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The Payroll Source 3-4 • It is subject to social security and Medicare taxes under the Federal Insurance Contributions Act (FICA), as well as federal unemployment tax under the Federal Unemployment Tax Act (FUTA)—these taxes are often referred to as employment taxes. Because many types of employee compensation are subject to one or more but not all of these taxes (i.e., subject to federal income tax withholding but not social security or Medicare tax, or subject to federal income tax but not federal income tax withholding), references to them throughout this book will be as specific as possible. 3.1-2 Fair Market Value When noncash fringe benefits or perks are provided by an employer to its employees, the amount of the benefit is defined as its fair market value, or what it would cost an individual to purchase the benefit on the open market in an “arm’s length transaction.”4 This means that the relationship between the employer and the employee, the employee’s subjective perception of the value of the benefit, or the actual cost of the benefit to the employer should not enter into the calculation of the benefit’s fair market value. The amount of the benefit the employer must include as income to the employee is the amount by which the fair market value exceeds the amount the employee paid for the benefit after taxes plus any amount the law specifically excludes:5 IFBA = FMV - (EPA + AEL) IFBA = Includable Fringe Benefit Amount FMV = Fair Market Value EPA = Employee-Paid Amount (with after-tax dollars) AEL = Amount Excluded by Law Example 1: Harry’s employer pays for Harry’s parking space in a commercial parking lot next to the employer’s premises. The employer’s cost for the space is $300 per month in 2017 which is the same fee charged to all monthly payers. Harry pays nothing for the parking space and has access to it every day. Up to $255 per month of employer-provided parking is excluded from income by law in 2017 (see Section 3.2- 1). Harry’s taxable income from the parking benefit is determined as follows: IFBA = $300 - ($0 + $255) IFBA = $300 - $255 IFBA = $45 per month SPECIAL RULES Some fringe benefits are valued using special valuation rules other than the general fair market value rule (e.g., personal use of employer-provided cars, group-term life insurance). See the appli- cable sections discussing these benefits for details. Benefits for spouse, dependents included. In addition to employer-provided benefits used by employees, benefits provided to their spouse and/or dependents are also included in the employees’ income unless specifically excluded. 3.2 Fringe Benefits Under the Internal Revenue Code As was mentioned in Section 3.1, certain employer-provided fringe benefits are specifically mentioned in the Internal Revenue Code and IRS Regulations and defined as either taxable or nontaxable. 4. IRS Reg. §1.61-21(b)(2). 5. IRS Reg. §1.61-21(b)(1). The Payroll Source®