When managing international payroll, staying compliant with different regulations is one of the trickiest parts. Every country has different sets of rules for calculating employees' net salaries. In addition, numerous factors impact the employees' payrolls, primarily benefits in-kind or BIK.
These are non-cash benefits that intend to ensure the wellness of the employees. In some countries, the in-kind benefits include bonus perks and employee compensation. Some employers also provide healthcare, medical insurance plans, childcare, and educational resources.
Benefits in-kind are often seen as an employee engagement and retention strategy. However, employees must ensure accurate and on-time filing of these benefits to stay compliant locally and internationally.
The challenging part of providing in-kind benefits to employees is tax compliance. Since they have monetary value, these benefits are taxable on most occasions, but the conditions of taxes will vary significantly from one country to another.
This post will help you learn about some pros and cons of in-kind benefits and which benefits are taxable and non-taxable. While we are at it, we will also discuss in-kind benefits rules and regulations in different countries.
What Is an In-Kind Benefit?
In-kind benefits are general, non-cash perks an employer offers to employees to boost their morale and ensure their well-being. In many countries, benefits in-kind (BIK) are also known as fringe benefits or non-mandatory perks.
The United States saw the popularity of fringe benefits in the 1930s and 1940s when collective bargaining agreements became more common. These contracts enabled employees to motivate the employers to improve their working environment.
Over the past few years, the industry saw a dramatic change in the benefits in-kind, considering that the employee tenure has gotten shorter. Many employers started to develop new, more effective strategies to increase employee retention. One of them is offering more in-kind benefits to the compensation packages.
Let's take a brief overview of the basics of the in-kind benefits:
- In-kind benefits are those perks that employees can't afford with their taxable monetary income.
- BIKs are not included in the employee's salary — they are additional perks or allowances that fall under the employee's comprehensive compensation plan.
- These benefits may seem non-cash, but they have a monetary value. So, they impact employees' paychecks differently. This is why employees and employers are required to pay taxes on the values of some provided benefits.
- Some in-kind benefits are non-taxable.
In-kind benefits also play a significant role in employee recruitment and retention. Here are some facts every employer should know:
- Many employees consider BIK a top reason for selecting a job position and applying for it.
- Most employers consider benefits in-kind an essential part of their compensation strategies to attract a talented workforce and retain existing ones.
- Several in-kind benefits have a significant impact on an employee's financial status. For example, suppose employees with an average monthly pay rate face housing or medical issues. In that case, BIK can cover these expenses and help employees save a considerable amount of their salary.
It's worth mentioning that many economists argue about raw cash income and its inefficiency in workers' compensation policy. In an article related to in-kind benefits, Janet Currie and Firouz Gahvari discussed the inefficiency of cash transactions and how in-kind transfer is a more efficient and effective way to compensate for employees' public health and housing policies.
Most Common Examples of In-Kind Benefits
All employees value in-kind benefits differently, but most see it as a plus point. Talking about benefits in-kind is as significant for employees as the salary negotiation. The SHRM's 2018 Employee Benefits Report found that a vast majority — 92% of the employees — reported additional perks as vital to ensuring job satisfaction. Therefore, the more attractive the benefits employers offer, the higher the chances they will outshine the competitors in the market.
Today, the most common benefits in-kind include healthcare and pension contributions. But educational and wellness perks are becoming increasingly popular worldwide. Many companies also offer additional benefits, like relocation stipends, non-business travel expenses, and entertainment expenses, to stand out from others.
Generally, you can divide in-kind benefits into the below groups:
Core Expected Benefits
These include perks that ensure a sense of safety for employees in the present and the future. Consider them insurance plans that an employee may need anytime in the future. Many employers offer core expected benefits for the employees alone, while others also cover the family members of the employees.
The most common core expected benefits are:
- Health insurance (not applicable to some countries outside the US)
- Retirement plan contributions or private pension contributions
- Disability insurance
- Life insurance
Education Perks
Helping employees upskill and improve in their profession is one of the most critical responsibilities of employers, yet it often stays unattended. While earning more and more profits, many businesses don't focus on the training and development of their employees. Unfortunately, this way, they miss on a significant opportunity.
Offering education perks as in-kind benefits can help employees remain engaged and informed about the latest trends. By staying up to date with the developments in their industry, employees can also polish their skills and acquire new ones on time.
