It is harder than ever to attract and retain employees. Employee benefits can make your business seem more appealing than the competition for new applicants. These employee benefits packages can span an array of offerings like health and dental insurance, retirement plans, paid time off, work hour flexibility, remote work, company vehicles or phones, and so much more. When it comes to each of these, certain provisions, rules, and tax implications apply.
Employee Benefits for Small Business
Generally, companies smaller than 50 employees are not required to offer or pay for health insurance or other benefits. However, if you decide to offer benefits to one employee, all other employees who match the qualifications and are eligible must also be offered equal benefits. You must not discriminate against offering benefits if all rules pertaining to the benefit are met by the employee.
Offerings such as insurance, retirement, and PTO should be offered under a written plan known as a Cafeteria Plan. These outline the types of benefits, how much (if any) the business will pay for or match, and how much will be allocated as taxable income. Other benefits like company vehicles, phones, computers, business meals, etc should be outlined as a Non-Cafeteria Plan in the employee manual. This explains how the company will reimburse employees for incurred expenses and how this will be reflected as taxable income or deductions for both the employee and employer.
While employee benefits are a major way to attract new employees, there is a fair amount of planning and documenting that must occur. We dive into all the details in our course, Up Level Your Small Business IQ!
What's Inside:
- How to better attract and retain employees.
- What are employee benefits?
- When a business will be required to offer benefits.
- Employee benefit provisions definition.
- What are the tax implications of employee benefits?
Mentioned In This Episode:
Read Episode Transcript
Michelle: Getting and retaining employees has never been more difficult. Employees are not only looking for stability and a good pay, they also need great benefits. Join us for our discussion on employee benefits in this episode of Profit Points.
Intro: We are a Modern CPA. Our purpose is to provide valuable information to small business owners on our podcast, Profit Points. We discuss business how to’s, give tax tips, and dig into real life experiences in the crazy world of running your own business. If you find this podcast helpful, then like subscribe and follow us on social media.
Michelle: Hey, everyone. Michelle and Shawn here. And today on Profit Points, we are going to talk about employee benefits. And we have clients that have been in business, let’s say, for a while and they’ve been operating on their own. And now they’re starting to grow and they’re maybe growing fast and they are trying to decide how they want to bring on new people. And one of the things that they always bring up to us is employee benefits. And exactly what are employee benefits? What constitutes a benefit to an employee and are they required to offer them? Yeah, we talk to a lot of clients about, you know, what is the requirement for that? And we’re going to start digging into what employee benefits are.
Shawn: Yeah. When you know, as a business, you know, it’s a hard job market. You want to attract and retain employees. And outside of salary, you know, employee benefits is a way to differentiate yourself from the competition to, you know, be able to, like I said, attract and retain employees.
Michelle: Yeah. Yeah. Because it’s really difficult to, you know, not only do you need to keep people, you need to pay them well and they are looking for benefits, health insurance and things of that nature are pretty expensive. And a lot of people are needing those benefits to help, you know, get supplemented sometimes or get a better plan.
Shawn: Yeah. And it’s difficult for a small business to be able to offer benefits because because of the cost and a lot of the rules around around these, they’re it’s not it’s not just, you know, offering the benefit and not having all these, you know, a written plan or, you know, all these different types of requirements that are out there. So, you know, the more you can offer these to employees and adapt them into your business, the better you can attract new employees.
Michelle: Yeah. So let’s get into what is an employee benefit because it’s more than just health insurance. Let’s talk about some examples of what an employee benefit might be.
Shawn: Yeah. So, I mean, the top one people think about is, you know, the health and dental benefits. You know, they can also come in the form of, you know, health insurance with their health savings account. If you’re in a high if they have a high deductible health insurance plan, but there’s a retirement plan, benefits like a 401k, ya know life insurance. Outside of, you know, normal benefit plans but offering vacation time and sick pay.
Michelle: That’s an added benefit that many people are really I know really want is the ability to have the time off that they need, especially if their lives are busy with kids or they have other obligations, you know, being able to get paid while, you know, they have this, you know, a stable job.
Shawn: Yeah. I mean, paid time off. Yeah. Everyone wants paid time off. It’s great for work life balance. It’s great for employee morale, employee mental health. You need to be able to have that ability to take time off for, you know, whatever vacation, you know, appointments, doctor’s appointments, kids, doctors appointments. There’s a lot of stuff.
