem Allowance Rules
If a per diem allowance is used, employees are deemed to have substantiated the amount of
expenses equal to the lesser of the federal per diem rate or the per diem allowance paid by the
employer.
The per diem allowance must be at or less than federal rates to be fully excludable.
No receipts are required if a per diem allowance is used, but the payments must meet the
other substantiation requirements including time (date), place and business purpose.
An employer’s substantiation requirements must, at a minimum, meet the federal
requirements. An employer may have more stringent requirements, such as requiring meal
and lodging receipts. Treas. Reg. Section 1.62-2(c); IRC Sections 274(d) and (e)(3); Rev. Proc.
2011-47; Rev. Rul. 2006-56
Example: An employee traveling away from home on business is reimbursed by his employer
at the federal per diem rate for the city in which he spends the night. In this situation,
the employee does not have to provide receipts; however, he must provide adequate
substantiation verifying the time, place and business purpose of the trip. The employer may
require additional substantiation. Treas. Reg.1-62-2(c)
Miscellaneous Expenses
Miscellaneous expenses are not considered part of a per diem reimbursement and, therefore,
substantiation is required. Employers may require actual receipts or written certification as
substantiation depending on their travel policies.
Miscellaneous expenses include cab fares, fax, telephone, copy charges, room taxes, energy
surcharges, laundry, cleaning and pressing of clothes and other business-related expenses.
Miscellaneous expenses are not part of M&IE per diem allowance, and therefore these
reimbursements, in addition to the M&IE allowance, may be excludable from wages if properly
substantiated.
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Optional Method for Incidental Expenses Only
An employer payment of $5 per day or partial day may be deemed to be substantiated expenses
under the per diem rules if the employee:
Is traveling away from home on business,
Does not pay or incur meal expenses, and
Is not receiving per diem or M&IE expenses.
Rev. Proc. 2011-47; Notice 2019-55
Travel for Days of Departure and Return
For both the day travel begins and the day travel ends, the per diem meal allowance is to be
prorated by one of two methods:
Allow ¾ of the per diem meal allowance for each of those days, or
Use any method that is consistently applied and that is in accordance with reasonable
business practice, such as the actual hours away from home on the rst and last day.
Rev. Proc. 2011-47
Traveling to More Than One Location
If the employee is traveling to more than one location in one day, use the per diem rate for the
area where the employee stops for rest or sleep. Rev. Proc. 2011-47
Per Diem Paid Under a Nonaccountable Plan
A per diem plan that fails to comply with any of the accountable plan requirements is considered
a nonaccountable plan. Treas. Reg. Section 1.62-2(c)(3)
Per diem payments made under a nonaccountable plan are wages subject to federal income tax,
and employer and employee Social Security and Medicare taxes. The payments are included in
wages in boxes 1, 3 and 5 on Form W-2.
Example: An employee regularly travels as part of her job requirements. The employer
provides her with a monthly per diem allowance based on an estimate of the number of
days traveled. The employer does not require the employee to return any of the allowance
that exceeds substantiated business expenses. Because the employer does not require the
employee to return excess advances or allowances, this is not an accountable plan and the
entire amount of the allowance is taxable to the employee as wages.
Other Per Diem Methods
The following are alternative per diem methods that may be applied to travel expenses.
Meals-Only Substantiation Method
An employer may reimburse actual lodging expenses and use the M&IE per diem allowance plan
for the meals and incidental expenses. Treas. Reg. Section 1.62-2; Rev. Proc. 2011-47; Notice
2019-55
High-Low Substantiation Method
“High-low substantiation” is another deemed substantiation method that may be used in place
of the per diem method. The IRS designates key cities or localities as “high-cost” areas. All
other localities are considered “low-cost” areas. Use of this method eliminates the need to keep
records of the current rate for each city. A single per diem rate is assigned to all high-cost areas
and all other areas are assigned another rate. An employer that uses the high-low method for
an employee must use the high-low method for that employee for all travel in the continental
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United States that year, unless an actual expenses method or the meals and incidental expenses
method is used. See the GSA per diem rate page and Rev. Proc. 2011-47 for more information
and Notice 2019-55 for current high-low rates.
Transportation Expenses
Transportation expenses are costs for local business travel that is not away from the tax
home area overnight, and that is in the general vicinity of the principal place of business.
Transportation expenses do not include commuting costs, which are not deductible business
expenses and cannot be excluded from wages if provided by the employer. To be excludable,
reimbursements for transportation expenses must meet the accountable plan requirements. IRC
Section 162(a); IRC Section 62(c); Rev. Rul. 99-7
Reimbursements for transportation expenses between a residence and a work location are
excludable from income if they are provided for:
Daily transportation between one work location and another, neither one being the employee’s
residence.
Daily transportation between the employee’s residence and a temporary work location outside
the metropolitan area where the employee generally works.
Daily transportation between the employee’s residence and a temporary work location in the
same business (regardless of distance) if the employee has a regular work location away from
the residence.
Daily transportation between the employee’s residence and another work location in the same
business (regardless of whether the work location is temporary and regardless of distance), if
the residence is the employee’s principal place of business (the residence is exclusively used
on a regular basis for the convenience of the employer).
If none of these situations apply, the transportation expenses are commuting costs and are
taxable if reimbursed to the employee. See Transportation Expenses and Commuting, below.
Rev. Rul. 55-109; Rev. Rul. 99-7
Transportation expenses may include:
Air, train, bus, shuttle and taxi fares in area of tax home
Mileage expenses or costs of operating a vehicle
Tolls and parking fees
Transportation expenses do not include:
Meals and lodging
Commuting costs to regular or principal place of business
Travel expenses
Transportation Expenses and Commuting
It’s important to distinguish expenses for transportation from commuting costs. “Commuting”
refers to travel between an employee’s personal residence and main or regular place of
work. Reimbursements for these expenses are never excludable. However, reimbursements
of transportation expenses for getting from one workplace to another in the course of the
employer’s business within the general area of the tax home may be excludable from wages.
Treas. Reg. Sections 1.162-2(e) and 1.262-1(b)(5); Rev. Rul. 99-7
The following illustrate commuting situations, for which reimbursements are taxable:
An employee drives from his residence to his principal or regular workplace (during or after
work hours, whether required or not by employer).
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An employee drives from her residence to her regular workplace on the weekend because of
an urgent meeting convened by her employer.
An employee has an ofce in the home that qualies as a principal place of business and
drives between the home and another work location in a different trade or business.
An employee with no regular or main place of business drives between his residence and his
rst business stop, and from last business stop and home.
The rules for commuting are illustrated by the following examples:
Example: An employee drives from her home to her main office in the morning. In the
afternoon, she drives to a satellite office in another town and then returns to her residence.
The trip between the employee’s home and place of business is personal commuting and any
reimbursement for this part of the trip is taxable to her as wages. If the accountable plan rules
are met, employer reimbursement for the travel from her main office to the satellite work site
and the return trip home is excludable.
Example: A fish and game warden lives in a remote area and does not have a regular place of
business. He drives daily to various temporary job locations and is reimbursed for his mileage.
Reimbursements for the daily travel between the employee’s residence and the first work
location and last work location and home are taxable as wages because the game warden
does not have a regular place of business and he is not driving to a work site outside of the
general area of his residence. Reimbursements for travel between the work sites are not
taxable.
Example: An employee travels from his residence to a temporary work site for the day, driving
past his official duty station on the way. Reimbursements for transportation between the
residence and a temporary work site may be excludable to the extent of the actual distance
traveled. Rev. Rul. 99-7; Chief Counsel Advice (CCA) 199948018; CCA 200027047
Example: A high school music teacher is permanently assigned to two schools. She works at
the first school in the morning and drives from the first to the second school in the afternoon.
She is reimbursed for driving between the two locations. The travel is not taxable to the
teacher because she is driving between work sites.
Temporary vs. Indefinite Assignments
For transportation expenses, as with travel expenses, it’s important to note the distinction
between “temporary” and “indefinite” assignments. Rev. Rul. 99-7; CCA 199948019
Note: The distinction between temporary and indefinite work locations only applies to
determining whether expenses for transportation between an employee’s residence and a work
location are taxable. It doesn’t apply to expenses for transportation between one work location
and another. However, if the employee’s residence is their principal place of business, all
reimbursements for transportation between the residence and other work sites in the same trade
or business are excludable.
Temporary Assignment - Transportation Expenses
Reimbursements of transportation expenses for temporary assignments in the general area of
the tax home are generally taxable to the employee. However, if an employee has one or more
regular work locations away from the employee’s residence, the employer may reimburse the
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employee for expenses for transportation between the employee’s residence and a temporary
work location in the same trade or business, regardless of distance.
Additionally, if the employee’s principal place of business is their residence (the residence is
exclusively used on a regular basis for the convenience of the employer), reimbursed expenses
(paid under an accountable plan) for transportation between the employee’s residence and
another work location in the same business (regardless of whether the work location is
temporary and regardless of distance) is not a taxable reimbursement. A temporary assignment
exists under these circumstances:
Duration at a single location is realistically expected to last, and does last, one year or less.
Assignment is away from the main place of work. Rev. Rul. 99-7
Indefinite Assignment - Transportation Expenses
Reimbursements of expenses for indefinite assignment transportation expenses generally are
taxable. If an assignment is indefinite, this generally precludes exclusion for reimbursement of
transportation expenses. An indefinite assignment exists under these circumstances:
Duration at a single location is realistically expected to be longer than one year.
The assignment location is away from the main place of work.
A break in service of seven months at an assignment location generally results in the beginning
of a new assignment for purposes of determining whether an assignment is temporary or
indefinite. Rev. Rul. 99-7; CCA 200026025; CCA 200025052
“Temporary” Transportation Assignment Becomes “Indefinite”
If an assignment at a single location, initially is realistically expected to last one year or less,
and then later is realistically expected to last longer than one year, the assignment is considered
temporary until the date the expectations change. At that time, the transportation is considered
“indefinite” and any reimbursements from this date are taxable.
The decision of whether an assignment is realistically expected to last more than one year is
made when the assignment begins.
The IRS considers all the facts to determine whether the travel assignment was truly intended to
be temporary.
Example: Tom, a state auditor, is assigned to an audit of another agency that is expected to
take, and does take, 18 months to complete. The agency he is auditing is in the same town as
his regular place of business. Tom travels daily from his residence to the office of the agency
he is auditing and is reimbursed for his mileage by his employer.
The travel is considered “indefinite” because the audit is expected to take more than one year,
Tom is not traveling away from his tax home area and, therefore, the transportation is considered
commuting. The reimbursements for mileage are taxable wages to Tom.
If Tom had traveled from his main place of business rather than from his residence, the
reimbursements could be excludable because he was not traveling from his residence, so the
“temporary vs. indefinite” rules do not apply.
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Substantiation of Transportation Expenses
Transportation expenses are subject to the same accountable plan rules as those for travel
expenses. Excludable transportation expense reimbursements can only be excluded when paid
under an accountable plan. The following requirements must be met:
Business connection
Substantiation
Excess returned within a reasonable time
Treas. Reg. Section 1.62-2(c)
Substantiation requires that the employees be able to prove amount, date and time, place and
business purpose of expenses, and keep contemporaneous records such as receipts. Expenses
must not be lavish but must be reasonable based on circumstances. Treas. Reg. Section 1.62-2;
IRC Section 274(d)
Moving Expenses
Payments or reimbursements for moving expenses are generally not considered fringe benefits;
however, many employers provide compensation or reimbursement for these expenses and a
brief discussion is included here. For more information, see Publication 521, Moving Expenses.
