Business owners must be fully knowledgeable about all aspects encompassing employee benefits and taxes. Prioritizing to meet employee benefits avoids unnecessary problems, such as an unproductive workforce and potential legal consequences, that can put any business at risk.
Also, problems arising from employee benefits and taxes could potentially delay or disrupt business operations, affecting business reputation and overall sales and services.
So, what are the employee benefits that are taxable and non-taxable? Can employers also get business tax deductions from offering employee benefits?
As a business owner, keep fully guided about employee benefits and taxes and why it’s important by reading below.
Understanding Fringe and Tax Benefits Keeps Employers Informed
As a business owner, it’s important to understand fringe and tax benefits so you’ll know what can be deducted on the taxable income of your employees. It’s one way to let your employees enjoy the perks of working in your company without shouldering all the tax responsibilities.
Fringe benefits are payments for the performance of business services. Allowing your employee to use the company vehicle to come to and from the office is an example of a fringe benefit. Other examples include wellness perks, home office setup, education stipends, and stock options. This benefit helps companies attract more talents and retain current employees.
Tax benefits refer to a fringe benefit that’s taxed and perceived as an employee’s income. Giving your employees a car service, a gift card, or other creative perks are just some of the examples of tax benefits that must be included as taxable income. Employers must also pay taxes on the benefit’s fair market value.
Non-taxable Benefits Increases Employee Satisfaction
As an employer, you should be aware of non-taxable benefits that your employees can enjoy. Employers can provide non-taxable benefits to help retain employees and attract talented job applicants.
Remember that not all fringe benefits are tax-free. All benefits provided by employers to their employees are taxable unless the law expressly excludes them.
Here are some of the examples included on the IRS’ list of tax-free or non-taxable benefits:
- Working Condition Benefits: Properties or services, such as a company vehicle for business use, are allowable business expenses–non-taxable benefits.
If an employer gives cash to an employee for these expenses, proof and verification must be presented, like receipts, that the cash was spent for these items, and any unused cash must be returned.
- Mobile Phones: Giving employees mobile phones for business use is not taxable to the employees. When employees use the phone for personal use, it’s considered de minimis.
- Health Insurance: Employers paying the cost of a health insurance plan or an accident aren’t considered wages, so they’re not subjected to income tax withholding.
- Worker’s Compensation Benefits: Employees won’t be taxed as long as worker’s compensation benefits are paid as part of a state’s worker’s compensation program. On the other hand, pension, which is also a worker’s compensation benefit, is taxable.
- Transportation Benefits: Commuter benefits are generally excluded from being taxed. But there are limits and exceptions in terms of parking, cycling, and mass transit benefits.
Bicycle commuting reimbursed expenses must still be included in the employee’s gross income for tax purposes.
- Meals: Typically, meals in small amounts and are infrequently provided to employees are not taxable.
- De Minimis or Minimal Benefits: These small gifts are given to employees irregularly with little value, making it unreasonable for accounting to still deal with them, hence de minimis are not taxable to employees. One good example of a di minimi is a basket of grocery items given to employees for the Christmas holiday.
All cash and cash equivalents, such as gift certificates or gift cards, including charge cards, cannot be considered de minimis. These are payments that are taxable to the employees.
Employee Benefits Tax Deductions
Business owners should consider offering employees benefits, including health insurance, worker compensation, and retirement savings plans. The importance of offering employee benefits shouldn’t be overemphasized anymore because it leads to higher satisfaction–retention is increased and turnover decreases.
Because of the tight labor market, business owners may level the battlefield by offering employee benefits.
However, for small business owners, funding these programs can be a heavy upfront cost. Most startup entrepreneurs don’t realize that many employee benefits and other employee-related expenses can be deducted when filing business taxes.
Here’s an explanation of the following employee benefits and related tax deductions:
1. Healthcare Plans
A crucial employee benefit that every business owner must provide to employees is a healthcare benefit. Contributions toward employees’ health insurance coverage can be considered a deduction or tax credit (less than 25 full-time staff).
The average annual wages and premiums paid should be less than the amount prescribed by the Internal Revenue Service (IRS).
2. Health Reimbursement Arrangement (HRA)
HRA is a more accessible and flexible option for small businesses, in which an employer can set a monthly budget for employee benefits. Employers can reimburse employees tax-free for healthcare plans they pick on the individual market rather than funding a group healthcare plan. Thus, employees can select the healthcare coverage they prefer.
Furthermore, HRA eliminates the burden of the employer’s shoulder, including the responsibility of managing a health plan. Medicare and Social Security taxes can lower employers’ payroll taxes and taxable employee income.
3. Paid Employee Leave
Employers can be qualified to take a tax credit if paid leave is offered for personal and medical reasons. The tax credit ranges from 12.5% to 25% of the leave paid to workers.
4. Retirement Plans
Retirement vehicles, such as SIMPLE 401(k)s, 401(k)s, and SEP IRAs are the common retirement benefits offered by employers that can be deducted to employment taxes.
For example, the Retirement Plans Startup Costs Tax Credit allows employers to claim a tax credit for expenses associated with starting a SIMPLE IRA, SEP, or a qualified plan.
5. Office Renovations
The law highly protects disabled workers. That’s why any type of office renovation (building curb ramps and installing assisted-use toilets) helping employees with disabilities may be qualified to get tax deductions or tax-deductible.
Employers can claim credit with less than 30 full-time employees and less than US$1 million in revenue.
Now, you’ve learned the different types of employee benefits, including fringe and taxable benefits. Generally, accidents and healthcare plans are not taxed to employees. Other non-taxable benefits include infrequently given meals and de minimis.
Not all employee benefits are non-taxable, such as small-value cash payments and gift cards.
You’ve also learned how you can reduce your business taxes by providing employee benefits, such as healthcare plans, retirement savings, office renovations, improving the working conditions of employees with disabilities, and HRAs.
You may be interested in: “The Fundamentals of Employee Benefits”