Payroll - Procedure 23850

Procedure 23850: Taxable Fringe Benefits

Contacts and revision dates:

Date: 01/06/2026
Status: Final
Last Revised: 01/06/2026

Last Reviewed: 01/06/2026
Department: Payroll
Procedure Owner: Payroll Director

Overview

This procedure outlines the process for identifying taxable fringe benefits, determining taxable components, and ensuring required tax reporting and withholding in accordance with IRS regulations. It serves as general guidance and is not a substitute for personal tax advice from a qualified professional.

In general, a fringe benefit refers to any property or service provided to an employee (including certain independent contractors) in lieu of, or in addition to, regular compensation. Examples of fringe benefits include - but are not limited to – athletic or entertainments tickets, specific club memberships and dues, expense reimbursements, spouse or companion travel, lodging, meals, recruitment and retention, personal use of employer owned vehicles, clothing allowances and reimbursements, immigration fees, gifts, prizes, or awards, educational assistance, employer provided aircraft, and dependent care.

For new or unique situations, departments should contact payroll to ensure the correct tax treatment is applied. According to IRS regulations, fringe benefits are taxable, unless specifically excluded by law.

Parties Involved

Employee

A benefit may be considered taxable even if the employee is not the direct recipient of the benefit – provided it is connected to the employee’s role or offered through an arrangement with the university.

For fringe benefit purposes, the term ‘employee’ includes the following individuals:

A current employee
The employee’s spouse
The employee’s dependent child
A former employee who retired or left due to a disability
The surviving spouse of an employee who passed away while employed

Department or Unit

An important aspect of tax compliance is the timely tracking and reporting of fringe benefits. Each department or business unit is responsible for identifying and reporting fringe benefits provided by the university at the time the benefit is arranged. Required documentation includes the type of benefit, its fair market value (FMV), the recipient, recipient acknowledgement, and a detailed description of the benefit. Adherence to established reporting deadlines is essential to ensure compliance.

Payroll

Once a fringe benefit has been identified, the payroll office will calculate the applicable taxes, assign the appropriate earnings code, and determine the amounts to be reported on the employee’s IRS Form W-2. Most taxable fringe benefits are subject to federal and state tax withholding, as well as Social Security and Medicare taxes. Taxable benefits for non-employees may be reportable on IRS Form 1099-MISC.

Fringe benefits are generally valued at FMV - the amount an individual would pay a third party in an arm’s length transaction to obtain the same benefit.

Exclusions and Exceptions

It is important to note that under IRS regulations, fringe benefits are considered taxable unless specifically excluded by law. These benefits must be properly accounted for to ensure accurate tax reporting and compliance. However, the IRS provides specific exclusions that allow certain types of fringe benefits to be omitted from an employee’s gross income when certain conditions are met. There are four primary provisions under which fringe benefits may qualify for exclusion.

Working Condition Fringe Benefit

A working condition fringe benefit is defined as a good or service provided and paid for by the employer that qualifies as a deductible business expense on the employees tax return if the employee had paid for it personally. To be excluded from the employee’s taxable income, all the following conditions must apply:

The benefit must be directly related to the employer’s business
The employee would have been eligible to claim the expense as a tax deduction if they had paid for it out of pocket
The business use of the benefit must be properly documented and substantiated

Examples may include clothing issued for safety or identification (i.e. university police uniforms), mandatory job-related education or training required for the current position, etc. Items with both personal and business use, or not specifically required by the employer, generally do not qualify and may be taxable.

No Additional Cost Services

A no-additional cost service is a benefit provided to an employee that does not result in any substantial additional cost to the employer. To qualify, the service must be one that the employer regularly offers to paying customers in the ordinary course of business. This type of fringe benefit is typically made available when the service is underutilized or has unused capacity, meaning the employer can provide it to employees without forgoing revenue or incurring significant additional expense. Examples may include a ticket to a performance at the Moss Arts Center or an entry fee to a conference held on campus. Season tickets are never provided as a no-cost service and should not be considered as such.

