Employee fringe benefits and contributions in form include various forms of non-wage compensation offered to employees as well as their regular salaries or wages. Such instances where individual trades wages for any other form of fringe benefit is usually referred to as a “payout”, “performance bonus”, “incentive bonus” or even “cash bonus”. These terms are usually used to describe performance-based and/or reward-based pay arrangements. The two general categories of fringe benefits are employer-provided and employee supplied.
Both types of benefits can have significant tax implications, especially the latter. An employer providing fringe benefits may be subject to tax for the full amount of the arrangement, regardless of whether the employee takes any form of payment for these benefits. Conversely, an employee may be subject to tax for the portion of a fringe benefit that is determined by an individual and not the business.
The term “fringe benefits” generally refers to items that are provided to an employee as part of a regular employment practice. Some examples of fringe benefits are vacation, health, dental, life and vision insurance. These items are generally considered “fringe benefits” because they are not considered an essential benefit required for employment. Benefits such as these, however, are extremely valuable to many employees, as most employees would not be able to survive without them. Most employers consider fringe benefits as an incentive to attract and retain qualified employees, as well as a measure of a company’s corporate responsibility. Additionally, the tax code provides such fringe benefits as a tax write-off, which are considered an income tax-free benefit.
A business providing fringe benefits may also choose to withhold income tax from the portion of an employee’s salary that is dependent upon any form of fringe benefit. Similarly, an employer may withhold income tax from an employee’s gross salary in case that employee is eligible for any tax benefit based on such fringe benefits. However, in general, an employer cannot withhold income tax from an employee’s only third party benefits. These are typically provided by an employer to an employee’s dependents during the employee’s retirement, or on termination of employment for specified circumstances.
To determine the tax-free and tax-deductible benefits to include in a package, an employee should consider all the fringe benefits available, the employees’ overall retirement and medical care needs, and their total lifetime incomes. If an employee has dependent children, including child care expenses, that will be included in his or her retirement package, but only up to a certain percentage of the total lifetime income. The cost of these types of fringe benefits should be considered when figuring the employee’s total retirement and medical care needs. Certain fringe benefits such as accident and injury insurance are considered pre-tax benefits, while insurance provided by employers is usually considered a post-tax benefit. An employee’s compensation history can also be used to help determine which fringe benefits should be included in his or her package and which should be excluded.
Another important factor to consider is whether the benefits are offered as an attractive incentive to employees. It is not uncommon for some employers to offer bonuses or other nonqualified incentives to employees who choose to retire with them. Such incentives may only be offered to highly qualified employees. If bonuses or other nonqualified incentives are being offered to employees who are not eligible to receive them under the tax law, they may not be taxable either.