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ContentsDepartment of the TreasuryInternal Revenue Service

Whats New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Publication 15-BIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

(Rev. February 2007)Cat. No. 29744N 1. Fringe Benefit Overview . . . . . . . . . . . . . . . . . . . 2

Are Fringe Benefits Taxable? . . . . . . . . . . . . . . . 2

Cafeteria Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Employers 2. Fringe Benefit Exclusion Rules . . . . . . . . . . . . . 3Accident and Health Benefits . . . . . . . . . . . . . . . 6Achievement Awards . . . . . . . . . . . . . . . . . . . . . 7Tax Guide toAdoption Assistance . . . . . . . . . . . . . . . . . . . . . . 7Athletic Facilities . . . . . . . . . . . . . . . . . . . . . . . . . 7De Minimis (Minimal) Benefits . . . . . . . . . . . . . . . 8FringeDependent Care Assistance . . . . . . . . . . . . . . . . 8Educational Assistance . . . . . . . . . . . . . . . . . . . 9Benefits Employee Discounts . . . . . . . . . . . . . . . . . . . . . . 9Employee Stock Options . . . . . . . . . . . . . . . . . . 10Group-Term Life Insurance Coverage . . . . . . . . . 10For Benefits ProvidedHealth Savings Accounts . . . . . . . . . . . . . . . . . . 13Lodging on Your Business Premises . . . . . . . . . 13in 2007Meals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Moving Expense Reimbursements . . . . . . . . . . . 16No-Additional-Cost Services . . . . . . . . . . . . . . . . 16Retirement Planning Services . . . . . . . . . . . . . . . 17Transportation (Commuting) Benefits . . . . . . . . . 17Tuition Reduction . . . . . . . . . . . . . . . . . . . . . . . . 18Working Condition Benefits . . . . . . . . . . . . . . . . . 18

3. Fringe Benefit Valuation Rules . . . . . . . . . . . . . 20General Valuation Rule . . . . . . . . . . . . . . . . . . . 20Cents-Per-Mile Rule . . . . . . . . . . . . . . . . . . . . . . 20Commuting Rule . . . . . . . . . . . . . . . . . . . . . . . . . 21

Lease Value Rule . . . . . . . . . . . . . . . . . . . . . . . . 22Unsafe Conditions Commuting Rule . . . . . . . . . . 24

4. Rules for Withholding, Depositing, andReporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

How To Get Forms and Publications . . . . . . . . . . . 26

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Whats New

Cents-per-mile rule. The standard mileage rate you canuse under the cents-per-mile rule to value the personal useGet forms and other informationof a vehicle you provide to an employee in 2007 is 48.5faster and easier by:cents a mile. See Cents-Per-Mile Rulein section 3.

Internet www.irs.govIncrease in qualified parking exclusion and commutertransportation benefit. For 2007, the monthly exclusionfor qualified parking increases to $215 and the monthly

TM

for Business exclusion for commuter highway vehicle transportationwww.irs.gov/efile and transit passes increases to $110. See Qualified Trans-

portation Benefitsin section 2.


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may be the provider of the benefit even if it was actuallyfurnished by another person. You are the provider of aRemindersfringe benefit your client or customer provides to youremployee for services the employee performs for you.

Katrina Emergency Tax Relief Act of 2005. This Actprovides tax relief for persons affected by Hurricane Ka-

Recipient of benefit. The person who performs servicestrina. Under the Act, your employees may be entitled to

for you is the recipient of a fringe benefit provided for thoseloans and tax-favored withdrawals from retirement plans,

services. That person may be the recipient even if therecontributions of withdrawals to retirement plans, and

benefit is provided to someone who did not perform serv-other benefits not covered in this publication. For moreices for you. For example, your employee may be the

information, see Publication 4492, Information for Taxpay- recipient of a fringe benefit you provide to a member of theers Affected by Hurricanes Katrina, Rita, and Wilma.employees family.

Photographs of missing children. The Internal Reve-nue Service is a proud partner with the National Center for Are Fringe Benefits Taxable?Missing and Exploited Children. Photographs of missing

Any fringe benefit you provide is taxable and must bechildren selected by the Center may appear in this publica-included in the recipients pay unless the law specificallytion on pages that would otherwise be blank. You can helpexcludes it. Section 2 discusses the exclusions that applybring these children home by looking at the photographsto certain fringe benefits. Any benefit not excluded underand calling 1-800-THE-LOST (1-800-843-5678) if you rec-the rules discussed in section 2 is taxable.ognize a child.

Including taxable benefits in pay. You must include in arecipients pay the amount by which the value of a fringe

Introduction benefit is more than the sum of the following amounts.This publication supplements Publication 15, (Circular E), Any amount the law excludes from pay.Employers Tax Guide, and Publication 15-A, Employers

Supplemental Tax Guide. It contains information for em- Any amount the recipient paid for the benefit.ployers on the employment tax treatment of fringe benefits.

The rules used to determine the value of a fringe benefitare discussed in section 3.Comments and Suggestions. We welcome your com-

ments about this publication and your suggestions for If the recipient of a taxable fringe benefit is your em-future editions. You can email us while visiting our website ployee, the benefit is subject to employment taxes andat www.irs.gov. You can write to us at the following ad-

must be reported on Form W-2, Wage and Tax Statement.dress:

However, you can use special rules to withhold, deposit,and report the employment taxes. These rules are dis-Internal Revenue Servicecussed in section 4.Tax Products Coordinating Committee

SE:W:CAR:MP:T:T:SP If the recipient of a taxable fringe benefit is not your1111 Constitution Ave. NW, IR-6406 employee, the benefit is not subject to employment taxes.Washington, DC 20224 However, you may have to report the benefit on one of the

following information returns.We respond to many letters by telephone. It would be

If the recipienthelpful if you would include your daytime phone number,receives the benefit as: Use:including the area code, in your correspondence.

An independent contractor Form 1099-MISC

A partner Schedule K-1 (Form1065)1. Fringe Benefit Overview

A fringe benefit is a form of pay for the performance of For more information, see the instructions for the forms

services. For example, you provide an employee with a listed above.fringe benefit when you allow the employee to use abusiness vehicle to commute to and from work. Cafeteria PlansPerformance of services. A person who performs serv-

A cafeteria plan, including a flexible spending arrange-ices for you does not have to be your employee. A personment, is a written plan that allows your employees tomay perform services for you as an independent contrac-choose between receiving cash or taxable benefits insteadtor, partner, or director. Also, for fringe benefit purposes,of certain qualified benefits for which the law provides antreat a person who agrees not to perform services (such asexclusion from wages. If an employee chooses to receive aunder a covenant not to compete) as performing services.qualified benefit under the plan, the fact that the employeecould have received cash or a taxable benefit instead willProvider of benefit. You are the provider of a fringenot make the qualified benefit taxable.benefit if it is provided for services performed for you. You

Page 2 Publication 15-B (February 2007)


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Generally, a cafeteria plan does not include any plan Exception for S corporation shareholders. Do nottreat a 2% shareholder of an S corporation as an employeethat offers a benefit that defers pay. However, a cafeteriaof the corporation for this purpose. A 2% shareholder forplan can include a qualified 401(k) plan as a benefit. Also,this purpose is someone who directly or indirectly owns (atcertain life insurance plans maintained by educational in-any time during the year) more than 2% of the corpora-stitutions can be offered as a benefit even though theytions stock or stock with more than 2% of the voting power.defer pay.

Plans that favor highly compensated employees. IfQualified benefits. Qualified benefits include the follow- your plan favors highly compensated employees as toing benefits discussed in section 2. eligibility to participate, contributions, or benefits, you must

include in their wages the value of taxable benefits they Accident and health benefits (but not Archer medicalcould have selected. A plan you maintain under a collec-savings accounts (Archer MSAs) or long-term caretive bargaining agreement does not favor highly compen-insurance).sated employees.

Adoption assistance. A highly compensated employee for this purpose is anyof the following employees. Dependent care assistance.

Group-term life insurance coverage (including costs 1. An officer.that cannot be excluded from wages).

2. A shareholder who owns more than 5% of the votingpower or value of all classes of the employers stock.

Health savings accounts (HSAs). Distributions from3. An employee who is highly compensated based onan HSA may be used to pay eligible long-term care

the facts and circumstances.insurance premiums or qualified long-term care serv-

ices. 4. A spouse or dependent of a person described in (1),(2), or (3).

