Let’s face it- no one enjoys paying taxes. As a household employer, you set a budget for employment costs and seek out the most highly qualified employee within that budget. Don’t be surprised by employment taxes, and don’t neglect an opportunity to minimize them by including forms of non-taxable compensation and benefits in an employment offer. By thinking beyond gross pay to total compensation, you can increase employee take-home pay and make a more attractive offer to your ideal candidate.
Employers can provide health insurance to employees through a Small Business Health Options Program (SHOP), though these plans are not available in all states. With these plans, the employer chooses the coverage to offer, makes premium payments directly to the insurance company, and may choose to deduct some portion of the premium from employee pay. Once established, these plans are fairly easy to administer
There are also two options for reimbursement arrangements allowing employees to choose their own health insurance coverage. Qualified Small Employer Health Reimbursement Arrangements (QSEHRA) and Individual Coverage Health Reimbursement Arrangement (ICHRA) are tailored for small employers not offering group health insurance, and support employees obtaining coverage on their state health insurance exchanges. Employers choose the maximum amount of the benefit in a given year, subject to caps of $5,450 for an individual and $11,050 for a family. The employee provides the employer proof of qualified expenses in the form of receipts with a reimbursement request. The employer keeps this documentation and reimburses the employee directly on a pre-tax basis. FICA tax savings of an HRA for a single employee can be as much as $417 for both employer and employee ($834 total). The Employee also benefits from a reduction in income taxes.
Educational expenses paid for or reimbursed by an employer (up to $5,250) are considered non-taxable educational assistance. This includes tuition, fees, books, supplies, and equipment. Educational Assistance Programs should be written documents, and employees cannot choose to receive this money as cash compensation instead of educational assistance.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act) also introduced an opportunity for employers to pay an employee’s qualified student loans and interest on a pre-tax basis. This exclusion expires on January 1, 2026.
Consider stretching the impact of that annual bonus a little further by offering to help your employee repay a student loan.
If your employee will be using their own vehicle while working, you should be reimbursing them for the expense incurred. The IRS establishes the maximum non-taxable reimbursement rate each year, and employers in Illinois, California, Massachusetts, Montana, Pennsylvania, New York, Iowa, and the District of Columbia are required by law to provide this reimbursement.
Qualified Transportation Benefits can be provided to your employee tax-free. Mass transit passes (bus, subway, rail, etc.) can be purchased or reimbursed up to $280 per month (2022). Parking costs near the worksite or a mass transit location used by the employee can also be provided or reimbursed up to $280 per month (2022).
Household employers can contribute towards an employee’s retirement savings in a few different ways. Simplified Employee Pension (SEP) IRAs allow for contributions of up to 25% of employee pay, while SIMPLE IRAs allow employer non-elective contributions of 2% or matching contributions up to 3% of employee pay. Employer contributions to SEP IRAs and SIMPLE IRAs are not subject to FICA taxes, saving 7.65% in employer taxes. Further, employee contributions to an IRA are not subject to income tax until withdrawal.
Total compensation may sound complicated, but the team of experts at HomeWork Solutions is here to help you craft the plan that is right for you. Check out our Knowledge Center or give us a call at 800.626.4829 for a free consultation. When you are ready to hire, be sure to enroll in our Complete Payroll service so you won’t have to lift a finger!