What Are Fringe Benefits?

According to the US Census, 86% of private-sector employees work in companies that offer health insurance. Similarly, Statista reports that 65% of US employers offer some type of education benefits to employees, such as student loan repayment assistance or college tuition assistance.

Both health insurance and education assistance are examples of what we call fringe benefits. These are non-wage costs that an employer bears on behalf of their employee.

While some fringe benefits may be required by law, others are offered as a way to attract and retain top talent. Together, these benefits form the fringe pay, which is the total compensation package for an employee beyond their base salary. Let's learn more.

What Are Fringe Benefits?

Fringe pay or fringe benefits are additional forms of compensation that a business offers its employees on top of their salary.

For example, if you own a retail business and allow your employees to purchase products from your store at a discounted price, this is considered a fringe benefit. Not all employees get the same types of fringe benefits. 

Those at the lower end of the pay scale may receive more basic benefits such as health insurance and vacation time, while those at the higher end may have access to additional perks like stock options, a company car, a generous retirement plan, and accommodation.

Some common fringe benefits include:

• Health and dental insurance
• Stock options or equity
• Gym memberships or fitness subsidies
• Professional development opportunities
• Housing allowances
• Travel reimbursements

Are Fringe Benefits Taxable?

Now that you know what are fringes in payroll, let's move on to the next big question: are they taxable like your base salary?

The default answer is yes. Fringe pay is taxable, but there are a few exemptions. 

Any benefit you provide as part of compensation for services is generally considered taxable income to the recipient. However, there are specific rules and exclusions that may apply to certain types of fringe benefits according to The Internal Revenue Service IRS docmuent "Publication 15-B (2024), Employer's Tax Guide to Fringe Benefits."

Taxable Fringe Benefits:

If a fringe benefit is taxable:

1. Employees: The value of the benefit must be included in the employee's wages and reported on Form W-2. Additionally, it is subject to employment taxes like Social Security, Medicare, and federal income tax withholding.
2. Non-Employees: For independent contractors or partners, taxable benefits are reported on forms like Form 1099-NEC or Schedule K-1.

Non-Taxable Fringe Benefits:

Some benefits are excluded from taxation under the law, including:

• Health insurance contributions: Contributions to an accident or health plan.
• Group-term life insurance: Up to $50,000 in coverage.
• Educational assistance: Up to $5,250 annually under a qualified plan.
• Transportation benefits: Up to $315 monthly for parking or commuter expenses.
• De minimis benefits: Minor benefits like occasional meals or small gifts.

How to Determine Taxability:

1. Exclusions: Refer to the rules in Section 2 of IRS Publication 15-B. If a benefit qualifies under these rules, it may be excluded from income.
2. Valuation: For taxable benefits, the value is determined based on fair market value minus any amounts the recipient paid for the benefit or excluded by law.
3. Special Cases: For certain benefits, like cafeteria plans or adoption assistance, additional rules may apply.

Reporting and Compliance:

• Employees: Use Form W-2 for wages and report taxable fringe benefits as income.
• Non-Employees: Use Form 1099-NEC for independent contractors and Schedule K-1 for partners.
• Cafeteria Plans: Qualified benefits under cafeteria plans remain non-taxable even if employees could have opted for cash.

Common Examples:

• Taxable: Personal use of a company car, gym memberships for non-employees, or benefits for highly compensated employees under a discriminatory plan.
• Non-Taxable: Accident and health benefits, meals provided on business premises for convenience, or transportation benefits within the allowed limits.

What Is a Fringe Rate?

Besides fringe benefits meaning, it's also important to know what a fringe rate is. The fringe rate or fringe benefit rate is the percentage of an employee's salary that goes towards fringe benefits. It varies across industries and job positions. 

According to the US Bureau of Labor Statistics, the civilian workers' fringe benefits rate is around 30.9%, while for private employees, it is about 29.2%. In local and state governments, the fringe rate is 38% of the total compensation.

How to Calculate Fringe Rate?

Here’s a simple formula to calculate fringe rate: 

Fringe Rate = (Total cost of fringe benefits / Total annual salary) x 100 

Now, let’s explain this with an example. You work as a project manager at XYZ firm. Your annual salary is $120,000. The total cost of fringe benefits you receive is approximately $30,000. 

