For employers competing to attract and retain talent, pay and benefits together are now the top reason workers choose to stay put, cited by 27% of respondents in Monster’s research on job hugging. That means wages alone don’t tell the whole story. Not all compensation comes in the form of a paycheck.
In addition to building a benefits package filled with the perks employees want most, many employers sweeten job offers and day-to-day work life with non-monetary compensation, like company vehicles or memberships to local health clubs. Commonly referred to as fringe benefits, these perks come in many forms, and the IRS sometimes treats them as taxable compensation, known as “imputed income.”
Key takeaways
- Fringe benefits are non-monetary perks, like company vehicles or health club memberships, given to employees in addition to their regular wages.
- Imputed income is the cash value of taxable fringe benefits that gets added to an employee’s gross wages to ensure correct tax withholding.
- Some perks, like occasional team lunches or job-related educational assistance, are considered non-taxable or de minimis benefits and are excluded from taxable income.
- Employers must report imputed income on employee pay stubs and W-2 forms so federal and state payroll taxes are calculated accurately.
Here’s what employers need to know about offering fringe benefits, including imputed income on paystubs, handling the payroll taxes accurately, and staying on the right side of the IRS.
What are fringe benefits?
Fringe benefits come in many forms, but they all have one thing in common: employees receive them in addition to their regular salary. These perks can help with retention, and they range from life insurance to tuition assistance to employee discounts. Whatever form they take, the IRS treats many fringe benefits as taxable employee compensation.
Are fringe benefits required?
This article focuses on fringe benefits and their relationship to imputed income, but federal and state governments mandate some benefits and insurance. We cover which benefits employers must offer in more detail in another article.
Are fringe benefits taxable?
It depends. Some fringe benefits are fully taxable, some are partially taxable, and some are tax-free for employees. As a rule of thumb, any compensation or benefit provided to an employee is subject to tax unless the IRS explicitly states otherwise.
What are some taxable fringe benefits?
Most fringe benefits count as taxable, non-monetary compensation. Similar to how you report standard wages, you need to account for taxable fringe benefits on an employee’s W-2. Our in-depth guide on how to complete a W-2 form gets into more detail if you get stuck.
The table below lists some common examples of taxable fringe benefits. For specific questions, it’s best to speak with your accountant or bookkeeper if you’re unsure about your obligations.
| Fringe benefits considered to be taxable compensation |
| Regular wages | Cell phone and/or company vehicles (if used outside of business tasks) |
| Overtime | Employer-paid commuter fees in excess of $340/month (in 2026) |
| Bonuses | Employer-paid parking that is greater than $340/month (in 2026) |
| Vacation payout | Employer-provided bicycle commuting assistance |
| Back-pay awards | Fringe benefits (unless specifically excluded) |
| Commissions | Group legal services |
| Gifts, gift cards, cash, prizes, awards | Group-term life insurance over $50,000 |
| Tips | Reimbursed moving expenses |
| Severance pay or last paycheck | Non-cash fringe benefits like gym membership |
| Third-party sick pay & disability benefits | Jury duty |
What are some non-taxable fringe benefits?
The IRS considers fringe benefits non-taxable when they fall under specific exclusion rules. For example, the IRS ruled that job-related education is generally not a taxable benefit. In most cases, these excluded benefits aren’t subject to federal income tax withholding, Social Security, Medicare, or FUTA taxes, and you don’t need to report them on a W-2. The IRS spells out conditions that apply, and it always pays to discuss the details with your accountant or bookkeeper.
Some examples of non-taxable fringe benefits are listed in the table below.
| Non-taxable fringe benefits |
| Dependent child care assistance (up to $7,500) under a section 129 plan | Contributions to cafeteria 125 plans (used to pay group health, dental, and vision premiums) |
| Company vehicle – Business use only Company cell phone – Business use only | No-additional cost fringe benefits |
| De minimis fringe (we go into more detail on what these benefits are in the next section) | Health savings account contributions |
| Disability benefits (employee contribution) | Reimbursed business expenses |
| Educational assistance for job-related courses (no limit) | On-premises athletic facilities |
| Group-term life insurance of $50,000 or less | Long-term care insurance |
Next, we’ll cover one more category: de minimis fringe benefits.
What are de minimis fringe benefits?
De minimis benefits are low-value fringe benefits that are not subject to tax. “De minimis’ means “minimal.” It’s a fancy way of saying the IRS doesn’t expect companies to put much (if any) effort into accounting for them, since they tend to carry little monetary value.
For example, you might bring coffee and donuts to the office one morning as a team pick-me-up. In the eyes of the IRS, that’s a de minimis (minimal) benefit to your employees. Value aside, your team will still probably appreciate them.
Keep in mind that while these benefits are tax-free for employees, the One Big Beautiful Bill Act limited how much employers can deduct for certain benefits, such as workplace coffee, snacks, and occasional meals. Your accountant can help you sort out what’s still deductible on your end.
Here are some more examples of de minimis fringe benefits:
| De minimis fringe benefits |
| Occasional printing of personal letters | Occasional personal use of company copier |
| Occasional tickets to sporting events or the theater | Traditional holiday gifts of small value (turkey, candy) |
| Coffee and snacks in break room provided to employees | Occasional use of company telephone for local personal calls |
| Occasional meals | Occasional parties and picnics |
So, now that we’ve covered different types of fringe benefits, you might be curious how offering them can affect out-of-pocket costs. Whether it’s extending an offer to a candidate — or just accounting for them in your expenses.