Qualified Employee Discounts

Employees may occasionally receive discounts on goods or services that the university offers for sale in the ordinary course of business. These discounts are excluded from the employee’s gross income, provided they do not exceed the following limits:

For services: A discount of up to 20% off the regular selling price.
For goods: The sale price is equal to or greater than the university’s cost.

Examples include an employee discount on computers or apparel at the university bookstore.

De Minimis Fringe

A de minimis fringe benefit is a benefit that has minimal value and is provided so infrequently that it would be unreasonable or administratively impractical to account for the transaction. As a result, the IRS allows such a benefit to be excluded from an employee’s taxable income. According to Procedure 23810-De Minimis Awards, the university defines the de minimis threshold as $100.

An example of a de minimis fringe benefit may be a low-value promotional item given to an employee or an occasional snack or beverage.

However, under IRS regulations, cash and cash equivalents, such as gift certificates or prepaid cards, can never be considered de minimis fringe benefits. These items are always taxable, regardless of their value or source of funding.

Tax Withholding for Fringe Benefits

Fringe benefits provided to employees may be subject to federal, state, and FICA (Social Security and Medicare) tax withholding, depending on the nature of the benefit and applicable IRS regulations. The university uses the standard withholding method for fringe benefits but may also apply the flat supplemental wage rate in certain circumstances. To ensure accurate tax reporting and compliance, these taxable fringe benefits must be processed through payroll. The university generally applies one of two methods to administer fringe benefit taxation: the gross method or the net pay method, depending on the circumstances of the benefit and departmental practices.

Gross Method

The full value of the fringe benefit is added to the employee’s gross taxable income for the applicable pay period. The value of the benefit is treated as if it were additional wages, and the corresponding federal, state, and FICA taxes are calculated and withheld from the employee’s paycheck. Because the taxes are deducted from the employee’s earning – without increasing their take-home pay – this results in a reduction in the employee’s net pay.

This approach ensures the employee bears the tax liability for the benefit received. The tax withholdings are in real time and reported accurately on the IRS Form W-2 at year end.

Net Method

Under this method, commonly referred to as the gross-up method, both the value of the fringe benefit and the associated taxes are included in the employee’s gross income. However, the employer covers the cost of the taxes on the employee’s behalf. This results in the employee receiving full benefit without a reduction in net pay. Because the employer is providing an additional benefit in the form of tax payments, the total taxable income reported includes both the original value of the fringe benefit and the taxes paid.

In both cases, the fringe benefit is subject to tax withholding and is reported on the employee’s IRS Form W-2. University departments should submit information to Payroll as soon as the benefit is acknowledged by the employee to ensure timely identification and processing of fringe benefits to meet IRS deadlines and avoid penalties.

Common Taxable Fringe Benefits

Tickets

Upon receipt by the employee, complimentary or discounted tickets to athletic or entertainment events are considered taxable income to the employee. However, tickets may not be taxable if the employee is attending the event for work purposes such as hosting donors, sponsors, or business partners or performing job-related duties at the event. If the tickets received were used to entertain the employee’s spouse, family, or friends, or if there is no clear business purpose documented, the value of the tickets is taxable.

The value of season tickets provided to employees and non-employees will be included in the recipient’s taxable income. The University may exclude up to twenty percent of the face value of season tickets from recipients’ taxable income. In addition to season tickets, packages for multiple tickets during the season and advanced tickets provided to a single event (i.e., any reserved seats) follow the same rules for inclusion in the recipient’s taxable income.

Note that if season tickets are provided in a section of the venue that requires a minimum donation for seating rights, the value of any required donations to be eligible for seating rights will follow the same rules for inclusion in the recipient’s taxable income.

