What are Fringe Benefits?
A fringe benefit is any compensation or reward beyond an employee’s regular salary. Companies can utilize fringe benefits to recruit, motivate and retain high-quality staff.
There’s no universal guideline to fringe benefits, meaning companies can offer a range of perks. However, certain fringe benefits are required depending on your company’s size, which can add long-term costs to your overall budget.
Fringe benefits explained
The IRS classifies any non-wage form of employee compensation as a fringe benefit. For example, giving an employee a business vehicle for work purposes would be a fringe benefit. Contract workers could also receive fringe benefits if they perform services for your business.
You don’t need to distribute fringe benefits equally. For instance, you can calculate paid time off benefits based on an employee’s length of employment. However, it’s best not to take away a benefit once offered since employees tend to rely on your company’s specific perks.
Third-party services are still considered fringe benefits. So, if you offer daycare services for workers through a third party, your company would still be considered the provider of this benefit.
Fringe benefits examples
Although most fringe benefits are optional, prospective employees usually expect certain ones — such as paid vacation time. You might struggle to hire and retain top talent if you skimp on the most common benefits.
However, you want to provide meaningful and useful benefits to attract long-term employees. There’s no point in offering expensive benefits that drain your business budget if nobody uses them.
Required fringe benefits
As an employer, you will likely need to provide the following benefits to your employees:
- Health insurance: Employers with 50 or more full-time or full-time equivalent employees must provide health care coverage under the Affordable Care Act. Health insurance companies and self-insuring employers must also provide coverage.
- Unemployment insurance: Employers must pay federal unemployment tax to fund workforce programs that assist unemployed people. The federal tax funds programs at the state level.
- Workers’ compensation: Employers must pay workers’ compensation insurance to cover employee accidents in the workplace. A private insurance company or a state-run fund usually pays these benefits.
- Family and medical leave: The Family and Medical Leave Act (FMLA) federally mandates that certain employers provide 12 weeks of unpaid, job-protected leave to care for a new child or take care of family health emergencies. FMLA applies to private companies with 50 or more employees, government agencies and public or private schools.
- Social Security, Medicare and Federal Insurance contributions: Although technically not a fringe benefit, the Social Security, Medicare and Federal Insurance Contributions Act, or FICA, is an employment tax that provides benefits to retirees, disabled persons and children. Both employees and employers are required to contribute to FICA taxes. Employers must still deduct these taxes from each paycheck even if employees do not expect to qualify for Social Security or Medicare benefits.
Optional fringe benefits
Although not required, here are some popular perks to consider offering your employees:
- Paid time off
- 401(k) retirement savings plans with matching contributions
- Life and disability insurance
- Employee stock ownership plan (ESOP)
- Commuter benefits
- Flexible work hours
- Meal subsidy
- Free coffee or snacks in the office
- Tuition reimbursement or student loan repayment assistance
- Child care services or discounts
- Fitness memberships or discounts
- Leadership seminars
- Company events
- Birthday cards or cake
While FMLA requires certain employers to offer 12 weeks of maternity or family leave, it’s optional to offer this as a paid benefit. About 40% of employers provide some form of paid maternity leave. Be sure to specify whether your company offers paid or unpaid maternity and family leave.
Advantages to offering fringe benefits
Benefits can represent your company’s values and culture while supporting team building, leadership development and social opportunities.
- Attract top-notch employees. Offering outstanding benefits could give your business a competitive edge when recruiting candidates. Sometimes, a candidate may accept a lower salary in favor of better benefits.
- Boost employees’ motivation and satisfaction. Fringe benefits tell your staff that you care about their well-being, growth and development. This could foster team camaraderie and bonding, helping to boost morale.
- Focus on your employees’ physical and mental well-being. Your business suffers if employees can’t work due to sickness or mental struggles. By offering access to adequate healthcare and fitness incentives, you can encourage employees to take time to attend to their health needs.
- Minimize employee turnover. Employees who feel valued and motivated within your organization are less likely to look for work elsewhere. Retaining your current employees helps save money from recruiting and training new staff.
Tax implications of fringe benefits
Are fringe benefits taxable? For the most part, yes. Furthermore, employees who received taxable fringe benefits must list the fair market value of each benefit as part of their taxable income for that year.
