Everything you need to know about benefits in kind: Tax, exemptions, and strategy

When I first moved from running Italian payroll to being responsible for international payroll in multiple countries, I remember being surprised by how complex being compliant with many different regulations was. It was challenging to ensure employees’ net salaries were impacted consistently across different countries. This was particularly the case with benefits in kind (vs general benefits) as they are treated differently across the board.

In some countries, providing health insurance as a benefit in kind was tax-exempt up to a certain threshold, while in others, employees had to pay upwards of 45% tax on the premium of the medical insurance plan they were enrolled in.

In some countries, employees didn’t have to pay taxes for employee product discounts they got, while in others, they had to, but sometimes only beyond a certain threshold. (When you work for a company like Apple, as I did at the time, it’s not easy to have to say to one employee they have to pay 30% tax on a discount that their colleague, who is based across the continent, gets “tax-free”.)

We took extra time to study benefits in kind, as they affect payslips differently, and their proper filing is fundamental to legal and compliant global employment. In this two-part series, I want to tell you everything I have come to learn about benefits in kind, why they are so important, how they are taxed in various jurisdictions, and what are some notable tax exemptions.

A benefit in kind (also known as a fringe benefit or perk) is any non-cash benefit of monetary value that an employer provides to employees. Unlike statutory benefits, which are mandated by the government, benefits in kind are something that a company offers at its own will. Since benefits in kind have monetary value, they are treated as taxable income on most occasions, and employees need to pay taxes on them just as they do on their salaries.

As you have probably noticed, I am talking specifically about benefits in kind, rather than benefits in general. That is because benefits such as additional vacation days, top-up of sick pay, paid sabbaticals or parental leave (all given to employees beyond the statutory requirements of the country), don’t have a particular impact on employees’ payslips (taking into account that these additional leaves are paid and taxed as regular salary and don’t result in any increase to gross pay).

Benefits in kind, on the other hand, have a special designation on the payslip, and depending on the jurisdiction, are taxed differently.

In the United States, fringe benefits became common through the surge of collective bargaining agreements in the 1930s and 1940s, which gave workers the power to persuade businesses to improve working conditions. In the last decade, we’ve seen a much greater evolution of benefits in kind, given that employee tenure, particularly in the tech startup ecosystem, tends to get shorter and shorter.

While a company in the past could count on employees staying with them for their whole career, recently that time has decreased. To increase the chance of retaining their best talent, companies started developing new strategies and added more fringe benefits to their compensation packages.

To this day, some of the most common benefits in kind are pension contributions and private health insurance. Latest trends also point towards benefits that allow employees more freedom and mastery of their craft. Many companies around the world are adding benefits such as a learning or conference budget, free Kindle books, or company-funded annual vacations.

You can broadly divide benefits in kind into the following categories:

The benefits that have come to be expected contribute to the sense of safety in the future:

• Health insurance (of particular importance for US-based workers)
• Private Pension contributions
• Disability insurance
• Life insurance

Everyone needs to keep learning and to get better at what they do. Curious minds need lifelong learning to stay engaged and interested. That’s why educational perks are essential. They could be things like:

• Conference budgets
• Courses
• Kindle subscription (sometimes the device itself, too)
• Book reimbursements (we just wrote about this being a fundamental perk at Shopify)
• Udemy for Businesses subscription
• Coaching

There is a heightened awareness of how important the physical and mental well-being of employees is, and many companies have stepped up in contributing to it by offering free:

• Gym memberships
• Yoga class subscriptions
• Employee assistance programs (usually tax-exempt if offered to all employees)
• Cycle to work schemes

As people are busy doing valuable work for the company, they can use help with many daily activities by providing:

• Catered lunches or meal vouchers
• Childcare
• Public transport reimbursement
• Company car
• Discounts on company products and services

Much-feared turnover rates of most corporate businesses are much lower in companies that allow flexibility and, amongst other things, remote work. When it comes to people working remotely, here are some useful benefits in kind:

• Ergonomics consultation (and if necessary, adjustments/tools) for home offices
• In-person company retreats and off-sites
• Covering the cost of the co-working space
• Coffee vouchers so people can work from cafes and avoid isolation.

The list above probably feels a bit overwhelming, and, understandably, you are not sure where to begin in establishing your benefits-in-kind policy. One thing that you will have to keep in mind is that your employees will be taxed for many of these benefits (there is a way to work around this, more on that in the second piece of this instalment), so choose wisely. Some companies, like VenturePact, offer their employees credits so they can choose their benefits. Companies like Perkbox provide this kind of pick-and-mix benefits.

