Fringe benefits are simply another form of compensation. Employers do not pay them in the form of wages, yet they play a meaningful role in how employees experience the value of their work.
These benefits are especially useful when you are trying to attract and retain top talent. In most cases, any fringe benefit you provide counts as taxable income unless it qualifies for an exclusion under federal tax rules.
Recognizing what counts as a fringe benefit
A fringe benefit can take many forms. It might be property, cash or a cash equivalent. It could also be something less tangible, such as access to a company vehicle, the ability to work flexible hours or discounts and savings opportunities.
When these benefits are taxable, such as bonuses or reimbursements for job-related expenses, employers must include them as income on the employee’s W-2. They are also subject to the usual withholding requirements.
The IRS outlines these rules in Publication 15B, which serves as a detailed employer guide to fringe benefits.
Understanding taxable fringe benefits
Employers must treat some benefits as taxable income. Employers must treat educational reimbursements not tied to job performance or that exceed IRS limits as taxable income.
Items that would normally qualify as working condition benefits can become taxable if they are used for personal purposes, as in the case of an employer-provided mobile phone.
The federal government also taxes unemployment insurance, although states have their own rules on whether they tax that income. Depending on the situation, fringe benefits may be taxed at the employee’s regular income tax rate.
You can also choose to withhold a flat supplemental wage rate of 22% when calculating the taxes owed on these benefits. If an employee receives more than $1 million in supplemental wages within a single year, the supplemental rate increases to 37%.
Most fringe benefits are included in gross income and are subject to standard employment taxes, including the employer and employee portions of Social Security and Medicare.
Recognizing tax-free fringe benefits
Not all fringe benefits are taxable. Many common offerings are fully or partially tax-free when administered correctly. These include various forms of health insurance, accident and disability coverage, health savings accounts, dependent care benefits, educational assistance programs and group term life insurance up to certain limits.
Qualified employee benefit plans — such as profit-sharing plans, stock bonus plans, money purchase plans and employee stock options — also fall within this category.
Other excluded benefits range from lodging provided on business premises to achievement awards, parking or commuting assistance, employee discounts, supplemental unemployment benefits and de minimis benefits that carry only minimal value.
Cafeteria plans allow employees to choose between cash and qualified benefits, and employers often structure them to maximize tax advantages.
Working condition benefits, medical and dependent care spending accounts, employer-provided athletic facilities used primarily by employees, retirement planning services, adoption assistance, personal use of business frequent flyer miles and certain moving expense reimbursements can also be excluded from taxable income when they meet IRS requirements.
Shaping a strategy around employee benefits
Fringe benefits play a meaningful role in an employee’s total compensation package and can significantly influence how they perceive the overall value of working for your company.
Benefits can and should be tailored to fit your company’s culture, workforce and the type of environment you want to create. A sustainable balance that supports financial, physical and mental wellness often leads to higher loyalty, stronger morale and a more engaged workplace.
Building a competitive and compliant program
Creating a competitive benefits package takes thoughtful planning. Many employers choose to work with a benefits consultant to develop a package that attracts and retains strong talent, manages costs, accounts for tax considerations and meets compliance requirements.
With the right structure in place, employee benefits become an asset that strengthens your organization from within.
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