Organizations often look for ways to reduce payroll taxes without cutting employees. It is possible to implement specific tax-saving strategies that trim tax burdens and boost the balance sheet.
Payroll Taxes – Savings Strategies
The payroll taxes that organizations pay on their employees’ wages include Social Security, Medicare, and federal unemployment taxes (as well as state unemployment tax in most states). These payroll taxes can gobble up company profits. Consider the following strategies to reduce the payroll tax burden.
1. Create an accountable plan for employee reimbursements.
Reimbursing employees for mileage, tools, or other job-related expenses typically incurs payroll taxes. By establishing an accountable plan, companies can avoid paying payroll taxes on these payments, thereby excluding them from employees’ taxable income. The policy should require employees to provide proper documentation confirming that each expense is work-related. The supporting documents are usually an expense report and an itemized receipt, which employees typically submit within 60 days of the purchase date. Accountable plans can be used to pay employees in advance for upcoming expenses, but employees must return any excess reimbursements within a reasonable timeframe (typically 120 days after the issue date).
2. When possible, work with independent contractors.
Independent contractors are responsible for their taxes, which saves the company from paying payroll tax money. However, proceed cautiously but diligently when classifying workers. The IRS categorizes workers as contractors or employees according to how much control the company exercises over the individual. The IRS typically considers a worker an employee if the person completes work related to an organization’s core business. Misclassification – that is, the IRS considers a person an employee when an organization brought him or her on as a contractor – could result in back taxes, interest, and penalties. (Read CRI’s 4 Things Small Business Owners Can Learn From Uber’s Drive into a Worker Classification Jam for more details about worker classification.) Before engaging potential independent contractors for a particular task, firms should evaluate the degree of control it expects to have over the workers. It may be helpful for them to look at how similar entities classify workers completing the same tasks. If the workers warrant an independent contractor status, they should sign an agreement stating that they are independent contractors and responsible for their taxes. Each contractor should also complete a Form W-9 and receive a Form 1099.
3. Offer tax-exempt fringe benefits instead of traditional raise in pay.
Companies should consider offering tax-exempt fringe benefits instead of traditional monetary raises. Examples of tax-exempt fringe benefits include health benefits, education assistance, dependent care assistance, group term-life insurance, and retirement planning services. The business can deduct the cost of the benefits just as it would wages or bonuses without owing payroll taxes on them. Additionally, employees will not owe income or payroll taxes on the benefits. Since employees might otherwise have to buy these services with their after-tax wages, fringe benefits can also help their dollars go farther. There should be dollar limits on, as well as exceptions to, some benefits. Given this, companies that may want to offer these perks should consult a professional before launching a benefits program.
Let CRI Help You Battle the Tax Bulge
Payroll taxes are part of doing business and can take a big bite out of a firm’s pocketbook, but they can be much less painful with a little planning. CRI’s CPA team can help you devise a plan to ease the payroll tax burden and keep your workforce happy.