Fringe benefits are non-monetary compensation employers provide to their employees. They are often included in an overall compensation package provided by an employer to an employee. Fringe benefits can also be called employment benefits (especially in British English), benefits in kind or perquisites, perks for short. They are mostly associated with high-value benefits top executives of companies receive. Even though they are mostly provided for top executives, any level employee can receive them. It is important to note that fringe benefits are an additional compensation paid to the employee on top of direct wages.
Introduction of fringe benefits
Fringe benefits were first introduced during the Second World War in the US and elsewhere. During the war, the US government froze pay for employees. This led to employers starting to use different fringe benefits as a recruiting tool. By offering different benefits, employees were more inclined to choose to work with a specific company and existing employees were more inclined to stay put as well.
Why are companies using fringe benefits?
Companies still use fringe benefits to attract employees to the company and to ensure current employees don’t feel the need to leave. A good compensation package can help employers attract the most qualified employees – something that is especially important at the top level. Fringe benefits can help improve the economic security of employees, and have been especially important during economic difficulties. The benefits are thought to help boost employee moral and increase employer loyalty.
Types of fringe benefits
There are two commonly used types of fringe benefits: taxable and non-taxable fringe benefits. The national government of each country, more specifically the tax revenue administration of each country, is in charge of deciding how taxable and non-taxable fringe benefits are determined.
1. Taxable fringe benefits
Taxable fringe benefits mean that the benefits are included in the employee’s wages. Therefore, the employee pays income tax on the received fringe benefits. The taxable amount of the fringe benefit is calculated by using the current market value of the benefit being offered. For example, if the employer pays the employee’s rent, the tax is paid based on the current market value of the property.
As mentioned above, national governments are in charge of defining what fringe benefits fall under each category. In the US, taxable fringe benefits include things such as the use of company transportation.
2. Non-taxable fringe benefits
Of these two types, the non-taxable benefits are the most desirable, as the person naturally doesn’t need to pay tax. The employer also gets to claim a tax benefit on non-taxable fringe benefits provided to its employees. There are differences between countries as to what falls under the non-taxable fringe benefit category.
For example, in the US, the non-taxable fringe benefits include things such as employer-paid health insurance, education assistance and matching retirement contributions. The employee doesn’t need to include these to income tax payments.
In the UK, non-taxable fringe benefits include things such as in-house sports facilities, certain childcare arrangements and cheap or free canteen meals.