What are Fringe Benefits

It is usually a collection of various benefits provided to the employee that are exempt from taxes, but on certain conditions. Fringe benefits include health insurance, group life coverage, education reimbursement, employee discounts and other similar benefits.

As per the IRC (internal revenue code) fringe benefit is a form of pay that is included in addition to the stated pay for the performance of services. This definition of fringe benefits applies to services of employees and independent contractors as well. The IRC had classified Fringe benefits are non taxable, partially taxable and tax deferred. Now let us understand these terms:

Taxable: Taxable means the benefit is included in the employees’ salaries and generally is subject to government tax with holding. For example bonuses are always taxable since there is no IRC section that excludes it from taxes.

Non- taxable: Excluded from wages by a specific section in IRC. Example health plan benefits excludable under section 105.

Partially taxable: a portion of the amount is taxable and the remaining part goes under that heading non taxable. Example public transportation subsidy given under section 132.

Tax deferred: benefits are not taxed when received, but subject to be taxed later. For example employer’s contribution made to employee’s pension plan will not be taxed when made, but is taxed when distributed to the employee.

Let us take a look at the general evaluation rule for fringe benefits. Taxable fringe benefits are valued at Fair market price, the amount the willing buyer would pay to the willing seller. The rule neither one forced to the conduct of transaction nor both have good knowledge of the facts. In most cases cost and fair market price are the same, may be sometimes they differ.

Let us see certain IRC sections that exclude fringe benefits:

  • Section 125            Cafeteria plans
  • Section 127            Educational assistance plans
  • Section 132(f)         Qualified transportation expenses.
  • Section 132(m)       Qualified retirement benefit plans
  • Section 117(d)        Qualified tuition reduction.
  • Section 104             Compensation by employer for injury or sickness.

Now let us see how fringe benefits are calculated. As an employer you have three alternative methods to calculate this tax. The single rate or flat rate system, alternate (formerly called the multi rate) and the rates of fringe benefits tax. The first rate you can choose to pay fringe benefit tax at 49.25% on all benefits you provide to the employee. When it comes to alternate method it allows an employee’s fringe benefits to tax on a marginal tax rate. Usually a particular slab is fixed which varies from every fiscal year. FBT rates you have choice regarding the rates of fringe benefit tax you use, in the sense depending upon which type of return you file that is as an independent contractor or salaried person.

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