Fringe benefits are additional forms of compensation given to employees by their employer. The word ‘fringe’ is used to describe these benefits because they are peripheral or outside of the main benefit of employment which is direct monetary compensation. The fringe benefits offered to employees can have a big impact on their desire to join a company, and will likely influence an employee’s willingness to stay with the company long term.
Two Types of Fringe Benefits
These benefits can be broken down into two separate categories: taxable and non-taxable. Unfortunately, the IRS doesn’t necessarily make it easy to understand the difference between these two categories. In fact, the IRS puts out a really, really long document every year that attempts to categorize fringe benefits as taxable or non-taxable, and explains the restrictions for each type of benefit an employer may offer. When determining the taxable nature of the benefits you offer to employees, we strongly recommend speaking with a tax accountant or lawyer if you have questions regarding which category a certain benefit may fall under.
Non-Taxable Fringe Benefits
Here is a general list of some of the most common non-taxable fringe benefits that you may offer to employees. (Please note that some of these do have restrictions that could make them taxable):
- Employer-paid health insurance
- Health Savings Accounts
- Matching retirement contributions
- Child-care reimbursements
- Education assistance
- Tuition reimbursement
- Athletic Facilities (must be on-premise)
- Cafeteria or lunch subsidies
- Employee discounts
- Life insurance
The value of these fringe benefits is not included in the employee’s taxable income.
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Taxable Fringe Benefits
Here is a general list of some of the most common taxable fringe benefits that you may offer to employees:
- Personal use of company car or transportation
- Cash bonuses
- Group-term life insurance greater than $50,000
- Vacation expenses
- Frequent flier miles earned during business use and converted to cash
- Relocation expenses in excess of actual expenses
- Country Club dues reimbursement
These taxable fringe benefits are usually subject to withholding as soon as they are made available. Taxable fringe benefits paid to an employee by an employer are to be reported on the Form W-2.
So how do employees value these benefits in order to include them on their income tax forms? Generally, it is expected that taxable fringe benefits are valued at “fair market” value. Fair market value is supposed to be the equivalent of the amount an employee may pay for this same benefit if buying it at retail or from a third-party.
Why Should My Company Offer Fringe Benefits?
Offering fringe benefits can give your company a substantial advantage when competing for talent. The ability to recruit great employees lays the foundation of success for any business, and the benefits you offer will significantly increase your chances of hiring great people.
What If I Can't Offer Expensive Benefits?
We are not unaware that many of the benefits mentioned in this article can come with a hefty price tag. Health insurance, 401k matching, and free lunches do not come cheap! If you can afford these benefits for your employees then you’re in an excellent position to make a meaningful contribution to the lives of your workers. But if your business is not yet to the point where these benefits are in reach, don’t be afraid to think outside of the box. Here are just a few suggestions on what you might offer that won’t break the bank:
- Flexible office hours. (According to a 2017 survey, 76% percent of millennial workers responded they’d accept a pay cut for the ability to have flexible office hours)
- The ability to work-from-home.
- A four-day work week (four 10-hour days, vs. five 8-hour days).
- Good mentorship opportunities.
- Pet-friendly office space.
- Generous PTO
- Generous parental leave
- Employee discounts on products, or free food if you run a restaurant
- An office space that people enjoy working in
- A company Audible account so everyone can listen to more books
- Online learning subscriptions to places like Pluralsight, Coursera, or Lynda so employees can learn new skills
- Streaming services like Netflix or Disney Plus for every employee
- Monthly house cleaning services
- Commuter benefits
- Invite business leaders/community leaders to speak to your employees
- Monthly company barbeques or get-togethers
- In-office games (ping-pong, XBox, etc.)
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Offering fringe benefits is a great way to stay competitive in recruiting top talent to your company. Additionally, these benefits will help you retain employees for longer, and therefore reduce your turnover which can be extremely costly. It’s also a great way to show employees you care about them on a personal level.
As the battle for top talent continues to rage on, companies that win will do so on the fringe.