Fringe benefits may be available to everyone in the company or may be used as incentives for meeting certain goals. They may be paid or given in the form of an achievement award. They are always considered compensation for services beyond employees’ normal rates of pay. In this way, they are unlike legally required benefits, such as workers’ compensation, which are based on a company's size and the number of employees and vary from state to state.
One of the biggest and most obvious drawbacks to fringe benefits is that they can be expensive. If you are going to offer them, weigh the cost with reasonable estimates of potential advantage.
For example, fringe benefits can be a significant factor in a
candidate's decision to accept a job
offer, helping you build and retain a strong team.
Some fringe benefits are taxable to the employee. Fair market value is typically regarded as whatever a buyer would pay for an item of equal value. For example, if you offer an annual gym membership as a fringe benefit, the facility's regular price for adult membership represents a good valuation of FMV even if you negotiated lower bulk pricing. However, with some limited exceptions, you can deduct the fringe benefit's cost regardless of whether the benefit is taxable to the employee. So, for example, if you buy a car for an employee, while the employee is taxed on the car's FMV, you can deduct the cost of the car. If you were to supply housing, the employee would be taxed on the fair rental value and you could deduct the housing-associated expenses.
Fringe benefits' FMV is added to the employee’s gross income. Income, including the benefits, is subject to federal withholding, Social Security and Medicare taxes as supplemental income and is reportable, along with any applicable taxes withheld.
Exploring fringe benefits
Fringe benefits include property, cash, cash equivalents, discounts, savings accounts and even nontangible benefits such as experiences. Specific examples of taxable benefits include:
- Bonuses
- Vacation time
- Club memberships
- Health resort expenses
- Moving costs
- Frequent flyer miles converted to cash
- Use of a company car
- Group term-life insurance over $50,000, unless paid with post-tax employee contributions
Among nontaxable fringe benefits are:
- Employer-provided spending accounts, such as medical, flexible or dependent care accounts
- Transit or parking benefits
- Child or dependent care services
- Group term-life insurance up to $50,000
- Tuition reduction (but certain conditions must be met)
- De minimis gifts — that is gifts for which the value is deemed too low to be accounted for or taxed; these might be noncash gifts, parties or picnics
When health savings accounts aren't used for medical expenses, they can be paid out in cash; however, the cash payment will be taxable. HSAs can never be used for nonmedical expenses.
Which IRS form?
It can be difficult to determine the correct employment taxes and what's subject to federal income tax withholding.
Taxed fringe benefits paid to employees are reported on Form W-2. Fringe benefits paid to independent contractors are reported on Form 1099-NEC. And those paid to partners are reported on Schedule K-1 (Form 1065).
If you're planning to incorporate new fringe benefits into your benefits package, consult IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits, for in-depth information related to federal tax laws on benefits or seek other professional advice. You want to be sure your benefits are reported and taxed correctly.