Section 11048 of the Tax Cuts and Jobs Act suspends the exclusion for qualified moving
expense reimbursements from employees’ income for tax years beginning after December
31, 2017, and before January 1, 2026. However, the exclusion is still available in the case of a
member of the U.S. Armed Forces on active duty who moves because of a permanent change
of station. The exclusion applies only to reimbursement of moving expenses that the member
could deduct if they had paid or incurred them without reimbursement. See Moving Expenses
in Publication 3, Armed Forces’ Tax Guide, for the definition of what constitutes a permanent
change of station and to learn which moving expenses are deductible; see Nondeductible
Expenses in Publication 521 for a list of expenses that are not deductible as moving expenses.
For payments or reimbursements made in 2018 in connection with a move that occurred prior to
January 1, 2018, the suspension does not apply if the payments would have otherwise satisfied
the requirements under IRC Section 217 for qualified moving expense reimbursements. Notice
2018-75
Accordingly, the following discussion only applies for tax years prior to 2018, or for members of
the U.S. Armed Forces on active duty who move because of a permanent change of station. In
all other cases, until 2026, reimbursements received by an employee for moving expenses are
included in the employee’s wages.
Generally, moving expenses incurred to change residences are personal expenses.
Reimbursements or payments to cover them are included in wages, unless the move is directly
related to work and the expenses meet the criteria under IRC Section 217. Personal expenses
for moving are not deductible under IRC Section 262. If the moving expenses qualify under IRC
Section 217, they may be taken as a deduction on the individual’s federal income tax return.
If the expenses are paid or reimbursed by an employer, the moving expense payment can be
treated as an excludable fringe benefit to the employee under IRC Section 132(g).
General Rule for Employees
A moving expense reimbursement received directly or indirectly from an employer (under an
accountable plan) is excludable to the employee if the following tests of IRC Section 217 are met
(IRC Sections 82 and 217):
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Individual must be an employee.
Employee must actually incur or pay the expenses.
Expenses are in connection with the commencement of work at a new principal place of work.
Move must bear a reasonable proximity both in time and location to starting work at the new
job location (generally moving expenses incurred within one year of the date the employee
rst reports to work at the new location qualify; moving expenses incurred after this one-year
period may be considered reasonably proximate if it can be shown circumstances prevented
these costs from being incurred within the one-year period).
The move must meet the time and distance tests (however, see note below):
Time test - The employee must work at least 39 weeks full-time in the first year after
arriving in the new location.
Distance test - The new job is at least 50 miles farther from the former home than the old
job location was from the former home.
Note: Members of the U.S. Armed Forces on active duty who move because of a permanent
change of station are not required to meet the time and distance tests.
Allowable Expenses
Moving expenses are the reasonable expenses for:
Moving household goods and personal effects from the former to the new residence;
The travel costs between the former and the new residence by the shortest and most direct
route; and
Certain in-transit storage expenses incurred within a period of 30 consecutive days after the
day the goods and effects are moved from the former residence and prior to deliver at the new
residence.
IRC Section 217(b); Treas. Reg. Section 1.217-2(b)(3)
Moving expense payments can be direct or indirect. Direct payments are made directly to the
employee for moving expenses. Indirect payments are made to a third party on behalf of the
employee (for example, a moving and storage company, an airline or travel agency). Treas. Reg.
Section 1.82-1(a)(3)
Period for Traveling Expenses
Employees can be reimbursed for the cost of transportation and lodging for themselves and
members of their household while traveling from their former home to their new home. This
includes expenses for the day they arrive. Employees can include any lodging expenses they had
in the area of their former home within one day after they could not live in their former home (the
furniture had been moved). Employees can be reimbursed for traveling expenses for only one trip
to their new home for themselves and members of their household. However, all family members
do not have to travel together or at the same time.
The period for travel begins one day after former residence is no longer suitable for occupancy
and includes one-night lodging at prior residence and ends on the date the employee secures
lodging at the new place of residence. The qualified expenses are deductible only for the first
day the employee arrives at the new location.
Any relocation allowances paying for more days than established by the guidelines above are
taxable as wages to the employee. Treas. Reg. Section 1.217-2(b)(4)
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Delayed Moving
There is no fixed time limit for incurring or reimbursing excludable moving expenses. As noted
above, generally moving expenses incurred within one year of the date the employee first reports
to work at the new location are considered to be reasonably proximate in time; moving expenses
incurred after this one-year period may be considered reasonably proximate if it can be shown
circumstances prevented these costs from being incurred within the one-year period). For
example, the employee may be waiting for dependents to finish school. Rev. Rul.78-200; Treas.
Reg. Section 1.217-2(a)(3)
These rules are further illustrated in Publication 521.
Meals and Lodging
The fair market value of meals or lodging furnished by an employer may be nontaxable to the
employee. IRC Section 119 provides an exclusion for the value of meals and lodging provided by
the employer under certain circumstances. Cash provided for meals is not excludable under this
IRC Section. However, under certain circumstances cash for meals can be excluded as a
de minimis fringe benefit.
In-Kind Requirement
“In-kind” refers to payments made in something other than cash. Meals or lodging paid in the
form of cash equivalent, do not qualify for this exclusion.
Meals are excludable from wages of the employee if they are provided:
On the employer’s business premises, and
For the employer’s convenience.
Lodging is excludable from the employee’s wages if it is provided:
On the employer’s business premises,
For the employer’s convenience, and
As a condition of employment.
Federal law takes precedence over a state statute or an employment or union contract in
determining the federal tax liability for furnished meals or lodging. The facts and circumstances
and the requirements of IRC Section 119 determine the liability for federal income, Social
Security and Medicare taxes. IRC Section 119(b)(1)
Example: An employee of a state institution is required by his employer to reside at the
institution to be available for duty at all times. Under the state statute, the employee’s lodging
is regarded as part of the employee’s compensation. Although the amount may be subject to
state tax, for federal tax purposes, the amounts are excludable.
If an employee has an option to receive additional compensation in place of actual meals or
lodging, then the meals and lodging, if chosen, are taxable. Treas. Reg. Section 1.119-1(e)
Meals
To be excludable, meals must be provided on the business premises and for the convenience of
the employer.
Meals on the Business Premises of the Employer
“On the business premises of the employer” means that the meals must be provided either at:
A place where the employee performs a signicant portion of duties, or
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The premises where the employer conducts a signicant portion of his or her business.
Treas. Reg. Section 1.119-1(c)
Example: Meals are provided at no cost to employees on a state ferry. The ferry qualifies
as the employer’s business premises and the employee performs a significant portion of
duties there. If the meals are furnished for the employer’s convenience (because the employer
cannot stop the ferry to allow the employees to go to lunch) the meals are not taxable.
Meals for the Convenience of the Employer
Meals are provided for the convenience of the employer if they are provided for a substantial
noncompensatory business reason; that is, the intention is not to provide additional pay for the
employee. This determination depends on the facts and circumstances of the case.
Meals provided in the following situations are furnished for substantial noncompensatory
business reasons:
Workers need to be on call for emergencies during the lunch period.
The nature of the business (not merely a preference) requires short lunch periods.
Eating facilities are not available in the area of work.
Meals are furnished to restaurant employees before, during or after work hours.
Example: Meals are furnished during working hours so that the employee is available for
emergency calls during the meal; for example, firefighters at the firehouse. You must have
evidence that emergencies occur.
Example: Meals are furnished to employees in a remote site because there are insufficient
eating facilities in the area, such as at a remote logging camp.
Example: Meals are furnished by a bank that experiences highest customer demand during
the lunch hour and, therefore, establishes a short meal period to meet this need (not to allow
the employee to leave earlier).
Meals provided to improve general morale or goodwill, or to attract prospective employees, are
not provided for a substantial noncompensatory business reason and are taxable. Treas. Reg.
Section 1.119-1(a)(2)
If meals are furnished to over half an employer’s employees for the convenience of the employer,
then meals furnished to all employees will be considered furnished for the convenience of the
employer. IRC Section 119(b)(4)
Meals Provided Before or After Working Hours
Meals provided before or after working hours are not for the employer’s convenience, unless:
They are provided for a restaurant or cafeteria employee, or
Duties prevent the employee from taking a meal until immediately after working hours. Treas.
Reg. Section 1.119-1(a)(2)(ii)(f)
Meals Furnished With a Charge
The fact that an employer charges for meals and employees may accept or decline the meals
isn’t taken into account in determining whether or not meals are furnished for the convenience of
the employer. IRC Section 119(b)(2)
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If an employer periodically charges an employee a fixed amount for meals, regardless of whether
the employee takes the meal, the employee’s regular taxable wages are reduced by the amount
of the charge, if the meals are furnished for the convenience of the employer. If not provided for
the convenience of the employer, the FMV of the meals is included in the employee’s wages.
Generally, the FMV of the meal will be the amount charged for the meal to the employee. IRC
Section 119(b)(3)
De Minimis Meals
Infrequent meals of minimal value may be excludable as a de minimis fringe benefit, regardless
of the tests above.
Meals and Lodging While Traveling
Reimbursements for meals and lodging expenses incurred while traveling away from home
overnight for business reasons may be excludable. These expenses generally fall under the rule
for travel expenses.
The taxability of these reimbursements or allowances depends on whether the meals and
lodging expenses are connected to the business travel and whether the expenses are
substantiated. Reimbursements or allowances must meet the accountable plan rules to be
excludable. For travel meals and lodging reimbursements to be excludable from wages,
employees must be traveling away from their tax home on their employer’s business. As
with other travel-related expenses, the general area of work, not the employee’s residence,
determines the tax home.
The requirements of “traveling away from home” are met when:
The employee must be traveling away from the general area of the tax home substantially
longer than an ordinary day’s work, and
The employee requires an overnight stay or substantial sleep or rest to meet the demands of
the work while away from home. IRC Section 162(a)(2); U.S. v. Correll, 389 U.S. 299, 302-303
(1967); Rev. Rul. 75-170; Rev. Rul. 75-432 (See Transportation Expenses)
Meals Away From Tax Home But Not Overnight
Generally, these meals are taxable as wages to the employee because travel expenses must be
away from home overnight to be excludable.
Example: An employee is required to travel out of town to work for the day. The employer
agrees to pay for the employee’s meals while away. The employee leaves home at 7:00 a.m.
and returns home at 9:00 p.m. Before the employee returns in the evening, the employee
takes a nap in his car for an hour.
Although the employee is away from his tax home for substantially longer than a normal work
day and even stops for rest, the rest is not considered to be substantial. The employee is not
considered to be away from home overnight. Any meal money that the employee receives is
taxable as wages.
For more information, see Transportation Expenses.
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Business Meals
Reimbursements or allowances provided to employees for business meals may be excludable
if the expenses are ordinary and necessary, the expense is not lavish or extravagant under the
circumstances, and the taxpayer, or an employee of the taxpayer, is present at the furnishing of
the food or beverages. IRC Section 274(k)
Substantiating Employee Meal Expense Reimbursements
Meal expense reimbursements or allowances must meet the accountable plan rules to be
excludable from wages. There must be a business connection, expense documentation and a
requirement to return excess advances or reimbursements to qualify as an accountable plan. An
employer may reimburse employees using an actual expense or per diem method.
Meals while not traveling, such as meals with meetings or overtime meals, must be
substantiated using the actual expense method.
Lodging
For lodging to be excludable from wages, it must be for the convenience of the employer, on the
employer’s premises and furnished as a condition of employment. Treas. Reg. Section 1.119-1(b)
Lodging provided to a state governor is considered to be for the convenience of the employer.
Rev. Rul. 75-540
Rent-subsidized living quarters provided to state legislators do not satisfy the convenience of the
employer or condition of employment tests where the legislator is not required to accept them.
