Fringe benefits: Meaning, examples, + how they work [+examples]

Attracting and keeping talented employees takes more than a simple paycheck. As your business grows, competing for experienced workers can become more challenging.

According to a QuickBooks report, 2 in 5 small businesses expect to hire, increasing competition for skilled employees. And when wages alone aren't enough, the benefits you offer start to matter more.

To stay ahead, small business employee benefits like fringe benefits can add value to your compensation package and help you retain top talent.

Let's explore how fringe benefits work, the different types, and what to consider when offering them:

Jump to:

• What are fringe benefits?
• Types of fringe benefits
• Pros and cons of fringe benefits
• Example of a fringe benefit plan
• Keeping your employees happy and productive

What are fringe benefits?

Fringe benefits are nonmonetary benefits offered to employees in addition to their regular salary or wages.

These benefits supplement base compensation and can include traditional offerings like retirement contributions, as well as lifestyle benefits such as remote work options.

While wages cover an employee’s core compensation, fringe benefits support broader aspects of employment, including job satisfaction, employee retention, and overall well-being.

How do employee fringe benefits work?

In practice, fringe benefits generally fall into two categories: statutory benefits, which are mandatory under the law, and optional benefits.

Fringe benefits you’re legally required to offer include:

• Workers' compensation
• Unemployment insurance
• Family and Medical Leave Act (FMLA) leave
• Health insurance (for certain employers)

Types of fringe benefits

Not all fringe benefits are taxed the same way. Before offering benefits to employees, it helps to understand the two main types of fringe benefits: taxable and nontaxable.

Taxable fringe benefits

Taxable fringe benefits are included in the employee's gross income and are subject to federal income tax, Social Security, Medicare, and FUTA taxes. Taxable fringe benefits must be reported as imputed income, meaning they’re treated as compensation for tax purposes—even if no cash changes hands.

Examples of taxable fringe benefits include:

• Bonuses like cash rewards given to employees for performance or holidays
• Employer-provided vehicles for personal use
• Gym or athletic club memberships
• Personal travel expenses paid by the employer
• Group-term life insurance exceeding $50,000

Nontaxable fringe benefits (Tax-exempt fringe benefits)

Nontaxable fringe benefits are excluded from the employee's gross income and are not subject to federal income tax withholding.

Examples of nontaxable fringe benefits include:

• Employer-provided spending accounts like flexible spending accounts (FSAs)
• Commuter benefits like public transportation or parking up to $340 per month
• Employer-provided dependent care benefits up to $7,500 per year
• Employee discounts on company products or services
• Small, infrequent benefits like holiday or employee appreciation gifts, or occasional meals

Note that the value of taxable fringe benefits must be included in Boxes 1, 3, and 5 of Form W-2 and on line 3 of Form 940.

Pros and cons of fringe benefits

For small businesses, offering fringe benefits comes with both advantages and trade-offs. Weighing how these benefits fit into your overall employee compensation strategy can help you decide what makes sense for your team and budget.

Here's a breakdown of both:

Example of a fringe benefit plan

Once you decide to offer fringe benefits, the next step is determining what a practical plan could look like for your business. Say your small business is looking to provide a fringe benefit plan to attract and retain top talent.

Keeping your employees happy and productive

Knowing the ins and outs of fringe benefits can help you make more confident decisions about what you offer your team. Employee benefits improve employee productivity and satisfaction, but they also require careful tracking and documentation.

Accounting software like QuickBooks helps organize payroll-related data and benefit expenses in one place. With everything organized, you can evaluate your offerings and make informed decisions as your team grows.

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