Benefits not allowed. A cafeteria plan cannot includethe following benefits discussed in section 2. Plans that favor key employees. If your plan favors key

employees, you must include in their wages the value of Archer MSAs. (See Accident and Health Benefits.)

taxable benefits they could have selected. A plan favors Athletic facilities. key employees if more than 25% of the total of the nontax-

able benefits you provide for all employees under the plan De minimis (minimal) benefits.

go to key employees. However, a plan you maintain under Educational assistance. a collective bargaining agreement does not favor key em-

ployees. Employee discounts.A key employee during 2007 is generally an employee

Lodging on your business premises. who is either of the following.

Meals.1. An officer having annual pay of more than $145,000.

Moving expense reimbursements.2. An employee who for 2007 was either of the follow-

No-additional-cost services. ing.

Transportation (commuting) benefits. a. A 5% owner of your business.

Tuition reduction. b. A 1% owner of your business whose annual paywas more than $150,000. Working condition benefits.

It also cannot include scholarships or fellowships (dis-More information. For more information about cafeteriacussed in Publication 970, Tax Benefits for Education).plans, see section 125 of the Internal Revenue Code andits regulations.

Employee. For these plans, treat the following individualsas employees.

A current common-law employee (see section 2 in 2. Fringe Benefit ExclusionPublication 15, (Circular E), for more information).

Rules A full-time life insurance agent who is a current stat-

utory employee.This section discusses the exclusion rules that apply to

A leased employee who has provided services to fringe benefits. These rules exclude all or part of the valueof certain benefits from the recipients pay.you on a substantially full-time basis for at least a

year if the services are performed under your pri- The excluded benefits are not subject to federal incomemary direction or control. tax withholding. Also, in most cases, they are not subject to

Publication 15-B (February 2007) Page 3


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social security, Medicare, or federal unemployment Group-term life insurance coverage.(FUTA) tax and are not reported on Form W-2.

Health savings accounts (HSAs).This section discusses the exclusion rules for the follow-

Lodging on your business premises.ing fringe benefits.

Meals. Accident and health benefits.

Moving expense reimbursements. Achievement awards.

No-additional-cost services. Adoption assistance.

Retirement planning services. Athletic facilities.

Transportation (commuting) benefits. De minimis (minimal) benefits.

Tuition reduction. Dependent care assistance.

Working condition benefits. Educational assistance.

Employee discounts.See Table 21 for an overview of the employment tax

Employee stock options. treatment of these benefits.



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Table 21. Special Rules for Various Types of Fringe Benefits(For more information, see the full discussion in this section.)

Treatment Under Employment Taxes

Type of Fringe Benefit Income Tax Withholding Social Security and Medicare Federal Unemployment (FUTA)

Exempt1,2, except for certain Exempt, except for certain Exemptlong-term care benefits payments to S corporation

Accident and health benefitsemployees who are 2%shareholders.

Achievement awards Exempt1 up to $1,600 ($400 for nonqualified awards).

Adoption assistance Exempt1 Taxable Taxable

Exempt if substantially all use during the calendar year is by employees, their spouses, and theirAthletic facilities

dependent children.

De minimis (minimal) benefits Exempt Exempt Exempt

Dependent care assistance Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return).

Educational assistance Exempt up to $5,250 of benefits each year. (See Educational Assistance, later.)

Employee discounts Exempt4 up to certain limits. (See Employee Discounts, later.)

Employee stock options See Employee Stock Options, later.

Exempt Exempt1,5 up to cost of $50,000 ExemptGroup-term life insurance

of coverage. (Special rules applycoverage

to former employees.)

Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits. (See Health Savings Accounts, later.)

Lodging on your business Exempt1 if furnished for your convenience as a condition of employment.premises

Exempt if furnished on your business premises for your convenience.Meals

Exempt if de minimis.

Moving expense reimbursements Exempt1 if expenses would be deductible if the employee had paid them.

No-additional cost services Exempt4 Exempt4 Exempt4

Retirement planning Exempt6 Exempt 6 Exempt 6

services

Exempt1 up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($110), orqualified parking ($215). (See Transportation (Commuting Benefits), later.)Transportation (commuting)

benefitsExempt if de minimis.

Tuition reduction Exempt4 if for undergraduate education (or graduate education if the employee performs teaching orresearch activities).

Working condition benefits Exempt Exempt Exempt

1 Exemption does not apply to S corporation employees who are 2% shareholders. .2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees.3 Exemption does not apply to certain highly compensated employees under a program that favors those employees.4 Exemption does not apply to certain highly compensated employees.5 Exemption does not apply to certain key employees under a plan that favors those employees.6 Exemption does not apply to services for tax preparation, accounting, legal, or brokerage services.



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Exclusion from wages. You can generally exclude theAccident and Health Benefitsvalue of accident or health benefits you provide to anemployee from the employees wages.This exclusion applies to contributions you make to an

accident or health plan for an employee, including the Exception for certain long-term care benefits. Youfollowing. cannot exclude contributions to the cost of long-term care

insurance from an employees wages subject to federal Contributions to the cost of accident or health insur-income tax withholding if the coverage is provided throughance.a flexible spending or similar arrangement. This is a benefit

Contributions to a separate trust or fund that directlyprogram that reimburses specified expenses up to a maxi-

or through insurance provides accident or health

mum amount that is reasonably available to the employeebenefits. and is less than five times the total cost of the insurance.However, you can exclude these contributions from the Contributions to Archer MSAs or health savings ac-employees wages subject to social security, Medicare,counts (discussed in Publication 969, Health Sav-and federal unemployment (FUTA) taxes.ings Accounts and Other Tax-Favored Health

Plans).S corporation shareholders. Because you cannot

treat a 2% shareholder of an S corporation as an employeeThis exclusion also applies to payments you directly or

for this exclusion, you must include the value of accident orindirectly make to an employee under an accident or health

health benefits you provide to the employee in the em-plan for employees that are either of the following.

ployees wages subject to federal income tax withholding. Payments or reimbursements of medical expenses. However, you can exclude the value of these benefits

(other than payments for specific injuries or illnesses) from Payments for specific injuries or illnesses (such as

the employees wages subject to social security, Medicare,the loss of the use of an arm or leg). The paymentsand FUTA taxes.must be figured without regard to any period of ab-

sence from work. Exception for highly compensated employees. Ifyour plan is a self-insured medical reimbursement planthat favors highly compensated employees, you must in-Accident or health plan. This is an arrangement thatclude all or part of the amounts you pay to these employ-provides benefits for your employees, their spouses, andees in their wages subject to federal income taxtheir dependents in the event of personal injury or sick-withholding. However, you can exclude these amountsness. The plan may be insured or noninsured and does not(other than payments for specific injuries or illnesses) fromneed to be in writing.the employees wages subject to social security, Medicare,

Employee. For this exclusion, treat the following individu- and FUTA taxes.als as employees. A self-insured plan is a plan that reimburses your em-

ployees for medical expenses not covered by an accident A current common-law employee.or health insurance policy.

A full-time life insurance agent who is a current stat- A highly compensated employee for this exception isutory employee.

any of the following individuals. A retired employee.

One of the five highest paid officers. A former employee you maintain coverage for based

An employee who owns (directly or indirectly) moreon the employment relationship.

than 10% in value of the employers stock. A widow or widower of an individual who died while

An employee who is among the highest paid 25% ofan employee.

all employees (other than those who can be ex-cluded from the plan). A widow or widower of a retired employee.

For the exclusion of contributions to an accident orFor more information on this exception, see section

health plan, a leased employee who has provided105(h) of the Internal Revenue Code and its regulations.

services to you on a substantially full-time basis for

COBRA premiums. The exclusion for accident andat least a year if the services are performed underhealth benefits applies to amounts you pay to maintainyour primary direction or control.medical coverage for a former employee under the Com-bined Omnibus Budget Reconciliation Act of 1986 (CO-Exception for S corporation shareholders. Do notBRA). The exclusion applies regardless of the length oftreat a 2% shareholder of an S corporation as an employeeemployment, whether you directly pay the premiums orof the corporation for this purpose. A 2% shareholder isreimburse the former employee for premiums paid, andsomeone who directly or indirectly owns (at any time dur-whether the employees separation is permanent or tem-ing the year) more than 2% of the corporations stock orporary.stock with more than 2% of the voting power.



