Reduce Your Payroll Taxes by Offering More Fringe BenefitsSeptember 08, 2014
Did you know that providing certain benefits can reduce your payroll taxes?
You know that benefits make up a substantial portion of an employee’s compensation package. You also know that payroll taxes further contribute to the cost of an employee. But did you know that providing certain benefits can reduce your payroll taxes?
Payroll taxes can be costly. They include the employer portions of Social Security tax (6.2%) and Medicare tax (1.45%), as well as federal and state unemployment taxes. Employers must pay these taxes on their employees’ wages and on certain benefits (such as retirement plan contributions). But they don’t have to pay them on statutorily excluded fringe benefits.
Here are some examples of benefits that can qualify for this special treatment:
- Term life insurance
- Mass transit or van pooling
- Certain meals on the employer’s premises
- Moving expense reimbursements
- Dependent care assistance
- Education assistance
- Retirement planning services
- Cell phones
Keep in mind that dollar limits and additional rules apply to many of these benefits. Health insurance premiums also are exempt from payroll tax, but there are many additional issues to consider before you change your health care offerings, such as Affordable Care Act requirements.
You can still deduct the cost of statutorily excluded fringe benefits just as you would wages, bonuses and non-excluded benefits. Employees also reap tax savings that can make these benefits more attractive to them: They won’t owe the employee portion of payroll taxes on the benefits, and the benefits won’t be included in their taxable income. Another advantage to employees is that they might otherwise have to buy these items and services with their after-tax wages.
So if you’re looking to attract and retain employees, consider offering more fringe benefits rather than more cash (such as bigger starting salaries or larger raises or bonuses). The key to success is to offer benefits that your employees value.
To learn more about the tax treatment of fringe benefits, please contact us.