Employers must provide basic benefits to employees, including complying with workers’ compensation requirements and contributing to state short-term disability programs. There are also benefits that can be given based on the employer’s discretion. Employers offer competitive employment packages to attract the best talents and establish loyalty within the company. But are all benefits taxable or non-taxable? What can employers get from providing fringe and taxable benefits to their employees?
If you have a cleaning business, learn more about the benefits and taxes you should discuss with your employees.
1. Taxable and Non-taxable Employee Benefits
Taxable employee benefits are specified under the Wage and Tax Statement or the Form W2. It’s the document employers are required to send to all employees and submit to the IRS. Employees, most especially first-time workers, should fully understand taxable benefits, which may affect their net pay.
Here are the things included in the Form W2:
- Employee’s total earnings
- Amount of taxes withheld, such as withholding for federal income tax and Social Security tax
- Money in tips earned for the year (even minor as it may seem, tips are also taxable under the law)
Generally, all cash payments, gift cards, or perks are taxable under the law. But of course, it won’t make sense applying taxes to everything the employees receive, which could drain the amount of their net income.
For this reason, there are exceptions or non-taxable benefits specified by the Internal Revenue Service (IRS). IRS non-taxable benefits, usually in the form of fringe benefits, mean that tax pays are not deducted from the benefits received.
2. Basic Employee Benefits
While employers are not required by the law to provide health plans, vision or dental plans, paid vacations, sick or holiday leaves, retirement plans, and life insurance plans, employers must provide basic benefits to employees to fully comply with employment laws. Not providing complete basic employee benefits may result in legal charges and affect your business.
It’s vital to discuss basic employee benefits to all newly hired employees and any legal changes to all employees because it’s their right to know. Failure to discuss these basic benefits may result in doubts, complaints, and possible lawsuits. Also, it may result in decreased employee morale and work productivity. Make sure your HR department find the time to discuss all benefits and taxes, especially withholding taxes, with all your employees.
Here are the basic benefits employees should receive:
- Give employees time off to serve on a jury, perform military service, or vote.
- Comply with workers’ compensation requirements.
- Pay the portion and withhold Federal Insurance Contributions Act (FICA ) taxes from employees’ paychecks to provide employees with disability and retirement benefits. FICA tax refers to a mandatory payroll deduction to pay Medicare (Hospital Insurance) and Social Security retirement benefits.
- Provide benefits for unemployed employees by paying state and federal unemployment taxes.
- Contribute to short-term disability programs of the state. Employers can also get business deductions when they provide disability-friendly workplace features and access.
- Comply with the rights of employees to have Federal Family and Medical Leave (FMLA).
3. Fringe Benefits
Fringe benefits are considered perks, which are given to employees in addition to salary or compensation. It’s important to talk about fringe benefits to employees, especially to new hires, to help them realize all the benefits they’ll be receiving and what makes your company stand out from the rest.
Companies should offer more than just their basic salary to retain more employees and attract more talents. Also, fringe benefits are offered to provide employees an improved and more meaningful quality of life. These benefits also help educate employees and build empathy. Successful fringe benefits are aligned with employee and company values.
Here are some examples of fringe benefits:
- Insurance Coverage: Healthcare insurance, life insurance, and disability insurance coverage are considered fringe benefits. Employees and employers usually share the cost of paying insurance premiums.
- Education Assistance: Big companies or corporations commonly offer this benefit. Reimbursements are provided for employees who want to continue their education, along with flexible work schedules. Short courses and training seminar reimbursements also make up education assistance.
- Fitness Access and Assistance: Employers may also provide on-site fitness centers or in-house gyms to keep employees healthy and fit. Discounts or free gym equipment may also be given to employees under this category.
- Cafeteria and Meal Plans: Employees tend to spend the majority of their pay on basic necessities, like food. Providing cafeteria and meal plans are appealing to employees because they get to save money and use it for other needs.
- Dependent or Childcare Assistance: Small companies may provide bonuses to help their employees pay for dependent care, and larger companies may provide dependent care on-site to full-time employees.
- Retirement Plan Contributions: Consider offering retirement plans to your employees, such as 401(k) paycheck deferrals, to help them save for the long-term.
4. Withholding Taxes
Withholding taxes refer to an amount of money taken out of employees’ paycheck and are paid to the government. It’s a credit taken against the annual income tax of employees. It’s imperative to discuss this topic to employees to avoid surprises, especially first-time or entry-level employees.
Here are the important things your employees have to know about withholding taxes:
- Tax Refund: If you have withheld too much money, the employees will receive a tax refund. If the company didn’t withhold the right amount, employees would have to pay the additional tax bill.
- Non-resident Withholding Tax: Nonresident aliens (foreign-born and without green card) who are earning money in the United States are also subject to withholding taxes on their income. This is carried out to ensure that proper taxes are collected on all income sources within the country. Discuss the standard IRS deduction and the exemption for nonresident aliens to your nonresident alien employees.
As an employer, it’s paramount to discuss all benefits and taxes your employees should know whether they’re a US or foreign citizen. It’s their right to know the basic benefits, taxable and non-taxable benefits, premium contributions, and withholding taxes, and all possible deductions on their pay.
With a clear explanation coming from you or your human resource department, all the doubts and questions of your employees will be answered for their peace of mind. Offering competitive pay and benefits will also benefit you because your employees are happier and more motivated with what they’re earning. It would mean higher productivity and revenue for your business.