It is important that you explain the taxable benefits that come with employment in the company to your employees. Learn the important reasons why you should discuss this topic with your employee below.
What Are Taxable Benefits?
If you have ever been employed and received any type of benefit, then you should know what taxable benefits are. A taxable benefit is an income payment made to an employee by the employer and is usually in the form of cash or monetary compensation. These are also often fringe benefits, such as use of a company car, relocation costs, stocks, and bonuses. All of these items will be taxable to the employee who receives them.
1. Employees Will Know Their Benefits
There are many reasons to tackle this topic with your employees, including fringe and taxable benefits as discussed at hoppier.com. A misunderstanding of their employee rights and compensation can result in legal consequences, like penalties, if your employees don’t properly report these benefits in their tax forms, and any misfiling of their taxable income can harm their tax return.
It is important to note that healthcare coverage, life insurance, child care, and tuition assistance are NOT taxable. Because there are such significant exceptions to the rule, it is even more important to emphasize to your employees which benefits are taxable and which are not so as to prevent any confusion or strife when tax season rolls around.
2. Determine Income Tax Deductions to Avoid Surprises
Employees must fully understand how their income is being taxed or deducted. These are the most difficult to determine because the nature of the employer, whether a small business owner or a corporation, will determine who is receiving benefits and thus if the tax is to be paid. For example, if the employer provides life coverage through an insurance policy to its employees, then the employer is liable for all taxes on the policy.
Here are the things employers should know when discussing taxable benefits with employees:
- Check the Tax Return: The first thing to check on an employee’s tax return is whether he or she has received any kind of benefit for which the employer is liable to pay taxes on. This can include health care coverage, life coverage, disability, and other similar items. The most common taxable benefits are the ones that are offered by the employer in the first place.
- Best Practices: When you consider these types of benefits on a tax return, be sure to check whether these are taxable as well. Remember to file your taxes early so that you do not have to deal with the possibility of being penalized for not filing early.
- For Employees: Also consider the type of benefit that the employer provides through means other than cash and the nature of that benefit. For example, the most common type of tax deduction that an employee receives is for health care expenses. In addition, some employers offer their employees’ vacation time and other types of additional support and assistance, such as childcare. If these benefits are received, then the employer is liable for taxes on these amounts as well.
3. Highlight the Appealing Compensation Package Offered to Employees
You also need to explain to your employees the taxable benefits that are given to them to provide a good idea of the total compensation package new employees will be receiving.
Here are some examples of employee benefits that attract job applicants and retain current employees:
- If a company offers a tax-free life insurance policy, a person who is employed at the company will be able to get these benefits at no cost from the company.
- They will not be taxed on the value of these policies that they receive at all.
- They will be able to get free dental consultation, free vision, and free travel insurance at all times.
4. Peace of Mind
There are many people who have no clue what their incentives, privileges, and additional compensation are. It is a tough subject to deal with, and you would think that most people would want to know this information. However, most people do not want to know what their tax returns look like and they would rather not know where they went. But as an employer, it is your responsibility to tell employees about applicable employment expectations for their peace of mind, whether taxable or not.
How each benefit is taxed can be tricky to figure out. The first thing to discuss with your employee is how to interpret what is known as an itemized deduction for his peace of mind. Some examples of things you may include on your itemized deductions are your Social Security, any disability benefit that you have received, any Medicare that you have received, and any other kind of social service that you may have received.
The reason for this is because the employee will pay more money in taxes if you don’t take a closer look at the itemized deduction on your federal tax return than if an itemized deduction is taken. An itemized deduction often means that a tax payer will discover that they may be able to claim more expenses and increase their tax return. This way, your employees will have a rough idea of what to expect on their tax returns.
It is best that you inform your employees about their employee benefits before they are offered by the company to them. Your employees must be informed as to their expected compensation and privileges they gain once they become employed at the company, which can provide incentives to join or stay in their positions, allowing you to grow and retain your workforce. Discussing these taxable benefits with your employees will help them know what they can get deducted from their taxable income for their peace of mind and build a culture of trust and transparency. Also, this practice will ensure your full compliance with employment and tax laws.