However, legislators may make an election to have their personal residence within the legislative
district which they represent to be treated as their tax home, allowing the value of the lodging to
be excludable as a qualified travel expense. IRC Section 162(h); Treas. Reg. 1.162-24;
TAM 9127009
Lodging Required as Condition of Employment
Lodging is required as a condition of employment if the employer requires the employee to live
on the premises to be able to perform the job duties. Common examples may include park
rangers, firefighters or apartment managers. For the exclusion to apply, the employee must be
required to accept lodging. Where lodging is provided as a condition of employment, meals, if
provided, may qualify as excludable. Treas. Reg. Section 1.119-1(f)-Example 5
Example: An employee of a state is employed at an institution. The employer requires the
employee to be available for duty at all times. The employer furnishes the employee with
meals and lodging at the institution without charge. Under the state statute, his meals and
lodging are regarded as part of the employee’s compensation. The employee would nevertheless
be entitled to exclude the value of the meals and lodging from his gross federal income.
Example: An employee at a prison is given the choice of residing at the institution free of
charge, or residing elsewhere and receiving a cash allowance in addition to the employee’s
regular salary. If the employee elects to reside at the prison, the value of the lodging is
taxable as wages to the employee because the employee is not required as a condition of
employment to reside on the premises.
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Example: A full-time executive works for a city but lives in another community. The city
provides a rented apartment locally to help defray the executive’s personal commuting costs.
The requirements for lodging to be excluded from income have not been met. The lodging
is not on the business premises of the employer, and therefore, does not qualify for an
exclusion.
Lodging Furnished by Certain Educational Institutions
Employees of an educational institution or an academic health center provided with lodging
that isn’t furnished for the convenience of the employer, as a condition of employment and on
the employer’s premises may still be able to exclude the value of the lodging from income if the
lodging is qualified campus lodging and the employee pays an adequate rent.
Qualified Campus Lodging
Qualified campus lodging is lodging furnished to the employee by an educational institution for
use as a home. The benefit applies to employees of an educational institution and their spouses
and dependents. The lodging must be located on or near a campus of the educational institution
or an academic health center.
Adequate Rent
The amount of rent the employee pays for the year for qualified campus lodging is considered
adequate if it is at least equal to the lesser of:
5% of the appraised value of the lodging, or
The average of rentals paid by individuals (other than employees or students) for comparable
lodging held for rent by the educational institution.
If the employee pays annual rent that is less than the lesser of these amounts, the difference is
included in wages. IRC Section 119(d)
Appraised value is the value determined as of the close of the calendar year and must be
reviewed annually.
Example: Carl Johnson, a professor for State University, rents a home from the university
that is qualified campus lodging. The house is appraised at $200,000. The average rent paid
for comparable university lodging by persons other than employees or students is $14,000
a year. Carl pays an annual rent of $11,000. Carl does not include in his income any rental
value because the rent he pays equals at least 5% of the appraised value of the house (5% ×
$200,000 = $10,000). If Carl paid annual rent of only $8,000, he would have to include $2,000
in his income ($10,000 − $8,000).
See Publication 525, Taxable and Nontaxable Income, for more information.
Reimbursements for Use of Employee-Owned Vehicles
Government employees often use their personal automobiles for official use. An employee can
deduct the costs of operating a vehicle for work as an employee, using either actual expenses or
a standard mileage rate. If an employer reimburses these expenses under an accountable plan,
they are not deductible by the employee, but may be excludable from the employee’s income.
If reimbursements are not consistent with accountable plan rules, or exceed the allowable
amounts, they may be taxable as wages. See Publication 463, Travel, Gift, and Car Expenses,
for more information.
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Standard Federal Mileage Rate
In most situations, an employer can choose to reimburse the employees through a standard
mileage rate allowance in lieu of actual automobile expenses and meet the accountable plan
rules. A standard mileage rate is considered to cover all expenses of operating a vehicle,
including insurance, maintenance, tires, oil and so on. It does not include parking or toll charges.
Mileage-rate reimbursements for allowable business travel are excludable from the wages of the
employee if equal to or less than the standard federal mileage rate and the employee accounts
for the business miles driven. IRC Section 274(d)
As of January 1, 2020, the standard mileage rate is 57.5 cents per mile. The rate for the current
year can be found on IRS.gov. Notice 2020-05
Reimbursements for non-business travel, including commuting, are always taxable even if paid
at or below the federal mileage rate and are to be included in regular wages and subject to all
income and employment taxes. (But see De Minimis Nontaxable Personal Use, later.)
Personal commuting between the residence and the principal place of business is considered
non-business travel or personal use.
Employer Reimbursements in Excess of Federal Mileage Rate
Reimbursements in excess of the federal mileage rate are taxable as regular wages to the
employee. When there is an excess reimbursement, both the nontaxable and taxable amounts
are reported on Form W-2:
Amounts up to federal mileage rate: box 12, code L.
Amounts in excess of federal mileage rate (taxable): boxes 1, 3 and 5 (withholding reported in
boxes 2, 4 and 6).
Employer Reimbursement Paid at or Less than the Federal Rate
If an employer reimburses an employee’s business mileage under an accountable plan, at or
below the federal mileage rate and the employee substantiates the business mileage, then:
The reimbursement is not taxable to the employee.
No income tax is withheld.
No reporting is required on Form W-2.
Reimbursement for Actual Expenses
If the employer reimburses the employee for actual expenses, such as fuel purchased in
connection with the performance of work, including repairs, depreciation and parking, those
expenses are excludable if made under an accountable plan. The employee must be able to
document the amount of the expenses and their connection to the business. Any expenses
that are personal in nature (for example, commuting) are never excludable and reimbursements
for these must be included in taxable wages. Reimbursement for actual expenses cannot be
excluded from wages if a standard mileage rate reimbursement is being provided.
See Publication 463 for more information on allowable vehicle expenses.
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Employee Deduction
The Tax Cuts and Jobs Act P.L. 115-97 suspended all miscellaneous itemized deductions that
are subject to the 2% of adjusted gross income floor under Section 67, including unreimbursed
employee travel expenses. The suspension applies to tax years beginning after December
31, 2017, and before January 1, 2026. Therefore, the business standard mileage rate listed in
Notice 2018-3 cannot be used to claim an itemized deduction for unreimbursed employee travel
expenses during the suspension.
Substantiation Requirements
The employee is required to provide substantiation to the employer. Substantiation rules require
the employee to record the date, business purpose and place of each trip. IRC Section 274(d)
Mileage should be recorded at or near the time incurred. Monthly expense reports generally
meet this requirement.
Example: In 2020, a state agency paid automobile mileage reimbursements at the federal
rate of 57.5 cents per mile to employees for business use of their personal vehicles. The
employees verified their expenses on monthly expense reports. Because the reimbursement
does not exceed the federal mileage rate and the business use has been verified, the
reimbursements are not included in employee wages. No reporting is required on Form W-2.
Employer-Provided Vehicles
If an employer provides a vehicle that an employee uses exclusively for business purposes and
the substantiation requirements are met, there are no tax consequences or reporting required
for that use. The use is treated as a working condition fringe benefit. Business use does not
include commuting. Employees should maintain records to substantiate that all vehicle use was
for business.
Employer Vehicle Used for Both Business and Personal Purposes
If an employer-provided vehicle is used for both business and personal purposes, substantiated
business use is not taxable to the employee (see Substantiation Requirements, below). Personal
use is taxable to the employee as wages. The employer can choose to include all use as wages;
in this case, the employee may reimburse the employer for personal use rather than having it
treated as wages. Treas. Reg. Section 1.61-21(c)(2)
What is Personal Use?
Examples of taxable personal use of an employer-provided vehicle include:
Commuting between residence and work station
Vacation or weekend use
Use by spouse or dependents
Example: An employee goes into his office on the weekend. This is personal commuting,
regardless of whether it’s required by the employer. Any reimbursement for the transportation
is taxable wages. Treas. Reg. Section 1.162-2(e)
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De Minimis Nontaxable Personal Use
An exception to the limitation on personal use applies for use that qualifies as de minimis.
Examples of excludable de minimis use of an employer-provided vehicle include:
Small personal detour while on business, such as driving to lunch while out of the ofce on
business.
Infrequent (not more than one day per month) commuting in employer vehicle. This does not
mean that an employee can receive excludable reimbursements for commuting 12 days a
year. The rule is available to cover infrequent, occasional situations.
Treas. Reg. Section 1.132-6(e)(2) and 1.132-6(d)(3)
Example: An employee uses a motor pool vehicle for a business meeting. The employer
requires that motor pool vehicles be returned at the end of the business day, but the
employee is delayed, and the motor pool is closed when the employee arrives back at the
office. The employee takes the vehicle home and returns it the next morning.
If this is an infrequent occurrence for that employee (generally happening no more than once
a month) the commuting value of the trip is a nontaxable de minimis fringe benefit. If this is a
frequent or routine occurrence, the commuting is taxable to the employee.
Substantiation Requirements
Under IRC Section 280F, vehicles are considered “listed property” and, therefore, to support an
exclusion or deduction, separate records for business and personal mileage are required.
IRC Section 274(d)
If the employee does not provide records documenting business and personal mileage
separately, the value of all use of the automobile is wages to the employee. Treas. Reg. Section
1.132- 5( b)
If the employee provides to the employer records documenting business and personal use
separately, only the personal use of the automobile is wages to the employee.
Exceptions to the recordkeeping requirements apply in certain situations discussed later in this
section.
Valuation of Personal Use of Employer-Provided Vehicle
Personal use of an employer’s vehicle that does not qualify for an exclusion creates taxable
wages to the employee. The following procedures should be used to determine how much to
include in wages on the employee’s Form W-2.
Under the general valuation rule for fringe benefits, the amount to include in income is
FMV, which is generally the lease value of the vehicle, but other rules may apply in certain
circumstances. Treas. Reg. Section 1.132-5(b)
Three Automobile Valuation Rules
Automobile Lease Valuation Rule -Treas. Reg. Section 1.61-21(d)
Vehicle Cents-Per-Mile Valuation Rule -Treas. Reg. Section 1.61-21(e)
Commuting Valuation Rule -Treas. Reg. Section 1.61-21(f)
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General Requirements for Using These Special Valuation Rules
To use one of the special valuation rules, the employer and employee must timely report
personal use as wages. Generally, the rules are applied on a vehicle-by-vehicle basis; the
employer may use different rules for different vehicles.
Automobile Lease Valuation Rule
Compute the value for purposes of the lease valuation rule as follows:
1. Determine the fair market value of the vehicle on the first day it is made available to
employee.
2. Use the table in Treas. Reg. Section 1.61-21(d)(2)(iii) or Publication 15-B to compute the
annual lease value.
3. Multiply the annual lease value by the percentage of personal use computed in Step 1.
4. If fuel is provided, add 5.5 cents per mile driven by the employee to the table lease value.
Maintenance and insurance costs are included in the standard mileage rate. Treas. Reg.
Section 1.61-21(d)(3)(i)
The employer’s cost, including tax, title and so on, may be used to determine the FMV. See
Treas. Reg. Section 1.61-21(d)(5) for information on the valuation of leased vehicles.
Example: Joe, an employee of Agency XYZ, uses an agency-provided car, for which fuel is
provided. In 2020, Joe drives the car 20,000 miles, of which 4,000, or 20%, were personal
miles. The FMV of the car is $24,500, for an annual lease value of $6,600. Personal use is
valued at $1,320: ($6,600 x 20%) plus $220 (5.5¢ x 4,000 miles) for fuel costs. $1,540 ($1,320
+ $220) is included in Joe’s wages.
Recalculation of Value after Four-Year Lease Term
Once computed, the annual lease value remains in effect through December 31 of the
4th full calendar year after the rule is first applied. Treas. Reg. Section 1.61-21(d)(2)(iv)
Transfer to Another Employee
If the vehicle is transferred to another employee, the employer may recalculate the annual lease
value based on the FMV as of January 1 of the year of transfer. This recalculation is not allowed
if the primary purpose of the transfer is to reduce federal tax liability. Treas. Reg. Section 1.61-
21(d)(2)(v)
Daily Lease Value
This method is required if the vehicle is available for less than 30 days. Figure the daily lease
value by multiplying the annual lease value by a fraction, using four times the number of days of
availability as the numerator, and 365 as the denominator.
