Whether you’re a small business or a larger company, you want to do what you can to attract and retain top talent. Offering competitive pay is but one way to accomplish that, but there are other things you can do. For example, you can offer fringe benefits.
What are fringe benefits?
In common parlance, fringe benefits (a.k.a. perks or perquisites) are benefits you offer in addition to pay. The IRS’ Publication 15-B (2021) Employer’s Tax Guide to Fringe Benefits defines a fringe benefit as “a form of pay for the performance of services. They can be anything from paid time off to access to a company car. In other words, “fringe” is whatever makes a position or your company more attractive for someone to join and grow.
Why are fringe benefits important?
If you want to build the best team, you need to offer something to stand out from your competition. It’s one more way to signal that you’re an employer of choice.
Job hunters typically compare fringe benefits their target companies offer – they’re an important factor in choosing an employer. At the same time, current employees may compare your offerings against a prospective new employer. In either scenario, you want to be competitive.
According to recent findings from Gallup.com, today’s employees seek benefits that enhance the quality of their lives, particularly around five key areas of wellbeing:
- Career wellbeing
- Social wellbeing
- Financial wellbeing
- Physical wellbeing
- Community wellbeing
Types of fringe benefits
Fringe benefits can be taxable or non-taxable. The IRS Fringe Benefit Guide gives examples of fringe benefits that are non-taxable, in whole or part, including:
- Achievement awards
- Adoption assistance programs
- Dependent care assistance programs
- Educational assistance programs
- Employee assistance programs (EAP)
- Employee discounts
- Employer-provided cell phones
- Group-term life insurance
- Health savings account (HSA) contributions
- Learning portals for professional development
- Remote work options
- Working condition benefits
You might also want to add non-taxable perks such as time off for volunteering in the community, the occasional theater and sporting event tickets or marathon sponsorships. These offerings can also be very attractive.
What types of fringe benefits are taxable?
Unless specifically excluded by the tax code, all fringe benefits are taxable as income. This generally means FICA (Social Security and Medicare taxes) and FUTA (federal unemployment tax) are withheld and must be included on W-2s. Some states may also tax fringe benefits, so be sure to check with your state tax authority before designing a fringe benefits package.
Examples of taxable fringe benefits include:
- Non-business use of company cars
- Cash (bonus pay)
- Gym memberships
- Paid personal time off
Remember to determine the value of the fringe benefits provided by Jan. 31 of the year after you give them to the employee. Also, some FUTA taxes are paid by you and not your employee, so you will use the employee’s total compensation to determine your FUTA liability.
Who is eligible for fringe benefits?
You might think only employees are eligible for fringe benefits, but certain non-employees are too. Independent contractors you hire for a specific job can be recipients. Partners in the business are also eligible. Though you don’t withhold taxes for these parties, you may need to report the benefit to the government using one of the following forms:
- IRS Form 1099-NEC for independent contractors
- IRS Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. for partners in the business
Must all employees receive the same benefits?
In most cases, the answer is no. You will generally have discretion when you structure your fringe benefit plan to base access on any number of qualifiers (e.g., full-time versus part-time, exempt versus non-exempt status, departments, job groups, etc.). However, in certain cases, if you don’t provide the same benefit for all employees, you can cause tax consequences for yourself or your employees, especially when highly compensated or key employees are being favored.
That said, you cannot discriminate against protected groups, even unintentionally. For example, if all your non-exempt employees are women and all your exempt employees are men, and you base your benefit access on exempt versus non-exempt, then you may be perceived as discriminating against women.
What mistakes do employers make?
The biggest mistake employers make is not promoting and reinforcing the use of fringe benefits. You don’t want to just talk about them once a year. You want to remind people to take advantage of what you have to offer.
For example, when an individual or a team takes a day to volunteer in the community, talk about it in the company newsletter. Use your EAP to help promote various benefits to staff. Encourage managers to reinforce continuing education through your learning portal by offering $25 gift cards for successful completion.
Remember: What people are really looking for in an employer of choice is not just a base salary. They want a company that thinks about the whole person – emotionally, physically, developmentally. Increasingly, they also want the company to be socially responsible. By creating a thoughtful fringe benefits package, you can start to address those wants and not break the bank.
Did you know that by properly addressing HR compliance, policies and procedures within your company, you may sidestep potential problems down the road? To learn more, download our free e-book: 7 most frequent HR mistakes and how to avoid them.