There are a number of benefits that you must pay your full-time employees according to federal law. You also need to take into account any state government requirements when you calculate payroll, plus any fringe benefits you may offer your employees. Fringe benefits examples can include retirement contributions or education assistance.
As an HR manager, you need to be aware of all the rules surrounding salary and fringe benefits. You also must have a solid understanding of payroll and how benefits are calculated in order to follow regulations correctly.
In this post, we are going to explore fringe benefits to help you with this. We will also discuss a few solutions to help you stay compliant and protect your business.
Fringe Benefits Definition
Federal law states that you must pay all your full-time employees certain benefits on top of their standard pay. This includes Medicare and social security, unemployment insurance, workers’ compensation insurance, and Family and Medical Leave Act (FMLA) protections (although workers’ compensation rates vary according to local or state laws). Most employers also offer a selection of salary and fringe benefits.
Fringe benefits are a form of compensation that supplement an employee’s standard rate of pay. They can be made in the form of property, services, cash, or cash equivalents. Common examples include retirement, medical, dental and vision insurance, premiums, training and tuition reimbursement, life insurance contributions, use of a company car, meal subsidization, housing allowance, educational assistance, vacation pay, meals and employee wellness plans.
An attractive benefits and compensation package can be a great way to attract and retain top talent. It can also be a great way to motivate and reward staff and encourage them to be more productive. However, you need to be clear about which benefits are taxable so that you calculate your payslips in accordance with the law. With a vast range of benefits to choose from, this can sometimes be confusing.
Fringe Benefits Examples
Generally speaking, salary and fringe benefits fall into three categories: legally required benefits, taxable benefits, and non-taxable benefits.
Here are some of the most common taxable fringe benefits examples. If you offer any of these perks, then you need to make sure you apply tax to any totals added to your employee payslips.
The first of the fringe benefits examples we are going to discuss is life insurance.
Many companies offer group term life insurance policies to their employees for free. With a group policy, if an employee dies, that lump sum benefit would go to the employee’s beneficiary. Sometimes the benefit can be paid as a pension, but it’s down to how the employer has set up the cover.
According to the IRS, life insurance premiums for a policy of more than $50,000 are classified as a fringe benefit and create a taxable income for the employee.
Retirement Plan Contributions
The next of the fringe benefits examples we are going to look at is retirement plan contributions.
Some employers match their employee 401(k) paycheck deferrals, whilst others make qualified contributions to retirement plans. These contributions can be pretax or after tax. An after-tax contribution is a deposit into a retirement account of money that has been taxed in the year in which it was paid into the account.
Another common fringe benefits example is education assistance.
In this case, employers usually offer tuition reimbursement for the completion of a college course or an advanced degree program. This fringe benefit also usually involves offering flexible schedules so that employees can balance their education with their work obligations. Some companies also offer educational assistance programs (such as scholarship grants) for strategic learning and development purposes.
The final fringe benefits example we are going to discuss is bonus compensation schemes.
This is a financial reward given to an employee in addition to their regular salary. You would usually offer an employee a bonus when they meet certain targets or at the end of the financial year. They can be a great motivational tool, especially for those employees working in sales. Employee bonus schemes are generally a positive strategy and can provide real motivation. They can also help employees identify with the company and align them with its operational objectives.
These bonuses are classified as taxable income and must be declared in an employee’s annual tax return.
Is Holiday Pay a Fringe Benefit?
One question that people often have is whether or not holiday pay is classed as a fringe benefit.
Having time off work is vital for the health and wellbeing of every employee. This is why, although there is no legal requirement, most employers include paid time off (PTO) as a fringe benefit in their employee contracts. This usually includes PTO for a set number of vacation days, sick leave, and time off for personal circumstances, such as family emergencies, funerals, and medical or parental leave.
Although countries like France, Germany, Spain and the UK see a total of around 30 days of PTO per year, the average for full-time workers in the USA is 10 vacation days per year, depending on company policy.
Aside from vacation days, many companies also pay employees for certain holidays, such as Christmas Day. Others that work in hospitality or retail, for example, are sometimes offered extra pay or overtime if they work on official holidays. However, companies that offer holiday pay need to ensure they offer it equally to avoid discrimination based on race or religion.
How to Calculate Fringe Benefits
Whichever fringe benefits you offer your employees, you need to make sure you take them into consideration when you calculate payroll each month. This includes withholding the right percentage of payroll tax. It also involves including salary and fringe benefits as supplemental income on an employee’s W-2. The IRS provides guidance on fringe benefits in a publication titled Employer’s Tax Guide to Fringe Benefits for Use in 2021.
In a nutshell, you should not classify fringe benefits as direct income. Instead, you should treat them as extra compensation. You also need to consider that some benefits are subject to employment tax. However, you can use special rules to withhold, deposit, and report employment taxes.
As a rule, any fringe benefit you provide is taxable and you must include it in an employee’s pay unless the law specifically excludes it. Exclusions include anything that would be difficult to account for financially, such as refreshments or snacks, or anything gifted “in kind” (known as de minimis benefits), such as a birthday gift card. Other salary and fringe benefits not considered taxable include health insurance, group term life insurance, stock bonus plans, transportation benefits, and employee discounts.
For intangible fringe benefits that are taxable, such as vacation days, you need to work out their dollar cost. You then need to add up the cost of all an employee’s fringe benefits for the year (including payroll taxes paid) and divide it by the employee’s annual wage or salary. Then, multiply the total by 100 to get the fringe benefit rate percentage.
Keep Track of Employee Benefits and Compensation
As you can see, keeping track of employee benefits and compensation is never straightforward. You need to make sure you calculate all your benefits correctly and withhold the right rate of tax where applicable. A payslip template can help with this, but you still need to ensure the right rate of tax is calculated. Not easy, especially if you have many employees with varying benefits and compensation packages.
Some companies choose to subcontract their payroll and benefits processes to a Professional Employer Organization (PEO). A PEO is a third-party HR service provider that manages and calculates all payroll and compensation deductions. They can be a great solution for ensuring compliance, but they can also be extremely costly. Not ideal, especially if you are a small business.
A much more cost-effective solution is using HR management software to manage all your HR processes, such as Factorial’s all-in-one solution. Our comprehensive software can automate and streamline your payroll processes, saving you time and stress. You also get peace of mind as all your employee benefits are correctly calculated each month. This leaves you with more time to focus on employee engagement and productivity, boosting the bottom line of your business.
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