When the market for talent shrinks, many employers review their benefits and perks in an effort to attract talent. The range of benefits companies offer can be vast – from basics like sick and vacation pay, to more specialized like health and wellness coverage. Most employers offer two types: essential benefits such as healthcare and fringe benefits (also known as perks). When it comes to fringe benefits, some have tax implications, others don’t. If you’re thinking of offering benefits but are not sure what counts as a fringe benefit, some legal designations can help guide what makes sense for you, your team and your company.
The Meaning of Fringe Benefits
The Bureau of Labor Statistics defines benefits as “non-wage compensation provided to employees.” Put succinctly, the benefit is provided in exchange for the services the employee provides that isn’t included in their salary or hourly compensation.
These benefits include 5 categories:
- Paid leave (sick, holiday, personal and vacation days)
- Supplementary pay (overtime, shift differentials like weekend or holiday pay)
- Insurance (life, health, disability)
- Retirement plans (pension, 401(k) contributions)
- Legally required benefits (social security, taxes, workers’ compensation).
All these defined benefits are considered non-taxable.
Examples of fringe benefits
Benefits employees receive beyond these five categories are considered fringe benefits or perks. Short for perquisites, perks are any privileges given to employees over and above salaries and benefits. Examples can include:
- Gym memberships
- Personal use of company cars
- Free housing
- Cash awards
- Employee meals/snacks
- Employee discounts
- Housing allowance
- Education assistance
As more businesses look to perks to entice workers, with giveaways that include free food, free daycare, dry cleaning services, and even masseuses, they must consider the tax implications, if any, involved in the offerings.
Fringe benefits impacted by the recent tax legislation
Recent changes to the tax code have created new tax implications for perks. These can mean previously provided benefits may now be subject to tax. While not an exhaustive list, some of the more common perks impacted by the Tax Cuts and Jobs Act (TCJA) include:
In the past, employers could deduct $255 per month for transportation/parking expenses (including public transportation, car services) provided to employees or $20.00 per month for biking expenses. Transportation/parking perks have been disallowed. Employers can now allow staff to use $260.00 per month of their own income, pre-tax, to offset costs. For cyclists, the $20.00 per month will become taxable income.
On-premise meals provided to employees were 100% deductible to the employer and tax-free to the employee prior to the TCJA. These expenses are now limited to 50% deduction to the employer until 2025, when they will be disallowed.
As more business looks to relocate new hires and existing staff, they must look carefully at new tax implications. In the past, employees who relocated over 50 miles for their current job could be provided tax-free reimbursement by their employer. Moving expense allotments are now generally considered taxable income (military families are excluded).
Exempt Organizations Not Exempt from Some New Taxes
The categories of benefits that are now considered taxable under the TCJA have had a larger effect than on for-profit business. Non-profits are now also being taxed at the corporate rate under the bill in certain instances. Some of the impact:
- 21% tax for nonprofits that pay $1 million or more to any of their five highest-compensated employees.
- Unrelated business income tax (UBIT) of 21% for transportation, onsite gym and athletic facilities benefits to employees.
Many non-profits and religious organizations have requested Congress return them to fully exempt status. No decision has yet been made.
Potential new benefits under the TCJA
One section of the TCJA aims to help employers provide limited paid leave. The law offers a partial tax credit to employers who offer compensation for time off for family or medical leave.
Under Section 13403, Employer Credit for Paid Family and Medical Leave employers may take a business credit equal to the amount they pay employees on FMLA leave, with some guidelines.
- At least two weeks wages must be paid
- At least 50% of the employee’s salary must be paid
- Employees must earn less than $72,000.00 per year
- Part-time employees must be eligible at a pro-rated rate
- A written policy to provide the wages during FMLA leave.
To be eligible for the credits, the business must have a written policy in place that does not impact employee sick, vacation or other paid time off.
How important are fringe benefits?
Benefits and perks are important aspects of overall compensation that attract and retain workers. For millennials, 56% agreed in a recent survey that a quality benefits package can even influence their choice of employers: 63% reported benefits are an important reason to stay with a company. For small and medium-sized business, providing the most benefits with the best tax advantages could be critical to success.