Are Employee Benefits Tax Deductible?
Have you ever had a job that provided excellent benefits?
Employers can deduct the cost of providing benefits, compensation, and perks to their employees as long as they are "reasonable" and "necessary."
Here is a list of ones you can deduct and ones you cannot:
Whether you hired one part-time assistant or a dozen full-time software developers, you can deduct the cost of their pay.
Keep in mind that any business expense you claim must be "ordinary and necessary," and that any wage and salary costs you claim must be "reasonable" for the job the employee is doing. For the IRS to decide if your employee's pay is fair, they will compare it to what a similar business would pay for the same services.
Vacation Pay, Sick Leave, and Disability Benefits
You can deduct these costs as long as the employee does not get money from insurance or another source to make up for the same amount of lost pay.
HSA Employer Contribution
HSA is an abbreviation for health savings account. If the plans are approved by the IRS, the cost of health insurance, long-term care insurance, and critical illness insurance for employees is often tax-deductible.
Contributions you make to a group health plan for your employees are also tax-deductible, as long as you do not deduct for your own premiums. This means you will need to keep track of these costs separately in your books. If, on the other hand, your business is a C corporation, you can deduct your own premiums.
Contributions to an HSA by an employee who is eligible are also tax-deductible. The maximum amount an employer and employee can put into an HSA together changes every year.
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Section 125 or “Cafeteria” Plans
Cafeteria plans are like a bundle deal for benefits. They are not taxed, and they usually have a mix of health benefits, help with adoption, help with child care, and/or health savings accounts (HSAs).
Section 125 of the Internal Revenue Code says that contributions to an employee's cafeteria plan are tax-deductible as long as they meet the requirements.
Check out the IRS's guide to section 125 plans for more information, and make sure your plan qualifies by talking to a tax expert.
Employee Assistance Programs (EAPs)
EAPs, or employee assistance programs, can be deducted in full. This includes counselling programs for family problems, drug abuse, and other problems that make it hard for your workers to do their jobs.
Life Insurance Coverage
Contributions you make to an employee's life insurance policy are tax-deductible as long as you do not "directly or indirectly benefit" from that policy. See section 1.264-1 of the Code of Federal Regulations or talk to a tax expert to find out what that means.
You can deduct education costs as long as they help an employee keep or improve skills related to their job and are part of a qualified educational assistance program. Most of the time, these costs cannot include the cost of tools or supplies (other than textbooks) or lodging and food.
For a complete list of which education expenses qualify, see page 10 of this IRS guide.
You can take a tax deduction for the entire amount you put into an employee's retirement plan.
"De minimis" Fringe Benefits
"De minimis" is just a fancy Latin word that the IRS uses to talk about costs that are too small to account for. "Fringe benefits" are any non-wage compensation you give your employees.
How little? The IRS has not set a specific dollar amount, but some people have said that costs below $25 are about right. As long as they are "occasional or unusual in frequency," you can write off a lot of small extra benefits.
Some "de minimis" benefits from the IRS:
- Occasional employee use of photocopiers
- Occasional snacks, coffee, doughnuts, bars, etc.
- Occasional tickets for entertainment events
- Holiday gifts
- Occasional meal money or transportation expense for working overtime
- Flowers, fruit, books, etc., provided under special circumstances
See page 9 of the IRS guide to de minimis fringe benefits for more information.
Meals and Lodging
Most of the time, you can deduct some of the cost of food and lodging for your employees. Most meals are 50% deductible, but meals that you pay for or that qualify as a "de minimis" fringe benefit are 100% deductible.
The IRS also gives a full guide of which meals and places to stay are tax-deductible.
Gifts and Gift Certificates
Gifts to employees of "nominal" value can usually be deducted by your business.
But there are exceptions even if you keep them small. Cash equivalent items, like gift certificates, are usually not tax deductible because they are considered part of an employee's income.
Bonuses and Awards
You can deduct an employee bonus as long as you can show the IRS that the bonus was directly related to work that the employee did.
You can deduct up to $1,600 per employee for two types of employee awards: awards for length of service and awards for safety achievements. Check out this IRS guide to learn all of the rules about awards.
Getting These Costs Back:
How you can claim these business costs depends on how your business is set up.
Sole proprietorships and single-member LLCs use the “Expenses” section of Schedule C.
Partnerships and multi-member LLCs use the “Deductions” section of Form 1065.
Are Taxes Due on Employee Benefits?
According to the Employer's Tax Guide to Fringe Benefits, all fringe benefits are taxed by default unless they are specifically exempt from taxation. The employee must include the fair price value of the benefits in their taxable income for the same year. A fringe benefit's fair price value is its market price on the open market.
The IRS keeps a list of extra benefits that do not have to be taxed:
- Accident and health benefits
- Achievement awards
- Adoption assistance
- Athletic facilities
- De minimis (minimal) benefits
- Dependent care assistance
- Educational assistance
- Employee discounts
- Employee stock options
- Employer-provided cell phones
- Group-term life insurance coverage
- Health savings accounts (HSAs)
- Lodging on your business premises
- No-additional-cost services
- Retirement planning services
- Transportation (commuting) benefits
- Tuition reduction
- Working conditions benefits
These are not completely exempt; the exemption is subject to a number of rules and laws. Before making any decisions, you should consult with a financial advisor or a tax expert to learn more about your options.
Are employee benefits taxable? The answer is that the majority of them are. If you don't take advantage of some of these employee benefits, you could be passing up a huge opportunity. Things like health insurance and life insurance, for example. Expenses like these are deducted from your gross salary before taxes are taken out. You can save a lot of money in the long run by having those taken out of your paycheck before taxes are calculated!
Make sure you're checking in on employee perks every so often to see what new options have opened up. Many employers offer great perks of which employees are completely unaware. Maybe you can write off a few of them. It's important to take use of all the employee benefits to which you're entitled.
I hope this information was helpful! If you have any questions, feel free to reach out to us here. I’d be happy to chat with you.
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This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this article.