Fringe Benefits

Fringe benefits are forms of compensation an employer provides in addition to regular wages or salary. Common examples include health and dental insurance, contributions to retirement plans, paid vacation and sick leave, life and disability insurance, company cars, meals, gym memberships, tuition help and employee discounts. They can be a large part of the total cost of employing someone: the US Bureau of Labor Statistics reports that benefits account for roughly 30 percent of total employer compensation costs for civilian workers.

The term has two related uses. In accounting, fringe benefits are part of compensation expense and create liabilities when earned but not yet paid. In US tax law, a fringe benefit is any form of pay other than cash wages, and the question is whether its value must be included in the employee's taxable income. The general idea, from the employee's perspective, is described in the entry on employee fringe benefits; this entry focuses on the accounting and tax treatment for employers.

Under the Internal Revenue Code, all fringe benefits are taxable unless a specific provision excludes them. IRS Publication 15-B lists the main exclusions. Broadly:

• Employer-paid health coverage under an accident or health plan is excluded from income, as are many contributions to health savings accounts.
• Group-term life insurance is excluded up to $50,000 of coverage, and the cost of cover above that amount is taxable.
• Working condition benefits, such as a work phone or business travel paid by the employer, are excluded if the employee could have deducted the cost as a business expense.
• De minimis benefits, such as occasional snacks, small holiday gifts that are not cash, or occasional event tickets, are excluded because accounting for them would be unreasonable.
• Qualified transportation benefits, such as transit passes and parking, are excluded up to monthly limits that are adjusted for inflation.

Taxable benefits, such as personal use of a company car, are valued at fair market value and added to the employee's wages. They are subject to income tax withholding, Social Security and Medicare, and appear on Form W-2.

Under accrual accounting, the cost of benefits is recognized as an expense in the period employees earn them, not when the employer pays. Most benefits are recorded in expense accounts such as health insurance expense, employee benefits expense or pension expense, often split by department so costs can be traced to products or functions.

Consider a company with 50 employees that pays $650 per employee per month toward health insurance and contributes 4 percent of a $500,000 monthly payroll to employees' 401(k) accounts. Each month it records benefits expense of $32,500 for health insurance and $20,000 for retirement contributions, a total of $52,500. If the retirement contributions are deposited after month end, the $20,000 is credited to a liability such as 401(k) payable until paid. Paid time off is accrued as employees earn it: if staff earn $15,000 of vacation in a month that they will take later, the company debits salaries expense and credits accrued vacation, an accrued liability.

Some benefits stretch over decades. A defined benefit pension plan promises a future pension based on salary and years of service, so the employer must estimate the present value of its obligation using actuarial assumptions, record pension expense each year and report the funded status on the balance sheet. Similar rules apply to retiree health benefits. These are governed by ASC 715 in US GAAP and IAS 19 in IFRS.

Benefits help employers attract and keep staff, and tax-free benefits can be worth more to employees than the same amount of cash wages. They also bring obligations. Employers must value taxable benefits correctly, include them in payroll reporting and pay the related employer payroll taxes. Errors can lead to back taxes, penalties and amended W-2s. For financial reporting, misjudging long-term benefit obligations can significantly understate liabilities, which is why pension and benefit notes are closely read by analysts and lenders.

• Internal Revenue Service: Publication 15-B, Employer's Tax Guide to Fringe Benefits