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Fringe Benefits & Payroll Guide | Complete Payroll

Written by Complete Payroll | Sep 26, 2022 12:00:00 PM

It’s an interesting job market right now. With high numbers of unfilled positions, employers have an urgent need to offer salaries and benefits that are not only competitive but generous. 

One way people are recruiting top talent is through offering fringe benefits on top of the competitive salary. In this article, we will show you exactly how fringe benefits affect your role in payroll.

What Are Fringe Benefits?

A fringe benefit is any additional compensation that employers give their employees. They’re usually offered as a strategy to recruit, motivate, and retain highly skilled workers. Who receives these benefits depends on the organization. Some companies give them to all employees while some keep them solely at the executive level. 

Some fringe benefits are offerings you’ll commonly find in a standard hiring package. These include health insurance, tuition assistance, use of a company car, gym membership, childcare reimbursement, stock options, or employee discounts. Some fringe benefits are perks offered that are on brand with the company. For example, Ben & Jerry’s offers all employees free ice cream. In broad terms, fringe benefits are any offerings that an employer provides outside of salaries.

Are Fringe Benefits Required By Law?

Most fringe benefits are optional and used as a way to recruit and retain top talent. However, depending on the size of the company and the number of full-time employees, there are certain fringe benefits that are required by law. These requirements are in place to protect employees in the event that they are dismissed from work or become ill or injured and cannot work for some time. Examples of these include:

  • Workers’ compensation
  • Unemployment insurance
  • Health insurance
  • Family and medical leave

Are Fringe Benefits Taxable?

Fringe benefits are usually included in an employee’s gross income, therefore they are subject to income tax withholding and employment taxes. As such, if the fringe benefit is taxable, it must appear on the employee’s W-2. The amount that should appear is the fair market value of the benefits. The employer can determine this amount by researching the retail cost of a similar item or service, such as a health club membership, and using this number, even if they were able to negotiate a group rate.

According to the IRS, “the amount that needs to be included by the employer for these benefits is the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount that the law excludes.”

Taxable fringe benefits include:

  • Bonuses
  • Travel expenses
  • Company cars
  • Certain types of retirement benefits
  • Boarding/lodging

It’s important to note, however, that not all fringe benefits are taxable. If they are exempt, their fair market value should not be added to the employee’s gross income for income tax withholding purposes. 

Some fringe benefits that are not taxable include:

  • Health insurance
  • Medical expense reimbursements
  • Education assistance
  • Daycare assistance
  • Retirement planning

Fringe benefits such as these aren’t only exempt from federal and state taxes, but they are also exempt from Social Security and Medicare taxes. 

If you are offering your employees fringe benefits as part of their terms of employment with your company, it’s important that you keep your employees informed of which benefits will be taxed, and which are exempt, so they may plan accordingly for tax season. 

Are you in need of more benefits information? Complete Payroll is the HR and Payroll expert. Visit our blog site today to find more articles like this one to guide you through all of your HR and Payroll questions.