No-Additional-Cost Services: Employee Fringe Benefits (2026 IRS Guide)
This guide covers “No-Additional-Cost Services” within employee fringe benefits. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.
Adapted from Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.
Context for these rules
This section discusses the exclusion rules that apply to fringe benefits. These rules exclude all or part of the value of certain benefits from the recipient’s pay.
In most cases, the excluded benefits aren’t subject to federal income tax withholding, social security tax, Medicare tax, federal unemployment tax under the Federal Unemployment Tax Act (FUTA), or Railroad Retirement Tax Act (RRTA) taxes and aren’t reported on Form W-2.
This section discusses the exclusion rules for the following fringe benefits.
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Accident and health benefits.
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Achievement awards.
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Adoption assistance.
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Athletic facilities.
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De minimis (minimal) benefits.
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Dependent care assistance.
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Educational assistance.
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Employee discounts.
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Employee stock options.
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Employer-provided cell phones.
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Group-term life insurance coverage.
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HSAs.
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Lodging on your business premises.
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Meals.
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No-additional-cost services.
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Retirement planning services.
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Transportation (commuting) benefits.
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Tuition reduction.
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Working condition benefits.
See Table 2-1 for an overview of the employment tax treatment of these benefits.
No-Additional-Cost Services
This exclusion applies to a service you provide to an employee if it doesn’t cause you to incur any substantial additional costs. The service must be offered to customers in the ordinary course of the line of business in which the employee performs substantial services.
No-additional-cost services are excess capacity services, such as airline, bus, or train tickets; hotel rooms; or telephone services provided free, at a reduced price, or through a cash rebate to employees working in those lines of business. Services that aren’t eligible for treatment as no-additional-cost services are non-excess capacity services, such as the facilitation by a stock brokerage firm of the purchase of stock by employees. These services may, however, be eligible for a qualified employee discount of up to 20% of the value of the service provided. See Employee Discounts, earlier.
Substantial additional costs.
To determine whether you incur substantial additional costs to provide a service to an employee, count any lost revenue as a cost. Don’t reduce the costs you incur by any amount the employee pays for the service. You’re considered to incur substantial additional costs if you or your employees spend a substantial amount of time in providing the service, even if the time spent would otherwise be idle or if the services are provided outside normal business hours.
Example.
A commercial airline allows its employees to take personal flights on the airline at no charge and receive reserved seating. Because the employer gives up potential revenue by allowing the employees to reserve seats, employees receiving such free flights aren’t eligible for the no-additional-cost exclusion.
Reciprocal agreements.
A no-additional-cost service provided to your employee by an unrelated employer may qualify as a no-additional-cost service if all the following tests are met.
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The service is the same type of service generally provided to customers in both the line of business in which the employee works and the line of business in which the service is provided.
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You and the employer providing the service have a written reciprocal agreement under which a group of employees of each employer, all of whom perform substantial services in the same line of business, may receive no-additional-cost services from the other employer.
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Neither you nor the other employer incurs any substantial additional cost (including lost revenue) either in providing the service or because of the written agreement.
Employee.
For this exclusion, treat the following individuals as employees.
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A current employee.
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A former employee who retired or left on disability.
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A surviving spouse of an individual who died while an employee.
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A surviving spouse of a former employee who retired or left on disability.
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A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.
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A partner who performs services for a partnership.
Treat services you provide to the spouse or dependent child of an employee as provided to the employee. For this fringe benefit, dependent child is a child or stepchild who is the employee’s dependent or who, if both parents are deceased, hasn’t reached the age of 25. Treat a child of divorced parents as a dependent of both parents.
Treat any use of air transportation by the parent of an employee as use by the employee. This rule doesn’t apply to use by the parent of a person considered an employee because of item (3) or (4) above.
Exclusion from wages.
You can generally exclude the value of a no-additional-cost service you provide to an employee from the employee’s wages.
Exception for highly compensated employees.
You can’t exclude from the wages of a highly compensated employee the value of a no-additional-cost service that isn’t available on the same terms to one of the following groups.
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All of your employees.
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A group of employees defined under a reasonable classification you set up that doesn’t favor highly compensated employees.
For this exclusion, a highly compensated employee for 2026 is an employee who meets either of the following tests.
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The employee was a 5% owner at any time during the year or the preceding year.
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The employee received more than $160,000 in pay for the preceding year.
Using the guidance
Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.
Sources and further reading
- Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits: Fringe Benefit Exclusion Rules — No-Additional-Cost Services — Internal Revenue Service; 2026 edition.
The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.