Introduction
Fringe benefits refer to compensation which employees get above their salaries or wages. They are used by employers to attract and retain employees. On many occasions, fringe benefits are subjected to taxation unless there are special provisions in law which exclude them from taxation. The aim of this paper is to discuss the different types of fringe benefits and the tax implications on employers and employees.
Discussion
Objectives of fringe benefits
During the industrial revolution, the management of organizations was based on the scientific management approach which viewed employees as robots or machines. Many employers were very harsh to their employees. The workplace was characterized by fear, tension, harassment and intimidation of employees by their employers. Employers did not bother whether employees were motivated or not and there was nothing like fringe benefits for employees.
Since then, the relationship between employers and employees has been characterized by conflicting interests. While employers are usually driven by the desire to minimize expenses, employees are interested in more compensation for the services which they offer to employers. In a state of nature therefore, employers would want to get almost free services from employees to maximize profits. Employers would also want to avoid taxation from the government or other authorities because to them, taxation is an unnecessary burden on their business. The tax agencies on the other hand would want employers and employees to pay as much tax as possible.
Just like employers, employees do not like taxation but wish to get their salaries and wages without being taxed because from their point of view, taxation deprives them of their hard earned cash.
These divergent interests have led to the emergence of industrial relations which aim at defining the relationship between employers, employees and tax agencies. As a result, labor laws governing employees’ salaries and wages have been introduced to prevent employers from exploiting employees or evading taxation. Such laws outline the responsibilities of employers to employees and vice versa. They also outline the terms and conditions of employment.
The introduction of labor laws has made employers and employees have good relationships which are based on mutual trust, adherence to work ethics and respect for each other. The change in perception of employers towards employees has led to emergence of the idea of employee motivation at the workplace. Globalization and cultural diversity have also compelled organizations to invest immensely in employees’ welfare to attract, retain and maximize employees’ productivity.
As a result, many employers have embraced the concept of fringe benefits as a way of motivating their employees and a tool for attracting talented employees who enrich their organizations with new business ideas thus increasing organizational competitiveness.
Apart from employees’ motivation, fringe benefits also have other objectives. They provide employees with a good working environment which makes work not only enjoyable but also satisfactory. They also cushion employees from various risks such as old age, accidents, ill-health and maternity related risks. Additionally, fringe benefits promote employees’ general welfare which creates a sense of belonging to their organizations thus increasing employees’ motivation and productivity at the workplace.
Types of fringe benefits and tax implications for employers and employees
As mentioned in the introduction, fringe benefits are forms of compensations which accompany employees’ salaries or wages. Just like salaries or wages, all fringe benefits are taxable. However, there are certain types of fringe benefits in which the tax liability is shifted from the employee to the employer depending on specific laws and on who benefits from the fringe benefits (Kinney & Raiborn, 2011). If it is employees who benefit, then the tax liability is on them. The same applies to the employers. The following are the various types of fringe benefits and their tax implications for employees and employers (Holley, Jennings & Wolters, 2012).
Housing and accommodation fringe benefits
Some employers provide housing and accommodation to their employees as fringe benefits. In employment relationships, housing refers to the provision of a place of residence to employees by employers for a prolonged period of time or on permanent basis while accommodation refers to the provision of a place of residence for a short period of time or on temporary basis, especially when employees go for trainings, seminars or when they represent their organizations in various meetings. Housing and accommodation may be provided either in form of allowances or direct payment by employers. However in most cases, employees are given the opportunity to decide on the mode of payment for their housing or accommodation.
When employees opt for allowances for their housing or accommodation, the allowances are subjected to taxation. Even though housing and accommodation are provided for the benefit of employers, the employees are taxed because it is presumed that the allowances form part of their earning. If on the other hand employers pay for the housing or accommodation, they pay fringe benefit tax for the housing or accommodation.
Education fringe benefits
Many employers are driven by the desire to develop their employees by enhancing their skills which boost organizational competitiveness. Employers therefore provide fringe benefits in form of education to their employees who in turn dedicate their skills and efforts to organizations (Sherman, 2011).
