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What Are Fringe Benefits? A Simple Guide For Employers

by Nickolas Gionis on Nov 3, 2022 2:53:31 PM

If you’re like most companies today, you’re looking for ways to be an employer of choice to boost your recruiting and retention efforts in the tight labor market. One option is to add fringe benefits to your offerings to enhance your overall compensation package. Wondering what these benefits are and how they work? Let’s find out.

Here, we’ll discuss what fringe benefits are, their tax implications, the variety of types available, and who you can offer them to. After reading this, you’ll be able to decide if these offerings are right for you and your employees.

What are fringe benefits?

Fringe benefits are additions to compensation that you can give your employees or, as the IRS defines them, “a form of pay for the performance of services.” Generally speaking, they fall into two categories: benefits given to compensate employees for costs related to their work or those intended to boost job satisfaction. Either way, the idea behind fringe benefits is to help you recruit and keep top talent.

Are fringe benefits taxable?

An employee’s gross income usually includes compensation for services, including fringe benefits, so the general answer is yes. While some fringe benefits are cash payments, like a discretionary bonus, most are either a product or service. These are taxed at their fair-market value, meaning, the amount an employee would need to pay a third party in an arm’s-length transition for the benefit.

However, there are some exceptions to the taxation of fringe benefits, which we’ll cover next.

What are the types of fringe benefits that aren’t taxable?

When it comes to your options for nontaxable fringe benefits, you have many types to choose from. These are not subject to federal income tax withholding, FICA, or FUTA, and typically don’t have to be reported on a W-2. Some of the more common ones include:

  • Tuition reduction: With this option, you can offer educational benefits to employees either in the form of reimbursements or tuition reduction plans up to an annual limit. Just keep in mind that any reimbursement during the year that exceeds $5,250 is included in wages.
  • Employee stock options: You may decide to give employees the right to buy shares of the company at a set price after a certain period of time.
  • Adoption assistance: An employee can exclude up to $14,440 for benefits received under your employer-provided adoption assistance program.
  • Meals: You can provide – and an employee can exclude from gross income – small food items and drinks, meals at picnics and parties as well as meals provided in kind or occasional cash received to buy dinner so the employee can work overtime.
  • Accident and health benefits: This category is one of the most common and includes typical items included in hiring packages like your contributions to the cost of health insurance or long-term care insurance.
  • Athletic facilities: You may provide employees access to an on-premises athletic facility; however, membership to an athletic facility like a health club or country club is not excludable from taxable income unless it’s owned or leased by you.
  • Dependent care assistance: If you choose to adopt a dependent care assistance program, you can make a tax-free reimbursement to employees of up to $5,000 for dependent care expenses every year.
  • Achievement awards: Awards valued at less than $1,600 can be excluded from taxation as a fringe benefit. Just keep in mind that you can’t give cash or cash equivalents nor vacations or tickets to a sporting event.
  • HSAs: While an HSA itself is not a fringe benefit, pre-tax employer contributions to an employee’s account are and are considered exempt.
  • Employee discounts: Discounts less than 20% of the price at which you offer goods or services to customers are not taxable.
  • Commuting benefits: You can provide nontaxable transportation fringe benefits such as mass transit benefits, van pools, or qualified parking, up to an annual limit. For 2022, that amount is $280 a month.
  • Employer-sponsored life insurance: As long as the coverage is $50,000 or less, it’s not considered a taxable fringe benefit.

The IRS has a complete list of nontaxable fringe benefits and when the exemption applies based on certain conditions.

Who can I offer these benefits to?

You can decide to give fringe benefits to all employees or only certain individuals such as executives or those who make a notable contribution. The important thing to remember is that benefits can’t be discriminatory, even unintentionally. The general rule is that a highly-compensated employee can’t be permitted to exclude a fringe benefit from their income unless it’s available on substantially the same terms to all employees or a group of employees.

How to Decide if Fringe Benefits are Right for You

Now that you know more about fringe benefits, you may be wondering if adding these offerings is the best decision for your company. These benefits have many advantages to you as an employer such as:

  • increased employee engagement and productivity
  • greater satisfaction, loyalty, and retention
  • enhanced health and well-being
  • better brand perception
  • reduced employee burden
  • stronger recruiting position

But they can also come at a cost so carefully considering what you offer and the amounts of any allowances is important. In addition, there are many, often complicated, rules that dictate whether fringe benefits are taxable or nontaxable to employees, which can increase the burden on your staff.

As you consider whether to add fringe benefits to your package, you may want to find out exactly what employees are looking for to make sure your offerings align so you can realize the great value from your perks. Read our next article on the top 5 employee benefit trends to learn more about what employees want today.

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