If you do the math, the fringe rate comes out to be 25%. 

Which Fringe Benefits Are Required by Law?

Most employees get some fringe payment, but the extent of it can vary, depending on the employer's and government's policies. Some fringe benefits are made mandatory by law.

For example, the Patient Protection and Affordable Care Act has mandated businesses with over 50 employees to provide healthcare plans that include emergency care, specialist doctors, and primary care physicians.

The Federal Unemployment Tax Act (FUTA) also requires the payment of state and federal unemployment tax to the Department of Labor. These taxes provide short-term monetary assistance to unemployed individuals who meet the requirements.

In addition, the US government requires employers with more than 50 workers to provide medical and family leave to employees who have worked in the company for over 12 months. The medical leave can be up to 12 weeks and is unpaid and protected.

Similarly, worker's compensation benefits are also offered to all employees who suffer injuries at work or develop work-related illnesses. These benefits include medical care, wage replacement, rehabilitation, and additional support.

Which Fringe Benefits Are Not Required by Law?

Some fringe benefits examples that are not mandatory by law include:

• Disability insurance
• Achievement awards
• Fitness training
• Stock options
• Paid holidays
• Employee discounts
• Meal plans

Statistics on Fringe Pay 

Here are some statistics to give you an idea on the ubiquitousness of fringe benefits across workplaces. 

• According to the Bureau of Labor Statistics, 73% of civilian workers in the US received retirement benefits from their employers in 2023.
• A Morgan Stanley survey found that 72% of companies offer equity compensation as a fringe benefit to certain employees. The figure has risen 7% since 2021, when it was at 65%. 
• A Care.com survey revealed that 56% of US employers prioritize child care benefits in their fringe pay to attract top talent. 
• Guardian Life reports that 91% of people who have a disability insurance plan in the US get it through their employers. 

Conclusion

Be it cash fringe or non-cash fringe, employees and employers must be aware of the benefits to avoid any lawsuits. Employers are also required to include the value of fringe benefits on employee pay stubs or W-2 forms.

As an employee, you can use a  W-2 form and paycheck stub generator to record your fringe benefits. Doing this will help you make sure you're getting all the benefits you're entitled to.

FAQs on Fringe Pay

What is the average fringe rate in the US?

On average, the fringe rate for American workers is around 29.5% of their total compensation and falls in the range of 22% to 32.7%.

How do I find my fringe rate?

You can find your fringe by reviewing your pay stub or W-2 form and looking for any non-cash benefits or bonuses listed. Or, speak to your HR representative for more information on the specific fringe benefits offered by your company.

Is health insurance a fringe benefit?

Yes, health insurance is a fringe benefit. It is a mandatory benefit for employers with 50 or more full-time employees, and it can also be offered as a voluntary benefit by smaller companies.

Where is the fringe pay listed on the Form W-2? 

The value of fringe benefits you receive is listed in the following boxes on the Form W-2: Box 1, Box 3, and Box 5. It also appears on the line 3 of Form 940 (for Annual Federal Unemployment (FUTA) Tax Return). 

How to Negotiate Fringe Benefits During Salary Negotiations

When negotiating fringe benefits, focus on those that matter most to you, such as additional leave or flexible work options. Highlight how these benefits support your productivity and align with company goals.

How to Design an Employee Benefits Plan?

A good employee benefits plan balances cost with employee needs by including essential perks like health coverage and optional add-ons. Understanding industry standards and employee preferences is key to designing a competitive package.

 

References:

• https://www.census.gov/library/stories/2024/02/health-care-costs.html
• https://www.statista.com/statistics/554081/percent-of-us-employers-offering-education-benefits/
• https://www.irs.gov/pub/irs-pdf/p15b.pdf
• https://www.bls.gov/opub/ted/2023/73-percent-of-civilian-workers-had-access-to-retirement-benefits-in-2023.htm
• https://www.morganstanley.com/content/dam/msdotcom/atwork/state-of-workplace-financial-benefits-study-2023/state-of-workplace-study.pdf
• https://www.guardianlife.com/reports/insuring-your-income
• https://www.hhs.gov/healthcare/about-the-aca/index.html
• https://www.bls.gov/news.release/pdf/ecec.pdf