Why your employer's gym membership perk may cost you at tax time
As an employee or contractor, we all “perk up” when we hear “perk” because we presume we are about to receive something for free, or on top of what we would normally receive. But in the case of gym memberships, the perk may cost you.
Your gym membership could count as a fringe benefit. If your employer’s gym plan does fall into this category, then the Fair Market Value (FMV) of the membership will be added as income on your W2.
Your employer will add the FMV to Box 1, under Wages, Tips and Other Compensation and might detail the amount in Box 14 or on a separate statement.
To find out the FMV of your fringe benefits, you can ask the person in charge of payroll. Because it is added to Box 1, your fringe benefit will be taxed as regular income.
Both you and your employer would pay taxes as though you were receiving the FMV in cash. So the greater and more luxurious the perk, the higher your additional tax burden. But some, specific types of memberships will not be taxed.
On-premise gyms and employer-owned athletic facilities are considered exceptions to normal fringe benefits taxation. Your employer might be able to write off the use of these facilities as an employer deduction, and the expense would not be added on your W2.
To qualify as an exception, the facility needs to be owned and operated by your employer, and the facility needs to be largely utilized by employees and family members. The most likely example of an on-premise gym would be a large corporation whose facilities included a gym, a cafeteria and other, similar amenities. A weight trainer at Bally’s or L.A. Fitness would still be required to pay taxes on his/her gym membership because the facility is utilized by consumers in addition to employees.
If your membership does qualify as a fringe benefit and taxable income, then it may still be valuable – just not as valuable as you originally thought. You calculate exactly how valuable.
How much is my gym membership actually costing me?
The FMV of your gym membership is taxed as though it were income, so it is costing you in taxes. To calculate how much you paid last year, simply apply your effective tax rate to the FMV.
FMV x Effective tax rate= Amount you pay for the fringe benefit
For simplicity’s sake, we will assume a 25% effective income tax.
So, if your payroll department reports a $2,400 FMV of your gym membership, then you are actually paying:
$2,400 x .25=$600
Assuming the same 25% tax rate, the following chart demonstrates how much you paid against the FMV.
If you are not willing to pay the tax on the services you are receiving, then your fringe benefit is actually a fringe deficit. But if you would pay more, then every dollar above that value is the true value of the “perk.”