How Fringe Benefits Work

What are fringe benefits?

Remember: You don't have to work during your paid vacation!
Remember: You don't have to work during your paid vacation!
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The Internal Revenue Service (IRS) defines fringe benefits as "a form of pay (including property, services, cash or cash equivalent) in addition to stated play for the performance of services" [source: IRS]. Some fringe benefits, such as health care plans, aren't taxed, while others, such as subsidies to pay for the use of public transportation, are excludable up to a certain limit. Other fringe benefits might not be taxed at the time you receive them, but they could be taxed later. For example, you won't pay income taxes on your employer's contributions to a tax-deferred retirement account such as a 401k at the time of the contribution, but you will have to pay taxes when you withdraw the money in the future.

Why offer fringe benefits? Employers have learned that these extras are a relatively cost-effective means of retaining valuable workers and attracting new talent. Some benefits, such as health insurance, are expensive, but others, such as employee discounts on the company's own merchandise, amounts to very little cost to the employer and means a great deal to the workforce.

As we mentioned before, a 2010 survey of human resource professionals show that the value of fringe benefits amount to about 50 percent of the percentage of payroll in American companies [source: Society for Human Resource Management]. An amount equal to about 19 percent of a firm's payroll goes to fund government-mandated benefits such as Social Security and Unemployment Compensation, but companies spent a nearly equal amount on voluntary benefits such as health and life insurance. Pay for time not worked -- vacation, sick and personal leave days -- accounts for an amount equal to about 11 percent of the total payroll at most companies in America.

Fringe benefits differ from profession to profession, depending on what would be most prized. A teenager working at a pizza restaurant might appreciate free meals and tokens to play games during breaks. A nurse or a teacher, however, would probably value tuition assistance, which would enable them to obtain ongoing training or work toward an advanced degree.