Fringe Benefits Meaning Tax Examples And Types

Fringe Benefits Meaning

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It includes pension schemes, daycare, canteen subsidies, tuition support, and other expensesOther ExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities.read more. Some are compulsory, like medical insurance, while others are independently awarded by the company, like tuition refund. The fringe benefits are taxable and must be covered in employee salary unless there are defined legal exceptions.

Key Takeaways

Fringe benefits are the rewards for employees, contractors, directors, or partners in addition to fixed salaries. Fringe benefits examples include daycare, tuition refund, health savings account, achievement awards, and employee stock options. These are of two types – lawfully required (accidental and health benefits) and willingly offered (employee discounts). Except for certain exclusions, the recipient must pay the fringe benefits tax on their income receipt. Also, different forms are available for different types of recipients.

Fringe Benefits Explained

Fringe benefits are the extra employee privileges gained apart from the set payment. It aids an organization to cherish the present skilful workers and stand out in the marketplace for potential workforce.

Different businesses offer different benefits to their employees, as per the latter’s choice during recruitment. They can choose any reward providing utmost comfort such as a company-sponsored gym membership, car, or employee concession.

The firm is the real provider and financier of the incentive, even though a 3rd-party supplies them. Likewise, the workers are the recipient, despite its expanded usage to their contacts. Moreover, the employer must mention all details in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more for audit purposesAudit PurposesThe primary purpose of an audit is to conduct an independent and unbiased verification of all financial and non-financial material information to ensure that it is in line with what the management has reported.read more.

In terms of employer-provided cell phones/laptops/computers for the personal usage of an employee, the Fair Market Value (FMV) is the value of such benefit. However, if the company has already used it before offering it to the employee, then the depreciated value of the equipmentDepreciated Value Of The EquipmentDepreciation on Equipment refers to the decremented value of an equipment’s cost after deducting salvage value over the life of an equipment. It lowers its resale value.read more is the benefit’s value.

Why Do Firms Offer Fringe Benefits?

Firms provide fringe or additional benefits for the following reasons:

#1 – Guarantees Workers’ Well-being

The work-related injuries or illnesses may prompt the employees to take some time off. This is detrimental to the company as it impacts the general efficiency rate. So, the rewards like accident and health benefits, health savings accounts, and gym membership ensure a secure workplace.

It guarantees the complete well-being of workers and lessens the chances of paid leaves. Needlessly, it boosts the company’s productivity rate.

#2 – Entices High-Potential Talent Pool

Collaborators presumably approach businesses that support their workers with a flourishing atmosphere. Additionally, skilled job hunters favor friendly companies with a growth-oriented climate.

Employee benefits make the firm stick out from its market rivals to draw in more shareholders and future talent pool. In addition, it increases the company’s goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company’s net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company’s net identifiable assets from the total purchase price.read more with practical bonus issuesBonus IssuesBonus shares refer to the stocks issued by the companies for free of cost to their existing shareholders in the proportion of their stock holdings. Companies issue such shares to compensate the shareholders with a higher dividend payout in the form of stocks.read more.

#3 – Improves Market Performance

When valued for their input in the corporation, employees become more diligent. In addition, added bonuses like education assistance, paid days off, achievement awards, and no-additional-cost services surge employee productiveness. Consequently, this enhances the organization’s market performance and provides tax benefitsEmployer Gets Tax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place.read more.

Types of Fringe Benefits

Fringe or additional benefits are of two types, Legitimately required and willingly provided. Let’s explore each one in detail.

#1 – Legitimately Required Benefits

An enterprise is lawfully committed to offer these benefits to its employees. It comprises health protection, retirement pension, and unemployment insurance. Employees can ask for such additional benefits from the employer when being hired.

Examples:

Accident & health benefitsGroup-term life insuranceRetirement planning servicesUnemployment insurance

#2 – Willingly Provided Benefits

An enterprise is not lawfully compelled and may or may not offer such rewards to its workers. It covers salaried leaves, employee stock optionsEmployee Stock OptionsEmployee stock option plan (ESOP) is an “option” granted to the company employee which carries the right, but not the obligation, to buy a promised number of shares at a pre-determined price (known as exercise price). read more, commuting services, and cafeteria facilities.

Achievement awardsAthletic facilitiesAdoption assistanceEducational assistanceDependent care assistanceEmployee stock optionsEmployee discountsHealth savings accountsTransportation benefitsTuition reductionEmployer-provided cell phonesLodgingMealsNo-additional-cost services

Examples

Let us discuss some fringe benefits examples in detail:

Example #1

Suppose three employees, namely Sam, Bill, and Harry, earn $1,400, $1,600, and $1,200, respectively. The latest rate of employees’ social security contribution is 6.20% of their income. So, the expected amount of the perk is calculated by multiplying their income by the contribution rate.

Thus, Sam, Bill, and Harry will receive a bonus amount worth $86.80, $99.20, and $74.40, respectively.

Example #2

Let us assume that Company ABC offers 100 shares to Timothy at $5 per share. Nonetheless, the stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more displays the stock rate at $8 per share on the same day. Hence,

Fringe benefit = $8-$5

= $3

So, Value = 100*$3

= $300

Example #3

Say, an employee named Brian took a loanLoanA loan is a vehicle for credit in which a lender will give a sum of money to a borrower or borrowing entity in exchange for future repayment.read more worth $25000 from the Bank of America, payable by the end of the year. Moreover, the annual lending rate is 3%. Now,

The interest amount to be paid by Brian = PRT

= $250000.031

= $750

If the loan’s purpose (insurance or retirement planning) justifies a legally required fringe benefit, Brian’s employer will pay $750 on his behalf.

Are Fringe Benefits Taxable?

Unless the law particularly specifies, additional employee benefits are taxable and should be covered in the recipient’s income. The employer must specify in the salary by how much the reward’s value is greater than the total of the below-mentioned amounts:

Payment for the perk on the receiver’s behalfLegally excluded amount from the salary

Moreover, different types of recipients use different forms to report taxable fringe benefits.

The employee may utilize certain rules for retaining, settling, and reporting employment taxes.

How To Report Taxes on Fringe Benefits?

The recipient must visit the IRS website and make the payment through:

Electronic Funds WithdrawalCredit or Debit cardMoney Order or CheckElectronic Federal Tax Payment SystemSame-Day Wire Transfer, orCash