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TaxTalk
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Earn Tax Deductions For Employee Benefits
Offering tax-free fringe benefits can keep your employees happy
and may add up to significant tax savings for your business. Here
are a few ideas from author Frederick W. Daily, excerpted from
his book Tax Savvy for Small Business (Nolo Press, 1998).
Dependent Care Assistance Benefit
Any business can establish a dependent or day-care assistance
plan for its employees’ children under age 13. Payments up to
$5,000 per worker annually are tax-free to the employee. (If the
employee is married but files taxes separately, the maximum is
$2,500.) However, the business can deduct all payments, even if
over $5,000.
Alternatively, an incorporated business can add up to $5,000 to
an employee/parent’s salary for dependent care tax-free. This
benefit must be given to every parent on the payroll, with a few
exceptions. The corporation may exclude employees under age 21,
those with less than one year of service, leased employees or
those covered by a collective bargaining agreement.
Even a business without a dependent care plan (perhaps because
it would be too expensive to cover all employees) may still qualify
for the “dependent care income tax credit.” This tax break is
designed to help working parents, and its mechanics are rather
complex.
Education Benefits
Businesses can get a tax break for helping employees, or owners,
with educational expenses.
Directly Related Expenses
Any business can pay–and deduct–an owner’s or employee’s education
expenses if directly related to her job. Deductible costs include
tuition, fees, books, course supplies, lodging and similar education
expenses. There is no upper limit to the education benefit, but
the expenses must be reasonable, taking into account the financial
circumstances of the business.
Other Educational Benefits
A business can also pay up to $5,250 per year for each employee
for education expenses even if they’re not directly related to
the job. However, this must be traditional education–hobby-type
courses don’t qualify. The business must adopt a written Educational
Assistance Plan (EAP). Payments or reimbursements are tax-free
to the employee, and an EAP can cover tuition, books and supplies.
Expenses paid for graduate-level courses are ineligible for this
exclusion. If the business pays for graduate education, the amounts
paid are income to the worker, but are still deductible expenses
to the business.
Gifts, Rewards, Discounts and Free Services
Small Gifts
Gifts to employees–totaling under $25 per recipient–are non-taxable.
In tax lingo, such gifts are “de minimus fringe”–so small as to
make accounting for the expense unreasonable or impractical. So,
the proverbial Thanksgiving turkey for employees is probably tax-free
to them and deductible to the business, but the more expensive
honey-baked ham might not be. This $25 limit applies to all business
entities, and hasn’t been changed in many years. But some relief
is provided by setting up a “qualified award plan.”
Achievement Awards
With a qualified award plan, a business can give gifts valued
up to $1,600 each year–gift certificates, watches, TVs and the
like–tax-free to employees and deduct the cost. Such awards must
be for special achievement, length of service or safety efforts.
Sorry, awards can’t be in cash, given to more than 10 percent
of all employees or favor just highly compensated employees.
If your business doesn’t have a qualified award plan, you still
may give special employees “good habit” awards, up to a value
of $400 per employee in any year. Again, no cash payments qualify;
a cash payment will be income to the employee.
Employee Discounts
Some discounts on goods or services may be given by a business
to employees and families tax-free. You can provide anything your
business makes or sells at a reduced price, but never below cost.
Discounts must be given across the board to employees and families
(or even retired employees), not just to higher-paid people. Some
things are specifically prohibited from being discounted without
being taxed to employees–primarily, real estate and investment
property.
Miscellaneous Minor Benefits
Some fringe benefits are so small that even the IRS doesn’t require
a business to keep track of them separately. Things that fly below
IRS radar include use of the company copy machine, having a personal
letter typed by a secretary, coffee and donuts, local telephone
calls or an occasional theater or sporting event ticket. In general,
cash can’t be given tax-free, but it’s okay if used for occasional
meals for employees working late. Also, it’s not taxable if given
for local transportation expenses (under $1.50).
Reprinted with permission from Tax Savvy for Small Business by Frederick W. Daily. Copyright© 1998. Published by Nolo Press,
Berkeley, CA. Available in bookstores or by calling 800-992-6656
(or 510-548-5902 in the Bay Area).
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