Attracting or retaining employees in a competitive market like the one we have today can be challenging. Workers are still motivated by a good paycheck; however, as their needs and demands grow, a monetary advantage is no longer enough.
According to Gallup, pay and benefits are at the top of the list of employee priorities. Namely, for 64% of respondents, a significant increase in salary and benefits was “very important“ when accepting a new job offer.
Thus, investing in other types of compensation, like fringe benefits as part of the hiring package, can give a significant advantage to companies.
In this article, we’ll go over what fringe benefits are, including their importance, the types, and how they’re taxed and calculated.
What Are Fringe Benefits?
Fringe benefits are a common workplace perk. They are a part of the employee hiring package and can broadly differ based on the company. These compensations come in several forms:
- Non-tangible benefits
- Cash or a cash equivalent
Most are taxable, but some exemptions like healthcare or unemployment insurance exist. Overall, fringe benefits are a valuable tool in the workplace since they can increase engagement and work satisfaction.
Fringe Benefits | Definition
By definition, fringe benefits are a form of employee payments that employers give their workers in addition to a regular salary. Usually, these compensations have monetary value but do not affect basic wage rates.
They range from computer benefits and membership cards to healthcare insurance and retirement plans. Depending on the type, they can be taxable or non-taxable, and employers can offer them to all employees or only to specific team members.
The Value of Fringe Benefits
A study by the Romanian Economic Journal on The Significance of Fringe Benefits on Employee Morale and Productivity reveals how substantial these benefits are in the workplace. The findings indicate that cash bonuses served as the best incentive for productivity, especially when they are subjected to the employee’s performance.
Monetary rewards were also a good boost for employee stability and motivation. Moreover, supplementary payments were equally essential for all employees and managerial levels, but also the firm.
The 2022 Global Benefits Attitudes Survey by consultancy WTW further reveals that more workers would rather have salary deductions if it means they get better benefits.
As expected, the workforce positively reacts to workplace perks and benefits.
The extent to which they respond depends on what type of benefits the employers provide. Employees who receive recognition tend to work harder and show more loyalty. On the other hand, a company that offers such benefits gains a competitive edge in the talent market. According to research from GRiD, 29% of employers think benefits are as significant as salary in obtaining and retaining talent.
In that sense, the key values of fringe benefits in the workplace are:
- Increased employee engagement
- Better employee motivation and job satisfaction
- Increased employee retention and lower turnover
Types of Fringe Benefits
Employers can compensate their employees beyond a salary in many different ways. However, the two main types of fringe benefits are those that are law-required and those that are not.
Benefits that companies are law-bound to provide to their employees are usually connected to medical care, retirement, or serve to lessen economic hardships in case of unemployment.
The second category is provided at the employer’s discretion. Although it’s not mandatory, such investments are an excellent workers’ incentive and can help companies in the long run.
Apart from this categorization, fringe benefits can also differ in whether or now they are taxable. By default, most are taxable unless the IRS specifically exempts them.
Perks & Fringe Benefits
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Fringe Benefits Examples
Employees have expectations from their employer that goes beyond their paychecks.
Research from pre-hire assessment firm ThriveMap shows that 48% of new hires left a role because it didn’t meet their expectations. For 29% of respondents, it was because of the benefits and salary.
Some “perks” in the workplace are beyond necessary for the wellness and job satisfaction of the employees, even if they’re not legally required. So, employers who want to attract and retain top talent, among other reasons, have to consider going the extra mile for their workers.
Here are some examples of fringe benefits they can voluntarily implement in the workplace, as well as some that are legally binding.
1) Law-Required Fringe Benefits
- Health Insurance: According to the Patient Protection and Affordable Care Act, employers who employ over 50 must provide a healthcare plan.
- Employee Leave: Like health insurance, companies with over 50 employees must provide family and medical leave. According to the law, medical leave can be up to 12 weeks and is unpaid. To be eligible, workers must be in the company for over a year.
- Worker’s Compensation: The Department of Labor administers workers’ compensation due to workplace injuries or occupational diseases.
- Unemployment Insurance: As a fringe benefit, the Federal Unemployment Tax Act (FUTA) regulates unemployment insurance. According to the act, employers must pay unemployment tax, enabling workers who lost their jobs with wages, training, and career guidance.
2) Optional Fringe Benefits
There’s an abundance of optional employee benefits employers can implement in the workplace. From different retirement plans to gym memberships, here are some examples of fringe benefits that are non-compulsory.
Are Fringe Benefits Taxable?
Fringe benefits are taxable except for those that the law exempts explicitly.
According to IRS’s Employer’s Tax Guide to Fringe Benefits, Section 2, benefits that are not taxable are:
- Accident and health benefits
- Achievement awards
- Adoption assistance
- Athletic facilities
- De minimis (minimal) benefits
- Dependent care assistance
- Educational assistance
- Employee discounts
- Employee stock options
- Employer-provided cell phones
- Group-term life insurance coverage
- Lodging on your business premises
- No-additional-cost services
- Retirement planning services
- Transportation (commuting) benefits
- Tuition reduction
- Working condition benefits
However, employers should keep in mind that these are not fully exempt from taxation. Depending on the benefit, the IRS excludes all or part of its value from the employee’s pay.
Taxable Fringe Benefits
Apart from the several exceptions above, most fringe benefits are taxable at fair market value (FMV). That means the recipient of the taxable fringe benefit must include the FMV in their yearly income subjected to taxes.
If the recipient is an employee, these benefits are usually subject to employment taxes. In this case, employers can either include them as yearly taxes or distribute them over every paycheck.
That doesn’t apply when the recipient isn’t an employee.
Hence, the benefits aren’t subject to employment taxes, and they should report to the IRS as follows:
- For independent contractors as nonemployee compensation, in Form 1099-NEC.
- For a partner as a partner’s share of income, deductions, credits, etc., in Schedule K-1, Form 1065.
How To Calculate Fringe Benefits?
The percentage of an employee’s wage that goes towards fringe benefits is called a fringe benefit rate.
According to the Bureau of Labor Statistics, the average rate is around 30%. However, considering that each employer pays its employees differently and delivers different perks in the workplace, this rate can differ
Thus, a simple way to calculate it would be to divide the total cost of all benefits by an employee’s annual salary. Then, the result is multiplied by 100 to get the rate percentage.
That would look like this:
(Total Fringe Benefits / Annual Wages) X 100 = Fringe Benefit Rate
For employers, this is an excellent way to determine the exact cost of an employee to the business beyond their earnings.
Fringe benefits are what every employer should strive for to improve employee satisfaction and well-being.
However, it’s also a valuable tactic to gain a competitive edge in the talent market beyond a good salary. The right fringe benefits help companies in the long run by attracting and retaining top talent and increasing employee engagement.
- The Top 6 Things Employees Want in Their Next Job
- Publication 15-B (2023), Employer’s Tax Guide to Fringe Benefits
- 5 Dangers of Using Off-the-Shelf Pre-Hire Assessments
- The Significance of Fringe Benefits on Employee Morale and Productivity
- The 2022 Global Benefits Attitudes Survey
- Employee Benefits Continue to Be an Afterthought During Recruitment Process