You offer fringe benefits to your employees? That’s great! Fringe benefits are fantastic perks that you can provide outside of regular wages.
However, it can be hard to determine which fringe benefits are non-taxable (since most are taxable). It’s not always as simple as it seems. If you outsource your payroll, you need to tell your payroll provider so they can help you.
At CSI Accounting & Payroll, we’ve worked with small businesses for nearly 60 years. That means we’ve spoken to thousands of small business owners about fringe benefits, answering questions like:
- What are fringe benefits? Why should I offer them?
- Which fringe benefits are taxable? Which ones are non-taxable?
- Why should I tell payroll about the fringe benefits I offer?
Why You Should Offer Fringe Benefits
Fringe benefits are additional compensations or perks that you provide beyond an employee’s regular wages. Most commonly, things like retirement plans and health insurance come to mind.
These are great benefits for your employees, but how do they also benefit you? Employers may want to provide fringe benefits because:
- They improve employee satisfaction.
- Some can have indirect benefits. An example would be an employer-funded gym membership helping the employees be healthier, live longer, and take fewer sick days.
- Some benefits may be required by law. Avoiding penalties or a lawsuit is always appealing!
- Some are only partially taxable.
- Some are payroll tax-free.
- Some are tax-advantaged.
If you offer fringe benefits but don’t have an in-house or outsourced payroll expert on your team, you should reconsider. Payroll specialists can provide a wide range of advice. They can help monitor requirements and ensure your fringe benefits stay in compliance.
Taxable vs. Non-taxable Fringe Benefits
As I mentioned earlier, figuring out how fringe benefits are taxed is easier said than done. There are dozens of potential fringe benefits, and there can be other nuances depending on who pays for it, whether it qualifies for an exemption, and if it meets IRS accountability rules.
Per the IRS, “Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it.” There are four types of fringe benefits:
- Taxable.
- Partially taxable.
- Non-taxable.
- Tax-advantaged.
Taxable Fringe Benefits Examples
Since most fringe benefits are taxable, I’ll just stick to the basics here.
Cash bonuses and gift cards are fully taxable, so they need to be reported to payroll. Another one that is fairly common is the personal use of a company car. (If you drive your car for your business, you should consider one!)
Partially Taxable Fringe Benefits Examples
When I say “partially taxable”, I mean that certain fringe benefits are tax-free until a certain limit. Limits are subject to change, but here are some examples as of 2025.
Life insurance is tax-free until it hits $50,000 of coverage. Educational assistance has a limit of $5,250 per year, adoption assistance has a limit of $17,280 per year, and child or dependent care assistance with a qualifying plan has a limit of $5,000 per year.
Non-taxable Fringe Benefits Examples
When I say “non-taxable”, I mean payroll tax-free. They may, however, still need to be reported on a Form W-2 – so your payroll specialist needs to know about them!
Provided you have a written Section 125 cafeteria plan in place, also known as a Premium Only Plan (POP), employer-sponsored health insurance premiums and HSA contributions paid by an employer are non-taxable. The same can be said for de minimis benefits (which are so small that they’re unreasonable to track), such as occasional snacks, small gifts, or the personal use of a business printer.
Tax-Advantaged Fringe Benefits Examples
This means they lower your employees’ taxable income and reduce your payroll tax liability.
This category can include examples from the other categories listed above, such as health insurance premiums, HSA contributions, child or dependent care assistance, group-term life insurance, and educational assistance.
It also includes a very notable benefit: employer matches to 401(k) contributions.
Why You Should Tell Payroll About Your Fringe Benefits
Based on the information above, you may have gathered some of the reasons why you should tell your payroll provider about all of the fringe benefits that you offer. Here’s my breakdown of those reasons:
- Handle your taxes correctly. Fringe benefits aren’t always taxed the way you’d expect. Some can even be handled differently depending on how they’re provided—such as reimbursing an employee for mileage logged using their personal vehicle for business purposes versus giving them a vehicle allowance. Your payroll specialist ensures you’re paying the correct taxes.
- Maximize payroll tax savings. When there are multiple fringe benefit options, your payroll specialist may even advise you on the choices that will save you on payroll taxes!
- Properly handle check reimbursements. Some fringe benefits are paid out through reimbursements. I just wrote about why you should always tell your payroll provider about employee checks here.
- Ensure correct reporting and W-2s. I stated earlier that even some non-taxable benefits still need to be reported on a Form W-2. Your payroll specialist can ensure that all of your fringe benefits are documented properly.
- Stay in compliance. Your payroll specialist understands IRS rules, state and local tax considerations, and reporting requirements. They help you meet compliance standards to avoid penalties.
Call Your Dedicated Payroll Specialist Directly!
If you don’t tell your payroll specialist about fringe benefits, checks, and beyond because it’s too much of a hassle to reach them, it may be time for a different payroll service.
Now that you know what fringe benefits are and why you should offer them, how there are four different types of fringe benefit taxation, and the great reasons why you should tell your payroll specialist about all of the fringe benefits you offer, are you ready to check out payroll services with CSI Accounting & Payroll?
To see if we can be a good fit for your business, click the button below for a free consultation:
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