As an SME owner or leader, the benefits you offer can greatly enhance employee satisfaction and retention, ultimately contributing to the success of the business. Besides the obvious morale boost, certain employee benefits also offer financial advantages through tax deductions.
This blog post will explore ten employee benefit costs that are deductible on your business taxes, helping you understand how to maximize these benefits for both your team and your business’s bottom line.
Unlocking Tax Savings: 10 Key Employee Benefits for SMEs
1. Health Care Plans
One of the most valued benefits for employees is health insurance, and it’s also among the most costly for employers. However, these costs come with a silver lining. Contributions to your employees’ health insurance premiums are deductible. Additionally, if you have fewer than 25 full-time employees earning an average wage of less than $50,000 annually, you might be eligible for the Small Business Health Care Tax Credit. This can cover up to 50% of the premium costs if you purchase through the SHOP Marketplace, offering significant savings.
2. Health Reimbursement Arrangements (HRAs)
For businesses unable to afford traditional group health plans, Health Reimbursement Arrangements (HRAs) provide a flexible alternative. Particularly, the Qualified Small Employer HRA (QSEHRA) and the Individual Coverage HRA (ICHRA) allow employers to set aside funds that employees can use tax-free for individual health insurance premiums and medical expenses. This arrangement not only offers tax benefits but also allows employees to choose plans that best fit their needs, making it a popular choice among small businesses.
3. Section 125 Deductions
Also known as cafeteria plans, Section 125 allows employees to convert a taxable cash benefit into non-taxable benefits. Under these plans, employees can deduct the cost of premiums for health and dental insurance from their pay before taxes are applied. The benefits for you as an employer include reduced payroll taxes and enhanced employee satisfaction by offering a range of pre-tax benefits through a simple and efficient mechanism.
4. Paid Employee Leave
If your business provides paid leave for medical or family reasons, you might be eligible for a federal tax credit. This credit ranges from 12.5% to 25% of the cost of each hour of paid leave, depending on the wage rate paid during leave. To qualify, you need to have a written policy in place that provides at least two weeks of paid leave annually at a minimum payment of 50% of the wages. This incentive is designed to support employers who offer more generous leave benefits.
5. Retirement Plans
Contributing to your employees’ retirement plans not only secures their future but also provides you with tax benefits. Whether it’s a SEP-IRA, a SIMPLE 401(k), or a standard 401(k) plan, your contributions are deductible. Under the SECURE Act, you could be eligible for additional credits if you’re starting a new plan or if your plan includes an automatic enrollment feature. These incentives are intended to make it easier and more beneficial for small businesses to offer retirement benefits.
6. Office Renovations for Accessibility
Investing in renovations to make your office more accessible to differently-abled employees can qualify for both tax deductions and credits. The Barrier Removal Tax Deduction allows deductions of up to $15,000 per year for qualified expenses related to removing physical barriers in facilities or vehicles. This is particularly important if you aim to create an inclusive workplace environment and comply with the Americans with Disabilities Act (ADA) requirements.
7. Tuition Reimbursement
Many companies now offer tuition reimbursement as an employee benefit, which can be a significant enticement for attracting and retaining top talent. For employers, the costs associated with tuition reimbursement are deductible up to $5,250 per employee per year. This makes it a financially viable option for businesses looking to invest in the continuous development of their workforce. Additionally, funding employee education can enhance your company’s reputation and reduce turnover, making it a strategic investment in your human capital.
8. Tools and Resources
If your business provides employees with tools and resources necessary for their jobs, these costs are generally deductible. This includes items like safety equipment, uniforms, and professional publications. However, it’s important to note that tools with a useful life of more than a year may need to be depreciated rather than deducted fully in the year of purchase. Providing these tools not only aids in compliance with various occupational safety standards but also enhances employee effectiveness.
9. Meals, Travel, and Transportation
Certain expenses related to meals, travel, and transportation for business purposes can also provide tax deductions. Business meals with clients or employees are now 50% deductible, as are meals provided at the workplace for the convenience of the employer. Moreover, travel expenses for business trips, including transportation and lodging, are fully deductible. However, the deduction for employee commuting expenses is limited to those necessary for ensuring the safety of the employee.
10. Achievement Awards
Offering achievement awards to employees for service or safety milestones can also yield tax benefits. If these awards are tangible personal property (like plaques or watches), they are deductible from your business taxes. The IRS sets specific limitations on the cost ($1,600 for qualified plan awards and $400 for non-qualified awards) and frequency (not more than every five years and not in the first five years of employment). Structuring your awards program within these guidelines can enhance employee morale while providing tax advantages.
Leverage Employee Benefits for Tax Efficiency
By offering a range of employee benefits, you not only foster a supportive and productive workplace but also leverage significant tax advantages. These deductions and credits help reduce the overall cost of providing benefits, making them a smart business strategy for enhancing employee satisfaction and retention.
To ensure you maximize these tax benefits, consult with a CPA or a tax advisor who can provide tailored advice based on your specific business situation. Remember, investing in your employees is investing in the future of your business.
Enhance Your Tax Filing Process with eFile360
As you optimize your tax strategy by leveraging employee benefit costs to enhance employee satisfaction and secure tax savings, ensure your compliance with accurate and efficient form filing.
eFile360 can assist you in effortlessly managing and filing your necessary IRS forms, such as 1099s, which may be required when reporting certain employee benefits. With our secure, IRS-authorized e-filing services, you can simplify your end-of-year tax reporting.
Register with eFile360 today to prepare for a smoother tax season with dependable support and a user-friendly platform. Start now to make your next tax filing as seamless as possible.