The most common educational perks include:
- Tuition reimbursement
- Courses
- Conference budgets
- Reimbursement for books
- Subscription to learning materials on Kindle and Udemy
- Coaching
Wellness Perks
With the adoption of the work-from-home approach over the past couple of years, taking care of employees' wellness has become more important than ever.
Many businesses have even developed policies to focus on their employees' mental and physical well-being. This promotes their productivity and overall health whether they work from home or in physical offices.
Some standard wellness perks offered by employers as in-kind benefits include:
- Gym memberships
- Yoga and meditation classes
- Cycle to Work schemes
- Employee assistance programs (EAPs)
Benefits Geared Towards Remote Workers
In general, it's easier to cater to the needs of in-house employees than those of remote workers. However, it's believed that companies that offer flexibility to their employees have a much lower turnover rate than those that don't.
At large, flexibility refers to remote work. It revolves around allowing employees to work from home or any place other than the physical offices.
Employers can provide the following benefits to their remote workers as part of in-kind benefits:
- Co-working spaces costs (for example, WeWork subscription)
- Home office stipend
- In-person company retreats and meetups
- Coffee vouchers so employees can work from cafes
- Ergonomics consultation for home offices
Advantages of In-Kind Benefits
Offering in-kind perks can give you an edge over your competitors. Since many people prioritize these benefits when looking for a job, it won't be hard for you to attract the best candidates with offers more promising than those of your competitors.
As these benefits are usually not included in the salary, they can also help employees cover their living expenses. This is particularly appealing to remote workers who may need more supplies for their home offices and extra support for traveling expenses.
Some advantages of in-kind benefits for employers and employees include:
- Facilitation of Complex Projects. Employees working on complicated or international projects can qualify for more advanced in-kind benefits than local workers. Such employees can get flexible-leave accommodations, paid employee sabbaticals, family-building (fertility and adoption) services, learning and development opportunities, and student loan relief.
- Generous Overseas Compensation. An ex-pat package usually gets offered to an employee who takes over an overseas project. It includes basic salary and in-kind benefits, such as living expenses, housing costs, international academic fees for the children, healthcare, etc. Such a package allows an employee to cover most living expenses with no-taxable BIK, leaving the base salary intact.
- Less Employee Cost. BIK decreases the total employment cost of hiring a new employee, benefiting employers.
- Reduced Employee's Income Tax. BIK can also reduce an employee's income tax.
Disadvantages of BIK
While BIK has a range of advantages, it also has downsides for employees and employers both. Some of them include:
- Low Incomes. A solid BIK package may result in a low salary. Many employers tend to reduce their income rates due to the BIK packages to normalize workers' compensation levels among all employee classes.
- Currency Risks. If in-kind benefits get calculated in the employee's home country currency, the perks may be subject to several currency risks.
- Taxable Perks. Many in-kind benefits are taxable. To avail of these perks, employees may have to file as a taxpayer in their home country and the worker's country.
BIK Tax Policy
The Internal Revenue Service (IRS) is the official tax-collection institution in the United States that administers the Internal Revenue Code, which is an integral part of the federal statutory tax law. The IRS has determined a list of non-taxable benefits on its website.
When an employer offers an additional perk to an employee as a fringe benefit, the reward is included as a taxable income. The employer has to mention such BIK in the the employee's W-2 form. Of course, this doesn't apply to the in-kind benefits included in the IRS's list of non-taxable benefits.
Taxable Benefits
In the USA, the most common taxable BIK benefits include:
- Reimbursement of tuition or education expenses
- Mileage expenses
- Company cars and phones used for personal purposes, primarily if they exceed the maximum amounts set by the IRS
Non-Taxable Benefits
Some non-taxable BIK benefits are:
- Special accommodations provided to workers to help them perform their job
- Achievement awards
- Benefits with insignificant value, such as small gift cards or birthday presents
Is BIK Tax-Deductible for Employers?
There are times when employers can file a cost deduction claim for BIK provided to employees. This could be the paid business vacations offered to the employees, which is an example of deductible benefits.
However, the taxability of the benefit and deductibility of the expense are two different things. So, even if employers provide non-taxable benefits to employees, they can still deduct the costs of offering those perks.
For taxable benefits, like a company car, their values are included in the employee's salary as compensation. Still, the employer can't deduct the car's value as a salary expense. Instead, they can only deduct the cost incurred in providing the vehicle.
How to Include In-Kind Benefits?
