What Are Fringe Benefits and Why Are They Important?

Header image featuring four icons representing different types of fringe benefits: travel, healthcare, meals, and monetary compensation

Contrary to popular belief, cash isn’t always king when it comes to employee retention. A recent BambooHR Compensation report found that most (85%) employees are looking for better benefits, and 63% would take a pay cut to get them.

What makes a competitive employee benefits package is ever-changing. If your HR team isn’t keeping tabs on what perks are essential, it may be more challenging to hit your company’s hiring targets and compete against competitors.

Every company has its own unique needs. But, no matter what you decide, BambooHR® Benefits Administration can make the process a breeze for HR and employees alike. Read on to discover some of the most sought-after fringe benefit examples that can help your business remain competitive.

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What are fringe benefits?

Fringe benefits are any perks that supplement an employee’s regular salary. They're more commonly referred to as employee benefits, and examples include health insurance and retirement plans.

Fringe benefits could make or break a candidate’s decision to accept your job offer (or whether they’ll apply in the first place). In fact, 68% of job seekers  want  to know what companies have to offer, but 36% of HR professionals admit their company doesn’t disclose benefits information up front.

Our recent Workforce Insights report found that, in the past year, 44% of HR Managers have seen many employees quit within their first month. Furthermore, poor fringe benefits were cited as the number one reason why employees quit their jobs in 2024.

Why do companies give fringe benefits?

Fringe benefits can enhance employee satisfaction, retention, and overall productivity, meaning they can help attract quality talent and reduce staff turnover. As a result, a positive working culture becomes the norm. These are all essential in a long-term success strategy.

Don’t ignore employee fringe benefits. Doing so can lead to high employee dissatisfaction, increased turnover, and difficulties in attracting the right candidates. Without competitive fringe benefits, you risk losing employees to competitors. You’ll also face further hidden costs of recruitment and training, plus lost productivity.

According to the Bureau of Labor Statistics, 29.7% of private industry employers’ compensation costs go to fringe benefits. On paper, this may seem like a lot, but most companies invest in their benefits for the following reasons:

Are fringe benefits taxable?

According to the IRS, “Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it.” If the recipient is your employee, the benefit is generally subject to taxes and must be reported on Form W-2. However, if the recipient is an independent contractor or partner, the fringe benefit is not taxable but may need to be reported on Form 1099 or Form 1065, respectively.

Additionally, IRS Publication 15-B notes several non-taxable fringe benefits, including:

How to calculate fringe benefits

You can calculate fringe benefits by using the fringe benefits rate, which shows how employee wages correlate to the perks they’re offered. This percentage can help you evaluate if your benefits package is both competitive in the market  and  cost-effective for your business. Knowing your rate can also help you determine how many employees your company can afford at any given time.

Below, we explore how to calculate your fringe benefits rate depending on employee type.

Fringe benefits rate for salaried employees

To calculate your fringe benefits rate for salaried employees, divide an employee’s yearly benefits cost by their annual salary and multiply that number by 100.

The equation is as follows:

(Total Fringe Benefits Cost / Annual Wage) X 100 = Fringe Benefits Rate

For the total fringe benefits sum, make sure to include unemployment insurance, health insurance, and any other required and elective benefits in your compensation package.

For example, if an employee’s yearly benefits are valued at $25,000 and their annual salary is $100,000, the overall fringe benefits rate would be:

($25,000 / $100,000) X 100 = 25%

This means your company is paying an additional 25% to the employee on top of their yearly salary.

Fringe benefits rate for hourly employees

The fringe benefit rate for hourly employees is calculated in the same way as salaried employees, but with one extra step. Since they’re paid hourly, you’ll first have to calculate their annual wage. Do this by multiplying their hourly rate by the number of hours worked per week and the number of weeks in a year.

For example, if an employee’s hourly rate is $45 and they work 40 hours each week, their annual salary would be:


$45 X 40 Hours X 52 Weeks = $93,600


Then, let’s say their benefits total $15,000 per year. The overall fringe benefit rate for this employee would be:


($15,000 / $93,600) X 100 = 16.03%


So, your company is paying an additional 16.03% to the employee on top of their yearly wage.

