Employee Fringe Benefits: What Are They and How Do They Work?
As an employee, you’ve probably heard about fringe benefits when you’re starting a new job, when you’re being promoted, or when filing taxes. This article explores what fringe benefits are and how they work.
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What Are Fringe Benefits?
For employees, fringe benefits are benefits given in addition to the normal salary. While the name may suggest that fringe benefits are uncommon, they are actually what most people call standard employee benefits.
The fringe benefits definition can also be looked at in another way. According to the IRS, “A fringe benefit is a form of payment for the performance of services.” The IRS stipulates that the person who performs services for the employer doesn’t necessarily have to be an employee, and can be a partner, director, or independent contractor. This means that you can get employee fringe benefits even when you are self-employed.
Additionally, the IRS highlights areas employers should consider for fringe benefit purposes.
- A person who agrees not to perform services, such as when there is a covenant not to compete, should be treated as if they are performing services.
- A person may be considered the recipient of a fringe benefit even if the use of the benefit is extended to the employee’s family members.
Types of Fringe Benefits
There are various types of fringe benefits depending on the employer, but the purpose of most of them is to acquire, compensate, motivate, and retain top talent. The following are some of the common fringe benefits examples:
- Employment services benefits: These include life insurance coverage, paid holidays, paid sick leave, overtime pay, meals, educational tuition, and use of work vehicles.
- Health protection benefits: Benefits under this category include health and accident insurance, disability insurance, maternity benefits, and sick benefits.
- No-additional-cost services: These are services provided to the employees tax-free. They are typically offered to employees free of charge or at a reduced rate and include entertainment facilities, transportation tickets, and recreation facilities.
- Old age and retirement benefits: These benefits include retirement plans and medical benefits for retired employees.
Are Fringe Benefits Taxable?
The IRS does exempt some fringe benefits from taxation, but otherwise, they are taxable. The value of a fringe benefit is subject to three categories of employment taxes: income tax withholding, Social Security and Medicare, and Federal Unemployment tax.
It’s important to know which fringe benefits are exempt so that you know how to file your taxes. The IRS lists the following fringe benefits as exempt from taxes.
- Accidental and health benefits: Exempt from income tax, Social Security and Medicare taxes, and Federal Unemployment tax.
- Health savings accounts (HSAs): Qualified individuals are exempt from all three categories up to certain HSA contribution limits.
- Group-term life insurance coverage: Exempt from income tax withholding and Federal Unemployment tax; exempt up to $50,000 of coverage for Social Security and Medicare, with special rules applying to former employees.
- Fitness facilities: Exempt from all three categories if the facility is operated by the employer on premises belonging to or leased by the employer and use of the facility throughout the year is mainly by employees, their spouses and their dependent children.
- Education assistance: Exempt from all three categories up to $5,250 of benefits each year.
- Tuition reduction: Exempt from all three categories if tuition is for undergraduate education. Graduate education tuition is exempt if the employee performs teaching or research activities.
- Achievement awards: Exempt from all three categories up to $1,600 for qualified awards. Non-qualified awards are exempt up to $400.
- De minimis (minimal) benefits: Exempt from all three categories.
- Meals: Exempt from all three categories if de minimis or if furnished on the business premises.
- Lodging on your business premises: Exempt from all three categories if lodging is offered for your convenience and as an employment condition.
- Retirement plan contributions: Exempt from all three categories.
- No-additional cost services: Exempt from all three categories.
- Dependent assistance: Exempt from all three categories up to $5,000 or up to $2,500 for married employees filing a separate return.
- Adoption assistance: Exempt from income tax withholding but taxed for both Social Security and Medicare and Federal Unemployment tax.
- Working condition benefits: Exempt from all three categories.
- Transportation benefits: Exempt from all three categories if under de minimis benefits. Also exempt from all three categories up to $270 for qualified parking or rides in a commuter highway vehicle and/or transit passes.
- Employee discounts: Exempt from all three categories up to certain limits.
- Employee stock options: Exempt from all three categories within the limits set within the IRS Publication 15-B.
- Employer-provided cell phones: Exempt from all three categories if provided mainly for noncompensatory business purposes.
Classifying an Employee as a “Non-Employee” for Specific Fringe Benefits
Several fringe benefits paid on behalf of certain employees are subject to special rules. In such cases, a person who is normally classified as an employee may be treated like a non-employee. They may be taxed on benefits that are normally tax-exempt, including health and accident insurance plans, life insurance coverage, meals, and achievement awards.
The following employees may be treated as non-employees for fringe benefits as stipulated by the IRS in Publication 15-B:
- An employee owning 2% or more of an S-Corporation stock.
- A highly compensated employee who is one of the following:
- An officer;
- A shareholder owning over 5% of voting power;
- A highly-compensated employee based on the facts and circumstances;
- A spouse or dependent of a non-employee.
- A key employee who is:
- An officer with an annual pay of $185,000;
- Either an employee owning over 5% of the business or an employee owning over 1% of the business and whose annual pay exceeds $150,000.
Choosing the Right Fringe Benefits
A significant part of your total compensation will likely be in the form of benefits. To get the most out of the benefits, you’ll need to choose the ones that best fit your needs. If you’re considering various employers you may also have to compare different employee benefits.
When negotiating benefits with your employer, you should keep several things in mind.
- Think about your long-term goals such as retirement.
- Consider benefits you can’t necessarily afford with your salary in case you can’t get a raise.
- Determine if anyone else will benefit from your benefits. For example, if you have a family that could benefit from paid vacations.
- Think about the tax implications of your fringe benefits.
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