What can employers do to improve their tax planning for 2021?

Pedro Silva
  • Any expenses an employer incurs related to health insurance (for employees or for dependents) are 100% tax-deductible as ordinary business expenses.
  • The SECURE Act, which became law in 2019, provides small business owners more incentives for offering retirement plans to their employees. 
  • Companies can save up to 70 cents on every dollar invested in childcare benefit programs because of federal and state tax incentives.

2020 may be a challenging year for employers when it comes to taxes.

Every employer has specific tax issues, but for companies that do not yet have robust benefit programs, there are plenty of opportunities to reduce tax liabilities and do right by workers in the new year.

As the year comes to a close, employers can set up three major benefit programs to lower their tax bill for 2021, boost productivity and retain talent as the economy recovers from the pandemic.

Health Care Coverage

Any expenses an employer incurs related to health insurance (for employees or for dependents) are 100% tax-deductible as ordinary business expenses, on both state and federal income taxes. Employer-paid premiums for health insurance are exempt from federal income and payroll taxes.

The portion of premiums employees pay is typically excluded from taxable income. The exclusion of premiums lowers most workers’ tax bills and reduces their after-tax cost of coverage. 

Small businesses have been able to access healthcare tax credits since 2010. To qualify for a tax credit of up to 50% of premium expenses for any two years, small business owners must pay at least half of employees’ healthcare premiums and have 25 or fewer full-time equivalent employees who earn an average of $50,000 or less per year.

Retirement Plans

The IRS pays you to help your employees save with credits and deductions for offering a retirement plan. The tax breaks have been getting better for companies, especially for small businesses.

The SECURE Act, which became law in 2019, provides small business owners more incentives for offering retirement plans to employees. The small employer maximum tax credit for new retirement plans increased from $500 to $5,000 in 2020, which means small business owners can receive a tax credit up to $5,000 for the first three years of a plan. The law provides small businesses with $500 for the first three years to set up automatic enrollment features on a retirement plan. Starting next year, companies also can band together to join pooled employer plans, created by the SECURE Act, that give employers the scale to save on the administrative costs of running retirement plans and allows them to offer more and better investment choices to their workers.

A generous employer match can create more tax savings opportunities. If you choose to include an employer match or profit-sharing contribution, you can deduct your share of the combined contribution limit of $57,000 per employee.

Childcare Benefits

Companies can save up to 70 cents on every dollar invested in childcare benefit programs because of federal and state tax incentives. Direct employer contributions for childcare can be more tax-efficient than employer contributions to dependent care flexible spending accounts - and together the two solutions can make the most out of the employers’ and parents’ dollars.

While a dependent care FSA helps employees partially, existing untapped federal and state tax incentives for your company can boost the impact of your investment in benefits significantly. Employer childcare contributions can also complement any existing dependent care FSA programs.

A dollar-efficient benefit program is difficult to build on your own. It needs to be tax-optimized and provide customizable payments to licensed childcare providers, regardless of where employees are based, and factor in employer contributions to other benefit programs. Arvorie’s platform can reduce the operational complexity of administering childcare benefits so your company can save up to 70% on program costs.

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