What are fringe benefits?
IRS Publication 15-B defines a fringe benefit as a form of compensation in addition to a wage or salary for services performed. These services may be rendered by an employee, independent contractor, partner or director. Fringe benefit rules also apply to individuals who enter an agreement not to compete or not to perform services.
A business that furnishes a fringe benefit is the provider for tax purposes. This is true even if a third party provides the benefit to employees. The recipient of a fringe benefit can be a person who performs services or that person’s family member. For instance, if a business offers child daycare through a contracted service, the business is the provider and the employees’ dependents are the recipients of the fringe benefit.
What are examples of fringe benefits?
Some fringe benefits are so widely available that many workers consider them a normal part of a compensation package. These include health insurance, family and medical leave, workers’ compensation and retirement savings plans. Smaller businesses may offer a combination of these and other attractive yet more economical provisions. It’s important to determine which benefits fit into the company culture and budget while enhancing productivity.
- Employee stock options: Encouraging employees to purchase part of your business at a discount is a powerful way to help them cultivate a sense of ownership in your company and their personal work.
- Transportation or commuter benefits: According to The Tax Foundation, an independent tax policy organization, it’s tax-advantageous for companies to pay for Qualified Transportation Fringe benefits, such as transit passes, biking and parking expenses and commuter highway vehicle rides.
- Meal Subsidization: Providing free meals, snacks or drinks can enhance productivity because employees don’t have to spend time, energy and money away from the office to eat.
- Professional development: Paying for courses, conferences and certifications is a solid investment in the advancement of a company’s workforce.
- Personal development: Workshops or counseling on topics such as financial education, heart health or mental wellness can help employees maintain a healthy work-life balance.
- Short workweek: A three-day weekend gives workers more time for their personal lives and condenses their time and focus during the workweek, which can translate into heightened productivity.
- Flexible working: Allowing employees to set their own schedule or work from home can attract talented employees who perform best in a less-structured office arrangement.
- Community service: Today’s workforce is more interested in doing good in the world, and they appreciate companies that encourage time off for volunteer opportunities.
Which fringe benefits are taxable?
The IRS states that any fringe benefit is taxable unless specifically excluded under the law. Its full value is subject to federal income, Social Security, Medicare and federal unemployment taxes. The taxable portion can be reduced by any amount that the recipient contributes to the benefit or any amount that the law allows to be excluded. Exclusion limits change each year, so it’s vital to verify your situation with a tax adviser.
Taxable fringe benefits
- Cash and equivalents
- Group-term life insurance over $50,000
- Value of the personal use of a business vehicle
- Vacation expenses
- Frequent-flier miles earned during business travel, converted to cash
Fully exempt fringe benefits
- Life, health and accident plans: Life, health and accident insurance benefits are exempt from FUTA. They are generally exempt from income tax, Social Security and Medicare barring certain circumstances.
- No-additional cost benefits: No-cost services, working condition benefits and “de minimis” benefits, such as small holiday gifts, occasional food money or event tickets and other small, infrequent benefits are not taxable. Group-term life insurance for a spouse or a dependent with a face value of no more than $2,000 is exempt from taxes as well.
- Educational expenses: Undergraduate education expenses for employees are exempt from income tax withholding, as are graduate education expenses for workers in research or teaching professions.
- Achievement awards: Qualified plan achievement awards up to $1,600 and nonqualified awards up to $400 are exempt from any taxes.
- Lodging: The value of lodging furnished by an employer on business property and as a prerequisite to employment can be excluded from taxes.
Partially exempt fringe benefits
- Dependent care assistance is exempt up to certain limits.
- Adoption assistance is exempt from income tax withholding but is subject to Social Security, Medicare and FUTA taxes.
- Employee discounts may not exceed more than 20% off the regular price charged to nonemployees.
- Employee stock options are subject to different rules regarding employee stock purchase plan options, incentive stock options and nonqualified stock options.
What are the advantages of fringe benefits?
Lure for talent
Benefits are some of the best tools for attracting and retaining high-quality talent. Perks are an important component of an employee’s compensation because they demonstrate a company’s tangible commitment to its workforce. SMBs can be more flexible with creative benefits options that give them an edge when competing against larger enterprises for the same job candidates.
Presenteeism occurs when employees are physically present at work but not fully engaged due to physical or emotional distractions. Fringe benefits, such as ample sick days, comprehensive health coverage, gym memberships and flexible work schedules, can alleviate this dilemma. Research suggests that perks can lead to increased productivity as employees experience a higher level of well-being and greater appreciation for their employers.
Offering benefits packages to employees conveys a genuine, vested interest in each worker. This can translate into greater engagement and camaraderie that inspires collaboration and creativity. A thriving work culture also makes a company more attractive to potential talent and makes it easier for new hires to become acclimated.
Fringe benefits FAQs
Is employee training a fringe benefit?
Employee training is a “working condition” fringe benefit, which encompasses services and property needed for an employee to do their job. Job-related education provided to workers qualifies as a business expense to the company.
Is vacation pay considered a fringe benefit?
Vacation pay is a taxable fringe benefit according to the law. The following authorized absences are also considered fringe benefits:
- Annual leave
- Sick leave
- Family-related leave
- Military leave
- Court leave
- Administrative leave
Which employees may not be treated as employees for certain fringe benefits?
Individuals who are normally treated as an employee for tax purposes may be reclassified as a nonemployee for some fringe benefits. This category includes:
- Employees who own more than 2% of an S corporation’s stock (S2%).
- Highly compensated employees (HCEs) who are officers, shareholders with more than 5% of the voting power, or a spouse or dependent of an HCE (HCE5%).
- Key employees are officers earning more than $170,000 annually, workers who earn more than $150,000 annually and own 1% of the business or those who earn more than $170,000 per year and own 5% of the business.