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How Taxation And Tax Exemptions For Benefits Matter To Employers And Employees

Collecting and depositing payroll taxes correctly and accurately reporting on such taxes are crucial parts of running a business. Underreporting and underpaying taxes can lead to serious consequences that can result in burdensome repayment obligations and government penalties. Furthermore, employees expect and demand clear explanations and documentation of tax exemptions and taxation requirements. Employers may use benefit plans and the tax-exempt status of some benefits to attract and keep employees. Employees, on the other hand, rightly expect employers to manage their payroll taxes accurately. Employees should be able to trust their employers not to deduct income taxes on the value of benefits that should not be taxed. Mistakes in the taxation of benefits may ultimately lead to conflicts and hurt a business’s bottom line.

Tax Treatment Of Various Benefits

Both employers and employees may benefit from, and must understand, taxation responsibilities and advantages associated with employee benefits. In a nutshell, consider the following rules of thumb:

  • Fringe benefits should be taxed and taxes on their value should be withheld along with other payroll taxes.
  • Unemployment insurance and workers’ compensation premiums that employers pay on behalf of employees are not taxable income for the employees.
  • A business may be able to deduct workers’ compensation premiums, payments and benefits from its own taxes as legitimate business expenses.
  • When injured workers receive workers’ compensation benefits, these are not normally taxed, although some exceptions may apply.
  • Employer-paid health insurance premiums are not normally counted as taxable income.

The above general summary is not intended to cover all areas and instances of taxation or nontaxation of benefits with regard to employees or employers. To understand your obligation as an employer to get these and other tax matters right, consult with a knowledgeable attorney. Clients of RAS Law, P.C., can count on attorney Rick Szczebak to correctly evaluate their businesses’ obligations, explain requirements efficiently, and guide human resource (HR) personnel and other responsible parties in the correct withholding and depositing of payroll taxes on benefits as required by law.

Seek Knowledgeable Guidance In Benefits Taxation

Attorney Richard Szczebak literally wrote the book on this area of employment law for employers, as he authored the 4th edition of the Bloomberg BNA Tax Management Portfolio on Section 125 Cafeteria Plans. Businesses and other law firms throughout the Boston area and statewide in Massachusetts look to Mr. Szczebak, a respected authority on taxation of employee benefits, for clear direction on taxation and employee benefits. To request a needs assessment for your Massachusetts business, call 866-463-2979 or complete a simple online form.