10 minute read
Employee retention has always been a concern for business owners, but the pandemic-induced economic shutdown made employee retention even more of a focus. Fortunately, there are a handful of strategies you can use to improve your chance at retaining employees, and — bonus! — they can save you taxes, too.
Fringe benefits are non-wage benefits used to supplement an employee’s salary. Generally, they are low cost for businesses but highly valued by employees and recruits. But how can fringe benefits help you save on taxes?
First, the cost of fringe benefits is generally deductible to employers. These deductions help the business reduce their taxable income, which can then reduce self-employment taxes for business owners. Just remember that to be eligible for a deduction, most benefits must be administered via a qualified plan (e.g., accountable plans, cafeteria plans, employee assistance programs, etc.).
Second, fringe benefits can be a way to pay employees for the work they do without incurring additional payroll tax liabilities. While some fringe benefits are subject to FICA and FUTA, many are not. By increasing nontaxable fringe benefits in lieu of raising salaries, businesses may be able to increase overall employee compensation without incurring additional FICA taxes (the employer portion of which is 7.65%) and FUTA taxes (which is effectively an additional 0.6%).
Health insurance is the most common type of fringe benefit exempt from payroll taxes, but here are a few others to consider:
Note: Fringe benefits can also be applied to owner-employees in closely held S corporations, but there are more restrictions. Many otherwise nontaxable fringe benefits are required to be included in wages of owner-employees when their ownership exceeds 2%.
Let’s discuss a few of these fringe benefits in a bit more detail.
Qualified employee achievement award programs (QEAAPs) are nontaxable fringe benefit programs that reward employees for length of service or meeting certain safety measures.
QEAAPs must meet the following requirements:
Prior to 2018, the definition of “tangible personal property” was quite broad, but when Congress passed the Tax Cuts and Jobs Act (TCJA), eligible achievement awards became more limited. Under its new definition, from 2018 through 2026, tangible personal property does not include cash, vacations, meals, lodging, event tickets and securities.
Today, most employers use QEAAPs to offer a limited selection of items employees can choose from. QEAAP catalogs tend to include items like:
Like other nontaxable fringe benefits, awards given under QEAAPs are deductible to the business and nontaxable to the employee. This means businesses will report lower taxable income, owners will report lower self-employment taxes and the awards will not produce additional payroll taxes for the employer or the employee.
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A profit-sharing plan is a type of defined contribution plan that allows employers to make discretionary retirement contributions for employees. Contributions to these plans can be made in any year, even if businesses don’t earn a profit. Employers can deduct profit-sharing plan contributions, up to certain limitations. Total employer/employee combined contributions cannot exceed the lesser of (1) 100% of the employee’s compensation, and (2) $61,000 in 2022, and only contributions of up to 25% of employee compensation are deductible.
The key tax-planning aspect of profit-sharing plans is that they are discretionary. This flexibility allows businesses to make contributions in years when they have the cash to fund those retirement plans and when the resulting deductions can be best utilized. And because profit-sharing plans require no contributions from employees, they are highly desirable benefits to new recruits and current employees.
Educational assistance programs under Section 127 of the tax code help employers reimburse employees for education expenses. This fringe benefit is deductible from business’s taxable income, and up to $5,250 of education costs per employee per year are excludable from wages and payroll taxes.
Education costs that can be covered under this program are tuition, textbooks, school fees, supplies and equipment needed to complete undergraduate- or graduate-level courses. Costs for items the employee can use after the course (like a tablet or computer) cannot be paid for with educational assistance program dollars, nor can costs for meals, lodging and transportation.
Educational assistance programs qualify only if all of the following requirements are met:
This perk is often highly valued by existing employees, recruits and the business because they can:
Until recently, educational assistance programs only reimbursed employees for current education costs, not costs they had incurred previously. However, with passage of the Coronavirus Aid, Relief, and Economic Security Act, student loan repayment became a reimbursable cost. Through the end of 2025, employers can reimburse their workers for up to $5,250 of student loan payments and/or other qualified education costs.
A cash balance plan is a type of defined benefit pension plan that promises a stated account balance when employees retire. Employers typically fund cash balance plans by depositing a percentage of employees’ annual compensation into the plan. Because employees are guaranteed a stated amount when they retire, the risk of investment belongs solely to the employer.
Contributions to cash balance plans are deductible, which will lower taxable income for the business. Additionally, they are not considered wages for payroll tax purposes. Employees will only be taxed on the income when they pull from their plans in retirement.
Cash balance plans and other pension plans are rare because (1) they cost employers more on average than defined contribution plans, and (2) the investment risk is not shared with the employee. But businesses that offer cash balance plans may find the extra cost worth it; their benefits package will make a mark in the minds of potential employees.
There are many other strategies businesses use to help retain employees, but utilizing fringe benefits can retain employees while supplying your business with tax savings — a win-win. If you want to see for yourself how fringe benefits can reduce your tax liability, contact us today and request a demo of our Corvee Tax Planning software. One of our experts can walk through the software and show you how helpful our tax planning tool can be when assessing different fringe benefit programs.
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