Fringe benefits are a way to compensate employees in addition to wages or a salary. Fringe benefits can be part of a salary package or a group of benefits that supplement wages.
For employers, fringe benefits can entice and keep top talent. The more benefits you offer, the more likely potential employees will look at your company as a desirable place to work. They can also help supplement employee’s wages in a competitive job market.
McKinsey & Company’s 2021 Employer Health Benefits Survey found that seventy-eight percent of employers surveyed reported offering at least one voluntary benefit and that they offer these benefits to support employee well-being, enrich core benefit plans, and attract new employees.
There are many decisions that go into deciding what types of fringe benefits to offer, as well as how they impact taxes. Here’s what you need to know.
Examples of Fringe Benefits
Fringe benefits come in many forms, from having a company cell phone to covering the costs associated with getting a degree. Here are a few ways fringe benefits exist.
- Commuting assistance: A company car, transit passes or parking.
- Technology: Things like cell phones, computers, laptops and other gear to get your work done.
- Free snacks and meals: In-office lunches or a flexible spending account to cover out-of-office meals.
- Moving expenses: Covering certain expenses if you have to relocate for your job. This varies by company. Some have a limit on how much to spend on moving expenses, some will cover only packing and moving-related costs. Others will cover temporary housing until you can find something permanent.
- Health and wellness: Health insurance is number one here, but other perks can include gym memberships, spa treatments or mental health coverage.
- Family assistance: Help covering adoption expenses, child care costs, dependent care assistance, life insurance, parental leave.
- Health savings accounts (HSAs): A healthcare reimbursement savings account where contributions, earnings, and withdrawals are tax-free.
- 401(k)s: Matching retirement plan contributions.
- Stock options: Equity in a company.
- Educational resources: Tuition reimbursement, paying for continuing education courses, resource material or textbook coverage.
Taxable Fringe Benefits
If you’re an employer looking to offer fringe benefits, keep in mind that according to the IRS, anything you offer is taxable unless it’s excluded. The IRS defines a fringe benefit as a form of pay for the performance of services.
The IRS says that if you provide a fringe benefit to your employee, it needs to be included in the employee’s taxable income unless tax law excludes that benefit. If the person receiving the benefit is an employee, the value of the benefit is usually subjected to employment taxes. But if the person getting the fringe benefit isn’t an employee, like a freelancer or contract worker, the benefit isn’t subjected to employment taxes. (However, they must still be reported.)
Keep in mind that whether benefits are taxable can change. For example, the Tax Cuts and Jobs Act suspended qualified moving expense reimbursements from employee’s income for tax years beginning after 2017 and before 2026. There’s an exception for members of the U.S. Armed Forces who move due to a permanent change of station.
How Do I Report Taxable Fringe Benefits?
As an employer, you’ll determine the valuation of non-cash fringe benefits before Jan. 31 for the prior year. During the previous year, you’ll need to estimate the value to the best of your ability. Generally, you should have an idea of how much something is worth in order to withhold and deposit on time. If you underestimate the value of a benefit and deposit less than what you would’ve owed, there’s a chance you could face a penalty from the IRS.
When you report, you’ll have the chance to choose between reporting:
- Per pay period
- Or other
You can’t choose reporting less frequently than annually. You can also change the period as often as you’d like within a calendar year, even for benefits that you’d like to split up. For example, if an employee was paid for a fringe benefit once, you can split up the reporting over many different periods without alerting the IRS.
When you report, you’ll add the value of the fringe benefit to the regular wages during the pay period or whatever period you choose. You’ll then figure out the income tax on the total amount.
Non-taxable Fringe Benefits
Nontaxable fringe benefits aren’t subject to income tax, Social Security and Medicare tax, or federal unemployment tax. Some are taxed for one but not others. For example, adoption assistance is exempt from income tax but is taxable for federal unemployment and Social Security and Medicare.
Other exemptions include:
- Accident and health benefits: Exempt from income tax (except long-term care benefits), federal unemployment tax, and exempt from Social Security and Medicare (unless you’re an S-Corp).
- Achievement awards: Up to $1,600 for qualified plan awards are exempt from all three taxes.
- Adoption assistance: Exempt from income tax.
- Athletic facilities: Exempt.
- De minimis (minimal) benefits: Exempt.
- Dependent care assistance: Exempt up to certain limits, $5,000.
- Educational assistance: Exempt up to $5,250 of benefits each year.
- Employee discounts: Exempt up to certain limits.
- Employee stock options: In some instances, but there are rules.
- Cell phones provided by employer: Exempt if provided primarily for non-compensatory business purposes.
