Employers frequently want to attract good employees by offering attractive compensation packages. Compensation, however, extends beyond an employee’s hourly or salary wages. It also includes fringe benefits, which are additional small business employee perks. So, what are the fringe benefits of HRM? And, how do you calculate fringe benefits tax? Also, what are the advantages and disadvantages of fringe benefits and their examples? This blog post will address all of these concerns.
What are Fringe Benefits (FBs)?
Fringe benefits in HRM are additional benefits provided to an employee in addition to their base salary for performing a specific service. Some FBs, such as social security and health insurance, are mandated by law, while others are provided voluntarily by the employer.
Free breakfast and lunch, gym membership, employee stock options, transportation benefits, retirement planning services, childcare, education assistance, and so on are examples of optional fringe benefits in HRM.
One of the benefits of FBs is that they are tax-free for the employer if certain conditions are met. Beneficiaries of FBs, on the other hand, are required to include the fair value of the benefits in their annual taxable income.
In most cases, the employer provides fringe benefits in HRM, even if the actual provider is a third party. This is because the employer is the one who pays for the benefit provided to the employee. Similarly, even if the benefit is extended to other family members, the employee is usually the recipient.
How Fringe Benefits Work
The various fringe benefits in HRM provided to employees differ from one company to the next, because the employer can choose which benefits will be provided to employees during a given period. During the recruitment process, employees are allowed to select the FBs that they are interested in.
Whether it is a company car, an employer-paid gym membership, or educational financial assistance, the employee is free to choose the options that provide the most comfort in their current position within the company. Employee discounts, gifts, and no-additional-cost services may also be provided by retail employers.
Although the goal of providing employee FBs is to ensure their comfort in the workplace, it also helps the company stand out to potential employees. Employers in highly competitive markets may find it difficult to retain top employees based solely on salary.
Providing employees with unique FBs helps the company stand out from the competition. It increases the likelihood of attracting high-value and talented employees from schools or competing companies.
What Are Fringe Benefits Examples
There are numerous examples of fringe benefits that you may encounter because they can range from formal employee benefits to in-office perks. Here are some examples of available FBs:
- Non-monetary compensation, such as flextime or remote work
- Health benefits
- Wellness initiatives
- Paid vacation and sick leave.
- Financial assistance or reimbursement for tuition.
- Retirement benefits
- Using a company vehicle or cell phone
- Office perks such as free meals
What Are Fringe Benefits Tax
Some fringe benefits are taxable, so you must report the amount unless the IRS expressly exempts the fringe benefit from the tax. Calculate, withhold, and report the federal income, Social Security, and Medicare taxes on fringe benefits. Additionally, calculate, remit, and report the federal unemployment tax on fringe benefits.
Some taxable FBs include cash bonus pay, paid personal time off, and personal use of business vehicles. Determine the value of employee FBs by January 31 of the year following their distribution to your employees. This way, you can report fringe benefits for all employees who receive them on Form W-2, Wage, and Tax Statement.
You can add the value of the fringe benefits to the employee’s regular wages for federal income tax withholding. Alternatively, you can withhold at the 22% fringe benefits tax rate (the same rate for supplemental pay).
After adding the employee’s wages, calculate and withhold Social Security and Medicare taxes on the total compensation. To calculate the employer portion of Social Security and Medicare taxes, add fringe benefits to the employee’s total compensation.
Nontaxable Fringe Benefits in HRM
Some FBs are not taxable compensation for employees. This means that the benefits may be exempt from federal income tax withholding, FICA, and FUTA tax. They are not usually included on the employee’s Form W-2.
How to Calculate Fringe Benefits
While it may appear complicated at first glance, calculating the fringe benefit rate is quite simple. Simply add up the annual cost of the employee’s fringe benefits (including payroll taxes) and divide by the employee’s salary or wage for the year. The next step is to multiply that number by 100.
This gives you the percentage of the fringe benefit rate. Here’s how it works:
Fringe Benefit Rate = (Total fringe benefits an employee get / Annual salary of the employee) X 100
Remember to include unemployment insurance, health insurance, pension plan contributions, and any other benefits you provide when calculating total fringe benefits in HRM.
An Example For Salaried Employees
Assume an employee earns $80,000 per year and your total FBs are around $20,000. A straightforward calculation would be:
- $20,000 / $80,000 = 0.25
- Then multiply by 100:
- 0.25 X 100 = 25%
As a result, the employee’s fringe benefit rate would be 25%. This means that your company is paying the employee an additional 25% on top of their base salary.
An Example for Hourly Workers
Assume you currently pay your employees around $35 per hour and provide FBs worth around $10,000 per year. You must divide the total cost of the benefits by the employee’s annual salary. So, if your employee works 40 hours per week, the calculation is:
- $10,000 / (($35 x 40) x 54 weeks)
- $10,000 / (1400 x 54)
- $10,000 / 75,600
- = 0.13
Then multiply by 100 to get the percentage:
- 0.13 x 100
- = 13%
As a result, this employee’s fringe benefit rate would be 13%.
Employers Should Consider
Consider the following factors when calculating FBs:
#1. Think about the advantages and disadvantages of providing fringe benefits.
If you’re an employer considering offering fringe benefits, a good place to start is by researching the advantages and disadvantages of doing so. Offering a 401(k) plan to your employees, for example, can be quite costly.
