The introduction of ICHRAs presents one of the biggest new opportunities for SMBs from a tax perspective. These allow employers to reimburse employees for health-related expenses, including individual market premiums. This means the employer can, with consultation from his or her CPA, can write off these reimbursements as business expenses. This may not lower payroll tax liabilities the way group health insurance would, but it can certainly still be a savings for an employer.
In light of these changes, what should business owners be doing right now in preparation for filing their taxes?
Topher Reynoso: Right now, small business owners should meet with their CPA to go over their options. A good option here is to choose an HR platform that not only handles payroll, but benefits administration as well. You’ll want to choose a platform that isn’t only financially incentivized to steer you one way, but rather, direct you towards the benefits options that make the most sense for your business.
What are the most common benefits-related tax deductions and credits SMBs can take advantage of?
Topher Reynoso: The most common benefits-related tax deductions SMBs can take advantage of are Section 125 deductions. These are items that can be deducted from employee pay on a pre-tax basis and are exempt from Federal Income Tax Withholding, Social Security, and Medicare taxes. These have the potential to lower employer payroll tax and lower employees’ taxable income: which is a real win-win.
Will Lopez: The most common benefits-related tax deductions that SMBs can take advantage of are retirement vehicles like SEP IRAs, Simple 401ks, and 401ks. In addition, owners of S-corporations can deduct health insurance premiums or participate in health reimbursement arrangements (HRAs). Also, the recent Tax Cut and Jobs Act (TCJA) established a new tax deduction for owners of pass-through businesses, such as partnerships, LLCs and S-corporations.
What questions should a business owner ask their CPA or tax planner when they’re trying to determine the best ways to take advantage of these deductions?
Topher Reynoso: Under the ACA, businesses over a certain size (businesses with 50 or more full-time equivalent employees) are required to offer benefits to their employees. So, it’s important for SMB owners to have their CPAs check on their full-time equivalent count by adding up their full-time employees plus the full-time equivalent of part-time employees. Of course, in today’s tight labor market, businesses of all sizes—not just those mandated by the ACA—want to offer benefits to recruit, engage, and retain their employees. Working with a CPA and a broker can help SMB owners determine the right plans and amounts to contribute at the right time.
Will Lopez: What services do you provide? Do you have experience with my kind of business? Can you represent me in all states where I do business? What are your tax philosophy and tax planning priorities? How often should we meet to discuss my business?
Do you have any general financial tips for employers who want to offer benefits to their staff?
Topher Reynoso: Offering benefits is definitely an investment by small business owners, but it’s a worthwhile one. When employees receive benefits, they have higher satisfaction, which decreases turnover and increases retention. Offering benefits also levels the playing field when it comes to recruiting talent, which is important in our tight labor market. For SMBs who are concerned about costs, there are ways to slowly step into the benefits pool. For example, most carriers require a 50% contribution, which enables SMB owners to pick a contribution percentage point that makes sense for them and their business. Or, SMB owners can look at an HRA that enables them to pick a flat dollar amount to contribute.
Topher Reynoso is the Head of Health Benefits Compliance at Gusto, the people platform that helps more than 100,000+ small businesses nationwide pay, insure, and offer benefits to their teams. Topher holds a JD in Law from Pennsylvania State University and a BA in philosophy from the University of Washington. @GustoHQ
Will Lopez is the Head of the Accountant Community at Gusto, the people platform that helps more than 100,000+ small businesses nationwide pay, insure, and offer benefits to their teams. Before Gusto, Will founded AdvisorFi, a modern accounting firm that helped accountants leverage digital transformation to benefit their clients.