Recently I published a series of short blog posts on the topic of payroll processing for small businesses. In summary, I’ve suggested that today’s automated payroll services are a fantastic value but that coördination and oversight by a small business compensation professional helps avoid problems and penalties that stem from miscommunication. I’ve suggested that the minimum price of this service with professional oversight should be about $75 per month or $900 per year for the smallest businesses. Of course, larger firms with more complex requirements may incur higher costs.
This post explores ways to have the payroll service assist with the implementation of tax reduction strategies that can offset the cost of the payroll service itself. While the specifics of wage taxes can vary, this post generalizes for the sake of clear communication.
Employers must pay 7.65% of their wages as a federal wage tax. States assess more taxes on employer’s wage base. Then on top of these wage taxes employers must pay workers compensation insurance premiums based on the wages. For the sake of simplicity in this discussion, this blog post assumes that employer expense on wages adds 10% to the cost of the wages paid. So an employer who pays $9,000 in wages pay an additional $900 in taxes and workers compensation. It follows then that an employer who can reduce taxable wages by $9,000 saves enough to offset the entire $900 cost of the payroll service. But how can this be accomplished?
Employees of small businesses typically spend about 10% of their take home pay on medical expenses. Some pay additional amounts on dependent care and education expenses. Federal tax law allows employers to set up employee benefit plans that exclude these expenses from taxable wages. The names of popular benefit plans are Health Reimbursement Arrangements, Health Savings Accounts, Flexible Spending Accounts, Simplified Employee Pensions, and more. Taken together, these benefit plans make up the safest and surest tax shelters allowed under the law.
Regardless of the specific type of benefit plans chosen, there are four steps required to achieve the employer tax savings;
- Plan the benefit to meet legal requirements and the employer’s goals
- Document the plan in writing
- Communicate and enroll employees
- Coordinate with the payroll processing service to avoid wage taxes.
A small business compensation planning expert can handle these steps efficiently; often at little cost above the regular payroll processing fees.
How does this work? Consider an example of a small business employer that has annual wages of $100,000. The business then sets up an employee benefit plan that lets employees convert $10,000 of their existing after-tax expenses into pre-tax reimbursements. The employees save about $2,000 on wage taxes* and the employer saves about $1,000. This is more than enough savings to the employer to offset the entire annual cost of the payroll service, essentially making the payroll service pay for itself.
I can handle all four of the steps above for small business clients to ensure a smooth transition and lock in the expected tax savings. To learn more, please schedule a complimentary telephone discussion.
*The details of employee tax savings are not discussed in this blog post but are covered in other earlier blog posts.