Benefit Plans: Tax Considerations

Employee benefit plans 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 article will explain the general considerations related to the taxation of employee benefits.

Employer Tax Implications

Employers can usually deduct amounts that they spend on employee benefits as a trade or business expense when filing taxes. In order to be deductible as a trade or business expense, the expense must meet the following criteria:

·   It is an ordinary and necessary expense of the employer’s trade or business.

o  The IRS defines “ordinary” as common and accepted in your trade or business. A “necessary” expense is one that is helpful and appropriate for your business; it need not be indispensable to be considered necessary.

·   The expense must be paid or incurred during the tax year in which it is deducted.

o  This depends on whether your company uses a cash method or accrual method of accounting. If using a cash method, the expense is deductible in the year it is paid. If accrual method is used, the expense is deductible in the year it is incurred.

·   The expense must be connected with the trade or business conducted by the taxpayer (employer).

o  This requirement simply differentiates a business with a primary purpose of achieving income or profit from a sporadic hobby or activity that happens to make money.

It is also important to remember for non-cash 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).

Employee Tax Implications

The employer is also responsible for determining if various benefits should be included in the employees’ 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, child care expenses, legal assistance and more. Visit for a complete list. In addition, some benefits are tax-deferred until the employee receives the benefit, such as qualified retirement benefits.

For benefits plans that are taxable, you must answer the following questions to determine the appropriate tax treatment of that particular benefit:

Benefit plans 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.



For More Information

For more information regarding insurance benefits for employees, please contact Next Generation Payroll a local black-owned business in Dallas. We are one of the top payroll processing companies based in Dallas, TX however, we provide multiple services that are designed to create a level playing field for local businesses to thrive in a global economy. In other words, our services are centered around risk management, operational efficiency, and strategies that improve market penetration by improving business opportunity leads. We build up small businesses making sure your business is solvent, and it operates efficiently in all economic climates.

At Next Generation Payroll, we are not interested in fulfilling quotas and meeting monthly sales goals. We focus on goals that are centered around fulfilling our client’s aspirations. Our top priority is to simply provide a strategy to help your business reach full potential. For more information, feel free to reach out to us at 214-396-2200. Stay in touch with us by signing up below for our monthly updates and newsletters


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