Employee benefits can be complex to administer, particularly in terms of taxation. It is important to understand the tax implications for both the employer and employee. This blog post will explain the general considerations related to the taxation of employee benefits.
Employers can usually deduct amounts that they spend on employee benefits as a trade or business expense when filing taxes. In order to be deemed deductible as a trade or business expense, the following criteria must be met:
It is also important to remember for noncash benefits that the employer may deduct only the cost of the benefit (though the value of the benefit must be included in the employee’s gross income).
The employer is also responsible for determining if various benefits should be included in the employee’s gross income for tax purposes. Generally, a benefit must be included in the employee’s taxable income unless specifically excluded by the IRS. Many employee benefits are expressly excluded from gross income by the IRS, including health insurance, life insurance (up to a limit), education assistance, flexible spending accounts, childcare expenses, legal assistance, and more. Visit www.irs.gov for a complete list. In addition, some benefits are tax-deferred until the employee receives the benefit, such as qualified retirement benefits.
For benefits that are taxable, you must answer the following questions to determine the appropriate tax treatment of that particular benefit:
Benefits that are not included in taxable income are also likely excludable from Social Security, Medicare, and unemployment insurance taxes. The employer, however, does need to consider any special rules, such as nondiscrimination rules, to be met for certain employees. Also, some benefits only allow a certain portion to be non-taxable; the employer should be aware of any limits.
*This article is not intended to be tax or financial advice. Please consult your financial professional partner for individual guidance.
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