Have you ever heard someone say, “My job doesn’t pay that well, but the benefits are great”? Usually this person is employed by a very smart entrepreneur.
Fringe work benefits, like use of a company car to commute to and from work or educational plans, make employees feel valued and appreciated, and allow employers to enjoy a tax deduction. In most cases, employees enjoy tax savings as well.
Health insurance is a common fringe benefit
s. The premiums owners pay on behalf of employees are tax free to them and a deduction for the business.
If an employer starts a group health plan, as the owner, she can also benefit. Unless the business is a C Corporation, owners cannot take the deduction for their own premiums as a business expense.
In a group plan, the premiums paid for the benefit of the owner(s) (to the extent of earnings) is listed as an adjustment to income on page 1 of Form 1040. Owners need to separate the cost of their premiums from the cost of employee’s premiums when paying the bill. To do this, owners should record the check with a split to “employee benefits” for the employee’s share and to their draw account for their share.
Employers should set up “Draw-health insurance” under their equity accounts so they can easily track the total amount paid for themselves and their family’s health insurance for tax purposes.
For employers having trouble obtaining health insurance due to pre-existing conditions, a group plan should solve this problem. Normally, pre-existing conditions are not considered under group plan policies.
Thanks to Obamacare, the Health Coverage Tax Credit is available for employers who provide health insurance to employees. Not only do owners enjoy the deduction but they also get the added bonus of a tax credit. Check out Health Coverage Tax Credit at www.irs.gov for more information.
Retirement plans are another common way of rewarding employees and encouraging them to save. The start-up costs for a retirement plan may be eligible for a tax credit of up to $500. The tax credit can be obtained by completing Form 8881 and Instructions available at the IRS website.
Employer-provided cell phones are deductible as a business expense, but not includible in wages for the employee. Other de minimis fringe benefits, such as providing goods or services to employees in the form of token gifts, use of the company’s copier or fax machine, occasional tickets to theatrical or sporting events – items that are so small and infrequently given that it would create a burden to track – can be provided to employees tax free.
The cost of meals provided to employees to keep them on the premises and working during a busy time are 100% deductible, unlike other meals and entertainment expenses which are only 50% deductible.
Dependent care assistance, educational assistance, life insurance, HSAs (Health Insurance Accounts), commuting benefits, tuition reduction, are also fringe benefits that are nontaxable to employees and deductible by a company. Owners can even buy a bicycle for an employee and if it is used to commute to work, it can be written off.
Your employee will not have to include the value as taxable income.
Remember, when extending fringe benefits it is important to note that discrimination rules apply. If benefits are extended to only highly compensated employees, then all or part of the benefit must be included in the employee’s W2.
If an employee pays part of the cost of a fringe benefit, this amount must be included in the employee’s pay. Not all fringe benefits are exempt from taxation. Check out IRS’ Publication 15-B for more information.
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.