Fringe Benefits

Fringe benefits are the added perks offered to employees, contractors, partners, or directors on top of their fixed remuneration. It assists firms in hiring, encouraging, and retaining the finest employees. A few employee fringe benefits are provided to all, while some are reserved for senior officials. 

It includes pension schemes, daycare, canteen subsidies, tuition support, and other expenses. Some are compulsory, like medical insurance, while others are independently awarded by the company, like tuition refund. The fringe benefits are taxable and must be covered in employee salary unless there are defined legal exceptions.

• Fringe benefits are the rewards for employees, contractors, directors, or partners in addition to fixed salaries. 
• Fringe benefits examples include daycare, tuition refund, health savings account, achievement awards, and employee stock options. 
• These are of two types - lawfully required (accidental and health benefits) and willingly offered (employee discounts).  
• Except for certain exclusions, the recipient must pay the fringe benefits tax on their income receipt. Also, different forms are available for different types of recipients. 

Fringe benefits are the extra employee privileges gained apart from the set payment. It aids an organization to cherish the present skilful workers and stand out in the marketplace for potential workforce. 

Different businesses offer different benefits to their employees, as per the latter’s choice during recruitment. They can choose any reward providing utmost comfort such as a company-sponsored gym membership, car, or employee concession. 

The firm is the real provider and financier of the incentive, even though a 3rd-party supplies them. Likewise, the workers are the recipient, despite its expanded usage to their contacts. Moreover, the employer must mention all details in the financial statements for audit purposes.

In terms of employer-provided cell phones/laptops/computers for the personal usage of an employee, the Fair Market Value (FMV) is the value of such benefit. However, if the company has already used it before offering it to the employee, then the depreciated value of the equipment is the benefit’s value.

The American department store chain, Target has invested an additional $300 million in employee perks. This comprises an increased initial salary range from $15-$24 per hour. Brian Cornell-led firm has also offered a 48% shareholder return. This amounts to twice as that of Amazon.com and thrice of Walmart during the 2019-2022 period.

Firms provide fringe or additional benefits for the following reasons:

#1 - Guarantees Workers’ Well-being 

The work-related injuries or illnesses may prompt the employees to take some time off. This is detrimental to the company as it impacts the general efficiency rate. So, the rewards like accident and health benefits, health savings accounts, and gym membership ensure a secure workplace. 

It guarantees the complete well-being of workers and lessens the chances of paid leaves. Needlessly, it boosts the company's productivity rate.

#2 - Entices High-Potential Talent Pool

Collaborators presumably approach businesses that support their workers with a flourishing atmosphere. Additionally, skilled job hunters favor friendly companies with a growth-oriented climate. 

Employee benefits make the firm stick out from its market rivals to draw in more shareholders and future talent pool. In addition, it increases the company’s goodwill with practical bonus issues.  

#3 - Improves Market Performance 

When valued for their input in the corporation, employees become more diligent. In addition, added bonuses like education assistance, paid days off, achievement awards, and no-additional-cost services surge employee productiveness. Consequently, this enhances the organization’s market performance and provides tax benefits. 

Fringe or additional benefits are of two types, Legitimately required and willingly provided. Let’s explore each one in detail. 

#1 - Legitimately Required Benefits

An enterprise is lawfully committed to offer these benefits to its employees. It comprises health protection, retirement pension, and unemployment insurance. Employees can ask for such additional benefits from the employer when being hired. 

Examples:

1. Accident & health benefits
2. Group-term life insurance
3. Retirement planning services
4. Unemployment insurance

#2 - Willingly Provided Benefits

An enterprise is not lawfully compelled and may or may not offer such rewards to its workers. It covers salaried leaves, employee stock options, commuting services, and cafeteria facilities. 

Examples:

1. Achievement awards
2. Athletic facilities
3. Adoption assistance
4. Educational assistance
5. Dependent care assistance
6. Employee stock options
7. Employee discounts
8. Health savings accounts
9. Transportation benefits
10. Tuition reduction
11. Employer-provided cell phones
12. Lodging
13. Meals
14. No-additional-cost services

Let us discuss some fringe benefits examples in detail:

Example #1 

Suppose three employees, namely Sam, Bill, and Harry, earn $1,400, $1,600, and $1,200, respectively. The latest rate of employees’ social security contribution is 6.20% of their income. So, the expected amount of the perk is calculated by multiplying their income by the contribution rate. 

Thus, Sam, Bill, and Harry will receive a bonus amount worth $86.80, $99.20, and $74.40, respectively. 

Example #2

Let us assume that Company ABC offers 100 shares to Timothy at $5 per share. Nonetheless, the stock exchange displays the stock rate at $8 per share on the same day. Hence, 

Fringe benefit = $8-$5 

                           = $3

So, Value = 100*$3

                 = $300

Example #3

Say, an employee named Brian took a loan worth $25000 from the Bank of America, payable by the end of the year. Moreover, the annual lending rate is 3%. Now,

The interest amount to be paid by Brian = P*R*T

                               = $25000*0.03*1

                               = $750

If the loan’s purpose (insurance or retirement planning) justifies a legally required fringe benefit, Brian's employer will pay $750 on his behalf. 

Unless the law particularly specifies, additional employee benefits are taxable and should be covered in the recipient’s income. The employer must specify in the salary by how much the reward’s value is greater than the total of the below-mentioned amounts:

1. Payment for the perk on the receiver’s behalf
2. Legally excluded amount from the salary

Moreover, different types of recipients use different forms to report taxable fringe benefits.

The employee may utilize certain rules for retaining, settling, and reporting employment taxes. 

The recipient must visit the IRS website and make the payment through:

1. Electronic Funds Withdrawal
2. Credit or Debit card
3. Money Order or Check
4. Electronic Federal Tax Payment System
5. Same-Day Wire Transfer, or
6. Cash

This article has been a guide to what is Fringe Benefits and its Meaning. Here we discuss types of employee fringe benefits and tax reporting, along with examples. You can learn more about accounting from the following articles –

• Amortize Goodwill
• Term vs Whole Life Insurance
• Payroll Meaning