Fringe benefits are on-the-job benefits that come in a form other than money. Fringe benefits, sometimes called “perks,” are offered by some employers to some employees, usually for the purpose of enticing highly qualified individuals to accept or maintain employment at their companies. This type of non-wage benefit is something counted as taxable income, depending on the perk. To explore this concept, consider the following fringe benefits definition.
Definition of Fringe Benefits
- Benefits given to an employee in addition to his wages or salary.
1945-1950 American business practice
What are Fringe Benefits
Fringe benefits are a type of compensation provided to an employee outside of his normal wage or salary. Many years ago, employers began to understand that potential employees give great consideration to the wage or salary offered. In an effort to tempt a qualified individual to accept employment with the company, rather than going to a competing company, many employers began offering non-wage compensation in addition to the actual salary offered.
These fringe benefits, often in the form of employer-paid life and health insurance policies, retirement benefits, and other things that might aid in the recruitment of top quality, skilled workers. In fact, fringe benefits play a large role in keeping workers motivated to do quality work and increase production. Some fringe benefits may be classified as taxable income by the IRS.
Types of Fringe Benefit
Many employers offer employees an array of fringe benefits in addition to their salaries. Also considered “job-perks,” these benefits cost employers, who pay for such perks, and are therefore considered a portion of the employees’ salaries on their books, even if the benefits are not in the form of money, such as bonuses. There are many types of fringe benefit, and which types are offered often depends on the type of employer, and value of the employee’s position.
Are Fringe Benefits Taxable
A person applying for, or accepting, a job that provides certain perks may ask himself “are fringe benefits taxable?” The answer depends on the type of fringe benefit offered, and the tax laws at the time. Many job perks are not required to be added into the employee’s taxable income at tax time, others are. The IRS provides a publication on employee fringe benefits, which is targeted at employers, though employees may benefit from it as well.
Non-Taxable Fringe Benefits
There are many types of non-taxable fringe benefits that may be offered to employees without increasing their tax burden. Some of the most common tax-free types of fringe benefit provided to employees by private and public businesses include:
Insurance coverage is perhaps the most common fringe benefit provided to employees, though the structure of how insurance is paid for has changed in recent years. Insurance coverage may include employer-paid life insurance, health insurance, and short or long-term disability insurance.
When an insurance coverage fringe benefit is offered, the employer most commonly shares the cost of premiums at a certain percentage, thus reducing the amount for which the employee is responsible. Of course, insurance coverage may be offered entirely at the employer’s expense. Some employers also offer health savings accounts to their employees, often matching the employees’ contributions to the plan.
Childcare assistance is one fringe benefit that comes in handy for many families, and may increase attendance at work, as well as productivity. This is because parents have additional responsibilities in ensuring their children are well cared-for while they are at work.
Many large employers are offering on-site childcare, either free of charge, or at a discounted price. This allows parents to concentrate on their work, knowing their children are close by, and being cared for. Some smaller employers, while unable to maintain an on-site daycare facility, offer a cost-share for daycare.
Some employers make it a priority to ensure their employees have access to gyms or fitness centers in order to promote a healthy lifestyle, which in turn increases attendance and productivity. Some companies maintain on-site fitness centers, where employees can work out on breaks or other off times, while others offer paid gym memberships, or memberships at a discounted price.
Education assistance in the form of tuition reimbursement, or other assistance in adding to an employee’s education or skillset, is one of the more popular types of fringe benefit offered by employers. Helping an employee gain new job-related skills or knowledge helps the company, as the employee is then able to work at a different level in his current position, or may become able to advance into new areas of the business.
Education assistance perks often mean the employer will work around the employee’s school schedule, and may pay all or part of his tuition, and may pay for books and other educational expenses. In many cases, the employer requires a commitment from the employee to remain employed at the company for a minimum period of time after successful completion of the education. This prevents individuals from taking advantage of this fringe benefit, then going to work someplace else.
Qualified Employee Benefits
Employers may offer certain employees, referred to as “qualified employees,” benefits in the form of profit sharing plans, stock bonus plans or stock options, and money purchase plans. Qualified employee benefits are generally made available only to employees who have worked for the employer for a specified minimum time period. This time period is often set at one year, but may be as long as five years.
In addition to offering incentives to employees who meet the minimum time of employment, the employer may reward employees for certain levels of achievement by giving them a percentage of the company’s profit over a certain amount, or allowing them to purchase stock options at a discounted rate.
