Employees working for companies might have certain privileges and benefits provided to them by the company. While these benefits are not charged by the employer, under the tax laws, there is a value to these benefits. The employer is supposed to determine the value of the benefits and take taxes out.
Fringe benefits are typically benefits paid by an employer. They range from vacation pay and sick days to providing retirement plans, as well as paid sick leave. These fringe benefits, according to the Internal Revenue Service, must be reported as part of the employee’s wages and should be considered part of the employee’s pay, which means the fringe benefits would have payroll taxes taken out.
Payroll taxes are paid on salaries and wages, as well as Social Security and Medicare. Under the IRS guidelines, fringe benefits are part of an employee’s wages. Both state and federal unemployment tax also fall under payroll taxes, as well as workers' compensation insurance.
When an employee is offered a choice between getting cash and being part of a taxable benefit package or receiving certain benefits excluded from tax under the law, it is referred to as a “cafeteria plan.” If the employee chooses one of the tax-exempt benefits, the employer will not take out payroll taxes on the benefit. For example, if a couple receives company assistance in adopting a baby, since adoption assistance is considered a qualified benefit, the employee will not be charged taxes on the value of the assistance.
Certain fringe benefits are exempt from being included under payroll taxes. These include awards for achievement in a department or in a chosen profession, as well as any athletic club benefits an employer might share with the employees. Certain kinds of educational assistance are also exempt from having payroll taxes taken out. In addition, benefits improving working conditions are not considered taxable, such as providing coffee and snacks during the workday. Employee discounts are also considered exempt.
When determining how much a fringe benefit is worth, fair market value is used. In some cases, this is hard to determine. For example, if an employee spends the night in a company suite in a hotel, but the company pays for the suite, regardless of whether it is used or not, the employer needs to determine the usual room rate. Therefore, even though the hotel might only pay $50 a night but the room normally would be worth $150, the fair value is considered $150.