Your salary or payroll is the foundation of your compensation — it’s the primary form of payment you receive for your work. But beyond that basic paycheck, there’s another layer known as fringe benefits. These are additional perks that companies can offer, enhancing the value of a job and making the overall work experience more rewarding.
Fringe benefits can have a significant impact on both businesses and employees. For employees, they can mean extra financial support, greater health and well-being, and ways to achieve a better work-life balance.
For employers, fringe benefits are a powerful tool to attract top talent and foster loyalty and engagement within their workforce. Naturally, with fringe benefits comes the discussion of taxes.
The value of many fringe benefits is included in your taxable income, which can lead to some complications. It’s always best to consult a reliable tax professional to understand the tax implications of any fringe benefits you offer or receive.
What Are the Mandatory Fringe Benefits Required by Law?
First are the primary examples of fringe benefits that aren’t optional for employers. If you’re going to offer fringe benefits, these are the ones that are pretty much mandatory for any modern business:
1. Health Insurance
The Affordable Care Act (ACA) made it a requirement for many employers to offer health insurance coverage to their teams. These plans usually help cover things like doctor visits, hospital stays, and even some prescription medications.
Having health benefits is a big deal — it helps you stay healthy and protects you financially in case unexpected medical expenses pop up.
2. Worker’s Compensation
Every state has its own worker’s compensation system. This benefit is designed to help employees who get injured on the job or develop a work-related illness. It helps cover things like medical treatment and lost wages and even offers support if you need to retrain for a new career due to the injury.
3. Unemployment Insurance
State unemployment insurance is kind of like a safety net for employees. Both businesses and employees pay into unemployment insurance, and the funds are there to provide temporary financial help to those who lose their jobs through no fault of their own. Think of it as a buffer while someone is looking for new employment.
4. Medical Leave
The Family and Medical Leave Act (FMLA) lets eligible employees take unpaid, job-protected leave for specific reasons like:
- Having a baby
- Caring for a sick family member
- Dealing with their own serious health condition
While the leave itself isn’t paid, it provides a level of job security during those important life events. Often, the value of the benefits is a reflection of the value of the employee. Those who feel valued are more apt to stay with companies for the long haul.
These mandatory fringe benefits act as an important foundation of support for employees. Not only do they promote well-being and offer financial safety nets, but they also demonstrate a level of care and responsibility from employers.
This can make a significant difference in how employees perceive their work environment and overall job satisfaction.
What Are Discretionary Fringe Benefits?
Discretionary employee fringe benefits are the extras that companies can choose to offer, going above and beyond the legal requirements. We’re talking about even more ways to support employee well-being and create an attractive work environment.
Let’s explore some popular options:
5. Retirement Planning Assistance
Everybody wants a comfortable retirement. Employers can help with this through retirement savings plans like 401(k)s, where you and your employer can contribute money. Often, companies even match a portion of your contributions, essentially giving you free money towards your future.
6. Paid Time Off (PTO) & Vacations
We all need a break from time to time. PTO provides paid time for vacation, paid sick leave, or personal days. Many companies also recognize major holidays, giving you paid time off to recharge and celebrate.
7. Education Assistance
Investing in yourself is always a smart move. Some employers offer financial help for furthering your education. This can cover tuition reimbursement, professional development courses, and even support for earning advanced degrees.
8. Life Insurance
This benefit offers financial protection for your loved ones in the event of your unexpected passing. Employer-provided life insurance plans often have more favorable terms than you might get on your own.
9. Commuter Benefits
Rush hour traffic can be a serious drag. Commuter benefits and employee reimbursement help make getting to and from work a little smoother. This could include anything from covering part of your public transit costs to providing stipends for gas or parking.
10. Gym Memberships or Wellness Programs
A healthy workforce is often a happier workforce. That’s why some employers offer discounted gym memberships, on-site athletic facilities, or even company-sponsored wellness initiatives.
11. Meal Plans
Who doesn’t love free food? Some workplaces provide subsidized meals, on-site cafeterias, or even company-sponsored lunches. This can save you both time and money and offer a great opportunity to connect with colleagues.
12. Disability Insurance
Getting disability insurance as part of your benefits package can provide financial support if you become unable to work due to an unexpected illness or injury. Highly compensated employees are more likely to remain with organizations that show interest in the care and longevity of their staff.
