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Everything You Need to Know About Fringe Benefits
January 21, 2019
Fringe-Benefits

Everything You Need to Know About Fringe Benefits

As a small business owner, talented and capable employees can be some of your most valuable assets. However, attracting and retaining great employees to a startup or small business is often difficult when competing with larger, more established rivals that have significantly more resources at their disposal. Fortunately, if your current budget doesn’t allow you to fully compensate your employees through wages, you can offer fringe benefits to make your total compensation package more attractive.

According to the Bureau of Labor Statistics, benefits currently account for just over 30 percent of the average employee’s total compensation. Since only a handful of benefits are required by law — for example, social security, unemployment insurance, time off to vote, and workers’ compensation, to name a few — offering employees various fringe benefits has become commonplace for most employers.

To help you better understand fringe benefits and their potential impact on your small business, we’ve provided an overview of what they are, how they work, and the advantages and limitations of offering them to your employees.

4 Questions You Should Know the Answers to Before Offering Fringe Benefits:

1. What Are Fringe Benefits?

Fringe benefits are any benefits you provide your employees that aren’t required by law. These benefits can range from the most basic — health insurance, retirement plans, and paid vacation and sick days — to more creative benefits like free weekly lunches, subsidized gym memberships, or the flexibility to work from home.

While all wages paid to employees are considered taxable income, fringe benefits are unique in that some of them offer tax advantages to both employee and employer. For example, health plans, life insurance coverage, and dependent care assistance are tax-free for employees and tax-deductible for small businesses.

2. How Do Fringe Benefits Work?

You have the flexibility to select which fringe benefits you want to offer your employees as part of their overall compensation package. However, just because you make certain benefits available to your employees doesn’t mean you need to foot the entire cost. In fact, offering benefits in lieu of higher wages can actually save you money over the long run. According to research from Pew Trusts, the median job has benefits that cost the employer 38 cents for each dollar spent on wages.

3. What Are the Advantages of Offering Fringe Benefits?

Aside from allowing you to attract and retain quality workers, offering a variety of fringe benefits to your employees can increase overall employee wellness, productivity, engagement, and loyalty — all the while, potentially boosting your bottom line.

  • Corporate wellness programs have been found to increase worker productivity by as much as one day each month, according to one study from the University of California, Riverside.
  • A recent MetLife study found that 59 percent of employees agree that health and holistic benefits increase loyalty, while 72 percent of employees agree that the ability to customize their benefits increases loyalty.
  • According to the International Foundation of Employee Benefit Plans, of those employers offering and measuring the impact of their wellness efforts, over half have found a decrease in absenteeism, 63 percent are experiencing financial sustainability and growth in the organization, 66 percent reported increased productivity, and 67 percent said employees are more satisfied.

4. What Are the Potential Downsides?

Given that not all benefits are treated equally by the IRS, taxation is one of the primary challenges fringe benefits present for employers. It’s generally a good idea to work with an accountant or tax professional to make sure you’re reporting your benefits correctly on your tax returns, as one error can potentially erase any financial benefits you’ve accrued. The IRS has a full guide to fringe benefits if you’re unsure how each is treated from a tax perspective.

Similarly, missteps in how you offer your benefits can be expensive and open you up to scrutiny from the IRS and Department of Labor. The biggest mistake employers tend to make is leaving certain employees off their plan because of how they’re categorized. Best practice is if one employee receives a tax-advantaged benefit, the same benefit must be offered to all other employees.

Conclusion: Fringe Benefits Can Increase Employee Retention

Research shows that employees not only expect certain benefits from their employers but thrive on them. Consequently, as a business owner, you can enjoy a range of advantages from attracting better talent to increased productivity, which directly impacts your bottom line. Since fringe benefits come with many complexities, it’s usually best to work with a benefits consultant initially, even if you’ve done your own research. Although the upfront cost of hiring a consultant may be high, it can easily save your business thousands of dollars once your benefits plan is implemented.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].