What are fringe benefits?

The term “fringe benefit” refers to any benefit provided to an employee that is in addition to the employee’s standard rate of pay. They can take the form of property, services, cash equivalents (such as savings bonds), or even cash in some cases (like bonuses which the employee takes as cash). 

When employees choose between job offers, financial compensation is just one of numerous factors they consider. Most employers offer competitive wages and salaries, so a good benefits package is often essential to standing out from the crowd.

Some examples of commonly offered fringe benefits include:

  • Health insurance
  • Dental insurance
  • Group term life insurance
  • Retirement plan contributions
  • Dependent assistance
  • Education assistance
  • On-premise fitness facilities
  • Cafeteria access and meal plans
  • Paid time off
  • Employee discounts
  • Moving expenses
  • Transportation benefits
  • Employer-provided cell phones
  • Employer-provided vehicles

Employers may deduct some types of fringe benefits (for instance, health insurance or retirement plan contributions) from an employee’s gross salary, while employers may offer others (such as on-premise facilities) for free or at a discount. 

Additionally, certain fringe benefits are required by law for companies of a specific size with a certain number of full-time employees. Exactly which benefits are legally required and for which companies can vary based on local and state laws, so it’s best to consult professionals (like us!) for the most accurate information. However, some common examples include: 

  • Workers’ compensations
  • Unemployment insurance
  • Family and medical leave
  • Health insurance

How are fringe benefits taxed?

Generally, fringe benefits are included in an employee’s gross income, with some exceptions. That means that the IRS considers them to be income, so unless the law expressly excludes it, all benefits you provide are subject to employment taxes. 

The fair market value of each benefit added on top of the employee’s gross income and reported on a W2 form is also subject to income tax withholding unless the IRS excludes it (we’ll discuss exclusions in the next section). 

One of the most common types of fringe benefit that the IRS considers taxable is employee reimbursement (such as for mileage expenses over a set limit, for education or tuition expenses not directly related to job performance, or over a set limit). Additionally, the IRS considers a working conditions benefit, like an employer-provided phone or automobile, taxable if used outside of business. 

Other examples of taxable fringe benefits include: 

  • Vacation, fitness club membership, or resort expenses
  • Value of the personal use of a company car
  • Amounts paid to employees for moving costs over actual expenses
  • Business frequent-flyer miles converted to cash
  • Group term-life insurance exceeding $50,000

Are there exclusions from fringe benefits tax?

As mentioned above, there are some specific tax exclusions and deferrals for benefits provided to an employee. The IRS deems some fringe benefits nontaxable because they are deductible on a pre-tax basis. 

For example, an employer contribution to a qualified retirement on behalf of the employee is eligible for tax-deferral, which means the contribution is not subject to taxation until the employee chooses to withdraw from the plan. 

Additionally, employer-provided health insurance for an employee is a tax-free fringe benefit, and awards for achievements are also exempt from withholding. Meals are also exempt, as long as they are provided on business grounds and offered as a benefit. For example, a meal during required overtime qualifies as a tax-free benefit. 

According to the de minimis tax rule, the IRS does not consider taxable fringe benefits that hold such a small value as challenging to account for, such as a gift card or snacks provided during a meeting. 

Other tax-exempt benefits include health insurance (up to a set threshold), dependent care, retirement planning services, adoption assistance, group term-life insurance, qualified benefits plans, transportation benefits, and employee discounts. 

Some of these exclusions can present an opportunity: a small business owner in a corporate setting may be both the owner and an employee of their business. By taking advantage of excludable fringe benefits, the owner receives a double benefit. First, the cost of the benefit is deductible by the business. Second, the cost of the benefit is tax-free to the employee-owner.

How do you value fringe benefits?

In general, you can determine the value of a fringe benefit by its fair market value. That means the employer must include the amount by which the fair market value of a given benefit is greater than the sum of what the employee paid for it (plus any amount that the law excludes). 

In simpler terms, the amount the employee likely would have had to spend to purchase a product of equal value to the benefit in a typical transaction is probably much greater than whatever amount they paid under your benefits program. The difference between those amounts, or the amount by which the fair market value exceeds the cost to the employee, is part of the employee’s annual taxable income. 

To estimate the fair market value of an item, an excellent place to start is to compare it to the retail cost of an equivalent or comparable item. For example, if your benefits package includes membership at a local resort, the resort’s regular price for membership is a good measurement of the fair market value of that benefit. 

There are other special rules that employers and employees may use to value certain fringe benefits. Take a look at IRS Publication 15-B, Employers’ Tax Guide to Fringe Benefits, for more information.

In closing…

Talented professionals want more than a competitive salary; they want competitive fringe benefits, too. That’s why it is in an employer’s best interest to attract and retain top talent by including attractive benefits in their compensation package.

However, it is equally important for both employer and employee to understand what fringe benefits are fully and how they are taxed.

If you are confused about the tax treatment of employee fringe benefits, it’s a good idea to speak with a tax professional. At Rosenberg & Chesnov, we stand ready to assist you with any questions.

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