Working Condition Benefits: Employee Fringe Benefits (2026 IRS Guide)

This guide covers “Working Condition Benefits” 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.

• Accident and health benefits.

• Achievement awards.

• Adoption assistance.

• Athletic facilities.

• De minimis (minimal) benefits.

• Dependent care assistance.

• Educational assistance.

• Employee discounts.

• Employee stock options.

• Employer-provided cell phones.

• Group-term life insurance coverage.

• HSAs.

• Lodging on your business premises.

• Meals.

• No-additional-cost services.

• Retirement planning services.

• Transportation (commuting) benefits.

• Tuition reduction.

• Working condition benefits.

See Table 2-1 for an overview of the employment tax treatment of these benefits.

Working Condition Benefits

This exclusion applies to property and services you provide to an employee so that the employee can perform their job. It applies to the extent the cost of the property or services would be allowable as a business expense or depreciation expense deduction to the employee if they had paid for it. The employee must meet any substantiation requirements that apply to the deduction. Examples of working condition benefits include an employee’s use of a company car for business, an employer-provided cell phone provided primarily for noncompensatory business purposes (discussed earlier), and job-related education provided to an employee.

This exclusion also applies to a cash payment you provide for an employee’s expenses for a specific or prearranged business activity if such expenses would otherwise be allowable as a business expense or depreciation expense deduction to the employee. You must require the employee to verify that the payment is actually used for those expenses and to return any unused part of the payment.

The exclusion doesn’t apply to the following items.

• A service or property provided under a FSA in which you agree to provide the employee, over a time period, a certain level of unspecified noncash benefits with a predetermined cash value.

• A physical examination program you provide, even if mandatory.

• Any item to the extent the payment would be allowable as a deduction to the employee as an expense for a trade or business other than your trade or business. For more information, see Regulations section 1.132-5(a)(2).

Employee.

For this exclusion, treat the following individuals as employees.

• A current employee.

• A partner who performs services for a partnership.

• A director of your company.

• An independent contractor who performs services for you.

Vehicle allocation rules.

If you provide a car for an employee’s use, the amount you can exclude as a working condition benefit is the amount that would be allowable as a deductible business expense if the employee paid for its use. If the employee uses the car for both business and personal use, the value of the working condition benefit is the part determined to be for business use of the vehicle. See Business use of your car next. Also, see the special rules for certain demonstrator cars and qualified nonpersonal use vehicles, discussed later.

Business use of your car.

If you use your car exclusively in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible.

You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. To find the standard mileage rate for 2026 and prior years, go to IRS.gov/Tax-Professionals/ Standard-Mileage-Rates.

If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.

For more information on car expenses and the rules for using the standard mileage rate, see Pub. 463.

Demonstrator cars.

Generally, all of the use of a demonstrator car by your full-time auto salesperson in the sales area in which your sales office is located qualifies as a working condition benefit if the use is primarily to facilitate the services the salesperson provides for you and there are substantial restrictions on personal use. For more information and the definition of “full-time auto salesperson,” see Regulations section 1.132-5(o). For optional, simplified methods used to determine if full, partial, or no exclusion of income to the employee for personal use of a demonstrator car applies, see Revenue Procedure 2001-56. You can find Revenue Procedure 2001-56 on page 590 of Internal Revenue Bulletin 2001-51 at
IRS.gov/pub/irs-irbs/irb01-51.pdf.

Qualified nonpersonal use vehicles.

All of an employee’s use of a qualified nonpersonal use vehicle is a working condition benefit. A qualified nonpersonal use vehicle is any vehicle the employee isn’t likely to use more than minimally for personal purposes because of its design. Qualified nonpersonal use vehicles generally include all of the following vehicles.

• Clearly marked, through painted insignia or words, police, fire, and public safety vehicles, provided that any personal use of the vehicle (other than commuting) is prohibited by the governmental unit.

• Unmarked vehicles used by law enforcement officers if the use is officially authorized. Any personal use must be authorized by the employer, and must be related to law-enforcement functions, such as being able to report directly from home to an emergency situation. Use of an unmarked vehicle for vacation or recreation trips can’t qualify as an authorized use.

• An ambulance or hearse used for its specific purpose.

• Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.

• Delivery trucks with seating for the driver only, or the driver plus a folding jump seat.

• A passenger bus with a capacity of at least 20 passengers used for its specific purpose and school buses. The working condition benefit is available only for the driver, not for any passengers.

• Tractors and other special-purpose farm vehicles.

• Bucket trucks, cement mixers, combines, cranes and derricks, dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks.

See Regulations section 1.274-5(k) for the definitions of “qualified moving van” and “qualified specialized utility repair truck.”

Pickup trucks.

A pickup truck with a loaded gross vehicle weight of 14,000 pounds or less is a qualified nonpersonal use vehicle if it has been specially modified so it isn’t likely to be used more than minimally for personal purposes. For example, a pickup truck qualifies if it is clearly marked with permanently affixed decals, special painting, or other advertising associated with your trade, business, or function and meets either of the following requirements.