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Achievement Awards1. It benefits employees who qualify under rules set upThis exclusion applies to the value of any tangible personal

by you, which do not favor highly compensated em-property you give to an employee as an award for eitherployees or their dependents. To determine whetherlength of service or safety achievement. The exclusionyour plan meets this test, do not consider employeesdoes not apply to awards of cash, cash equivalents, giftexcluded from your plan who are covered by a col-certificates, or other intangible property such as vacations,lective bargaining agreement, if there is evidencemeals, lodging, tickets to theater or sporting events,that adoption assistance was a subject of good-faithstocks, bonds, and other securities. The award must meetbargaining.the requirements for employee achievement awards dis-

cussed in chapter 2 of Publication 535, Business Ex- 2. It does not pay more than 5% of its payments duringpenses. the year for shareholders or owners (or their spouses

or dependents). A shareholder or owner is someoneEmployee. For this exclusion, treat the following individu-

who owns (on any day of the year) more than 5% ofals as employees.

the stock or of the capital or profits interest of your A current employee. business.

A former common-law employee you maintain cover- 3. You give reasonable notice of the plan to eligibleage for in consideration of or based on an agree- employees.ment relating to prior service as an employee.

4. Employees provide reasonable substantiation that A leased employee who has provided services to payments or reimbursements are for qualifying ex-

you on a substantially full-time basis for at least a penses.year if the services are performed under your pri-

You must exclude all payments or reimbursements youmary direction or control. make under an adoption assistance program for an em-

ployees qualified adoption expenses from the employeesException for S corporation shareholders. Do not

wages subject to federal income tax withholding. However,treat a 2% shareholder of an S corporation as an employee

you cannot exclude these payments from wages subject toof the corporation for this purpose. A 2% shareholder is

social security, Medicare, and federal unemploymentsomeone who directly or indirectly owns (at any time dur-

(FUTA) taxes. For more information, see the Instructionsing the year) more than 2% of the corporations stock or

for Form 8839, Qualified Adoption Expenses.stock with more than 2% of the voting power.

You must report all qualifying adoption expenses youpaid or reimbursed under your adoption assistance pro-Exclusion from wages. You can generally exclude thegram for each employee for the year in box 12 of thevalue of achievement awards you give to an employeeemployees Form W-2. Use code T to identify thisfrom the employees wages if their cost is not more thanamount.the amount you can deduct as a business expense for the

year. The excludable annual amount is $1,600 ($400 for

Employee. For this exclusion, do not treat a 2% share-awards that are not qualified plan awards). See chapter 2 holder of an S corporation as an employee of the corpora-of Publication 535 for more information about the limit ontion. A 2% shareholder is someone who directly ordeductions for employee achievement awards.indirectly owns (at any time during the year) more than 2%

To determine for 2007 whether an achievement of the corporations stock or stock with more than 2% of theaward is a qualified plan award under the de- voting power.duction rules described in Publication 535, treatCAUTION

!any employee who received more than $100,000 in pay for Athletic Facilities2006 as a highly compensated employee.

If the cost of awards given to an employee is more than You can exclude the value of an employees use of anyour allowable deduction, include in the employees wages on-premises gym or other athletic facility you operate fromthe larger of the following amounts. an employees wages if substantially all use of the facility

during the calendar year is by your employees, their The part of the cost that is more than your allowable

spouses, and their dependent children. For this purpose,deduction (up to the value of the awards). an employees dependent child is a child or stepchild who The amount by which the value of the awards ex- is the employees dependent or who, if both parents are

ceeds your allowable deduction. deceased, and not attained the age of 25.

Exclude the remaining value of the awards from the em- On-premises facility. The athletic facility must be locatedployees wages. on premises you own or lease. It does not have to be

located on your business premises. However, the exclu-sion does not apply to an athletic facility for residential use,

Adoption Assistance such as athletic facilities that are part of a resort.

An adoption assistance program is a separate written plan Employee. For this exclusion, treat the following individu-of an employer that meets all of the following requirements. als as employees.



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A current employee. the same as the tests the employee would have to meet toclaim the dependent care credit if the employee paid for

A former employee who retired or left on disability.the services. For more information, see Qualifying Person

A widow or widower of an individual who died while Testand Work-Related Expense Testin Publication 503,Child and Dependent Care Expenses.an employee.

A widow or widower of a former employee who re- Employee. For this exclusion, treat the following individu-tired or left on disability. als as employees.

A leased employee who has provided services to A current employee.you on a substantially full-time basis for at least a

A leased employee who has provided services toyear if the services are performed under your pri- you on a substantially full-time basis for at least amary direction or control.year if the services are performed under your pri-

A partner who performs services for a partnership. mary direction or control.

Yourself (if you are a sole proprietor).

A partner who performs services for a partnership.De Minimis (Minimal) Benefits

You can exclude the value of a de minimis benefit you Exclusion from wages. You can exclude the value ofprovide to an employee from the employees wages. A de benefits you provide to an employee under a dependentminimis benefit is any property or service you provide to an care assistance program from the employees wages if youemployee that has so little value (taking into account how reasonably believe that the employee can exclude thefrequently you provide similar benefits to your employees) benefits from gross income.

that accounting for it would be unreasonable or administra- An employee can generally exclude from gross incometively impracticable. Cash and cash equivalent fringe ben- up to $5,000 of benefits received under a dependent careefits (for example, use of gift card, charge card, or credit assistance program each year. This limit is reduced tocard), no matter how little, are never excludable as a de $2,500 for married employees filing separate returns.minimis benefit, except for occasional meal money or However, the exclusion cannot be more than the earnedtransportation fare. income of either:

Examples of de minimis benefits include the following. The employee, or

Occasional personal use of a company copying ma- The employees spouse.

chine if you sufficiently control its use so that at leastSpecial rules apply to determine the earned income of a85% of its use is for business purposes.spouse who is either a student or not able to care for

Holiday gifts, other than cash, with a low fair markethimself or herself. For more information on the earned

value.income limit, see Publication 503.

Group-term life insurance payable on the death of an Exception for highly compensated employees. Youemployees spouse or dependent if the face amount cannot exclude dependent care assistance from theis not more than $2,000. wages of a highly compensated employee unless the ben-

efits provided under the program do not favor highly com- Meals. See Meals, later.pensated employees and the program meets the

Occasional parties or picnics for employees and requirements described in section 129(d) of the Internaltheir guests. Revenue Code.

For this exclusion, a highly compensated employee for Occasional tickets for entertainment or sporting2007 is an employee who meets either of the followingevents.tests.

Transportation fare. See Transportation (Commut-ing) Benefits, later. 1. The employee was a 5% owner at any time during

the year or the preceding year.

Employee. For this exclusion, treat any recipient of a de 2. The employee received more than $100,000 in payminimis benefit as an employee. for the preceding year.

You can choose to ignore test (2) if the employee was notDependent Care Assistance also in the top 20% of employees when ranked by pay for

the preceding year.This exclusion applies to household and dependent careservices you directly or indirectly pay for or provide to an Form W-2. Report the value of all dependent care assis-employee under a dependent care assistance program tance you provide to an employee under a dependent carethat covers only your employees. The services must be for assistance program in box 10 of the employees Form W-2.a qualifying persons care and must be provided to allow Include any amounts you cannot exclude from the em-the employee to work. These requirements are basically ployees wages in boxes 1, 3, and 5.



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Employee. For this exclusion, treat the following individu-Educational Assistanceals as employees.

