What Are Fringe Benefits?

Attracting and retaining top talent for your business is critical. While setting a competitive salary is important, offering the right fringe benefits might make it easier for you to recruit, motivate and retain high-qualify staff.

A fringe benefit is defined as any compensation or reward beyond an employee’s regular salary. Examples of fringe benefits include health insurance, employee stock options and tuition reimbursement.

Fringe benefits explained

The IRS classifies any non-wage form of employee compensation as a fringe benefit. For example, giving an employee a business vehicle for work purposes would be a fringe benefit. Contract workers could also receive fringe benefits if they perform services for your business.

Some fringe benefits are required by law. As an employer, you will likely need to provide the following benefits to your employees:

• Health insurance: Employers with 50 or more full-time or full-time equivalent employees must provide health care coverage under the Affordable Care Act. Health insurance companies and self-insuring employers must also provide coverage.
• Unemployment insurance: Employers must pay unemployment tax to fund workforce programs that assist unemployed people.
• Workers’ compensation: Employers must pay workers’ compensation insurance to cover employee accidents in the workplace. A private insurance company or a state-run fund usually pays these benefits.
• Family and medical leave: The federal Family and Medical Leave Act (FMLA) mandates that certain employers provide 12 weeks of unpaid, job-protected leave to care for a new child or take care of family health emergencies. FMLA applies to private companies with 50 or more employees, government agencies and public or private schools.
• Social Security, Medicare and Federal Insurance contributions: Although technically not a fringe benefit, the Social Security and Medicare taxes paid under the Federal Insurance Contributions Act (FICA) are employment taxes that provide benefits to retirees, disabled persons and children. Both employees and employers are required to contribute to FICA taxes. Employers must still deduct these taxes from each paycheck even if employees do not expect to qualify for Social Security or Medicare benefits.

Beyond these legal requirements, many employers choose to offer a range of voluntary fringe benefits. These are the perks that truly help companies stand out in the job market. Businesses offer these benefits to attract highly skilled employees, boost workforce morale, improve employee retention and foster a positive work environment.

Voluntary fringe benefits range from traditional offerings like paid time off to more modern and innovative perks. Think along the lines of gym memberships, child care assistance and things like company-sponsored meals or events. The specific benefits you choose to offer should reflect your company’s values while meeting the needs of your workforce.

How do fringe benefits work?

Before you can offer fringe benefits to your employees, you’ll need to understand how they work. While some employers offer the same benefits to all employees, others may offer additional perks and incentives for hires at an executive level.

Some companies also offer cafeteria plans, which allow employees to choose from a list of available medical benefits up to a certain dollar amount. This approach can allow employers to keep their costs low while giving employees a variety of benefits options.

Regardless of the approach they choose, many companies turn to third-party providers to administer fringe benefits. For example, a payroll service provider can assist with administering employee paychecks, including bonuses and achievement awards, while HR software can simplify the process of offering paid time off.

Third-party services are still considered fringe benefits. So, if you offer daycare services for workers through a third party, your company would still be considered the provider of this benefit.

Pros and cons of fringe benefits

How to choose fringe benefits for your business

Although most fringe benefits are optional, employees might expect certain ones, like paid vacation time. You might struggle to hire and retain top talent if you skimp on the most common benefits. At the same time, there’s no point in offering expensive benefits that drain your budget if nobody uses them.

To decide which fringe benefits to offer your employees, consider the following factors:

• Budget: It’s important to balance the desire for attractive perks alongside the financial realities of running a business. Different benefits come with different costs, so be sure to consider upfront and ongoing costs when choosing fringe benefits.
• Fair market value: This refers to the amount employees would pay for these services out-of-pocket. Purchasing benefits at a discount — like getting a good deal on 100 memberships to the same gym — can help you get benefits with a lot of value on a budget. The IRS’ Fringe Benefits Guide can help you determine the value of benefits you plan to offer.
• Industry standards: If your main competitors offer the same types of benefits, it may be important for you to offer them as well. Alternatively, if you see an opportunity to offer a perk that your competition does not provide, it could help your business stand out.
• Employee needs: Understanding the needs of your workforce can make it easier to choose fringe benefits. A younger workforce might prioritize tuition reimbursement, while a workforce with families might value childcare benefits more. Many companies use surveys or staff retention rates to determine the importance of certain benefits.
• Company culture: The fringe benefits you choose should align with your company culture. For example, a business that values work-life balance might prioritize flexible work arrangements and paid time off.

Some businesses like to offer fringe benefits that also align with their industry. For example, PetSmart offers pet-friendly offices, and Planet Fitness employees receive a free gym membership. For more information about choosing benefits for your business, consult the IRS’ Employer’s Tax Guide to Fringe Benefits.

How fringe benefits are taxed

There are many types of fringe benefits, some of which will be subject to federal and state tax withholding. In general, benefits offered as cash or cash equivalents are considered taxable income for your employees, while benefits offered in a medium other than cash are typically exempt from taxation.

Property or services offered to employees infrequently or with a low value, called de minimis fringes, may also be tax exempt. Let’s take a closer look at these different types of benefits.

Taxable fringe benefits

Fringe benefits delivered as cash, or with a cash equivalent, will need to be included in an employee’s gross income. These taxable benefits include:

• Paid time off
• Employee bonuses
• Some achievement awards
• Gift certificates
• Moving expenses

Nontaxable fringe benefits

Fringe benefits are typically taxable unless they are specifically excluded from taxation by the IRS. Excluded items include:

• Accident and health benefits
• Some achievement awards
• Adoption assistance
• Athletic facilities
• De minimis (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)
• No-additional-cost services
• Retirement planning services
• Commuting benefits
• Tuition reduction
• Working condition benefits
• Meals

Some exemptions are subject to certain conditions. Educational assistance, for example, is exempt for up to $5,250 annually, while dependent care assistance exemptions max out at $5,000 (or $2,500 for a married employee filing a separate tax return.) And adoption assistance is only exempt from income tax, not Social Security and Medicare or federal unemployment tax.

Working condition benefits are fully exempt from taxes. They include access to property and services employees need to do their jobs, such as a company car, cellphone or work-related education.