Businesses and workers benefit when businesses offer an incentive to employees to remain in their organization or participate in training. Whether for personal benefits, career enhancement or to gain greater work experience, incentives have long been utilized to retain workers.
There are some tax advantages to including employee incentives as part of an employee’s taxable compensation. For years, employee retention credit has been a benefit enjoyed by many companies. However, recently, the IRS has tightened restrictions around what qualifies as an employee retention incentive.
A significant change in the tax code in 2022 raised the bar on what an employee may receive as an incentive for remaining with the employer. In addition to other changes in the tax code, the IRS now places a limit on the time period that an incentive can be used. The definition of an employee retention incentive also is focused on the tangible and intangible benefits employees receive.
Income Tax Benefits for Employee Perks
When employers offer incentives to attract, retain and reward their employees, they can often qualify for a tax credit. These tax credits offset the amount the employee pays for various perks. For example, in the event that a new employee is offered a salary increase, the employee may be eligible for a tax credit to the tune of the increase they received.
Before being passed into law in 1996, the Tax Reform Act required that employee retention incentives include a legal and common-sense description of how the incentives are intended to be used. So, if you have employees in your company who are considering taking a leave, you might consider offering an incentive to incentivize them to stay. While these tax breaks can sometimes be used as a bonus for all workers, some of them can be targeted to new employees.
Financial Contributions
Some of the benefits that might be eligible for an employer tax credit includes:
- Health insurance contributions (both for individual employees and family members)
- Employee tuition contributions for continuing education (in the case of higher education)
- Graduation bonuses
- Bonus based on job performance
- Investment contributions (such as business or personal)
- Insurance reimbursements
- Professional Development – such as continuing education
- Paid leave
Here is a list of all the benefits that an employer can currently claim as a tax credit for:
- Health insurance
- Tuition payments
- Work-related educational expenses
- Employee training
- Bonus or incentive based on job performance
- Insurance
- Travel and entertainment expenses
- Perks
If you have a number of things that qualify as a perk, you might consider filing for a deduction for a specific thing rather than for the entire expense. For example, if you pay your employees’ health insurance costs, instead of a standard deduction, it might be worthwhile to consider a medical expense deduction. The majority of employers already deduct medical expenses, so it’s a worthwhile idea to take advantage of this common-sense deduction.
Basic tips for saving on employee costs
Whether you have one employee or a thousand, you need to determine whether there are any tax benefits for you to offer an incentive to your employees. Before deciding, take a look at what other benefits your employees are receiving and what your total spending is on those other benefits.
Here are some other simple suggestions to help you save on the costs associated with employee benefits:
- Pick a reasonable amount to offer your employees.
- Consider any training or education that is offered to the employees.
- Watch for excessive or duplicate benefits. Some companies offer a number of different tax benefits to their employees.
In the end, deciding whether to offer an employee benefit or not is a personal choice. However, it is important to know the rules in place and keep good records to make sure that you follow the law.
Changes to Employee Retention Credit
The Employee retention tax credit will become part of the employee’s taxable compensation in the following circumstances:
- The employee receives the benefit on an open or continuing basis
- The benefit is granted and received in a taxable year
- The employee receives the benefit in the first 90 days of employment
Withholding the benefit at the end of the tax year avoids the potentially expensive claw back of an employee’s employer-provided healthcare coverage by the IRS. Until the previous filing season, the IRS allowed an employee retention credit to be included in an employee’s gross income based on the amount of the bonus paid to the employee.
If an employee’s entire compensation was treated as a bonus, a company would pay taxes on the amount of bonus received, not the total compensation to the employee. Even with this approach, employers still faced the challenge of identifying the amount of the employee’s total pay for the year.
As the IRS tightened its interpretation of the employee retention incentive, the change in rules applies to all employees — regardless of the amount of their salary.
Additionally, in order to receive the employee retention tax credit, the employee must receive the benefit in the first 90 days of employment.
However, employees can receive the benefit for longer than 90 days of employment if:
- The employee receives the benefit in the first 90 days of employment after becoming an employee of the employer
- The employee receives the benefit for an employee in the first 90 days of employment after being an employee of the employer for the previous year
- The employee receives the benefit for an employee who is at least 18 years of age
- The employee receives the benefit for an employee who is at least 25 years of age
- The employee receives the benefit on an open or continuing basis
You can see the details of the 2022 tax year payroll deductions and benefit from the Internal Revenue Service.
