Large corporations usually offer a slew of financial incentives to attract and retain top talent. Small companies may not be able to offer comparable incentives but can provide some valuable fringe benefits to stay competitive with the big boys. Besides health coverage and retirement plans, here are some other prized, yet relatively inexpensive, benefits you can offer to employees. The best part: You get to deduct your costs while employees receive the benefits on a tax-free or tax-deferred basis.
Company-provided cell phones are not taxable to employees as long as you give them for “non-compensatory” reasons, meaning the phones cannot be rewards or inducements for employment. However, they are tax free if, for example:
- You need to contact the employee at all times for work-related emergencies
- You require that the employee be available to speak with clients at times when the employee is away from the office
- Employees need to speak with clients located in other time zones at times outside of the employee’s normal work day
As long as there's a reason for providing the phones to employees other than as additional compensation, any personal calls they make are ignored for tax purposes. They are viewed as a de minimis (minimal) fringe benefit.
Employees cannot deduct the cost of commuting to work. But you can help them with their parking costs (on your premises or at commuter stations); transit passes for buses, subways, and trains; van-pooling; and even with bicycles used for commuting. You can pay their costs up to set dollar limits, which can change annually.
Even if you can’t afford to pay for monthly transit passes, you can arrange for employees to use them on their own on a pre-tax basis. The portion of wages used to pay for passes (up to $245 per month in 2013) is not taxable to them.
While large companies may help employees obtain college or graduate degrees, small companies may not be able to do this because of cost. However, companies can still help employees advance their learning and skills by supporting programs. Paying for a particular online course for a worker to learn a new computer skill, for example, is appreciated by the employee and benefits the company through improved worker skills.
You can enable employees to buy your company’s goods or services at a reduced price. Their savings (the amount of the employee discount) is not taxable to them.
There are limits fixed by tax law on the amount of discounts you can offer (e.g., up to 20 percent of the fees you would charge customers for your services; different amounts for merchandise).
Flexible Spending Accounts
These are arrangements set up by your company to enable employees to pay for certain costs on a pre-tax basis. You don’t have to make any contributions to employees’ accounts; your only outlay is administrative costs.
Flexible spending accounts (FSAs) can be set up for:
- Medical costs (with employee contributions for 2013 limited to $2,500). Funds in these FSAs can be used to pay for medical costs not covered by insurance.
- Dependent care expenses (with contributions limited to $5,000).
Providing these benefits is a good business strategy for recruiting and retaining employees while providing tax breaks for all. In addition to income tax savings, these benefits also save on payroll taxes, including FICA (paid by you and employees) and federal/state unemployment taxes (paid by you alone). Learn more about taxes and fringe benefits in IRS Publication 15-B. Determine which benefits your employees value, then assess what you can afford to provide.
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Barbara Weltman is an attorney and author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com.