13. Achievement Awards
Recognizing hard work and success is an important aspect of a positive company culture. Achievement awards can range from small tokens of appreciation to more significant bonuses.
14. Employee Discounts
Everybody loves a good deal. Some companies offer discounts on their own products or services or partner with other businesses to provide exclusive perks to their employees.
15. Stock Options
Stock options give you the right to buy company shares at a set price in the future. If the company performs well, this can be a valuable financial benefit.
16. Company Car
For roles that involve frequent travel or client visits, a company car can be a major perk. It eliminates the hassle and expense of using your own vehicle for business purposes. However, it’s important to note that this benefit often comes with tax implications.
17. Cell Phones
Staying connected is important in today’s fast-paced business world. Many companies provide employee reimbursement for cell phones to help cover the cost of mobile phone service for their employees.
18. Childcare Assistance
Balancing work and family can be a challenge. Some employers offer childcare on the business premises, subsidies for childcare costs, or even help finding reliable childcare options. This kind of support can be a lifesaver for working parents.
19. Adoption Assistance
Growing a family through adoption is a wonderful thing, but it can also be financially challenging. Some companies offer financial support or paid leave to help employees with the adoption process.
20. Spending Accounts
These specialized accounts allow you to set aside pre-tax dollars to cover eligible healthcare and childcare expenses. Using these accounts means you’ll pay less in taxes, leaving you with more money to spend on what matters.
This list is only the beginning of all the discretionary fringe benefits out there. Companies can get creative, tailoring their offerings to their employees’ interests and needs. As a job seeker, these perks can make a big difference when weighing employment options.
For employers, discretionary fringe benefits are a powerful way to demonstrate investment in their employees, attract top talent, and boost overall job satisfaction.
How Are Fringe Benefits Taxed?
The IRS uses the following terms to describe the tax treatment of fringe benefits:
Taxable: These benefits must be included in your gross income as wages and are subject to income tax withholding, as well as Social Security and Medicare taxes (if applicable).
Nontaxable (Excludable): These benefits are excluded from your wages by a specific section of the Internal Revenue Code (IRC).
Partially Taxable: Certain benefits may be excluded up to specific dollar limits. Any amount exceeding the limit is taxable.
Tax-Deferred: These benefits are not taxed when you receive them but may become taxable later (for example, when you take a distribution from a retirement plan).
Understanding these terms is essential when considering the overall value of a fringe benefits package. While some benefits may offer immediate tax savings, others provide long-term advantages through tax-deferred growth.
Consult the IRS Publication 15-B or a tax professional for specific guidance on the taxation of individual fringe benefits.
Fair Market Value (FMV)
In most cases, taxable fringe benefits are included in your wages at their fair market value, or FMV. FMV refers to the amount a willing buyer would pay to an unrelated seller in a typical transaction.
The Importance of the IRS Publication 15-B
The IRS Publication 15-B (Employer’s Tax Guide to Fringe Benefits) is an indispensable resource providing in-depth explanations, examples, and specific rules on a wide range of fringe benefits. It’s an important reference for both employers and employees seeking to understand the tax treatment of various benefits.
Examples of Common Fringe Benefits and Their Tax Implications
It’s important to consult Publication 15-B or a tax professional for detailed explanations, but here are some common fringe benefits and their general tax treatment:
Health Insurance Premiums (Employer-Provided): Typically nontaxable to the employee.
Educational Assistance: Up to $5,250 per year may be nontaxable. Amounts exceeding this limit are often taxable.
Dependent Care Assistance: Up to $5,000 per year may be nontaxable.
Retirement Planning Services: May be taxable, nontaxable, or tax-deferred, depending on the plan type and rules.
Gym Memberships: Generally taxable but may be excluded if the facility is on the employer’s business premises and primarily used by employees.
Employers generally must report taxable fringe benefits as wages on Form W-2. Federal tax withholding requirements apply, although special rules and elections may exist for specific benefits. An employer may choose to use a special accounting period or add taxable benefits to regular wages and withhold income tax on the combined figure.
Stay Compliant with Mosey
Fringe benefits go beyond standard compensation to give employees everything from financial support to wellness perks. These benefits are a great way to make a job more attractive to potential hires — and at the same time, they increase satisfaction for current employees.
If you’d like to streamline your state compliance and open up time to give your employees benefits they’ll love, book a demo with Mosey today. Learn how we can simplify this complicated area of payroll for your business.
