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Whether it’s a result of a booming economy, tighter immigration laws or an educational system gone astray, finding qualified job applicants has become increasingly more difficult for those in the specialty fabrics industry. How can small businesses compete for badly needed, qualified workers?
Thanks to our unique tax laws, every business can afford to offer fringe benefits to its workers, and may even be able to benefit themselves in the process. Our tax laws merely prevent employers from discriminating in favor of owners, key employees or other highly compensated individuals when setting up any benefits plan that is to be tax deductible by the business and tax-free to the recipient.
Fringe benefits are key
Fringe benefits are often defined as property and/or services with benefits to employees that frequently outweigh the cost to the employer. Fringe benefits are generally included in an employee’s gross taxable income, where they are subject to income tax withholding and employment taxes.
Some fringe benefits, however, aren’t taxable wages and yet remain deductible by the employer. These so-called qualified fringe benefits include health insurance, medical expense reimbursements, dental insurance, education assistance and day care assistance. These tax-qualified benefits are deductible by employers and totally free of federal and state income taxes, as well as the employee’s Social Security and Medicare taxes.
The tax savings obviously make fringe benefits an attraction. Thanks to last December’s Tax Cuts and Jobs Act (TCJA), the array of tax-free fringe benefits that employers can provide employees is not quite as generous as it used to be.
Attract and retain
Survey after survey shows that it is not money alone that attracts new workers and keeps existing employees on the job—it’s the benefits. Among the benefits most treasured by job seekers and employees are flexibility and the opportunity to balance work with other life responsibilities.
No fabricator or supplier can be an employer of choice without offering a good benefits package. Job training, educational assistance and employer-provided vehicles used for business are examples of common working-condition fringe benefits for many small businesses.
On-the-job training provided by an employer is a tax-free hiring incentive as well as an invaluable perk for current employees. Educational assistance and tuition reimbursement are also welcome fringe benefits.
A formal, written educational assistance plan doesn’t require immediate employer funding. Employers can provide reimbursement for an employee’s educational expenses up to $5,250 per employee, per year, exempt from tax. Educational assistance doesn’t just include tuition assistance, but also covers payments for books, equipment and other expenses related to continuing education.
On the money
While financial compensation often isn’t the primary goal for many job seekers, employers should keep in mind that salary remains an important factor in today’s job market. By surveying the local job market and the compensation offered by others in the industry, an employer can set wages that are better than average to attract the best candidates.
Employers should also consider offering benefits that are above industry standards, and add new fringe benefits when they are affordable. Make sure to educate existing employees about the cost of their benefits, to help them understand and appreciate that their needs are being addressed.
Job seekers and employees are increasingly looking for cafeteria-style benefit plans that allow them to balance their choices with those of a working spouse or partner. Profit-sharing plans and bonuses that pay employees for measurable achievements and contributions are invaluable.
Bonuses and awards must, as mentioned, be included in an employee’s taxable income. Should the bonus or award be in the form of goods or services, employees must include the fair market value of those goods or services in their reported income. The same applies to holiday gifts. However, employees receiving turkeys, hams or similar items of nominal value from their employers at Christmas or other holidays may exclude the value of those gifts from their income when filing their taxes.
Share the wealth
A profit-sharing plan, often called a “deferred profit-sharing plan” (DPSP), is a plan that gives employees a share in the profits of the business. Under this type of arrangement, an employee receives a percentage of the operation’s profits based on its quarterly or annual earnings. This is a great incentive to attract new workers and give existing employees a sense of ownership in the business. Not too surprisingly, however, there are restrictions as to when and how a person can withdraw these funds. Early withdrawals, just as with other retirement plans, are subject to penalties.
The contribution limit for a business sharing its profits with an employee is the lesser of 25 percent of the employee’s compensation or $55,000. In order to implement a profit-sharing plan, the business must file a Form 5500-series return/report and disclose all participants of the plan.
An employee stock ownership plan (ESOP) is an employee-owner program that provides workers with an ownership interest in the business tax- free. An ESOP is a qualified defined contribution employee benefit plan designed to invest primarily in the stock of the employer.
In general, employees are provided with ownership with no up-front cost. The shares provided can be held in trust for safety and growth until the employee retires or resigns. At that time, the business buys back the shares and distributes vested benefits to the employee.
Tax-free fringe benefits
Common tax-free employee fringe benefits include:
• Health benefits. This is by far the single most important fringe benefit. Health benefits include providing employees with health, dental and vision insurance, as well as paying health-related expenses.
• Long-term care insurance. This insurance covers expenses such as the cost of nursing home care. While premiums are not taxable benefits, benefits received under the insurance may be partly taxable if they exceed certain limits.
• Group term life insurance. A business may provide up to $50,000 in group term life insurance to each employee tax-free.
• Dependent care. Up to $5,000 in dependent care assistance can be provided to an employee tax-free. Of course, many working parents may qualify for a tax credit for child and dependent care.
• Working condition fringe benefits. Working condition fringe benefits are anything provided or paid for by an employer to help employees do their jobs. Local and long-distance travel for business, business-related meals and entertainment, professional publications and company cars used for business driving are all examples of tax-free working condition fringe benefits.
Low cost, high value
So-called de minimis benefits may be worth little or nothing in the eyes of our lawmakers, but they go a long way toward making current and prospective employees happy—without an accompanying tax bill. De minimis fringe benefits refer to any property or service that is so small in value that accounting for it is unreasonable or administratively impractical.
Another time-tested attraction for employees and job seekers: A business with a happy workplace. Whether you offer a nightclub affair or a buffet in the company break room, parties are a tried-and-true benefit. And, in addition to making employees feel valued and keeping them motivated, parties have tangible tax benefits.
The tax rules allow a business to throw a holiday party—even a relatively fancy one—with no tax consequences to the employees. In order for the gathering to be deductible for the employer, the IRS requires the party cost to be “reasonable.” A business cannot deduct expenses for entertainment that is “lavish or extravagant.”
Tax reform changes are also ongoing. Last December’s TCJA included important changes to the tax treatment of employer-sponsored benefit programs. The new law restricts an employer’s ability to deduct many common business expenses such as meals, entertainment and employee moving expense reimbursements. On the upside, the law also included a new tax credit for employers who provide paid family and medical leave for their employees.
The bottom line
To attract talented workers and retain qualified employees, today’s employers must offer fringe benefits and other perks. Once you determine which benefits will best attract badly needed workers, which benefits your employees prefer and which benefits your business can really afford, you can make an informed choice about the benefits that will do your business and your employees the most good.
Stay on top of the latest tax and employment information when deciding which benefits to offer in the current job market. You may find that the most valuable benefits turn out to be the ones that cost your operation the least.
Mark E. Battersby writes extensively on business, financial and tax-related topics.