Employee-paid benefit programs provide both large and small businesses a legal way to get relief from payroll tax obligations. When employees elect to direct a portion of their pretax income towards qualifying expenses, employers enjoy payroll tax relief on those dollars.
Payroll taxes can pile up quickly for a business. Wouldn’t it make sense to allow, encourage, and educate employees about the value of employee paid benefits, and the advantages of pretax elections? Doing so can:
- Provide businesses with payroll tax relief
- Increase employee spending power
- Expand employee choice
Relief from Payroll Tax Obligations
Small business payroll tax relief can be achieved by promoting the advantages of pretax payroll deductions for health insurance, supplemental insurance, flexible spending accounts, and 401k plans.
Every dollar an employee directs to any of these qualified programs lowers the amount of reportable W2 income. Since payroll taxes are paid as a percentage of employee wages, lower reportable income in turn lowers employers’ payroll tax obligation. Small businesses, medium businesses and large businesses all benefit.
Payroll taxes are more commonly known as FICA deductions. FICA stands for Federal Insurance Contributions Act. The tax pays for Social Security and Medicare.
Payroll tax relief varies by employee gross income.
Payroll tax obligations were restored to historic levels as part of the fiscal cliff deal settled in December of 2012. Beginning in January of 2013 the amounts paid by employers and employees returned to an even fifty-fifty split. This is how FICA payroll taxes vary by income in 2013.
|Income Range||Employee Social Security||Employee Medicare||Employer Social Security||Employer Medicare|
|Up to $113 K||6.20%||1.45%||6.20%||1.45%|
|Up to $200 K||0.0%||1.45%||0.0%||1.45%|
|$200 K Plus||0.0%||2.35%||0.0%||1.45%|
Increase Employee Spending Power
Any size business can give their employees a raise while legally avoiding payroll tax obligations at the same time. Employees give themselves a pay raise when they make pretax elections in two ways: lower FICA deductions, and lower income tax obligations.
The FICA tax relief for employees is shown in the chart above. Anything that reduces payroll taxes for a business reduces the amount of FICA money deducted from employee paychecks in equal measure with one exception. Employees earning more than $200,000 will see an even bigger reduction in their FICA obligation as their rate is bumped up.
What you don’t see in the chart is the amount relief employees also get from their state and federal income tax obligations. The lower reportable W2 earnings mean that employees will also owe less in federal income taxes, as well as state income taxes. Consider this simple example of an employee earning $100,000, and electing to make $10,000 of pretax contributions:
- Business payroll tax relief – $765
- Employee FICA savings – $765
- Employee federal income tax avoided (25% bracket) – $2,500
If these numbers seem compelling, ask your employer to offer employee paid benefits so you can have the coverage, the increased spending power, and the business gets payroll tax relief in the process. It makes sense to me.
Expand Employee Choice While Reducing Payroll Tax Obligations
Any sized business (small, medium, or large) can get relief from payroll tax obligations, while increasing employee spendable income. All they have to do is expand employee benefit options, encourage participation, and educate employees about the programs and tax savings.
The best part is there is no direct cost to the business, supplemental insurance carriers are happy to do all the work, and your employees will better appreciate their working environment.
Since employees pay for the programs, nothing comes directly from employer pockets. The greater the participation level, the bigger the amount of relief a business may see in payroll tax obligation. Expand options, and let a trained benefits counselor promote the value, educate employees, and capture compliant documentation.