Maximizing Benefits: Understanding Tax Implications for Employers and Employees

Employees switch jobs more frequently as the unemployment rate decreases and the economy stabilizes. Employers must provide a work environment that attracts new talent and keeps current employees happy. One way to do this is by offering great benefits. However, employers may wonder how to handle taxes on these new benefits.

When an employer raises an employee’s wages or offers bonuses and taxable fringe benefits, they must pay employment taxes. Certain benefits, including health insurance up to a specific dollar amount, accident and disability insurance, educational assistance, and transportation benefits, are not taxable to employees. Taxable benefits, like education assistance over the $5,250 annual limit for non-job-related education and student loan repayment assistance, can still benefit employees because they pay less tax on the benefit than they would if they purchased it themselves.

Employers should remember that some benefits, such as remote or hybrid work arrangements, do not have tax consequences. Additionally, qualifying employers may be eligible for tax credits, such as the Affordable Care Act’s deduction for contributions toward employee health insurance premiums.

Employers should consult with their tax advisers to ensure compliance with complex provisions and stay aware of any changes.