#2. List all the potential FBs you provide.
List any existing fringe benefits. If you’re thinking about offering FBs, make a list of what you’d like to offer. This can calculate you in calculating the total cost of the fringe benefits and determining whether it fits within your budget.
#3. Determine the worth of each employee’s fringe benefits package.
The benefits will vary according to each employee’s role and position. This can make calculating the fringe benefit rate more difficult. To make things easier, check employment contracts to determine each employee’s FBs.
Once you have all the necessary information, it is time to calculate the total value of the fringe benefits you provide. This shouldn’t be too difficult, and it’s the first step in calculating the fringe benefit rate.
Advantages and Disadvantages of Fringe Benefits
The following are some advantages and disadvantages:
Advantages
- Employees are motivated by FBs. Motivation results in more work completed in less time, saving the organization money.
- The employees’ health is guaranteed. Employees who are in good health are more productive at work.
- FBs demonstrate the employer’s concern for its employees. It improves the organization’s self-image.
- It reduces employee turnover and increases workplace loyalty.
- Education support increases the employee’s knowledge base. The employer can assign tasks to employees based on the newer skills they have acquired. This allows the employer to profit from the additional cost of hiring new employees.
Disadvantages
- Some employees require a higher cash salary than the salary plus benefits package. Such employees do not stay with the company for long.
- Administrative costs rise to manage the equal flow of benefits within the organization.
- Because only a few benefits are mandated by law, any noncompliance results in the payment of fines and penalties to the government. Thus, to comply with labor laws, the employer must also bear the cost of a professional expert.
- The nature of FBs is standardized. Because of the organization’s large size, customization is difficult, and you cannot keep each employee happy.
- The cost of providing FBs is also high for a few organizations. The employer must make up the difference in revenue or selling price of his products.
Why Do Employers Offer Fringe Benefits in HRM?
Employers invest in fringe benefit programs for a variety of reasons, including:
Public opinion
Companies that provide benefits in addition to salary often stand out from their competitors, making the company appealing to a variety of stakeholders. Customers, for example, are more likely to buy from companies that are known in the public eye for treating their employees well and providing a safe work environment. The company will also attract talented employees who want to work for companies that value their employees.
Employee well-being
When employees are unable to work due to work-related illnesses or injuries, businesses lose money. This is because employees will spend time seeking treatment instead of contributing their skills and experience to the company. Providing a safe working environment and FBs like a gym membership, health insurance, and dental care coverage can improve their health and reduce sick leave.
Employee involvement
Employees frequently work harder when they believe their employer values their contribution to the company. Providing additional benefits such as paid holidays, health insurance, an employer-provided car, stock options, and so on is one way to increase employee satisfaction. It will also help to reduce the number of disgruntled employees and keep them engaged.
What are fringe benefits examples?
Health insurance, workers’ compensation, retirement plans, and family and medical leave are some of the most common examples of fringe benefits. Paid vacation, meal subsidies, commuter benefits, and other benefits are examples of common fringe benefits.
What are the 7 fringe benefits?
Health insurance, life insurance, tuition assistance, childcare reimbursement, cafeteria subsidies, below-market loans, employee discounts, employee stock options, and personal use of a company-owned vehicle are examples of benefits.
What is the meaning of a fringe benefit?
A fringe benefit is any nonwage payment provided to employees by their employers (for example, pension plans, profit-sharing programs, vacation pay, and company-paid life, health, and unemployment insurance programs).
Are fringe benefits deducted from a paycheck?
In general, FBs are taxable to the employee, must be reported on the employee’s W-2 as supplemental income, and are subject to withholding and employment taxes. In a publication titled Employer’s Tax Guide to Fringe Benefits for Use in 2021, the IRS guides FBs.
What is another word for fringe benefits?
Gravy, allowances, benefits, bonus, compensation package, employee-benefit, lagniappe, perk, perks, perquisites, and perquisites are other words for a fringe benefit.
Is 401k a fringe benefit?
Medical and dental insurance are common forms of fringe benefits. End-of-year and performance bonuses Employer-sponsored retirement plans such as 401ks, IRAs, and employee matching contribution plans
Conclusion
Who doesn’t like the same thing when it comes to benefits? As previously stated, there is no such thing as a free lunch. Your employer recovers 5 to 10 times the cost of extra benefits provided to you by using your skill set for the job in some way. Employee retention is a difficult task in today’s fast-paced world. Every organization intends to keep the same people who have shown great promise in the past. Companies want to keep good employees at any cost. Even for employees, it demonstrates the employer’s courtesy to them.
What Are Fringe Benefits FAQs
Who pays fringe benefit?
employers
Employers must pay FBT on certain benefits provided to their employees, their families, or other associates. Even if the benefit is provided by a third party under an arrangement with the employer, FBT applies.
Do you get taxed on fringe benefits?
The consequences of having a reportable fringe benefit amount
Even though a reportable fringe benefits amount (RFBA) is shown on your income statement or payment summary and your tax return, you do not include it in your total income or loss amount. It is subject to income tax or the Medicare levy.
How do I avoid fringe benefits tax?
You can reduce your FBT liability by replacing fringe benefits with a cash salary. Your employees could claim an income tax deduction if they paid for them themselves (the “otherwise deductible rule”). Providing benefits that are not subject to FBT
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