How Your Benefits Program Can Save Your Company on Payroll Taxes

As the famous saying goes, the only two things certain in life are death and taxes. Luckily, there are ways that employers can be more strategic about the latter to maximize earning potential. A well-thought-out benefits program is a great strategy to improve company culture and retain talent while also saving your company money on taxes.

Understanding the FICA tax

The FICA tax is a U.S. federal payroll tax paid by employees and employers. It consists of a 6.2% Social Security tax and a 1.45% Medicare tax. The FICA tax rate is applied to all taxable compensation. This includes salary, wages, tips, bonuses, commissions, and taxable fringe benefits.

What is exempt from the FICA tax? 

 The two items that come to mind immediately for most employers are health insurance plans and retirement accounts. Retirement account examples include traditional IRAs and Roth IRAs, which have a few key differences.  

Traditional IRA: Employees don’t pay taxes on the deposited money, which then grows tax-deferred. However, withdrawals are subject to income tax. 

Roth IRA: The money employees put in is already taxed, but it grows tax-free with subsequent withdrawals.

What other accounts are tax-advantaged?

 There are a few other avenues for tax savings. These include health savings accounts (HSAs) and flexible spending accounts (FSAs). 

Health spending accounts (HSAs)

An HSA (health savings account) is a tax-advantaged benefit account that works like a personal savings account for specific health-related items. Employees can spend money from an HSA on a wide range of eligible costs, including doctor’s visits, new glasses, and flu shots. Unlike FSAs, employers do not own HSAs. Instead, employees own and control the money in their account, although some employers will still contribute to the account on their behalf and administer the HSA. The money an individual deposits into the account is triple tax-free: (1) contributions are not taxed, (2) interest and investment income are not taxed, and (3) qualified distributions for medical spending are not taxed.

Flexible spending accounts (FSAs)

An FSA (flexible spending account) is a tax-advantaged benefit account offered by many employers. Flexible spending accounts are tax-advantaged for employees as the money put into the account reduces taxable income, meaning it is exempt from income and payroll taxes. By reducing their taxable income, employees can hypothetically increase their take-home pay. Employers, on the other hand, can reduce the amount of Social Security, Medicare, and other payroll tax they’re expected to pay since they don’t pay tax on the employee's FSA contributions. 

Achievement awards

 Employers may not be aware that certain awards for length of service or excellence in safety may be tax-exempt. The IRS has several regulations in place concerning achievement awards, including that the award must be a tangible item, the awards program must be well-established and not designed to favor certain employees, and safety awards can't be given to more than 10% of eligible employees during the same year.

Other fringe benefits

These other fringe benefits can also reduce employee taxable income and result in higher take-home pay:

• Dependent care assistance: Employer-paid assistance is exempt for up to $5,000 annually ($2,500 if married filing separately).
• Adoption assistance: Up to $14,890 in employer-provided adoption assistance is exempt from federal income tax withholding. It is still subject to Social Security, Medicare, and federal unemployment taxes (FUTA). 
• Commuter benefits: The monthly maximum amount set by the IRS that you can deduct pre-tax is currently $280 for transit and $280 for parking.
• Employer-sponsored 401(k): 401(k)s allow pre-tax income to be deposited, which reduces taxable income in the year of the contribution.
• 529 college/education savings accounts: College savings accounts are a popular fringe benefit, but many are not aware of the complexities. Contributions can’t exceed the amount necessary to provide for the qualified education expenses of the beneficiary. Be sure to check out the guidelines listed by the IRS and your state. 

Questions to ask your CPA

Guidelines surrounding tax-deductible plans can be quite complex, and we recommend asking your CPA several questions during your planning period. Here are a few to ask:

• How could my organization benefit from tax-deductible programs? 
• Which programs do you recommend based on my business and employee base?
• What direct business expenses can I deduct?
• Do I qualify for the qualified business income deduction?
• Is this still the right business structure for my organization?
• Does my state have unique tax laws and/or policies I should be aware of? 
• What type of HRA works best for my business?

Tax-advantaged programs are a win-win for employees and employers. Have more questions about how to build a benefits program that saves your company on payroll taxes? Feel free to reach out to us at sales@getbenepass.com.