Like every individual and business owner, we met the 2017 Tax Day deadline thinking about what we could have done smarter or better. Don’t shrug those learnings off or try to forget they never happened. Instead, leverage them now into initiatives that you – and your employees – will be celebrating next April 15th.
Section 125 Plans
Section 125 of the IRS Code allows employees to choose to pay for qualified benefit premiums before taxes are deducted from their paychecks. A health insurance premium is a typical example. The health insurance premium comes off of the top of the pay for the period, and the employee is taxed on the net pay after that.
The Result: Employee income is less, reducing the amount of money they owe for federal, state and Federal Insurance Contributions Act (FICA) taxes. This also saves the employer money on the FICA tax match and lowers their Federal/State Unemployment Tax Act liability.
The Kicker: There are a lot of benefits programs in addition to health insurance that qualifies in different ways. Employers can create Section 125 plans with pre-qualified benefits for employees to choose from.
• Health Savings Accounts (HSAs), Flex spending accounts, and the childcare offset allow employees to add to these funds tax-free, however, they are only reducing the FICA tax amount. This income still counts toward state and federal taxes.
• Disability benefits can go either way and are up to the employee on when they want to be taxed. They can pay the premium with pre-tax dollars, but need to understand that they will be taxed if they collect on a claim. If the disability premium is paid with after-tax dollars, then it won’t be taxable once it is used.
FICA taxes include Social Security and Medicare. Employees contribute to both and employers are required to match the tax. Once an employee reaches $127,500 in wages, they are no longer subject to the Social Security tax for income over the $127,500 and Medicare tax has no income limit. Once an employee reaches $200,000 in wages, the employee is subject to an additional 0.9 percent Medicare surtax.
The Result: Employees crossing over the $127,500 threshold in 2018 should be aware that they can manage their increased tax liability if they put pre-tax money toward retirement or qualified benefits plans.
The Kicker: Typically, our highest earning years are when we are in our 30s, 40s, and 50s. Employees should want to reduce their tax liability as much as possible in their highest earning years so that when they retire, they will be in a lower tax bracket. Participating in a 401(K) or Simple IRA plan with pre-tax dollars is a great way to reduce tax liability. Employers should be aware that a Simple IRA is much easier to conform to than a 401(K) when it comes to fees and reporting requirements.
Unreimbursed Employee Expenses
One 2018 tax change employees need to brace for is that unreimbursed employee expenses will no longer be taken as an itemized deduction on their tax return.
The Result: Employees who incur general expenses for a job that an employer does not reimburse will now pay those expenses out of pocket at no benefit to them. Examples include mileage, union dues, uniforms, and meals. In effect, this tax change is reducing their take-home pay – at least, in the equivalent of the tax deduction they are used to receiving.
The Kicker: Employers can still deduct expenses on their taxes. Mileage is deductible for businesses and meals are 50 percent deductible. Employers can help balance out the unreimbursed expense tax change without increasing operating costs by looking at their fee structures. For instance, they can lower the commission rate of sales representatives and begin reimbursing for mileage and meals. Just remember that entertainment is no longer a deductible expense.
There will no doubt be additional tax implications to prepare for in 2018 as the Trump Administration’s Tax Cuts and Jobs Act comes into effect. Talk to your partners at Herus Group today to see how benefits programs can help you stay ahead in the cost-savings game.