Working condition fringe benefits explained.

The deductible-if-paid test

Publication 15-B (2026) says the working condition benefit exclusion applies to property and services you provide to an employee so the employee can perform their job, 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 listed: an employee’s use of a company car for business, an employer-provided cell phone provided primarily for noncompensatory business purposes, and job-related education.

The exclusion also covers a cash payment you provide for an employee’s expenses for a specific or prearranged business activity, if those expenses would otherwise be deductible by the employee. You must require the employee to verify that the payment was actually used for those expenses and to return any unused part.

What does not qualify

The exclusion does not apply to a service or property provided under an 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; or 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 (see Regulations section 1.132-5(a)(2)).

Who counts as an employee

For this exclusion the publication treats as employees a current employee, a partner who performs services for a partnership, a director of your company, and an independent contractor who performs services for you. That definition includes directors and independent contractors, which several other exclusions do not. There are two exceptions: you cannot exclude consumer goods in a product-testing program from the pay of an independent contractor or director, and you cannot exclude the value of parking as a working condition benefit for an independent contractor (though it may be de minimis); transit passes for independent contractors may qualify if they meet the working condition requirements.

Company vehicles

If you provide a car for an employee’s use, the amount excludable as a working condition benefit is the amount that would be an allowable business expense if the employee paid for its use. When the car has both business and personal use, the working condition value is the business-use part, divided on the basis of actual mileage. Under the lease value rule, the employee must account for business use by substantiating mileage, the time and place of travel, and the business purpose; written records made at the time of each business use are the best evidence, and unsubstantiated use is included in income. See the cents-per-mile page for the valuation rules for the personal part.

Demonstrator cars. Use of a demonstrator car by a full-time auto salesperson in the sales area where the sales office is located generally qualifies in full if the use primarily facilitates the salesperson’s services and there are substantial restrictions on personal use; Revenue Procedure 2001-56 gives optional simplified methods.

Qualified nonpersonal use vehicles

All of an employee’s use of a qualified nonpersonal use vehicle is a working condition benefit. These are vehicles the employee is not likely to use more than minimally for personal purposes because of their design. The publication’s list includes: clearly marked police, fire and public safety vehicles where the governmental unit prohibits personal use other than commuting; unmarked law-enforcement vehicles used under authorization; ambulances and hearses used for their purpose; vehicles designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds; delivery trucks with seating for the driver only (or driver plus a folding jump seat); passenger buses seating at least 20 and school buses (driver only); tractors and special-purpose farm vehicles; and bucket trucks, cement mixers, combines, cranes and derricks, dump trucks, flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks and refrigerated trucks.

A pickup truck or van with a loaded gross vehicle weight of 14,000 pounds or less can qualify if specially modified so it is not likely to be used more than minimally for personal purposes, such as being clearly marked with permanently affixed decals or other advertising, with the equipment features the publication lists (for example a hydraulic lift gate or permanent tanks for a pickup; permanent shelving or an always-loaded open cargo area, with a driver-only seat, for a van).

Education, outplacement and product testing

Job-related education qualifies if it meets the same requirements as for the employee’s own deduction: it is required by the employer or by law to keep present salary, status or job and serves a bona fide business purpose of the employer, or it maintains or improves skills needed in the job. It does not qualify if needed to meet the minimum educational requirements of the present trade or business, or if part of a program that will qualify the employee for a new trade or business. Degree programs as a whole do not necessarily qualify; each course is evaluated separately. Compare the $5,250 educational assistance exclusion.

Outplacement services qualify if provided on the basis of need, you receive a substantial business benefit distinct from paying additional wages, and the employee is seeking new employment in the same kind of trade or business. They do not qualify if the employee can choose cash or taxable benefits in their place.

Product testing of consumer goods you manufacture for sale qualifies when testing off-premises is a business necessity, the product is provided no longer than needed and returned, use is limited to reduce personal benefit, and the employee submits detailed reports that you actually use. A program that is in essence a leasing arrangement does not qualify.

Cell phones

The business use of an employer-provided cell phone given primarily for noncompensatory business reasons is a working condition benefit; the personal use is de minimis. Substantial business reasons include the need to contact the employee at all times for emergencies and the need to speak with clients in other time zones. A phone provided to promote goodwill, attract a prospective employee, or give additional compensation does not qualify. See the de minimis page.

Employment taxes

Table 2-1 shows working condition benefits as exempt from income tax withholding, social security and Medicare, and FUTA, with no limits other than the deductibility test. Any portion that fails the test is a taxable fringe benefit valued under section 3 and included in boxes 1, 3 and 5 of Form W-2. A working condition benefit cannot be offered as a cafeteria plan choice; see the cafeteria plan page.

Pub 15-B fringe benefits at a glance

Other pages in this set

De Minimis Benefits, Achievement Awards, Educational Assistance ($5,250), Dependent Care Assistance, Adoption Assistance, Meals on Business Premises, No-Additional-Cost Services, Cents-per-Mile Valuation Rule, Cafeteria Plan, Lodging on Business Premises.

Sources

• IRS Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits: section 2, Working Condition Benefits; Table 2-1; section 4 reporting. Page last reviewed April 30, 2026. Read November 2, 2026.

Every dollar figure on this page is a 2026 figure from the publication unless a different year is stated. The IRS can change a publication at any time, and the publication, your plan documents and a payroll professional control over this page. This page restates the publication and does not extend it to facts it does not address.