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The Truth About Fringe Benefits
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When a potential employee decides whether to take a job at your company, fringe benefits could seal the deal. In addition to salary, benefits like health insurance, 401(k) options, flexible hours and free snacks could help you recruit employees and keep staff satisfied and engaged.
“Employers put together the best benefits package they can afford to help attract and retain staff, and in some cases, to support a ‘lifestyle’ at the company,” said Joanne Markow, founding partner of Boston-based career coaching organization GreenMason.
However, fringe benefits are typically taxable and can be a significant, long-term cost to the company. Once you offer a benefit, it can be difficult to take it away, Markow said. Before offering extra perks to your employees, keep reading to find out how fringe benefits would impact your small business.
- What are fringe benefits?
- Why you should offer fringe benefits to employees
- How to provide fringe benefits
- Tax implications of fringe benefits
What are fringe benefits?
A fringe benefit is a non-wage form of compensation for the performance of services, according to the IRS. Giving an employee a business vehicle to commute to and from work would be an example of a fringe benefit. Contract workers could also receive fringe benefits if they are performing a service for your business.
You would be considered the provider of fringe benefits if the service is done for you, even if a third party is actually delivering the benefit. For instance, if you offer daycare services for workers through a third party, you would still be the provider of this benefit.
As an employer, you are legally required to offer certain fringe benefits, while others could be offered at your discretion. Here are some examples of required fringe benefits:
- Social Security, Medicare and Federal Insurance contributions: The Social Security, Medicare and Federal Insurance Contributions Act, or FICA, is an employment tax that funds Social Security and Medicare programs. Both employees and employers are required to contribute to it. Even if employees do not expect to qualify for Social Security or Medicare benefits, employers must still deduct these taxes from each paycheck.
- Unemployment insurance: Employers must pay federal unemployment tax to fund workforce programs that assist people who are unemployed. 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 paid 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.
- 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.
Beyond those required benefits, it’s up to you as the business owner to decide what additional perks you want to provide for your employees. Here are some examples of optional fringe benefits:
- Paid time off
- 401(k) retirement savings plans
- Life and disability insurance
- Flexible work hours
- Free coffee or snacks in the office
- Tuition reimbursement
- Child care services or discounts
- Fitness memberships or discounts
- Leadership seminars
- Company events
- Birthday cards or cake
When compiling a benefits package for employees, you may want to hire legal counsel to help you articulate what the company provides, Markow said. You would need to accurately explain what the business covers, as any errors could lead to legal trouble for the company, she said.
Why you should offer fringe benefits to employees
Benefits can represent the values and culture of a company and can help support team-building, leadership development and social opportunities, Markow said. Benefits could also give your business a competitive edge when recruiting candidates. In some cases, a candidate may accept a lower salary in favor of better benefits, which could save the company money, she said.
Fringe benefits can communicate to employees that you care about their well-being as well as their growth and development within the business, Markow said. Some perks could foster team camaraderie and bonding, which may boost morale.
Nearly all employees relate benefits to their overall job satisfaction, according to a 2018 report from the Society for Human Resource Management, and 29% of employees consider their benefits package a top reason to look for a new job elsewhere while 32% consider their benefits a reason to stay put.
Companies that strategically use benefits to recruit and retain talent have better overall performance than those that do not — 58% compared with 34% of companies, per the SHRM report. And 19% of businesses that use benefits as a strategic tool report effective recruitment and 28% report effective employee retention. Of businesses that do not prioritize benefits, just 8% report effective recruitment and 11% report effective retention.
Health care and flexible scheduling tend to be the most valued workplace benefits, although that’s not always the case, Markow said. Corporate wellness programs specifically have been found to reduce both health insurance costs for business owners and employee absenteeism. A study from the University of California, Riverside, showed that these programs often boost productivity in the workplace as well, equaling about one additional workday per month for each employee.
Before offering new perks, though, you may want to send out a survey to determine what would be most appreciated. “Don’t assume everybody values each of these things,” Markow said.
When fringe benefits might not pay off
Certain fringe benefits might not have the desired effect among your staff. Perks like gift cards or service awards could create a feeling of disdain if some people are left out, Markow said.
“What it creates is a have and have-not feeling,” she said.
