How Should I Approach Employee Stipends?

Offering stipends to employees can be an effective way to enhance benefits, but it’s essential to understand the rules involved. The most important factor is whether the employee has complete control over how they spend the stipend. If you give an employee $80 for a gym membership, and they can choose how to use it, that money becomes taxable income.

However, some stipends are not taxable. For example, if a small business pays an employee’s health insurance directly to the provider, there is no tax on the payment since the employee doesn’t control the funds. In contrast, direct payments for gym memberships, even if made by the employer, remain taxable.

The IRS also has specific rules for reimbursements, such as those for cell phones. If an employee uses their phone for both personal and business purposes, you can provide a tax-free stipend or reimbursement. It’s crucial to stay updated on IRS guidelines, like those in IRS Publication 15 (also known as Circular E), which outlines how to tax and report fringe benefits, including life insurance policies.