Use fringe benefits to attract and keep workers while lowering your company’s tax bill.
How can small businesses compete for qualified workers? Thanks to U.S. tax laws, every business can afford to offer fringe benefits, and may even be able to benefit themselves in the process.
Fringe benefits are often defined as property and/or services with benefits to employees that frequently outweigh the cost to the employer. These benefits are generally included in an employee’s gross taxable income, where they are subject to income tax withholding and employment taxes.
Some fringe benefits, however, aren’t taxable wages and yet remain deductible by the employer. These so-called qualified fringe benefits include health insurance, medical expense reimbursements, dental insurance, education assistance and day care assistance. These tax-qualified benefits are deductible by employers and totally free of federal and state income taxes, as well as the employee’s Social Security and Medicare taxes.
Survey after survey shows that it is not money alone that attracts new workers and keeps existing employees on the job—it’s the benefits. Job training, educational assistance and employer-provided vehicles used for business are examples of common working-condition fringe benefits for many small businesses.
For example, on-the-job training provided by an employer is a tax-free hiring incentive as well as an invaluable perk for current employees. Educational assistance and tuition reimbursement are also welcome fringe benefits. Employers can reimburse an employee’s educational expenses up to $5,250 per employee, per year, exempt from tax. Educational assistance includes tuition assistance, books, equipment and other expenses related to continuing education.
On the money
Salary remains an important factor in today’s job market. To attract the best candidates, employers should also consider offering benefits that are above industry standards, and add new fringe benefits when they are affordable. Job seekers and employees are increasingly looking for cafeteria-style benefit plans that allow them to balance their choices with those of a working spouse or partner. Profit-sharing plans and bonuses that pay employees for measurable achievements and contributions are invaluable.
Bonuses and awards must be included in an employee’s taxable income. Should the bonus or award be in the form of goods or services, employees must include the fair market value of those goods or services in their reported income. The same applies to holiday gifts, other than items of nominal value.
Tax-free fringe benefits
Common tax-free employee fringe benefits include health benefits, long-term care insurance, group term life insurance, dependent care and working condition fringe benefits (anything provided or paid for by an employer to help employees do their jobs, including local and long-distance travel for business, business-related meals and entertainment, professional publications and company cars used for business).
So-called de minimis benefits may be worth little or nothing in the eyes of lawmakers, but they go a long way toward making current and prospective employees happy—without an accompanying tax bill. De minimis fringe benefits refer to any property or service that is so small in value that accounting for it is unreasonable or administratively impractical.
Another time-tested attraction for employees and job seekers: a happy workplace. Tax rules allow a business to throw a holiday party—even a relatively fancy one—with no tax consequences to the employees. In order for the gathering to be deductible for the employer, the IRS requires the party cost to be “reasonable.” A business cannot deduct expenses for entertainment that is “lavish or extravagant.”
Tax reform changes are also ongoing. The 2017 Tax Cuts and Jobs Act (TCJA) included changes to the tax treatment of employer-sponsored benefit programs. The new law restricts an employer’s ability to deduct many common business expenses such as meals, entertainment and employee moving expense reimbursements. On the upside, the law included a new tax credit for employers who provide paid family and medical leave for their employees.
Mark E. Battersby writes extensively on business, financial and tax-related topics.