As an employer, fringe benefits can be a useful way to attract and retain top talent, as well as differentiate your business from competitors. Within the realm of small business HR, there’s no doubt you’ve heard of benefits—health insurance, workers comp, etc.—but what does fringe benefits mean exactly?
In this guide, we’ll walk through everything you need to know—from a fringe benefits definition, to examples, to the difference between taxable and non-taxable benefits. Plus, we’ll list some of the top providers that you can turn to if you’re looking to offer fringe benefits to the employees of your small business.
Fringe benefits are any form of compensation an employer offers their employees in addition to their stated salary.
For another definition, the IRS states that fringe benefits are: “a form of pay (including property, services, cash, or cash equivalent) in addition to stated pay for the performance of services.” Therefore, although the term “fringe” might suggest that these benefits are uncommon or atypical, fringe benefits actually include traditional forms of employee benefits—such as health insurance and paid vacation.
This being said, whereas your traditional wages are paid by check, cash, or direct deposit, fringe benefits can come in many other forms. Similarly, whereas traditional wages are subject to income tax (i.e. taxable income), not all fringe benefits are taxable, as we’ll discuss in greater detail below.
Overall, for employees, fringe benefits are supplemental to your salary—and you might negotiate your employee benefits package if a potential employer isn’t able to offer you a salary as high as you’d like. For employers, on the other hand, fringe benefits are both meant to compensate employees for costs associated with their work, as well as function as a useful tool for recruiting top talent, retaining employees, and increasing workplace satisfaction.
With this definition in mind, let’s explain a little more about how fringe benefits work.
First, fringe benefits are provided by an employer, even if a third party is the one providing the actual benefit. For example, an employee may have a membership at a gym that is paid for by their employer—the employer, however, is still the fringe benefit provider even though the gym issues the membership.
Similarly, the employee is the receiver of a fringe benefit, even if it is utilized by others, such as in the case of a family health care plan.
This being said, regardless of the types of fringe benefits offered, most of these perks are provided entirely at the employer’s discretion and can vary widely from company to company. Additionally, certain fringe benefits, like the ability to work remotely, for example, might be only awarded to specific employees.
Generally, employees select their benefits during the onboarding process or during open-enrollment periods—as is the case with health care and some retirement plans. Other fringe benefits, however, might be provided as perks (like discounts on company merchandise) and can be redeemed by the employee at any time.
So, what types of perks are included under the umbrella of fringe benefits? As we’ve mentioned already, these benefits can include something as well-known as paid vacation days to something as unique as discounted company merchandise.
With this in mind, there are a number of ways you can categorize different types of fringe benefits. First and foremost, there are fringe benefits that are required by law:
As you might expect, any fringe benefits that aren’t listed here would be considered “not required”—this being said, however, it may be more helpful to categorize additional perks as taxable fringe benefits and non-taxable fringe benefits.
The IRS has very specific guidelines on what types of benefits are taxable and which are not. Overall, the IRS states, “any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically excludes it.”
Therefore, unless the benefit you’re providing is included in the IRS list of excluded benefits, it’s safe to assume that it is taxable.
This being said, some of the most common taxable fringe benefits include:
With this in mind, if you offer taxable fringe benefits, the value of those benefits is subject to federal income tax, social security tax, Medicare tax, and FUTA, and the value must be included on your employees’ W-2s, as well as on your IRS Form 940.
If you’re wondering how to calculate fringe benefits for your taxes, the process can be complicated, as the IRS dictates specific methods for evaluating the value of different benefits. Additionally, the taxable portion of fringe benefits may be reduced by the amount the recipient pays for the benefit, or if the benefit is a low-cost gift or achievement award.
Therefore, on top of referring to IRS Publication 15-B, it will likely be helpful to work with an HR professional or tax expert to walk you through these calculations.
So, what are some fringe benefits examples that are non-taxable? Here’s what’s included on the IRS list:
It’s important to note, however, that even though these benefits are considered “excluded” by the IRS, they each have their own unique rules. For example, athletic facilities are only exempt if, “substantially all use during the calendar year is by employees, their spouses, and their dependent children, and the facility is operated by the employer on premises owned or leased by the employer.”
Moreover, any or all of a fringe benefit can be excluded from taxable income if the recipient is not an employee. If the recipient of a fringe benefit is not an employee, then it is not subject to any income tax withholding, but it may have to be reported as income elsewhere—such as on a Form 1099-MISC for independent contractors or a Schedule K-1 for partners.
When it comes down to it, although there are parts of fringe benefits that can be complex—especially in regards to taxes—these perks offer significant value to both employers and employees. So, what’s the importance of fringe benefits?
Let’s review some of the ways these benefits can have a positive impact on your small business.
Selecting the right benefits package for your business depends on your objectives and budget. Employers should consider their business’s size, location, industry, and collective bargaining agreements, as well as the benefits practices of their competitors. It is also advisable to conduct a needs assessment to understand what your employees value in terms of benefits selection and design.
Once you have a good understanding of what your employees want, you can begin to formulate fringe benefits offerings in order of priority, checking the cost of providing the prioritized benefits against the benefits budget. This can be a complicated process with many variables to consider, especially when it comes to things like selecting a small business health insurance provider.
With this in mind, once you know what fringe benefits you want to offer, you’ll want to consult a benefits provider. These are services that administer benefits on behalf of the employer. Overall, there are six different types of benefits providers, each with their own rates and offerings:
At the end of the day, fringe benefits provide value to both employees and employers—after all, employee engagement statistics show that 68% of employees feel that “work perks” are just as important as more traditional benefits, it’s certainly worth considering how your small business can offer fringe benefits.
This being said, however, with the different tax implications, costs, and decisions involved, acquiring fringe benefits can be a time-consuming process. Therefore, you’ll likely find it useful to consult with an HR professional, business advisor, or other experts to help you through the process.
Matthew Speiser is a former staff writer at Fundera.
He has written extensively about ecommerce, marketing and sales, and payroll and HR solutions, but is particularly knowledgeable about merchant services. Prior to Fundera, Matthew was an editorial lead at Google and an intern reporter at Business Insider. Matthew was also a co-author for Startup Guide—a series of guidebooks designed to assist entrepreneurs in different cities around the world.