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Employee Benefits, Perks & The In Betweens

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(This post is part of my Small Business Startup & Survival Guide. You can catch up on the whole series here.)

When it comes to business, it can be tough for a small business to match the salaries offered big companies. The solution? Focus on benefits and perks that make employees happy and are still cost and tax efficient. Opportunities to build loyalty are as individual as your business but here are some ideas to consider:

Fringe benefits. For federal tax purposes, a fringe benefit is a form of pay for the performance of services. This doesn’t have to be exclusively for an employee, it could be an independent contractor, partner or other person with whom you’re doing business. Generally, it’s a way of compensating someone with a benefit for doing something for you. Quid pro quo, if you will. And under the Tax Code, fringe benefits are generally taxable to the recipient. So that means that offering a fringe benefit to your employees - instead of just handing them a check - is still a taxable transaction.

That said, that doesn’t mean that fringe benefits are bad. They can still be really great. And all fringe benefits aren’t taxable. Here's a look at a few that are generally tax free to employees:

  • Achievement Awards. Accolades at the office are always a good thing: who doesn’t want to be told that they’re awesome? While cash, cash equivalents, gift certificates and compensation for a job well done may be taxable, the value of any tangible personal property you give to an employee for length of service or safety achievement is not taxable. Dollar limits may apply depending on the type of award.
  • Cell phones. Nobody wants to carry two cell phones if they don’t have to. The personal use of an employer-provided cell phone provided primarily for business purposes is generally tax free to employees. So go ahead, let your employees call mom on your dime.
  • Discounts. If you offer an employee discount for property or services you offer to customers, the value of the discount is tax free to your employees so long as it stays within certain limits (typically around 20%). Discounts can be huge motivators. I’m not gonna lie: I worked at the Gap far longer than I needed to because I couldn’t let that discount go.
  • Food. At our office, we have a break room for employees. We’re not Google but we do offer unlimited coffee (okay, arguably that’s not de minimis for me) and other beverages as well as an array of snacks and candy. In addition to munchies, meals that you provide for employees on your own premises are generally tax free.
  • Gym. Sitting around the office all day can be unhealthy. If you provide an on-premises gym or other athletic facility for your employees, their spouses, and their dependent children, the value of that benefit is free from tax. And no, I’m not saying you have to move in a Planet Fitness: a room on your premises or leased by your premises with some exercise equipment works just as well.
  • Holiday gifts. Cash is always taxable but other gifts at the holidays will be tax free so long as it has a low fair market value. There’s no hard and fast dollar amount so use common sense: a Porsche is too much but a box of chocolates is okay.
  • Life insurance. Group-term life insurance payable on the death of an employee’s spouse or dependent is tax free to your employees if the face amount is not more than $2,000. Ask your insurance broker for more information on group term plans (they're usually pretty inexpensive).
  • Parties or picnics for employees and their guests. Why not celebrate birthdays and other events with your employees? It can be fun to offer a break during the workday - and who doesn’t love cake? That said, parties don’t have to be restricted to the workday: having a fun night out at the holidays or to celebrate a job well done remains tax free to your employees so long as it’s occasional. It doesn't have to be a fancy dress up party at a catered spot either - a nice spread at your office works, too.
  • Tickets for theater or sporting events. Tickets for events are tax free to your employees so long as they’re for occasional use only. No to Philadelphia Eagles season tickets for your crew but yes to the occasional employee outing at the Phillies. We sometimes take it a step further at our office and offer tickets for the whole office and their families for a single game. Pro tip: Minor league games are inexpensive and tend to be fun for the entire family - you can even buy packages that include beer and hotdogs.
  • Transportation. If you provide a transportation benefit that has so little value that accounting for it would be unreasonable or administratively impracticable, that benefit is tax free to your employees. An example would be occasional cab fare: my husband’s company used to pay for cab fare when an employee worked late to make sure that employees got home safely. If, however, transportation is regular enough to be considered a qualified transportation benefit, other rules apply. Qualified transportation benefits include a ride in a commuter highway vehicle between the employee’s home and work place; a transit pass; qualified parking; and qualified bicycle commuting reimbursement and are generally valued and extended at the whim of Congress every year.
  • Use of the company copier. This may seem trivial but if you own or lease a copy machine at work, you might have forgotten how inconvenient it is to have to make a copy when you don’t have access to one. Employees often need to make copies for non-work related reason like insurance records or their kid’s science project. The IRS specifically excludes the occasional personal use of a company copying machine if you, as the employer, still ensure that it’s used 85% of the time for business purposes.

