Can tax preparation services be provided to employees as a tax-free benefit?


Your company is a provider of tax and other business information. Every year, it provides free tax preparation services to its employees. Can this benefit be provided tax-free?


The tax preparation services might be considered a tax-free “no-additional-cost service” benefit under Internal Revenue Code Sec. 132, but a number of rules must be met. A “no-additional-cost service” is a service that is provided tax-free to employees at no additional cost to the employer. It is typically offered to employees either free or at reduced charges by an employer and includes the services that the employer, in its line of business, sells to the general public. If specified rules are met, the value of a no-additional-cost service provided to participating employees is excludable from their income and wages for purposes of income and employment taxes.

Criteria. To be considered a no-additional-cost service, the services must meet the following criteria:

    • the employer does not incur any substantial additional cost in providing the service to the employee;

    • the service provided by the employer is within its “line of business”;

    • the employee works in the line of business in which the service is being provided; and

    • the service is offered free or at a reduced charge by an employer to an employee, or specified members of the employee's family, for personal use.

Who may receive the service? Free or reduced charges for an employer's services are classified as tax-free, no-additional-cost services only if the services are provided to the company's employees. For purposes of no-additional-cost services, the term “employees” includes: current employees; spouses of employees; dependent children; former employees who have left the service of the employer due to retirement or disability; and widows and widowers of deceased former employees.

Source: Internal Revenue Code Sec. 132(b).

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