What are fringe benefits? Options, taxability, and other considerations.

Employers are required by law to provide certain benefits to employees. Beyond that, however, fringe benefits can help employers sweeten the deal and make work a better place to be. The difference between fringe benefits and required benefits lies in whether or not a given company is required by law to provide them. Social security and workers’ comp, for example, aren’t usually bonus options and so are not considered fringe benefits.

Fringe benefits can include:

• Cash bonuses

• Extra vacation time

• Paternity leave or extended maternity leave

• On-site amenities

• Childcare

• Wellness plans

• Retirement planning services

• Monthly stipends for work expenses

Unless they’re working in a highly competitive field, most employees expect employers to offer fringe benefits, at least on some level. Employers can use this to their favor by distinguishing themselves as a desirable place to work.

Let’s talk about the different types of fringe benefits and how employers can make the most of them.

Taxable vs. Non-taxable

Benefits are always tax-deductible, aren’t they? Not quite.

Employees can be taxed on some high-value benefits when they are considered part of the employee’s compensation package. These benefits will show up on an employee’s Form W-2 at the end of the year and must be reported as taxable income.

Taxable examples of fringe benefits might include:

• Gym memberships

• Moving stipends beyond the actual moving cost

• Personal use of a company car

• Frequent flyer miles when converted to cash

• Certain life insurance payments

Information like this can come as a shock. Small businesses often aren’t aware that their employees are being taxed for perks they want to write off as expenses, so get help from an accountant if you’re unsure.

Non-taxable benefits

According to IRS publication 15-B, all fringe benefits are taxable except those specifically excluded by law. For example, company contributions to a workers’ compensation plan or accident fund are often tax-exempt and not subject to income tax withholding.

Other non-taxable benefits can include:

• Achievement awards

• Adoption assistance

• Child/dependent care and assistance

• Tuition reimbursement or education assistance

• Employee stock options

• Health Savings Accounts (HSAs)

• Retirement planning services

• Meals

Another non-taxable category is known as de minimis (minimal) benefits. These are small perks or gifts from employers that are so minor in value that it would be impractical to track them for tax purposes. Basically, the IRS considers de minimis benefits on par with small bonuses.

De minimis benefits could include:

• Snacks

• Birthday gifts

• Holiday gifts like a Christmas tree

Determining whether a fringe benefit is or isn’t taxable is something to figure out on your own—let an accountant be your tax guide to fringe benefits. However, with a little planning and execution, these perks can help your business become a more desirable place to work without adding tax liability.

Why fringe benefits are important

It’s no secret that businesses with good benefits can attract and keep talented people, while those with worse benefits see lower retention. A good benefits program signals to employees that someone is watching out for their well-being. They can also bring about better work, as the health benefits of a healthy and stress-free team lead to better focus and productivity.

Small businesses should align fringe benefits with their company vibe, as well as with what workers actually need. Most people hope their job will help them strike a better balance between work and life, so benefits should be tailored to fostering better personal health and more financial security. In other words, an employee’s salary and insurance coverage are likely to be worth more than paid meals every other Friday.

Ask employees what they want. It may yield ideas about what kinds of benefits to invest in, such as a better insurance plan rather than an on-site gym.

Use caution

Giving employees good benefits is almost always the right answer. However, it’s important to be pragmatic, as the desire for a comprehensive benefits package is usually at odds with a company’s financial goals.

Overspending on benefits is a surefire way to sour the experience. Not only is the cost too high, but more resources will go toward maintaining those benefits and ensuring they are distributed in compliance with the law. If the benefits are eventually taken away, employees may get upset.

Also, some people get more out of certain benefits than others. This is inevitable, but it can also lead to frustration from those whose lifestyles don’t have a need for a given benefit. Not everyone likes to meditate, for example, so don’t expect them to be grateful for a free subscription to a meditation app.

Identifying which benefits people need

How many of your employees commute to work? Does your workforce trend toward older or younger people? Are your salaries competitive?

Questions like these can shed some light on overlapping preferences between companies and employees. The better each fringe benefit is suited to employee needs, the more likely it is to benefit employees.