Employer’s Benefits
The IRS has also changed the rules that apply to employer’s contributions to a 401(k) or another qualified retirement plan. If your company does not provide a qualified retirement plan to its employees, you can still contribute up to $18,000 to an employee’s 401(k) in 2017. If your company does provide a qualified retirement plan, the amount of employee’s contributions to their retirement plan remains the same.
If the maximum employee contribution is not enough for an employee to contribute enough to their employer-provided retirement plan, then an employer can contribute up to an additional 25% of an employee’s compensation.
What about the Flexible Spending Account?
For employees, the IRS has temporarily waived the employer’s share of the Medicare withholding tax on flexible spending account contributions for the 2022 tax year. However, the flex spending refundable credit for the maximum amount of $2,650 (if you meet certain requirements) will be suspended if you use the maximum credit for any of the 2022 tax years.
Employees and Employers
In addition to these changes, the new law also extends the maximum amount of the tax credit to taxpayers whose 2017 income is $55,000 or less, and the maximum amount of the annual refundable tax credit to taxpayers whose 2017 income is $54,000 or less. Previously, the maximum credit was $600 for taxpayers whose income was less than $55,000. The new law raises the maximum amount of the credit to $1,400 if a taxpayer has a modified adjusted gross income of $55,000 or less.
Additionally, the minimum amount of the credit remains $400. This means that a taxpayer with a modified adjusted gross income of $55,000 or less who files an amended return to include a refundable credit of more than $600 will still get an extra $400 for the amount of the credit over $400.
People close to retirement will notice this tax credit in their refund check in the early years. In the last years before the taxpayers retire, the credit will probably be a bigger part of the tax refund. For example, a taxpayer filing a 2016 return with $2,000 of qualifying income and a refundable credit of $600 would receive $375 for the refundable credit on the return, and $150 as a refundable credit on their return for the reduced tax due.
There are a lot of changes in the tax law that affect the preparation of your 2017 tax return, and many of the changes will go unnoticed. This is especially true if you are already familiar with tax deductions, credits, and rules. You can use the IRS website to get more information.
Other Benefits of Employee Retention Credit for Employees
They save on the costs associated with the benefit. It reduces the taxes owed on that benefit. They provide an incentive for current and future employees to work for you. They provide employees with a business benefit. They are a business expense to the employer. Employees will not receive the benefit unless they work for you for the full year. It’s a gift that keeps on giving. It has been around for many years and it has generated tax savings for many years. It is not a temporary benefit. It continues to provide tax savings every year, no matter the size of your company.
Here are some other benefits of Employee Retention Credit for employees:
- Help cover unexpected medical costs.
- Provide investment and financial benefits.
- Provide a deduction for travel, entertainment, and gifts.
- Provide a gift to the employee or family member.
- Help pay for continuing education.
- Reduce taxable earnings.
- Reduce taxable wages.
- Provide a deduction for employee or family member tuition payments.
- Reduce a taxable Social Security and Medicare cost-of-living adjustment.
- Reduced taxable earnings.
Let’s discuss each benefit in details below:
- Help cover unexpected medical costs
In the past, the maximum tax credit for the employee was $500, but this year it has increased to $1,000. So, when you need to offer a generous benefit for a situation where you can’t afford it and your employees need it, you could be rewarded with a tax credit. If the reimbursement covers 100% of the employee’s costs, then you will get the full $1,000 back from the IRS.
To be eligible, you must first ask your employees if they would be willing to receive the medical reimbursement. It might be cheaper to give it to them as a bonus than to pay the medical costs out of pocket. If they agree, you will file the required forms with the IRS and they will review the situation and verify that you actually offered the medical benefit. They will then send you a check for the amount you received from the IRS.
- Provide investment and financial benefits
Business owners know the benefits of offering a company-paid retirement account to their employees. The 401(k) is a company-funded retirement plan. When an employee is enrolled, the employer can contribute to that plan and when the employee retires, he or she gets a proportionate share of the company’s contribution. The employee’s share of the contribution is calculated based on the age of the employee.
Business owners also know that investing in 401(k) plans is a smart way to save for retirement. It is typically a low-cost, tax-deferred account that grows tax-deferred until the employee starts taking withdrawals. And then it becomes a Roth IRA. But you will usually want to invest more in your 401(k) if you have employees, because the contributions are matched by the employer on a regular basis.
If you don’t provide a 401(k) plan for your employees, you can still provide other types of financial benefits. The three largest types are:
- Cash bonuses. Cash bonuses can be less expensive than an equivalent pension. You can choose whether the payment comes in the form of cash or in a performance-based instrument. It can be paid either in cash or in the form of a performance-based stock, bond, or other security. It can be paid when the employee is hired, or during any time after the employee is hired.
