BlogFeb 17, 2022
The Hows and Whys of Fringe Benefits Tax
The Blue dot Team
The Blue dot Team
Reportable fringe benefits are perks or compensation to employees beyond the basic salary. Depending on the frequency of the benefit, the value or its nature, the benefit will be deemed salary, and thus will be subject to wage taxation.
The answer is no; these are one and the same – akin to your tomatoe and my tomato! Voordeel alle Aard (Belgium), Loon in natura (the Netherlands), Benefit in Kind (Ireland), Geldwerter Vorteil (Germany), Fringe Benefits (US and Australia) are just a few examples of local synonyms describing taxable employee benefits.
Depending on the respective fringe benefit, these forms of compensation allow companies to offer a diverse range of payment for services to help attract or retain employees, provide additional support, and increase job satisfaction. These “extras” can run the gamut from work-related costs such as using a company vehicle, health insurance and stock options; family-focused or personal wellness perks such as reimbursement for childcare, gym membership, and education assistance – and more. It’s a matter of company policy and discretion. Some fringe benefits might be part of a standard compensation package, i.e the same for all employees. More generous benefits might be based on seniority or performance or at times reserved for the executive level. Successful fringe benefit programs align company and employee values, keep employees motivated, and are often more valuable than their material cost.
There are, however, also benefits that are not intentionally provided by the employer to the employee. More often than not, these are found within the scope of employee reimbursements. Direct managers may approve an expense which is slightly in excess of the regular expense policy, provide gift vouchers to team members, or allow certain expenses for spouses in the course of doing business. Further, staff social events or home internet reimbursement may simply be reported under different expense types yet flow unseen through the expense process despite their potentially taxable nature. These types of benefits often remain hidden from HR, finance and payroll.
Once a benefit is, based on local legislation, deemed to be regarded as salary then these benefits also become taxable for wage taxation.
Companies develop ways to leverage fringe benefits to provide their employees with added job satisfaction that is meaningful and inherently valuable to the individual employee. Some companies find exceptionally creative ways to provide that added value – with extras such as free massages, free meal plans, and happy hours. Monthly family care and support stipends could cover significant expenses such as home office setup, babysitting services, travel, even care for elderly parents.
Some companies offer fringe benefits that employees can enjoy while gaining a better understanding of the offerings or services that the company provides, for example, a dating service or travel agency. Employees can better understand customer experience and how the service works while building a new relationship or enjoying a vacation. Retail companies can offer employee discounts and gift cards for their products – driving a sense of loyalty, engagement and value that benefits both, yet remains invisible to traditional compensation tracking mechanisms required for compliant HR and payroll review.
This kind of approach to employee support is a great way for companies to stand out in a competitive market and develop a sense of community, reinforce company culture, and enhance employee engagement and productivity. It demands, however, an equally creative, and accountable approach to taxation where relevant for payroll accuracy, efficiency and tax compliance.
The term ‘fringe benefit’ was introduced in the late 1940s following World War II, but the concept can be traced back to the Middle Ages, when workers often received compensation in the form of extra food or housing. Fringe benefits began to evolve towards the end of the 19th century when railroad and mining companies started to provide health services to their employees through company doctors. Broader access to health care came about during WWII when employers began to offer health insurance programs as a benefit to retain their workers. Shortly after, governments enacted legislation to define taxable benefits.
In most cases fringe benefits are considered as a part of an employee’s taxable compensation that must be reported and/or be paid wage tax upon. Thus by default, unless they are specifically exempted, fringe benefits are taxable. Unless an employee has reached specific maximum limits in a tax or calendar year, tax and any relevant social security burdens are withheld from the value of the benefit.
Imputed income: The value of any non-monetary compensation, benefit, or services that an employee receives for tax purposes (for example, company car, gift card, gym membership).
Fair market value (FMV): The general rule for fringe benefit valuation is to use the fair market value. FMV is determined by how much an employee would have to pay for it, less the amount paid toward the benefit by the employee. For example, a taxable fringe benefit with a market value of $250 that an employee paid $50 toward reduces the taxable fringe benefit to $200.
The tax authorities provide detailed guidelines for withholding, depositing, and reporting taxable fringe benefits.
Depending on the specific jurisdiction, local regulations, accrued annual values or items, excess of statutory thresholds, benefits will be subject to taxation, meaning that the employer and/or employee need to report on them, and more importantly these will be subject to income tax withholding, social security, and other specific local levies. Also the question will have to be answered whether the costs of such benefits for taxation purposes will be assumed by the employer, and thus a form of ‘gross-up’ will apply or the final burden of the benefit taxation will be pushed forward to the employee. Some examples of common taxable benefits today could be:
For more guidance on fringe benefits taxation, read also our other publications.
Anna Tolwinska received her Master’s degree in Finance and Banking from the University of Lodz in 2007 and postgraduate at SGH Warsaw School of Economics in 2008. After that she has been working in Global Mobility Services at both KPMG and Deloitte. Since 2022, Anna has been responsible for the Taxable Employee Benefit product content and is supporting clients with their product onboarding and implementation at Blue dot. Anna also provides in-house training sessions to international payroll departments.