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Fringe benefits examples by industry

Many candidates and employees view benefits like health insurance as a must-have. So, it's in a company's best interest to offer additional incentives and fringe benefits to stand out. Deciding on these depends on your industry and other factors such as, company size, what your competitors offer, and what your candidates and employees value.

Check out these examples of fringe benefits relevant to five top industries to help you win over—and retain—top talent:

Construction

In this physically demanding industry, health and life insurance, paid leave, and generous retirement plans are often sought after.

The construction industry has one of the highest employee turnover rates, averaging about 25% annually. So, a generous compensation package can help improve retention and team productivity. Here are some examples of fringe benefits to consider:

Finance

In a survey conducted by Quartz, 101 of the most influential finance companies were asked to disclose their employee fringe benefits. Notable perks included personal and family-oriented benefits like adoption support, gender reassignment funding, and extended leave. Perhaps consider introducing:

Healthcare

In addition to health insurance, meaningful perks include wellness support, paid time off (PTO), student loan assistance, and commuter benefits.

Healthcare organizations offer these benefits to support employees’ holistic well-being and avoid burnout. Some examples of healthcare fringe benefits to consider are:

Non-profits

While many non-profit employees are driven by mission over salary, more organizations are competing with corporate employers for top talent. Common benefits include meals, fundraising bonuses, and PTO for off-site events.

To help employees plan for their futures, many non-profits offer education reimbursement and financial support. Some fringe benefits to consider are:

Technology

Aside from the impressive office spaces the tech industry is known for, companies in the space are also adopting a personalized approach of building fringe benefits packages. According to Forbes, common perks include those that feel personal to employees, such as mental and physical healthcare, family care, flexible working and financial support. Think about:

Fringe benefits FAQs

Building a fringe benefits package that works for both you and your employees is important. Below, we answer some common questions so you can ensure you have all the information you need before getting started.

Is vacation a fringe benefit?

Yes, vacation time qualifies as a fringe benefit. It’s a non-wage compensation that isn’t included in an employee’s salary or hourly compensation. Paid vacation may not be a requirement in many employees’ eyes, so offering it can boost their feelings of work satisfaction.

Do fringe benefits count as income?

According to the IRS, fringe benefits are generally counted as income. But there are exceptions. For example, some fringe benefits are subject to income tax withholding and employment taxes, while others aren’t.

Are fringe benefits taxable?

In the US, the IRS provides a detailed list of tax-free benefits in IRS Publication 15-B. All others are taxable fringe benefits.

Here are some examples of tax-free fringe benefits:

What’s the difference between salary and fringe benefits?

A salary is the fixed amount of money an employee receives for working at an organization. Meanwhile, fringe benefits are additional perks on top of an agreed salary—for example, healthcare insurance and paid time off. Fringe benefits can also be monetary themselves and can include things like bonuses. The purpose of these perks is to provide further incentive beyond base pay to work for a company, and stand out among competitors.

What is a cafeteria plan?

A cafeteria plan allows employees to choose between cash and different pre-tax benefits to help reduce taxable income. Staff members can choose whether to contribute a portion of their income before it’s taxed, which can go towards benefits like health insurance and retirement plans. This helps reduce income tax while also giving employees greater flexibility.

Next steps: Improve Your Employee Fringe Benefits Strategy

Although fringe benefits are an added expense, your company will be better positioned to attract top candidates and boost employee satisfaction. By offering in-demand perks, employees can better take care of themselves and their families—which can encourage them to become personally invested in your company.

However, manually monitoring benefits and onboarding elections in multiple places can drain your HR department’s time and energy. But maintaining fringe benefits doesn’t have to be a painstaking process.

With BambooHR  Benefits Administration, you can manage everything in one easy-to-use interface. Plus, employees have a user-friendly and holistic view of their favorite perks—a win-win solution for everyone.

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https://www.bamboohr.com/blog/creative-benefit-ideas
https://www.bamboohr.com/blog/fair-compensation-for-beginners
https://www.bamboohr.com/blog/difference-reward-and-recognition
https://www.bamboohr.com/blog/benefits-limitations-unlimited-vacation