Fringe benefits: What they are and how they work with examples

Attracting and keeping talented employees can often take more than a simple paycheck. In fact, 25% of small business owners believe that hiring is hard, according to the QuickBooks small business insights survey. Hence, you may need to offer fringe benefits, which are perks beyond salary. 

These small business employee benefits are an essential component of a comprehensive compensation package and are crucial in attracting, motivating, and retaining top talent. Let's look at how fringe benefits work, the different types, and whether you should offer them:

• How do fringe benefits work?
• Types of fringe benefits
• Pros and cons of fringe benefits
• Example of a fringe benefit plan
• Keeping your employees happy and productive
• Fringe benefits FAQ

How do fringe benefits work?

Fringe benefits encompass many offerings, from traditional health insurance and retirement plans to unique perks like free gym memberships or pet-friendly workplaces. Some fringe benefits are statutory—meaning they are mandatory. 

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)

Employers have some discretion in the types of fringe benefits they offer, who is eligible to receive them, and the extent of each benefit.

Examples of optional fringe benefits include:  

• Retirement plans like 401(k) plans
• Paid time off
• Life insurance
• Disability insurance
• Tuition reimbursement
• Gym memberships
• Flexible or remote work arrangements
• Employee discounts
• Mental health support

Types of fringe benefits

You can offer two key 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 above $50,000

Nontaxable 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)
• Transportation benefits like public transportation or parking
• Child care assistance over $5,000 
• 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 can be a complex decision with advantages and disadvantages. Here's a breakdown of both, along with tips for fringe benefits:

The key advantages to offering fringe benefits include things like: 

• Attract and keep top talent: Fringe benefits can make your company more appealing to potential employees and encourage them to stay with you.
• Boost morale and productivity: They demonstrate that you value employee well-being, leading to increased job satisfaction and productivity.
• Reduce absenteeism: Benefits like health insurance and wellness programs can help employees stay healthy and reduce sick leave.
• Offer tax benefits: Some fringe benefits, such as contributions to qualified retirement plans and health insurance premiums, may be tax-deductible for the business. 

However, there are also potential drawbacks to offering a fringe benefits program beyond employee compensation: 

• Cost: Fringe benefits can be expensive, especially for small businesses with limited budgets. 
• Administrative burden: Managing and administering fringe benefits can be complex and time-consuming. 
• Unequal distribution of benefits: Some employees may benefit more from certain perks than others, leading to potential dissatisfaction.
• Legal compliance: You’ll need to ensure your fringe benefits are administered in compliance with all applicable laws and regulations

Ask your employees what benefits they value most. This can help you tailor your package to meet their specific needs. And note that if you can't afford traditional health insurance, look into alternatives like health reimbursement arrangements (HRAs) or health savings accounts (HSAs).

Example of a fringe benefit plan

Fringe benefits are not just "extras" you offer to keep employees happy—they offer strategic advantages. Say your small business is looking to provide a fringe benefit plan to attract and retain top talent. 

An example of a fringe benefit plan small businesses might offer include: 

• Health and wellness benefits: Health insurance, dental and vision insurance, and a wellness program like gym membership. 
• Work-life balance: Paid time off like vacation and sick pay, parental leave, and flexible work arrangements. 
• Financial benefits: Retirement plan and disability and life insurance. 
• Other perks: Tuition assistance or continuing education support and employee discounts. 

A solid fringe benefit plan should let you attract highly skilled employees but also foster a positive and supportive work environment. 

Keeping your employees happy and productive

Knowing the ins and outs of fringe benefits helps employers attract and retain top talent while ensuring compliance with tax regulations. Offering competitive fringe benefits like health benefits can enhance employee morale and loyalty. 

Payroll software like QuickBooks can help you streamline building benefits packages while managing your payroll. Its built-in human resource functions also allow you to talk to HR advisors and stay up-to-date on wage and overtime laws.

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