Tax-Free Fringe Benefits for Small Business Owners and Employees

Tax-free fringe benefits (deductible by employer, excluded from employee income):

1. Health insurance (IRC 106): Employer-paid health insurance premiums are excluded from employee income. For S-Corp owner-employees: premiums are included in W-2 box 1 but deductible on Form 1040 line 17 (self-employed health insurance deduction).

2. Retirement plan contributions (IRC 401, 403, 408): Employer contributions to 401(k), SEP IRA, SIMPLE IRA. Deductible by the employer, not taxable to the employee until withdrawal.

3. Education assistance (IRC 127): Up to $5,250/year per employee for tuition, books, and fees. Must be offered under a written educational assistance program. No requirement that the education be job-related.

4. Dependent care assistance (IRC 129): Up to $5,000/year per employee for childcare expenses. Offered through a dependent care FSA or direct employer payment.

5. Group term life insurance (IRC 79): Up to $50,000 of coverage per employee. Premiums above $50,000 coverage are included in income (using IRS Table I rates, which are very low).

6. De minimis benefits (IRC 132): Small, infrequent benefits: occasional meals, coffee, holiday gifts, flowers for illness, personal use of company copier. No specific dollar threshold (must be so small that accounting for it is unreasonable).

7. Working condition fringe (IRC 132(d)): Property or services the employee could have deducted as a business expense if they paid for it themselves. Examples: company phone, laptop, professional subscriptions, work-related education.

8. Qualified transportation (IRC 132(f)): Up to $325/month (2025) for transit passes and vanpooling, and $325/month for qualified parking. NOT available for S-Corp shareholders who own >2%.