Companies with employees must report payroll and fringe benefits on their financial statements through a process commonly called payroll accounting. Fringe benefits, or fringes, typically include supplementary wage and nonwage payments or benefits you receive from your employer. Unless specifically excluded by a section of the Internal Revenue Code, fringes are taxable wages for employees. The IRS groups fringes into four basic categories: taxable, nontaxable, partially taxable and deferred taxation.

Taxable Fringes

Taxable fringe benefits are considered wages because they are not specifically excluded by some section of the tax code. Taxable fringes impact your gross income, which in turn affect the company's payroll withholding and payroll tax liabilities. They must be reflected on your employee W2 tax forms. For example, if you receive employee bonuses and get paid sick days, these sums are always a taxable liability to you because there is no section of the tax code that excludes bonuses and sick days from taxation.

Nontaxable Fringes

Tax code specifically excludes accident, disability and qualified health plan benefits from your gross wages as an employee. Nontaxable fringes such as health benefit plans are mutually beneficial for your employer and for you because your employer is allowed to offer a tax-free benefit to you while deducting the cost of that benefit as a normal business expense, thereby reducing your company’s tax liability.

Partially Taxable Fringes

Partially taxable fringes are benefits in which part of the benefit is specifically excluded from taxable wages. Take your company car, for example. If your employer allows the company car for business and personal use, your employer will include as income on your W2 statement only the computed value of the personal-use portion of the car expense. The business-use portion is not taxable income to you. Another example is educational assistance. Your employer can provide up to $5,250 worth of educational assistance to you as a tax-free benefit. Assistance in excess of $5,250 is taxable income to you unless the education qualifies as a “condition for employment” fringe benefit.

Deferred Taxation Fringes

Deferred taxation fringes are employer-contributed fringe benefits that are taxable to the employee, but the taxes are deferred until a time in the future. Take profit-sharing, for example. Your employer may make all the contributions to your qualified profit-sharing plan, which defers payout until you retire. Your employer’s contributions—and the income earned from those contributions—are not taxable until you withdraw them at the time of your retirement.

Significance of Fringes to Employees

Fringes offer tremendous opportunities to decrease your out-of-pocket expenditures for some of life’s necessities because the benefits are basically subsidized by the government. Frequently, the cost of the fringes is tax-deductible by your employer, while the benefits are not taxable at all, or taxed at a reduced rate at some time in the future. So, the true benefit of fringes to you is the tax savings, which is paid for by the government in the form of lost tax revenue.