What Is Fringe Pay? Types of Fringe Benefits and How They Work

When discussing employee compensation, it’s common to mainly focus on salary. However, a critical component often overlooked is fringe benefits—those additional perks companies offer to attract, retain, and motivate employees.

Fringe pay, or fringe benefits, includes a variety of non-wage compensations provided to employees in addition to their normal wages or salaries. These benefits enrich the employee’s compensation package and offer various tax advantages for both the employer and the employee. 

This article explores fringe benefits in detail, examining how they work, their types, how they're calculated, and their tax implications.

Main Takeaways From This Article: 

• Fringe pay, commonly known as fringe benefits, is additional compensation offered by employers, including health insurance, retirement plans, and tuition assistance.
• These benefits not only enhance employee satisfaction and retention but also result in cost savings for employers.
• Fringe benefits can be either taxable or nontaxable, depending on numerous factors such as the type of benefit, coverage limit, and wage exclusions.
• The cost of employee achievement awards and accident and health benefits have tax implications and specific reporting requirements that employers must adhere to.
• Tools like Paystubsnow can optimize the recording and reporting of fringe benefits, further simplifying the management of these additional forms of compensation.

What Are Fringe Benefits?

Fringe benefits, also known as "employee benefits" or "perks," are various forms of non-wage compensation provided to employees in addition to their regular salaries or wages. While these benefits can encompass various services and coverages, income tax withholding (like federal income tax withholding) and employment taxes apply to them. 

Common examples of fringe benefits are health insurance, retirement plans, tuition assistance, and company cars.

In the United States, the legal framework governing fringe benefits is primarily administered by the Internal Revenue Service (IRS), along with specific guidelines from the Department of Labor (DOL). 

Here’s a brief overview of key regulations and acts that oversee fringe benefits:

• Internal Revenue Code (IRC): The IRC stipulates which benefits are considered taxable and nontaxable. For example, while health insurance premiums paid by an employer are typically tax-exempt for the employee, other benefits like personal use of a company car are taxable.
• Employee Retirement Income Security Act (ERISA): This act safeguards employee rights regarding employer-sponsored retirement plans and certain welfare benefit plans, encompassing some fringe benefits. ERISA mandates specific standards for plan administration, reporting, and participant disclosures.
• Affordable Care Act (ACA): The ACA plays a role in health-related fringe benefits. It mandates that employers of a certain size offer health insurance to their employees and outlines the minimum coverage standards these plans must meet.
• Americans With Disabilities Act (ADA) and Family and Medical Leave Act (FMLA): These laws don't directly regulate fringe benefits but have an impact. The ADA ensures that certain employer-provided benefits, like medical leave or disability accommodations, are non-discriminatory. Similarly, the FMLA guarantees eligible employees a leave of absence for medical reasons or to care for family members.

Compliance with these regulations is crucial for employers to avoid penalties and for employees to understand the full scope of their compensation package.

How Do Fringe Benefits Work?

Fringe benefits are perks on top of employers' salaries to attract and retain staff. Companies pay for these benefits, like health insurance or retirement plans. Employees get them tax-free (up to a limit) and feel more secure, boosting morale and productivity. 

Consider this example: A company wants to attract and retain top talent. To this end, it might create a package of fringe benefits, which are additional perks on top of the base salary. These can include health insurance, retirement plans, or even tuition assistance. 

Employees who receive these benefits don't just get amazing perks; they gain tangible advantages. Health insurance provides financial security in case of medical needs. Retirement plans help them save for the future. Tuition assistance allows them to pursue educational goals. It's like a treasure chest of benefits that enrich the employee's overall compensation package. 

The Importance of Fringe Benefits

Both employers and employees stand to benefit from fringe pay:

Enhancing Employee Satisfaction and Retention

Fringe benefits go beyond a paycheck and play a key role in employee satisfaction. Companies offer a comprehensive support system by addressing personal and professional needs, from healthcare security to educational opportunities and retirement planning. 

This, in turn, can lead to a happier, more engaged workforce with a stronger commitment to the company. Imagine employees feeling valued and secure, taking the lead with greater enthusiasm and satisfaction.

Cost Savings for Employers

Employers also benefit financially from offering fringe benefits. For instance, many fringe benefits are tax-deductible for the employer and tax-free for the employee, providing financial incentives to offer more extensive benefits packages. 

Additionally, by retaining a satisfied workforce, companies avoid the high costs associated with employee turnover, such as recruitment and training. It's an investment that pays off in the long run!

Types of Employee Fringe Benefits

Fringe benefits, which offer perks beyond standard wages, can be taxable or nontaxable. Here’s an overview of common types of fringe benefits.

Taxable Fringe Benefits

Taxable fringe benefits are perks on top of an employee's salary that the IRS considers extra income. These benefits can include cash bonuses, personal use of a company car, or prize winnings (except for some awards). The employee will owe taxes on the value of these perks. 

