Employee fringe benefits: A beginner’s guide
August 30, 2022 6 min read
When you receive a job offer, salary may be the first thing you consider. It could be a good idea to also consider any nonwage benefits that are offered to you. That’s because your potential employer might offer additional perks, like fringe benefits.
But what are fringe benefits, and what types of benefits could you possibly receive? Read on to learn more about these benefits, how they work and why they matter.
- Fringe benefits are additional compensation employers offer their employees beyond salaries or earned wages.
- Some companies may use fringe benefits to recruit new talent or increase job satisfaction.
- Some fringe benefits are taxable, while others are nontaxable.
- Certain benefits—like Social Security or federal and state unemployment insurance—may be required by law. These types of benefits are typically considered mandatory benefits.
What are fringe benefits?
Fringe benefits are compensation employers offer to employees in addition to wages and salaries. A business could offer fringe benefits to both employees and independent contractors. Some companies may offer certain fringe benefits to all employees, while other benefits might only be available to certain employees—like executives.
Fringe benefits typically fall into two categories: voluntary benefits and mandatory benefits. These benefits could play an important role in a prospective employee’s decisions. That’s why employers may offer voluntary benefits—like 401(k) plans—to increase job satisfaction, retain workers and attract new talent. Others—like Social Security or health care—may be required by federal and state laws.
It may be a good idea to consider which fringe benefits are important to you. You could use this information to look for job opportunities with employers that offer those benefits. And knowing the common types of fringe benefits could help you better understand the value of your compensation package.
Common types of voluntary fringe benefits
There are many different types of voluntary fringe benefits employers could offer their employees. Companies aren’t required by law to offer these benefits. However, some companies offer unique perks to recruit top talent or support their employees’ well-being.
Here are some common types of voluntary fringe benefits you might see when you research compensation packages:
- Paid time off. Some employers may offer paid vacations and holidays. According to the Bureau of Labor Statistics, 77% of private-sector employees have access to paid vacation benefits.
- Employee stock options. Employees may be offered stock options as part of their compensation or as a reward for their performance.
- Retirement planning services. Retirement planning services and qualified retirement plans are common fringe benefits. The Bureau of Labor Statistics states that 68% of private-sector workers have access to retirement benefits through their employers.
- Disability insurance and life insurance. Some organizations may also offer disability and life insurance. These fringe benefits might provide financial support for employees or their families.
- Tuition assistance. Employees could have some of their education expenses reimbursed by their employers.
- Gym memberships. Employees might get free or reduced-price gym memberships through their employers.
Other types of voluntary benefits could include free meals, transportation stipends and more. When you review your compensation package or research prospective employers, you may want to explore all of your voluntary fringe benefit options. You may also want to consider any mandatory benefits you could receive.
Examples of mandatory fringe benefits
Certain benefits, such as unemployment insurance, may be required by law. Legal requirements for mandatory benefits could vary by state and might also depend on other factors, such as the number of employees a company has and your employment type.
Here are some examples of fringe benefits that could be considered mandatory benefits:
The Affordable Care Act (ACA) requires applicable large employers (ALEs) with more than 50 full-time employees to offer qualifying health care benefits to full-time employees. An employee’s spouse and children may also be eligible for health care coverage under a plan offered by an employer.
Unemployment benefits can provide unemployment compensation for eligible workers who lose their jobs through no fault of their own. The Federal Unemployment Tax Act (FUTA) requires companies to pay a FUTA tax.
Employers are typically required to pay both federal and state unemployment tax, but these taxes aren’t taken out of an employee’s pay. It’s important to note each state sets its own eligibility guidelines for unemployment benefits, so you may want to review your state’s requirements.
Medical leave and sick leave
The Family and Medical Leave Act (FMLA) offers eligible employees up to 12 weeks of job-protected unpaid leave per year. All public agencies and companies with 50 or more employees must follow FMLA guidelines. This leave is designed to help employees deal with life events such as caring for a sick family member. The FMLA also states that employers must maintain an employee’s group health care coverage during the employee’s leave.
There are no federal laws that require companies to provide paid sick leave. However, some states may have paid sick leave requirements that employers must follow. Still, many companies offer paid sick leave benefits even if these benefits aren’t legally required. In fact, a 2021 U.S. Bureau of Labor Statistics report states that 79% of workers have some form of sick leave benefits included in their compensation packages.
Workers’ compensation can provide medical and cash benefits to employees who become ill or injured while on the job or because of their job. Employers typically purchase workers’ compensation insurance for their employees. And workers’ compensation is usually handled by state-level programs. Be aware: The program benefits can vary by state.
Are fringe benefits taxable?
According to the Internal Revenue Service, any fringe benefit an employer provides is considered taxable unless the law specifically excludes the benefit from taxation. That’s why some benefits—like bonuses—are taxed, while others—like health savings accounts—are tax-exempt.
Fringe benefits are usually considered taxable income and must be reported on an employee’s W-2. However, certain fringe benefits are exempt from some or all taxes. Examples of tax-exempt fringe benefits can include:
- Achievement awards
- Adoption assistance
- Commuter or transportation benefits
- Employer-provided cellphones
- Group term-life insurance
- Health care benefits
- Retirement planning services
- Workplace accommodations
Knowing how common fringe benefits are taxed can help you compare compensation packages or better understand your total compensation. But the rules for valuing and taxing these benefits can be complicated.
You can view IRS Publication 15-B for a full list of exclusions and read more about the tax treatment of fringe benefits. You could also contact your employer’s benefits coordinator or a qualified tax professional to learn about your fringe benefit options.
Fringe benefits in a nutshell
Fringe benefits are nonwage compensation that employers may provide. Employers could be required by law to provide certain benefits, while others could be unique company perks.
Whether you’re on the job hunt or an existing employee, knowing which fringe benefits an employer offers could help you determine the value of your compensation package. And some fringe benefits—like retirement planning services—could play an important role in your overall personal finance strategy.