As a small business owner, you understand the importance of attracting and retaining talented employees. Employee benefits such as health insurance and retirement savings plans can be crucial in achieving these goals. While providing these benefits may seem like a significant upfront expense, it’s essential to realize that many of these costs can be tax-deductible, offering valuable tax savings for employers and employees. Health Care Plans: Health care benefits are among the most sought-after by employees and can be a significant expense for employers. However, there are tax-saving opportunities for small businesses. You may be eligible for the Small Business Health Care Tax Credit if you have fewer than 25 employees with annual salaries below $50,000. This credit, established by the Affordable Care Act, allows you to provide health insurance for your employees while potentially receiving a tax credit. For example, if you have ten employees with an average annual salary of $40,000, you could receive a credit of up to 50% of the premiums you pay for their health insurance. This can result in substantial tax savings for your business.
Health Reimbursement Arrangements (HRAs): HRAs offer small businesses a flexible and accessible alternative to traditional healthcare plans. Options like the Qualified Small Employer HRA (QSEHRA) and the Individual Coverage Health Reimbursement Arrangement (ICHRA) provide employers with the flexibility to set a monthly budget for benefits and reimburse employees tax-free for individual health plans. Let’s say one of your employees opts for an individual health plan costing $500 per month, and your budget is set at $400 per month. You can reimburse them $400, saving your business money while providing valuable health benefits.
Section 125 Deductions: Section 125 deductions, often called cafeteria plans, enable employees to select pretax benefits like health and dental insurance. These deductions can lower employer payroll taxes and employees’ taxable income, making it a win-win situation. For instance, if employees contribute $200 per month to their health insurance premium through a Section 125 plan, they effectively reduce their taxable income by $2,400 annually. This lowers their tax liability while also reducing your payroll tax expenses.
Paid Employee Leave: Offering paid leave for medical and personal reasons can make your business eligible for tax credits. Let’s say you provide two weeks of paid family/medical leave to an employee who earns $40,000 annually. If you qualify for a 15% tax credit, you could receive a credit of $1,200 for that employee’s leave. This supports your employees during critical times and provides your business with valuable tax savings.
Retirement Plans: Retirement savings plans are common benefits for small businesses. Contributions made to employees’ retirement plans can often be tax-deductible. Suppose you contribute $5,000 to an employee’s SEP-IRA. This $5,000 is a tax-deductible expense for your business, reducing your taxable income. Additionally, if you meet the criteria for the Startup Tax Credit, you could receive a credit of up to $500 per eligible employee, further reducing your tax liability.
Office Renovations for Accessibility: Renovations to make the workplace more accessible to differently-abled individuals may be tax-deductible. Let’s say your small enterprise has undergone renovations costing $10,000 to remove structural barriers, making your office accessible. By claiming the Barrier Removal Tax Deduction, you can deduct this $10,000 expense from your business taxes, saving you a significant amount.
Tuition Reimbursement: Tuition reimbursement is an increasingly popular benefit for employees, offering advantages for both employers and workers. Suppose your employee invests $4,000 in continuing education coursework directly related to their job responsibilities. Your business reimburses them for this expense, and as an employer, you can deduct this $4,000 as a tax-deductible expense. This not only supports employees’ education but also reduces your taxable income, resulting in tax savings.
Additional Deductions: Beyond these specific benefits, many reasonable and necessary business expenses can qualify for tax deductions. For example, if you purchase professional publications, tools, uniforms, or educational materials for your employees, these expenses are generally tax-deductible. Let’s say you spend $1,000 on professional publications and $2,000 on tools for your employees. You can deduct these $3,000 in expenses from your business taxes, reducing your overall tax liability.
Offering benefits not only benefits your employees but also offers valuable tax savings, making it a worthwhile investment in your business’s future. By taking advantage of tax-saving opportunities associated with these benefits, you can attract and retain top talent while managing your company’s financial health. Contact an R+R tax advisor to maximize these deductions and ensure compliance with IRS guidelines.
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve. Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.