- Stock options. When you offer an employee stock options, you are essentially telling them that if they are the right person to take care of your business, then they will receive a financial benefit. And you will probably help them buy that right by buying a certain percentage of their shares at the time you offer them the option. You might decide to keep the stock option for yourself, or you might keep some for yourself and give the rest to the employee.
- Incentive stock options. Incentive stock options can also be a way to reward employees for taking care of your business. An employee who comes up with the best ideas for expanding or selling your company could be given an option to purchase a certain percentage of that company’s stock, on a “first-in, first-out” basis, or to keep 100% of the shares. This option could be contingent on other criteria, such as having the employee remain with the company. An employee who loses the option can buy the shares at the option price when it is offered to him.
Incentive stock options don’t have to be restricted to tech companies, either. Many companies offer them to those who are paid well or are in specialized fields such as scientific research. And you don’t need to be a tech company to offer them. Many financial institutions offer such options to their employees.
Three important points to keep in mind:
- None of these options will provide an income benefit for your employees. In fact, the shares in their option grant funds will be received when they retire.
- And they will be bought at a price that is independent of any capital appreciation.
- Employees may be willing to take the stock option as long as they agree to the company’s conditions.
- Provide a deduction for travel, entertainment, and gifts.
Even if you don’t have an employee travel and entertainment policy, you can still take a deduction for expenses you make to take your employees to travel, watch sporting events, or to watch movies. An employee retention credit is usually allowed if the value of these expenses is over a reasonable amount, such as $500, if the employee works more than 20 hours a week. You can get a tax benefit for these expenses if you pay your employees for these trips or pay for entertainment on their behalf. But the amounts for each item have to be separately specified on the return, and they can’t exceed the standard deduction.
- Allow your employees to purchase life insurance on themselves.
Employees who are offered this benefit can typically get a group policy with as much as $250,000 of coverage. When they’re willing to be named on this policy, they can often get the benefit of up to $250,000 of additional coverage, depending on their age and risk profile.
- Allow your employees to purchase accidental death and dismemberment insurance on themselves.
While you might not be able to use these benefits for your employees, they can be used by their parents. But you have to pay for this coverage for their children. In some cases, you can take a deduction for this accidental death or dismemberment insurance. These can be important benefits. But remember that they can only be offered to your employees.
It ‘s a good idea to have an employee retention plan. It can make good sense to offer these benefits to employees who are willing to work with you for a long time. And it can help you keep your best and highest-performing employees, who may be able to help you avoid expensive recruiting and training costs in the future.
- Help pay for continuing education.
Many employers help their employees by providing tax-free tuition assistance and matching grants. But there’s a limit to what you can do with tuition assistance and matching grants. The grants must be of a specific value (say, $2,000) and have a specific purpose (for example, for a graduate degree). You can offer employees the tuition assistance and matching grants for continuing education.
But the amount you can give for this benefit can’t exceed the amount of the tuition assistance and matching grant. In some cases, the employer may be able to give the employee more money, but you can’t pay out more than the tuition assistance and matching grant amounts, or you’ll have to take a tax deduction. The amount you can give, however, can be included in the total amount of tuition assistance and matching grants for the employee.
- Support your employees in charitable giving.
You can generally give your employees a deduction for charitable donations, as long as the donations are made to a qualified organization. While you can’t give your employees an excess of their income for tax purposes, you can still give them a deduction if their contributions exceed the amount of their income.
You can give employees a deduction if they donate, but you can’t give a deduction to anyone else if your employees give to a different organization. You also can’t deduct the expenses related to the donation.
- Provide your employees with a retirement plan.
You can generally offer your employees a retirement plan that doesn’t count against your income. But you can’t deduct any contributions. This is true even if your employees don’t participate in the retirement plan.
You can, however, offer a retirement plan to your employees’ children if the plan allows employers to make deductible contributions. And you can make deductible contributions to retirement accounts if the employees’ contributions are also deductible.
- Give your employees a company-paid automobile allowance.
If your employees don’t own a car or are paying for their own car, you can’t give them a company-paid allowance for transportation. But you can give them a deduction if you give them an allowance for the purchase of a new car or any other type of vehicle.
- Provide your employees with health insurance.