Michelle: I can tell you. And I think flexibility is a type of employee benefit. You know, having your work environment be flexible is something that is becoming more and more important to the younger work staff and the worker. And, you know, it just is needed more. So now people want to be able to do their work, not necessarily 9 to 5.
Shawn: Right, exactly. I mean, if you have a business that allows yourself to allow people to work from home or have a flexible work schedule, like you said, not 9 to 5 or.
Michelle: Obviously you have to go with what your business requires.
Shawn: Yeah, exactly.
Michelle: Yeah, yeah. If you’re a retail store, you’re not going to necessarily be able to, you know, have everyone just come. I mean, when they want.
Shawn: Right. Exactly. Exactly. I mean, it has to fit your mode of business. But there are, you know, other ways to incentivize and provide benefits, even if you can’t offer the kind of work, a flexible work schedule or work from home type of environment. Right. Um, you know, there’s, you know, people, a lot of employers offer some sort of an educational reimbursement plan. Um, you know, this help motivates people to go further in their educational career, to not only help themselves, but it can also help you in your business.
Michelle: The business owner.
Shawn: Yeah. To help them? Yeah. If you have a more educated workforce, give them more education to do higher level work within your organization. Mm hmm.
Michelle: Absolutely. So let’s talk about some other, more complicated matters when it comes to employee benefits, because employers should not just blanketly offer these benefits without going through some of these other steps and processes. And just like everything else, there’s a process. So let’s talk about what some of that is.
Shawn: Well, I mean, so I mean, the first thing you want to think about is, you know, what is the tax treatment of benefits? And, you know, if you’re paying for benefits, you know, are they going to be taxable to your employees? And, you know, basically all benefits are taxable unless there’s a provision in the law that excludes that from income to the employee or offers a deferral.
Michelle: So a lot of people don’t want to hear that, though. Do they really want to? Oh, my God. I don’t want my employees to be taxed for their health insurance. Well, of course not. But this process is in place and this provision is in place for you. What is that provision?
Shawn: So an example is if you provided a vehicle for your employee and that employee uses it for personal use, then that would be a taxable benefit, just the personal use portion. Right. So they would have to include that in their income. When an employer contributes to a retirement plan, that’s a deferred tax benefit because you don’t pay tax on that until you take it out in retirement and then it excludes benefits. That’s not subject to taxes if you as an employer pay for a portion of your employees health insurance. So those are kind of a couple examples of those different types.
Michelle: But all of these things need some sort of written policy or written plan in order for them to be treated the way that they’re treated.
Shawn: Right? Yeah. Yeah. There’s just basically two categories. The cafeteria plan is where a number of benefits fall under where you have a written plan. That includes these pieces. Some examples are like a 401k plan, health and dental, health benefits, dental insurance, those types of things fall under a cafeteria plan and that allows that use of some of these benefits to be, you know, nontaxable to you or deferred tax like in the form of employer.
Michelle: So you mean nontaxable to the employee? So any contributions to those, for instance, let’s say you your portion of the health insurance is $500. This plan, this written plan, cafeteria plan, allows the contribution to that health insurance premium to be not taxable for federal income tax purposes.
Shawn: So you as the employee don’t pay tax on what you pay towards your health insurance. And what the employer pays is also not taxable to you as the employee. Right. And the employer, you get a tax deduction for that contribution. And then outside of cafeteria plans, there’s non cafeteria type of benefits. But in this case, you have you need a written policy within your employee manual to identify what these types of benefits are, what the reimbursement policy is, or what you’re going to offer the employee. Some examples are educational systems, employer provided cell phones or vehicles. Mm hmm. Those types, there’s many more, but.
Michelle: Reimbursements of certain things like cell phones and. Business meals and things of that nature. You want that written plan because that enables the employee to get reimbursed for what they put out for these types of expenses and not get subject to income taxes for those. You don’t want the employee to have undue burden for doing business, doing your business, basically. So these plans help one, you reimburse them without them being subject to income taxes on that money. And then also, you know, you’re able to take those as business expenses because they’re an expense of yours. So you want to make sure that you’re taking those expenses as your own business expenses as reimbursements.
Shawn: Right. And it establishes parameters around which the employee has to follow the certain rules as to how they’re going to get reimbursed, what they have to provide as far as evidence, the timeliness of all of that stuff and the extent to which they’re being reimbursed. I mean, you don’t want to have an open ended policy.
