What Are Fringe Benefits? A Guide for Small Business Owners

It’s not just about the paycheck anymore—today’s employees expect more from their workplace.

If you own or manage a small business, especially in a competitive hiring market like Indiana, offering fringe benefits can help you attract and keep talented employees. You don’t have to provide high-cost plans like large corporations do. Even small perks can go a long way if they are thoughtful, well-organized, and correctly reported.

Below, we’ll break down fringe benefits in simple terms. You’ll learn what they are, what kinds are available, which ones are taxable, how they affect your payroll and taxes, and how to choose the right mix for your business.

What Are Fringe Benefits?

Fringe benefits are extra perks or forms of compensation that you provide to your employees in addition to their regular wages or salary. These can include everything from health insurance to a company car.

They differ from base pay and bonuses because they are not cash compensation for work performed. Instead, they offer value in other forms—benefits that support your team’s health, retirement, work-life balance, or personal needs.

Some examples of fringe benefits include:

• Health, dental, and vision insurance
• Retirement contributions, like a 401(k) match or SIMPLE IRA
• Flexible schedules and paid time off
• Gym memberships or wellness incentives
• Company-paid meals or transportation assistance
• Gift cards or holiday bonuses

It’s important to know that some of these benefits are considered taxable by the IRS, while others are not. That distinction can impact how you report them to your payroll provider and how they appear on employee tax forms.

Common Types of Fringe Benefits for Small Businesses

There’s no one-size-fits-all list of benefits. But these categories are the most common and most useful among small and mid-sized businesses. The right mix depends on your budget, your team’s needs, and the kind of workplace culture you want to build. Even modest benefits can have a meaningful impact when they reflect what your employees value most.

Health and Wellness Benefits

Health-related benefits remain one of the most valuable types of fringe benefits. They support employee well-being, reduce stress, and help your team stay focused and productive. These benefits can also improve long-term employee loyalty.

• Health insurance (medical, dental, vision)
• Health savings accounts (HSAs)
• Wellness stipends or reimbursements
• Gym memberships or fitness classes

Some small employers opt for basic health plans that cover only preventive care, which helps control costs while offering employees some coverage.

Retirement Benefits

Helping employees prepare for retirement is a powerful way to build long-term trust. Retirement benefits show that your business supports not just today’s work, but your employees’ future as well. For small businesses, simple and low-maintenance options are available that still offer strong value to your team.

Common options include:

• SIMPLE IRA plans (usually lower-cost than 401(k)s)
• Employer matching contributions
• Roth or traditional 401(k) plans, if available

SIMPLE IRA plans work well for small businesses because they are easy to set up and maintain, and allow employer contributions without high administrative fees.

Time-Off Benefits

Time-off benefits offer employees something just as valuable as money—time. Whether for rest, family needs, or health, having the ability to take paid time away from work contributes to a better work-life balance. These benefits are often easy to administer and have a significant impact on employee satisfaction.

These can include:

• Paid vacation days
• Sick leave or personal days
• Holiday pay
• Flexible work schedules

Even if you cannot afford long vacation periods, offering occasional paid time off or flexible scheduling can make a big difference in employee satisfaction.

Lifestyle Benefits

Lifestyle benefits help your team manage the responsibilities they face outside of work. These perks make it easier for employees to focus on their jobs by easing financial or logistical challenges in their personal lives. When tailored to your team’s needs, these benefits can improve retention and engagement.

Examples include:

• Tuition assistance or professional development reimbursements
• Childcare stipends or flexible hours for parents
• Commuter benefits or mileage reimbursements

These types of benefits are especially helpful for working parents or those with long commutes.

Special or “Perk” Benefits

These extras may not be essential, but they can help your workplace stand out. Perks often create moments of delight or convenience that improve morale and show appreciation. While not every business needs them, choosing a few thoughtful ones can strengthen your company culture.

Examples include:

• Use of a company vehicle
• Employee discounts on products or services
• Free meals or snack budgets
• Home office stipends for remote workers

Perks can be small, but when chosen with purpose, they help employees feel appreciated and valued.

Taxable vs. Nontaxable Fringe Benefits

Not all fringe benefits are treated the same for tax purposes. Some are considered part of an employee’s taxable income, while others are excluded and do not affect payroll taxes or W-2 reporting. Understanding the difference is important because it impacts how benefits are recorded, reported, and communicated to your payroll service provider. Misclassifying a benefit could lead to underreporting income, compliance issues, or unexpected tax liabilities for both the business and the employee.

