By Mark E. Battersby / Published August 2014
The Internal Revenue Service is reportedly considering taxing the perks many businesses, especially those in the technology sector, use to attract and retain employees. Far from leveling the playing field between the high-flying tech companies and the far larger number of small employers, such as the average pressure cleaning business, the potential crackdown illustrates the importance our tax rules play in attracting and retaining qualified workers.
With or without the financial helping hand provided by our tax laws, how can any contractor, distributor, or manufacturer hope to compete for the ever-dwindling number of qualified workers available? Surprisingly, survey after survey shows that it is not money alone that attracts new workers and keeps existing employees on the job. It is the benefits.
Fringe benefits are rewards given to employees for their service and play a crucial role in employee retention and recruiting. These benefits can include paid life insurance, dependent care assistance, group insurance, and parking among other perks. The value of many fringe benefits can be excluded from an employee’s income. And, so long as our tax laws are followed closely, every smart pressure cleaning business can afford to offer fringe benefits to their workers.
Because perks or benefits play such an important role in the lives of employees as well as their families, the benefits offered by a pressure washing business are often a deciding factor for a potential employee. In general, there are two types of employee benefits: those every employer must provide by law, and those the employer offers as an option to compensate employees.
The law requires employers to provide employees with certain benefits including:
• Time off to vote, serve on a jury, and perform military service
• Workers’ compensation
• Withholding FICA taxes from employees’ paychecks and pay the employer portion of FICA taxes, providing employees with Social Security retirement and disability benefits
• Pay state and federal unemployment taxes, thus providing benefits for unemployed workers
• Contribute to state short-term disability programs where such programs exist
• Comply with the federal Family and Medical Leave Act (FMLA)
An employer is not required to provide:
• Retirement plans
• Health plans (except in Hawaii) dental or vision plans
• Life insurance plans
• Paid vacations, holidays, or sick leave
The federal Family and Medical Leave Act (FMLA) requires employers to give workers up to 12 weeks off to attend to the birth or adoption of a baby, or the serious health condition of an employee or an immediate family member. After 12 weeks of unpaid leave, the business must reinstate the employee in the same job or an equivalent one. The 12 weeks of leave does not have to be taken all at once; in some cases, employees can take it a day at a time.
In most states, only employers with 50 or more employees are subject to the Family and Medical Leave Act. However, some states have family leave laws that place family leave requirements on businesses with as few as five employees.
The best perk that an employer can give an employee is often one that he or she wants and costs the operation little or nothing. Thus, while stock options, big salaries, and controversial benefits may be needed to lure higher level employees, the average contractor, distributor, or manufacturer can get some pretty good mileage out of some inexpensive perks. A few common ones that consistently get high marks are:
• Flex time
• Free food and free beverages
• Casual dress Fridays (or full time)
• Education or personal development training (on or after company time)
Notice that among the perks most often chosen by employees, only one, education or personal development, actually costs the employer. That’s where our tax rules step in to provide a helping hand.
Ordinarily, every employee (as well as the operation’s owner) is permitted a personal income tax deduction for money spent for educational expenses, even if they lead to a degree. When education is offered as a fringe benefit by a pressure cleaning business, the payments received by an employee for tuition, fees, books, supplies, etc. under the employer’s educational assistance program may be excluded from the employee’s income up to $5,250 per year.
Although the course covered by an employer’s plan need not be job related, courses involving sports, games, or hobbies may be covered only if they involve the employer’s business or are required as part of a degree program. Best of all, the business may claim a full tax deduction for the amount paid. Drawbacks include the necessity of a formal tuition reimbursement plan and, obviously, sufficient cash flow to fund the program.
People like being paid—and not just cash salaries but also those all-important bonuses. Bonuses are a great way to reward the kind of performance an employer is looking for. The classic saying that you get what you pay for is very true when it comes to compensation.
However, no small-business should provide competitive cash compensation in the absence of employee objectives. If the pressure cleaning operation establishes objectives that people will be rewarded for reaching or achieving, that’s exactly what they will do. Thus, cash compensation including bonuses is really important.
Unlike many fringe benefits, bonuses and awards must be included in an employee’s taxable income. Should the bonus or award be in the form of goods or services, employees must include the fair market value in their income. The same applies to holiday gifts. Employees who receive turkeys, hams, or other similar items of nominal value from their employers at Christmas or other holidays may exclude the value of the gift from their income.
On a similar note, so-called de minimis benefits may be worth little or nothing in the eyes of our lawmakers, but can go a long way toward making an employee happy—without an accompanying tax bill. Under the rules, employees may exclude from their gross income the value of fringe benefits that qualify as de minimis.
The right benefits package can help a small business attract or hold on to top-notch talent. To be fair though, what benefits small-business owners put in place to attract and retain workers depend in large part on the demographics of the workforce. Younger workers care more about cash, while older workers tend to want insurance. Insurance, health insurance, and disability insurance tend to appeal to people later in their life.
Small businesses should, according to many experts, consider a bigger menu of benefits to attract and retain older workers. In many cases, the standard benefits could include health insurance and an employer sponsored retirement plan such as a 401(k). After that, the pressure cleaning business might consider adding non-qualified stock options or a “cafeteria” plan, which allows employees to pay certain qualified expenses such as health insurance premiums, adoption assistance, dependent-care assistance, group-term life insurance coverage, as well as contribute to health savings accounts on a pretax basis, thereby reducing their total taxable income and increasing their spendable/take-home income.
No matter which benefits employees may be clamoring for or which benefits the competition is offering, every pressure cleaning business owner or manager should assess how those benefits will impact the business. If, for example, popular benefits such as generous time-off policies or health insurance are offered, the operation is going to be able to attract—and keep—more and better employees. But will those benefits be worth their cost?
While each employee has different needs, the recent trend has been pointing toward health insurance as the most important and highly-valued benefit for employees. Unfortunately, employers face plenty of uncertainty as the administration delays key pieces of the Affordable Care Act. The latest delay, announced in February by the U.S. Treasury, grants companies another year before they must offer affordable coverage to all full-time workers.
The new delay means businesses with 50-99 workers will not have to meet the requirement until 2016. Larger employers must cover 70 percent of full-time workers next year and 95 percent by 2016. However, according to the Kaiser Foundation, more than 90 percent of employers with 50-199 workers already offer insurance, as do 99 percent of businesses with 200 or more workers.
Many small businesses mistakenly believe they cannot afford to offer benefits. However, while going without benefits may boost the pressure cleaning operation’s bottom line in the short run, a “penny-wise” philosophy could strangle the business’s chances for long-term prosperity.
The IRS’s predicted crackdown on extravagant benefits will likely center on whether they benefit the employee—and are thus taxable—or benefit the business. With benefits such as health insurance and retirement plans falling under government scrutiny, the importance of qualified professional assistance to help your business afford to keep the workers so essential to its success—and compete for new workers can’t be emphasized enough.