Performance Bonuses vs. Fringe Benefits: Which is More Beneficial for Employees and Companies?

Choosing Between Performance Bonuses and Fringe Benefits: What’s Best for Employees and Companies?

The Unlimited Advantage of Fringe Benefits

Unlike performance bonuses, the tax relief for fringe benefits is not tied to the amount of income received in the previous tax period.
The tax substitution of 5-10% applies to those who, in the previous year, did not earn more than 80,000 euros from employment income, including specific sums subject to the 5% tax, pensions, and the TFR quota liquidated in payslips.

Nevertheless, other employment incomes subject to separate taxation and performance bonuses replaced by welfare benefits within the exclusion threshold are not included in the 80,000 euro limit.
The tax relief also applies even if there are no employment incomes, if the 80,000 euro limit is exceeded due to other types of income, or if the limit is surpassed during the year due to different earnings.

It’s essential to consider foreign work, even if not taxed in Italy, as those incomes should be included in the calculation of the 80,000 euro limit.

A Simpler Process for Fringe Benefits

Unlike performance bonuses, which must meet specific procedural constraints to access tax benefits, fringe benefits are more straightforward to grant.
Performance bonuses must be variable and linked to increases in productivity, profitability, quality, efficiency, and innovation, as specified in national or company-level agreements.

The improvement in productivity must be real, not potential, and the indicators for measurements must be set in advance by the collective agreements.

No Income Tax for Fringe Benefits

According to the Italian tax legislation, goods and services of modest value are exempt from taxation up to a limit.
However, performance bonuses, even if benefiting from tax relief, are subject to a 5-10% tax.

Moreover, the threshold for tax-exempt goods and services in 2024 has been raised to 1,000.00 euros, increasing to 2,000.00 euros for employees with children, including those born out of wedlock, as well as adopted or entrusted children.

Changes in INPS Contributions

Up to the established limit, specific values of benefits in kind are exempt from social security contributions for the tax year 2024.
Conversely, performance bonuses, like other remuneration components, are subject to social security contributions.