Who doesn’t like a little something extra? While there are some benefits your employer is required to provide you, they may also give you additional perks in the form of what are known as “fringe benefits.” Here’s a look at some examples of fringe benefits, how they work and whether they’re taxable.
What Are Fringe Benefits?
Employers compensate their employees with a traditional paycheck and some additional benefits they must provide, such as workers’ compensation coverage or unemployment. In an effort to attract top talent, many employers offer fringe benefits as an additional form of pay to their employees. For example, an employer could provide a company car that could be driven to and from work.
According to the IRS , employers are considered to be the “provider” of the benefit. This is the case even if there is a third-party involved who actually does the providing.
For example, employers are considered to be the provider of child care services even if employees send their kids to a third-party daycare as long as they offer child care as a benefit. Regular employees, contractors, partners and directors can all receive fringe benefits.
In some cases, employees are considered to be the recipient of fringe benefits even if they aren’t the person receiving it. For example, if an employee’s family member uses a benefit, the employee is still considered to be the recipient.
Common Fringe Benefits
Here’s a look at some of the fringe benefits you may encounter:
• Accident and health benefits: Provides help with health-related costs not covered by your traditional insurance plan.
• Athletic facilities: Provides access to on- and off-premises athletic and gym facilities.
• Dependent care assistance: Helps you pay for some care-related expenses for qualifying dependents, including children, a disabled spouse or legally dependent parents.
• Adoption assistance: Provides payment and reimbursement for expenses related to adopting a child.
• Employee stock options: Gives employees the chance to buy a certain amount of company stock at a specified price and by a certain time.
• Group-term life insurance coverage: Allows employers to provide their employees with up to $50,000 in tax-free insurance. Coverage is traditionally 1-2x salary, where the first $50,000 is received tax-free, then any additional coverage is taxed.
• Health savings accounts (HSAs): Provides tax-advantaged savings accounts for employees enrolled in high-deductible health plans. These accounts may receive contributions by the employer or simply be funded on a pre-tax basis by the employee to help them pay for dental and health care costs.
• Transportation and commuting benefits: Helps employees get to and from work, such as through the use of a company vehicle. Employees may also be able to have qualified transportation costs taken from their pre-tax pay, reducing their taxable income.
• Tuition reduction: Allows employers to chip in for the cost of tuition to educate an employee and sometimes their spouse or children.
• Meals: Provides employees with free on-premises food and snacks.
For a more complete list of fringe benefits, check out IRS Publication 15-B .
Are Fringe Benefits Taxable?
The fringe benefits that an employer provides must be included as part of the recipients pay and are therefore subject to employment taxes, including federal income tax, Social Security tax, Medicare tax, and Federal Unemployment tax. The IRS does allow certain exceptions to this rule.
Employers must typically include the full value of the fringe benefit as part of the recipient’s pay, reduced by various exclusions.
Fringe benefits for employees are typically reported on a W2 (or like document) and subject to employment taxes. On the other hand,
Fringe benefits for non-employees are not subject to employment tax, and contractor’s benefits are typically reported on a Form 1099-MISC.
Tax-Advantaged Fringe Benefits
Some fringe benefits are supercharged by allowing certain tax advantages. These perks allow employees to direct a certain amount of their gross pay toward designated accounts before taxes are calculated, thereby lowering their taxable income.
The benefits are (somewhat oddly) known as “cafeteria plans .” Though the idea is cafeterias are places where people select the food of their choice, and cafeteria plans allow employees to select the benefits of their choice.
Qualified benefits include:
• Flexible spending accounts
• 401(k) plans
• Accident and health benefits, excluding Archer medical savings accounts and long-term care insurance.
• Adoption assistance
• Group-term life insurance coverage
• HSAs (Distributions from HSAs can be used to purchase long-term care coverage.)
There are, predictably, a few more nuanced rules about cafeteria plans and employee tax treatment. While most regular employees receive normal tax treatment, other employees or contractors may not be treated as such for cafeteria plans. If you have tax-related questions about fringe benefits, it might be a good idea to consult your attorney or preferred tax specialist.
Planning Around Fringe Benefits
Employers offer fringe benefits to make the work environment better for current employees and more desirable for future prospects. Just because an employer offers certain benefits doesn’t mean you have to use them.
Some may hold a lot of appeal. For example, 401(k)s are a powerful tool for saving for your retirement. Others may be less appealing. You may decide you don’t want to use FSAs, which often come with a lot of restrictions about how much you can contribute and when you have to spend the funds in the account.
You’ll typically decide which benefits you want to start using when a company hires you and you’re filling out your initial paperwork. In the flurry of activity that comes with starting a new job, you may make some mistakes or some choices that aren’t really right for you. But luckily you can go back and make appropriate changes in the future.
If you need help with your decision-making process you can reach out to your HR department or a financial professional. Financial advisers can help you take a look at your complete financial picture and help you make the choices that are right for your individual situation.
If you’re feeling unclear about what’s next in your financial goals, sign up for SoFi Relay. Start tracking your money and cash flow at no cost by connecting your accounts to see everything in one pace within the SoFi app. Plus, you’ll get access to financial planners at no cost so you can talk one on one through your personal goals for your money and your life, too.
Schedule an appointment with a SoFi financial planner to help you develop strategies around your benefits, financial plan with support for things like financial checkups to planning, managing debt, and retirement.
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