Keep in mind just because a perk is tax free to your employees doesn’t mean that there’s no tax consequence. Depending on the perk, it may be tax deductible to you as a business expense. A win-win!

Cafeteria plans. A cafeteria plan (sometimes called a Section 125 plan) is a written plan that allows your employees to choose between receiving cash or taxable benefits instead of certain qualified benefits. If an employee opts for the qualified benefit under the plan, that benefit is tax free to the employee. Cafeteria plans may include accident and health benefits; adoption assistance; dependent care assistance; group-term life insurance coverage; health savings accounts (HSAs); and stock options. Cafeteria plans are subject to regulations and can be tricky to set up: small businesses, defined as those with fewer than 100 employees, may opt to establish a simple cafeteria plan instead.

  • Stock options. There are three kinds of stock options: incentive stock options (ISOs), employee stock purchase plan options (ESOP options), and non-statutory (nonqualified) stock options. Stock options can be great incentives to keep employees at your small business but the rules that govern them are tricky and beyond the scope of this piece. If you’re considering offering options, be sure to check with your company lawyer for guidance.

Flexibility. Depending on your business, there's no real cost to you to be flexible and it makes working more pleasant for your employees. Flexibility comes in different flavors. You can offer flex-time for employees: an easy way to do this is to fix a minimum number of office work hours and then stipulate which "core hours" you need to see employees at the office. For example, you can tell your employees that they must work a full 40 hours at the office and they may arrange those office as they wish as long as they are at the office everyday between 10:00a.m. and 2:00p.m. You can offer other arrangements that allow employees to work from home or flex hours when needed to accommodate doctor's appointments and school meetings.

Time off.  According to the Center for Economic and Policy Research, 25% of Americans get no vacation at all.  There is no law that requires paid leave for vacation. Even when Americans have vacation time, they are scared to take it because they are scared that they may lose their jobs or are afraid their bosses will think they’re lazy. Even though they might not take vacation, workers like time off. This is a great opportunity for small businesses to provide a perk to employees with little to no tax consequences: simply offer time off. You can offer time off a few ways:

  1. If you give an hourly employee time off without pay, there are no tax consequences to the employee and the employer. No work for hourly employees generally equals no pay although it’s worth noting that some companies do have paid vacation for hourly employees. While the employee may miss the pay, they may also appreciate the time off more.
  2. If you give a salaried employee time off, the same tax consequences apply as if they had worked a “regular” week, assuming that it’s considered paid vacation time. In other words, if you pay an employee a flat rate of $3,000 for the month of February, the tax and financial consequences to the employee are exactly the same whether they work 26 days or 28 days. The perk is, of course, that the employee has the benefit of not working.
  3. Some employers allow employees to buy additional time off through payroll deductions or other arrangements. With such an arrangement, employees opt in as part of a benefits plan. It’s been popular at companies like USAA where more employees buy time off as sell it. Jeff Weiss, senior vice president of benefits at USAA, said, about the arrangement: "We think time off is actually critical to productivity. When people take their time off to refresh and renew, we believe they service the members more effectively."
  4. If the prospect of managing all of those time sheets is daunting, don’t be discouraged. Think outside of the box. Wil Reynolds of Seer Interactive, an SEO company with offices in Philadelphia and San Diego, came up with an alternative: Seer has an unlimited paid time off (PTO) & sick leave policy which means that there are not any restrictions or caps on those policies. Seer’s Director of Employee Development, Emily Allen, explained that the only caveat to the policy is that the company expects its employees to ensure that they have an out of office plan in place to ensure that colleagues and clients are supported during any absence.
  5. Offer summer or special hours. In addition to unlimited PTO, Seer also offers ‘summer hours’ each Friday from Memorial Day to Labor Day so that employees can head out early for the weekend if they wish. My law firm, Erb Law, has the same rule.

It’s worth noting that no matter what your company’s policy is with respect to hours worked, vacation, paid time off and sick leave, you want to make sure that you’re in compliance with federal, state and local laws. Similarly, to avoid any confusion, plans should be clearly communicated to and acknowledged by employees: an updated employee handbook is a great way to ensure this happens.

The bottom line: there are many ways to keep employees happy without cleaning you out in the process. Remember: happy employees tend to be productive employees.

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