In the current labor market, a salary gets a candidate’s attention, but the employee benefits package is often what gets them to sign the offer letter.
As stated above, benefits comprise nearly 30% of total compensation cost. According to the Bureau of Labor Statistics (BLS), employer costs for employee compensation averaged $43.11 per hour worked, with wages accounting for 70.4% and benefits accounting for the remaining 29.6%.
This guide categorizes the essential types of benefits, distinguishes between what is required by law and what is optional, and explains the tax implications of “fringe” perks.
1. Mandatory Benefits: The Legal Minimum
Before designing a flashy perks package, every business must ensure compliance with federal and state laws. These are not optional; failing to provide them can result in severe penalties.
- Social Security & Medicare: Under the Federal Insurance Contributions Act (FICA), the IRS requires employers to match the employee’s contribution (6.2% for Social Security, 1.45% for Medicare).
- Unemployment Insurance:Â Employers fund this entirely. It provides temporary income for workers who are laid off.
- Workers’ Compensation:Â State-mandated insurance that covers medical care and lost wages for work-related injuries.
- FMLA (Family and Medical Leave): According to the U.S. Department of Labor, companies with 50+ employees must provide up to 12 weeks of unpaid, job-protected leave for qualified medical or family reasons.
2. Core Voluntary Benefits: Health and Security
These are the “standard” benefits that, while not federally mandated for small businesses (under 50 FTEs), are expected by most professionals.
Health Insurance
This is the single most valued benefit. A robust health insurance plan usually includes medical, dental, and vision coverage.
- Context: For small businesses, buying through the SHOP Marketplace can open the door to the Small Business Health Care Tax Credit.
Retirement Plans
Helping employees save for the future creates long-term loyalty.
- Defined Contribution (401k):Â The most common model. Employers often match contributions up to a certain percentage of salary.
- Fact: Surveys by SHRM (Society for Human Resource Management) consistently rank retirement savings as a top-three priority for job seekers alongside healthcare and leave.
3. Fringe Benefits and Taxable Perks
“Fringe benefits” is a broad tax term covering forms of compensation other than cash wages. As outlined in IRS Publication 15-B, a fringe benefit is taxable and must be included in the recipient’s pay unless the law specifically excludes it.
Common Tax-Free Exclusions:
- Health savings accounts (HSA) contributions.
- Educational assistance (up to $5,250 per year).
- Group-term life insurance (coverage up to $50,000).
- Dependent care assistance.
Common Taxable Fringe Benefits:
- Gym memberships (usually).
- Excessive moving expense reimbursements.
- Company cars for personal use.
4. Modern "Lifestyle" Benefits
As the workforce shifts, so do the expectations for employee retention. The modern benefits package focuses heavily on work-life balance and flexibility.
- Remote Work Stipends:Â Allowances for home office equipment or high-speed internet.
- Flexible Scheduling:Â Four-day workweeks or “core hours” policies.
- Mental Health Support:Â Subscription access to apps like Calm or Headspace, or dedicated Employee Assistance Programs (EAPs).
5. Cafeteria Plans (Section 125)
One of the most efficient ways to offer benefits is through a Section 125 Cafeteria Plan.
A Cafeteria Plan allows employees to pay for certain benefits—like health insurance premiums or Flexible Spending Accounts (FSAs)—on a pre-tax basis.
- Benefit to Employee: lowers their taxable income, increasing take-home pay.
- Benefit to Employer: reduces the total payroll amount subject to FICA taxes, saving the company roughly 7.65% on every dollar contributed.
The ROI of Benefits: Why Spend the Money?
Why should a business spend an extra 30% on top of salaries? The answer lies in retention mathematics.
Replacing an employee costs significantly more than retaining one. Research cited by Gallup suggests that the cost of replacing an individual employee can range from one-half to two times the employee’s annual salary due to recruiting fees, training time, and lost productivity.
By offering a competitive benefits package, you reduce turnover. If a solid 401k match or health plan keeps a $60,000/year employee from leaving, you have saved the company roughly $30,000 to $60,000 in replacement costs.
Frequently Asked Questions
What is the difference between a benefit and a perk?
A benefit is usually a non-wage compensation that covers a fundamental need (Health, Retirement, Safety) and often has significant monetary value. A perk is a discretionary add-on that boosts morale but is less essential (free snacks, casual Fridays, standing desks).
Do part-time employees get benefits?
Federal law does not generally require employers to offer benefits like health insurance or retirement plans to part-time workers (usually defined as working fewer than 30 hours a week). However, many companies offer pro-rated employee benefits to part-timers to remain competitive.
Are bonuses considered employee benefits?
Technically, bonuses are considered “supplemental pay” rather than a benefit. They are taxed differently than standard wages (often at a flat 22% withholding rate) and are treated as taxable income, unlike health insurance premiums.
Can I offer benefits to only some employees?
You must be careful here. While you can offer different benefits to distinct groups (e.g., “Full Time” vs. “Part Time”), you cannot discriminate in favor of highly compensated employees within those groups. Doing so can cause your plan to fail IRS non-discrimination testing.
How do I manage employee benefits?
Most small businesses use a PEO (Professional Employer Organization) or payroll software (like Gusto or ADP) to administer benefits. These platforms handle the deductions, carrier payments, and compliance automatically.
Building a Strategy, Not Just a List
Effective employee benefits are more than just a checklist of expenses; they are a strategic tool for business growth. By offering a mix of mandatory protections, core health security, and modern lifestyle perks, you position your company as a destination for top talent.
Take the next step
- Analyze your budget:Â Determine if you can afford the standard 30% load on top of salaries.
- Check compliance:Â Ensure you are meeting all FICA and FMLA requirements.
- Get a quote: Use our guide on Small Business Health Insurance Quotes to estimate your biggest cost center.