Here are some other things to consider when selecting employee fringe benefits:

• Budget constraints. Make sure your spending accounts have enough in them to keep benefits sustainable and affordable.

• Competitive analysis. Compare which benefits your competitors offer in order to attract and retain talent.

• Legal requirements. Always stay compliant with the laws governing mandatory benefits like minimum wage, paid time off, and healthcare.

• Company culture. Fringe benefits should align with the company’s values and culture.

• Workforce demographics. Consider the demographics of your workforce, such as age, family status, and lifestyle preferences.

• Employee feedback. Gather input from employees through surveys or meetings to understand their preferences and needs.

• Market trends. Stay updated on evolving trends in employee benefits to remain competitive in attracting top talent.

• Flexibility. Offer a variety of benefit options to meet diverse employee needs and preferences.

• Long-term impact. Assess how benefits will impact employee retention, productivity, and company success over the long term.

There are also specialists whose jobs involve helping companies determine the right benefits for their unique situation. Online forums can also help..

Putting a value on fringe benefits

Publication 15-B is your guide to understanding how to assign and calculate the value of fringe benefits for tax purposes. Some benefits have a static value assigned that doesn’t change, while others need to be calculated.

General valuation rule

Most fringe benefits are evaluated according to Fair Market Value (FMV). FMV represents the amount someone would ordinarily pay for the benefit.

Special valuation rules

Some benefits have specialized rules for valuation. For instance, there are specific guidelines to follow when assessing the value of meals provided at the workplace or the value of using company aircraft.

Valuing employer-provided vehicles

When it comes to cars provided by employers, their value is usually determined based on what someone would pay to lease a similar vehicle in the same area.

Cents-per-mile rule

This rule calculates the value of a car provided for personal use by multiplying the miles driven for personal reasons by a predetermined rate.

Commuting rule

This rule informs the value of employer-provided transportation for commuting purposes, whether due to unsafe conditions or other reasons.

Lease value rule

Under this rule, businesses use the annual lease value of a vehicle to determine its value. Various factors can influence lease value.

Unsafe conditions commuting rule

This rule helps determine the value of employer-provided transportation that employees need in order to avoid unsafe commuting conditions.

Businesses and employees alike should understand these valuation rules, as they can have impacts on tax implications and financial matters for everyone involved.

How fringe benefits affect taxes

There are a few rules to follow when it comes to dealing with taxable fringe benefits. Let’s break them down.

Determining the value of fringe benefits

You must calculate the value of a fringe benefit no later than January 31st of the following year that it gets reported. This is to ensure that the value doesn’t change later on (when you’re stressed about doing taxes). If you haven’t figured out a value by then, make an estimate and withhold enough to be compliant when the time arrives to file taxes.

Taxable fringe benefits can be handled on a weekly, monthly, quarterly, or yearly basis. You can even choose different periods for different employees, and that period can change however you need it to.

Withholding taxes

When it comes to taxes, you have a couple of options:

1. Add the value of a fringe benefit to the employee’s regular wages and calculate income tax based on that total

2. Withhold federal income tax on the value of fringe benefits using a flat rate of 22% (this rate goes up to 37% if the employee’s total supplemental wages for the year exceed $1 million)

If you pay an employee more than $200,000 in a calendar year, you need to withhold an additional 0.9% on the amount exceeding $200,000 for Medicare tax. This tax only applies to the employee, not the employer.

Don’t guess with your taxes. Consult an accountant as necessary.

Other FAQs about fringe benefits

Businesses today spend around 20% of their total employee expenditures on fringe benefits. Some benefits are legally required to be provided to employees, but that may change in the near future. As things like Workers’ Comp and health insurance move away from being legally mandatory, they become taxable and need to be factored into tax liability.

Employees need benefits. Employers who can offer comparably better benefits will have better luck finding talented workers. It’s not rocket science, but budgeting for it can be challenging. Take time to get to know the needs of both your business and your employees. Build a benefits package that is actually beneficial, and it will be worth the time it takes.