Fringe Benefits

Fringe benefits are defined as those benefits an employer makes available to any employee, partner, or independent contractor. Fringe benefits are treated as compensation in addition to any wages or salaries. For example, access to a company car, housing allowance, medical insurance, pension plan, and paid holidays would all be viewed as fringe benefits. Certain fringe benefits may be exempt from taxation if specific conditions are met. If you are a recipient of any taxable fringe benefits, you must include the benefit’s fair market value in your annual taxable income calculation. Taxable fringe benefits are subjected to all federal income taxes, as well as FICA and FUTA.  Non-fringe benefits are not subject to any of the aforementioned taxes. Any benefits that an employer offers to an employee in return for services rendered would be classified as a fringe benefit.

Competitive fringe benefits are generally offered to employees with the intent of attracting job seekers. In fact, one study revealed that 25.2 percent of respondents indicated that quality of employee benefits was very important to them. While 31.2 percent viewed employee benefits as moderately important, 33.8 percent viewed employee benefits as somewhat important, and only 9.8 percent stated that employee benefits were not important. 

In the not too distant past, employers started to realize that prospective employees attribute great weight to salary being offered for the position. In an attempt to lure qualified individuals to the company, rather than considering a competing offer, employers started to offer non-salary compensation in addition to the actual salary compensation.

Breaking Down ‘Fringe Benefits’

Within the classification of fringe benefits, an employee can commonly expect to find educational assistance, group-term life insurance coverage, health insurance coverage, childcare assistance reimbursement, employee stock option plans, and others.  As previously mentioned, a fringe benefit may be classified as tax-exempt based on the type of benefit as well as the benefit value. That said, the default position remains that all fringe benefits are subject to taxation unless the benefit has been specifically classified as tax-exempt.

Tax-Exempt Benefits

There are several examples of fair market value. Fair market value is defined as the price an employee would pay for the same benefit if he/she were to engage in a transaction with a third party. To calculate fair market value, any relevant factors must be considered, such as geographic location as well as current market conditions. The actual cost of providing the benefit to the employee may be different than the benefits fair market value.

The calculation used to value the usage of a company automobile is slightly more complex. One may use fair market value. In addition, if the automobile could have been part of a leasing program based on a cent per mile basis, the miles driven in the automobile may be multiplied by the standard rate per mile allowed by the IRS.  

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