Tax Rules for the Care and Feeding of Your Employees

Tax Rules for the Care and Feeding of Employees

Employers increasingly are acting in loco parentis, essentially assuming parental responsibilities for the well-being of their employees. Toward this end, employers provide a number of fringe benefits to support the physical, mental and emotional health of their staff. Doing so contributes to a happy and productive staff, which is critical in this tight labor market. And there’s an added consideration: tax write-offs for these benefits help to defray their cost.

Tax Implications for the Care and Feeding of Employees

Covering Medical Costs

Large employers (50 or more employees) are required to provide affordable health coverage (or pay a penalty). Small employers don’t have to, but have a variety of ways to do this on a tax-advantaged basis:

  • QSEHRAs. Qualified small employer health reimbursement arrangements (QSEHRAs) allow small companies to pay employees for their individually-obtained health coverage up to set dollar limits each year.
  • HSAs. Employers can pay for high-deductible health plans (essentially low-cost policies) and make deductible contributions to employees’ health savings accounts (HSAs). While these aren’t limited to small employers, they are a viable option for keeping employee covered without breaking the bank.

Paying for Food

Employers can foot the bill for food for employees. The tax treatment for deducting the bill depends on the circumstances of where the food is eaten.

  • On the road. If you pay for travel expenses, then you deduct 50% of the cost of meals eaten away from the employee’s home on a business trip.
  • In the office. If you pay for breakfast, lunch, or snacks for a staff meeting, again 50% is deductible. Food you provide in the break room, such as fruit and coffee, is fully deductible.
  • At events. If you host company picnics, holiday parties or other employee recreational events, you can deduct 100% of the cost.

Caution: At the present time, tax pros differ on whether the cost of meals your employees have with customers, clients, vendors, and other business associates is deductible at 50% or at zero. Some say the elimination of the deduction for entertainment costs kills the 50% deduction for wining and dining. Others say that customary business meals with customers remains 50% deductible. IRS guidance is needed for a definitive answer.

Providing other benefits for the welfare of employees

There are other benefits that support the general welfare of employees:

  • Wellness programs. These programs can help employees lose weight, stop smoking, or become aware of their health risks. Your costs are deductible, but you must use care to be sure the programs don’t violate any laws.
  • Lodging.  If your business requires employees to be on the premises and you give them free housing (e.g., you need a live-in manager for your motel), this fringe benefit to your employees is tax free (i.e., no employment taxes for you).
  • Flexible work schedules. Perhaps the best way to give employees a good work-life balance is to allow them to work around their personal responsibilities. Some may prefer to start the day early and be home in time for children getting off the school bus. Others may choose to work from home one or more days a week. Permitting flexible work schedules doesn’t entail any additional cost to you, and it means a great deal to employees.
  • Break time. Affording employees enough break time can enable them to exercise or take a walk, take a power nap (a 20-minute snooze), or just chill out.

Get creative

If you look on your employees as assets rather than expenses to the business, you’ll be sure to find ways to protect your assets. And you may reap some tax breaks as well.

Photo via Shutterstock

Barbara Weltman Barbara Weltman is the Tax Columnist for Small Business Trends. She is an attorney and author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and is a trusted professional advocate for small businesses and entrepreneurs.