Fringe Benefits and Taxability

Fringe Benefits

Definition of Fringe Benefit

  • Fringe Benefit: Any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employees).

Examples of Fringe Benefits

  1. Housing
  2. Expense account
  3. Vehicle of any kind
  4. Household personnel, such as maid, driver, etc.
  5. Interest on loan at less than market rate (only the difference between the market rate and actual rate)
  6. Membership fees, dues, and expenses borne by employer for employee in social/athletic clubs or similar organizations
  7. Expenses for foreign travel
  8. Holiday and vacation expenses
  9. Educational assistance for the employee or dependents
  10. Life or health insurance and non-life insurance premiums exceeding legal limits (Sec. 33 (B))

Taxability of Fringe Benefits

  1. For Managerial or Supervisory Employees:

    • Subject to a fringe benefit tax, imposed on the grossed-up monetary value of fringe benefits received, regardless of the employer's nature (individual, corporation, or government).
    • Managerial Employee: Vested with powers/prerogatives to manage policies and personnel.
    • Supervisory Employee: Recommends managerial actions requiring independent judgment (not merely clerical).

  2. For Rank and File Employees:

    • Fringe benefits are not subject to the fringe benefit tax but are included in taxable compensation income.
    • Rank and file employees do not hold managerial or supervisory positions.

Tax Base and Rate of Fringe Benefit Tax

  • Tax Base: Grossed-up monetary value (GUMV) of benefit = Total monetary value (MV) / 65%.
  • Fringe Benefit Tax Rate: 35% of GUMV.

Calculation Example for Fringe Benefit Tax

  • Calculation Steps:
    • Monetary Value of Benefit = P xxx
    • Divided by: 65%
    • Grossed-Up Monetary Value (Tax Base): P xxx
    • Fringe Benefit Tax: [Grossed-Up Monetary Value] x 35% = P xxx

Definition of Grossed-Up Monetary Value (GUMV)

  • The GUMV represents the total income realized by the employee, including:
    • Net monetary value received, plus the fringe benefit tax due paid by the employer on behalf of the employee (Rev. Regs. No. 3-98).

Fringe Benefits Not Subject to Fringe Benefits Tax

  1. Fringe benefits authorized/exempted from income tax under the Code or special laws.
  2. Employer contributions to retirement, insurance, and hospitalization plans.
  3. Benefits to rank and file employees, regardless of collective bargaining (CBA).
  4. De minimis benefits.
  5. Fringe benefits required by the employer's business.
  6. Those granted for the employer's convenience.
  7. Exemptions do not exempt from other income taxes unless specifically stated.

Concept of De Minimis Benefit

  • De Minimis Benefit: Benefits of relatively small value provided by the employer to promote employee health, goodwill, and efficiency.
    • Term meaning “about minimal things”; describes insignificance.

Examples of De Minimis Benefits

  1. Monetized unused vacation leave not exceeding 12 days per year.
  2. Medical cash allowance for dependents not exceeding P2,000.00 per semester or P333.00 per month.
  3. Rice subsidy of P2,500.00 or one sack of 50kg rice per month.
  4. Uniform/clothing allowance not exceeding P8,000 per annum.
  5. Medical assistance not exceeding P12,000 per annum for medical expenses.
  6. Laundry allowance not exceeding P400.00 per month.
  7. Employee achievement awards with a monetary value not exceeding P12,000.00 annually.
  8. Gifts during Christmas or anniversaries not exceeding P6,000.00 per employee per annum.
  9. Daily meal allowance during overtime/night shifts not exceeding 30% of the basic minimum wage regionally.
  10. Benefits from CBAs and productivity incentive schemes not exceeding P12,000.00 combined per employee per taxable year.

Rules When De Minimis Benefits Exceed Ceiling

  1. For supervisory/managerial employees, excess considered taxable fringe benefit.
  2. For rank and file employees, excess treated as “Other Benefits” and included with other annual benefits. Excess over P90,000 is taxable compensation income (Rev. Regs. No. 3-2015).

Housing Privilege

Valuation of Housing Benefits

  • Leasing: Value = rental paid by employer (shown in lease contract) x 50%.
  • Owned Property: Annual value = 5% of market value as per Tax Declaration Form or zonal value, whichever is higher, x 50%.
  • Installment Purchase: 5% of acquisition cost (excl. interest) x 50%.
  • Transfer of Ownership: Value = employer’s cost or zonal value, whichever is higher.
  • Reduced Sale Price: Value = (FMV/ZV, whichever higher) - cost to employee (entire value).

Tax-Exempt Housing Privileges

  1. Housing for military officials of the Armed Forces of the Philippines.
  2. Units within 50 meters of business premise.
  3. Temporary housing for 3 months or less.

Expense Accounts

  1. Employee expenses paid by the employer are typically taxable benefits unless receipted in employer's name and personal expenses.
  2. Reimbursed personal expenses are taxable unless receipted and not personal.
  3. Fixed transportation allowances are taxable compensation income, not fringe benefits.

Motor Vehicles

Valuation of Motor Vehicle Benefits

  1. Employer Purchases Vehicle: Value = acquisition cost.
  2. Cash for Purchase: Value = amount received by the employee.
  3. Partial Employer Payment: Value = employer's contribution.
  4. Installment Purchase: Value = (acquisition cost excl. interest) divided by 5 years.
  5. Fleet for Business Use: Value = (acquisition cost of non-personal use vehicles) divided by 5 years (50% for monetary value).
  6. Leased Fleet: Value = total rental payments for vehicles not used for personal purposes (50% for monetary value).
  7. Aircraft Use: Treated as business use, not subject to tax.
  8. Yacht Use: Considered taxable fringe benefit, valued based on depreciation over 20 years.

