Using Tax-Free Benefits to Further Compensate Workers

In the competition to attract the best talent possible, business owners and managers have to be competitive with their compensation packages. Some use tax-free benefits to increase compensation packages without putting additional tax liabilities on staff. In order to do so, however, businesses must understand what does and does not qualify as a tax-free benefit. Business payroll services should know this by default.

A tax-free benefit is a kind of benefit offered by an employer that creates some sort of tangible value to the employee but is not subject to payroll taxes. A good example is health insurance. Staff members enjoy a very tangible benefit with health insurance yet they pay no income, Social Security, and Medicare taxes on the value of their insurance.

Other tax-free benefits include things such as:

  • life insurance
  • childcare reimbursement
  • employee discounts for products and services
  • cell phones, computers, and other electronic devices used for work purposes


Be Familiar with the Law

As previously stated, business payroll services should know about tax-free benefits as a matter of course. Business owners who handle payroll in-house may not be as familiar. However, they say that ignorance is no excuse. Management and payroll staff need to be familiar with the law so that they do not run afoul of it.

The place to start is with IRS publication 15-B. In this document, the IRS lists the different kinds of tax-free benefits that can be offered to employees. Employers should note that some of the benefits are free of all payroll taxes while others may be exempt only from some. For example, an employer-provided cell phone is fully exempt as long as its primary purpose is for doing business. Adoption assistance is entirely different. It is exempt from income tax, but not from Social Security, Medicare, and FUTA.

Business owners with questions about tax-free benefits can speak with their CPAs or payroll service providers. While not every fringe benefit is tax exempt, those that do qualify can be valuable tools for recruiting and retaining top talent. Obviously, companies have to weigh the cost of these benefits against the tangible value they offer to employees.


Rules regarding Special Circumstances

One last thing employees need to be aware of is that there are rules in place governing special circumstances. For example, let us say your company provides a vehicle primarily used for business purposes but which you also allow the employee to use personally. The personal use of the vehicle is considered part of your employee's compensation package.

Employers could use either the fair market value or cents-per-mile rules to determine the value of the benefit. Either way, whatever value the employee receives from the company car would be taxable. Either rule would have to be applied based on how the vehicle is used and the mileage accumulated. Employers can consult IRS publication 15-B for more information.


Compete Using Tax-Free Benefits

It should be obvious that tax-free benefits give employers an extra tool for competing for top talent. Used wisely, these tax-free benefits can really make the difference in the company's recruiting efforts. Employees will normally choose a position with a better compensation package, assuming everything else is equal, so benefits really make a big difference.

If your company uses third-party business payroll services, your account manager should be able to help you figure out what tax-free benefits would be good in your situation. If you handle payroll in-house, you might want to brush up on your knowledge of tax-free benefits. They make your business more competitive in the marketplace of talented workers.


Choosing BenefitMall as your payroll, benefit, compliance expert allows you to focus on what matters most - your business. Contact us today.