The University may provide general admission (day of event) tickets to employees, non-employees, their spouses, and their dependent children without creating taxable income under the no additional cost service exclusion. This exclusion applies if the event/show is not sold out and no revenue is lost while providing the tickets to employees. This means the show/event can be substantiated as not sold out. These tickets must be provided on a non-discriminatory basis for approved events. For example, tickets could be offered to all VT employees or to a specific group of employees.

Additionally, if single-event tickets are infrequently provided and not significant in value, they may also qualify for exclusion under the de minimis exception. See VT Procedure 23810: De Minimis Awards for details.

Lastly, employees and non-employees who adequately document a bona fide business purpose for the use of single event tickets should not have the value of the tickets included in taxable income. To document a bona fide business purpose, the following substantiation must be provided by the recipients of the tickets:

The detailed business reason or the nature of the business benefit derived or expected to be derived
Name, title, or other designation of the person being entertained, sufficient to establish the business relationship to the University

Club Memberships and Dues

Club memberships and dues are fees paid to organizations for social, recreational, or sometimes business purposes. According to IRS rules, if an employer pays these fees, the payment is considered taxable income to the employee. To qualify as nontaxable, memberships must be ordinary, necessary, and directly related to business.

Some organizations—like professional associations, trade groups, chambers of commerce, and civic or public service groups—are not treated as "clubs" by the IRS, and therefore, not taxable.

Entertainment and recreational clubs are generally fully taxable. Payroll reviews club use each year to allocate personal versus business use and processes the taxable portion.

Employee Expense Reimbursements

Per IRS Regulations, employee reimbursements for business expenses may be excluded from taxable income if made under an accountable plan. To qualify as an accountable plan, all three of the following conditions must be met:

The expense is business related.
The employee provides documentation within 60 days per Procedure 20335f: 60-Day Limitation for Business Expense Reporting Under Accountable Plan.
Any excess advance must be returned to the university within 60 days.

If any condition is not met, the reimbursement is not covered by the accountable plan and treated as taxable income, included on IRS Form W-2, and subject to tax withholding.

Spouse or Companion Travel

Generally, travel costs for a spouse, companion, or dependent (such as transportation, lodging, meals, or registration fees) cannot be paid with university funds. In limited cases, these costs may be allowed through a foundation fund and reported as taxable income to the employee.

The employee must follow IRS guidelines by clearly documenting the bona fide business purpose of each accompanying individual’s travel. To qualify as non-taxable, the employee must document the following:

The amount, date, time, and location of each expense
The business reason for the expense, demonstrating meaningful involvement as minimal or indirect involvement does not meet the condition

Lodging

The value of employer-provided long term, non-travel-related lodging may be excluded from an employee’s gross income if all three of the following conditions are met:

The lodging is furnished on the employer’s business premises.
The lodging is provided for the convenience of the employer.
The employee is required to accept the lodging as a condition of employment.

If any one of these requirements is not met, the full value of the lodging is taxable.

Housing allowances or options to choose between housing and cash payment are not excludable from income. Even if the employee chooses lodging over cash, the value is taxable when a choice is offered.

Meals

The value of employer-provided meals provided solely for goodwill, employee morale, or during a one-day business trip without an overnight stay, is taxable and must be included in the employee’s gross income. The value of employer-provided meals may be excluded from an employee’s gross income if it meets the following conditions:

The meal is provided on the employer’s business premises (as defined in Treas. Reg. §1.119-1(c)), and
The meal is furnished for the employer’s convenience, meaning there is a substantial non-compensatory business reason, such as requiring the employee to remain on duty, the absence of nearby eating facilities, or operational demands that shorten break time (IRC §119(a)).
For example, Resident Advisors (RAs) can exclude free meals if they are required to live in university housing and the meals are served on campus to support their job responsibilities.

To qualify for exclusion when reimbursed, the meal must meet accountable plan rules (business connection, substantiation, and return of excess reimbursements), per Trea. Reg §1.62-2 and Procedure 20335f: 60-Day Limitation for Business Expense Reporting Under Accountable Plan. Business meals may also be excludable from income if the meal is:

Directly related to the active conduct of in person business, and
Not lavish or extravagant under the circumstances.