However, the Employer’s Tax Guide to Fringe Benefits outlines which benefits are partially or fully exempt from taxation. The following may be eligible for a tax reduction:
- 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
- Health savings accounts (HSAs)
- Lodging on your business premises
- No-additional-cost services
- Retirement planning services
- Transportation (commuting) benefits
- Tuition reduction
- Working condition benefits
Some exemptions are subject to certain conditions. Educational assistance, for example, is exempt up to $5,250 annually, while dependent care assistance exemptions max out at $5,000 or $2,500 for a married employee filing a separate tax return. And adoption assistance is only exempt from income tax, not Social Security and Medicare or federal unemployment tax.
Working condition benefits are fully exempt from taxes. They include access to property and services employees need to do their jobs, such as a company car, cellphone or work-related education. This exclusion also applies to the cost of the property and services as long as it fits as a qualified business expense. Benefits that wouldn’t qualify for this exemption include a flexible spending account for employees, any type of physical examination program or any expense for a business other than your own.
Things to know: The Tax Cuts and Jobs Act of 2017 eliminated tax deductions for several fringe benefits. Employees can no longer take deductions for transportation-related expenses, including reimbursement for bicycle commuting. Moving expense reimbursements are also no longer deductible. Achievement awards may still be deductible if the employee received tangible personal property as an award. Otherwise, an award will need to be taxed.
Consult with a professional tax advisor or invest in tax software to ensure you’re recording fringe benefits properly.
How to provide fringe benefits
Before offering employee perks, you should calculate the value of providing fringe benefits. For instance, if you want to offer vacation time, you need to calculate a person’s hourly wages to adequately reflect the cost of that person being away from work.
Defining the value of other types of fringe benefits could be difficult. Many companies use surveys or staff retention rates to determine the importance of certain benefits. However, if no one takes advantage of perks like gym memberships or fitness classes, the value would be virtually nothing.
The IRS directs business owners to use fair market value to determine the value of benefits. Fair market value would be the amount an employee would have to pay a third party to purchase the same benefit, such as paying for their gym membership.
Once you’ve determined what perks are essential to your business, you may need third-party services to help administer and manage your fringe costs. Here are a few popular options to get you started:
- Professional Employer Organization (PEO): A PEO provides benefits and human resources management services to businesses and can also handle compliance, safety training and payroll services. Additionally, you may find lower health care costs through a PEO compared with working with an insurance broker. However, you could pay high fees for these services at a flat rate or as a percentage of employee wages.
- Small Business Health Options Program (SHOP): The federal government administers SHOP, an online insurance marketplace, as part of the Affordable Care Act. If your business falls under the Affordable Care Act requirements, you could use SHOP to find insurance coverage for your employees. You could compare prices and find discounts or connect with a SHOP-registered broker. You may also qualify for tax credits that could minimize your health care costs.
- Payroll services: A payroll service provider would administer employee paychecks, including bonuses, and manage withholdings. Some services even calculate and submit payroll taxes on your behalf. Most payroll service providers charge a monthly or yearly subscription fee depending on the number of people you employ.
- HR software: HR programs and software can simplify tracking employee time and onboarding new workers, giving you extra time to focus on taking your business to the next level.
Frequently asked questions
One example of a fringe benefit is access to a company car to commute to work or for work-related trips. Other typical fringe benefits include health insurance, paid vacation time, life insurance, childcare reimbursement, employee stock options and commuter benefits.
In general, fringe benefits are taxed at the fair market value with the tax amount withheld or deducted from an employee’s paycheck. For example, if someone receives an annual bonus of $3,000, it will be reported as income on their W-2 form with the applicable taxes deducted from the corresponding paycheck.
However, the IRS has “special rules for various types of fringe benefits,” which allows certain benefits to be partially or fully tax-exempt. Refer to the IRS website for the most up-to-date information on fringe benefits.
This decision is up to you. Overall, fringe benefits help businesses attract, inspire and retain highly skilled individuals. Furthermore, fringe benefits can decrease employee turnover rates by increasing employee loyalty and job satisfaction. If you want to stay competitive in today’s market, offering the most common benefits could be worth the time, effort and money involved.
Despite its name, a cafeteria plan has nothing to do with company-sponsored meals or fun snacks. The term “cafeteria plan” refers to a range of fringe benefits employees can pick and choose from — similar to grabbing what you want at a cafeteria buffet.
These benefits are generally deducted from pre-tax dollars and can include options such as insurance plans, retirement benefits, health savings accounts (HSAs), dependent care assistance, disability insurance and more. Again, employees choose which benefits they want and can opt out of all benefits if they want.