What is a fringe benefit rate and how do I calculate it?
To understand your total labor costs, meaning the wages you pay plus the cost of the fringe benefits you provide per employee, you’ll need to calculate your fringe benefit rate. A fringe benefit rate is the percentage of an employee’s wages relative to the fringe benefits they receive. You calculate it by dividing the total cost of an employee’s fringe benefits by their wages. Here’s the formula.
Fringe benefit rate = (total fringe benefits / annual salary ) x 100
Don’t let the calculation above intimidate you. Here’s how it works in practice:
- Let’s say you have a salaried employee who earns $50,000 a year
- The value of their fringe benefits (like life insurance or education assistance) adds up to $10,000 per year
- Divide $10,000 by $50,000 to get 0.2
- Multiply 0.2 by 10 to get 20%
That 20% is the fringe benefit rate. In this example, the employer pays an additional 20% on top of base wages, in the form of fringe benefits. When in doubt, it always pays to talk to a tax professional or bookkeeper about the finer details of calculating your fringe benefit rate.
Next, we’ll cover the overlap between fringe benefits and imputed income. They’re not the same thing, and employers are responsible for knowing what technically qualifies as income and what doesn’t.
What is imputed income?
Imputed income is the value of any non-cash compensation an employee receives in the form of fringe benefits. While imputed income isn’t part of an employee’s salary or wages, it’s usually taxable and gets added to an employee’s gross wages so employers can withhold employment taxes correctly.
Imputed income won’t show up as an actual dollar amount in an employee’s take-home pay, but it appears as income on a paycheck, so employers can withhold taxes appropriately.
How do you calculate imputed income?
When employers provide taxable fringe benefits, they’re responsible for calculating and recording imputed income for the employee. In most cases, the IRS wants you to use the general valuation rule to determine the value of a fringe benefit. According to the rule, the value of the benefit is its fair market value (FMV).
Fringe benefit value
Generally, the FMV is the going rate of what your employee would pay for the service or product, based on figures from real-world businesses. So if you provide daycare for parents in your workplace at, say, $500 per month, the FMV is roughly the same as what a person walking in off the street would pay.
Imputed income in action
Example: Non-job related tuition reimbursement
Let’s say you offer an educational assistance program that covers school expenses such as books, tuition, and supplies. But what the employee learns in class isn’t related to the job they perform. For example, Ted is earning a degree in psychology, but works part-time in your IT department. You decide to offer him a full-time position and pay for his last college semester as a fringe benefit.
Since school isn’t related to the job role, IRS rules let you exclude up to $5,250 of the educational benefit. Anything above that dollar amount gets included in Ted’s taxable income.
So if Ted receives $10,000 in educational assistance, the imputed income, or the dollar amount he pays taxes on, is $4,750 ($10,000 minus $5,250). To be clear, Ted isn’t paying $4,750 cash out of pocket for school. You add that dollar amount to his reported income for tax purposes.
Example: Employee commuter benefits
Let’s say you decide to help with employee commuter costs, either for those who take public transportation or drive their own vehicle. Per IRS rules on transportation fringe benefits, you can exclude up to $340 per month for parking, vehicle transportation, or transit passes.
So if the employee receives $400 for commuting costs, the imputed income, or dollar amount they pay taxes on, is $60.
These are a couple of example scenarios. Beyond these examples, there are many more forms of remuneration the IRS considers imputed income.
Include imputed income on payroll
As an employer, you can add the value of taxable fringe benefits to employee wages each pay period.
To calculate the gross income your team members pay taxes on, add fringe benefits, or the actual imputed income, to their salary.
For example, an employee receives a salary of $5,000 per month, plus an additional $500 per month in imputed income. In this case, the worker’s taxable wages for federal and state taxes, Medicare, Social Security, and deductions are $5,500.
Imputed income on pay stubs
When you record employees’ imputed income during payroll processing, there’s a good chance you’ll use a separate pay or earnings item, apart from their regular salary, hourly, or overtime wages. Since these items appear on employee pay stubs, they could cause some confusion for anyone taking a closer look.
Communication is key to keeping everyone informed and confident they’re still being paid correctly. You may be able to customize the name of additional pay items or add a message directly to pay stubs. You could also have your accounting, payroll, or HR team reach out to staff by email or however you typically share internal messages.
For instance, if you hand out gift cards as a small bonus, the email could include details along these lines:
- Everyone received a $50 gift card from management
- It will appear on your next pay stub in a line item called “gift card,” since it needs to be recorded as income
- For any questions, reach out to accounting, and we’ll do our best to help
Many online payroll services make it simple to add these types of items to pay stubs with just a couple of clicks.
Shift differentials, extra pay for employees who work less desirable shifts, are another tool employers use to attract and retain talent. They work a little differently than the fringe benefits covered here, so if that’s relevant to your business, our guide to shift differential pay breaks down how to calculate it.
Final thoughts on fringe benefits
Fringe benefits could give you an edge with job seekers on the hunt for more than a paycheck. In fact, our research found that health insurance is the benefit employees want most, followed closely by paid time off and retirement plans. Even if your employees pay some taxes on imputed income, offering these benefits can still help you attract a great candidate who thinks about more than just the dollars and cents.
Check out our guide to offering employee benefits to learn how to build a benefits package that works for your team. No matter what combination of benefits you provide, it’s another great way to look after your people and stay a step ahead of the competition when hiring.
This article is for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.