Recruitment and Retention Incentive Bonus

Recruitment or retention bonus per university Policy 4005: Exceptional Recruitment and Retention Incentive Options Policy are taxable.

Vehicles – Personal Travel

Personal use of a university owned vehicle is taxable to the employee. This applies to any vehicle owned, leased, or insured by the university, including courtesy vehicles provided to athletic staff. Personal use includes commuting, weekend or vacation trips, or use by a spouse or dependent. When personal use occurs, the Annual Lease Value (ALV) Rule is used to calculate the taxable amount. The calculation involves the following steps:

1. Find the Fair Market Value (FMV) of the vehicle on the first day it’s available to the employee.

For owned vehicles: Use the purchase price, including taxes and fees.
For leased vehicles: Use one of the following:
MSRP less 8%
Retail value from pricing guide
Manufacturer’s invoice plus 4%

2. Determine the ALV using the IRS- table (IRS Publication 15-B Employer’s Tax Guide to Fringe Benefits), based on a 4-year lease. ALV includes maintenance and insurance but not fuel.

3. Calculate the taxable portion by multiplying the ALV by the percentage of personal miles driven.

Employees must keep a detailed mileage log, including:

Date and purpose of each trip
Starting and ending locations
Odometer readings
Total miles driven

If no log is kept, the full ALV, plus fuel if employer-provided, is taxable.

Properly documented business use is not taxable. A mileage log is not required if:

The vehicle is used 100% for business.
It is stored overnight on university property.
Personal use is prohibited (except for minor use such as a lunch stop during a business trip).

Clothing Allowances and Reimbursements

Clothing allowances and clothing reimbursements are usually counted as taxable income, unless an exclusion applies. If an employer gives an employee clothing, it might not be taxed if it qualifies as a working condition fringe benefit. For the clothing to be non-taxable, all three of these rules must be met:

The clothing is required or needed for the employee’s job (such as a uniform provided directly or reimbursed by the employer).
The clothing is not something people would normally wear outside of work.
The employee does not wear the clothing outside of work.

However, if an employer gives money, store credit, or merchandise credit to buy clothes or other items, the value is taxable, even when the items are used for work.

Immigration Fees

Immigration-related fees paid or reimbursed by the university may be nontaxable or taxable, depending on the purpose.

Business-Related (Nontaxable)

If the university pays immigration fees to allow an individual to work in the United States specifically for Virginia Tech, the cost is a business expense and not taxable to the employee. This is because the university is the official petitioner. Additional information can be found in Procedure 20310c: Employment Based Visa Expenses (H-1B, O1, E-3, TN).

Examples of nontaxable fees:

Fees for employer-specific visas (e.g., non-student J, O, TN)
Required employer fees for H-1B petitions or extensions

Personal Benefit (Taxable)

Immigration costs for Lawful Permanent Resident (LPR) status (green card) are always considered a personal benefit and taxable to the employee. Even if the University sponsors the employee’s application, the cost is treated as taxable income. Additional information can be found in Procedure 20310b: Permanent Residency Expense.

Examples of taxable fees:

Green card application (Form I-485)
Premium processing (Form I-907)
Attorney fees for the green card process
Medical exams or personal documents
Costs for family members (legal or filing fees)

Departments must report any payments or reimbursements for green card or family-related immigration costs to payroll, even if paid directly to an agency or lawyer. These amounts will be included in the employee’s taxable income.

Gifts, Prizes, or Awards

All cash and cash equivalent awards must be processed through payroll to ensure proper tax withholding.

A non-cash employee achievement award is a physical gift given for years of service or safety accomplishments. Non-cash awards may be tax-free if the total value of all such awards does not exceed $400 annually.