You can apply a prorated annual lease value for a period of continuous availability of less than
30 days by treating the automobile as if it had been available for 30 days. Use a prorated annual
lease value if it would result in a lower valuation than applying the daily lease value to the shorter
period of availability. Treas. Reg. Section 1.61-21(d)(4)
Fleet Average Valuation Rule
If the employer has 20 or more cars used for business and personal use by employees, a “fleet-
average value” may be used to calculate the annual lease valuation. For 2020, each car must be
valued at less than $50,400. (For 2018, 2019 and 2020, there is no separate maximum amount
for trucks and vans.) See Notice 2020-05; Treas. Reg. Section 1.61-21(d)(5)(v)
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Vehicle Cents-Per-Mile Rule
To use the vehicle cents-per-mile rule, one of the following tests must be met:
The employer reasonably expects the vehicle to be regularly used in the trade or business
throughout the calendar year.
The mileage test is met. Treas. Section 1.61-1(e)(1)(i)
A vehicle is considered “regularly used in the business” if:
At least 50% or more of the total annual mileage each year is in the employer’s business; or
It is generally used each workday to transport at least three employees to and from work, in an
employer-sponsored commuting vehicle pool. Treas. Reg. Section 1.61-21(e)(1)(iv)
The mileage test is met if the vehicle is:
Driven by employees at least 10,000 miles (personal and business) per year; and
Used primarily by employees. Treas. Reg. Section 1.61-21(e)(1)(ii)
Continued Usage Rule
You must continue using the cents-per-mile rule for the vehicle for all later years, except that
the employer can use the commuting rule for any year during which use of the vehicle qualifies
under that rule. If the vehicle does not qualify for the cents-per-mile rule during a later year, you
can use, for that year and thereafter, any other rule for which the vehicle then qualifies.
Treas. Reg. Section 1.61-21(e)(5)(ii)
Limitation on Value
For 2019, the maximum value for use of the vehicle-cents-per mile rule is $50,400, on the first
day of use. Notice 2020-05; Treas. Reg. Section 1.61-21(e)(1) and 1.280F
Multiply the standard mileage rate by the number of personal miles driven. If fuel is not provided
by the employer, the standard mileage rate can be reduced by up to 5.5 cents (57.5 cents - 5.5
cents = 52 cents per mile in 2020). Treas. Reg. Section 1.61-21(e)(3)(ii); Notice 2020-05.
Example: Joe drives his agency-provided car for 2,000 personal miles in 2020. The amount
included as wages is $1,150 (57.5 cents x 2,000 personal miles) or, if no fuel is provided by his
employer, the amount would be $1,040 (52 cents x 2,000 miles).
Commuting Valuation Rule
Personal use for commuting can be valued at $1.50 each way if all the following conditions are
met:
The vehicle is owned or leased by the employer.
The vehicle is provided to the employee for use in the business.
The employer requires the employee to commute in the vehicle for a bona de
noncompensatory business reason:
The employer has a written policy prohibiting personal use other than commuting.
The employee does not use the vehicle for other than de minimis personal use.
The employee who uses the vehicle is not a control employee (defined below).
If more than one employee commutes in the vehicle, the $1.50 each-way rule applies to each
employee. Reg. Section 1.61-21(f)
Note: The employer must require the employee to use the vehicle for a business purpose; it
cannot be voluntary on the employee’s part. For example, a transportation employee, who is on
call 24 hours a day to respond to road emergencies, is required by the employer to commute in
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a vehicle outfitted with communications or other equipment the employee would need if called
out at night.
Commuting Rule Not Available for Control Employee
Personal use of a vehicle by a “control employee” cannot be valued using the commuting
valuation rule ($1.50 rule). A control employee in a governmental organization is either an:
Elected ofcial; or
Employee whose compensation is at least as great as a federal government employee at
Executive Level V (Beginning January 1, 2020, this is $160,100).
Treas. Reg. Section 1.61-21(f)(6)
Instead of the above definition of control employee, the employer may treat all employees who
are “highly compensated” (generally, for 2020, those exceeding $130,000 compensation) as their
only control employees. Treas. Reg. Section 1.132-8(f); Notice 2019-59
Example: An agency in a rural area doesn’t have secure parking and has a history of
vandalism to its vehicles. The employer requires employees using the vehicles for the day on
business to take the vehicles home overnight. The trip home and to the office the next day
is considered taxable personal commuting. The commuting may be valued at $1.50 each
way, because the employee had a valid noncompensatory business reason for commuting
in the employer’s vehicle. If this was an unusual situation for the employee, that is, generally
occurring no more than once a month, the commuting could also be considered a nontaxable
de minimis fringe benefit.
Example: An agency requires an employee to take home a van to carry displays and
equipment to a trade show the next day. In this situation, the commuting could be valued at
$1.50 for the trip from the office to home, because the agency is requiring the employee to
use a specific vehicle for valid business reasons (assuming the other rules listed above are
met). If this was an unusual situation for the employee, that is, generally occurring no more
than once a month, the commuting could be considered a nontaxable de minimis fringe
benefit, even if the commuting valuation rule is not met.
Qualified Nonpersonal Use Vehicles
Use of a qualified nonpersonal use vehicle, including commuting, is excludable to the employee
as a working condition fringe benefit if the specific requirements for the type of vehicle are met.
Recordkeeping and substantiation by the employee are not required by the IRS. IRC Sections
274(d) and (i)); Treas. Reg. Section 1.132-5(h)
Eligible Vehicles
A qualified nonpersonal use vehicle is any vehicle that the employee is not likely to use more
than minimally for personal purposes because of its design. Qualified nonpersonal use vehicles
generally include:
Clearly marked police, re or public safety ofcer vehicles (discussed below).
Unmarked vehicles used by law enforcement ofcers if the use is ofcially authorized
(discussed below).
Qualied specialized utility repair truck (discussed below).
An ambulance or hearse used for its specic purpose.
Any vehicle designed to carry cargo with a loaded gross vehicle weight over 4,000 pounds.
Delivery trucks with seating for the driver only, or the driver plus a folding jump seat.
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A passenger bus with a capacity of at least 20 passengers used for its specic purpose.
Construction or specially designed work vehicles (for example, bucket trucks, dump trucks,
cement mixers, forklifts, garbage trucks).
School buses.
Tractors, combines and other special-purpose farm vehicles. Treas. Reg. Section 1.274-5(k)(2)
Clearly Marked Police, Fire or Public Safety Officer Vehicles
A clearly marked police, fire or public safety officer vehicle is a qualified nonpersonal use vehicle
only if the following apply:
The employee must always be on call.
The employee must be required by the employer to use the vehicle for commuting.
The employer must prohibit personal use (other than commuting) for travel outside of the
ofcer or reghter’s jurisdiction.
It is readily apparent, by words or painted insignia, that the vehicle is a public safety vehicle. A
marking on a license plate isn’t a clear marking for this purpose. Treas. Reg. Section 1.274-5(k)(3)
Public Safety Officer
A public safety officer is an individual serving a public agency in an official capacity, with
or without compensation, as a law enforcement officer, as described above, or a firefighter,
chaplain or member of a rescue squad or ambulance crew. TD 9483; Treas. Reg. Section 1.274-5
Unmarked Law Enforcement Vehicles
Unmarked law enforcement vehicles are qualified nonpersonal use vehicles only if:
The employer must ofcially authorize personal use.
Personal use must be incident to use for law-enforcement purposes; that is, no vacation or
recreational use.
The employer must be a governmental unit responsible for crime prevention or investigation.
The vehicle must be used by a full-time law enforcement ofcer authorized to carry rearms,
execute warrants and make arrests. The ofcer must regularly carry rearms, except when it
is not possible to do so because of the requirements of undercover work. Treas. Reg. Section
1.274-5(k)(6)(ii)
Qualified Specialized Utility Repair Truck
A specialized utility repair truck qualifies as a qualified nonpersonal use vehicle if:
The truck (not a van or pickup) is designed to carry tools and equipment,
The truck has permanent interior construction, including shelves and racks, and
The employer must require the employee to commute for emergency call-outs to restore or
maintain utility services (for example, gas, water and sewer). Treas. Reg. Section 1.274-5(k)(5)
Vans and pickup trucks do not qualify as qualified nonpersonal use vehicles unless specifically
modified to be unlikely to allow more than minimal personal use. For a van or pickup truck with
a loaded gross vehicle weight of 14,000 pounds or less, the vehicle must be clearly marked
with permanently affixed decals, special painting or other advertising associated with the trade,
business or function.
Vans must have a seat for the driver only (or the driver and one other person) and either:
Permanent shelving that lls most of the cargo area, or
An open cargo area, and the van always carries merchandise, material or equipment used in
your trade, business or function. Rev. Rul. 86-97; Private Letter Ruling 200236022
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Pickup trucks must be equipped with at least one of the following:
A hydraulic lift gate.
Permanent tanks or drums.
Permanent side boards or panels that materially raise the level of the sides of the truck bed.
Otherwise, they must be used primarily to transport a particular type of load (other than over the
public highways) in a construction, manufacturing, processing, arming, mining, drilling, timbering
or other similar operation for which it was specially designed or significantly modified.
Safe Harbor Substantiation Rules for Vehicles
If certain conditions are met, a safe harbor rule relieves employees of the requirement to keep
detailed records of employee use of vehicles. How the safe harbor rule applies depends on
whether the vehicles are used for any personal purposes, or for vehicles with no personal use
other than commuting. Treas. Reg. Section 1.274-6T(a)(1)
Employees using employer vehicles are not required to keep detailed records of vehicle use if all
the tests below are met:
For vehicles not used for personal purposes:
The vehicle is owned or leased by the employer and is provided to the employee for use in the
employer’s business.
When not in use, the vehicle is kept on the employer’s premises (for example, motor pool cars).
No employee using the vehicle lives at the employer’s business premises.
The employer has a written policy prohibiting personal use, except de minimis use (such as
driving to lunch while away from the ofce).
The employer reasonably believes the vehicle is not used for any personal use (other than de
minimis). Treas. Reg. Section 1.132-5(e) and (f); Treas. Reg. Section 1.274-6T(a)(2)
For vehicles not used for personal purposes other than commuting:
The vehicle is owned or leased by the employer and is provided for use in the employer’s
business.
For bona de noncompensatory reasons, the employer requires the employee to commute to
and/or from work in the vehicle.
The employer has established a written policy prohibiting personal use other than commuting
and de minimis use.
The employer reasonably believes that, except for commuting and de minimis use, no
individual uses the vehicle for personal purposes.
The employee is not a control employee (for the denition, see “Commuting Rule Not Available
for Control Employee” earlier).
The employer accounts for the commuting use by including the commuting value in the
employee’s wages. Treas. Reg. Section 1.274-6T(a)(3)
Written Policy Statements
The employer must maintain a written policy statement that implements a policy restricting
personal use of employer-provided vehicles. The Conference Report to P.L. 99-44,
Contemporaneous Recordkeeping Requirements Repeal Act, states that a resolution of a city
council, or a provision of state law or the state constitution qualifies as a written policy statement
for the safe harbor provisions.
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Employer Monitoring Required
Although detailed recordkeeping is not required, the employer must have some way to prove that
the vehicles are being used in accordance with the rules. For example, the employer may use
internal controls such as requiring employees using motor pools to sign vehicles out, and signed
statements by the employees agreeing to no personal use, or (if applicable) no personal use
other than commuting.
Equipment and Allowances
This section discusses some common situations involving employee use of equipment and
supplies, as well as cash allowances provided by an employer to pay for them. In general, any
equipment the employer provides that represents ordinary and necessary business expenses,
are excludable from income. Allowances paid or reimbursements made by an employer under an
accountable plan to an employee are excludable. IRC Section 162
The accountable plan rules require:
Business connection – the expenses must qualify as a business expense to the employer.
Substantiation of amount, date and time, place and business purpose.
