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.
What Are Fringe Benefits?
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.
How Do Fringe Benefits Work?
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.
Fringe Benefits Examples
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:
Required Fringe Benefits
- Social security and Medicare tax: These payroll taxes fund the social security program, which provides millions of Americans with retirement, disability, and survivorship benefits—as well as the Medicare program, the federal health insurance program for people 65 and over in the U.S.
- Workers compensation: This is insurance paid for by an employer that provides employees who are injured in the course of doing their job with wage replacement and medical benefits. Note that workers compensation requirements vary by state, industry, size, and structure of your business.
- Unemployment insurance: Employers pay taxes to the Department of Labor, which in turn provide wages, job training, and career guidance to workers who become unemployed through no fault of their own.
- Health insurance: Under the employer mandate, businesses that employ more than 50 full-time employees are required to provide health insurance to their workers. Note that this mandate doesn’t apply to many small businesses, as they don’t meet the employee threshold.
- COBRA Insurance: Otherwise known as the Consolidated Omnibus Budget Reconciliation Act, employers pay premiums so that employees who lose their job through no fault of their own can still receive health care benefits until they find other work.
- Family and medical leave: Businesses with over 50 employees must provide employees who have worked at the company over a year with up to 12 weeks of job-protected, unpaid leave for family or medical reasons. Again, this might not apply to your small business, depending on its size.
- Time off to perform civic duties: Employers must provide job-protected, unpaid time off to allow employees to perform their civic duties, including serving on a jury, and performing military service. In addition, 30 states provide employees with time off to vote during elections.
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.
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:
- Paid vacation
- Use of a company vehicle
- Relocation or coverage of moving expenses
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.
Non-Taxable Fringe Benefits
So, what are some fringe benefits examples that are non-taxable? Here’s what’s included on the IRS list:
- 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 conditions benefits
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.
Advantages of Fringe Benefits
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.
- Employee engagement: A study found that 80% of employees who like their benefits package also say they identify strongly with their company’s vision and values, as opposed to 40% of employees who don’t like their current benefits package. Engaged employees will work harder, faster, and smarter to achieve your business goals, and they do so because they feel their contributions are valued. According to Gallup, businesses with engaged workforces are 22% more profitable than those staffed with disgruntled workers.
- Employee wellness: American businesses lose billions of dollars annually due to employee illness. Investing in comprehensive health care, vision, and dental programs, along with things like gym discounts and employee assistance programs can keep your employees healthy and working. Plus, healthy employees are more productive and keep insurance premiums down.
- Employee retention: To hold on to employees, you need to make them feel that you are as invested in them as they are in you, and good fringe benefits convey that message. A Randstad survey revealed that 55% of employees left a job because they found better benefits elsewhere. Conversely, 71% of employees with good benefits feel loyal to their employer.
- Recruitment: If workers are deciding between multiple offers with similar salaries, benefits tend to be the determining factor in deciding where to go. It’s important you understand the benefits packages of your competitors so that you can offer a competitive option.
- Public perception: Businesses that treat their employees well are often recognized for their efforts in “best places to work” articles and on websites like Glassdoor and LinkedIn. Not only does this serve as a great recruitment tool to find employees, but it can also make you more attractive to customers who want to do business with companies they perceive to be benevolent.
How to Get Fringe Benefits for Your 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:
- Professional employer organization (PEO): PEOs are external organizations that co-employ a company’s worksite employees and oversee human resources tasks like payroll, compliance, and benefits. Because professional employer organizations group co-employees from all their client companies, they can secure benefits packages and rates typically reserved for large corporations. A PEO arrangement is ideal for midsize businesses that want to offer comprehensive benefits. The cost varies, but prices typically start at $100 per employee per month.
- HR software: An employer can use HR software to secure various benefits, including health, dental, and vision insurance. This solution is perfect for a small but growing business that needs to start systematizing HR. The cost of HR software starts at around $20 per user per month.
- Payroll software: Payroll software is like a simpler version of HR software. These programs can manage payroll and ensure it is compliant and reliable. Most payroll software platforms also offer workers compensation insurance. This bare-bones solution is good for business with very few employees. Prices start at under $10 per month per user.
- Small Business Health Options Program (SHOP) Exchange: The SHOP Exchange was set up as part of the Affordable Care Act to create an online marketplace with information about various health insurance providers. Some states run their own SHOP Exchange, while others are run by the federal government. Small business owners can use the SHOP Exchange to find group coverage for their employees. Businesses with under 25 employees are eligible for a 50% tax credit.
- Insurance broker: Working with a licensed insurance broker can be more expensive than shopping for benefits on your own, but it will also likely save you time and effort. Insurance brokers can help you land the best plan for your business, assist with paperwork and compliance, and help with implementation and renewals. This being said, for many small businesses, it might be best to try and secure benefits on your own and hire an insurance broker only to assist you with the parts you find confusing.
- Contact health insurance providers directly: If you know exactly what you are looking for in terms of health insurance, you may be able to save some money by contacting health insurance providers directly. Note that some health insurance providers will only work through a broker.
The Bottom Line
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.
- IRS.gov “Taxable Fringe Benefit Guide“
- IRS.gov “Publication 15-B, Employer’s Tax Guide to Fringe Benefits“
- HR Tech Weekly. “Earn Employee Loyalty through Benefits Technology“
- Gallup. “How Employee Engagement Drives Growth“
- PRNewswire. “The Benefits of Benefits: Why Employers Can’t Afford Inadequate Workplace Perks“
- SHRM. “Benefits Can Boost Employee Loyalty“
- HRDive. “Survey: ‘Work Perks’ Are Gaining on Traditional Benefits“