- Group-term life insurance coverage: Exempt.
- Health savings accounts (HSAs): Exempt up to the qualifying limits.
- Lodging on your business premises: Exempt and must be a condition of employment.
- Meals: Exempt.
- No-additional-cost services: Exempt.
- Retirement planning services: Exempt.
- Transportation/commuting benefits: Exempt up to certain limits.
- Tuition reduction: Exempt.
- Working condition benefits: Exempt.
While many exemptions exist, there are some rules that are in place. For instance, retirement planning services are exempt but that’s not the case for tax preparation, accounting, legal or brokerage services.
The Complete IRS Guide To Fringe Benefits And What It Will Tell You
The Internal Revenue Service publishes IRS Publication 15-B (2022), Employer’s Tax Guide to Fringe Benefits, which provides detailed and helpful information to help small business owners understand and navigate employee fringe benefits.
Although it’s long and detailed, it’s generally easy to read and it breaks information up into relevant sections such as employer provided cell phones, transportation benefits, education assistance (including employer payment of student loans), among many other topics.
Are Businesses Required to Offer Fringe Benefits to Employees?
Fringe benefits can be an all-encompassing term that includes many different types of perks, some of which are mandatory while many are just nice to have.
For instance, if your company employs 50 workers or more, you’re required to provide health insurance. Also, if you have that many workers, you’re required to provide family and medical leave (FMLA). Employees who have been at the company for at least a year are entitled to at least 12 weeks of unpaid, job-protected leave for family or medical reasons.
If you’ve ever had to serve on a jury, your employer is required to provide you job-protected unpaid time off to perform civic duties, like jury duty. Other required fringe benefits include:
- COBRA insurance
- Unemployment insurance
- Workers’ compensation
- Medicare and Social Security tax
The rest, like stock options and paid time off (PTO) aren’t required benefits.
Why Should Businesses Consider Offering Fringe Benefits?
Even though many fringe benefits aren’t required by law to offer employees, many of them attract some of the best talent available. The more incentives you offer, the more likely you’ll find strong, dedicated workers to hire for your business.
You might not have the budget to offer meal plans or tuition reimbursement, but consider offering as much as you can to find reputable employees. For example, if you already offer health insurance to your workers, consider adding dental and vision. Or instead of just workers, see if there are plans available to your employee’s family members and dependents.
There are some benefits that many workers are interested more than others, like:
- Employer-matched 401(k): Having your employer not only have a 401(k) plan available, but have a matching component as well, is a big draw for workers who appreciate the retirement savings boost.
- Remote/work-from-home options: Commuting to work can get tiring and extend the workday for many employees. Having some time to work from home for any reason at all is enticing to workers. Some companies are fully remote.
- Educational resources: If you have workers that participate in continuing education, get certifications, or complete a degree, see if you can pay for some or all of it. Their hard work only helps them become better workers for you.
Finding Out What Fringe Benefits Are Important To Your Employees
Surveying employees on a regular basis may help you understand which benefits are most appealing to them. You may find out that you’re wasting money on benefits that may not attract or retain many employees, and you may discover there are benefits you don’t offer but that really matter to your employees.
The only way to find out is to ask.
What Are Good Questions To Ask On An Employee Survey About Fringe Benefits?
First, it’s a good idea to make sure employee surveys are structured in such a away that answers will be completely anonymous. You want employees to feel comfortable answering candidly.
It can also be helpful to provide a combination of multiple choice questions and open-ended questions. Give employees a chance to provide feedback on the survey questions themselves, so you can address any confusion that may arise.
The Society of Human Resources Management (SHRM) provides a sample survey that covers a variety of topics, such as health benefits, time off, retirement plans and more.
The Downsides to Fringe Benefits
There are definite drawbacks to fringe benefits. Many can be expensive, and out of reach for smaller businesses. Some employees may benefit from certain benefits more than others, and you may feel like you’re wasting money on benefits that aren’t used. In addition, it’s hard to take away a benefit once you’ve offered it, even if it proves to be financially impossible to continue.
Final Word: Fringe Benefits
Offering fringe benefits isn’t a requirement for your business, but it might be the right move. Some of the best workers are attracted to lucrative benefits. The more benefits you offer, the more you might find strong, skilled workers.
But make sure what you’re offering is within your budget. It’s a good idea to offer what you can, and if possible, grow incentives as your company grows. Find out how you can start offering benefits or increase the benefits you offer by talking to a financial advisor or accountant that works with businesses.
This article was originally written on January 10, 2020 and updated on February 2, 2023.