In today’s world, fringe benefits are important if you want to secure and retain the best employees. Here, we explain what fringe benefits are and provide some common examples. We also explain the difference between taxable and non-taxable benefits.
As a business owner, you no doubt realize that the job market is very competitive. It evolves and changes. Sometimes, the job market favors prospective employees, while at other times it favors business owners like you.
When it’s a market that favors the former, you need to be ready to compete for the best candidates you can find. You also want to be able to keep your best workers with your business for as long as possible, which means making sure they’re happy and well taken care of.
It’s difficult for businesses to win the battle for the best staff based on salary alone, however. To hire the most skilled and desirable employees, employers must often provide other incentives. That’s why many companies try to offer good fringe benefits.
What are fringe benefits?
The IRS defines fringe benefits as “a form of pay (including property, services, cash or cash equivalent) in addition to stated pay for the performance of services.” In other words, fringe benefits are anything you provide to employees on top of their salary or wages.
Not surprisingly, the list of potential fringe benefits you could be offering your staff is quite extensive. It includes:
- Types of insurance, such as vision, medical, dental, and life
- An auto allowance or access to a company car
- The option to participate in a 401(k) savings account with matching contributions
- Paid vacation days
- Paid holidays
- Tuition assistance or reimbursement
- Student loan assistance or options for refinancing student loans
- Employee discounts for products or services
- Stock options
- Paid sick days
To be very clear, this is just a partial list of fringe benefits you could offer your staff.
If you want to get creative, there are a lot of other ways you can motivate and show gratitude to your workforce. For example, company swag is very popular in some industries! In others, a fun employee break room is considered a real draw.
Are fringe benefits taxable?
Yes, unless it’s on the IRS’s list of exclusions. Things like bonuses and paid personal time off, which are included in the employee’s W-2, are examples of fringe benefits that the IRS considers taxable.
Small gift cards and achievement awards, on the other hand, are not considered taxable.
Examples of taxable fringe benefits
As you contemplate building a fringe benefits package for your employees, keep in mind that some of these benefits are taxable. Additionally, some are nontaxable, and others are partially nontaxable.
For most people, it’s the taxable fringe benefits that draw the most concern. If fringe benefits are taxable, you need to make sure the value of those benefits is included in the gross wages of the recipients. It would then be up to the employees to make sure they pay any residual taxes that might come from their taxable benefits.
In most cases, employers must be clear if they’re deducting the fringe benefits themselves or if the employee can.
For example, employers typically reimburse employees for business mileage incurred while operating the vehicle for work purposes. That amount received by employees isn’t taxable but can be deducted by the employer.
Liability insurance is tax deductible and often necessary in most states. However, other forms of insurance, such as comprehensive or collision, are also deductible, even though they’re not necessary.
Here is a list of fringe benefits that the IRS defines as taxable:
- Paid personal time off
- Use of company vehicle for personal activities
- Mileage expenses beyond the allowable limit
As the employer, you can choose between adding the value of the fringe benefits to the employee’s regular wages, or you can do a tax withholding on the value of the benefits at a statutory rate of 22%.
Nontaxable and partially nontaxable fringe benefits
Much of the remaining benefits from the first list are non-taxable benefits. However, it’s worth noting that the nontaxable portion is capped on several of what the IRS classifies as partially nontaxable fringe benefits. Workers should not see the value of nontaxable fringe benefits on their W-2s at the end of the year.
Section 125 Cafeteria Plan
If you are interested in getting extra tax considerations for providing your employees with a benefits package, you could elect to offer a Section 125 Cafeteria Plan. A cafeteria plan allows your staff to directly receive the money they can use to purchase pre-tax benefits like health insurance. As an alternative, they could elect to simply have that portion added to their salaries with full taxation.
As the employer, you would benefit from tax savings since the contributions you make to pay the associated benefits are tax-exempt.
Benefits that employees need
If you have budget limitations, you will need to select affordable fringe benefits. You will also want to focus on offering benefits that are important to your employees.
At a bare minimum, it’s highly recommended that your business offers health insurance, such as medical and dental. Due to the provisions in the Affordable Care Act (ACA), all Americans are required to carry health insurance.
As an employer, you can ease the burden of this requirement on your personnel by offering a group insurance plan. If you don’t offer health insurance, you might find it difficult to recruit quality employees.
Another benefit that people find essential is the 401(k) savings option. A 401(k) account allows your employees to save money on a tax-deferred basis. At the same time, you can make matching contributions on their behalf. The fact you would be making a matching contribution is quite an incentive for those who are serious about planning and saving for the future.
While employees are saving in their 401(k) accounts, they can invest said money in a wide range of investment options. The list of potential investment options includes, but is not limited to:
- Mutual funds
- Precious metals
- Some forms of real estate
Save time and money with integrated payroll
This might seem like a lot, but many benefits can be streamlined and automated with the right software. For example, TimeForge makes it a breeze to track paid time off (PTO) and other leave policies.
And did you know that TimeForge is integrated with many top payroll providers? Not only that, but our time and attendance software tracks vacation, holiday pay, sick days, and any other PTO or leave type you want to define. TimeForge allows employees to easily request time off and change their availability, and the system tracks everything for you to ensure your people are getting paid the right amounts, every time.