Per IRS regulations, length of service awards cannot be given during the first five years of service and not more often than once every 5 years (no award in the current year or prior four years). A retirement award can qualify as a length-of-service award only if it meets the same rules (tangible property, meaningful presentation, and five-year timing). Also, per IRS regulations, safety achievement awards may only be awarded to less than 10% of eligible employees during the calendar year and cannot be given to managers, office staff, or professional employees. If an award exceeds the value or frequency limits, the entire award becomes taxable.

If the third-party handles selection and distribution of funding, it retains responsibility for issuing required tax forms. If Virginia Tech receives funding from a third party, but selects and distributes the award, then the university handles tax withholding for taxable awards. Additional information can be found in University Policy 4335: Employee Awards and Recognition Programs.

Educational Assistance

Virginia Tech may provide up to the IRS annual limit per calendar year in tax-free educational assistance to employees in accordance with Policy 4800: Tuition Benefits Program for Salaried Employees. This includes reimbursements or direct payment of tuition, fees, books, supplies, and equipment. Graduate tuition amounts over the IRS annual limit are taxable, unless they qualify as a working condition fringe benefit.

To qualify for the working condition exclusion, education must:

Be required to keep the employee’s current job, salary, or status, or
Improve skills needed for the current role

Educational benefits are taxable if the education:

Meets minimum job requirements, or
Prepares the employee for a new trade or business

As determined by tuition assessments or reimbursements, the Payroll department identifies the taxable amount of the benefit, adds non-cash earnings for W-2 reporting, and withholds applicable taxes from the employee’s pay over one or more pay periods. Employees should consider this tax implication when requesting waiver and/or reimbursement. Payroll notifies employees via email prior to the withholding of taxes. The employee may provide additional supporting documentation and request a second review of the taxable value if they believe a working condition exclusion is applicable.

Aircraft - Personal Travel

The value of personal flights taken by an employee or their family members and friends on an institution-owned or chartered aircraft must be included in the employee’s taxable income as it constitutes a benefit arising from the employment relationship between the university and the employee. The value of each flight is calculated using the Standard Industry Fare Level (SIFL) formula on a per-flight basis.

However, under IRC § 1.61‑21(g), seating capacity rule, if 50% or more of the regular passenger seating is occupied by individuals traveling primarily for the employer’s business, then the value of travel by the employees, spouses, and dependents is considered zero for tax purposes.

The seating capacity rule exclusion does not apply to non-employees (such as friends or other guests). Regardless of whether the seating capacity rule is met, the SIFL value of flights taken by non-employees must be included in employee’s gross income and calculated using the non-control employee rates.

Dependent Care

Generally, Virginia Tech supports a dependent care flexible care spending account but does not provide additional dependent care benefits. Employees must enroll in the Dependent Care FSA each plan year (July 1–June 30) during open enrollment. Contributions up to the annual exclusion limit per household are not taxable; any amount paid above this federal limit, or outside of an enrolled FSA, is considered a taxable fringe benefit. Employer-provided dependent care services for children under the age of 13, or for a spouse or dependent who is incapable of self-care and lives with the employee for more than half the year, are considered a taxable fringe benefit to the extent they exceed the IRS annual exclusion limit.