1. It is equipped with at least one of the following items.

   1. A hydraulic lift gate.

   2. Permanent tanks or drums.

   3. Permanent side boards or panels that materially raise the level of the sides of the truck bed.

   4. Other heavy equipment (such as an electric generator, welder, boom, or crane used to tow automobiles and other vehicles).

2. It is used primarily to transport a particular type of load (other than over the public highways) in a construction, manufacturing, processing, farming, mining, drilling, timbering, or other similar operation for which it was specially designed or significantly modified.

Vans.

A van with a loaded gross vehicle weight of 14,000 pounds or less is a qualified nonpersonal use vehicle if it has been specially modified so it isn’t likely to be used more than minimally for personal purposes. For example, a van qualifies if it is clearly marked with permanently affixed decals, special painting, or other advertising associated with your trade, business, or function and has a seat for the driver only (or the driver and one other person) and either of the following items.

• Permanent shelving that fills most of the cargo area.

• An open cargo area and the van always carries merchandise, material, or equipment used in your trade, business, or function.

Education.

Certain job-related education you provide to an employee may qualify for exclusion as a working condition benefit. To qualify, the education must meet the same requirements that would apply for determining whether the employee could deduct the expenses had the employee paid the expenses. Degree programs as a whole don’t necessarily qualify as a working condition benefit. Each course in the program must be evaluated individually for qualification as a working condition benefit. The education must meet at least one of the following tests.

• The education is required by the employer or by law for the employee to keep their present salary, status, or job. The required education must serve a bona fide business purpose of the employer.

• The education maintains or improves skills needed in the job.

However, even if the education meets one or both of the above tests, it isn’t qualifying education if it:

• Is needed to meet the minimum educational requirements of the employee’s present trade or business, or

• Is part of a program of study that will qualify the employee for a new trade or business.

Outplacement services.

An employee’s use of outplacement services qualifies as a working condition benefit if you provide the services to the employee on the basis of need, you get a substantial business benefit from the services distinct from the benefit you would get from the payment of additional wages, and the employee is seeking new employment in the same kind of trade or business in which the employee is presently working. Substantial business benefits include promoting a positive business image, maintaining employee morale, and avoiding wrongful termination suits.

Outplacement services don’t qualify as a working condition benefit if the employee can choose to receive cash or taxable benefits in place of the services. If you maintain a severance plan and permit employees to get outplacement services with reduced severance pay, include in the employee’s wages the difference between the unreduced severance and the reduced severance payments.

Product testing.

The FMV of the use of consumer goods, which are manufactured for sale to nonemployees, for product testing and evaluation by your employee outside your workplace, qualifies as a working condition benefit if all of the following conditions are met.

• Consumer testing and evaluation of the product is an ordinary and necessary business expense for you.

• Business reasons necessitate that the testing and evaluation must be performed off your business premises. For example, the testing and evaluation can’t be carried out adequately in your office or in laboratory testing facilities.

• You provide the product to your employee for purposes of testing and evaluation.

• You provide the product to your employee for no longer than necessary to test and evaluate its performance, and (to the extent not finished) the product must be returned to you at completion of the testing and evaluation period.

• You impose limitations on your employee’s use of the product that significantly reduce the value of any personal benefit to your employee. This includes limiting your employee’s ability to select among different models or varieties of the consumer product, and prohibiting the use of the product by persons other than your employee.

• Your employee submits detailed reports to you on the testing and evaluation.

The program won’t qualify if you don’t use and examine the results of the detailed reports submitted by employees within a reasonable period of time after expiration of the testing period. Additionally, existence of one or more of the following factors may also establish that the program isn’t a bona fide product-testing program.

• The program is in essence a leasing program under which employees lease the consumer goods from you for a fee.

• The nature of the product and other considerations are insufficient to justify the testing program.

• The expense of the program outweighs the benefits to be gained from testing and evaluation.

The program must also not be limited to only certain classes of employees (such as highly compensated employees), unless you can show a business reason for providing the products only to specific employees. For example, an automobile manufacturer may limit providing automobiles for testing and evaluation to only their design engineers and supervisory mechanics, as they can properly evaluate the automobiles.

Exclusion from wages.

You can generally exclude the value of a working condition benefit you provide to an employee from the employee’s wages.

Exception for independent contractors who perform services for you.

You can’t exclude the use of consumer goods you provide in a product-testing program from the compensation you pay to an independent contractor. You can’t exclude the value of parking as a working condition benefit, but you may be able to exclude it as a de minimis fringe benefit. Transit passes provided to independent contractors may be excluded as a working condition benefit if they meet the requirements of a working condition benefit described earlier. However, personal commuting expenses aren’t deductible as a business expense. Transit passes may also be excluded as a de minimis fringe benefit. For more information on de minimis transportation benefits, see De Minimis Transportation Benefits, earlier in this section.

Exception for company directors.

You can’t exclude the value of the use of consumer goods you provide in a product-testing program from the compensation you pay to a director.

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 — Working Condition Benefits — 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.