The Internal Revenue Service is reportedly considering taxing the perks many businesses use to attract and retain employees like food and gym memberships.
Far from leveling the playing field between the high-flying tech companies and the far larger number of small employers such as the average snow and ice removal business, the potential crackdown illustrates the importance our tax rules play in attracting and retaining qualified workers.
Fringe benefits are rewards given to employees for their service and play a crucial role in employee retention and recruiting. Benefits can include paid life insurance, dependent care assistance, group insurance and parking, among other perks.
The value of many fringe benefits can be excluded from an employee’s income. And, so long as tax laws are followed closely, every smart contractor can afford to offer fringe benefits to their workers.
Required employee benefits.
In general, there are two types of employee benefits: those every employer must provide by law, and those the employer offers as an option to compensate employees.
The law requires employers to:
- Provide time off to vote, serve on a jury and perform military service.
- Provide workers’ compensation.
- Withhold FICA taxes from employees’ paychecks and pay the employer portion of FICA taxes, providing employees with Social Security retirement and disability benefits.
- Pay state and federal unemployment taxes, thus providing benefits for unemployed workers.
- Contribute to state short-term disability programs Comply with the Federal Family and Medical Leave Act (FMLA).
An employer is not required to provide:
- Retirement plans
- Health plans (except in Hawaii), dental or vision plans
- Life insurance plans
- Paid vacations, holidays or sick leave
The federal Family and Medical Leave Act (FMLA) requires employers to give workers up to 12 weeks off to attend the birth or adoption of a baby, or the serious health condition of an employee or an immediate family member. After 12 weeks of unpaid leave, the snow and ice removal business must reinstate the employee in the same job or an equivalent one. The 12 weeks of leave doesn’t have to be taken all at once.
Most states subject only employers with 50 or more employees to the Family and Medical Leave Act. However, some states have family leave laws that place family leave requirements on businesses with as few as five employees. And, in many cases, special rules apply to seasonal employment.
What do they want?
The best perk that an employer can give an employee is often one that he or she wants and costs little or nothing. While stock options, big salaries and big ticket benefits may be needed to lure higher level employees, you can get pretty good mileage out of some inexpensive perks. A few common ones that consistently get high marks are:
- Flex time
- Free food and beverages
- Education or personal development training (on or after company time)
Notice that among the perks most often chosen by employees, only one, education or personal development, is a significant cost to the employer. That’s where our tax rules can provide a financial helping hand.
Ordinarily, every employee, as well as the operation’s owner, is permitted a personal income tax deduction for money spent for educational expenses, even if they lead to a degree. When education is offered as a fringe benefit by a snow removal or ice management business, the payments received by an employee for tuition, fees, books, supplies, etc., under the employer’s educational assistance program may be excluded from the employee’s income up to $5,250 per year.
Although the course covered by an employer’s plan need not be job related, courses involving sports, games or hobbies are usually covered only if they involve the employer’s business or are required as part of a degree program. Best of all, the snow removal business may claim a full tax deduction for the amount paid. Drawbacks include the necessity of a formal tuition reimbursement plan and, obviously, sufficient cash flow to fund the program.
Cash is king.
No small-business should provide competitive cash compensation in the absence of employee objectives. If the snow and ice removal operation establishes specific objectives that people will be rewarded for reaching or achieving, that’s exactly what they will do. Cash compensation, including bonuses, is really important.
Unlike many fringe benefits, 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 in their income. The same applies to holiday gifts. Employees who receive turkeys, hams or other similar items from their employers at Christmas or other holidays may exclude the value of the gift from their income.
On a similar note, so-called “de minimis” benefits may be worth little or nothing in the eyes of our lawmakers, but can go a long way toward making an employee happy – without an accompanying tax bill.
Under the rules, employees may exclude from income the value of fringe benefits that qualify as de minimis.
Small businesses should, according to many experts, consider a bigger menu of benefits to attract and retain older workers. In many cases, the standard benefits could include health insurance and an employer-sponsored retirement plan such as a 401(k).
After that, a snow removal contractor or business might consider adding a “cafeteria” plan, which allows employees to pay certain qualified expenses such as health insurance premiums, adoption assistance, dependent-care assistance, group-term life insurance coverage, as well as contribute to health savings accounts, on a pretax basis, thereby reducing their total taxable income and increasing their spendable/take-home income.
Benefits from benefits.
Unfortunately, employers face plenty of uncertainty as the administration delays key pieces of the Affordable Care Act. The latest delay granted large businesses another year, until 2016, before offering affordable coverage to all full-time workers.
The delay means businesses with 50-99 workers will not have to meet the requirement until 2016. Larger employers must cover 70 percent of full-time workers next year and 95 percent by 2016. However, according to the Kaiser Foundation, more than 90 percent of employers with 50-199 workers already offer insurance, as do 99 percent of businesses with 200 or more workers.
The bottom line.
Many small snow and ice removal contractors mistakenly believe they cannot afford to offer benefits. However, while going without benefits may boost the snow removal and ice management operation’s bottom line in the short run, a “penny-wise” philosophy could strangle the business’s chances for long-term prosperity.
The IRS’s predicted crackdown on extravagant benefits will likely center on whether they benefit the employee – and are thus taxable – or benefit the business.
With benefits such as health insurance and retirement plans falling under government scrutiny, the importance of qualified professional assistance to help your snow removal business afford to keep the workers so essential to its success – and compete for new workers – can’t be emphasized enough.
The author is a financial writer based in Ardmore, Pa.