With the labor market finally showing some signs of a steady recovery, now is the time for small business owners to review their hiring strategies and pay scales along with ay fringe benefits they could and should be offering. Your company might save a bundle by replacing dollars with benefits.

Have you ever heard someone say, “My job doesn’t pay that well, but the benefits are great?” Usually this person smiles when she says it. And she is usually employed by a very smart entrepreneur.

The beauty of fringe benefits is that you are generally providing something the employee would otherwise have to purchase and you are providing it without incurring a tax liability for your company or the employee. These benefits are paid for with pre-tax dollars.

For example, you pay your employee Tom $2,000 per month and let him get his own health insurance, he would have to pay for the health insurance with dollars shrunken by a tax bite. By the time federal income tax withholding, FICA and Medicare taxes, and state income taxes have been deducted, Tom’s net pay would be about $1,500. Approximately $500 or 25% of Tom’s pay goes to taxes.  Then he pays $200 for a health insurance premium, and he’s down to $1,300.

But let’s say you structure a salary of $1,800 per month and the company pays Tom’s health insurance cost of $200 per month. Deduct 25% payroll taxes from Tom’s check ($450) and his take home pay is $1,350. Tom is ahead by $50. In fact, because Tom is now on a group medical insurance plan, his savings on premium costs might be considerably more than $50. Individual plans are usually more expensive than group plans. They may also not be attainable by individuals afflicted with pre-existing conditions.

You, as the boss, save money as well. On Tom’s base salary you have to cough up matching FICA and Medicare plus contributions into the federal and state unemployment funds for an additional cost of approximately 11%. Those taxes do not apply to the medical insurance you purchase for Tom. Using the numbers in the example given above, your company will save $22 in taxes. Multiply that by the number of employees and you will have saved a tidy fund.

Other fringe benefits such as achievement awards, adoption assistance, dependent care assistance, educational assistance, health savings accounts, group-term life insurance, retirement plans, moving expense reimbursements… the list goes on and on are available.  Check with your tax pro, your payroll provider, or read Publication 15  to find out which benefits work for your company. Many fringe benefits are 100% excluded from taxation. Others are partially excluded or completely taxable.

Next time one of your employees is up for a raise, consider providing a mutually acceptable fringe benefit rather than cash. The tax savings will put a smile on both of your faces!

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook

Bonnie Lee is an enrolled agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter and on Facebook.