Excess returned within a reasonable time. Treas. Reg. Section 1.62-2(c)(1); IRC Section 274(d)
Except where the law provides a specific exception (for example, the standard mileage rate)
any allowance or reimbursement based on hours worked, units produced or other system that
does not involve accounting for actual expenses, is treated as wages subject to withholding of
income, Social Security and Medicare taxes. Rev. Rul. 2004-1; Rev. Rul. 2012-25
Wage Recharacterization
If an employer arranges to pay an amount to an employee, whether called an allowance,
reimbursement or some other term, regardless of whether the employee incurs, or is reasonably
expected to incur, deductible business expenses, the business connection requirement is not
met for these payments. This constitutes “wage recharacterization” and all amounts paid are
considered taxable wages for income, Social Security and Medicare tax purposes. See the
discussion of accountable plans. Treas. Reg. 1.62-2(d)(3)(i); Rev. Rul. 2012-25
Example: An employer pays a premium per working hour (sometimes called a “tool
allowance”) for employees who provide their own tools. The employees retain ownership and
control of their tools and there is no requirement to account to the employer. The employees
are not required to substantiate the cost of each item. The premium is not specifically
determined by the employees’ actual expenses. Reimbursements based on the hours worked
cannot meet the accountable plan requirements. Payments of this type do not meet the
accountable plan rules and, therefore, are additional compensation includible in income and
fully taxable as wages.
Example: An employer’s mileage reimbursement plan operates to routinely pay an amount
as a mileage reimbursement to workers who have not incurred (and are not reasonably
expected to incur) deductible business expenses in connection with the employer’s business.
The purported mileage reimbursement is merely recharacterized wages because all workers
receive an amount as a mileage reimbursement regardless of whether they incur (or are
reasonably expected to incur) mileage expenses. The arrangement fails to satisfy the business
connection requirement of Treas. Reg. Section 1.62-2(d) and does not meet the accountable
plan rules.
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Work Clothes and Uniform Allowances and Reimbursements
Clothing or uniforms are excluded from wages of an employee if they are:
Specically required as a condition of employment, and
Are not worn or adaptable to general use as ordinary clothing.
The accountable plan rules must be met for reimbursements or clothing allowances. IRC Section
162; Treas. Reg. Section 1.62-2(c)(1)
Note: If the clothing qualifies as excludable, then reimbursements for the cleaning costs are also
excludable.
Periodic allowance payments made to employees for the purchase and maintenance of specific
articles of employer-required uniforms are not taxable to the employees to the extent that the
allowances are used to pay for uniforms that are not adaptable to general use and are not worn
for general use, and the employees substantiate the expenses. If the employer does not require
substantiation, the allowance is taxable as wages and subject to withholding when paid.
Example: An agency is required to reimburse certain employees for shoes under a union
contract. The shoes are not safety shoes. Because the shoes are adaptable for general wear,
the reimbursements are included as wages to the employees even if the employer is required
to make the payment.
Safety Equipment
Safety equipment is excludable from employee wages if the equipment is provided to help the
employees perform their job in a safer environment. To be excludable, it is not necessary that
the equipment be required by the employer. However, the accountable plan rules must be met
for reimbursements for safety equipment. IRC Section 162; Treas. Reg. Section 1.62-2(c)(1)
Common examples include a hardhat, an anti-glare screen for computer and safety shoes.
Example: A government entity pays employees annually for part of the cost of safety
equipment not required by the employer. The payments may be excludable even though
the safety equipment is not required by the employer. If the equipment helps the employee
perform their job in a safer environment, it may qualify as an employee business expense. If
the expenses are substantiated, the reimbursement is excludable for the employee.
Mileage Allowances
Reimbursements for expenses of operating employee-owned vehicles are discussed in
Employer-Provided Vehicles. The tax treatment of cash allowances or reimbursements for
automobile use is governed by the accountable plan rules.
Example: An employer provides an employee with a car or mileage allowance and does not
require substantiation. The accountable plan rules have not been met; the car allowance is
fully taxable as wages to the employee.
Listed Property
Employers often provide employees with certain equipment for use in the performance of their
duties, outside of the employer’s premises. Items listed in IRC Section 280F are considered
“listed property” because the property by its nature lends itself to personal use. Strict
substantiation requirements apply to property in this category. Employees are required to
45
account for business and personal use. IRC Sections 274(d), 280F(d)(4) and 132(d)
Examples include automobiles and property used for recreation.
The following rules apply to listed property:
Business use is excludable from the wages of the employee as a working condition fringe
benet.
Personal use is included in the wages of the employee.
If substantiation requirements are not met, all use is included in the wages of the employee.
IRC Section 280F(d)(4)
Substantiation Requirements
The employee must keep records of business and personal use of listed property to determine
whether the value of any of the use is included in the employee’s wages. IRC Section 274(d)
Awards and Prizes
Unless specifically excluded, prizes or awards given to employees are taxable. The following
awards are always taxable as wages to an employee (regardless of the cost or FMV):
Cash or cash equivalent awards, such as savings bonds or gift certicates.
Recognition awards, cash or non-cash, for job performance, unless they are qualifying
de minimis fringe benets.
Non-cash prizes (unless de minimis) won by employees from random drawings at employer
sponsored events.
Awards for performance, such as outstanding customer service, employee of the month or
awards based on productivity.
Achievement awards, cash or non-cash, that do not meet specic qualied plan award rules,
discussed below.
Awards for length of service or safety achievement that do not meet specic requirements,
discussed below. IRC Section 274(j)
Cash awards to employees are always taxable. Generally, the value of an award or prize given by
an employer is taxable to an employee as wages, includable on Form W-2, and subject to federal
income tax withholding, Social Security and Medicare. IRC Sections 74 and 3121(a)(20)
If the employer pays the employee’s share of taxes on an award, the amount of taxes paid
are additional wages to the employee (except for agricultural and domestic services) and are
subject to all payroll taxes. For information on calculating the tax on employee taxes paid by the
employer, see Publication 15-A, Rev. Rul. 86-14
Excludable Awards
There are three types of non-cash awards that may be excluded from income (subject to dollar
limitations, discussed later). Each category has specific requirements that must be met to be
excludable. These categories are:
1. Certain employee achievement awards
2. Certain prizes or awards transferred to charities
3. De minimis awards and prizes
Employee Achievement Awards
An employee achievement award is an item of tangible personal property (not cash) for length-
of-service or safety. To be excludable the achievement:
Must be given for length-of-service or safety,
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Must be awarded as part of a meaningful presentation, and
Cannot be disguised wages or made under conditions and circumstances that create a
signicant likelihood that it is disguised wages.
The amount of an award that is excludable depends on whether it is considered qualified. A plan
is a qualified plan award if:
The award is made under an established written plan,
The plan does not discriminate in favor of highly compensated employees (generally, for 2020,
those whose compensation exceeds $130,000), and
The average cost of all employee achievement awards (both qualied and nonqualied awards
for length-of-service and safety) made by the employer during a single year does not exceed
$1,600 ($400 for awards that aren’t qualied plan awards). IRC Section 274(j)
Safety Achievement Awards
An award will qualify as an excludable safety achievement award unless one of the following
applies:
It is given to a manager, administrator, clerical employee or other professional employee.
During the tax year, more than 10% of the employees, excluding those listed above, have
already received a safety achievement award (other than one of very small value). Eligible
employees must have worked full-time for a minimum of one year prior to the award. IRC
Section 274(j)
Example: If an agency has 50 eligible employees and six receive safety awards, the sixth
award is taxable because 10% of the eligible employees have already received it.
Length-of-Service Achievement Awards
An award made for length-of-service may be excludable. However, it does not qualify if either of
the following applies:
The employee received the award during his or her rst ve years of employment.
The employee received another length-of-service award (other than one of very small value)
during the same year or in any of the prior four years.
Note: A traditional retirement award is an exception to the five-year rule. IRC 274(j)
Awards other than for safety or for length-of-service are always nonqualified awards, unless they
are qualifying de minimis fringe benefits.
Dollar Limitation
The maximum amount of excludable awards to a single employee during a calendar year is
limited to:
$400 for awards made under a nonqualied plan, or
$1,600 in total for awards made under both qualied and nonqualied plans.
An award is not a qualified plan award if the average cost of all the employee achievement
awards given during the tax year (that would be qualified plan awards except for this limit) is
more than $400. To figure this average cost, ignore de minimis awards. IRC 274(j)
Generally, if an award is taxable to an employee, it is valued at its FMV. The taxable amount
of an award to an employee depends on whether the award is made under a qualified plan,
whether the cost of the award to the employer exceeds the dollar limitations and the FMV of
the award. A length-of-service or safety achievement award may be a qualified plan award. IRC
Section 274( j)
47
Example: An employer only makes awards to employees that are non-cash, qualifying length-
of-service or safety awards. To avoid the extensive recordkeeping and tracking required for
determining the taxability of awards, the employer has a policy of not making awards that
exceed $400 per employee annually. In this situation, none of the awards would be taxable to
the employees.
Example: An employee receives two employee achievement awards during the year. For both
awards, the cost and FMV of the awards were the same.
Cost and FMV
Nonqualified plan award of a watch $400
Qualified plan award of a stereo + 1,350
Total awards 1,750
Less: annual limitation - 1,600
Taxable portion of awards $150
Cost Exceeds Dollar Limitations
Generally, if an award is taxable to an employee, it is valued at FMV. If the cost to an employer
for an award exceeds the plan dollar limitations, either $400 (nonqualified plan) or $1,600
(qualified plan), then the amount included in wages is the greater of:
The part of the employer’s cost that is more than the plan dollar limitation (but not more than
the FMV), or
The amount by which the FMV exceeds the amount of the plan dollar limitation.
Example: An employer pays $520 for golf clubs given to an employee as a nonqualified plan
employee achievement award. The FMV of the award (golf clubs) at the time it is given to the
employee is $750.
Cost FMV
Award $520 $750
Less: Limitation - 400 - 400
Excess over limitation $120 $350
The amount included in taxable wages to the employee is $350, the greater of the cost less
the limitation or the FMV less the limitation. If the award had been a qualified plan award, the
employee would not have been taxed on any of the value of the award.
Example: An employer pays $395 for golf clubs given to an employee as a nonqualified plan
employee achievement award. The FMV of the clubs at the time the award is given to the
employee is $450.
Cost FMV
Award $395 $450
Less: Limitation - 400 - 400
Excess over limitation $0 $50
Because the employer’s cost of the award does not exceed the $400 limitation for nonqualified
awards, the employee is not taxed on the value of the award. Treas. Reg. Section 1.74-2(b)
Example: An agency presents employee length-of-service awards to six employees for a total cost
to the employer of $1,800. The average cost of all awards is $300 ($1,800/6). Since the average cost
of all awards does not exceed $400, the awards are considered qualified plan awards provided there
is a written plan that does not discriminate in favor of highly paid employees.
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Prizes or Awards Transferred to Charities
Certain prizes and awards given in recognition of charitable, scientific, artistic or educational
achievement are not taxable if the recipient transfers them to a charitable organization. IRC
Section 74(b)
The following requirements must apply for a transferred award to be excludable from wages:
Award is for achievement.
Recipient is selected without entering any contest.
No substantial future services are required.
Recipient transfers the award to a charitable organization recognized under IRC 170(c) prior to
receiving the benet.
Example: A college instructor is chosen as teacher of the year by a national education
association. He is awarded $5,000, which, before accepting the award, he directs the
education association to transfer it to a college scholarship fund at the institution where he
teaches. The award is not taxable to the college instructor.
De Minimis Awards and Prizes
A prize or award that is not cash or cash equivalent, of nominal value and provided infrequently
is excludable from an employee’s wages. Prizes or awards that are given frequently to an
employee do not qualify as an excludable de minimis award, even if each award is small in value.
