Have you ever wondered what a fringe benefit is?
Many people hear the term but are unaware of what it means. It is merely a benefit that goes along with a salary, without that person having to pay for the specific benefit itself.
They are great ways of getting something extra as an employee, and they are also great at getting more people to apply for jobs so that a business can have the best talent possible. If you want to find out more about what a fringe benefit is and how the different varieties can improve your life, read on.
What Is a Fringe Benefit?
In its simplest form, a fringe benefit is a benefit that an employer provides to current employees or uses to bring top talent in when new positions open up. Some of the more common fringe benefits include dental insurance, gym memberships, paid lunches, and even the opportunity to work remotely now and again.
These attract new employees and help them stay with companies longer. These benefits are part of the overall compensation each employee gets for doing a good job. However, some are calculated on the employer’s taxes, while others fall to the employee to be responsible for.
How Do Fringe Benefits Work?
Keeping an employee happy: that is the ultimate goal of adding a fringe benefit to what you offer employees. Some companies turn to team-building exercises or friendly wagers, while other companies try and offer extra perks.
When an employer offers a fringe benefit, the employee has the right to take it or not. If the employee takes it, the employer covers the cost and then the employee has to pay taxes on this benefit during tax time. If the employer takes out any money utilizing withholding to help cover the cost of the benefit, then the employer may be responsible for the tax on the benefit-cost.
Do fringe benefits count as income?
A fringe benefit is still considered compensation for a task, meaning it is still income. But not all fringe benefits are considered a wage in the sense that they pay taxes.
It is important that the employer finds out from the business’s accountant which benefits will pay taxes and who will pay them (the employee or the employer).
Most Common Fringe Benefits
Companies have to pay specific benefits by law. This includes paying disability, medical leave, health care benefits, and Social Security, for example.
However, a fringe benefit is the type that the company chooses to offer. Here are some of the most common types of benefits that an employer could offer:
- Medical and dental insurance.
- Meals and cafeteria plans.
- Stock options in the company.
- Reimbursement or reduction of tuition costs for those who seek continued education.
- Assistance covering the cost of adoption.
- Paid holidays.
- Life insurance.
- Matching employee payments into retirement funds. This includes things like a pension fund or a company matching something like 10 percent of all deposits that an employee puts into their retirement fund each year.
- Paying for disability insurance in case something happens to the employee.
- Discounts on products or services the company offers.
Do All Types of Employees Receive Fringe Benefits?
Employees can receive fringe benefits, but not all of them have to. Just because an employer pays for some fringe benefits, does not mean they need to pay for them for every employee.
For example, independent contractors do not have the same rights to employee perks as full-time employees do. Plus, management-level employees can get better perks offered to them than those who recently joined the company.
It is up to the company to decide what perks to offer each type of employee to help keep employees happy and prevent turnover.
Companies of different sizes also have different requirements. For example, a small company that only employs a few people does not have to pay medical leave. However, once the company gets to 50 or more employees, then it is required to do so.
Why Do Companies Offer Fringe Benefits?
There are many reasons a company could provide a fringe benefit (or more) to its employees. As we have discussed, keeping employees from leaving and keeping employees happy are just two reasons to offer a fringe benefit. However, those are not the only reasons.
So, what are the advantages of fringe benefits?
- Fringe benefits can attract new talent. In many cases, this helps a company pique the interest of talented employees that otherwise would consider other job opportunities. And higher-level employees help make a company more competitive in its niche.
- Fringe benefits help improve the productivity of employees.
- Some fringe benefits allow employees to be healthier, which means fewer insurance rate increases and fewer sick days.
- Offering fringe benefits and going out of their way to keep employees happy helps change the public perception of a company while attracting the interest of stakeholders.
- Fringe benefits also allow employees to save money overall, which helps improve employee relationships and moods.
While fringe benefits are a great way to boost a company’s profile and make them more competitive, they are also expensive.
New companies that are trying to set themselves up for a future of success may be limited in the type of fringe benefit packages they can offer. It is important to consider this before deciding on what benefits an employer should offer, at least until it is big enough to cover these expenses more easily.
Are Fringe Benefits Taxable?
Almost every fringe benefit is taxable to some extent. However, it will not always be the employee who foots the bill for the tax. There are different ways of covering the taxable portion of each benefit.
When a fringe benefit gets taxed to the employee, the employee is responsible for figuring out what the market value of the benefits they receive would be. That is what the employee should add to their taxes to remain in full compliance with IRS regulations. Employers need to be able to provide the value to the IRS during tax time so that everyone can stay in compliance and no one gets into financial trouble.
On top of figuring out who pays for the taxes, each company and employee must understand when to pay the taxes on each fringe benefit.
For example, some benefits should have taxes paid annually. This includes benefits like a company paying for a company car.
Some benefits do not require tax payments at all, such as those benefits that are required by law.
Yet, other benefits require taxes to be paid eventually, but they do not require payment right away. This includes things like pensions or 401(k) programs. These can be taxed when the money goes in, or they can be taxed later when the money is withdrawn.
Offering Fringe Benefits is a Great Way to Give Your Business a Boost
Fringe benefits are great ways of attracting new employees and keeping current employees happier and healthier. They just take a little bit of adjustment to see who is responsible for paying the taxes on the benefit itself.
Are you looking for some great ideas on how to keep your employees happy and healthy, all while growing your business?
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