Fringe benefits are a form of nonpayment compensation you receive from an employer that can include health and life insurance, tuition reimbursement and employee discounts.
Fringe benefits can fall under one of four categories: tax free, taxable, tax deferred or partially taxable, meaning you could be taxed for the value of the fringe benefit that exceeds an annual limit.
Taxable and partially taxable fringe benefits derive their value from the difference between fair market price and the discount you receive. For example, if you pay $10 for an item that has a market value of $40, your fringe benefit is $30.
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The rate at which fringe benefits are taxed depends on your taxable income. For example, if you are in the 25 percent tax bracket, you will pay a 25 percent tax on your fringe benefits.
Fringe benefit taxes are intended to ensure that workers in a specific income bracket, regardless of whether or not they receive rich fringe benefits, pay an equal percentage of their income in taxes. The tax also prevents companies from helping employees evade tax payments, compensating them with goods instead of a paycheck.
Certain fringe benefits like health insurance, term life insurance and some transportation reimbursement are not taxable.