Terminology

Accountable Plan - An employer reimbursement arrangement that covers business-related expenses without the payments being treated as taxable income. To qualify, the expenses must have a business connection, be properly documented, and any excess funds must be returned within a reasonable time.
Annual Lease Value (ALV) Rule – An IRS method used to determine the taxable value of an employer-provided vehicle when it is available for an employee’s personal use, including commuting. This value is treated as a taxable fringe benefit and must be included in the employee’s gross income.
De Minimis Fringe Benefit - A benefit that has minimal value and is provided so infrequently that it would be unreasonable or administratively impractical to account for the transaction. As a result, the IRS allows such a benefit to be excluded from an employee’s taxable income. See Procedure 23810-De Minimis Awards.
Employee (Fringe Benefit Purposes) – IRS defines an employee as the current employee, the employee’s spouse, the employee’s dependent child, a former employee who retired or left due to a disability, or the surviving spouse of an employee who passed away while employed.
Fair Market Value (FMV) - The amount an individual would pay a third party in an arm’s length transaction to obtain the benefit.
Fringe Benefit – A form of compensation provided to an employee in addition to regular wages or salary. It can include cash, cash equivalents, property, or services.
Gross Method of Taxation - The value of the benefit is treated as if it were additional wages, and the corresponding federal, state, and FICA taxes are calculated and withheld from the employee’s paycheck resulting in a decrease in net pay.
Net Method of Taxation - Both the value of the fringe benefit and the associated taxes are included in the employee’s gross income. However, instead of deducting the taxes from the employee’s paycheck, the employer covers the cost of the taxes on the employee’s behalf. This results in no net pay impact to the employee.
No Additional Cost Service - Benefit provided to an employee that does not result in any substantial additional cost to the employer and is normally due to excess capacity. To qualify, the service must be one that the employer regularly offers to paying customers in the ordinary course of business.
Qualified Employee Discount – Discounts for employees on goods or services that the university offers for sale to others in the ordinary course of business.
Seating Capacity Rule - A tax rule defined in IRC § 1.61‑21(g), stating that if at least 50% of the regular passenger seats on an employer-provided aircraft are occupied by individuals traveling primarily for the employer’s business, then the value of travel provided to other passengers (such as employees, spouses, or dependents) is considered non-taxable.
Working Condition Fringe Benefit - A good or service provided and paid for by the employer that qualifies as a deductible business expense if the employee had paid for it personally.

References

Summary of Taxable Fringe Benefits
Fringe Benefit	Taxable?	W-2 Reporting Required?	Who Typically Pays Tax?	Possible Exclusions
Tickets	Yes	Yes	Employee	Exclusion for event attendance in performance of job duties as a working condition fringe benefit.
Club Memberships and Dues	Yes	Yes	Employee	Excludes dues to civic, public service, or professional orgs.
Expense Reimbursement – Accountable Plan	No	No	N/A	Must meet business purpose, substantiation, and return excess.
Expense Reimbursement – No Accountable Plan	Yes	Yes	Employee	N/A.
Spouse/Companion Travel	Yes	Yes	Employee	Documented business purpose and contributions made by spouse or companion.
Lodging – Employer Provided	No	No	N/A	Lodging on premises, for employer convenience, required for employment – working condition fringe benefit.
Lodging Allowance	Yes	Yes	Employee	It cannot be excluded if an employee can choose cash or housing.
Meals – Employer Provided	No	No	N/A	Meals provided on premises for convenience of the employer as a working condition fringe benefit.
Meals – One Day Trips	Yes	Yes	Employee	Unless reimbursed under accountable plan.
Relocation	Yes	Yes	Employee	Moving expenses are taxable for all except active-duty military
Vehicles – Personal Use	Yes	Yes	Employee	Cents-per-mile, commuting rule, or ALV method.
Vehicles – Business Use	No	No	N/A	Must be properly documented.
Clothing Allowances	Yes	Yes	Employee	Working condition fringe (job-required, not suitable for everyday wear)
Clothing Reimbursements	Yes	Yes	Employee	Working condition fringe (job-required, not suitable for everyday wear)
Immigration Fees – Employment	No	No	N/A	For employer-sponsored visas (e.g., H-1B, non-student J, TN).
Immigration Fees – Personal	Yes	Yes	Employee	Lawful permanent resident, premium processing, family member visas, etc.
Gifts, Prizes, and Awards	Yes	Yes	Employee	Physical gift limit; Safety or length-of-service awards under dollar/frequency limits.
Educational Assistance ≤ non-taxable annual limit	No	No	N/A	Tax-free under qualified program.
Educational Assistance > non-taxable annual limit	Yes	Yes	Employee	Working condition fringe benefit exclusion
Aircraft Personal Travel	Yes	Yes	Employee	Seating capacity exclusion.
Dependent Care	Yes	Yes	Employee	Only allowable on sponsored or private funding.

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