Key Takeaways
1. Fringe benefits, or in-kind benefits, are non-wage benefits that are given to employees separate from their salary.
2. One way that organizations can become more attractive to prospective employees, and keep existing valuable staff members, is by offering fringe benefits.
3. Different countries around the world have different legal requirements regarding how to calculate fringe benefits. It is therefore important for companies to be aware of the rules of the countries in which they operate.
4. Fringe benefits can include things like use of a company car, healthcare perks such as medical insurance, and sports classes or gym memberships.
5. Companies need to be aware of which fringe benefits are compulsory and which are optional in whichever country they operate in.
What are fringe benefits?
In a post-pandemic world, it is no secret that many people value different things now such as flexible or hybrid working. Most employees around the world had no choice but to work from home during lockdowns when in many cases, this was never an option before. Now, many people are still working from home or at least working partly in the office and partly remotely. In some cases, employers have experimented with four day workweeks. In a lot of cases, this has allowed employees to have a better work/life balance and the opportunity to see more of their family.
Subsequently, it may be that employee expectations have heightened when it comes to things like flexible working and as such, the pressure on employers to offer non-mandatory benefits is higher than ever. Similarly, extra perks or fringe benefits can be important to attract new talent and retain existing employees. Having competitive fringe benefits can be a strong way for organizations to position themselves as good places to work.
What is the definition of fringe benefits?
Fringe benefits are non-monetary benefits that are given to employees separate from their salary. They might be mandatory, or they might be optional, and the precise scope of fringe benefits differs by country. Fringe benefits might include:
- Healthcare benefits such as mental wellness support
- Medical or dental insurance
- Gym memberships or sports classes
- A company car
- Free tickets
Offering fringe benefits can be a useful way of incentivizing employees to stick around, especially if they are benefits that cannot be easily acquired elsewhere. Fringe benefits are treated slightly differently in different countries in terms of the way they are calculated and which benefits can be excluded from tax.
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How to calculate fringe benefits in the UK
In the UK, employees need to pay tax on benefits such as cars and accommodation. This is taken from their wages through the Pay As You Earn (PAYE) system. For example, if an employee has a company car, employees will be taxed on the value of the car to them such as how much it would cost and whether it uses petrol or diesel.
The tax on fringe benefits is calculated by adding the value of the benefits together with the employee’s gross wage and then making the tax deductions, and other contributions through the PAYE system.
How to calculate fringe benefits in Australia
In Australia, they have what is called “fringe benefits tax” (FBT) which is separate from income tax and has to be paid by employers for particular employee benefits. At the time of writing (2022-23), the current FBT rate is 47%. Fringe benefits tax is calculated based on the value of the benefit which has to be established by the employer.
To work out the fringe benefits tax liability, companies must calculate the taxable value of fringe benefits provided to employees before tax, there are different gross-up rates when calculating fringe benefits taxable amounts depending on whether the company is entitled to a Goods & Service Tax (GST) credit or not.
- If a company is entitled to claim GST credit for fringe benefits, it must multiply the taxable value of all fringe benefits by 2.0802 which is the applicable gross-up rate.
- If a company is not entitled to claim GST credit for fringe benefits, it must multiply the taxable value of all fringe benefits by 1.8868 which is the applicable gross-up rate.
How to calculate fringe benefits in the United States
In the United States, any fringe benefit that an employer provides to an employee, independent contractor, partner, or director is taxable unless it is excluded by law. These include things like employee discounts, meals, tuition reduction, achievement awards, or cell phones. Taxable fringe benefits must be reported on form W-2 Wage and Tax statement for employees, Form 1099-NEC, Nonemployee Compensation for independent contractors, and Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc for partners.
Under US law, calculating tax on fringe benefits starts by working out the value of fringe benefits. This is done by way of assessing its “fair market value” which is the amount that an employee would ordinarily pay to a third party for the benefit. For example, take a company car for instance, the amount that would be taxable would be the amount that the employee would need to pay to lease the exact car on the same terms.
Once the value of the benefits is established, the tax is calculated by adding them to the employee’s wage for the particular payroll period and deducting the usual amount that the employee would be taxed. Alternatively, employers can withhold federal income tax on the value of fringe benefits at the flat 22% rate.
Conclusion
The task of managing employee benefits can be difficult, especially in large companies that operate in multiple jurisdictions. Understanding how to calculate the value of fringe benefits and establishing which benefits are taxable can be confusing. In order to be compliant with international laws, it is important that organizations understand how to calculate fringe benefits.
At Horizons, we have the ability to hire employees anywhere in the world including taking care of all employment taxes and fringe benefits taxes. Contact us today to see how we can help you.
Frequently Asked Questions
Fringe benefits are additional benefits that employers can provide to employees, separate from core benefits. They are a type of non-monetary compensation. They can include things like a company car, giving a discounted loan, free tickets, or flexible working.
Sometimes employers add these special perks to attract and retain employees. Sometimes, employers are legally required to provide the benefit. It is also quite common for employees who have been with the company for a certain amount of time to be provide with fringe benefits as a form of reward.
