Being on top of your startup’s finances and taxes is paramount to ensuring the maturation of your startup. Moreover, understanding your entity’s tax obligation keeps you on the right side with the taxman and empowers you to take greater control of your finances.
What’s more, in a day and age dominated by skyrocketing competition to attract and retain high-quality talent, entrepreneurs and HR personnel must be wary of the appropriate practices to keep their current and future employees engaged and happy in their roles.
Offering competitive pay and attractive employee benefits boosts your workforce morale, creating a dynamic and profitable operation. Not to mention low levels of staff turnover and improved relations between team leaders and workers. In sum, employee benefits are an essential aspect of employee motivation.
Unfortunately, funding these programs can be a significant upfront expense, especially for startups and SMEs, whereby insubstantial funds and tight budgets are notable setbacks. The good news is that it’s possible to deduct some employee benefits from your startup’s income before taxation.
Acumen from a financial controller or a tax professional can go a long way in ensuring your startup capitalizes on deductible employee benefits. Even better, this post offers valuable insights into the prevalent employee perks that come with tax-saving benefits. But first, let’s take a look into the requirements for deducting employee benefits.
Overview for tax savings on employee benefits
In a previous post, we explicitly elucidated non-deductible expenses to help ensure your startup is compliant with its tax obligations. But, conversely, deductible expenses, as the name gives it away, can be deducted from a company’s income before taxation, helping your startup generate revenue.
Wages, salary, and bonuses paid to your team members are tax-deductible. Also, some employee benefits are tax-deductible and can provide employment tax savings. Straightforward as it sounds, there are many details involved in taking these deductions.
Primarily, there are two standard principles for deducting employee payments or benefits. First, such payments have to be ordinary and necessary business expenses. Also, your startup must pay or be liable for these costs. Additionally, there must be a connection to the service an employee performed for these payments.
Essentially, most benefits use the fair market value (FMV) rule to establish the deductible costs. In a nutshell, FMV is the amount a staff member would have to pay another individual in a transaction between two independent parties to buy or lease the benefit.
A little bit perplexing, right? Look at it from this perspective. Bonuses are typical deductible employee benefits. However, it’s only possible to deduct the cost of paying staff bonuses if the bonus is for services rendered and not a gift. Similarly, you can deduct sick pay, but only for amounts that aren’t covered by insurance or other means.
Let’s take a more comprehensive look at other deductible employee benefits your startup should take advantage of:
Provisional health plan
Health care plans, similar to group life insurance and qualified long-term care insurance contracts, are employee benefits that are tax-deductible in both the initial cost and the expense of the employer’s contribution.
Health care is among the most lucrative benefits workers expect from their employers, and is still the most expensive. Fortunately, contributions towards your team member’s health insurance coverage can be classified as a tax credit and aren’t subject to social security and income tax withholding. Still, you must meet specific requirements, including having less than a certain number of full-time staff. Additionally, the paid average annual wages must be less than the stipulated amount by the taxman (all depending on your startup’s locale).
Nonetheless, health care plans are flexible and accessible for startups and SMEs, and it’s only reasonable for your startups to leverage this goodwill to reduce your tax burden as an employer.
Retirement plans are yet another typical benefit-related tax deduction for SMEs and startups. Investing in a retirement plan is an effective strategy to reduce your tax bill while increasing your net worth and future security. Of course, there are limits depending on your region’s tax regulations, but it’s possible to deduct contributions you make to your employee’s retirement plans and your own.
Certain workplace renovations
This is especially the case for adjustments made to accommodate staff members with disabilities. For example, suppose your startup’s workplace has undergone revamping to make it user-friendly to differently-abled individuals. In that case, it’s possible to claim a tax credit, especially if you are a yet-to-be-established organization and have less than 30 full-time employees.
It’s possible to deduct achievement awards, including the length of service and safety efforts that your startup offers employees. Still, they have to be tangible, for example, trophies or jewelry, and must not be part of a catalog or an assortment of possible items.
Also, there are limitations on how frequently you can issue awards and the recipients. For instance, you can’t issue safety awards to more than a specific percentage of eligible employees in a given year. Similarly, you can’t offer length of service achievement awards more often than certain years, nor during an employee’s first specific duration.
Education assistance expenses
Many companies are investing in employees’ development. It’s an effective strategy to equip your workforce with skills, knowledge, and resources to handle tasks productively. In addition, employee training helps attract and retain top talent. It gets better, considering that if you pay for employee training expenses, it’s possible to deduct some of these costs so long as the student meets the stipulated criteria.
Your startup can offer staff discounts on products/services you provide to clients without including these discounts as taxable employee pay. Still, the deal must be in the region where the employee works and must be items customers can purchase.
Meals and lodging
Note that it’s impractical to deduct entertainment costs from business tax returns. However, there are waivers for meals in certain situations, mostly at 50%. Also, it’s possible to deduct 100% of costs for providing occasional recreational and social activities to your team members, such as a Christmas party. Other deductible meal plans include:
- Staff meals while traveling or having dinner with customers on business-related expeditions.
- Meals provided to employees on your startup’s premises, like the cafeteria or break room.
Other deductible employee benefits
You can take a business tax deduction for offering paid leave for medical and personal reasons. Also, professional publications such as your startup’s magazines are reasonable and necessary business expenses that you can deduct from your entity’s taxes. Finally, tools and uniforms that you purchase for your staff members to use for their work-related operations also qualify for a deduction.
Your region’s tax regulations on deducting employee benefits can be complicated and overwhelming for most startup owners. In addition, each type of benefit has restrictions and qualifications, and every business situation is unique. As a result, it’s best not to venture into such critical topics on your own, but instead to liaise with a certified accountant or a tax professional. Remember that non-compliance can be detrimental to your startup’s health.