When you’re a small business owner, it’s easy to think that adding a retirement plan or a health plan will simply mean added costs and headaches for you.
But have you considered the cost of not offering these benefits?
Employee turnover can be one of the most costly problems your business will ever face. Adding these plans can be a powerful force to minimize turnover, saving you the expenses and hassles of recruiting and training. And more than helping you keep your talent, a strong benefit plan can make your company more attractive to top candidates to begin with.
Even better, the government incentivizes you to offer retirement and health plans to your employees. We’ll detail these tax benefits below. There are even special tax credits available right now for smaller businesses to offer these valuable perks.
How critical are these benefits?
According to a recent report by Glassdoor, 57% of employees said that benefits offered are among their top considerations in accepting a job.
In that same survey, four out of five workers said they preferred new benefits to a pay raise.
Among specific benefit types, the survey found:
- 40% of employees ranked health insurance as the top preferred benefit, over vacation and performance bonuses.
- 31% of employees chose a retirement plan as their preferred benefit. 1
The Key? Design it Right.
One critical part of a successful benefit plan is to have it designed with your company’s needs in mind. As a firm that has been helping business owners with all aspects of their financial needs for decades, we’ve seen the difference between a well-designed benefit plan and one that was recommended without proper analysis.
In today’s market, there are many more options available, and automated financial platforms have helped bring down the cost of small retirement plans. There are also some new types of health plans, such as Health Reimbursement Arrangements and health savings accounts. These plans can provide a simpler format, but still offer very meaningful benefits for small (or large) teams.
What are the Tax Benefits?
So we can easily see how these plans benefit employees. But how about you, the business owner?
There’s good news: overall, tax savings can help offset some or most of the cost of running these plans. Here’s a quick overview of the tax benefits you can expect to see. This information is general in nature; always consult your tax professional for specific advice. You can also consult the IRS Publication Employer’s Tax Guide for Fringe Benefits for more detail.
Health Plans: Tax Benefits for Your Company
- Lower payroll taxes: The contributions your business makes for health care benefits are usually tax-exempt.2 So these amounts aren’t normally subject to income tax withholding, Social Security, Medicare, federal unemployment (FUTA) tax, or other payroll taxes, which can lower your employer payroll-related contributions.
When employees pay for dependent health insurance with pre-tax dollars, that reduces their taxable income. That can further reduce payroll taxes for your business.
- Deductions: Usually, any money your business spends on an employee health plan is fully deductible as a business expense. For example, contributions your company makes to employee premiums are normally deductible (subject to some conditions), as well as the cost of administration, consultants, etc.
- Health Care Tax Credits. There are also small business health care tax credits available to small businesses, which can cover 50% of health insurance premiums. This is available to companies with less than 25 full-time employees who are paid an average salary of less than $53,000 per year. The company needs to cover at least half of the employee premiums (not including dependent premiums). You’ll also need to buy insurance through the plan for yourself as well. There are other requirements, which you can learn about on the IRS website.
Health Plans: Tax Benefits for Your Employees
Your team benefits, too. Since health care premiums are not considered wages, they aren’t taxed. So employees get more for their money.
That’s the health insurance side. There’s also a whole swath of benefits for creating a retirement plan, too, helping to further save you and your team taxes. So while retirement plans can help individuals put away money for retirement, your business can benefit, too. Then you as a business owner have the opportunity to put money away for your retirement, as well.
Retirement Plans: Tax Benefits for Your Employees
Employees eligible to participate can put away money for retirement on a tax-advantaged basis, either tax-deferred (by putting pre-tax dollars into a standard retirement plan) or tax-free (by putting after-tax dollars into a Roth retirement account). So individuals can decide to save more now (with a standard account where they get the tax deduction in the current year) or later with a Roth style account (where available). Both are extremely powerful savings tools.
Retirement Plans: Tax Benefits for Your Business
First, if you are an active employee of your business, you share those same benefits with your team, and can put away money for your retirement on a tax-advantaged basis.
Second, your business receives tax advantages, too. These are available whether you have a corporation, an LLC, or even a sole proprietorship.
- Costs and contributions are deductible. The costs of the plan are normally fully deductible as employee benefits. That includes any matching contributions you make to employee accounts, as well as costs of administration.
- Lower payroll taxes. The plan can also usually lower your payroll taxes. Once you establish a 401(k) or other retirement plan, employees will start contributing part of their wages, and you may match some contributions, too. Instead of paying those dollars as wages, those contributions are usually nontaxable, so this will reduce taxable wages. In addition, unemployment insurance premiums might be lower, too, as a result.
- Tax credits may be available. Your business may be eligible for tax credits if you have less than 100 employees. Starting in 2020 and beyond, your company may qualify for a credit starting at $500. Larger credits may be available as well, with a $250 credit for each non-highly-compensated individual on your payroll up to a maximum of $5,000. (Learn more about the Credit for Small Employer Pension Plan Startup Costs.)
Invest in Your Business and Your Team
While these benefits may seem expensive, the offsetting tax advantages can usually make them quite affordable. Even if they don’t in your situation, however, it’s important to realize that an investment in a benefits package is an investment in the long-term success of your business. A competitive retirement plan and health plan can inspire loyalty and give your employees one more reason to love their job.