- Fringe benefits are the compensation that an employee receives outside of their standard salary or wages.
- The most common fringe benefits are retirement contributions, employee stock options, education assistance, tuition reimbursement, paid time off, and medical, dental, life and disability insurance.
- All fringe benefits are subject to federal income taxes – FICA (Social Security and Medicare) and FUTA (unemployment tax) – unless explicitly stated otherwise by the IRS.
A competitive salary is no longer the only thing needed to recruit and retain great employees. A recent study by MetLife shows that 76% of employees think employers have a responsibility toward the health and well-being of their employees. Offering competitive fringe benefits is a great way to demonstrate your dedication to your employees’ satisfaction and professional growth.
What are fringe benefits?
Fringe benefits, also known as employee benefits or perks, are the supplemental compensation that an employee receives outside of their standard salary or monetary wages.
Ryan O’Donnell, CEO of Replyify, said that fringe benefits fall into two consideration silos for employees: necessary benefits and ancillary benefits. Necessary benefits are those that an employee would have to pay for on their own if the employer doesn’t provide it.
“A family of four can’t just not carry health insurance,” O’Donnell told business.com. “If the company doesn’t provide this benefit, the employee would need to calculate the $12,000 price tag against their salary, and that could make a big difference in hiring and retention.”
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Ancillary benefits, on the other hand, are not essential; instead, they are supplemental perks that can improve employee wellness emotionally, financially or personally. These include perks like life insurance, retirement plans, food and beverage, commuter benefits and disability insurance.
“These wellness benefits can contribute to a happy employee who meets and exceeds corporate expectations on productivity,” said O’Donnell. “These benefits are harder to quantify than covering health insurance premiums, but [they tend] to be more impactful.”
To attract top talent, businesses should offer a variety of fringe benefits to their employees, allowing each employee to customize their benefit plan to fit their needs. In MetLife’s study, 72% of employees said that customized benefits would increase their loyalty to their employer. A wide array of benefits can also increase employee satisfaction and growth.
Why is it important to offer fringe benefits?
While many employee fringe benefits are technically optional, it has become practically a necessity for businesses to offer them. Fringe benefits make up roughly 30% of an employee’s total compensation, and HR Dive reported that more than 70% of employees consider fringe benefits a key component when they are evaluating potential jobs.
Since employees place high importance on fringe benefits and increasingly expect them as part of their compensation packages, it is important for small businesses to offer a variety of fringe benefits to remain competitive.
“More specialized and niche fringe benefits are becoming critical to supporting employees with the unique challenges that face the workforce today,” said Jason Murray, co-founder and head of growth and strategy at Fringe. “Benefits like financial wellness, caretaker benefits, child care solutions, mental health and well-being support, physical wellness, convenience services, and more are becoming not only optional but expected from many employers.”
Murray said there are four primary reasons to offer fringe benefits:
- To attract and retain top talent
- To invest in the health and well-being of your employees
- To find creative ways to reward and recognize employees (and drive employee engagement)
- To create a total rewards strategy that stands out from competitors and helps your employees feel appreciated and valued
It is important that your employees feel happy and valued enough to stick with your company. Research suggests that employee turnover can cost up to two times the employee’s annual salary. Offering fringe benefits is a great way to lower your turnover and save you money in the long run.
Examples of fringe benefits
Some fringe benefits may be mandatory based on federal, state, or local laws and regulations. These can include benefits like Social Security, Medicare, Federal Insurance Contributions Act (FICA) tax, unemployment insurance, workers’ compensation insurance, health insurance, and family and medical leave.
Traditional fringe benefits
Each company needs to evaluate available fringe benefits and decide what works best for its employees. Many traditional benefits are often included in a hiring package provided at the time of employment. These are some of those fringe benefits that many organizations offer:
- Insurance (health, dental, vision)
- Life insurance policy
- Retirement plans, such as 401(k) and 529
- Short-term and long-term disability
- Cafeteria subsidies (HSA and FSA)
- Stock options
- Tuition reimbursement
- Dependent caregiver benefits
- Paid vacations
- Flexible scheduling
- Commuter incentives
- Remote work options
Less common fringe benefits
Some nontraditional benefits have risen in popularity over recent years. Murray listed some of these less common fringe benefits:
- Gym memberships
- Meals and lunches
- Wellness stipends
- Grocery delivery services
- Mental health and meditation services
- Education subscriptions
- Massage memberships
- Free beer on tap
- Company outings and events
- Unlimited vacation days
- Career coaching and skill development services
Other relatively rare fringe benefits include adoption assistance, achievement awards, student loan relief, employer-provided electronics, club memberships, transit passes and moving expense reimbursement.
