What Are Fringe Benefits?
Fringe benefitsare additions to compensation that companies give their employees. Some fringe benefits are provided to all employees, while others may be offered to executives only. Some benefits may include a company car, paid time off, or gym membership. Employers use fringe benefits to helpthem recruit, motivate, and retain high-quality talent.
Key Takeaways
- Fringe benefits helpcompanies recruit, motivate, and retain high-quality employees.
- Companies competing for the most in-demand skills tend to offer the most benefits.
- Some common benefits, like health and life insurance, are not taxable, but others are taxed at fair market value.
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Understanding Fringe Benefits
Common fringe benefits are basic items often included in hiring packages. These include health insurance, life insurance, tuition assistance, childcare reimbursem*nt, cafeteria subsidies, below-market loans, employee discounts, employee stock options, and personal use of a company-owned vehicle.
Uncommon fringe benefits may fit the company profile. PetSmart And Dogtopia both operate pet-friendly workplaces. Ben & Jerry's rewards its workers with free ice cream. The companies that compete for the best talent in highly competitive fields may offer the most extraordinary fringe benefits. Google's parent company Alphabet provides free commuter bus service and a free gourmet cafeteria. Microsoft gives 20 weeks of paid time off to new birth mothers and 12 weeks for other new parents.
Tax Considerations
By default, fringe benefits are taxable unless they are specifically exempted. Recipients of taxable fringe benefits include the fair market value in their taxable income for the year. The Internal Revenue Service (IRS) maintains a list called the Tax Guide to Fringe Benefits. The list of fringe benefits excluded from income taxes includes:
- Accident and health benefits
- Achievement awards (up to $1,600 for qualified awards)
- Adoption assistance
- Athletic facilities
- Commuting benefits
- Deminimis (minimal) benefits
- Dependent care assistance
- Educational assistance
- Employee discounts
- Employee stock options
- Employer-provided cell phones
- Group-term life insurance coverage
- Health savings accounts (HSA)
- Lodgings on business premises
- Meals
- No-additional-cost services
- Retirement planning services
- Tuition reduction
- Working conditions benefits
All of these exemptions are subject to certain and often complex conditions. For example, achievement awards are only exempt up to a value of $1,600 for qualified plan awards and a value of $400 for non-qualified plan awards.
Qualified plan awards are open to all employees, not just highly paid employees. Other exemptions are not available to highly compensated employees if the benefits are given to them but not rank-and-file employees. These include employee discounts, adoption assistance, and dependent care assistance. Most but not all fringe benefits that are income tax-exempt are also exempt from Social Security, Medicare, and federal unemployment taxes.
The companies that compete for the best talent in highly competitive fields may offer the most extraordinary fringe benefits.
Valuing Fringe Benefits
Any fringe benefit not named above, or any of the benefits named above that does not conform to IRSrules for exemption, is taxable. The exemption rules are complex, also.
For example, working condition benefits are taxable to the extent that they are for personal use. If an employee is given a laptop, the taxable income would be the percentage of the laptop's fair market value devoted to personal use. If 80% of its use is personal, the taxable income is 80% of the value of the computer.
In general, fringe benefits are valued at fair market value. This is the amount the employee would pay for the same benefit at retail.
Are Fringe Benefits Taxable?
Any fringe benefit an employer provides is taxable and must be included in the recipient's pay unless the law expressly excludes it.
What Is a Cafeteria Plan?
A cafeteria plan refers to a suite of fringe benefits that allow employees to choose among them. Often, these benefits will come out of pre-tax dollars and may include insurance plans, and retirement benefits. The name cafeteria is used because it is akin to a menu of benefits that can be selected or passed over, such as at a cafeteria buffet.
Is a Lifetime Achievement Award Given to an Employee Taxable?
An achievement award may be excluded from taxation as a fringe benefit if it meets specific criteria. For example, it must be worth less than $1,600 and cannot be cash or cash equivalents such as a gift certificate or gift card. It also cannot be stocks, bonds, or other securities. The exclusion doesn't include vacations, meals, lodging, and tickets to theater or sporting events.
The Bottom Line
Fringe benefits are additional incentives designed to attract and retain talent. Examples of fringe benefits are paid time off for specific occasions, exercise areas, or pet-friendly work environments.
