Providing benefits for your team can motivate employees and lead to valuable deductions on your small business taxes. If you're trying to decide which benefits to offer, here are a few ideas and rules for deducting them.
Salary and Wages
One of the most obvious perks of working for a living is getting paid, and the salaries and wages you pay your employees are deductible. However, if your business is structured as a limited liability company (LLC) or S corporation, make sure you pay yourself and other shareholders reasonable compensation to avoid IRS scrutiny.
Sick Time and Disability Benefits
Paying wages while employees are out sick or on vacation is tax-deductible. In addition, if you pay disability insurance premiums for your employees, you can also consider this a deductible expense.
Other health benefits, including premiums for health, vision, and dental insurance, contributions to an employee's health savings account (HSA), and long-term care insurance, are also tax-deductible.
However, health insurance premiums for the business owner and their spouse and dependents may not be deductible. S corporations can't deduct premiums paid for more than 2% of shareholders. Instead, the premiums paid by the company are treated as a draw and reported on the shareholder's W-2.
However, the shareholder can deduct those premiums as self-employed health insurance premiums on their individual tax return.
Employee Assistance Programs
Employee Assistance Programs (EAPs) are generally fully deductible for tax purposes. EAPs take various forms and may include counseling programs related to substance abuse, family issues, and other similar issues negatively affecting employees' productivity.
Life Insurance Premiums
If you offer group term life insurance for employees, you can deduct the premiums for up to $50,000 of coverage per employee.
While not all education expenses are deductible, many are. To qualify for the deduction, the educational program should maintain or improve the employee's skills in their existing career—you can't deduct educational expenses to prepare employees for a different line of work.
Retirement Plan Contributions
Setting up a 401(k) or another qualified retirement plan can result in some valuable tax deductions. This includes the expenses you pay to set up and administer the program and contributions you make to employee accounts.
Fringe benefits occasionally provided to employees are typically tax-deductible. However, some fringe benefits are taxable income to the employee, and some aren't.
Tax-free fringe benefits include health insurance premiums, long-term care insurance, group term life insurance, disability insurance, educational assistance, dependent care assistance, and transportation benefits.
They also include "working condition fringe benefits," which covers anything employees need to be able to do their jobs, such as traveling for business, business-related meals, and subscriptions to professional publications.
You can learn more about taxable and tax-free fringe benefits in IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits.
Discounts given to employees on business products or services can be deductible.
The general rule is that the product or service has to be offered for sale to customers in the ordinary course of business in which the employee performs substantial services.
In addition, for services, the discount can't be more than 20% of the price at which the service is offered to non-employees. Any discounts greater than 20% have to be included in the employee's gross income.
Overall, a range of employee benefits may be tax deductible, as long as they are within certain limits set by the IRS. If you plan on claiming any of these deductions, be sure to document the expenses and keep good records in case the IRS ever selects your tax return for an audit.
Consider working with a qualified tax professional if you're still confused about small business taxes and which benefits are deductible. They can help you navigate the rules and take advantage of every deduction you're entitled to claim.