What are fringe benefits?

The term “fringe benefits” might make them sound like they’re out of the ordinary, but fringe benefits are more commonly known simply as employee benefits—the extra monetary and non-monetary perks given to employees on top of their regular wages. Fringe benefits can range from freshly brewed coffee and snacks to indispensable safety nets like health insurance and retirement plans. 

In the modern workplace, compensation means more than just numbers on a paycheck. In addition to wages, employers also offer fringe benefits for employees. Fringe benefits are crucial for attracting top talent and improving employee retention. 

These additional benefits enhance the overall compensation package and provide financial security. Offering benefits such as health insurance, retirement plans, and paid time off can significantly boost job satisfaction and loyalty.

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13 Fringe benefits examples

Fringe benefits are additional compensations provided to employees outside their regular wages. Examples of fringe benefits include:

1. Health benefits:

• Health insurance
• Dental insurance
• Vision insurance
• Prescription drug coverage

2. Financial benefits:

• Bonuses
• Profit-sharing
• Stock options
• Employee stock purchase plans (ESPPs)
• Performance-based incentives

3. Commuting benefits:

• Transit passes 
• Parking
• Company-provided transportation

4. Time off benefits:

• Paid vacation time
• Paid sick leave
• Paid holidays
• Paid parental leave
• Bereavement leave
• Medical leave

5. Childcare and family benefits:

• On-site daycare
• Dependent care assistance
• Flexible spending accounts (FSAs)
• Adoption assistance

6. Insurance benefits:

• Life insurance
• Disability insurance
• Long-term care insurance 
• Pet insurance

7. Recognition and awards:

• Employee of the Month programs
• Service awards
• Recognition ceremonies

8. Retirement planning services:

• 401(k) plans
• Pension plans
• Roth IRAs

9. Educational assistance benefits:

• Tuition reimbursement
• Professional development opportunities
• Skill-building workshops

10. Wellness benefits:

• Gym memberships
• Wellness programs
• Fitness classes
• Health screenings

11. Flexible work arrangements:

• Remote work opportunities
• Flextime (flexible working hours)
• Compressed workweeks

12. Technology and equipment:

• Company-provided laptops or devices
• Cell phone reimbursement
• Reimbursement for home office setup

13. Community involvement:

• Paid volunteer time
• Community service initiatives

Are fringe benefits taxable?

There are two types of fringe benefits: taxable and non-taxable. The value of a fringe benefit is subject to a number of taxes, including federal income tax, Social Security tax, Medicare taxes, and Federal Unemployment Tax Act (FUTA).

By default, all fringe benefits are taxable unless they fall under specific exemptions outlined in the IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits. The fair market value of all non-exempt fringe benefits should be included in employees’ taxable income each year.

Taxable fringe benefits 

• Using a company car for personal reasons
• Gym memberships
• Vacation expenses
• Moving expenses

Non-taxable fringe benefits

• Reimbursements for job-related education
• De minimis benefits (small perks like free coffee in the office)
• Employee stock options
• Adoption assistance
• Health savings accounts
• Meals
• Working condition benefits

See the IRS’s full list of tax-exempt fringe benefits in Publication 15-B. Note that any fringe benefits exempt from income taxes might also be free from Social Security, Medicare, and federal unemployment taxes.

Which fringe benefits should you offer?

Deciding which fringe benefits to offer requires a strategic approach that balances employee needs with your business goals. Be sure to regularly reassess your offerings to remain an attractive choice for both prospective and current employees. Here's what to consider:

• Assess employee needs: Understand your workforce's demographics, preferences, and needs. Conduct surveys, feedback sessions, and performance reviews to identify the most valued benefits. 
• Review industry standards: When thinking through the most suitable fringe benefits, compare what competitors are offering. Also, research which fringe benefits are common in your industry and geographic location. 
• Prioritize core benefits: Start with essential benefits like health insurance, retirement plans, and paid time off. Employees often expect these and they can provide a solid foundation for your benefits package.
• Customize to your culture: Tailor benefits to your company culture. For example, if you emphasize work-life balance, offer flexible work arrangements or wellness benefits programs.
• Consider your budget: Analyze your compensation budget to determine which benefits you can realistically offer without straining company finances. The cost of your benefits shouldn't be excessive, as increased administrative expenses can negatively affect your profit margins in the long run. 
• Ensure legal and regulatory compliance: Ensure your benefits align with local labor laws and regulations. This includes tax implications and reporting requirements. For instance, the Family and Medical Leave Act (FMLA) mandates up to 12 weeks of unpaid leave for serious medical reasons or family care, with continued group health benefits.

 Once you decide which benefits to offer, clearly communicate benefits options to employees, explaining how they work and their value. Offer resources to help employees make informed choices.

Required vs. optional fringe benefits

Some fringe benefits are required. For example, if you have 50 or more full-time or full-time equivalent employees, federal law requires you to provide health insurance. Workers’ compensation insurance is another example—laws vary by state, but most states require employers to provide workers’ comp once they have a small number of employees (and in some states, like California, Colorado, and Hawaii, it’s required once they have a single employee). 

But even when fringe benefits aren’t legally required, failing to offer them can make it a challenge to hire and retain the most talented (and committed) employees. On the other hand, while there's room for creativity, it’s important to choose these benefits carefully to avoid draining your resources in the long run.

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5 advantages of offering fringe benefits

Offering fringe benefits comes with advantages related to employee engagement. Here are five advantages to offering desirable fringe benefits:

1. Curb turnover: High turnover can wreak havoc on any organization. A robust benefits package can help cultivate loyalty and reduce the likelihood that employees will seek new opportunities—translating to savings in recruitment and training costs.
2. Attract top talent: A standout benefits package gives your business a competitive edge when seeking top-tier candidates. Many job seekers prioritize benefits and compensation when searching for a new job.
3. Boost morale: Fringe benefits are an investment in your employees, which can help foster a sense of camaraderie among team members, ultimately boosting morale.
4. Improve employee wellbeing: Through fringe benefits, you can give employees access to quality healthcare, mental health resources, fitness incentives, and other tools to promote their overall wellbeing.
5. Lower costs. Strategically built fringe benefits can yield tax benefits for both the company and employees.

FAQs

Can independent contractors get fringe benefits?

Yes, but remember that contractors don't typically receive all the same benefits as employees. Offering benefits can help retain talent, but avoid blurring the contractor-employee line to prevent legal and tax issues.

Do fringe benefits qualify as income?

Yes. According to the IRS, fringe benefits qualify as income and are subject to income and employment taxes—except for a specific list of tax-exempt fringe benefits outlined in Publication 15-B.

What is a cafeteria plan?

A cafeteria plan is a system that offers employees a selection of pre-tax benefits to choose from, similar to picking items from a buffet. These benefits can include options like insurance plans, retirement plans, health savings accounts (HSAs), and more. Employees can customize their choices based on their needs and preferences, and they can even choose not to take any benefits.

Is a lifetime achievement award taxable?

According to the IRS, a lifetime achievement award can be tax-exempt if it meets the following conditions: It should be valued at less than $1,600; it shouldn't be given as cash, gift cards, or stocks.

Certain items like vacations, meals, and event tickets don't qualify for a tax deduction, but something like a plaque, pen, or wristwatch (as long as it’s worth less than $1,600) would typically be exempt from taxation.

Is a bonus a fringe benefit?

Cash bonuses like performance or sign-on bonuses are a form of fringe benefit. However, tax rules for bonuses can differ based on location.

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