Fringe Benefits

Fringe Benefits Fringe benefits are non-wage compensations employers provide to attract, motivate, and retain employees. They range from basic offerings like health insurance and paid time off to unusual perks such as on-site childcare, pet-friendly workplaces, or free meals. Common types
* Health insurance and group-term life insurance
* Retirement planning services and health savings accounts (HSAs)
* Paid time off and tuition reduction/assistance
* Employer-paid or subsidized meals, cafeterias, and athletic facilities
* Commuting benefits and employer-provided cell phones
* Employee discounts, stock options, and use of company vehicles
* Dependent care assistance and adoption assistance
* Below-market loans, lodging on business premises, and no-additional-cost services
Companies competing for top talent may offer distinctive perks (e.g., free gourmet cafeterias, commuter buses, extended parental leave, or on-site services). Explore More Resources

How fringe benefits work Employers include fringe benefits as part of the overall compensation package. Some benefits are taxable income to employees; others may be excluded from taxable income if they meet specific legal criteria. Employers decide which benefits to offer based on budget, recruiting strategy, and legal/tax considerations. Tax considerations
* By default, fringe benefits are taxable and must be included in an employee’s income unless the law specifically excludes them.
* Many common benefits are eligible for exclusion from taxable income, but exclusions are subject to detailed rules and limitations.
* Valuation is generally at fair market value: the amount an employee would pay for the same benefit at retail.
Common categories of benefits that may be excluded from income (subject to rules and limits):
- Accident and health benefits; HSAs
- Achievement awards (limits apply)
- Adoption and dependent care assistance (conditions may vary for highly compensated employees)
- Athletic facilities and workplace meals in certain circumstances
- Commuting benefits (subject to caps and rules)
- De minimis (minimal) fringe benefits
- Employee discounts and employee stock options (rules apply)
- Employer-provided cell phones and working-condition benefits
- Lodging on business premises, retirement planning services, tuition reduction, and no-additional-cost services Explore More Resources

Note: Exclusion from income tax does not automatically mean exclusion from Social Security, Medicare, or federal unemployment taxes. Many — but not all — income-tax-exempt fringe benefits are also exempt from payroll taxes. Valuing fringe benefits
* Most benefits are valued at fair market value.
* If a benefit is used partly for personal reasons, only the personal-use portion is taxable. Example: if an employer-provided laptop is 80% personal use, 80% of its fair market value is includible in income.
* Any benefit that does not meet the statutory exemption rules is taxable.
Special topics
* Cafeteria plan: A flexible benefits arrangement that lets employees choose among a menu of benefits (often funded with pre-tax dollars), such as health insurance and retirement contributions.
* Achievement awards: Noncash awards for employee achievement may be tax-exempt if they meet strict criteria. Limits apply (e.g., certain qualified awards are exempt up to a specified dollar limit), and cash or cash equivalents generally do not qualify.
Key takeaways
* Fringe benefits broaden total compensation and help employers recruit and retain employees.
* Many common benefits may be excluded from taxable income, but exclusions depend on specific IRS rules and limitations.
* Unexempt benefits are taxable at fair market value, and personal-use portions of employer-provided items are includible in income.
* Employers and employees should consult tax guidance or a tax professional to confirm how particular fringe benefits are treated.