When an employer hires an employee who is then expected to move from his current home to another city, state, or even country, it may provide reimbursement for the employee’s moving expenses. This is usually only seen in larger companies, and with high-level employees. This benefit is only non-taxable if the employee moves farther than 50 miles from his current residence.
Michael has worked for Star Mortgage Company for many years, working his way up through the corporate structure. Michael’s hard work is recognized when he is offered a promotion to the position of national sales manager, though accepting the position would mean a 2,000 mile transfer to the corporate office. Michael accepts the promotion, and begins arranging for the move.
Michael incurs expenses for travel to find a home in the corporate hometown, then arranges for a professional moving company to assist with the move. The movers pack the bulk of his family’s items, load them into the large trucks, then transport them to the family’s new home. The fee charged by the moving company exceeds $4,000, but it is a necessary expense.
Other moving expenses include the purchase of boxes and packing wrap for the items packed by the family themselves, and travel expenses for their final trip to the new home. If the company has agreed to pay Michael’s moving expenses, he may submit receipts and a statement of his expenses, and when he is reimbursed, those expenses would not be considered taxable income. This is because Michael moved further than the IRS’ required distance of 50 miles.
Taxable Fringe Benefits
According to the IRS, any fringe benefit provided by an employer may be taxable, unless it is specifically excluded from taxation. The IRS provides specific information regarding fringe benefits, including which are considered taxable at this link. Some of the fringe benefits that may be taxable under certain situations often include payment of, or reimbursement for, things in an excessive amount. These include:
- Excessive Moving Expenses – if an employer reimburses or pays for an employee’s moving expenses, when the move was less than 50 miles from the employee’s current residence, may be taxed.
- Excessive Mileage Reimbursement – employer reimbursement for business-related driving of the employee’s private vehicle may be taxable if the total exceeds the IRS’ standard mileage rate.
- Expense Reimbursement – expense amounts reimbursed to an employee with the employee’s sufficient accounting, may be taxable.
- Clothing Reimbursement – employer reimbursement for clothing that is not strictly for work on the job, but which is suitable for everyday street wear, is taxable.
- Working Condition Benefits – any equipment or supplies purchased by an employee that is used for work purposes exclusively, it is tax free. If the item is used for any personal purpose at all, it is taxable.
- Excessive Education Expenses – Educational assistance for education that is not job-related, or which the amount exceeds the IRS allowable amount is taxable.
- Awards and Prizes – Employee awards and prizes that are given in cash, are taxable, unless they are given to charity in the employee’s name. Valuable non-cash awards may also be taxable, unless the value is minimal.
Example of Working Condition Benefit:
John owns a private computer technical support company. He leases a new high-end laptop computer, and gives it to his technician Greg so he can work from home, or wherever he is when customers call. As long as Greg only uses the laptop for work purposes, he does not have to pay taxes for it. If he uses the laptop 50% of the time for personal use, he would be required to pay taxes on 50% of the value of the laptop.
The most common working condition fringe benefit is the use of a company car. If the employee uses the car for personal purposes at any time, it must be included in his income and taxed.
Retirement Plan Contributions
Retirement plan contributions are an important and popular fringe benefit offered to employees. While some companies match the employee’s contribution, made directly from his paycheck, others contribute a specified amount to the plan without requiring the employee to do so himself. Most people consider employer retirement plans to be a vital tool for planning their later lives.
The most commonly seen employer-offered retirement plan today is the 401(k), to which the employer matches the employee’s contribution at 50%. This means that, for an employee who contributes $500 of his paycheck each month to his 401(k) account, the employer contributes $250 each month.
Fringe Benefit Statement
At the beginning of the year, employers should provide their employees with a statement of both their regular income and any fringe benefits received for the previous year. In this fringe benefit statement, some employers list employer-paid benefits, as well as employee-paid benefits or expenses. At tax time, the employee can refer to the fringe benefit statement in addition to his W2 form, or take the forms to a qualified tax professional.
Related Legal Terms and Issues
- Excessive – Exceeding what is usual, proper, necessary, or normal.
- Regular Wages or Regular Salary – The regular, fixed wage or salary that a person earns for performing his job tasks during a specified period of time, such as $20 per hour, or $2,000 per month.
- Reimbursement – Compensation paid for money already spent, or for damages.
- Taxable Income – The amount of income that is subject to being taxed.
- Qualified Employee – An employee who meets the requirements specified by an employer to be eligible for certain employee or fringe benefits.