Loading the player...

What are 'Fringe Benefits'

Fringe benefits are additional compensation provided to employees above and beyond an agreed-upon wage or salary. Besides helping employees, offering fringe benefits helps employers tremendously from a recruiting perspective. Among similarly focused companies, employers can find it challenging to attract desired talent based on salary alone. By offering fringe benefits, especially those not available through a competitor, an employer stands a greater chance of attracting the level of talent it needs or wants.

Fringe benefits are generally tax-exempt, as long as certain conditions are met. Recipients of taxable fringe benefits have to include the fair market value of the benefit in their taxable income for the year.

BREAKING DOWN 'Fringe Benefits'

Fringe benefits commonly include health insurance, group-term life insurance coverage, educational assistance, childcare and assistance reimbursement, cafeteria plans, employee discounts, employee stock options, personal use of a company-owned vehicle and others. Whether a fringe benefit is tax-exempt depends on the type and, in some cases, the value of the benefit. By default, all fringe benefits are taxable unless they are specifically named as being tax-exempt. (Data was sourced from IRS publication 15-B Employer's Tax Guide to Fringe Benefits, Feb, 22, 2018)

Tax-Exempt Benefits

Benefits that are typically exempt from income tax include the following:

  • Accident and health benefits
  • Achievement awards
  • Adoption assistance
  • Athletic facilities
  • Commuting benefits
  • De minimis benefits
  • Dependent care assistance
  • Educational assistance
  • Employee discounts
  • Employee stock options
  • Employer-provided cell phones
  • Group-term life insurance coverage
  • Health savings accounts (HSA)
  • Lodging on business premises
  • Meals
  • Moving expense reimbursements
  • No-additional-cost services
  • Retirement planning services
  • Tuition reduction 
  • Working conditions benefits

All of these exemptions are subject to certain conditions. For example, achievement awards are only exempt up to a value of $1,600 for qualified plan awards and a value of $400 for non-qualified plan awards. Moving expenses are exempt if expenses would be deductible if the employee had paid them. Some exemptions are not available to highly compensated employees if the benefits favor them over other employees; these include employee discounts, adoption assistance and dependent care assistance.

Most fringe benefits that are income tax-exempt are also exempt from Social Security, Medicare and Federal unemployment taxes, but not all: adoption assistance is exempt from income tax only, for example. 

Any fringe benefit not named above, or any of the benefits named above which does not conform to IRS rules for exemption, is taxable. Working condition benefits are taxable to the extent that they are for personal use. For example, if an employee receives a company computer, their taxable income would include the computer's fair market value multiplied by the proportion of time they devote to personal use. If they only use it for business purposes, there's no additional taxable income. If 80% of their use is personal, their taxable income must include 80% of the value of the computer.

Valuing Fringe Benefits

In general, fringe benefits are valued at fair market value. This is the amount the employee would pay for the same benefit in a third-party, arms-length transaction. All relevant circumstances, such as geographic area and current market conditions, must be taken into account. The fair market value may be different from the actual cost to the employer of providing the benefit; this fact does not affect the valuation. 

Valuing the use of a company vehicle is more complicated. Using the fair market value is one option. If the car could have been leased on a cents-per-mile basis, the miles driven can be multiplied by an IRS-determined standard cents-per-mile rate (53.5 cents in 2017). If the employer sponsors a ride-sharing program, three or more employees regularly commute to work in a company vehicle, and the employees are not allowed to use the vehicle for personal reasons, the employer can use a rate of $1.50 per employee per commute. Under certain circumstances, the employer can use a daily or prorated annual lease value determined by the IRS. 

RELATED TERMS
  1. IRS Publication 15-B, Employer's ...

    IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits ...
  2. Current Service Benefit

    A current service benefit is the pension benefit earned by an ...
  3. Accrued Benefits

    Accrued benefits are those benefits earned or accumulated by ...
  4. Defined-Benefit Plan

    A defined-benefit plan is an employer-sponsored retirement plan ...
  5. Reimbursement Plan

    A generic term for several types of plans that reimburse employees ...
  6. Withdrawal Benefits

    Withdrawal benefits refer to the rights of employees with retirement ...
Related Articles
  1. Financial Advisor

    Understanding Rules on Defined Benefit Pension Plans

    Defined benefit plans offer advantages to both employers and employees. Employers must understand the federal tax rules when establishing these plans.
  2. Taxes

    10 Sources of Nontaxable Income

    Taxes are often a deterrent from investing and saving. These financial practices will bring you no tax grief.
  3. Insurance

    Defined Contribution Health Plans: A Primer

    A look at defined contribution health plans and how they work for both employees and employers.
  4. Personal Finance

    Financial Wellness Programs: How Employees Benefit

    More and more employees, regardless of age, career or income, are turning to their employers for help with their personal financial plans.
  5. Insurance

    Section 125 Plan (Cafeteria Plan): How Does It Work?

    Learn about section 125 cafeteria plans, who is allowed to use one, how it works, the benefits it provides, and how to set one up.
  6. Retirement

    The 401(k) and Other Qualified Plans Tutorial

    Learn about eligibility requirements, contributions and distribution rules for these retirement plans.
  7. Retirement

    Is a SIMPLE IRA Right for Your Small Business?

    Here's how small businesses can benefit from offering a SIMPLE IRA to their employees.
  8. Financial Advisor

    Why Do Businesses Benefit From Life Insurance on Employees?

    Companies can buy life insurance on their employees and collect the benefit proceeds. Find out why companies want to benefit from the death of their employees.
  9. Insights

    Top 10 Companies That Will Pay for School (SBUX, T)

    Scrutinizing employee benefits can help people in the job market chose employers strategically to find companies that will pay for school.
  10. Retirement

    3 Jobs With Good Retirement Benefits

    Jobs with retirement benefits are sought after by U.S. employees. Those retirement benefits can include pensions, 401(k) plans and other perks.
RELATED FAQS
  1. Are fringe benefits deductible for the employer?

    Learn how the IRS treats the taxation of fringe benefits provided by an employer to employees, contractors, partners and ... Read Answer >>
  2. What assets are taxable and what assets are not taxable?

    Adjust your taxable income by understanding what assets the IRS taxes. Learn about legal strategies to lower tax liability ... Read Answer >>
  3. How to avoid paying taxes on Social Security income

    Learn how to calculate the percentage of Social Security income benefits that may be taxable – and discover strategies to ... Read Answer >>
Trading Center