As a small business owner, you may have considered offering your employees benefits like health insurance and retirement savings plans.
"When employees receive benefits, they have higher satisfaction, which decreases turnover and increases retention," said Topher Reynoso, former Head of Health Benefits Compliance at Gusto. "Offering benefits also levels the playing field when it comes to recruiting talent, which is important in our tight labor market."
Funding these programs can be a significant upfront expense, especially on a tight startup budget. However, many of these benefits-related costs can be deducted when you file your business taxes.
If you offer the following employee benefits to your team, you might be able to save on your tax bill.
Health care plans
Health care is one of the most important benefits workers expect from their employers — and often the most expensive. However, Chayim Kessler, CPA and Managing Member at MiamiBeachCPA LLC, noted that contributions toward your employees' health insurance coverage can be considered a tax credit "as long as you have less than 25 full-time staff, the paid premiums are under the SHOP Marketplace and the paid average annual wages are less than the prescribed amount by the IRS."
If you have fewer than 25 employees with annual salaries of under $50,000, the Small Business Health Care Tax Credit can be beneficial to your bottom line. This tax credit, created by the Affordable Care Act, allows small businesses and tax-exempt employers to provide health insurance for employees. The credit amount you receive is determined on a sliding scale — the fewer number of employees, the more credit. However, the maximum credit is 50% and is only available for two consecutive years. To calculate and claim the credit, you’ll need to use Form 8941, Credit for Small Employer Health Insurance Premiums.
HRAs
Not sure if you can afford to offer an employer-sponsored health care plan? Health reimbursement arrangements (HRAs) are a much more flexible and accessible option for small businesses, thanks to regulations like the Qualified Small Employer HRA (QSEHRA) and the Individual Coverage Health Reimbursement Arrangement (ICHRA).
"Instead of funding a group health plan, employers can set a monthly budget for benefits and reimburse employees tax-free for plans they choose on the individual market," said Amy Skinner, a spokesperson for Take Command Health. "This increasingly popular trend of offering QSEHRAs is gaining traction because of its flexibility, efficiency, and cost-control to the employer and portability, personalization, and more choices for the employees."
Skinner also noted that an HRA takes the burden of managing a health plan and underlying health risks off of the employer. Instead, your employees choose the health care coverage that best suits their needs, and you can simply support them.
[Read more: What You Need to Know About Qualified vs. Non-Qualified Benefit Plans]
Section 125 deductions
Reynoso recommends looking into Section 125 deductions to reduce your tax burden as an employer.
"These are items that can be deducted from employee pay on a pre-tax basis and are exempt from federal income tax withholding, Social Security, and Medicare taxes," Reynoso told CO—. "These have the potential to lower employer payroll tax and lower employees' taxable income, which is a real win-win."
Often referred to as a “cafeteria plan,” a Section 125 plan allows employees to choose from a menu of pretax benefits, including health and dental insurance. Those who choose to participate in the plan will provide a fraction of their gross pay to help cover the benefits. The most common benefits that attract employees are premium-only plans (POPs) and flexible savings arrangements (FSAs). Notably, some work expenses like phones or tuition assistance are not considered eligible deductions under Section 125.
If you’re interested in this option, open enrollment is offered yearly, but make sure to adhere to the specific IRS guidelines that govern these plans.
Paid employee leave
If you offer paid leave for medical and personal reasons, you might be eligible to take a tax credit, said Kessler. Typically, the credit ranges from 12.5% to 25% of the leave paid to the employee. Eligible employers can request a credit equal to a percentage of the wages they provide to qualified employees during their family and medical leave. The credit applies to wages earned starting on December 31, 2017, and ending on January 1, 2026.
In order for credits to be claimed, a written policy is required to be in place stating that a minimum of two weeks paid family/medical leave and wages paid will not be less than 50% of annual wages. Only employees who have been with a company for over one year are eligible for paid employee leave.
Retirement plans
According to Will Lopez, Head of Mission and Chief Ambassador for Gusto, the most common benefits-related tax deductions for small business owners are retirement vehicles like SEP-IRAs, SIMPLE 401(k)s, and 401(k)s. While there are limits to the amount, you can usually deduct contributions you make to your employees' retirement plans, as well as your own.
Under the SECURE Act and the SECURE 2.0 Act, three distinct tax credits have been introduced to encourage the adoption of retirement plans and employer contributions:
- Startup Tax Credit. To qualify for this credit, businesses must meet three criteria:
- Have 100 or fewer employees who were given a minimum of $5,000 in compensation in the prior year.
- Cover a minimum of one non-Highly Compensated Employee (HCE) with your retirement plan.
- Ensure that, in the three tax years preceding eligibility, the plan does not cover the same employees as another retirement plan sponsored by the business, a related entity, or a predecessor.
- Employer Contribution Tax Credit. To qualify for this credit, a business must meet the eligible employer criteria for the Startup Tax Credit. Employers can receive a maximum annual credit of $1,000 per eligible employee, provided the eligible employee's annual compensation doesn't exceed $100,000. The credit amount varies based on the number of employees and the years since the plan's initiation.
- Auto-Enrollment Tax Credit. Small businesses can receive a $500 tax credit for implementing an automatic enrollment feature in their 401(k) plan, as long as it complies with Eligible Automatic Contribution Arrangement (EACA) requirements. Eligibility for this credit is solely based on having 100 or fewer employees earning a minimum of $5,000 in the prior year. Starting in 2025, most 401(k) plans will be required to include the auto-enrollment feature.
