608 Taxability of Employee Benefits

Approved by President                                            
Effective Date: January 1, 2019
Responsible Division: Business and Finance
Responsible Office:  Business and Finance
Responsible Officer:  Associate Vice President, Business and Finance

I.  Purpose

Per the Internal Revenue Service (IRS), a fringe benefit is “a form of pay for the performance of services.” Any fringe benefit an employer provides is taxable and must be included in the recipient's pay unless the law specifically excludes it. This policy outlines certain taxable fringe benefits that Middle Tennessee State University (MTSU or University) may encounter and provides information for the reason for the taxation.

The policy provides the following guidance to assist MTSU employees and departments in understanding the tax treatment of various fringe benefits, as well as the reporting and withholding rules that MTSU must follow as the employer. The University does not provide personal tax advice. For specific concerns or questions relative to an individual tax situation, University stakeholders should consult their personal tax accountants or advisors.

II.  Fringe Benefits

A fringe benefit is a type of compensation that employers may provide to employees, including certain independent contractors. Generally, a fringe benefit is taxable unless the IRS excludes it from taxable income. Employers typically provide fringe benefits as "in kind," meaning that they are typically paid in a medium other than cash. Under nearly all circumstances, a payment in cash will be taxable wages to the employee. Fringe benefits may include the use of automobiles or cell phones, tickets, moving expenses, or a variety of other benefits. The taxability of a fringe benefit will depend on whether it falls within an exception and meets the requirements for excludability. An employer must include all taxable fringe benefits in an employee's gross income, as they are subject to federal and state tax withholding, FICA, and Medicare.

For a fringe benefit to be taxable, the University does not need to furnish it directly to an employee, as long as the benefit is in connection with the performance of services for the University. A fringe benefit may be taxable to a person even though the person did not actually receive it. For example, the IRS treats taxable fringe benefits that employers provide to an employee’s spouse or child as a benefit to the employee.

III.  Tax Withholding and Reporting

As required by federal law, the University must report taxable fringe benefits for employees as taxable wages on IRS Form W-2. Most taxable fringe benefits are subject to federal and state income tax withholding, as well as social security and Medicare taxes. The University may spread tax withholding on fringe benefits over multiple pay periods during the tax year, depending on when a department submits the reportable benefits. Benefits provided in the last two (2) months of the year may have taxation carried into the following year. 

Taxable fringe benefits for non-employees are not subject to tax withholding, but may be reportable on IRS Form 1099-MISC.

A.  Non-Taxable Fringe Benefits

1.  The IRS defines no