What Employers Should Know About Fringe Benefits and S Corporation Shareholder Compensation

Fringe benefits are any non-wage compensation employers provide, and most are taxable unless a specific exclusion applies. Employers must follow clear rules when offering reimbursements, allowances, wellness benefits, remote-work stipends, transportation benefits, meals, awards, and insurance coverage. S corporation shareholders who own more than two percent follow different rules from regular employees and must include many benefits in wages. Understanding these requirements helps employers maintain compliance, avoid payroll corrections, and protect tax deductions.

What Counts as a Fringe Benefit for Employers

A fringe benefit is any compensation an employee receives that is not a regular paycheck. Examples include:

• Reimbursements
• Company property or services
• Allowances or stipends
• Gift cards or awards

Most fringe benefits are taxable unless a specific exclusion applies. If a benefit is taxable, it must be included in wages and subject to payroll taxes.

What this means for you
Assume a benefit is taxable unless you have a clear reason to treat it as tax free.

Key Fringe Benefit Rules Employers Should Understand

• Wellness stipends, remote-work allowances, and commuting reimbursements are taxable unless they meet specific requirements.
• Tax free reimbursements require receipts and a defined business purpose.
• Rules for meals, transportation benefits, and awards have been updated.
• S corporation shareholders who own more than two percent follow different rules from regular employees.

Wellness and Lifestyle Benefits

Many employers offer wellness benefits to support employee health. However, most general wellness expenses do not qualify as medical care for tax purposes. This includes:

• Gym memberships
• Fitness apps
• Weight loss programs
• Lifestyle coaching or non-medical counseling

Reimbursements for these items are taxable unless supported by medical documentation.

Common mistake to avoid
Participating in a wellness program that advertises payroll tax savings without requiring receipts or medical documentation.

What this means for you
Treat most wellness reimbursements as taxable unless you can document a qualifying medical expense.

Fringe Benefit Rules for Remote and Hybrid Workers

Commuting

Travel from home to the office is considered a personal commuting expense, even if an employee works from home most days. Commuting reimbursements are taxable unless provided under the limited transportation benefit program.

Common mistake to avoid
Reimbursing mileage to the office and treating it as business travel.

Home Office and Remote Work Expenses

Employers may reimburse home office and remote work expenses tax free only when:

• Receipts are provided
• The expense is required to perform the employee’s job
• The reimbursement is made under an accountable plan

Flat monthly stipends without documentation are taxable.

If an employee keeps employer-purchased equipment after employment ends, the item may create taxable income.

What this means for you
If you want a tax free program, reimburse actual costs rather than issuing general allowances.

Meals for Remote Employees

Meals consumed at home or during a commute rarely qualify as business meals. Meals must meet narrow criteria to be excluded from income.

What this means for you
Unless a meal directly supports business needs, treat it as taxable.

Insurance and Disability Coverage

Group Term Life Insurance

• The first 50,000 dollars of employer-provided coverage is tax free.
• Coverage above that amount is taxable and must be reported on Form W 2.

Short Term and Long Term Disability

• If the employer pays the premium with pre tax dollars, disability benefits are taxable.
• If the employee pays the premium with after tax dollars, benefits are generally tax free.

What this means for you
Review how premiums are paid so you understand whether benefits will be taxable if an employee becomes disabled.

Accountable Plan Requirements for Tax Free Reimbursements

Reimbursements are tax free only when:

1. Receipts are provided

2. There is a valid business purpose

3. Employees return excess amounts

Missing documentation means the reimbursement is taxable. Employers may also become responsible for unpaid payroll taxes if handled incorrectly.

Common mistake to avoid
Treating allowances as reimbursements without requiring receipts.

What this means for you
A clear accountable plan protects the business from payroll corrections and compliance issues.

Educational Assistance

For Current Employees

Two types of tax free education benefits are available:

• Job-related education that helps the employee perform their current role
• Up to 5,250 dollars per year of education assistance, including student loan repayment

Beginning in 2027, this amount adjusts annually for inflation.

What this means for you
A written education assistance plan can help employees build skills and remain tax efficient.

For Prospective Employees

Education payments or loan forgiveness for individuals who have not yet started work are taxable to the recipient.

