Fringe Benefits — Taxable vs. Nontaxable (2025)

Nontaxable Fringe Benefits (Not included in income)

Taxable Fringe Benefits (Included in W-2 wages)

Accountable vs. Non-Accountable Plans

Accountable plan (reimbursements NOT taxable): employee must (1) incur expenses performing duties, (2) adequately account for travel/meals/lodging, (3) provide documentation (receipts), (4) return excess reimbursements within a reasonable time. Temporary (≤1 year) work-location travel reimbursable; >1 year assignments are "indefinite" — travel not reimbursable.

Non-accountable plan (reimbursements ARE taxable wages): fails any accountable requirement; unverified reimbursements = wages. Employer may still deduct as compensation.

Highly Compensated Employees (HCE) & Key Employees — Nondiscrimination

Most cafeteria plans must pass nondiscrimination tests. If a plan favors HCEs or key employees, they lose the tax benefits (becomes taxable to them).

• HCE (2025): officer, ≥5% owner (current/prior year), or employee earning ≥$155,000 (2024 compensation test); includes spouse/dependents of these (family attribution). Mid-year hires don't become HCE until Jan 1 of next year.
• Key employee (2025): officer earning >$230,000, OR ≥5% owner, OR ≥1% owner earning >$150,000. Need not own the company.

Flexible Spending Arrangements (FSAs)

FSA "use-or-lose" rule with 2.5-month grace period (or carryover if plan permits). DCFSA funds: daycare, before/after-school programs, adult day care for disabled dependents.

Key Valuation Rules

• FMV is generally the amount an employee would pay in arm's-length transaction
• Employer cost used for services (no-additional-cost, employee discounts)
• Vehicle: Cents-per-mile ($0.70/2025), annual lease value, commuting ($1.50/way)

Self-Employment & Business Income (Schedule C) — 2025

Who Must File Schedule C

Self-employed individuals with net earnings ≥$400 must file. Also must file Schedule SE (self-employment tax). Independent contractors receive Form 1099-NEC if paid $600+ (the $600 reporting threshold is unrelated to the $400 SE filing requirement).

Self-Employment Tax (Schedule SE)

Before applying rates: Multiply net SE income by 92.35% (deduct 7.65% to account for employer-equivalent portion). If taxpayer also has W-2 wages, the wage SS tax is applied first against the $176,100 base; SE tax applies only to remaining base.

Above-the-line deduction: Deduct 50% of SE tax on Schedule 1 (employer-equivalent portion). Cannot deduct the 0.9% additional Medicare tax half.

Multiple businesses (one taxpayer): Combine profit/loss from ALL businesses owned by the SAME taxpayer to determine SE-taxable income. Example: business A net +$50,000, business B net −$23,000 → SE tax on $27,000.

Spouses: Married spouses CANNOT combine their separate SE income/loss to compute individual SE tax. Each spouse computes SE tax on their own net SE income.

Excess Social Security credit: If an employee works multiple jobs and combined wages exceed $176,100, too much SS tax was withheld. Claim the excess as a fully refundable credit on the personal return. (If a SINGLE employer over-withheld, that's an employer error — employer must adjust; if refused, file Form 843.)

Employee vs. Independent Contractor

IRS uses common-law rules to determine classification. Key factors:

• Behavioral control: Does company control how work is done?
• Financial control: Who controls business aspects (investment, expenses, profit/loss opportunity)?
• Relationship: Written contract, benefits, permanency, services provided as key business activity?

Misclassified workers can file Form SS-8 (determination request) and Form 8919 (reporting wages with unpaid FICA — computes the employee's share of SS/Medicare that the employer should have withheld/ paid).

Deductible Business Expenses (Schedule C)

Must be ordinary (common in your industry) AND necessary (helpful to business):

• Cost of goods sold (for inventory-based businesses)
• Office supplies, equipment
• Advertising and marketing
• Professional services (legal, accounting)
• Business travel, meals (50% deductible), entertainment (NOT deductible)
• Vehicle expenses (standard mileage: $0.70/mile for 2025 OR actual expenses)
• Insurance
• Rent/lease payments
• Employee wages and benefits
• Home office deduction (see below)

Home Office Deduction

Must be regularly AND exclusively used for business. Two methods:

Simplified: $5/sq ft, up to 300 sq ft ($1,500 max) Regular: Actual expenses (mortgage interest, utilities, insurance, depreciation) × business use %

Limitation: Deduction cannot exceed gross business income minus other expenses. Excess carries forward.

Exclusivity test: Room must be used ONLY for business. No personal use.

Daycare providers: Easier test — space used REGULARLY (not exclusively)

Business Use of Vehicle

Standard mileage rate: $0.70/mile (2025). Must be used in first year of service.

Actual expenses: Depreciation, gas, insurance, repairs × business use %.

Commuting (home ↔ regular workplace): NOT deductible. Travel between work sites: deductible.

Health Insurance Deduction for Self-Employed

100% of premiums for taxpayer, spouse, dependents. Deductible above-the-line on Schedule 1 (not Schedule A). Limited to net profit from business.

Retirement Plans for Self-Employed

• SEP-IRA: Up to 25% of net earnings, max $70,000 (2025)
• SIMPLE IRA: Employee contribution $16,500 + catch-up $3,500
• Solo 401(k): Employee deferral $23,500 + profit-sharing up to $70,000 total

Estimated Tax for Self-Employed

Must pay quarterly estimated tax (Form 1040-ES) covering both income tax AND self-employment tax. Safe harbor: 100% of prior year tax (110% if AGI >$150K).

Key 2025 Deduction Limits