Non-Taxable Allowances

Tax-free allowances, commonly known as non-taxable allowances or fringe benefits, are payments from employers to employees that are free from income taxes, Social Security taxes, Medicare taxes, and in some cases, state and local taxes. Some of the non-taxable allowances may exist in different formats like housing allowances, transportation allowances, meal allowances, education assistance, health insurance premiums, retirement contributions, and employee discounts amongst others. They are provided to employees either to reduce taxes or as a part of their perquisites without having to pay higher taxes. Non-taxable allowances serve as a financial motivation for employees and employers while improving the efficiency of the taxation system and adherence to financial laws.

Example of Non-Taxable Allowances

Say, Zeta Corporation, an employer, would exempt its workers from the tax when offering a non-taxable transportation allowance as a reimbursement for commuting costs. Workers who make use of public transportation services, such as buses, trains, or subways, are eligible to receive $100 per month to subsidize the fare cost. The transportation allowance provided to the Zeta Corporation staff members is not included in their taxable income. Hence, it is not subject to the federal income tax, Social Security tax and Medicare tax. They therefore get the full value of the transport allowance without any tax deductions, increasing their net income and reducing the total amount of tax they pay. Through the non-taxable benefits such as the transportation allowance provided by Zeta Corporation, the employees’ benefits package is improved, commuter friendly policies are developed and tax savings for the employees and the company are maximized.