The right way to offer in-kind benefits to the employees depends on their country or location. Employers can provide them in one of the following ways:
Home Country Method
This method lets employees receive the payroll and benefits set for the home country. It's ideal for short-term projects and overseas employees because they get a chance to cover extra expenses when working from far away. These could be schooling fees, housing expenses, etc.
However, if an employee's payroll gets divided between the host and the home country, this method may not reimburse the employee for the host country's taxes or currency differences. This could take a significant toll on the employee's total compensation.
Localized Model
Contrary to the previous method, the localized model provides the employees with benefits available in the host country. Thus, it is considered ideal for long-term projects.
The localized model includes in-kind benefits like housing expenses, pension contributions, food allowances, etc. Remember that these benefits are included in the employee's total compensation value.
Global Model
As the name suggests, this model specially offers in-kind benefits to employees who frequently relocate. In addition, the global model enables employees to determine their financial plans in accordance with the international benefits. Such employees can also retain these benefits irrespective of wherever they relocate.
For example, pension contributions are only provided in the employee's home country. But other in-kind benefits, like housing expenses, depend on an employee's location.
Why You Should Report BIK and Other Perks
Not only the United States but countries all over the globe oblige employers to report BIK and other perks provided to the employees as part of the compensation package. Reporting these benefits is required by the country's tax and payroll laws. So both employers and employees must know the ins and outs of different types of in-kind benefits reporting.
The United States requires employers to mention all taxable benefits on an employee's W2 form. Meanwhile, the United Kingdom obliges employers to include this information in the P11D form.
The IRS requires US employers to report independent contractor benefits and bonuses on Form 1099-NEC.
Tax-Free In-Kind Benefits by Country
The taxability of in-kind benefits varies from country to country. Here is a breakdown of tax-free BIK offered by different countries around the world:
United States
The IRS considers all in-kind benefits taxable, excluding those mentioned in the tax code. But that doesn't mean there are no non-taxable perks in the country. The federal tax and payroll laws only require the employees to meet specific requirements to qualify for the BIK.
It's good to keep in mind that ex-pat or overseas workers are not obliged to any provision for BIK taxability. Therefore, all their benefits for housing, vehicles, and other living expenses, are taxable.
The common tax-free perks in the USA include:
- Health insurance
- Life insurance
- Onsite company accommodation and meals
- Per diem, including business travel costs, accommodations, and meals
- Childcare, accounting for up to $5,000 annually
- Relocation costs
You can also visit the IRS's Employer's Tax Guide to Fringe Benefits to get deeper insights.
Canada
Canada offers somewhat similar non-taxable benefits as the USA, including:
- Private healthcare insurance (provided by the employer)
- Childcare expenses for employees located out of town
- Education and professional development expenses
- Vehicle allowances
- Mobile phone and internet services allowances
- Reimbursement on relocations cost
United Kingdom
The UK allows any employee earning less than £12,570 ($16.367,71) a year the personal allowance to avail tax-free BIK. These include:
- Childcare expenses
- Commuting costs
- Relocation costs
- Pension contributions
- Business travel accommodations
- Company car for business use
China
China allows international employees to avail of various in-kind benefits or tax-exempt benefits. These are not included in the employee's salary package and are paid to them as reimbursement (not cash). Such BIK include:
- Housing rental costs
- Childcare
- Education expenses
- Language training and development costs
- Moving expenses
- Home leave costs
- Meal and laundry expenses
- Business travel expenses
Belgium
Belgium requires self-employed people and employees to pay progressive income tax and social security depending on their cash income. However, employers have to provide social insurance and other in-kind benefits.
Some in-kind benefits subject to favorable taxes include:
- Housing and utility expenses
- Stock options
- Company car, cell phone, or computer
Note that the above incentives are only for Belgium nationals. The in-kind benefits for foreign employees include:
- Tax equalization
- Schooling fee
- Living costs (accounting for a maximum of $2,739)
- Housing expenses
How Revelo Can Help You With Payroll Compliance
No matter where your employees are, you need to ensure that they get the right benefits and suitable working conditions. While taking care of that, you also have to stay compliant with the local and international laws. This part of the process may become challenging for employers working all on their own and dealing with overseas employees.
But things don't need to be difficult, and you can choose a trustworthy partner to support you on your journey. Revelo is a platform that helps employers find, hire, and manage remote engineers residing in Latin America. We also handle employee benefits, payroll issues, and local compliance, so you don't have to waste your time and efforts.
Contact Revelo today to learn more about how we can help you expand your business effortlessly.
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