IRC Section 132(e)
Examples of Excludable De Minimis Awards
Nominal gifts for birthdays, holidays
Holiday turkey and hams
Flowers, plaques, coffee mugs for special occasions
Gold watch on retirement
Parking for employee of the month, if value is less than statutory limit for qualified
transportation fringe benefits
“Nominal” for this purpose means small in value, relative to the value of total compensation.
There is no set dollar amount in the law for nominal prizes or awards. (The IRS gave advice at
least once, in 2001, that a benefit of $100 did not qualify as de minimis.) CCA 200108042
“Cash equivalent” means readily convertible to cash, for example, a voucher for merchandise, a
savings bond or a gift certificate.
Example: An employer provides dinner at an annual awards banquet for employees. The
regulations specifically indicate that occasional group meals are considered nontaxable fringe
benefits. Treas. Reg. Section 1.132-6(e)(1)
Cliff Provision
If an employer provides an award that exceeds either the value or frequency limitations for de
minimis fringes, the entire award is included in the employee’s wages, not just the portion that
exceeds the de minimis limits. Treas. Reg. Section 1.132-6(d)(4)
49
Awards Funded by Third Party
If funds for awards or prizes are provided by an outside party, the award is taxable in the same
way as if provided directly by the employer. If the funds are turned over to the employer to
select and distribute the awards, the employer is responsible for all applicable payroll taxes and
withholding. IRC Section 3402(d)
Example: A bank provides funds to a state agency to support a special performance award
program. The agency chooses the recipients and distributes the awards. The value of the
awards is additional compensation to these employees and reportable on their Forms W-2,
subject to payroll taxes and withholding. The treatment would be the same if the outside party
were a nonprofit organization or an educational foundation.
Example: A television set, donated by a business to a state agency, is awarded through a
random drawing to an employee. The FMV of the television is considered taxable wages to
the employee. Prizes in a random drawing of employees are considered wages. A television
set is not considered a de minimis benefit.
In the case where the outside party selects and distributes the award directly to an agency
employee without any direction or decision making from agency personnel, then the award is
income to the recipient and must be reported. The outside party is required to furnish a Form
1099-MISC to the recipient for a calendar year if the total awarded to that individual in that year
has a value of $600 or more.
Example: Special duck prints donated by artists are given away as awards to employees. For
purposes of determining the taxable value, the FMV can be determined by an appraisal, by
establishing the sales price of similar prints by the artist or by any other reasonable method.
The taxability of the value of the prints to the employees depends on the type of award, dollar
limitations and other specific requirements.
Professional Licenses and Dues
Employer reimbursements to employees for the cost of their professional licenses and
professional organization dues may be excludable if they are directly related to the employee’s
job.
Once an employee has completed the education or experience required for a professional
license, the expenses necessary to maintain a license or status are considered ordinary and
necessary business expenses. If paid or reimbursed by an employer for an employee, the fees
are a working condition fringe benefit. If paid under an accountable plan, they are excludable
from the income of the employee. If paid under a nonaccountable plan, they are included in the
income of the employee and are subject to federal income, Social Security and Medicare taxes.
The employee may deduct the expenses on their income tax return. IRC Section 132(d); Treas.
Reg. Section 1.132-5(a)(1)(v); IRC Section 62(a)(2)(A); Treas. Reg. Section 1.62-2(c)(2); IRC Section
62(c)(1)&(2); Treas. Reg. Section 1.62-2(c)(3)
Example: An employer pays the professional dues for an employee, who is a financial officer,
to a national association of finance officers. If the accountable plan rules are met, this is an
excludable reimbursement to the employee.
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Example: A state agency requires an employee to be a notary. The employee submits the
paid receipt for the annual fee to maintain this professional license to the agency, and the
agency reimburses the employee. The reimbursement is not taxable to the employee because
it is an ordinary and necessary business expense under IRC Section 162 and paid by the
employer under an accountable plan.
Example: A state agency pays the annual CPA license fee for the chief game warden each
year. The warden does not use his CPA expertise on the job for the agency. Because the
game warden does not use his CPA expertise in his capacity as game warden with this state
agency, it is not a working condition fringe benefit. The reimbursement to the game warden is
taxable to him and is subject to federal income, Social Security and Medicare taxes.
Business and Professional Organizations
Payment or reimbursement of dues to clubs organized for business purposes are excludable
from income if:
The organization is related to the employer’s business, and
The employee is performing duties for the employer that are related to the professional
organization’s focus or mission.
Examples of these organizations include business leagues, professional organizations, and trade
associations such as medical, legal and accounting associations including state associations of
CPAs, school officers or similar professional groups. Treas. Reg. Section 1.162-15(c); IRC Section
162(a); Treas. Reg. Section 1.132-5(a)
Entertainment and Recreational Organizations
Club dues and memberships are not allowed as business deductions. If an employer provides
these benefits to an employee, they are taxable to the employee and subject to withholding for
income tax, Social Security and Medicare.
Similarly, the payment of club dues by the employer is a taxable fringe benefit. No business
deduction is allowed for club dues. If an employer pays or reimburses an employee for club
dues, the amount is taxable to the employee and subject to income tax withholding, Social
Security and Medicare taxes. IRC Section 274(a)(3)
Educational Reimbursements and Allowances
Employers frequently pay educational expenses on behalf of employees or reimburse them
for educational expenses they incur. In addition, many educational institutions provide a
benefit in the form of free or reduced-cost education to employees. To determine whether
the reimbursement or value of the education is excludable from wages, it is first necessary to
determine which provisions of the Internal Revenue Code apply. There are three sections of the
IRC that permit the payments or reimbursements to be excludable from wages under certain
circumstances.
The following IRC Sections apply to tuition reductions:
For all employers:
IRC 132(d) – Education as Working Condition Fringe Benefit
IRC 127 – Qualified Educational Assistance Program
51
For certain other employers:
IRC 117(b) – Qualified Scholarships
IRC 117(d) – Qualified Tuition Reductions
An educational payment that is not exempt from tax under one IRC section may be exempt
under a different section. An educational benefit under IRC Section 132(d) (working condition
fringe benefit) can be excludable only if benefits under any other IRC sections do not apply.
A chart at the end of this section provides help in determining whether specific payments or
reimbursements for education expenses are excludable.
This section summarizes these provisions for employer-paid education. For more detailed
information, see Publication 970, Tax Benefits for Education.
Education as a Working Condition Fringe Benefit (Section 132(d))
Job-related educational expenses may be excludable from an employee’s income as a working
condition fringe benefit, which is an excludable benefit of property or services provided by an
employer to an employee so that the employee can perform his or her job. It applies to the extent
the cost of the property or services would be allowable as a business expense to the employee
if the employee had paid for it. The exclusion is generally available for any form of educational
instruction or training that maintains or improves the job-related capabilities of an employee, or
meets certain express requirements of the employer, or of applicable law or regulations. IRC
Section 132(d); Treas. Reg. Section 1.162-5
For governmental entities, working condition fringe benefits for education may be available
to current employees or independent contractors. For purposes of working condition fringe
benefits, independent contractors, directors and partners, and volunteers are considered
employees. Treas. Reg Section 1.132-5(r) and 1.132-1(b)
For educational reimbursement to qualify as a working condition fringe benefit, the education
must be job-related. It is not required that the employer have a written plan or dollar limitations,
and the employer may discriminate in favor of highly compensated employees. IRC Section
132(d); Treas. Reg. Section 1.132-1(f)(1)
Job-Related
The educational course must be job-related, and either maintain or improve job skills, or be
expressly required by the employer or by law.
Examples of qualifying (excludable) courses include work toward an advanced degree necessary
to retain the job or pay level. IRC Section 132(d); Treas. Reg. Section 1.162-5(a)(1)
To be excludable, the educational course must not:
Be needed to meet the minimum educational requirements of the current job, or
Qualify the employee for a new trade or business.
Treas. Reg. Section 1.162-5(b)(2) and 1.162-5(b)(3)
Substantiation Requirements for Cash Payments to Employees
If an employee receives cash, the employer must require the employee to:
Use the amount provided for payment of education expenses that qualify as a working
condition fringe benet,
Verify that the payment was used for the expenses, and
Return to the employer any unused portion of the payment.
Treas. Reg. Section 1.132-5(a)(1)(v)
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Qualifying Educational Expenses
The following may qualify for exclusion as working condition fringe benefits:
Tuition, books, supplies, equipment -Treas. Reg. Section 1.162-5(a)
Certain travel and transportation costs -Treas. Reg. Section 1.162-5(d)
Graduate or undergraduate level courses -Treas. Reg. Section 1.162-5(a)
Courses Qualifying Employee for New Position
Generally, education courses that qualify an employee for a new position or specialty within their
existing trade or business are not excludable as a working condition fringe benefit. These are
considered to be qualifying an employee for a new trade or business. Examples of excludable
courses that qualify employees for a new position rather than a new trade or business include:
Teacher to principal
Elementary school teacher to secondary school teacher
Teacher in one subject area to teacher in another subject area
Teacher to guidance counselor
Treas. Reg. Section 1.162-5(b)(3)
Often, courses needed for acquiring a license or certificate are considered to be leading to a
new trade or business. Examples include the following:
Accountant to CPA
CPA to lawyer
Mechanic to engineer
Minimum Job Requirements
You cannot exclude payments for education to meet the minimum requirements of a job. Even
if an employee is already performing service, this does not establish that the employee has met
the minimum requirements of the job. Treas. Reg. Section 1.162-5(b)(2)
Example: Veronica is a computer technician at a state agency. The agency pays for her to
take a graduate computer course at STU University to enhance her current job skills. The
class is excludable as a working condition fringe because it is job-related and maintains or
improves Veronica’s skills, and it does not prepare her for a new trade or business.
Example: Due to a teacher shortage, Doug, who has 80 hours of college credits, is given
a position as a teacher although the job normally requires 120 hours of credits. Doug is
reimbursed by his employer for the expenses of completing the 40 credits at night school
while he is teaching. The reimbursement is not excludable as a working condition fringe
benefit because the courses are needed to meet the minimum requirements of his present
job. (This amount may be excludable under another IRC section, for example, Section 127.
See Qualified Educational Assistance, later.)
Example 3: Peter, a fiscal technician hired into an Accountant I position, does not have all
the accounting credits he needs for the job. He registers for and takes the courses required
for the position. The courses may improve his job performance, but the primary purpose of
taking them is to acquire the minimum requirements for the position. The reimbursement for
Peter’s classes is not excludable under IRC Section 132(d) because the education is needed
to meet the minimum educational requirements of his position. The reimbursement is included
in Peter’s wages, unless it is excludable under another IRC Section, such as Section 127. (See
Qualified Educational Assistance, later.)
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Working Condition Educational Fringe Benefit - General Guide
Qualified Educational Assistance (Section 127)
Under an educational assistance plan, an employer may exclude up to $5,250 paid or incurred
on behalf of an employer from the wages of each employee, if certain requirements are met. The
education may be at undergraduate or graduate level and is not required to be job-related. IRC
Section 127
The following requirements apply for a qualified educational assistance plan:
The employer must have a written plan.
The plan may not offer other benets that can be selected instead of education.
Assistance does not exceed $5,250 per calendar year for all employers of the employee
combined.
The plan must not discriminate in favor of highly compensated employees (generally, for 2020,
those receiving $130,000 or more). IRC Sections 127(a)(2) and 127(b)(2); Notice 2019-59 for
2020
Eligible Employees
Individuals who may qualify for the Section 127 benefit include current and laid off employees,
employees retired or on disability, and certain self-employed individuals. Spouses or dependents
of employees are not eligible. Treas. Reg. Section 1.127-2(h)
Educational Expenses
Educational expenses include tuition, books, supplies and equipment necessary for class.
Educational expenses do not include tools or supplies that the employee may keep after the
course is completed; education involving sports, games, hobbies (unless job-related), meals,
lodging or transportation. IRC Section 127(c)(1)
Is the education part of a program of
study that can qualify the employee for a
new trade or business?
