Fringe benefits are those extras that are often offered by companies as a way to boost employee satisfaction and loyalty, helping to retain good talent. They also help to increase employee health, which reduces workplace illness and injuries. They may be required by law or granted at an employer’s discretion. They can include health insurance, paid vacation, meal subsidization, commuter benefits, etc. In most cases, fringe benefits aren’t taxable as long as they don’t exceed the limits on what you can exclude. However, some fringe benefits are taxable as ordinary income, such as the value of certain employee meals and air transportation.
These taxable fringe benefits are subject to employment taxes and must be reported on Form W-2, Wage, and Tax Statement. You can withhold and deposit these taxes or use special rules to report and pay these taxes on your tax return. For most fringe benefits, you must use the general valuation rule to determine the value of the benefit. The FMV is the amount an employee would have to pay a third party in an arm’s-length transaction to purchase or lease the benefit. You can exclude the value of some qualified transportation benefits from your employee’s wages if you provide them under a compensation reduction agreement. The value of the compensation reduction can’t exceed the monthly limits for transportation benefits described in Exclusion from wages later.
You can also exclude the value of certain de minimis fringe benefits from your employee’s income, such as an employer-provided cell phone. These de minimis benefits are excluded from your employee’s income if they meet the working condition fringe benefits requirements and are provided to the employee for non-compensatory business purposes.
Examples of Fringe Benefits
Fringe benefit examples include health insurance, retirement plans, and family and medical leave. Some fringe benefits are considered taxable, while others have tax-advantaged status. A fringe benefit is an employer’s payment to an employee for services provided in exchange for an employment agreement. This can be any type of payment, including property, services, cash, or some other cash equivalent. It can also include the use of company cars or other company-owned equipment. It may be offered to all employees or only to certain types of employees, such as executives and senior managers.
Generally, a fringe benefit is not required by law, but many employers choose to provide them anyway. These extra perks can be a great way to boost employee satisfaction and build loyalty among your workers, making your business a more attractive place for new hires.
- One of the most popular examples of fringe benefits is flexible working arrangements, such as remote work or hybrid work. This helps employees control their schedules and balance their work and home lives, reducing stress and increasing productivity.
- Another common fringe benefit is paid time off. This allows employees to take off work when they need to care for a loved one or attend to their own health issues.
- Other common fringe benefits include 401(k)s, tuition assistance, EAPs, and learning and development stipends. This kind of perk is especially valuable in competitive industries where it can help attract top talent and encourage high performance.
Are Fringe Benefits Deducted from Paycheck?
Traditionally, fringe benefits were considered an umbrella term for various unique perks that an employer gave employees outside of their standard health insurance offerings. These days, though, most businesses offer a mix of fringe and core benefits. For example, some employers may provide their workers free or discounted commuter bus service. Others might provide childcare assistance or gym memberships for their employees. While fringe benefits are often a big draw for prospective employees, it is important to note that they can also be taxed at the same time. These benefits are generally taxable at fair market value, meaning they will need to be reported on the employee’s W-2.
In addition, some fringe benefits may be exempt from taxable income if they are provided to certain types of employees. For instance, educational assistance is exempt up to $5,250 annually, while dependent care assistance exemptions are available up to $5,000 or $2,500 for a spouse filing a separate return. Some fringe benefits are now not deductible by employees because of the Tax Cuts and Jobs Act of 2017. For example, reimbursement for bicycle commuting is no longer a deductible expense, and moving expenses are no longer tax-free. Consult with a professional tax advisor or invest in tax software to make sure that your fringe benefits are recorded properly.