When deciding which benefits to provide your employees, you might also consider company-specific benefits that mesh with the products or services you provide. For example, a restaurant could offer free employee meals, while a dance studio could offer free dance classes.
What fringe benefits are taxable?
All fringe benefits are subject to federal income taxes – FICA (Social Security and Medicare) and FUTA (unemployment tax) – unless explicitly stated otherwise by the Internal Revenue Service. According to the IRS, “you must include in a recipient’s pay the amount by which the value of a fringe benefit is more than the sum of the following amounts: any amount the law excludes from pay and any amount the recipient paid for the benefit.”
The following are nontaxable fringe benefits (in certain situations):
- Accident and health benefits
- 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 (HSAs)
- Lodging on your business premises
- No-additional-cost services
- Retirement planning services
- Transportation (commuting) benefits
- Tuition reduction
- Working condition benefits
These benefits are only excluded from specific taxes and may still be considered taxable income under certain circumstances. To see the special rules for these various types of employee fringe benefits, you can consult Table 2.1 in the IRS’ 2020 Employer’s Tax Guide to Fringe Benefits.
Employers should also be aware of the new Coronavirus Aid, Relief and Economic Security (CARES) Act. Section 2206(B) includes a tax incentive for employers who offer student loan benefit contributions, which is a win-win for employers and employees.
Expert advice about fringe benefits
Although fringe benefits often come at an extra cost to your company, there are several advantages that can outweigh their monetary value. For example, Murray said that a thoughtful array of fringe benefits can complement your culture and employer brand, setting you above the competition.
“Personalization is the mantra for today’s employees, and it’s important to design programs that can help meet the needs of employees’ lives now,” he said. “Few companies have the vision and resources to scale this core value across an entire employee population. Those that do will inevitably stand out and have the most talented and engaged employees.”
When evaluating which benefits to offer, start by looking at what your competition offers. Additionally, it is always wise to consult your tax professional before deploying a new benefit that could have tax implications for you or your employees. This will help you create a plan that is both affordable and desirable.
“Just because your company-sponsored prize trip to Cancun is a taxable event doesn’t mean you should eliminate it,” said O’Donnell. “If this is a coveted prize amongst the sales team, consider supplementing the tax consequence with a spot bonus (which may also be taxable) to offset a tax bill later.”
Fringe benefits FAQs
The following are the top questions from employers deciding what fringe benefits to provide within their organizations.
How do you report taxable fringe benefits?
Most employer-provided fringe benefits are taxable. Often, fringe benefits are reported on an employee’s W-2 form. However, if the fringe benefit was provided to an independent contractor, you would use Form 1099-NEC. Partners report fringe benefits on Form 1065. Employers must determine the monetary value of the fringe benefit and list it on these taxation forms.
The IRS has a list of exclusions that may not fall under the standard tax rules, including medical benefits, achievement awards, adoption assistance payments, caregiver assistance, HSA contributions and meals. Employers should speak to an accountant if they are unsure whether they need to report their fringe benefits.
Do employees pay for fringe benefits?
No, an employee does not normally pay for any fringe benefits. The point of fringe benefits is that they are incentives for employees to work for a company. In some cases, though, a company may ask employees to contribute a portion of the cost of fringe benefits. For instance, employees may have to pay a certain percentage of healthcare premiums. Retirement benefits and pension contributions usually require an employee to pay a certain percentage of each paycheck, with the employer matching the amounts. As the employer, you should explain any amount the employee is responsible for paying at the time they are hired or you start offering the fringe benefit.
What basic benefits must a company provide employees?
According to the Bureau of Labor Statistics, the following benefits are required by law:
- Social Security
- State unemployment insurance
- Workers’ compensation
Most employers at least offer these benefits to employees. Full-time employees usually receive some sick time, vacation time and health benefits. Each employer decides what type of healthcare coverage to offer and the number of paid days off that each worker receives.