Is the education required by the employer,
or by law, to keep the present salary,
status or job?
Does the education maintain or improve
skills required in doing the present work?
The educational reimbursement is taxable.
The educational reimbursement is not
taxable.
Is the education needed to meet the
minimum educational requirements of the
position?
No
No
No
No
Yes
Yes
Yes
Yes
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Example: Karen is a secretary at a state agency. She wants to take an undergraduate
psychology class at MNO Community College. The state agency has a written educational
assistance plan. The state agency pays $250 for the tuition to the community college for the
course. Karen receives no taxable income from this benefit because the requirements for an
educational assistance plan have been met under IRC 127.
Example: Joe, a janitor at a state agency, wants to take a math class toward his bachelor’s
degree. The state agency has a qualified educational assistance plan and reimburses Joe
$300 for the course after he verifies the cost. Joe does not have taxable wages from this
reimbursement.
Example: Tom is a recreation specialist for a municipality. His employer pays for him to take
courses toward a license as a soccer referee. If the employer has a qualified plan, Tom does
not have taxable income from this benefit, even though the courses he is taking are sports-
related. The courses have a reasonable relationship to the business of the employer, and this
meets an exception to the rule that sports, games and hobby classes are not permitted under
educational assistance programs.
Qualified Tuition Reduction (Section 117)
Free or reduced tuition provided by educational institutions to its employees may be excludable
from their wages. At the undergraduate level, the education need not be at the same institution
where the employee works. Whether a tuition reduction is a qualified tuition reduction, and
therefore excludable from income, depends on whether it’s for education below or at the
graduate level, and whether the tuition reduction represents payment for services. IRC Section
117(d)
An “educational organization” for this purpose must:
Maintain a faculty and curriculum, and
Normally have a regularly enrolled student body on site. IRC Section 170(b)(1)(A)(ii)
Nondiscrimination
Generally, a qualified tuition reduction cannot discriminate in favor of highly compensated
employees (for 2020, employees with total compensation exceeding $130,000). IRC Section
117(d)(3); IRC Section 414(q)(1)(B)(i); Treas. Reg. Section 1.132-8(f); Notice 2019-59 for 2020
Qualified Tuition Below Graduate Level
A tuition reduction for education below the graduate level is excludable only if the student is
associated with the educational institution as a:
Current employee
Former employee who retired or left on disability
Widow or widower of an individual who died while an employee
Widow or widower of a former employee who retired or left on disability
Dependent child or spouse of one of the above
IRC Section 117(d)(2)(A); IRC Section 132(h)
The tuition reduction cannot represent payment for services.
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Example: Carl works for ABC Community College, a division of the State University, as a
physics teacher. His two children attend the State University undergraduate program at a
reduced tuition. This situation meets the requirements for qualified tuition reduction and does
not result in any taxable income for Carl.
Example: The facts are the same as in the above example, but in addition to reduced tuition,
Carl’s children are receiving free room and board. The tuition reduction remains excludable,
but the value of the free room and board will be taxed as wages to Carl.
Qualified Tuition Reduction at Graduate Level
Tuition reductions for graduate education are considered “qualified” and are excludable only
if they are provided by an eligible educational institution to a graduate student performing
teaching or research activities for the educational institution. The courses must be taken at the
school where the employee is working. The employee must include in income any other tuition
reductions received for graduate education. IRC Section 117(d)(5); Section 170(b)(1)(A)(ii)
Officers, Owners and Highly Compensated Employees
Qualified tuition reductions apply to officers, owners or highly compensated employees only if
benefits are available to employees on a nondiscriminatory basis. This means that the tuition
reduction benefits must be available on substantially the same basis to each member of a
group of employees. The group must be defined under a reasonable classification set up by
the employer. The classification must not discriminate in favor of owners, officers or highly
compensated employees.
Tuition Waiver for State Employees
Some state laws permit state colleges and universities to waive all or a portion of tuition,
services and activities fees for state employees. For example, the benefit is made available to
those employed half-time or more in certain classifications for permanent employees.
If a tuition waiver or reduction does not meet the requirements for a qualified tuition reduction,
it may still qualify for an exclusion as an educational assistance plan or as a working condition
fringe benefit. IRC Sections 117(d), 127 and 132(d)
Qualified Tuition Reductions and IRC 132
If the tax treatment of an educational expense is expressly provided for in a specific IRC section, then
it is not covered by IRC Section 132 (except for Section 132(e), de minimis fringe benefits). Because
Section 117(d) applies specifically to tuition reductions, the exclusions under Section 132, such as
no-additional-cost benefits or working condition fringe benefits do not apply to free or discounted
tuition provided to employees of an educational institution. Treas. Reg. Section 1.132-1(f)(1)
If the amounts paid (not the value of reduced or free tuition) by the employer for education
relating to the employee’s trade or business as an employee of the employer is such that, if
the employee had paid for the education, the amount paid would be allowable as an employee
business expense deduction, the costs of the education may be eligible for exclusion as a
working condition fringe benefit under Section 132. Field Service Advice 200231016
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Scholarships and Fellowships
Individuals pursuing a course of study or research often receive awards or funds to pay for their
educational costs in the form of scholarships, fellowships, stipends or grants. Regardless of the
name given the benefit, the taxability of the award depends on whether the provisions of IRC
Section 117 are met.
The amount is excludable if it is a “qualified” scholarship or fellowship, discussed below, and
the recipient is a candidate for degree at a qualified educational organization. IRC Section 117(a)
The amount is taxable if it represents payment for, or requires, past, present or future services,
or is a payment that funds study or research primarily for the benefit of the grantor. Treas. Reg.
Sec tion 1.117- 4(c)
Candidate for Degree
A candidate for degree, for this purpose, is:
A primary or secondary school student, or
An undergraduate or graduate student pursuing studies or conducting research toward a
degree at a college or university, or
A full- or part-time student at an accredited educational institution.
Treas. Reg. Section 1.117-6(c)(4)
Example: Jeff, a professor of anthropology, is awarded a fellowship by the college that allows
him to devote 100% of his time to a research project of his choice. The fellowship is designed
to award faculty for present or past services. The fellowship is taxable wages to Jeff.
Example: Tracy is granted a stipend by the city of Riverdale to attend a paramedic training
program. She is required to accept employment with the grantor at the conclusion of the
training. The stipend is taxable wages to Tracy.
Example: Mona is a candidate for an advanced medical degree at a university. She receives
a fellowship grant of $4,000 per month for performing surgery in a residency program at the
university’s hospital and a one-time payment of $3,000 for independent research of Mona’s
choosing. The $3,000 for research is excludable from income. The $4,000 per month grant to
perform surgery represents payment for services and is taxable as wages.
Qualified Scholarship or Fellowship
A qualified scholarship or fellowship is excludable to the extent the amounts are used for qualified
tuition and related expenses. This includes fees, books, supplies and equipment required for a
class. Qualified expenses do not include travel, meals or lodging. IRC Section 117(b)
An educational institution is an organization that exists for an educational purpose, maintains a
regular faculty and curriculum, and has a regularly enrolled body of students on site. IRC Section
170(b)(1)(A)(ii)
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Comparison of Code Sections Covering Educational Assistance
The following table is for quick reference. For more information, see the relevant IRC Sections or
Publication 970.
Feature Section 127
Qualified
Educational
Assistance
Section
132(d)
Working
Condition
Fringe
Section 117(d)
Qualified
Tuition
Reduction
Written plan required Yes No No
Undergraduate courses covered Yes Yes Yes
Graduate courses covered Yes Yes No*
Must be job-related No Yes No
Courses qualifying employee for new trade or
business covered
Yes No Yes
Courses needed to meet minimum job
requirements covered
Yes No Yes
Can discriminate in favor of highly compensated
employees
No Yes No
Dollar limitation $5,250 No No
Definition of employee includes:
Current employees Yes Yes Yes
Family members No No Yes
Laid-off employees Yes No No
Employees retired or on disability Yes No Yes
Independent contractors No Yes No
Educational expenses covered:
Tuition Yes Yes Yes
Books, supplies, equipment Yes Yes No
Tools or supplies employee may keep No No No
Education involving sports, games, hobbies No** No** Yes
Meals, lodging or transportation No Yes No
* See text for exceptions
** Yes, if specifically job related
Note: These are general rules.
Dependent Care Assistance
Under Section 129, an exclusion is provided for household and dependent care services
provided by an employer for a qualifying person’s care and provided to allow the employee
to work. The employer can exclude the value of these benefits from employee wages if the
employer reasonably believes that the employee can exclude the benefits from gross income.
An employee can generally exclude from gross income up to $5,000 ($10,000 in 2021) of benefits
received under a dependent care assistance program each year. However, the exclusion cannot
be more than the smaller of the earned income of either:
The employee, or
The employee’s spouse.
IRC Section 129(b)(2)
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Nondiscrimination Rule
You cannot exclude dependent care assistance from the wages of a highly compensated
employee unless the benefits provided under the program do not favor highly compensated
employees (generally, for 2020, those earning $130,000 or more). For more information, see
Publication 15-B. IRC Section 129(d)(2)
Reporting
Amounts that the employer does not believe will qualify for exclusion are reported as wages on
Form W-2, subject to income tax, Social Security and Medicare withholding. Amounts that are
excluded are shown in box 10 of Form W-2.
Dependent care assistance may be offered as part of a cafeteria plan. For more information, see
Publication 15-B and Publication 503, Child and Dependent Care Expenses.
Group-Term Life Insurance
An employer may exclude the imputed cost of up to $50,000 of employer-provided coverage
under a group-term life insurance plan, if the plan:
Provides a general death benet that is not included in income;
Is provided to a group of employees (generally, at least 10 full-time employees at some time
during the year). Certain exceptions apply to this rule (see the discussion in Publication 15-B
and Treas. Reg. Section 1.79-1(b)and (c));
Provides an amount of insurance to each employee based on a formula that prevents
individual selection. This formula must use factors such as the employee’s age, years of
service, pay or position; and
Benet is provided under a policy carried directly or indirectly by the employer. Even if the
employer does not pay any of the policy’s cost, the employer is considered to carry it if it
arranges for payment of its cost by its employees and charges at least one employee less
than, and at least one employee more than, the cost of their insurance. IRC Section 79
Coverage of More Than $50,000
The employer must include in employee’s wages the imputed cost of group-term life insurance
for more than $50,000 worth of coverage, reduced by the amount the employee paid toward the
insurance. To determine the amount to include in employee wages, do not use the actual cost; you
must use a table designated by the Regulations. This table provides a monthly cost per $1,000 of
coverage, and may be found as Table 2-2 in Publication 15-B or Table 1 in Treas. Reg. Section
1.79-3(d)(2). Use this table to determine the value of additional coverage to include in wages.
Dependent Coverage
Group-term life insurance coverage paid by the employer for the spouse or dependents of an
employee may be excludable from income as a de minimis fringe benefit if the face amount
is not more than $2,000. If the face amount is greater than $2,000, the entire amount of the
dependent coverage must be included in income unless the amount over $2,000 is purchased
with employee contributions on an after-tax basis. Notice 89-110
Former Employees
When group-term life insurance coverage of more than $50,000 is provided to an employee
or former employee (including retirees) after their termination, the employee share of Social
59
Security and Medicare taxes on that period of coverage is paid by the former employee with
their tax return on Form 8919, Uncollected Social Security and Medicare Tax on Wages, and is
not collected by the employer. The employer is not required to collect those taxes. The value of
the insurance coverage is computed in the same way as with current employees, as discussed
above.
Use the table providing monthly cost per $1,000 of coverage to determine the amount of
Social Security and Medicare taxes owed by the former employee for coverage provided after
separation from service. Report those uncollected amounts separately in box 12 on Form W-2
using codes “M” and “N.” See the Instructions for Form W-2 and W-3 and the Instructions for
Form 941.
