What are the types of fringe benefits and how can you manage them?
Fringe benefits are allowances or compensation that are not included in payslips as wages, but carry financial value.
Using fringe benefits allow companies to alter the way they are taxed and the manner in which they report their expenses. And, for many companies, it is viewed as a key component to drive employee engagement and staff retention.
However, managing fringe benefits is a challenge for many businesses: What are examples of fringe benefits? And how can you manage them?
If you are an HR manager or an accountant, this article is for you!
What are fringe benefits?
Fringe benefits are goods or services that a business provides to an employee. They are either free of charge or at a discounted price, in exchange for the employee's services.
Fringe benefits are used for both business and personal purposes.
For example, a smartphone that is solely used to contact customers during working hours is not a fringe benefit. The same goes for a company car that is returned before every weekend break.
Here is a video that explains how fringe benefits work:
How do fringe benefits work
A fringe benefit is considered to be an additional form of compensation. As such it is :
- specified in a clause of the employment contract or in an amendment
- included in accounting and payroll
- subject to payroll and employer's social security contributions
- subject to income tax
Fringe benefits allow employers to:
- give the best possible working conditions to their employees
- value benefits during wage negotiations
- deduct social security and unemployment contributions in certain cases
How to calculate a fringe benefit rate
A fringe benefit rate is a percentage that is calculated by adding together the annual cost of all benefits and payroll taxes paid, and dividing this amount by the annual wages paid.
For example, if the total benefits paid were $35,000 and the wages paid were $100,000, then the fringe benefit rate would be 35%.
Most common types of fringe benefits in human resources
Fringe benefits can be categorized into two categories: taxable fringe benefits and nontaxable fringe benefits.
Taxable fringe benefits
Taxable fringe benefits are included in gross income and are subject to federal withholding, social security, and medicare taxes.
Here are some of the main types of fringe benefits that are taxable according to the IRS Employer’s Tax Guide to Fringe Benefits:
- repayment of expenses for an employee's relocation of less than 50 miles
- clothing provided to an employee "that is suitable for street wear"
- reimbursement for assisting an employee with education when it is not related to his or her job or exceeds the allowable IRS exclusion
- any expense reimbursement that doesn't come with adequate accounting
- using a company vehicle for personal use
Businesses and employees are required to claim the fair market value of taxable fringe benefits. The fair market value is defined as the amount someone would pay if they were to acquire the item or service on their own. This may differ from the amount an employer paid for the benefit because companies may receive corporate discounts.
Non taxable fringe benefits
Some fringe benefits are not subject to federal income tax withholding and are excluded from gross income.
As of 2019, the Internal Revenue Service (IRS) provided a list of fringe benefits excluded from income taxes, this includes:
- accident and health benefits
- achievement awards
- adoption assistance
- athletic facilities
- commuting benefits
- de minimis (minimal) benefits
- dependent care assistance
- educational assistance
- employee discounts
- employee stock options
- employer-provided cell phones
- group-term life insurance coverage
- health savings accounts (hsa)
- lodgings on business premises
- no-additional-cost services
- retirement planning services
- tuition reduction
- working conditions benefits
How to manage fringe benefits in payrolling
On an employee's payslip, fringe benefits appear twice:
- they are added to the base salary to obtain the gross salary;
- national insurance is then calculated on this gross salary, and deducted to obtain the net salary ;
- fringe benefits are then deducted from the net pay, resulting in the net amount payable to the employee.
Here is an example of an employee payslip containing fringe benefits:
To help you manage your benefits, you can use payrolling software such as PayFit.
Payrolling benefits on PayFit is straightforward. Via the "Pay Elements" section of your employee's profile, click on "Add" and fill in the benefit, its type (accommodation, meals, etc.) and the method of calculation.
If you want to choose a monthly rate, fill in the number of days for meals, or the number of rooms rented, etc. The calculation is done automatically.
You can change, delete, or carry them over from one month to the next, and find the summary of benefits in kind in the “Summary of the month” section.
Make the most of payroll and accounting software
The laws and regulations of payroll and accounting are complex and subject to change.
To make sure that the fringe benefits that you implement are up to date and do not become issues for your business, equip yourself with a SaaS software and benefit from their plethora of features: regular updates, automated calculations, you will save time and peace of mind!