How do I lower Federal income taxes for business by providing employee benefits?

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Answered by: Mike, An Expert in the Business Taxes Category
One strategy to lower federal income taxes a business pays to the government is by providing benefit plans to employees. Not only is there a benefit from lower federal income taxes, but in addition, employees are better compensated and thus more motivated and committed to the company.

Setting up an employee health insurance plan takes money that would have gone to taxes and instead is spent on providing medical coverage for employees and their families. The employees of the company are more motivated and committed to the pursuit of the company’s financial performance because they are receiving direct benefit that is very real and on their minds.



In today’s world, the cost of medical care is extremely high and seems to grow more expensive by the day. This burden to provide for medical care for employees and their families weigh on workers and contribute to their stress levels. By providing this peace of mind to employees, the company gains not one, but two benefits. The first is financial in the form of spending profits to better provide for employees instead of paying taxes to the government. The second benefit to the business is the increase in productivity from employees who are less stressed and more dedicated and committed to the company because of the additional benefit they are receiving in the form of the employee health plan.

There are a number of employee health plans a business can maintain for their employees that are tax deductible. Medical plans can be provided by the business to their employee’s and because of the expense, most plans require an employee contribution. The company pays a portion of the cost of the medical plan and the cost is deductible as a business expense on the business’s federal income tax return. The health plans can include medical, dental and vision coverage.



An example of providing a health plan for employees is as follows. For tax years beginning after December 31, 2010, certain small businesses that offer cafeteria plans to their employees may be able to qualify the cafeteria plan as a simple cafeteria plan. This will allow the plan the applicable nondiscrimination requirements of a classic cafeteria plan to be treated as satisfied. A simple cafeteria plan is a cafeteria plan that is maintained by an eligible employer and which meets certain requirements for contribution, eligibility and participation.

To be able to establish the simple cafeteria plan, an employer who employs an average of one hundred or less employees for either of the first or second preceding year is considered a small employer and, thus, able to establish the simple cafeteria plan. This then would satisfy the nondiscrimination rules for a regular cafeteria plan. In summary, a business can lower federal income taxes by providing health plans to employees. The business gains two benefits from this tax reducing strategy.

First profits that would pay federal income taxes to the government are spent instead on employees. The second benefit results from the first, where the employees are more motivated and committed to the company because of the benefits they are now receiving.

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