See Publication 15-B for more information on how to apply the nondiscrimination tests, and
other eligibility rules and reporting requirements for group-term life insurance benefits.
Fringe Benefits for Volunteers
Individuals designated as “volunteers” perform significant services for many governmental
entities. Although not providing fixed salaries or wages, the entities may provide the volunteers
with various reimbursements, stipends, property or other benefits. The general rules for
employment tax apply to any compensation received, regardless of the title given to or used by
the worker. Reimbursements made under the accountable plan rules for employees, discussed
earlier, are excludable from income. In addition, volunteers may be able to deduct business-
related expenses against compensation they receive.
Example: Volunteer workers for County X receive no cash payments for their services but
are entitled to a reduction in their personal property taxes based on the number of hours
of volunteer work provided. The value of the tax reduction constitutes taxable wages to the
volunteers.
As is the case with employees generally, the treatment of the payments or reimbursements for
federal payroll purposes depends on whether the volunteer is an employee or nonemployee,
and on the form of payment. The same tests that are used to determine whether other workers
are common-law employees apply to workers who are considered volunteers. The common-
law tests are discussed in detail in Publication 15-A. The discussion below illustrates how the
common-law rules may apply to volunteers.
Bona fide volunteers who perform services for a government entity are covered by the
rules generally applied to employees for working condition fringe benefits. An individual is
considered a bona fide volunteer if the volunteer does not have a profit motive. In general, if the
value of the services the volunteer provides is substantially greater than the benefit received, this
indicates an absence of a profit motive. Treas. Reg. Section 1.132-5(r)(3)
Right to Control
A volunteer is an employee under common law if an entity has the right to direct and control
the volunteer’s performance, not only as to the results to be accomplished, but also as to the
methods by which the results are accomplished. It is the right to control, even if the entity does
not exercise the right, that is important. Many factors in an employment relationship may have
to be considered before a decision can be made as to whether the entity has the right to direct
and control. If an entity does not retain the right to direct and control the details and means of
performing the work, the volunteer worker is not an employee.
60
Evidence of the Right to Control
In determining whether an entity retains the right to control a worker, the IRS generally looks at
facts that fall into three main categories of evidence: behavioral control, financial control and
relationship of the parties. The facts considered in these categories include whether the agency
provides training or instructions, whether the worker can earn a profit or incur a loss, or whether
benefits are provided. All these elements do not apply in every situation and the degree of
importance varies depending on circumstances.
Example: An agency is required to build a watershed in a state forest. Volunteers who are
experienced in forestry work have offered their services. The agency asks the volunteers to
build the watershed in accordance with environmental laws to the best of their abilities and
experience. The agency does not provide other instructions or supervision. These individuals
are not employees.
Example: The circumstances are the same as above, except an agency employee oversees
the project. The agency gives instructions, provides the tools and materials, and sets the
hours of operation. In this case, the volunteers are common-law employees for tax purposes.
See Publication 15-A for more information on the tests for common-law employees.
Volunteer Firefighters
Generally, “volunteer” firefighters are employees of the fire department or district for which they
perform services. The usual common-law tests apply to determine their employment status. For
example, the relationship between the firefighter and the fire department will generally indicate
that the department provides training and direction in how the work will be performed and
provides the equipment to perform the work.
Many jurisdictions provide some kind of compensation to volunteer firefighters, or emergency
responders, other than payments designated as wages. For instance, in some cases, volunteer
firefighters receive no amounts designated as salaries, but receive amounts intended to
reimburse them for expenses. They may also receive other cash or in-kind benefits, including
reductions in property or other local taxes that may be includible in gross income for federal tax
purposes. They may receive no regular payment but receive a certain amount of reimbursement
per call. None of these payments are automatically excluded from income. Volunteer firefighters
who are employees can receive tax-free reimbursements for their expenses provided the
accountable plan rules are met; any reimbursements that are provided without an accountable
plan are includible in income.
Payments under Domestic Volunteer Service Act (Title II and III)
Payments for supportive services or reimbursements of out-of-pocket expenses of volunteers
under Title II and III of the Domestic Volunteer Service Act are not wages or compensation and
no withholding or reporting is required by the payer. Rev. Rul. 74-322; Rev. Rul. 78-80
Programs under Title II and III include:
Retired Senior Volunteer Program (RSVP)
Foster Grandparent Program and other older volunteer programs
SCORE Association
Active Corps of Executives (ACE)
61
Liability Insurance for Volunteers
Liability insurance provided for volunteers by an entity qualifies as a tax-free working condition
fringe benefit. Treas. Reg. Section 1.132-5(r)(3)(ii)
Reporting Payments to Volunteers
If a volunteer meets the definition of an employee, the reporting rules are the same as for other
employees. Therefore:
Stipends and other payments for services are wages,
Reimbursements paid under an accountable plan are not taxable and not reportable, and
Reimbursements not paid under an accountable plan are taxable and reportable on Form W-2
as wages subject to withholding.
No reporting for these types of payments is necessary if the only payments are reimbursements
for substantiated expenses. However, if the reimbursements are greater than the expenses, the
excess is gross income (unless some other exclusion applies), and is reportable on Form 1099-
MISC. Treas. Reg Section 1.6041-1; Rev. Rul. 67-30
Fringe Benefits for Independent Contractors
Generally, the taxability of fringe benefits or reimbursements paid to independent contractors is
similar to that for employees. However, different withholding and reporting requirements apply to
these workers. Treas. Reg. Section 1.132-1(b)(2)(iv)
Note: Independent contractors are not eligible for qualified transportation fringe benefits. Treas.
Reg. Section 1.132-9(b) Q-5
Reimbursements for Travel, Transportation and Other Out-of-Pocket Expenses
Expense reimbursements or advances must meet the accountable plan rules to be excluded
from reporting and income. In general, all compensation for services for an independent
contractor must be reported on Form 1099-MISC when the amount (excluding reimbursements
under an accountable plan) is $600 or more in a calendar year. The amounts are not subject to
income or employment tax withholding.
Example: An independent contractor is hired to perform specific services for a set fee, plus
out-of-pocket expenses. If the contractor provides adequate substantiation for the out-of-
pocket expenses, reimbursements for these expenses will not be reported as income by the
payer on Form 1099-MISC, or by the contractor on their individual income tax return. The
contractor may not deduct the expenses if they are reimbursed by the payer. If the contractor
is not reimbursed, adequate substantiation of the expenses should be retained to claim
expenses on the contractor’s individual income tax return.
If the individual is considered an independent contractor and does not properly account to the
payer for reimbursed expenses, then any advances or reimbursements are to be included on a
Form 1099-MISC as taxable nonemployee compensation, along with other payments for their
services.
Substantiation Requirements
Publication 463 provides information on records, substantiation and reporting requirements for
independent contractors.
Independent contractors are treated in the same manner as are employees for purposes of
working condition fringe benefits.
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Board and Commission Members
Some of the independent contractor rules and reporting requirements may also apply for board
or commission members. Board or commission members of a government entity are generally
considered public officials, and therefore are considered employees; however, under some
circumstances, and based on local statutes, they may be independent contractors. Officers,
employees and elected officials of states and their political subdivisions and instrumentalities
are employees for purposes of federal income tax withholding. But for FICA (Social Security
and Medicare) purposes, the common-law rules apply to determine whether an individual is an
employee.
Public officials are usually subject to a degree of control that is characteristic of an employer-
employee relationship. If you are not sure of the employment status of a board or commission
member, it may be necessary to consult the statutes or ordinances establishing a position to
determine whether that position is a public office.
In the case of school boards, the statutes or ordinances usually provide ample evidence that
the school board members are public officials. Elected public officials serve a term designated
by the voters and are subject to control by a supervisor, and should generally be classified as
employees. Appointed public officials are generally employees, but under some circumstances
may be independent contractors. See Publication 963 and CCA 200113024.
IRS Publications
Publication number Title
15 (Circular E), Employer’s Tax Guide
15-A Employer’s Supplemental Tax Guide
15-B Employer’s Tax Guide to Fringe Benefits
463 Travel, Gift, and Car Expenses
521 Moving Expenses
525 Taxable and Nontaxable Income
535 Business Expenses
963 Federal-State Reference Guide
970 Tax Benefits for Education
1542 Per Diem Rates
New revisions of the publications are generally available after the first of the year. Forms and
publications may also be ordered by calling 800-829-3676.
63
Legend for Reading the Citations in this Publication
Citation Source Example
Internal Revenue Code IRC Section 132(a)(1)
Treasury Regulation Treas. Reg. Section 1.162-
2(a)(2)
Revenue Procedure Rev. Proc. 2007-1
Publication Pub. 15-B
Revenue Ruling Rev. Rul. 2006-36
Notice Notice 98-03
Field Service Advice FSA 200132035
IRS News Release IR 2007-171
Tax Court Memorandum 1986-64, 51 TCM 455
64
Index
A
Accountable plan 4
Achievement awards 45
Adoption assistance 3
Automobiles, SeeVehicles
Awards and prizes 45
B
Bicycle expenses 17
Board and commission members 62
Business use of employee vehicle 34
C
Cafeteria plans 3, 18
Cell phones 9
Cents-per-mile rule 16, 39
Common-law employee 59
Commuter vehicle 16
Commuting expenses 17, 25
Control employee 39, 40
D
De minimus benefit
dened 9
meals 10
unsafe conditions 11
E
Educational assistance program 50
Educational benefits 51
Educational reimbursements 50
Employee, definition 8
Entertainment meals 31
F
Fair market value 2
Fellowships 56
Firefighters 60
Fleet average valuation rule 38
Flexible spending arrangement 18
Form W-2 2
Fringe benefit, defined 1
G
General valuation rule 2
Group-term life insurance 58
H
Health and medical benefits 17
High-low substantiation method 24
I
Independent contractors 61
L
Lease valuation rule 38
Life insurance 58
Lodging
required by employer 20, 33
M
Meals
as entertainment 31
away from home 32
for conveninence of employer 31
occasional 10
Meals and lodging
for convenience of employer 31
furnished with a charge 31
reimbursements 33
Mileage allowance 44
Moving expense reimbursement 3
Moving expenses 28
N
No-additional-cost service 3, 12
Nonaccountable plan
dened 5
travel advances 5
O
Overnight rule 20
P
Parking 17
Per diem rules 23
Prizes 45
Public safety officer 41
65
Q
Qualified bicycle commuting
expenses 17
Qualified employee discounts 3, 13
Qualified nonpersonal use vehicle 40
Qualified retirement planning services 3
Qualified transportation fringe
parking 17
transit passes 16
Qualified tuition reduction 54
R
Reimbursements
accountable plan 4
educational expenses 50
meals 32, 33
travel 22
Retirement planning service 3
S
Safety equipment 14, 44
Scholarships 56
Special accounting period 3
Standard mileage rate 35
State legislators 20
T
Tax-deferred benefit 2
Tax home
dened 19
more than one place of business 19
no regular place of business 19
state legislator 20
Tool allowance 43
Transit passes 16
Transportation expenses 25
commuting and 25
temporary 26
temporary vs. indenite 26
unsafe conditions 10
Travel
miscellaneous expenses 23
overnight rule 22
per diem rules 23
Travel advances 5, 18
Tuition reduction 50
Tuition waiver 55
U
Uniform allowance 44
Unsafe conditions
de minimus benet 10
transportation expenses 11
V
Valuation rule 2
Vehicles
cents-per-mile rule 16, 39
de minimus personal use 37
employer provided 36
eet average valuation rule 38
general rules 38
lease valuation rule 38
partial business use 36
qualied specilaized utility repair truck 41
reimbursements 34
valuation of personal use 37
Volunteer firefighters 60
Volunteers 59
W
Wage recharicterization 4, 43
Work clothes 44
Working condition fringe 8
educational reimbursements 50
Working condition fringe benefit 8
dened 8
general rule 8