This exclusion applies to educational assistance you pro- A current employee.

vide to employees under an educational assistance pro- A former employee who retired, left on disability, orgram. The exclusion also applies to graduate level

was laid off.courses.Educational assistance means amounts you pay or in-

A leased employee who has provided services tocur for your employees education expenses. These ex- you on a substantially full-time basis for at least apenses generally include the cost of books, equipment, year if the services are performed under your pri-fees, supplies, and tuition. However, these expenses do

mary direction or control.not include the cost of a course or other education involv- Yourself (if you are a sole proprietor).ing sports, games, or hobbies, unless the education:

A partner who performs services for a partnership. Has a reasonable relationship to your business, or

Is required as part of a degree program.Exclusion from wages. You can exclude up to $5,250 ofeducational assistance you provide to an employee underEducation expenses do not include the cost of tools oran educational assistance program from the employeessupplies (other than textbooks) your employee is allowedwages each year.to keep at the end of the course. Nor do they include the

cost of lodging, meals, or transportation. Assistance over $5,250. If you do not have an educa-tional assistance plan, or you provide an employee withEducational assistance program. An educational assis-assistance exceeding $5,250, you can exclude the valuetance program is a separate written plan that providesof these benefits from wages if they are working condition

educational assistance only to your employees. The pro- benefits. Property or a service provided is a working condi-gram qualifies only if all of the following tests are met.tion benefit to the extent that if the employee paid for it, the

The program benefits employees who qualify under amount paid would have been deductible as a business orrules set up by you that do not favor highly compen- depreciation expense. See Working Condition Benefits,sated employees. To determine whether your pro- later.gram meets this test, do not consider employeesexcluded from your program who are covered by a Employee Discountscollective bargaining agreement if there is evidencethat educational assistance was a subject of This exclusion applies to a price reduction you give angood-faith bargaining. employee on property or services you offer to customers in

the ordinary course of the line of business in which the The program does not provide more than 5% of itsemployee performs substantial services. However, it doesbenefits during the year for shareholders or owners.not apply to discounts on real property or discounts onA shareholder or owner is someone who owns (onpersonal property of a kind commonly held for investmentany day of the year) more than 5% of the stock or of(such as stocks or bonds).the capital or profits interest of your business.

Employee. For this exclusion, treat the following individu- The program does not allow employees to choose toals as employees.receive cash or other benefits that must be included

in gross income instead of educational assistance. A current employee.

You give reasonable notice of the program to eligible A former employee who retired or left on disability.employees.

A widow or widower of an individual who died whileYour program can cover former employees if their employ- an employee.ment is the reason for the coverage.

A widow or widower of an employee who retired orFor this exclusion, a highly compensated employee for left on disability.

2007 is an employee who meets either of the following

A leased employee who has provided services totests. you on a substantially full-time basis for at least a1. The employee was a 5% owner at any time during year if the services are performed under your pri-

the year or the preceding year. mary direction or control.

2. The employee received more than $100,000 in pay A partner who performs services for a partnership.for the preceding year.

You can choose to ignore test (2) if the employee was not Exclusion from wages. You can generally exclude thealso in the top 20% of employees when ranked by pay for value of an employee discount you provide an employeethe preceding year. from the employees wages, up to the following limits.



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For a discount on services, 20% of the price you October 22, 2004, of an employee stock purchase plancharge nonemployee customers for the service. option resulting from any disposition of the stock. The IRS

will not apply federal income tax withholding upon the For a discount on merchandise or other property,

disposition of stock acquired by the exercise, before Octo-your gross profit percentage times the price you

ber 23, 2004, of an incentive stock option or an employeecharge nonemployee customers for the property.stock purchase plan option. However, the employer mustreport as income in box 1 of Form W-2, (a) the discountDetermine your gross profit percentage based on allportion of stock acquired by the exercise of an employeeproperty you offer to customers (including employee cus-stock purchase plan option upon disposition of the stock,tomers) and your experience during the tax year immedi-and (b) the spread (between the exercise price and the fair

ately before the tax year in which the discount is available. market value of the stock at the time of exercise) upon aTo figure your gross profit percentage, subtract the totaldisqualifying disposition of stock acquired by the exercisecost of the property from the total sales price of the prop-of an incentive stock option or an employee stockerty and divide the result by the total sales price of thepurchase plan option. An employer must report the excessproperty.of the fair market value of stock received upon exercise of

Exception for highly compensated employees. You a nonstatutory stock option over the amount paid for thecannot exclude from the wages of a highly compensated stock option on Form W-2 in boxes 1, 3 (up to the socialemployee any part of the value of a discount that is not security wage base), 5, and in box 12 using the code V.available on the same terms to one of the following groups. See Regulations section 1.83-7.

An employee who transfers his or her interest in non- All of your employees.statutory stock options to the employees former spouse

A group of employees defined under a reasonable incident to a divorce is not required to include an amount inclassification you set up that does not favor highly gross income upon the transfer. The former spouse, rather

compensated employees. than the employee, is required to include an amount ingross income when the former spouse exercises the stock

For this exclusion, a highly compensated employee for options. See Revenue Ruling 2002-22 and Revenue Rul-2007 is an employee who meets either of the following

ing 2004-60 for details. You can find Rev. Rul. 2002-22 ontests.

page 849 of Internal Revenue Bulletin 2002-19 at www.irs.gov/pub/irs-irbs/irb02-19.pdf. You can find Rev. Rul.1. The employee was a 5% owner at any time during2004-60 on page 1051 of Internal Revenue Bulletinthe year or the preceding year.2004-24 at www.irs.gov/pub/irs-irbs/irb04-24.pdf.

2. The employee received more than $100,000 in pay For more information about employee stock options,for the preceding year. see sections 421, 422, and 423 of the Internal Revenue

Code and the related regulations.You can choose to ignore test (2) if the employee was notalso in the top 20% of employees when ranked by pay forthe preceding year. Group-Term Life Insurance Coverage

This exclusion applies to life insurance coverage thatEmployee Stock Optionsmeets all the following conditions.

There are three kinds of stock optionsincentive stock It provides a general death benefit that is not in-

options, employee stock purchase plan options, and non- cluded in income.statutory (nonqualified) stock options.

You provide it to a group of employees. See TheWages for social security, Medicare, and federal unem-10-employee rulebelow.ployment taxes (FUTA) do not include remuneration result-

ing from the exercise after October 22, 2004, of an It provides an amount of insurance to each em-

incentive stock option or under an employee stock ployee based on a formula that prevents individualpurchase plan option, or from any disposition of stock selection. This formula must use factors such as theacquired by exercising such an option. The IRS will not

employees age, years of service, pay, or position.apply these taxes to an exercise before October 23, 2004,

You provide it under a policy you directly or indirectlyof an incentive stock option or an employee stockcarry. Even if you do not pay any of the policys cost,purchase plan option or to a disposition of stock acquiredyou are considered to carry it if you arrange forby such exercise.payment of its cost by your employees and charge atAdditionally, federal income tax withholding is not re-least one employee less than, and at least one otherquired on the income resulting from a disqualifying disposi-employee more than, the cost of his or her insur-tion of stock acquired by the exercise after October 22,ance. Determine the cost of the insurance, for this2004, of an incentive stock option or under an employeepurpose, as explained under Coverage over thestock purchase plan option, or on income equal to the

discount portion of stock acquired by the exercise, after limit, later.



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Group-term life insurance does not include the following 2. You provide the insurance to all your full-time em-insurance. ployees or, if the insurer requires the evidence men-

tioned in (1), to all full-time employees who provide Insurance that does not provide general death bene-

evidence the insurer accepts.fits, such as travel insurance or a policy providingonly accidental death benefits. 3. You figure the coverage based on either a uniform

percentage of pay or the insurers coverage brackets Life insurance on the life of your employees spouse

that meet certain requirements. See Regulationsor dependent. However, you may be able to exclude

section 1.79-1 for details.the cost of this insurance from the employeeswages as a de minimis benefit. See De Minimis Under the second exception, you do not have to meet

(Minimal) Benefits, earlier. the 10-employee rule if all the following conditions are met.

Insurance provided under a policy that provides a You provide the insurance under a common planpermanent benefit (an economic value that extends covering your employees and the employees of atbeyond 1 policy year, such as paid-up or cash sur- least one other employer who is not related to you.render value), unless certain requirements are met.

The insurance is restricted to, but mandatory for, allSee Regulations section 1.79-1 for details.

your employees who belong to, or are representedby, an organization (such as a union) that carries on

Employee. For this exclusion, treat the following individu- substantial activities besides obtaining insurance.als as employees.

Evidence of whether an employee is insurable doesnot affect an employees eligibility for insurance or1. A current common-law employee.the amount of insurance that employee gets.

2. A full-time life insurance agent who is a current statu-

tory employee. To apply either exception, do not consider employeeswho were denied insurance for any of the following rea-3. An individual who was formerly your employee undersons.(1) or (2), above.

They were 65 or older.4. A leased employee who has provided services to youon a substantially full-time basis for at least a year if They customarily work 20 hours or less a week or 5the services are performed under your primary direc- months or less in a calendar year.tion and control.

