Fringe benefits are fairly common, but you probably only think of them as benefits. These often include health insurance, tuition assistance, life insurance, and even employee discounts.
Simply put, fringe benefits are what you provide to your employees that add value to what you’re paying your employee.
The IRS also considers these benefits to be tax-free which means that the money for these is not taxed like your regular income.
At this point, you’re probably beginning to make a list of benefits you should offer your employees, but first, let’s discuss what they are, benefits you may currently be offering, as well as deciding whether or not the benefits need to be taxed.
What Are Fringe Benefits?
Fringe benefits are basically employee benefits. They are meant to be another form of pay that isn’t actually money and still acts as an incentive for your employees. As an example, if your employees travel, you may consider offering meals per diem which is essentially a meal allowance.
Many fringe benefits are tax-free while others demand tax from the IRS, so as an employer, you need to know which is which.
Here is a short list of benefits that you can think about as you consider what to add to what you might be willing to offer.
- Achievement awards with varying amounts. These can be in the form of gift cards that can be used for a variety of things like travel, food, toys, and even Amazon.
- Employee discounts are always appreciated, especially in the world of retail and services. If you can offer a discounted membership or discounts on purchased products, your associates will enjoy knowing that they can get a deal on something they would buy anyway.
- Insurance for medical, dental, and disability are also regular insurance benefits that most people expect. Plans for all of these will vary by provider and company, so you’ll have to see what will give you what you’re looking for.
- Tuition assistance is helpful for individuals that want to further themselves through education. With student loans reaching all-time highs, this is a benefit that can be very attractive to potential employees.
- Life insurance for employees, as well as their spouses, can also be benefits that attract and retain employees. No one likes to think about the possibility of dying, but the reality is that you never know when it could happen. This gives peace of mind.
- Health savings accounts are also wonderful in helping to offset medical expenses. Employees appreciate having one because it helps pay for things like glasses or high-cost medication.
- Paid vacation is always a huge plus, so the more you’re willing to offer is going to be better for your potential employees.
- Sick leave or personal leave are also big perks, especially to people that have families. They are well aware that their kids will get sick because that’s what kids do, and having that leave to fall back on is something that they will appreciate.
There are also other benefits that are sometimes called fringe benefits, but they are most definitely taxable. Examples of these types of benefits include things like mileage reimbursement or company cars.
If you’re not sure about whether or not the benefits you’re considering are taxable, reference the IRS to make sure what needs to be included or excluded in taxes.
What Are You Currently Offering?
Before reading this article, you may not have realized that you may already be offering fringe benefits. That free coffee that you provide every morning or buffet you provide to employees that work over time are both what you could also consider fringe benefits.
Even if you’re not currently offering these little perks, employees will appreciate having these things available. There are reports and studies that qualitatively state benefits like these can actually improve employee productivity.
Although these benefits are much appreciated, you will have to be prepared to include some of these things on your employee’s W2 when you sent them out come tax time. If you don’t want them used for personal purposes so as to not have to worry about adding taxable income to your employee’s wages, then you will need to make sure that is in all of your employee handbooks.
Mandatory Employee Benefits Required by Law
There are certain benefits that are required by law for every employer to offer to their employees. Some of them, you might not consider benefits, but the truth of the matter is that they are when it comes down to it.
These mandatory benefits that are required by law are also not taxable if they resemble a possible form of payment. They include COBRA, Family and Medical Leave Act, overtime, minimum wage, disability benefits, unemployment, and workers’ comp.
COBRA is essentially providing medical information in the event that medical insurance is not a part of the employment package. Family and Medical Leave Act ensures that you don’t lose your job in the event of a family emergency or other event like pregnancy.
Overtime, on the other hand, does not have to be offered, but if it is offered, then employees must be paid accordingly. Workers’ Compensation is provided in the event of an injury on the job that renders an employee unable to work.
How to Know if Benefits are Taxable
To figure out what needs to be taxed, you’ll have to go through and keep track of everything that could maybe be considered a fringe benefit. You’ll need to make sure you know how much these perks cost, and you’ll have to know how often these benefits are provided to your employees.
To help you begin to categorize the perks that are offered, you’ll need to know where they fall. There are three basic categories – always tax-free, sometimes tax-free, and never tax-free.
Tax-free benefits will not incur income taxes, Medicare taxes, or Social Security taxes. These benefits include things like health insurance, dental and vision insurance, medical expense reimbursements, moving expense reimbursements, adoption assistance, meals provided during business hours, and several other things.
Certain benefits, though, are only taxed sometimes and not all the time. Benefits like these include employee discounts, retirement plan contributions, day care assistance, education assistance, and group term life insurance. There are plenty of other perks that fall into this category due to limitations that are placed by the IRS, so you’ll need to check and see what is and is not expected to incur taxes and to what limit.
Many companies offer benefits that will never be tax-free, so you’ll want to make sure you’re up to speed on these. Examples include things like laptops or cell phones that employees can use for both personal and professional reasons that were purchased by the company. Chances are that these need to be reported on W2s.
Understanding Health Insurance as a Benefit
As per the Patient Protection and Affordable Care Act, employers must provide health insurance to their employees if there are more than fifty people on the payroll. As a result, employers do present group medical insurance plans as options for health care insurance.
Health insurance options often present with either HMO plans or PPO plans. They both have different specific choices regarding deductibles or co-pays, and as an employer, you will have to decide what you will be willing to offer.
Understand that all employers will be required to provide health insurance for workers that work for more than 30 hours per week. With that in mind, most part-time workers are not covered by employee provided healthcare. Some do, though, so you’ll have to figure out whether or not you’re going to want to offer benefits like that.
Deciding on Benefits to Offer
Unless your business is a brand-new company, then chances are that you already offer benefits and don’t even realize that you’re doing it.
Make sure you document all of the different benefits you offer or think you offer. Double check with your accountant to ensure you’re compliant with all IRS regulations and you’ll be ready to go.