Fringe Benefits Employees Don't Pay Tax On
The benefits a small business can provide tax-free, the dollar limits, and why owners of pass-through businesses often cannot use them themselves.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Fringe benefits are deductible by the business and excluded from the employee's wages when they fit one of the exclusions in the tax code — health coverage, retirement contributions, education assistance, dependent care, group-term life insurance, commuting benefits, and small or job-related items. Owners of sole proprietorships, partnerships, and S corporations are excluded from several of them.
On this page
Which benefits are tax-free, and up to what amount?
| Benefit | Exclusion | 2026 limit |
|---|---|---|
| Employer-paid health, dental, vision | Section 106 | No limit |
| Health savings account contributions | Section 106 | $4,400 self-only, $8,750 family (all contributions combined) |
| Retirement plan contributions | Section 401 and related | Plan limits |
| Education assistance, including student loan repayment | Section 127 | $5,250 per year (indexed for inflation after 2026) |
| Dependent care assistance | Section 129 | $7,500 per year, $3,750 married filing separately (raised from $5,000 starting 2026) |
| Group-term life insurance | Section 79 | First $50,000 of coverage |
| Transit passes and parking | Section 132(f) | $340 a month for transit and vanpools plus $340 a month for parking ($325 each in 2025) |
| Working-condition benefits (phone, laptop, training) | Section 132(d) | No limit if business-related |
| De minimis items (occasional snacks, small gifts, not cash) | Section 132(e) | Small value |
| Employee discounts on your own goods or services | Section 132(c) | Gross profit (goods) or 20% (services) |
| Achievement awards (tangible property) | Section 74(c) | $400, or $1,600 under a qualified plan |
Cash, gift cards, and bonuses are always taxable wages. Most benefits must be offered without favoring highly compensated employees.
Which owners cannot use them?
Sole proprietors, partners, and more-than-2-percent S corporation shareholders (and, through stock attribution, an S corporation shareholder's spouse and other family members) are not treated as employees for health coverage, group-term life insurance, commuter benefits, and several other benefits. Sole proprietors and partners can, however, be covered by dependent care and education assistance plans, subject to caps on how much goes to owners. Their health premiums are handled through the self-employed health insurance deduction instead. Working-condition and de minimis benefits are generally available to them. C corporation owner-employees can use the full menu, which is one reason some high-benefit businesses stay C corporations.
How are benefits reported?
Excludable benefits do not appear in wages, though some are shown in W-2 box 12 for information. Taxable benefits — personal use of a company car, group-term life above $50,000, benefits paid to 2 percent shareholders — are added to wages. Most are also subject to withholding and payroll taxes, but the cost of group-term life coverage above $50,000 is exempt from income tax withholding, and a 2 percent shareholder's health premiums are exempt from Social Security and Medicare tax.
What makes a benefit plan hold up?
A written plan where the code requires one (education and dependent care assistance), consistent eligibility rules, substantiation for reimbursements, and payroll reporting that matches the plan.
Frequently asked questions
Can a small business give employees a cell phone tax-free?
Yes, when provided primarily for business reasons; personal use is treated as de minimis.
Are holiday bonuses taxable?
Yes. Cash and cash equivalents are wages regardless of size.
Can education assistance cover an employee's student loans?
Yes. The 2025 tax law made student loan payments a permanent part of the exclusion, within the same $5,250 annual limit, which is indexed for inflation after 2026.
Do benefits for an owner's spouse-employee work in an S corporation?
No. A spouse of a 2 percent shareholder is treated as a 2 percent shareholder for these benefits.
Official sources
The IRS explains: “Don’t treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder for this purpose is someone who directly or indirectly owns (for any day during the tax year) more than 2% of the corporation’s stock or stock with more than 2% of the voting power.” — Internal Revenue Service, Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits, https://www.irs.gov/publications/p15b
The IRS explains: “Fringe benefits for employees are taxable wages unless specifically excluded by a section of the IRC.” — Internal Revenue Service, Publication 5137, Fringe Benefit Guide, https://www.irs.gov/pub/irs-pdf/p5137.pdf
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk designs benefit packages that stay excludable and reports them correctly on W-2s. See pricing or book a free fit call.
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