They have not been employed for the waiting periodgiven in the policy. (This waiting period cannot beException for S corporation shareholders. Do notmore than 6 months.)treat a 2% shareholder of an S corporation as an employee

of the corporation for this purpose. A 2% shareholder issomeone who directly or indirectly owns (at any time dur- Exclusion from wages. You can generally exclude the

ing the year) more than 2% of the corporations stock or cost of up to $50,000 of group-term life insurance from thestock with more than 2% of the voting power. wages of an insured employee. You can exclude the sameamount from the employees wages when figuring social

The 10-employee rule. Generally, life insurance is not security and Medicare taxes. In addition, you do not havegroup-term life insurance unless you provide it to at least to withhold federal income tax or pay FUTA tax on any10 full-time employees at some time during the year. group-term life insurance you provide to an employee.

For this rule, count employees who choose not to re-Coverage over the limit. You must include in yourceive the insurance unless, to receive it, they must contrib-

employees wages subject to social security and Medicareute to the cost of benefits other than the group-term lifetaxes the cost of group-term life insurance that is moreinsurance. For example, count an employee who couldthan the cost of $50,000 of coverage, reduced by thereceive insurance by paying part of the cost, even if thatamount the employee paid toward the insurance. Report itemployee chooses not to receive it. However, do not countas wages in boxes 1, 3, and 5 of the employees Form W-2.an employee who must pay part or all of the cost ofAlso, show it in box 12 with code C.permanent benefits to get insurance, unless that employee

Figure the monthly cost of the insurance to include in thechooses to receive it.employees wages by multiplying the number of thousands

Exceptions. Even if you do not meet the 10-employee of dollars of insurance coverage over $50,000 (figured torule, two exceptions allow you to treat insurance as the nearest $100) by the cost shown in the following table.group-term life insurance. Use the employees age on the last day of the tax year.

Under the first exception, you do not have to meet the You must prorate the cost from the table if less than a full10-employee rule if all the following conditions are met. month of coverage is involved.

1. If evidence that the employee is insurable is re-quired, it is limited to a medical questionnaire (com-pleted by the employee) that does not require aphysical.



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Table 22. Cost Per $1,000 of Protection For 1 Month The premiums you pay for the employees insur-ance. See Regulations section 1.79-4T (Q-6) for

Age Cost more information.Under 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .05

The cost you figure using the Table 22.25 through 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0630 through 34 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .08

For this exclusion, a key employee during 2007 is an35 through 39 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .09employee or former employee who is one of the following40 through 44 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10individuals. See section 416(i) of the Internal Revenue45 through 49 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15Code for more information.50 through 54 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

55 through 59 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 1. An officer having annual pay of more than $145,000.60 through 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6665 through 69 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.27 2. An individual who for 2007 was either of the follow-70 and older . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.06 ing.

You figure the total cost to include in the employeesa. A 5% owner of your business.

wages by multiplying the monthly cost by the number of fullb. A 1% owner of your business whose annual paymonths coverage at that cost.

was more than $150,000.Example. Toms employer provides him with

group-term life insurance coverage of $200,000. Tom is 45 A former employee who was a key employee uponyears old, is not a key employee, and pays $100 per year retirement or separation from service is also a key em-toward the cost of the insurance. Toms employer must ployee.include $170 in his wages. The $200,000 of insurance Your plan does not favor key employees as to partici-

coverage is reduced by $50,000. The total cost of pation if at least one of the following is true.$150,000 of coverage is $270 ($.15 x 150 x 12), and is

It benefits at least 70% of your employees.reduced by the $100 Tom pays for the insurance. Theemployer includes $170 in boxes 1, 3, and 5 of Toms Form At least 85% of the participating employees are notW-2. The employer also enters $170 in box 12 with code C. key employees.

Coverage for dependents. Group-term life insurance It benefits employees who qualify under a set ofcoverage paid by the employer for the spouse or depen- rules you set up that do not favor key employees.dents of an employee may be excludable from income as ade minimis fringe benefit if the face amount is not more Your plan meets this participation test if it is part of athan $2,000. The part of this coverage that the employee cafeteria plan (discussed in section 1) and it meets thepaid on an after-tax basis is also excludable from income. participation test for those plans.For this purpose, the cost is figured using the monthly cost When applying this test, do not consider employeestable above. who:

Former employees. For group-term life insurance over Have not completed 3 years of service,

$50,000 provided to former employees (including retirees), Are part-time or seasonal,the former employees must pay the employees share of

social security and Medicare taxes with their federal in- Are nonresident aliens who receive no U.S. source

come tax returns. You are not required to collect those earned income from you, ortaxes. Use the table above to determine the amount of

Are not included in the plan but are in a unit ofsocial security and Medicare taxes owed by the formeremployees covered by a collective bargaining agree-employee for coverage provided after separation fromment, if the benefits provided under the plan wereservice. Report those uncollected amounts separately inthe subject of good-faith bargaining between youbox 12 on Form W-2 using codes M and N. See theand employee representatives.Instructions for Forms W-2 and W-3.

Exception for key employees. Generally, if yourYour plan does not favor key employees as to benefits if

group-term life insurance plan favors key employees as to all benefits available to participating key employees areparticipation or benefits, you must include the entire cost ofalso available to all other participating employees. Your

the insurance in your key employees wages. (This excep-plan does not favor key employees just because the

tion generally does not apply to church plans.) Whenamount of insurance you provide to your employees is

figuring social security and Medicare taxes, you must alsouniformly related to their pay.

include the entire cost in the employees wages. Includethe cost in boxes 1, 3, and 5 of Form W-2. However, you do S corporation shareholders. Because you cannotnot have to withhold federal income tax or pay FUTA tax on treat a 2% shareholder of an S corporation as an employeethe cost of any group-term life insurance you provide to an for this exclusion, you must include the cost of allemployee. group-term life insurance coverage you provide the 2%

shareholder in his or her wages. When figuring socialFor this purpose, the cost of the insurance is the greatersecurity and Medicare taxes, you must also include theof the following amounts.



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cost of this coverage in the 2% shareholders wages. The maximum annual contribution (including ad-ditional amount for individuals who are age 55 orInclude the cost in boxes 1, 3, and 5 of Form W-2. How-older) must be reduced to reflect any portion ofever, you do not have to withhold federal income tax or pay CAUTION

!the year during which the individual was not a qualifiedfederal unemployment tax on the cost of any group-termindividual.life insurance coverage you provide to the 2% shareholder.

Nondiscrimination rules. Your contribution amount toHealth Savings Accountsan employees HSA must be comparable for all employees

A Health Savings Account (HSA) is an account owned by a who have comparable coverage during the same period.qualified individual who is generally your employee or Otherwise, there will be an excise tax equal to 35% of the

amount you contributed to all employees HSAs.former employee. Any contributions that you make to anHSA become the employees property and cannot be with- Exception. The Tax Relief and Health Care Act of 2006drawn by you. Contributions to the account are used to pay allows employers to make larger HSA contributions for acurrent or future medical expenses of the account owner, nonhighly compensated employee than for a highly com-his or her spouse, and any qualified dependent. The medi- pensated employee. A highly compensated employee forcal expenses must not be reimbursable by insurance or 2007 is an employee who meets either of the followingother sources and their payment from HSA funds (distribu- tests.tion) will not give rise to a medical expense deduction on

1. The employee was a 5% owner at any time duringthe individuals federal income tax return. For more infor-the year or the preceding year.mation about HSAs, visit the Department of Treasurys

website at www.treas.gov/offices/public-affairs/hsa. 2. The employee received more than $100,000 in payfor the preceding year.

Eligibility. A qualified individual must be covered by a You can choose to ignore test (2) if the employee was notHigh Deductible Health Plan (HDHP) and not be covered also in the 20% of employees when ranked by pay for theby other health insurance except for permitted insurance preceding year.listed under section 223(c)(3) or insurance for accidents,disability, dental care, vision care, or long-term care. A Partnerships and S corporations. Partners and 2%qualifying HDHP must have a deductible of at least $1,100 shareholders of an S corporation are not eligible for salaryfor self-only coverage or $2,200 for family coverage and reduction (pre-tax) contributions to an HSA. Employer con-must limit annual out-of-pocket expenses of the benefi- tributions to the HSA of a bona fide partner or 2% share-ciary to $5,500 for self-only coverage and $11,000 for holder are treated as distributions or guaranteed paymentsfamily coverage. as determined by the facts and circumstances.

