As the unemployment rate falls from its 2020 high, employees are switching jobs in record numbers. With greater economic stability, workers now have more flexibility to choose jobs that align with their needs, values, and lifestyles. This puts pressure on employers to create an appealing work environment—including offering strong benefits packages. But when employers expand their benefits, an important question arises: how are these new programs taxed?
In general, when an employee’s wages, salary, or commissions increase, the employer must pay employment taxes. The same applies to bonuses and taxable fringe benefits.
Some employee benefits are not taxable, though certain limits may apply. These include:
The tax rules governing these benefits can be complex and may vary depending on specific circumstances. Noncompliance may result in the benefit being treated as taxable income to the employee.
Even taxable benefits can remain attractive to employees—many pay less tax on employer-provided benefits than they would spend purchasing the same services privately. However, taxable benefits must be reported as income on an employee’s W-2 or 1099.
Common taxable benefits include:
Not all valuable benefits have tax implications. For example, offering remote, flexible, or hybrid work arrangements carries no tax consequences and can significantly improve recruitment and retention.
Certain employers may also qualify for tax credits. Under the Affordable Care Act, small businesses with fewer than 25 full-time-equivalent employees may deduct up to 50% of their contributions toward employee health insurance premiums (up to 35% for tax-exempt employers), provided coverage is offered through the Small Business Health Options Program.
This overview highlights only a portion of the rules governing employee benefits. Because these provisions can be complex and subject to change, employers should consult a tax adviser to ensure compliance.
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