Michelle: Where they can incur are so many expenses and there’s no cap to that. Yeah.
Shawn: Exactly. Um, you know, and also, you know, like one of the other examples is employee discounts. So if you’re, you know, what is the discount that you’re offering for, you know, your business? Is it, you know, a certain amount?
Michelle: Percentage or.
Shawn: Certain percentage off of the goods you sell or a dollar amount per meal that you provide if you’re like a restaurant, that kind of thing.
Michelle: So when an employer is talking about these benefits, you know, they may have, I’ve had instances where they’ve come to me and said, well, I need to give health insurance to this one employee. And I said, okay, well, who else do you have on your staff? And they’ll say, Oh, I have, you know, Sue and Jane and Tom. And I said, Well, you have to also be able to provide the health insurance to them as well if they are qualified. And so let’s talk about, you know, what that means, because there’s rules around how you can offer benefits. If you’re offering benefits to one person, what does that look like for your other staff?
Shawn: Yeah. So, you know, generally, you can’t discriminate between, you know, business owners and high paid individuals in your organization versus the rest of your employees. So, um, the IRS doesn’t look kindly on that. So there are rules around that. So generally, if you offer benefits to all your employees, then everybody can receive tax favored treatment in these. So you’re the business owners, the higher paid employees, you know, all the way down to lower paid employees. Everybody is offered these benefits, everybody can participate. So you want to understand the discrimination rules because there’s different discrimination rules based on different types of benefits.
Michelle: Yeah. So a good example is, you know, you may have a 401k plan or some sort of retirement plan, but in order to participate, you have to reach a certain number of working hours or be considered to be full time. There are different rules set up. You have to be of a certain age. You know, there are definitely rules for each type of benefit that you want to be sure that you’re following. You know, if you have somebody, let’s say that only works for you, for you for maybe 5 hours a month, they’re not going to have the same benefits as somebody who may be full time. Right. Exactly. And so that kind I don’t want to say it’s discriminatory, but the very part time person doesn’t meet the rules of that benefit. And so although it is in a way discriminatory, it’s just that there’s a a rule set for that benefit.
Shawn: Yeah, exactly. I mean, there are ways to discriminate in in. Within certain types of benefits. But there is a baseline generally where, you know, you can’t discriminate in certain areas, or you have to meet a certain baseline before you can discriminate. So, you know, we know these rules are complicated.
Michelle: Yes, absolutely.
Shawn: We don’t want to go into excruciating detail on all this. But, yeah, it’s just very just. Yeah. Just understand that there, you know, if you’re offering benefits, there may be some rules around who can do what you have to do and who you have to offer them to.
Michelle: Yeah, absolutely. And, you know, again, consider these items. When you’re thinking about the retention of your employees and attracting your employees, they become more and more important. And so we always suggest that you review the types of things that you want to do now. One last thing that I know I’d like to mention is that when you are a small business owner, you may not be required to offer any of these types of benefits. They are not necessarily required of you to provide health insurance. If you do provide health insurance, you aren’t required to help pay for that health insurance. You could provide a plan, but the employee could be the one that has to pay for the full premium. So when you’re talking about these benefits, there’s definitely a distinction between a small business and a company that has I think 50 or more employees who start falling into different roles.
Shawn: Right? Yes. Small organizations have some flexibility as to what they’re required to contribute to some of these things. But again, you know, different types of benefits have different rules.
Michelle: Different rules. Exactly. But what I’m saying is really like you may decide that you do not want to offer a retirement plan or the retirement plan that you offer does not require some sort of matching component where it keeps your costs very low. These are the things that you need to examine when you’re bringing on people. You know, you may offer a benefit that is that employees completely fund that you don’t fund at all. But it’s an offering.
Shawn: Yeah. And I’ve had clients who actually, you know, put in like a 401k plan and they’re like, oh, well, you know, it’s going to be really costly to match or to contribute to it. But once you kind of look at the numbers, it may not be as expensive as you thought and that little extra benefit could be really of great value in providing that.
Michelle: Yeah. Yeah. So we thank you for joining us today on Profit Points. We dig into some of these things in a little bit more detail in our course Up Level Your Small Business IQ, which is ideal for an independent contractor, self-employed individual or small business owner. And we thank you for joining us today, and we look forward to seeing you next time.
Shawn: Take care, everyone.
Michelle: If you find this podcast helpful, then like, subscribe, and follow us on social media.
