Fringe benefits are the additional perks a company provides to its workers. Fringe benefits are not part of the gross or net pay and may include perks like free housing, paid vacations, health insurance, life insurance, free meals, scholarships and personal development opportunities.
Companies use fringe benefits to attract, retain and motivate their staff. Some fringe benefits might be solely for executive staff, while others might be more general. Fringe benefits can also be tied to performance, longevity or roles.
Companies that recruit top talent have an impressive array of fringe benefits. The quality of benefits offered can determine the reputation a company has and the people it attracts.
A Closer Look at Fringe Benefits
Fringe benefits come in different forms. There are compulsory fringe benefits and voluntary fringe benefits. In many countries, including the United States, Social Security and health insurance are compulsory benefits.
Voluntary fringe benefits may include free property and free housing, the use of company vehicles, tuition assistance, life insurance, childcare reimbursement and more.
Some organizations provide unique benefits that improve their work environment. For example, PetSmart and Deltopia have pet-friendly environments, Patagonia’s headquarters has extensive volleyball courts and yoga classes, and Ben & Jerry’s rewards workers with free ice cream.
Multinational companies that compete for world-class talent offer some of the most impressive fringe benefits. Alphabet, the parent company of Google, provides free commuter bus service and free gourmet meals for all staff. Microsoft gives new mothers 20 weeks of paid time off and 12 weeks off to other new parents.
Real estate can also be a fringe benefit. Property, land, free apartment, discounts on accommodation and property purchase are some of the real estate-related fringe benefits a company may offer. However, even when real estate is provided as a fringe benefit, it is still a taxable item.
Also, if an employee receives property as a fringe benefit, they will be responsible for additional costs such as gas, electricity, water supply and repairs.
- Fringe benefits as incentives companies use to recruit, keep and motivate their staff
- Companies looking for top talent offer the most lavish fringe benefits.
- Most fringe benefits are taxed at fair market value except benefits like adoption assistance, health and life insurance which are not taxable.
- All real estate fringe benefits are taxable. The recipient is also responsible for additional expenses.
Valuing Fringe Benefits
Fringe benefits are either taxable or non-taxable. Non-taxable fringe benefits are benefits that do not conform to IRS rules for exemption. IRS rules are controversial because of their complexity. Working condition benefits are taxable as long as they are for personal use.
Fringe benefits are taxable by default; they can only be free from tax when IRS exemptions apply to them. Recipients of taxable fringe benefits are required to include the fair market value of the benefit in their taxable income for the year. Furthermore, the IRS maintains a list called the Tax Guide to Fringe Benefits. As of 2019, the list of fringe benefits excluded from income taxes includes:
- Tuition reduction
- Athletic facilities
- Employee discounts
- Adoption assistance
- Commuting benefits
- Educational assistance
- Employee stock options
- Dependent care assistance
- No-additional-cost services
- Working conditions benefits
- Accident and health benefits
- Retirement planning services
- Employer-provided cell phones
- Health savings accounts (HSA)
- De minimis (minimal) benefits
- Lodgings on business premises
- Group-term life insurance coverage
- Achievement awards (up to $1,600 for qualified awards)
These fringe benefits are exempted from tax because they are subject to certain complex conditions. For instance, only $1,600 of achievement awards are non-taxable for qualified plan awards; with non-qualified plan awards, that value is only $400.
All employees can access qualified plan awards. Some tax exemptions such as employee discounts, adoption assistance, and dependent care assistance are not available to highly compensated employees. In most cases, if fringe benefits are non-taxable, they are also exempt from Social Security, Medicare, and federal unemployment taxes.