And employees may not appreciate or take advantage of benefits if company culture doesn’t allow it, Markow said.
“If a perk is three to four weeks of vacation but the culture doesn’t support taking time off, there can also be a disconnect in the value of the benefit versus expected behavior at the office, which leads to discontent,” she said.
It’s crucial that employees don’t become cynical about the fringe benefits you offer, Markow said. If employees feel resentful toward perks, then those benefits would be a wasted expense for the company.
“Smaller companies have an opportunity to do sincerely powerful and personal things,” she said. “When you get to the bigger companies and [are] removed from management, that’s when some of the perks start to feel insincere.”
How to provide fringe benefits
Before you begin offering perks to employees, you should calculate the value of providing fringe benefits. Both tangible and intangible benefits will cost you, Markow said.
For instance, if you want to offer vacation time, you would need to calculate a person’s hourly wages for time out of the office, Markow said. That would show the cost of that person being away from work. At most offices, each employee has 2,080 maximum paid hours per year, which equals 40 hours per week for 52 weeks each year, including vacation time.
If your company tracks employees’ billable hours, then vacation time could affect an employee’s overall pay rate if you need to factor in non-billable time, Markow said.
It could be difficult to define the value of other types of fringe benefits, and you may only be able to determine results in employee surveys or staff retention rates, she said. However, if no one takes advantage of perks like gym memberships or fitness classes, then 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.
Once you’ve determined what perks are essential to your business, you may need third-party services to help you administer those benefits.
Professional Employer Organization
A Professional Employer Organization (PEO) provides benefits and human resources management services to businesses. A PEO could also handle compliance, safety training and payroll services. Additionally, you may be able to find lower health care costs through a PEO compared with working with an insurance broker. However, a PEO could charge high fees for its services, either 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 be able to qualify for tax credits that could minimize your health care costs.
A payroll service provider would administer employee paychecks, including bonuses, and manage withholdings. Some services, like Intuit Payroll, also calculate and submit payroll taxes on your behalf. Most payroll service providers charge a monthly or yearly subscription fee that would depend on the number of people you employ.
HR programs and software can simplify the process of tracking employee time and onboarding new workers. Programs like Zenefits would allow you to manage employee time and attendance, and administer benefits information. Some payroll providers, like Gusto, also include HR management tools, like full payroll services, the management of time-off requests and employee onboarding.
Tax implications of fringe benefits
Any fringe benefit would be taxable unless the IRS specifically excludes it. The IRS excludes all or part of the value of 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 cellphones
- Group-term life insurance coverage
- Health savings accounts
- 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 each year and dependent care assistance exemptions are capped 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. You can find out here how much would be exempt from taxes for each benefit.
Working condition benefits are fully exempt from taxes and include access to property and services employees need to do their jobs, such as a company car, cellphone or work-related education. The exclusion applies to the cost of the property and services as it would be calculated as a business expense for the employee. Working condition benefits that wouldn’t qualify for the exemption include a flexible spending account for employees, any type of physical examination program or any benefit that would be an expense for a business other than your own.
The Tax Cuts and Jobs Act recently changed several fringe benefit deductions for business owners. The new law no longer allows deductions for reimbursing 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 would not be excluded from taxes.
The bottom line
Fringe benefits can have a positive impact on the workplace. As long as you provide legally required benefits like workers’ compensation and medical leave, you’re free to add employee perks.
Keep in mind that some benefits could hurt the company if you’re not careful. Employees who attend leadership workshops often take a new job elsewhere shortly after receiving training and coaching, Markow said. And employees may begin to resent perks like paid vacation time if the company doesn’t encourage them to step away from work.
The costs of providing fringe benefits can add up, so make sure you only offer as much as you can afford. If cash flow dips and you rescind fringe benefits, even something as small as free coffee, employees’ perception of the company could drop, Markow said.
“Many employees don’t consider this cost, but they do consider the benefits package a reflection of the company’s overall brand,” she said.
The cost of providing fringe benefits should generate some sort of return on investment. You could see improved employee retention, satisfaction and overall attitudes, Markow said, as well as an increased ability to recruit candidates.
“If you are statistically able to hire repeatedly the people you want to hire from competitors or in competitive situations, then your perks combined with salary offerings are worth it,” she said.