Nonprofit organizations provide services to the public and do not receive a profit from their business. Some nonprofits, such as educational, religious and charitable organizations, may also not be required to pay federal taxes. However, there is some confusion when it comes to employee benefits and whether they are tax-deductible.
Compensation for Nonprofit Employees
There are a number of ways that nonprofit organizations can save at tax time. Some of the largest deductions available to these businesses relate to employee wages and benefits. Employee compensation is often one of the most substantial annual expenses of a nonprofit and can account for a considerable portion of its budget.
The type of employee will be a major determining factor in how tax deductions are addressed. Volunteers are generally not paid and therefore, cannot be considered for tax deduction purposes. However, if an organization hires a subcontractor for a project or event, these labor costs may be considered a tax-deductible expense.
Board members within a nonprofit organization may also be able to claim some benefits on their personal tax returns. Certain travel-related expenses related to business activities or meetings may be tax-deductible. However, the nonprofit as a whole cannot use payments to these individuals as a write-off.
Taxable and Nontaxable Employee Benefits
Employee benefits refer to benefits or perks provided to an employee on top of their regular wages or salary. The Internal Revenue Service (IRS) considers most employee fringe benefits to be taxable compensation which must be reported on tax forms.
Some of the most common taxable fringe benefits include discretionary bonuses, gym memberships, moving expenses, employer-provided cell phone, meals and lodging, non-business-related travel expenses, group-term life insurance with more than $50,000 of coverage, housing allowance and reimbursement for classes unrelated to work.
While most fringe benefits are subject to taxation, a select few are considered nontaxable. Nontaxable fringe benefits are not subject to federal income tax withholding, Medicare, Social Security or federal unemployment tax (FUTA).
Some of the most common examples include adoption assistance, dependent care assistance, disability insurance, employee stock options, education assistance, health savings accounts (HSAs), retirement planning services and qualified transportation benefits.
It is important for nonprofit organizations to approach fringe benefits with caution. Unless a benefit is specifically exempted by federal law, the IRS may require the business to report the benefit as income. Failure to do so could result in penalties.
Tax Advantages of Offering Employee Benefits
The benefits that a nonprofit organization offers could be the deciding factor in whether a qualified candidate chooses to accept the job or turn to a different organization. However, nonprofits must be careful not to overextend their budget when choosing fringe benefits. Some of the offered perks will not only benefit employees, but also the employer. It is important to understand these tax advantages before deciding which options are best suited for the organization.
Some IRS-qualified employee health plans can provide nonprofit organizations with tax advantages. For health insurance coverage to be tax-deductible, the business must meet specific criteria established by the IRS.
Starting January 1, 2015, organizations with 50 or more full-time employees are required to provide affordable health care coverage as part of an employer shared-responsibility mandate covered under the Affordable Care Act (ACA). To qualify, a business must pay for at least 50 percent of their employee’s health care coverage costs and the annual wage paid must be below $50,000. Companies with fewer than 50 workers can purchase a health plan through a state or federal insurance exchange.
Life insurance premiums paid out by businesses are also considered tax-deductible business expenses if the insured on the policy are officers or employees within the organization. Tax laws also dictate that the organization cannot be a direct or indirect beneficiary of the policy for it to be tax deductible.
Businesses that offer group term life insurance to their employees are eligible to deduct premiums on the first $50,000 of benefits for each employee. This arrangement benefits both employers and employees as the benefit is more affordable and lessens the financial strain on the company.
Section 125 plans can also be useful for nonprofit organizations that want to reduce their tax bill. Also known as a Cafeteria Plan, this benefit allows employees to convert their taxable benefits into non-taxable benefits by having them deducted from their paychecks before any taxes are taken out. Section 125 plans are particularly beneficial to employees with ongoing medical or childcare needs.
Employers can also benefit from Section 125 plans. Many employers can benefit from tax advantages with this plan, such as savings on FICA taxes paid, and on any state or federal unemployment tax bills. There are also other types of employee benefits that are completely tax deductible for nonprofit organizations, such as employee assistance programs.
An employee assistance program (EAP) provides employees with support resources for certain personal issues they may be experiencing. From chronic depression to substance abuse, employers can choose to help their employees gain more control over their problems and gain the help they need to recover.
Valuable employee assistance programs can have a positive impact on employees’ work performance and can reduce turnover costs. When employees are doing well, it can also cut down on health insurance claims, worker’s compensation claims and mental health claims. Since EAPs are tax-deductible, they are a great choice for nonprofits.
Speak With An Experienced Benefits Consultant
Being a nonprofit organization offers certain tax advantages that are not available to for-profit companies. Organizations that are considered public charities under Internal Revenue Code 501(c)(3) may be eligible for payment exemption of corporate income tax.
These organizations are generally exempt from similar local and state taxes which helps these businesses to operate within their budget. Some nonprofits may also be eligible for other types of financial reprieves based on their location, size, industry or other identifying factors. To learn more about if nonprofit employee benefits are tax deductible or to speak with an experienced benefits consultant, contact Business Benefits Group today.