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Fringe benefits-Definition, Types, Examples and Tax treatment with an illustration

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Fringe benefits may be defined as the additional benefits that are meant for supplementing the money wage or salary of an employee. There are certain fringe benefits that are offered to the entire workforce working in the company while there are specific fringe benefits that are only meant for offering to only those who are working at executive levels. It thereby means that some fringe benefits are statutory in nature while certain fringe benefits are provided voluntarily by the employer.

There are various types of fringe benefits that are generally offered to the employees which may include health insurance, subsidies in cafeteria, assistance for tuition, employee stock options, etc. Employee stock options typically mean a type of compensation in the form of the company’s equity meant for rewarding a company’s employees and executives.

Types of fringe benefits
As discussed earlier, fringe benefits can be categorized into two chief categories i.e. statutory fringe benefits or the fringe benefits required by law and voluntary fringe benefits or the fringe benefits not required by law.

Statutory fringe benefits
There are several statutory benefits that are required by law which are as follows:

  1. Health insurance: The Patient Protection and affordable care act cover this kind of fringe benefit. As per this act, business firms employing more than 50 employees are obligated to provide health care plans, and further, employees can have health insurance coverage.
  2. Unemployment insurance: This fringe benefit is covered under the Federal unemployment tax act. As per this act, employers are under the obligation of paying federal and state unemployment tax to the Department of Labor. This results in the payment of wages, training and career guidance to the workforce who got unemployed or jobless as a result of no fault of their own.
  3. Medical leave: As far as this fringe benefit is concerned, business firms employing more than 50 employees are obligated to provide family and medical leave to their employees who have completed the tenure of about 12 months in the company.
  4. Workers’ compensation: This fringe benefit is administered by the Department of Labor. The workers who got injured at the workplace or acquire an occupation disease are generally covered under this fringe benefit. This fringe benefit mainly apprehends benefits like medical treatment, rehabilitation, wage replacement benefits, etc.

Voluntary fringe benefits
There are several fringe benefits that provided at the employer’s discretion. Examples of these fringe benefits include:

  • Stock options
  • Disability insurance
  • Paid holidays
  • Education reduction
  • Retirement planning services
  • Life insurance
  • Paid time off
  • Commuter benefits
  • Achievement awards
  • Fitness training
  • Employee discounts
  • Meal plans

Purpose of fringe benefits
Fringe benefits are generally awarded for two chief reasons. It may be to compensate the employees for the costs that have been incurred by them due to the nature of their work. It may also be provided with a view to gear up their general job satisfaction of the workforce. Other reasons for awarding the fringe benefits by employers could be keeping the high-quality workforce, motivating the existing workforce and also to foster the recruitment process.

Tax treatment to fringe benefits
Generally, the fringe benefits are considered to be taxable in nature while there are certain fringe benefits that are specifically exempted and are not considered for tax purposes. The fair market value (i.e.  The value that particular fringe benefit would generate in an open market) of the respective fringe benefits should be considered by the recipients at the time of filing their taxable income for the year.

As far as tax guide to fringe benefits (maintained by internal revenue service) is concerned, there exists a list of fringe benefits that are excluded for income tax purposes. These benefits mainly include accident and health benefits, commuting benefits, working condition benefits, health saving accounts, meals, group term life insurance coverage, employee stock options, etc. All the aforesaid exemptions are somewhat subject to certain conditions.

Although we have discussed earlier that fringe benefits are taxed considering their fair market value, yet there are fringe benefits that are taxed in a slightly different manner like working condition benefits are taxed by taking into consideration the personal use.

For instance, an employee is provided with a laptop and 80% of its usage is personal in nature. Thus, the fair market value of the laptop would be a percentage that is devoted to personal usage. In this way, the taxable income would be 80% of the value of the computer.

At AJSH & Co, we do provide certain services to our clients in which we come up with various ways to help them in matters of personal and corporate taxation. To know more about our services and offerings, you can write to us info@ajsh.in or you can visit our website: www.ajsh.in


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