Employers are not required to provide their employees with health insurance. But if you’re not providing health insurance for your employees, you’re still obligated to make sure they have a sufficient amount of health insurance coverage. In general, you can’t be more generous in providing health insurance if you’re not offering health insurance to your employees.
- Provide a retirement account.
You can generally make a tax-deductible contribution to an employee’s 401(k) or similar retirement account if the employee is under the age of 50. In this case, the contribution is made from the employee’s pay. You can’t make a deductible contribution if the employee is over the age of 50.
- Provide paid family leave.
You can generally make a tax-deductible contribution to an employee’s family leave program if the employee is under the age of 50. These programs may allow the employee to take time off work to care for a family member or a sick relative. You can’t make a deductible contribution if the employee is over the age of 50.
- Provide workers’ compensation insurance.
If you provide workers’ compensation insurance, you can deduct the cost of the insurance from the wages of your employees. But you can’t deduct the cost of the insurance from the wages of your employees if you pay the cost of the insurance yourself.
- Provide employer-provided health insurance.
You can’t deduct any of the health insurance costs that you incur for the employees, but you can provide them with health insurance. You can also make a deductible contribution to the employees’ health insurance coverage if you pay for the insurance. If you pay for the insurance yourself, you can deduct the cost of the health insurance from the wages of your employees.
- Give your employees paid time off to care for a sick relative.
You can’t deduct the cost of any leave that you pay for, but you can provide your employees with paid time off to care for a sick relative.
- Allow your employees to telecommute.
You can’t deduct the time that your employees spend on work-related tasks that aren’t connected to the main operation of your business. But you can allow your employees to telecommute as long as they use company-provided technology to do their work.
- Provide assistance for child care.
You can generally deduct child care expenses if you provide paid child care to your employees, though you can’t deduct the cost of the child care if your employees pay for the cost of child care themselves. If you make a deductible contribution to the employee’s child care expenses, you can’t deduct the amount that you paid for child care.
- Provide paid maternity and paternity leave.
You can generally deduct the costs of maternity and paternity leave if you provide paid leave to employees. But you can’t deduct the cost of the leave if you pay for the leave yourself.
- Provide on-site child care.
You can generally deduct the cost of child care if you provide child care to your employees, though you can’t deduct the cost of the child care if your employees pay for the cost of child care themselves.
- Provide financial assistance for medical expenses.
You can generally deduct the cost of certain expenses that you pay to help an employee or a dependent relative pay for health care, medical transportation, and prescription drugs. If you make a deductible contribution to the employee’s health savings account, you can’t deduct the money from your taxes.
- Provide free business resources for employees.
You can generally deduct the cost of certain free business resources that you provide your employees. You can generally deduct the cost of the free resources if they help an employee learn more about the company, build strong relationships with customers, and do their job more efficiently.
- Allow your employees to take the employee stock option plan as a deduction.
You can generally deduct the cost of an employee stock option plan if you take advantage of the plan, which is one of the few deductions that you can take for an employee benefit. But you can’t take the deduction if you don’t take the benefit.
- Allow your employees to make employee stock purchase plan contributions to the 401(k) plan.
You can generally deduct the cost of the stock option plan if you take advantage of the plan, which is one of the few deductions that you can take for an employee benefit. But you can’t take the deduction if you don’t take the benefit.
- Give employees flexible work schedules.
You can generally deduct the cost of flexible work schedules if you allow your employees to work from home, for example, or on a part-time basis.
- Allow your employees to take advantage of other employer-sponsored benefits.
There are a lot of employer-sponsored benefits that you can give to your employees, including:
- 401(k) plans
- Medicare plans
- Spousal and dependent care benefits
- Long-term care insurance plans
- Life insurance
- Life insurance tax advantages
- Mortgage loan guaranty insurance
- Employee profit-sharing plans
You can also give some of these benefits to your employees, and still deduct the cost. You just can’t deduct the cost if you give the benefit without taking advantage of it.
- Allow your employees to carry over some of their unused vacation time.
You can generally deduct the costs of employer-provided paid holidays, paid vacation days, and paid holidays if you allow your employees to carry over some of their unused vacation time to the next year.
- Allow your employees to spend some of their paid time off in-store.
You can generally deduct the cost of some employees using their paid time off in-store, if you allow them to do it. This benefit is available if your employees go to work in-store for an hour or less each day.
Conclusion
We have revised more than 20 benefits of Employee Retention Credit. We hope you find it helpful. If you have questions about other benefits that can help you retain employees, please leave us a comment below. We will add your question to this section. If you find it useful, please consider supporting our effort by signing up for our newsletter.