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)
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
- 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.