Taxable and Nontaxable Employee Benefits

As the unemployment rate falls from its 2020 high, employees are switching jobs in record numbers. The new stability in the economy means workers have more leeway to shop around for jobs that fit their lifestyles, needs, and values. Now, the onus is on employers to provide an environment that makes their star team members want to stay and also attracts new talent. Part of that equation is providing a great benefits package. But if you’re one of the many employers expanding their benefits, how do you pay taxes on your new programs?

What Are Taxable and Nontaxable Employee Benefits?

In general, when an employee’s wages, salary, or commissions are raised, the employer must pay employment taxes. The same is true of bonuses and taxable fringe benefits.

Nontaxable Employee Benefits

Some benefits are not taxable to the employee, although some are subject to certain dollar limits. These benefits include:

Health and Insurance Benefits

• Health insurance up to certain dollar amounts
• Accident and disability insurance
• Up to $50,000 group term life insurance per employee, and $2,000 for the spouse or dependent of an employee
• Health savings accounts up to certain dollar limits

Retirement and Financial Benefits

• Employer contributions to qualified retirement plans, including profit-sharing plans, stock bonus plans, and money purchase plans

Work-Related Benefits

• Cellphones used for business
• Transportation benefits
• Parking expense assistance (tax free to employees, but not deductible by employers from 2018 to 2025)
• Employee discounts on the goods or services the employer sells

Family and Education Benefits

• Educational assistance, which is completely untaxed for job-related education and untaxed up to $5,250 for non-job-related education
• Adoption assistance
• Dependent care assistance up to certain dollar limits

Employee Achievement Awards

• Achievement awards up to $1,600 for qualified plan awards and $400 for nonqualified awards

Taxable Employee Benefits

Offering even taxable benefits to employees can be beneficial, provided that the benefit is valuable enough to the employee. That is because employees pay less in tax on a benefit than they would pay for the service if they purchased it out of pocket. Taxable benefits must be included as income on the employee’s W-2 or 1099.

Common Examples of Taxable Benefits

• Education assistance over the $5,250 annual limit for non-job-related education
• Student loan repayment assistance
• Use of a company car for personal reasons

Employer Tax and Reporting Requirements for Employee Benefits

The rules around the deductibility of these benefits and others can be complex and often vary based on the specific circumstances. Noncompliance with these rules can mean the benefit is taxable to the employee.

In addition, certain tax credits may be available to qualifying employers. For example, the Affordable Care Act allows qualifying businesses with fewer than 25 full-time-equivalent employees to deduct up to half of their contributions toward employees’ health insurance premiums, or up to 35% for tax-exempt employers, for coverage offered through the Small Business Health Options Program.

This is just a summary of complex provisions. Employers should consult with their tax advisers on any benefits to make sure they’re following the rules, and keep an eye out for changes.

Employee Benefits That Do Not Have Tax Consequences

Employers should keep in mind that tax standing is not an issue for some benefits they may offer. For example, offering a remote, flexible, or hybrid work arrangement does not have tax consequences. Benefits such as these are valuable to employees and can help attract new talent.

Consult a Tax Advisor Before Expanding Benefits

Because the tax treatment of employee benefits varies based on structure, dollar limits, and specific circumstances, careful planning is essential.

The professionals at Siepert & Co., LLP can help you evaluate the tax implications of your current and proposed benefit programs, ensure proper reporting, and identify available tax credits. Contact us today to discuss how your employee benefits strategy aligns with your overall tax and business goals.