Nontaxable Benefits

Nontaxable fringe benefits give employees added value without increasing their taxable income. These benefits are not subject to income or payroll taxes if they meet IRS requirements. When structured correctly, they offer a cost-effective way to support your team without extra tax burden.

• Employer-paid health insurance premiums
• Employer contributions to qualified retirement plans
• De minimis benefits (small-value perks like occasional snacks)
• Use of certain wellness programs
• Educational assistance (within IRS limits)

These benefits must be offered consistently and tracked properly to maintain their tax-free status.

Taxable Benefits

Taxable fringe benefits count as income and must be reported on the employee’s Form W-2. This means they are subject to income and payroll tax withholding. If not handled correctly, they can cause reporting issues and lead to penalties.

• Gift cards or prepaid cash-equivalent items
• Personal use of a company vehicle
• Wellness or fitness stipends not tied to a formal reimbursement plan
• Holiday bonuses paid in cash or cash equivalents

How Fringe Benefits Affect Payroll and Taxes

Fringe benefits are directly tied to payroll processing and tax reporting. If you offer any taxable fringe benefits, those values must be included in employees’ total wages when calculating taxes. Some require regular reporting. Others only appear once a year on year-end forms.

Incorrect reporting can lead to:

• IRS penalties
• Inaccurate W-2s
• Trouble with state or local tax authorities

Some benefits, such as retirement contributions or health reimbursements, affect payroll calculations. 

For example:

• Pre-tax retirement deferrals reduce taxable income
• Employer matches are a business expense but not part of the employee’s wages
• Health reimbursement arrangements (HRAs) must follow certain rules to stay nontaxable

A good payroll system should help you track, apply, and report all these benefits correctly.

The Business Case: Why Offer Fringe Benefits?

Offering fringe benefits may seem like a luxury, especially if your business runs on a tight budget. But there’s a strong business case for making them part of your compensation strategy.

Benefits can:

• Reduce employee turnover
• Boost morale and workplace satisfaction
• Improve recruitment by helping you stand out
• Encourage employee loyalty and productivity

Think of fringe benefits like oil in an engine. They don’t drive the vehicle, but they keep it running smoothly. Without them, your business might still move forward, but not as efficiently, and breakdowns like frequent hiring or lost productivity can become expensive.

Common Mistakes Small Businesses Make with Fringe Benefits

Even with the best intentions, it’s easy for small businesses to run into trouble when managing fringe benefits. From misreporting to inconsistent policies, these common errors can lead to compliance issues, frustrated employees, and unexpected tax problems. Knowing what to avoid is the first step toward getting it right.

1. Not Knowing What’s Taxable

This leads to missed payroll entries, incorrect W-2s, or exposure to IRS penalties. Every benefit offered should be reviewed for its tax impact.

2. Poor or Missing Documentation

Employers should clearly document:

• Which benefits are available
• Who qualifies and when
• How the benefits are used or redeemed

Without written policies, it’s hard to apply benefits consistently and fairly.

3. Inconsistent Application

Offering different benefits to different employees without a clear class-based policy can cause compliance problems. For example, providing perks to managers but not staff without documentation could raise legal concerns.

4. Overlooking Low-Cost Options

Sometimes, businesses skip offering benefits because they assume all benefits are expensive. But options like flexible scheduling, basic retirement plans, and paid time off are often low-cost and high-impact.

How to Choose the Right Fringe Benefits for Your Business

Choosing fringe benefits doesn’t have to be overwhelming. Start by thinking about what your employees truly value.

Here’s a short checklist to help:

✅ What are your team’s biggest needs (health, time, flexibility, development)?
✅ What benefits can you afford to offer this year?
✅ Are there low-cost options with high value to your employees?
✅ Can your payroll system support tracking and reporting the benefit?
✅ Have you documented how each benefit works?

Start small if needed. Even one or two thoughtful benefits can show employees that you care about their well-being.

Simplify Benefits and Stay Compliant with Expert Help

Fringe benefits help small businesses compete for talent, boost morale, and reduce turnover costs. But they also require clear planning and accurate tracking to stay compliant.

If handling payroll and fringe benefits is starting to feel like a full-time job, you don’t have to figure it all out on your own. With the right service provider and accounting support, you can simplify the entire process—so your team stays happy and your business stays on track.

TMA Accounting helps small business owners stay compliant with benefit reporting, payroll processing, and income tax preparation. We’re here to make sure your benefits work for your employees and your business.

Need help figuring out which benefits are right for your team? Let’s talk. We make it simple to get started and stay compliant.

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