There are no income limits that restrict an individualsCafeteria plans. You may contribute to an employeeseligibility to contribute to an HSA nor is there a requirementHSA using a cafeteria plan and your contributions are notthat the account owner have earned income to make asubject to the statutory comparability rules. However, cafe-contribution.teria plan nondiscrimination rules still apply. For example,contributions under a cafeteria plan to employee HSAs

Exceptions. An individual is not a qualified individual if hecannot be greater for higher-paid employees than they are

or she can be claimed as a dependent on another personsfor lower-paid employees. Contributions that favor

tax return. Also, an employees participation in a health lower-paid employees are not prohibited.flexible spending arrangement (FSA) or health reimburse-ment arrangement (HRA) generally disqualifies the individ-

Reporting requirements. You must report your contribu-ual (and employer) from making contributions to his or her tions to an employees HSA on Form W-2 in box 12 usingHSA. code W. The trustee or custodian of the HSA, generally a

bank or insurance company, reports distributions from theEmployer contributions. Up to specified dollar limits, HSA using Form 1099-SA, Distributions from an HSA,you can generally exclude your contributions (must be in Archer MSA, or Medicare Advantage MSA.

cash) to the Health Savings Account (HSA) of a qualifiedindividual (determined monthly) from federal income tax Lodging on Your Business Premiseswithholding, social security tax, Medicare tax, and FUTAtax. For 2007, you can contribute up to $2,850 for self-only You can exclude the value of lodging you furnish to an

employee from the employees wages if it meets the follow-coverage or $5,650 for family coverage to a qualifieding tests.individuals HSA.

The contribution amount determined above is increased It is furnished on your business premises.$800 for 2007 for qualified individuals who are age 55 or

It is furnished for your convenience.older at any time during the year. No contributions can bemade to an individuals HSA after he or she becomes The employee must accept it as a condition of em-enrolled in Medicare Part A or Part B. ployment.



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Different tests may apply to lodging furnished by educa- Occasional meals or meal money provided to enabletional institutions. See section 119(d) of the Internal Reve- an employee to work overtime. (However, the exclu-nue Code for details. sion does not apply to meal money figured on the

basis of hours worked.)The exclusion does not apply if you allow your employee

to choose to receive additional pay instead of lodging. Occasional parties or picnics for employees andtheir guests.

On your business premises. For this exclusion, yourbusiness premises is generally your employees place of

This exclusion also applies to meals you provide at anwork. (For special rules that apply to lodging furnished in a

employer-operated eating facility for employees if the an-camp located in a foreign country, see section 119(c) of the

nual revenue from the facility equals or exceeds the directInternal Revenue Code and its regulations.) costs of the facility. For this purpose, your revenue fromproviding a meal is considered equal to the facilitys directFor your convenience. Whether or not you furnish lodg-operating costs to provide that meal if its value can being for your convenience as an employer depends on allexcluded from an employees wages as explained underthe facts and circumstances. You furnish the lodging toMeals on Your Business Premiseslater.your employee for your convenience if you do this for a

substantial business reason other than to provide the em-If food or beverages you furnish to employees

ployee with additional pay. This is true even if a law or anqualify as a de minimis benefit, you can deduct

employment contract provides that the lodging is furnishedtheir full cost. The 50% limit on deductions for the

TIP

as pay. However, a written statement that the lodging iscost of meals does not apply. The deduction limit on meals

furnished for your convenience is not sufficient.is discussed in chapter 2 of Publication 535.

Condition of employment. Lodging meets this test if youEmployee. For this exclusion, treat any recipient of a derequire your employees to accept the lodging because

minimis meal as an employee.they need to live on your business premises to be able toproperly perform their duties. Examples include employ-Employer-operated eating facility for employees. An

ees who must be available at all times and employees whoemployer-operated eating facility for employees is an eat-

could not perform their required duties without being fur- ing facility that meets all the following conditions.nished the lodging.

You own or lease the facility.It does not matter whether you must furnish the lodgingas pay under the terms of an employment contract or a law

You operate the facility. (You are considered to op-fixing the terms of employment. erate the eating facility if you have a contract with

another to operate it.)Example. A hospital gives Joan, an employee of the

The facility is on or near your business premises.hospital, the choice of living at the hospital free of charge orliving elsewhere and receiving a cash allowance in addition

You provide meals (food, drinks, and related serv-to her regular salary. If Joan chooses to live at the hospital,

ices) at the facility during, or immediately before orthe hospital cannot exclude the value of the lodging from

after, the employees workday.her wages because she is not required to live at thehospital to properly perform the duties of her employment.

Exclusion from wages. You can generally exclude theS corporation shareholders. For this exclusion, do not value of de minimis meals you provide to an employeetreat a 2% shareholder of an S corporation as an employee from the employees wages.of the corporation. A 2% shareholder is someone who

Exception for highly compensated employees. Youdirectly or indirectly owns (at any time during the year)cannot exclude from the wages of a highly compensatedmore than 2% of the corporations stock or stock with moreemployee the value of a meal provided at an employer-than 2% of the voting power.operated eating facility that is not available on the sameterms to one of the following groups.Meals All of your employees.

This section discusses the exclusion rules that apply to de

A group of employees defined under a reasonableminimis meals and meals on your business premises. classification you set up that does not favor highlycompensated employees.

De Minimis MealsFor this exclusion, a highly compensated employee for

You can exclude any meal or meal money you provide to 2007 is an employee who meets either of the followingan employee if it has so little value (taking into account how tests.frequently you provide meals to your employees) that ac-counting for it would be unreasonable or administratively 1. The employee was a 5% owner at any time duringimpracticable. The exclusion applies, for example, to the the year or the preceding year.following items.

2. The employee received more than $100,000 in pay Coffee, doughnuts, or soft drinks. for the preceding year.



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You can choose to ignore test (2) if the employee was not these emergency calls have occurred or can reasonablyalso in the top 20% of employees when ranked by pay for be expected to occur.the preceding year.

Example. A hospital maintains a cafeteria on its prem-ises where all of its 230 employees may get meals at no

Meals on Your Business Premises charge during their working hours. The hospital must have120 of its employees available for emergencies. Each ofYou can exclude the value of meals you furnish to anthese 120 employees is, at times, called upon to performemployee from the employees wages if they meet theservices during the meal period. Although the hospitalfollowing tests.does not require these employees to remain on the prem-

They are furnished on your business premises. ises, they rarely leave the hospital during their meal period.Since the hospital furnishes meals on its premises to its They are furnished for your convenience.employees so that more than half of them are available foremergency calls during meal periods, the hospital canThis exclusion does not apply if you allow your employeeexclude the value of these meals from the wages of all ofto choose to receive additional pay instead of meals.its employees.

On your business premises. Generally, for this exclu-Short meal periods. Meals you furnish during working

sion, the employees place of work is your business prem-hours are furnished for your convenience if the nature of

ises.your business restricts an employee to a short meal period(such as 30 or 45 minutes) and the employee cannot beFor your convenience. Whether you furnish meals forexpected to eat elsewhere in such a short time. For exam-your convenience as an employer depends on all the factsple, meals can qualify for this treatment if your peakand circumstances. You furnish the meals to your em-

work-load occurs during the normal lunch hour. However,ployee for your convenience if you do this for a substantial they do not qualify if the reason for the short meal period isbusiness reason other than to provide the employee withto allow the employee to leave earlier in the day.additional pay. This is true even if a law or an employment

contract provides that the meals are furnished as pay.Example. Frank is a bank teller who works from 9 a.m.However, a written statement that the meals are furnished

to 5 p.m. The bank furnishes his lunch without charge in afor your convenience is not sufficient.cafeteria the bank maintains on its premises. The bank

Meals excluded for all employees if excluded forfurnishes these meals to Frank to limit his lunch period to

more than half. If more than half of your employees who30 minutes, since the banks peak workload occurs during

are furnished meals on your business premises are fur-the normal lunch period. If Frank got his lunch elsewhere, it

nished the meals for your convenience, you can treat allwould take him much longer than 30 minutes and the bank

meals you furnish to employees on your business prem-strictly enforces the time limit. The bank can exclude theises as furnished for your convenience.value of these meals from Franks wages.