These credits help with retirement savings opportunities and financial security for employees while lightening the burden on employers.
[Read more: How to Set Up an Employee Retirement Plan]
Offering benefits is definitely an investment by small business owners, but it's a worthwhile one.
Topher Reynoso, former Head of Health Benefits Compliance, Gusto
Office renovations for accessibility
While repainting the office won't count toward your tax deductions, any type of renovation that helps accommodate employees with disabilities may be considered tax-deductible.
"If your office has undergone renovations to make it more accessible to differently-abled people, then you can claim credit as long as your small enterprise has less than $1 million in revenue and less than 30 full-time staff," said Kessler.
One example is the Barrier Removal Tax Deduction, which rewards any business for removing structural or transportation barriers restricting disabled individuals. Companies have the option to deduct qualified expenses, typically subject to capitalization, of up to $15,000 annually. This credit can be used alongside the Disabled Access tax credit yearly.
Tuition reimbursement
More companies than ever are offering tuition reimbursement as part of their compensation package, and with good reason: Both employees and employers can reap the benefits. Investing in employees’ education helps attract and retain top talent, subsequently lowering recruiting costs as well as strengthening a company’s reputation and overall success. Even better, tuition reimbursement comes at a minimal cost to organizations, as it is a tax-deductible perk.
In the tuition reimbursement process, an employee will pay upfront for college, graduate, or continuing education coursework. Once the semester is complete, the employer reimburses the employee for some or all of their previously paid tuition, so long as the student meets all listed criteria. This criterion may vary by company, but it typically includes a minimum grade or overall GPA, as well as coursework that is related to the employee’s job or industry.
While this may sound like a high expense, money spent on tuition or education reimbursement is tax-deductible — up to $5,250 per employee per year. Employers can deduct this per-employee amount from their own taxes each year. There are also additional government reimbursement programs that may apply to individuals taking job- or duty-specific coursework. As long as a business has the upfront capital for reimbursement, the actual long-term cost is oftentimes minimal and well worth it for companies and their staff alike.
If you’re planning to implement a tuition assistance program, you’ll want to seek legal assistance to ensure it meets federal, state, and local laws and guidelines.
Tools and resources
Many “reasonable and necessary” business expenses also qualify for tax breaks. For example, professional publications and other continuing education materials can be deducted from your business taxes. Tools and uniforms purchased by the employer also qualify for a deduction, though some may deduct the cost of these items from their employees' paychecks. Note that if tools will be used for more than a year, they must be depreciated.
Tax deductions for education are also available — as long as the education is required to maintain your position or improve your abilities, or is required by law. Schooling that helps you switch careers is not eligible.
Meals, travel, and transportation costs
In some circumstances, business meals are tax-deductible. Meals purchased while traveling for work or meeting with clients, as well as during social or recreational activities (such as a company retreat or holiday party), are now 50% deductible as of the 2023 tax season. Meals provided for employees at the cafeteria, break room, or other business locations are deductible at 50%.
Travel reimbursements are also largely tax-deductible. Employers can deduct employees’ expenses related to transportation, lodging, and any other associated costs. Temporary work assignments, work retreats, and conferences or conventions all fall under this category. Long-term work assignments (over one year in length) do not qualify.
Commuting reimbursements, on the other hand, vary by circumstance. As of 2018, businesses can no longer deduct reimbursement for many regular commuting benefits, such as transit passes or parking, unless they are necessary for ensuring an employee’s safety. Bicycle commuting reimbursements can still be deducted, though these amounts must be included in employee pay.
Achievement awards
If your organization offers awards for safety achievement or length of service, there’s good news: Certain types of these awards are exempt from FICA taxes. The cost of any achievement award that comes in the form of tangible personal property, such as plaques or jewelry, can be deducted from your business taxes.
There are certain IRS requirements for achievement awards to be tax-deductible. The limit for qualified plan awards — one that is given as part of an established, written program that does not favor highly paid employees — is $1,600 per employee per year. The limit for non-qualified awards that do not meet the above criteria is $400 per employee per year. Additionally, the IRS has limitations on how frequently awards can be given and who can receive them. Safety awards cannot be given to more than 10% of eligible employees in a given year; length-of-service awards cannot be given more often than every five years, nor during the employee’s first five years.
Keep in mind that achievement awards given in forms other than tangible personal property are not eligible for this tax deduction. For example, gifts of cash or their equivalent, gift cards or certificates, tickets to events, vacations, meals, lodgings, stocks, bonds, and securities are not tax-deductible.
Questions to ask your CPA
As you determine the best ways to take advantage of benefits-related tax deductions, our sources recommend asking your CPA or tax planner the following questions:
- Can I reimburse my employees for their health insurance?
- How much will I save if I offer a QSEHRA instead of a traditional group plan for my staff?
- What type of HRA works best for my business?
- What information and documents do I need to prepare?
- How might I benefit from tax deductions or credits?
- What are some recent changes in terms of tax filing?
- How might I reduce my tax bill?
"Offering benefits is definitely an investment by small business owners, but it's a worthwhile one," said Reynoso.
[Read more: A Complete Guide to Filing Your Business Taxes]
This story was originally written by Nicole Fallon.
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