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, 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.
Healthcare 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."
Not sure if you can afford to offer an employer-sponsored healthcare plan? Health reimbursement arrangements (HRAs) are much more flexible and accessible option for small businesses, thanks to recent regulatory changes like Qualified Small Employer HRA (QSEHRA) and 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, founder of White Jay Consulting. "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 healthcare coverage that best suits their needs, and you can simply support them.
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."
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 percent to 25 percent of the leave paid to the employee.
According to Will Lopez, head of Gusto's accountant community, 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. You might also be eligible for the Retirement Plans Startup Costs Tax Credit, which allows you to claim a tax credit for costs associated with starting a SEP, SIMPLE IRA or qualified plan.
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.
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.