Education fringe benefits are of two types namely scholarships and grants. When employers pay for scholarships for employees, they are subjected to fringe benefit tax depending on the amount of money paid for the scholarships. Employees are therefore not taxed on the scholarships. However, when employers pay school fees for employees or clear school fees arrears for employees or their family members, then the employees are taxed for the amount which is paid as school fees or school fees arrears.
Transport fringe benefits
In an ordinary employment relationship, transport expenses are included in employees’ gross salaries or wages. However, some employers may decide to provide employees with company vehicles for movement to and from work. Other employers provide company vehicles which pick employees at certain points in the morning and drop them in the evening after work. In these types of fringe benefit plans, the employer is supposed to pay fringe benefit tax on behalf of the employees because the transport is provided for the benefit of the employer since it enables employees to arrive at work on time. This ensures that no time is wasted due to late coming or absenteeism especially in areas where public transport is not available or is unreliable. Employees are only taxed if they receive an extra transport allowance or if they commute for organizational purposes. When employees travel by air, they may be provided with air tickets for which the employers are taxed. However, if employers give employees a flight allowance, the employees are taxed for the same.
Health fringe benefits
The well-being of employees is critical to employers because healthy employees are able to maximize their skills, talents and energies in their work. Providing employees with health security through fringe benefits is therefore indispensable for employers who aspire to meet their organizational goals and objectives in an efficient and effective manner (Weltman, 2012).
Basically, there are two types of health fringe benefits. The first is where employers deduct health insurance from employees’ salaries or wages and submit to a health insurance scheme. The second is where employers contribute directly to a health insurance scheme on behalf of employees. In the first case, employees are not taxed while in the second case; employers are taxed for the amount they contribute to employees’ private medical schemes.
Retirement fringe benefits
They form part of employees’ social security for cushioning them from financial difficulties during old age. Even though old age fringe benefits to employees have no direct positive impact on employers, they play an important role in motivating employees. When employees get retirement benefits from their employers, they develop a positive attitude towards them. The organizations therefore have what is referred to as cohesive organizational culture. Many organizational researchers agree that a cohesive organizational culture is one in which all members of an organization have similar beliefs and values which hold them together as an organization. These beliefs and values are implicit or explicit to the organization. In this kind of culture, the organizational structure does not matter but what matters most is the commitment of each member of the organization to these beliefs and values. Cohesive organizational leads to high motivation among the employees because they share common beliefs and values. When employees are highly motivated, there is minimal use of resources in their supervision which in turn increases their productivity because to them, what matters most is the good of the organization but not personal good (Herriot, 2013).
Employees contribute directly to their retirement benefit schemes from their salaries or wages. They may also contribute through their employers who deduct some amount from their salaries or wages and submit to retirement benefit schemes. In either of the cases, neither the employee nor the employer is taxed. However, employers may decide to give retirement allowances to their employees in cash. When this happens, employees are taxed for the amount they receive. In other cases, employers may contribute directly to employees’ retirement benefit schemes without deducting the amount from employees’ salaries or wages. In such cases, the employers are supposed to pay fringe benefit tax as stipulated in the relevant laws and regulations.
Conclusion
Fringe benefits are forms of compensation which employees receive on top of their usual salaries or wages. During the industrial revolution, employers did not care about the welfare of employees. However, with the introduction of labor laws, globalization and cultural diversity, employers have seen the need to motivate their employees through fringe benefits. All fringe benefits are subject to taxation. However, when fringe benefits are given for the benefit of employers, the employers are subjected to fringe benefits tax. Employers also pay fringe benefit tax when they provide fringe benefits in kind; for example, when they pay for facilities such as accommodation, education, transport and health for their employees.
References
Herriot, P. (2013). Employment relationship. New York: Routledge.
Holley, W.H., Jennings, K.M., & Wolters, R.S. (2012). The labor relations process. Mason, OH: South-Western Cengage Learning.
Kinney, M.R., & Raiborn, C.A. (2011). Cost accounting: foundations and evolutions. Mason, Ohio: South-Western Cengage Learning.
Sherman, A.J. (2011). Mergers & acquisitions from A to Z. New York: American Management Association.
Weltman, B. (2012). J.K. Lasser’s small business taxes 2012: your complete guide to a better bottom line. Hoboken, N.J.: John Wiley & Sons.