If you are looking for the gold standard of benefits when it comes to remote companies, check out Basecamp. Here are some guidelines to help you decide.

Benefits that don’t have an impact on your employees’ tax situation but will make them happy.

As a company that operates in the remote workspace and with half of the team working remotely (currently all of us), we take the benefit of working from home or travelling and working from different places for granted. However, up until COVID-19 forced everyone to be remote, the option of working from home wasn’t open to many employees. Once this crisis is over, we hope the opportunity is extended far wider. This is a great benefit to start with, which will not cost you anything.

Another great benefit to offer is an unlimited or open vacation. This type of perk is managed ‘informally’ – employees need to check with their direct supervisors and teams whether it’s okay to take time off without impeding on any projects or deadlines. Employers track days off up to the statutory minimums for the jurisdictions that require it, but don’t track anything beyond this. Offering open vacation implies trust and gives autonomy to teams to self-manage, which in turn brings better results and less turnover. If you are offering it, make sure it’s fully paid time off. The tax people would need to pay on it is the same as they would on regular holiday pay.

Paid sabbatical is another excellent benefit to offer to loyal people in the company with longer tenures. Some great Remote work champions offer great examples of this – Automattic offers three months after every five years of service, while Buffer gives one to two months after every three years. Hotjar, Doist, and Close are other great companies that have similar policies. If you decide to implement sabbaticals for your employees, encourage people to work on a passion project or do something unrelated to ‘normal’ work. Once they are back, they can bring a fresh perspective and more creativity.

In many countries, the statutory leave for parents is very limited and, with a few exceptions, usually only covers maternity leave. As your employees become parents, one of the best things you can do is allow them to spend those vital first few weeks and months with their newborns.

Similar to paid parental leave, statutory sick leave doesn’t give much coverage to your employees if something more serious happens to them. If your employees fall ill or injure themselves and are unable to work because of it, see if you can offer some extra paid time off while they recover.

From there, what you choose to offer as benefits in kind (which will cost you and for which your employees will need to pay tax on) can depend on where people are based. Understanding the geopolitical and social context of home countries is a great start.

Here are some examples:

In the US, health insurance is a hugely important benefit, as the country doesn’t have a national healthcare system. Some employers offer incredibly competitive private healthcare plans that sometimes add over $15,000 to an employee’s compensation package, and are a desirable benefit, particularly for those with families.

Similarly, in Ireland, the healthcare system is overloaded, and people need to wait for appointments for a very long time. Providing private health insurance can help your employees be seen by doctors much more quickly.

While companies can negotiate good packages in their HQ countries where they have a larger number of employees, one way to get access to better deals for your remote employees is to employ these people through a Professional Employer Organisation, which may offer such benefits.

As life expectancy has increased over the last 20 years and people are expected to live well past retirement age, state pensions are considered insufficient to provide a comfortable standard of living. In many countries, people are encouraged to join private pension funds or are automatically enrolled in one if they do not explicitly decline.

A common benefit in kind offered by employers, and mandatory in some countries such as the UK, is to match the contribution that employees make to a private fund. In most countries, employees will be taxed for this benefit in kind; however, there are some notable exceptions, which are covered in the follow-up article.

Companies like Basecamp offer fully covered life insurance policies that employees do not have to contribute to, and give them peace of mind.

During my time at Apple, I saw firsthand how much employees appreciated employee discounts for our products. As mentioned at the start of this article, however, these discounts can be tricky to file taxes for, which I will cover in detail in the follow-up article.

Stock options or employee share options schemes are among the most sought-after benefits in good times and in bad.

Beyond ensuring employee retention, offering benefits in kind carries financial incentives for the company, as the cost of most of them is tax-deductible for the company.

What we have outlined in this article is just the start of how you should think about benefits in kind. The entire lifecycle of putting them in place for your employees is more complicated, as you will need to procure suppliers for these benefits, such as pension funds, health insurance providers, gyms, relocation assistance providers, etc. Then you will have to make monthly payments to these providers and account for the benefits on your employees’ payroll, month in and month out.

The most critical part of benefits in kind, which we will cover in our follow-up post, is ensuring compliance in terms of the correct application of proper taxes on these benefits according to the regulations of your employees’ home country. There are some handy mechanisms that minimise the impact of the taxable benefits on your employees’ paychecks (hint: gross-up).