Food service employees. Meals you furnish to a res- Proper meals not otherwise available. Meals you fur-taurant or other food service employee during, or immedi-nish during working hours are furnished for your conve-ately before or after, the employees working hours arenience if the employee could not otherwise eat properfurnished for your convenience. For example, if a waitressmeals within a reasonable period of time. For example,works through the breakfast and lunch periods, you canmeals can qualify for this treatment if there are insufficientexclude from her wages the value of the breakfast andeating facilities near the place of employment.lunch you furnish in your restaurant for each day she

works. Meals after work hours. Meals you furnish to an em-ployee immediately after working hours are furnished for

Example. You operate a restaurant business. You fur- your convenience if you would have furnished them duringnish your employee, Carol, who is a waitress working 7 working hours for a substantial nonpay business reasona.m. to 4 p.m., two meals during each workday. You but, because of the work duties, they were not eaten duringencourage but do not require Carol to have her breakfast working hours.on the business premises before starting work. She must

Meals you furnish to promote goodwill, boost mo-have her lunch on the premises. Since Carol is a foodrale, or attract prospective employees. Meals you fur-service employee and works during the normal breakfastnish to promote goodwill, boost morale, or attractand lunch periods, you can exclude from her wages theprospective employees are not considered furnished forvalue of her breakfast and lunch.your convenience. However, you may be able to excludeIf you also allow Carol to have meals on your businesstheir value as discussed under De Minimis Meals, earlier.premises without charge on her days off, you cannot ex-

clude the value of those meals from her wages. Meals furnished on nonworkdays or with lodging.You generally cannot exclude from an employees wagesEmployees available for emergency calls. Meals youthe value of meals you furnish on a day when the employeefurnish during working hours so an employee will be avail-is not working. However, you can exclude these meals ifable for emergency calls during the meal period are fur-

nished for your convenience. You must be able to show they are furnished with lodging that is excluded from the



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employees wages as discussed under Lodging on Your someone who directly or indirectly owns (at any time dur-ing the year) more than 2% of the corporations stock orBusiness Premises, earlier.stock with more than 2% of the voting power.

Meals with a charge. The fact that you charge for themeals and that your employees may accept or decline the Exclusion from wages. Generally, you can exclude qual-meals is not taken into account in determining whether or ifying moving expense reimbursement you provide to an

employee from the employees wages. If you paid thenot meals are furnished for your convenience.reimbursement directly to the employee, report the amountin box 12 of Form W-2 with the code P. Do not reportS corporation shareholder-employee. For this exclu-payments to a third party for the employees moving ex-sion, do not treat a 2% shareholder of an S corporation as

penses or the value of moving services you provided inan employee of the corporation. A 2% shareholder is kind.someone who directly or indirectly owns (at any time dur-ing the year) more than 2% of the corporations stock orstock with more than 2% of the voting power. No-Additional-Cost Services

This exclusion applies to a service you provide to anMoving Expense Reimbursementsemployee if it does not cause you to incur any substantialadditional costs. The service must be offered to customersThis exclusion applies to any amount you directly or indi-in the ordinary course of the line of business in which therectly give to an employee, (including services furnished inemployee performs substantial services.kind) as payment for, or reimbursement of, moving ex-

Generally, no-additional-cost services are excess ca-penses. You must make the reimbursement under rulespacity services, such as airline, bus, or train tickets; hotelsimilar to those described in chapter 13 of Publication 535rooms; or telephone services provided free or at a reducedfor reimbursement of expenses for travel, meals, and en-price to employees working in those lines of business.

tertainment under accountable plans.The exclusion applies only to reimbursement of moving Substantial additional costs. To determine whether you

expenses that the employee could deduct if he or she had incur substantial additional costs to provide a service to anpaid or incurred them without reimbursement. However, it employee, count any lost revenue as a cost. Do not reducedoes not apply if the employee actually deducted the the costs you incur by any amount the employee pays forexpenses in a previous year. the service. You are considered to incur substantial addi-

tional costs if you or your employees spend a substantialDeductible moving expenses. Deductible moving ex- amount of time in providing the service, even if the timepenses include only the reasonable expenses of: spent would otherwise be idle or if the services are pro-

vided outside normal business hours. Moving household goods and personal effects from

the former home to the new home, and Reciprocal agreements. A no-additional-cost serviceprovided to your employee by an unrelated employer may

Traveling (including lodging) from the former homequalify as a no-additional-cost service if all the following

to the new home. tests are met:

Deductible moving expenses do not include any ex- The service is the same type of service generallypenses for meals and must meet both the distance test and provided to customers in both the line of business inthe time test. The distance test is met if the new job which the employee works and the line of businesslocation is at least 50 miles farther from the employees old in which the service is provided.home than the old job location was. The time test is met if

You and the employer providing the service have athe employee works at least 39 weeks during the first 12written reciprocal agreement under which a group ofmonths after arriving in the general area of the new jobemployees of each employer, all of whom performlocation.substantial services in the same line of business,

For more information on deductible moving expenses, may receive no-additional-cost services from thesee Publication 521, Moving Expenses. other employer.

Neither you nor the other employer incurs any sub-Employee. For this exclusion, treat the following individu- stantial additional cost either in providing the serviceals as employees.or because of the written agreement.

A current employee.

A leased employee who has provided services to Employee. For this exclusion, treat the following individu-you on a substantially full-time basis for at least a als as employees.year if the services are performed under your pri-mary direction or control. 1. A current employee.

2. A former employee who retired or left on disability.Exception for S corporation shareholders. Do not

treat a 2% shareholder of an S corporation as an employee 3. A widow or widower of an individual who died whileof the corporation for this purpose. A 2% shareholder is an employee.



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4. A widow or widower of a former employee who re- Transportation (Commuting) Benefitstired or left on disability.

This section discusses exclusion rules that apply to bene-5. A leased employee who has provided services to you

fits you provide to your employees for their personal trans-on a substantially full-time basis for at least a year if

portation, such as commuting to and from work. Thesethe services are performed under your primary direc- rules apply to the following transportation benefits.tion or control.

De minimis transportation benefits.6. A partner who performs services for a partnership.

Qualified transportation benefits.Treat services you provide to the spouse or dependent

Special rules that apply to demonstrator cars and qualifiedchild of an employee as provided to the employee. For this nonpersonal-use vehicles are discussed under Workingfringe benefit, dependent childmeans any son, stepson,Condition Benefits, later.daughter, or stepdaughter who is a dependent of the em-

ployee, or both of whose parents have died and who hasDe Minimis Transportation Benefitsnot reached age 25. Treat a child of divorced parents as a

dependent of both parents.You can exclude the value of any de minimis transportation

Treat any use of air transportation by the parent of an benefit you provide to an employee from the employeesemployee as use by the employee. This rule does not wages. A de minimis transportation benefit is any transpor-apply to use by the parent of a person considered an tation benefit you provide to an employee if it has so little

value (taking into account how frequently you provideemployee because of item 3or 4above.transportation to your employees) that accounting for itwould be unreasonable or administratively impracticable.Exclusion from wages. You can generally exclude theFor example, it applies to occasional transportation fare

value of a no-additional-cost service you provide to an you give an employee because the employee is workingemployee from the employees wages.overtime if the benefit is reasonable and is not based on

Exception for highly compensated employees. You hours worked.cannot exclude from the wages of a highly compensated

Employee. For this exclusion, treat any recipient of a deemployee the value of a no-additional-cost service that is

minimis transportation benefit as an employee.not available on the same terms to one of the followinggroups.

Qualified Transportation Benefits All of your employees.

This exclusion applies to the following benefits. A group of employees defined under a reasonableclassification you set up that does not favor highly A ride in a commuter highway vehicle between thecompensated employees. employees home and work place.

A transit pass.For this exclusion, a highly compensated employee for2007 is an employee who meets either of the following Qualified parking.tests.

