All employee benefits appear good on paper. But for government and prevailing wage contractors giving out these employee benefits, there is a definitive ranking of employee benefits from best to worst. This ranking is based on the effect of a benefit to the income taxes of both the employer and the employee.
The Best Type of Employee Benefits
The best type of employee benefit is one that is deductible and nontaxable or tax deferred. When an employee benefit is deductible, the cost of providing the benefit to the employees is taken as a tax deduction on the employer’s business tax return. The cost of health plans, life insurance, and dependent care assistance are usually deductible to employers. These deductions are allowed in consideration of the importance of employee benefits to the business.
Fringe benefits provided to an employee are usually taxable from an income, unless tax law specifically excludes it. When the fringe benefit is nontaxable, you can exclude the compensation from the gross income report you make, regardless if the benefit is in the form of cash payment, a gift, or personal use of company property.
An example of a nontaxable benefit is tuition reimbursement, provided that the amount does not exceed $5250 annually and that the company has an existing educational assistance program. Employer lodging can also be excluded as long as you satisfy certain requirements as an employer. Lastly, another example would be ‘De Minimis’ benefits, or benefits so small in value that they do not need to be accounted for.
Examples of this “best” type of employee benefits include:
– Medical expense reimbursement plans
– Qualified retirement plans
– SIMPLE IRAs
– Group term insurance
With this type of benefit, the entire value of the benefit goes to the employee.
The Good Type of Employee Benefits
An acceptable, middling-range type of employee benefits are those which are deductible to the employer, but still taxable to the employee.
Examples of this “good” type of employee benefits include:
– Salary allotment plans
– Survivor income plans
– Disability income plans
– Deferred compensation
– Split-dollar insurance
– Executive equity plans
The employee only receives a portion of the fringe benefits, as part of it goes to employee taxes.
The Worst Type of Employee Benefits
The worst type of employee benefit is one that is both nondeductible to the employer as well as taxable to the employee.
For every income the employer receives, they would have to pay a percent in taxes. The remaining portion going to the employee would be further reduced because of employee taxes.
Learn more about fringe benefits with ARCHER JORDAN
ARCHER JORDAN has worked decades providing fringe benefits to government contractors and hourly hires. With our expertise and experience, you can be assured of getting the best deal when it comes to workers’ compensation.
Benefit both your business and protect your employees with the right type of employee benefits. Contact us today!