Heads up: this article is only relevant for U.S. businesses.
Employee benefits, compensation, and perks are generally tax deductible. Here’s an overview of what you may be able to deduct in this category.
Whether you’ve hired a single part-time assistant, or ten employees who perform everything from marketing to order fulfillment, the cost of employee pay is deductibles.
Keep in mind, the cost of employee pay needs to be ordinary and necessary for the type and size of your business. The IRS requires that the wage and salary costs you claim be “reasonable” for the role the employee is performing, so you won’t be able to deduct any pay that the IRS deems excessive. The IRS will determine whether the pay is “reasonable” by comparing it to salaries for similar roles, among other factors.
Vacation pay, sick time, and disability benefits
You can deduct these costs as long as the employee doesn’t also get compensated for the same loss of pay from insurance or another source.
As long as the cost of the health insurance plan you provide for employees isn’t greater than the business’s net profit, you’re able to deduct the costs.
Your business is able to deduct the amount that they contribute to the employee’s retirement plan.
Employee education expenses
Offering educational opportunities to employees is a great way to improve the overall skill level of your team. It can also increase job satisfaction amongst your team. Thankfully, you can deduct education expenses as long as the cost is ordinary and necessary to maintain or improve the employee’s skills for the business. The IRS wants these investments to go towards making your business more successful and profitable in the long-term. If the cost meets this requirement then it can be deducted whether you paid for the education outright, or you reimbursed the employee.
Claiming these expenses
How you claim these business expenses will depend on your specific business structure.
- Sole proprietorships and single-member LLCs use the “Expenses” section of Schedule C.
- Partnerships and multi-member LLCs use the “Deductions” section of Form 1065.