The exclusion applies whether you provide only one or acombination of these benefits to your employees.1. The employee was a 5% owner at any time during

the year or the preceding year. Qualified transportation benefits can be provided directlyby you or through a bona fide reimbursement arrange-2. The employee received more than $100,000 in payment. However, cash reimbursements for transit passesfor the preceding year.qualify only if a voucher or a similar item that the employee

You can choose to ignore test (2) if the employee was not can exchange only for a transit pass is not readily availablealso in the top 20% of employees when ranked by pay for for direct distribution by you to your employee. A voucher isthe preceding year. 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 effectivelyRetirement Planning Servicesprevent the employer from obtaining vouchers. See Regu-lations section 1.132-9 for more information.You may exclude from an employees wages the value of

You can exclude qualified transportation fringe benefitsany retirement planning advice or information you providefrom an employees wages even if you provide them into your employee or his or her spouse if you maintain aplace of pay. For information about providing qualifiedqualified retirement plan as defined in section 219 (a)(5) oftransportation fringe benefits under a compensation reduc-the Internal Revenue Code. In addition to employer plant ion ag reemen t , see R egu la t ions sec t ionadvice and information, the services provided may include1.132-9(b)(Q-11).

general advice and information on retirement. However,the exclusion does not apply to services for tax prepara- Commuter highway vehicle. A commuter highway vehi-tion, accounting, legal, or brokerage services. cle is any highway vehicle that seats at least 6 adults (not



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including the driver). In addition, you must reasonably Benefits more than the limit. If the value of a benefitfor any month is more than its limit, include in the em-expect that at least 80% of the vehicle mileage will be forployees wages the amount over the limit minus anytransporting employees between their homes and workamount the employee paid for the benefit. You cannotplace with employees occupying at least one-half the vehi-exclude the excess from the employees wages as a decles seats (not including the drivers).minimis transportation benefit.

Transit pass. A transit pass is any pass, token, farecard,More information. For more information on qualified

voucher, or similar item entitling a person to ride, free oftransportation benefits, including van pools, and how to

charge or at a reduced rate, one of the following.determine the value of parking, see Regulations section

On mass transit. 1.132-9. In a vehicle that seats at least 6 adults (not including

Tuition Reductionthe driver) if a person in the business of transportingpersons for pay or hire operates it.

An educational organization can exclude the value of aMass transit may be publicly or privately operated and qualified tuition reduction it provides to an employee fromincludes bus, rail, or ferry. the employees wages.

A tuition reduction for undergraduate education gener-Qualified parking. Qualified parking is parking you pro- ally qualifies for this exclusion if it is for the education ofvide to your employees on or near your business premises. one of the following individuals.It includes parking on or near the location from which youremployees commute to work using mass transit, com- 1. A current employee.muter highway vehicles, or carpools. It does not include

2. A former employee who retired or left on disability.parking at or near your employees home.

3. A widow or widower of an individual who died whilean employee.Employee. For this exclusion, treat the following individu-

als as employees. 4. A widow or widower of a former employee who re-tired or left on disability.

A current employee.

5. A dependent child or spouse of any individual listed A leased employee who has provided services to

in (1) through (4) above.you on a substantially full-time basis for at least ayear if the services are performed under your pri- A tuition reduction for graduate education qualifies formary direction or control. this exclusion only if it is for the education of a graduate

student who performs teaching or research activities forA self-employed individual is not an employee for quali- the educational organization.

fied transportation benefits. For more information on this exclusion, see Publication

970, Tax Benefits for Education.Exception for S corporation shareholders. Do nottreat a 2% shareholder of an S corporation as an employeeof the corporation for this purpose. A 2% shareholder is Working Condition Benefitssomeone who directly or indirectly owns (at any time dur-ing the year) more than 2% of the corporations stock or This exclusion applies to property and services you pro-stock with more than 2% of the voting power. vide to an employee so that the employee can perform his

or her job. It applies to the extent the employee coulddeduct the cost of the property or services as a businessRelation to other fringe benefits. You cannot exclude aexpense or depreciation expense if he or she had paid forqualified transportation benefit you provide to an employeeit. The employee must meet any substantiation require-under the de minimis or working condition benefit rules.ments that apply to the deduction. Examples of workingHowever, if you provide a local transportation benefit othercondition benefits include an employees use of a companythan by transit pass or commuter highway vehicle, or to acar for business and job-related education provided to anperson other than an employee, you may be able to ex-employee.clude all or part of the benefit under other fringe benefit

This exclusion also applies to a cash payment yourules (de minimis, working condition, etc.).provide for an employees expenses for a specific or prear-ranged business activity for which a deduction is otherwise

Exclusion from wages. You can generally exclude theallowable to the employee. You must require the employee

value of transportation benefits that you provide to anto verify that the payment is actually used for those ex-

employee during 2007 from the employees wages up topenses and to return any unused part of the payment.

the following limits.For information on deductible employee business ex-

$110 per month for combined commuter highway penses, see Unreimbursed Employee Expensesin Publi-vehicle transportation and transit passes. cation 529, Miscellaneous Deductions.

$215 per month for qualified parking. The exclusion does not apply to the following items.



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A service or property provided under a flexible An ambulance or hearse used for its specific pur-pose.spending account in which you agree to provide the

employee, over a time period, a certain level of un- Any vehicle designed to carry cargo with a loaded

specified noncash benefits with a predeterminedgross vehicle weight over 14,000 pounds.

cash value. Delivery trucks with seating for the driver only, or the

A physical examination program you provide, even ifdriver plus a folding jump seat.

mandatory. A passenger bus with a capacity of at least 20 pas-

Any item to the extent the employee could deduct itssengers used for its specific purpose.

cost as an expense for a trade or business other

School buses.than your trade or business.

Tractors and other special-purpose farm vehicles.Employee. For this exclusion, treat the following individu-

Pickup trucks. A pickup truck with a loaded gross vehi-als as employees.cle weight of 14,000 pounds or less is a qualified nonper-

A current employee. sonal-use vehicle if it has been specially modified so it isnot likely to be used more than minimally for personal A partner who performs services for a partnership.purposes. For example, a pickup truck qualifies if it is

A director of your company. clearly marked with permanently affixed decals, specialpainting, or other advertising associated with your trade, An independent contractor who performs servicesbusiness, or function and meets either of the followingfor you.requirements.

Vehicle allocation rules. If you provide a car for an em- 1. It is equipped with at least one of the following items.ployees use, the amount you can exclude as a workinga. A hydraulic lift gate.condition benefit is the amount that would be allowable as

a deductible business expense if the employee paid for its b. Permanent tanks or drums.use. If the employee uses the car for both business and

c. Permanent side boards or panels that materiallypersonal use, the value of the working condition benefit israise the level of the sides of the truck bed.the part determined to be for business use of the vehicle.

See Business use of your carunder Personal Expensesin d. Other heavy equipment (such as an electric gen-chapter 1 of Publication 535. Also, see the special rules for erator, welder, boom, or crane used to tow auto-certain demonstrator cars and qualified nonpersonal-use mobiles and other vehicles).vehicles discussed below.

However, instead of excluding the value of the working 2. It is used primarily to transport a particular type ofcondition benefit, you can include the entire annual lease load (other than over the public highways) in a con-

value of the car in the employees wages. The employee struction, manufacturing, processing, farming, min-can then claim any deductible business expense for the ing, drilling, timbering, or other similar operation forcar as an itemized deduction on his or her personal income which it was specially designed or significantly modi-tax return. This option is available only if you use the lease fied.value rule (discussed in section 3) to value the benefit.

Vans. A van with a loaded gross vehicle weight ofDemonstrator cars. Generally, all of the use of a demon- 14,000 pounds or less is a qualified nonpersonal-use vehi-strator car by your full-time auto salesperson qualifies as a cle if it has been specially modified so it is not likely to beworking condition benefit if the use is primarily to facilitate used more than minimally for personal purposes. For ex-the services the salesperson provides for you and there ample, a van qualifies if it is clearly marked with perma-are substantial restrictions on personal use. For more nently affixed decals, special painting, or other advertisinginformation and the definition of full-time auto salesper- associated with your trade, business, or function and has ason, see Regulations section 1.132-5(o). seat for the driver only (or the driver and one other person)

and either of the following items.Qualified nonpersonal-use vehicles. All of an em-ployees use of a qualified nonpersonal-use vehicle is a Permanent shelving that fills most of the cargo area.working condition benefit. A qualified nonpersonal-use ve-

An open cargo area and the van always carrieshicle is any vehicle the employee is not likely to use more

merchandise, material, or equipment used in yourthan minimally for personal purposes because of its de-

trade, business, or function.sign. Qualified nonpersonal-use vehicles generally includeall of the following vehicles.

Education. Certain job-related education you provide to Clearly marked police and fire vehicles.

an employee may qualify for exclusion as a working condi- Unmarked vehicles used by law enforcement officers tion benefit. To qualify, the education must meet the same

if the use is officially authorized. requirements that would apply for determining whether the



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us internal revenue service: p15b

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