Household Expenses

  • Household personnel salaries and related expenses paid by the employer = taxable fringe benefits.

Interest on Loans at Less Than Market Rate

  1. No interest: The foregone interest is the monetary value.
  2. Lower than 12%: The difference between employee's rate and 12% = monetary value.
  3. Benchmark Interest Rate: 12% unless revised.

Membership Fees and Dues

  • Membership fees borne by employer in social/athletic clubs = taxable fringe benefits (excludes business clubs).

Foreign Travel Expenses

Exempt from Fringe Benefit Tax

  1. Reasonable business expenses for travel to meetings/conventions.
  2. Inland travel expenses (food, local transport).
  3. Economy/business class tickets.

Subject to Fringe Benefit Tax

  1. Lodging costs exceeding $300 per day.
  2. First-class tickets (30% excess).
  3. No documentation proving business purpose.
  4. Family member travel expenses.

Holiday and Vacation Expenses

  • Employer-paid holiday/vacation expenses = taxable fringe benefits.

Educational Assistance

  1. Employer-paid educational assistance = taxable fringe benefits, unless it's a scholarship tied to business.
  2. Educational assistance for dependents = generally taxable unless provided through a competitive scholarship program.

Life and Health Insurance

  • Premiums paid by employer for employee = taxable fringe benefits, except:
  1. Contributions under existing law (e.g., SSS, GSIS).
  2. Group insurance premiums for employees.

Tax Accounting and Journal Entry for Fringe Benefits

  1. Taxable fringe benefits and taxes allow deductions from employer’s gross income.
    • Pro-forma Journal Entry:
      • (Debit) Fringe benefit expense
      • (Debit) Fringe benefit tax expense
      • (Credit) Cash
      • (Credit) Fringe benefit tax payable

Example of Journal Entry for Vacation Expenses

  • Vacation expense: P17,000.00, GUMV = P26,154.00, Tax = P9,154.00.

Specific Calculations for Housing Benefits

  1. Leased Housing: Valued based on rental x 50%. Example: Rental P30,000.00 → MV = P15,000.00.

  2. Owned Housing: If property cost exceeds market value, only actual tax constitutes deduction.

  3. Cost Less than FMV: Excess amortized over useful life for deductibility.

Fringe Benefit Granted to Non-Resident Aliens (NRAETB)

  • Taxed at 25% of GUMV (calculated by MV / 75%).

Tax Filing and Payment for Fringe Benefit Tax

  • Filing Due: Quarterly returns due on the last day of the month following the close of the quarter.

Fringe benefits are additional perks that employers offer to employees beyond their basic salary. They can come in various forms, including cash, goods, services, or other benefits. Here are some detailed examples and explanations:

1. Types of Fringe Benefits

  • Housing:
    • Employers may pay for an employee’s housing costs, which could include rent, mortgage payments, or providing a company-owned house. The value of this benefit is often calculated based on the rent the employer pays or the home’s market value.
  • Expense Account:
    • This is a sum of money that employers give employees to cover work-related expenses, such as travel, meals, or supplies. If an employee spends their own money for these expenses without proper receipts, they may face taxation on those amounts.
  • Vehicles:
    • Employees may be provided with a company car or allowances to buy their own. If the employer purchases a vehicle, the value is often based on the vehicle's purchase price or market value, divided over a certain number of years.
  • Health Insurance:
    • Employers may cover some or all of the costs of health insurance premiums for employees, which generally reduces the amount employees have to pay out of pocket for health services.
  • Educational Assistance:
    • Employers can help pay for employees’ education or the education of their dependents. This benefit may or may not be taxable, depending on how it’s structured. For instance, scholarships tied to business needs are not typically taxed.

2. Tax Implications

  • For Managers and Supervisors:
    • If you hold a managerial or supervisory position, any fringe benefits you receive are generally subject to taxation. The tax is based on the monetary value of the benefits, which is often calculated using a formula called Grossed-up Monetary Value (GUMV). This means the total monetary value of the benefit is divided by 65% to determine the taxable amount, and then taxed at a rate of 35%.
  • For Rank-and-File Employees:
    • Employees in lower positions (non-managerial) don’t pay fringe benefit tax on benefits they receive. However, any fringe benefit they do receive typically gets added to their taxable income, which may affect their overall tax liabilities.

3. Benefits Exempt from Taxation

  • Certain fringe benefits are not taxed at all. Examples include:
    • Small gifts or de minimis benefits like a holiday turkey.
    • Employer contributions to retirement or health plans.
    • Educational assistance programs that follow specific guidelines.
    • Benefits for rank-and-file employees that are specifically exempted under laws or collective bargaining agreements.

4. Special Situations

  • When fringe benefits exceed certain value thresholds, they may be taxed differently:
    • For managerial employees, any excess is considered a taxable fringe benefit.
    • For rank-and-file employees, any excess benefits may be treated as 'Other Benefits' and taxed as income if they exceed specific amounts.

5. Calculation Examples

  • Housing Benefits: If an employer pays $1,000 per month for an employee's rental home, the taxable value might be $1,000 divided by 2 (50%), resulting in a taxable fringe benefit of $500.
  • Cars: If an employer purchases a vehicle costing $20,000 for an employee, that entire amount is considered a benefit.

6. Conclusion

Fringe benefits enhance employee compensation packages and can make jobs more attractive. However, these benefits also come with tax implications that vary depending on an employee’s role. Understanding both the types of benefits and their tax liabilities can help employees make informed decisions about their total compensation.