6 Tax Perks of Group Benefits for Small Businesses

For small businesses, offering group benefits can feel like a double-edged sword—there's the potential to attract top talent, but the price tag can seem intimidating. Still, what many small business owners might not realize is that offering group benefits doesn’t just help with recruitment and retention. Besides those reasons, group benefits have a lot of tax advantages. These tax perks can make providing benefits like health insurance and retirement plans are both affordable and strategic. Contrary to quick projections, group benefits might be an actually low-cost way for small businesses to stand out in the hiring market without sacrificing their bottom line.

In this guide, we’ll go deeper into how offering an employee benefits package can help small businesses attract top talent, improve employee retention, and reduce turnover. We’ll particularly focus on the tax advantages that can lower your company’s costs and explore different types of group benefits for small business, from a health savings account to retirement benefits, that you can offer your team.

What Are Group Benefits for Small Businesses?

Group benefits refer to a set of perks that businesses provide to their employees, usually as part of a comprehensive compensation package. A typical group benefits package includes options to cover qualified medical expenses, provide retirement plans, life insurance, dental and vision coverage, and various wellness programs.

Offering these benefits helps level the playing field for small businesses competing with larger corporations. While these types of organizations might not be able to offer the same salaries as big firms, a solid small business benefits package can be a compelling reason for employees to join and stay with a company. Employees are often looking beyond just the paycheck—they want the security that comes with health coverage or the peace of mind that a retirement plan offers. Actually, three out of four workers say the benefits package offered by an employer is very important in their decision to accept or turn down a job.

On top of employee satisfaction, there are tax incentives available that can make offering these perks more cost-effective for your business. We'll go deeper into this advantage right away.

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Why Group Benefits Are a Smart Choice for Small Businesses

Group benefits are a smart move for small businesses because they can truly help your company stand out in today’s globally competitive job market. First off, offering competitive benefits packages, like health insurance plans, retirement plans, and wellness programs, can significantly raise employee satisfaction. When employees feel secure and taken care of, they’re more likely to stick around and feel motivated at work, which means less turnover and better morale overall​.

On top of keeping employees engaged, small business employee benefits also come with some key tax perks. For example, health insurance premiums and retirement contributions are usually tax-deductible, which can help save your business a lot of money. Plus, there are credits available for companies offering health benefits.

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Tax Perks of Group Benefits for Small Businesses

Understanding these tax perks that can positively impact your small business's bottom line can help you make informed decisions about your employee benefits strategy. Let’s take a look at some of the key tax advantages that come with providing group benefits.

Deductible Premiums

One of the most straightforward tax benefits is that the premiums paid for group health insurance are typically tax-deductible. This means you can subtract these costs from your taxable income, which can reduce your overall tax burden. For small businesses operating on tight margins, this deduction is particularly beneficial.

Payroll Tax Savings

When you contribute to employee health benefits, those contributions are generally not subject to Social Security and Medicare taxes. This can lead to a considerable payroll tax savings that frees you to reinvest those funds elsewhere in your business or to support other employee benefits.

Tax-Free Benefits for Employees

Some fringe benefits offer tax-free advantages to employees. With certain benefits, like when they are given a company car, employees might be exempted from paying federal income tax on the value of these benefits. This indirectly improves their compensation package—not necessarily their salary, but their compensation. And it also indirectly positively impacts retention and morale.

Retirement Plan Contributions

Contributions you make to employee retirement plans, such as 401(k)s, are also tax-deductible. Additionally, employees can make pre-tax contributions, which reduces their taxable income and encourages long-term savings. This dual benefit makes retirement plans an appealing option for both employers and employees.

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit rewards employers for hiring individuals from specific target groups, including veterans and those facing significant barriers to employment. If you provide fringe benefits to these employees, you can potentially qualify for a federal tax credit, which can help offset your tax liability.

Small Business Health Care Tax Credit

If your business has fewer than 25 full-time equivalent employees and offers health insurance, you might be eligible for the Small Business Health Care Tax Credit. This credit allows you to claim up to 50% of your contributions toward employee health insurance premiums, which will significantly reduce your tax bill. It's one of the easiest and most affordable ways to cover medical expenses and provide health insurance. It's a part of the Affordable Care Act.

How to Maximize Tax Benefits Through Group Benefits

Maximizing tax benefits through employee benefits for small business can be straightforward with the right approach. Here are some tips to help you get the most out of your benefits program:

1. Get to Know What Employees Need

Start by finding out what your employees value most. Use surveys, employee assistance programs, or focus groups to collect feedback. Listening to your team helps to make sure that your benefits actually meet their needs. It might be something that employees already have access to, but they'd prefer if the company sorted it out for them. For example, a survey showed that 70% of employees prefer to buy insurance coverage through their employer.

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2. Set a Realistic Budget

Establish a budget for your benefits program. Consider how much you can afford while also looking for benefits that offer tax advantages. Exploring options like employee stipends can provide flexibility without overwhelming costs.

3. Get Creative with Benefits

Don’t just stick to the usual offerings. Think about unique perks that could appeal to your employees, such as wellness programs, mental health coverage or remote work stipends.

4. Communicate Clearly

Make sure all employees know what benefits are available to them. This is a long-standing problem for HR. Most times, surveyed employees admit they don't know or understand their benefits. And when they understand them, they might think employers missed the mark. In a SHRM poll from some years ago, almost a third of employees replied that they didn't perceive value in their benefits. So HR should always make their measures public.

Manage Benefits with HR Software to Relieve Your Tax Burden

In short, offering group benefits can offer significant tax perks for small businesses. From deductible premiums and payroll tax savings to tax-free benefits for employees and contributions to retirement plans, these perks can help you expand your employee offerings while alleviating your tax liability. On top of that, options like the Work Opportunity Tax Credit and the Small Business Health Care Tax Credit further support your efforts to create a competitive benefits package.

As a small business owner, it’s worth taking the time to explore and implement these group benefits. Plus, you can consider implementing an HR software platform to automate the tedious part of employee benefit administration. This option is no longer only affordable for large corporations, TalentHR offers a specialized solution for small business that can significantly improve your people management experience without making you break the bank!

Register now for free and start making the most out of TalentHR!