• Bonuses: Cash bonuses are a straightforward taxable benefit. They are considered additional income and taxed at the employee's regular income tax rate. 
• Personal Use of Company Car: When an employee uses a company vehicle for personal purposes, the value of that personal use is taxable. Employers typically value this benefit based on the miles driven for personal reasons or by using a standard IRS rate. 
• Awards and Prizes: Monetary awards and non-cash prizes like vacations or vehicles, unless given as recognition for service or safety achievements, are generally taxable. The value of non-cash prizes is determined by their fair market value. 
• Moving Expense Reimbursements: These are taxable to the employee unless they are specifically for a military move. The reasoning behind this is that the reimbursement is seen as additional income to cover moving costs, except in the case of military moves where relocation is a requirement. 
• Excess Mileage Allowances: Reimbursements above the IRS-approved mileage rate are taxable. This is because the IRS sets a standard mileage rate to account for the operational costs of using a personal vehicle for business. Reimbursements exceeding that rate are considered additional compensation to the employee. 
• Group Term Life Insurance: Coverage over $50,000 provided to an employee is taxable on the amount of premium attributable to the excess coverage. Group term life insurance premiums paid by employers are generally non-taxable up to a certain amount ($50,000). However, the employee is taxed on the premium cost for coverage exceeding that limit. 

Nontaxable Fringe Benefits

Nontaxable fringe benefits are perks like health insurance or educational assistance that the IRS excludes from an employee's gross income, saving them money on their taxes.

• Health Insurance: Employer-paid health insurance premiums for medical, dental, and vision coverage are generally nontaxable to the employee. This can significantly reduce your taxable income and save you money on taxes. 
• Educational Assistance: Up to $5,250 per year in educational assistance provided by the employer can be excluded from an employee's taxes, easing the financial burden of pursuing higher education. However, the program must meet IRS qualifications. 
• Dependent Care Assistance: Dependent care assistance is an essential type of nontaxable fringe benefit. This program provides significant tax advantages to employees who juggle work while ensuring adequate care for their dependents. The benefits from these programs remain untaxed up to certain limits—$5,000 for couples filing jointly or $2,500 for those filing separately.
• Employee Discounts: Discounts on products or services offered by the employer are typically nontaxable as long as they don't exceed fair market value and are available to most employees. This can be a great way to save money on things employees already purchase. 
• Retirement Planning Services: Retirement planning services provided by the employer, like access to financial advisors or online resources, are generally nontaxable. This benefit can help employees plan their financial future. 
• De Minimis Benefits: These are perks of minimal value that the IRS doesn't require employers to track for tax purposes. Examples include occasional free meals, snacks, or recreational activities. These small perks can help boost employee morale. 

Valuing and Calculating Fringe Benefits

Accurately valuing fringe benefits is crucial for both employers and employees. Employers need this information for proper tax reporting, while employees benefit from understanding the total value of their compensation package.

The method used to value a fringe benefit depends on the specific benefit. Some benefits, like health insurance premiums, have a clear dollar value associated with them. Others, like employee discounts or personal use of a company car, require more specific calculations.

• Fair Market Value (FMV): This is the price a willing buyer would pay a willing seller for the benefit in an open market. It's commonly used to value employee discounts or perks like gym memberships provided by the employer.
• Government Rates: The IRS publishes standard mileage rates for valuing the personal use of a company car. They also have specific guidelines for valuing other benefits like parking or meals provided by employers.
• Allocation: For some benefits, like using company equipment for personal use, employers may need to allocate a portion of the cost based on personal vs. business usage. 

Tax Implications and Reporting Requirements

The tax treatment of fringe benefits varies depending on the specific benefit. Here's a general overview:

• Taxable Benefits: The employee is taxed on the fair market value of the benefit. Employers must withhold income taxes and report the taxable amount on the employee's W-2 form.
• Nontaxable Benefits: The law specifically excludes these fringe benefits from the employee's taxable income. However, employers may still need to report any supplemental income on informational forms like Form 1099-NEC for non-employee recipients of certain benefits. 

IRS Requirements for Reporting Fringe Benefits

The IRS has specific requirements for reporting fringe benefits on payroll and tax documents. Here are some key points:

• W-2 Forms: Employers must report the total taxable value of all fringe benefits provided to an employee during the year in Box 12 (code DD) of the W-2 form.
• Form 1099-NEC: This form might be used to report certain fringe benefits that are nontaxable and provided to independent contractors or non-employees.
• Detailed Records: Employers are required to maintain detailed records of all fringe benefits provided to employees, including the type of benefit, its value, and how it was valued. These records are crucial for tax audits.

Enhance Benefits Management With Paystubsnow

Managing fringe benefits can be complex, especially for companies with large workforces or diverse benefit offerings. Paystubsnow offers a comprehensive payroll solution that can help:

• Automate Calculations: Paystubsnow can automate the calculation of fringe benefit values, ensuring accuracy and reducing the risk of errors.
• Streamline Reporting: The platform integrates seamlessly with tax forms, simplifying the reporting of fringe benefits to the IRS.
• Employee Transparency: Paystubsnow can provide employees with breakdowns of their fringe benefits on their paystubs, offering transparency and a detailed understanding of their compensation package.

By leveraging Paystubsnow, employers can simplify fringe benefit administration, ensure accurate tax reporting, and provide employees with a clear picture of their total fringe benefits package. Generate paystubs now!