Common mistake to avoid
Paying for schooling before a future employee begins work and assuming the benefit is tax free.

PTO Donations and Leave Sharing Programs

PTO donation programs must follow very specific rules. A compliant program should:

• Limit how much PTO can be donated
• Require written requests
• Prevent donors from selecting recipients
• Require recipients to use their own PTO first
• Return unused disaster leave to active donor employees

What this means for you
Leave sharing programs must be carefully structured to avoid unintended taxable income.

Company Vehicles

Personal use of a company vehicle is taxable unless the employee reimburses the employer.

Employers must:

• Track personal miles
• Assign a value to personal use
• Report the amount on Form W 2
• Notify employees if withholding will not be taken

Cash vehicle allowances are taxable. Reimbursing both mileage and fuel results in double payment and payroll risk.

Common mistake to avoid
Providing a flat allowance and assuming it is tax free.

De Minimis Benefits and Meals

A de minimis benefit is a small, infrequent item that is impractical to track, such as occasional snacks or small holiday treats.

Items that do not qualify include:

• Season tickets
• Club or gym memberships
• Use of company vacation property
• Most gift cards

Meals

• Business meals are generally 50 percent deductible.
• Recreational employee events may be fully deductible.
• Beginning in 2026, meals provided for employer convenience are not deductible unless employees pay full cost.

What this means for you
Review your meal programs before 2026 so you understand how deductibility may change.

Awards, Gifts, and Prizes

Most employee gifts and awards are taxable unless a specific exception applies. Employers may generally deduct no more than 25 dollars per gift unless the amount is included in wages.

Length-of-service and safety awards may be tax free when:

• The employee has at least five years of service
• They have not received a similar award within four years
• The award is tangible property
• The value falls within limits

Award trips are usually taxable unless they involve legitimate business activity.

Moving Expenses

Employer-paid moving expenses are taxable unless the employee is active-duty military or in certain federal roles with permanent change-of-station orders.

Transportation Benefits

Employers may provide transportation benefits tax free within monthly limits.

2025 limits:

• Parking: 325 dollars per month
• Transit or vanpooling: 325 dollars per month

These limits increase slightly in 2026.

Mileage reimbursements for commuting do not qualify.

What this means for you
Stay within monthly limits to maintain tax free treatment.

Cell Phones and Communication Devices

Employer-provided cell phones are tax free when required for business needs, such as client communication or after-hours availability.

Phones given as perks or bonuses are taxable. Reimbursements for personal phone use must follow accountable plan rules.

Common mistake to avoid
Labeling a phone as business equipment when its primary use is personal.

Fringe Benefit Rules for 2 Percent S Corporation Shareholders

Shareholders who own more than two percent of an S corporation do not receive many of the same tax free benefits as employees.

Generally Taxable to 2 Percent Shareholders

• Health, dental, and vision coverage
• Long term care coverage
• Employer HSA contributions
• Disability premiums
• Group term life insurance
• Transportation benefits
• Meals and lodging provided for employer convenience

Common mistake to avoid
Failing to include taxable shareholder benefits in wages. This may also prevent the corporation from deducting the expense.

Nontaxable to 2 Percent Shareholders

• Retirement plan contributions
• Up to 5,250 dollars of educational assistance
• Dependent care benefits
• Working condition fringe benefits
• Employee discounts and no additional-cost services
• De minimis benefits
• On-premises athletic facilities

What this means for you
S corporation owners must treat benefits differently to protect compliance and deductions.

Frequently Asked Questions

Are home office stipends tax free?
Not without receipts and a clear business purpose.

Can remote workers receive tax free meals?
Generally no.

Are commuting reimbursements tax free?
Only within the IRS monthly limits for parking and transit benefits.

Can employers pay student loans tax free?
Yes, up to 5,250 dollars per year under a written education assistance plan.

Do S corporation shareholders receive the same exclusions as employees?
No. Many benefits that are tax free for employees are taxable for shareholders.

Need Help Reviewing Your Fringe Benefit Program

Clear and accurate fringe benefit treatment prevents payroll corrections, protects deductions, and reduces compliance risk. If you want support reviewing your program or understanding how these rules apply to your workforce or S corporation owners, VSH CPAs is here to help.

We simplify complex areas of compensation so you can make confident decisions for your business.