Employee Benefits and Pension Costs
Copyright 2010 by Morris Rosenthal - - contact info
Copyright 2010 by Morris Rosenthal
All Rights Reserved
Schedule C Deductions For Employing Workers In Your Business
Warning: These pages are not intended as professional advice. They are presented "as is", reader beware!
The main thing to remember if you are a sole proprietor with employees is it doesn't matter what you call yourself, whether you have a modest job title, even report to one of the people you hired. If you are a sole proprietor, you are not an employee, and you cannot take a Schedule C tax deduction for any benefits or "wages" you pay yourself. But your contribution to the benefits you give your employees are deductible ,including health insurance and the other qualified benefits in the table below. Note that payments to health insurance plan that includes yourself may be deductible on the front of Form 1040, but it has to be a business plan, which health insurance providers in many states will not sell to a sole proprietor without employees.
Pension benefits provided to employees get their own line on Schedule C, and again, if you've made contribution to a pension plan (IRA, SEP, 401K) on behalf of yourself, they aren't Schedule C deductions. You will be able to deduct your own pension contributions that fall within the legal limits on the front of your 1040, but that deduction is only good against your Federal income tax, it won't reduce your state tax or self employment tax. See Publication 560 to find out if you have to file a form 5500 or 5500EZ.
Salaries and wages you pay to employees are full deductible on Schedule C, but not any wages you paid yourself. If you want to be able to pay yourself a fixed salary, exclude some amount of your gross income from social security taxes and be able to get a partial deduction for health insurance, forming an S Corporation is probably the way to go.
Don't forget to check the "What's New - Disaster Areas" paragraph of Schedule C to see if the government is running any giveaways for your area this year, like retaining employees after a flood, etc. I have a friend who was basically ruined by a cheap loan program he couldn't resist, following a disaster that should have shut him down. With the "free" government money, he kept his restaurant going without any customers until he ran through the loan and his savings, and ended up living underground for a decade. TANSTAAFL.
Cafeteria plans amount to a-la-carte fringe benefits with the option to select cash instead. The theory is the amount of cash you give the employee reflects what a selection of benefits would have cost you, but you leave it to the employee to either purchase those benefits or do what they want with the money. In this instance, the fact that an employee accepts cash for what otherwise would have been a non-taxable benefit (usually insurance, but also employee discounts, gym facilities and a few other items), does not make the cafeteria plan taxable. However, if the plan favors highly paid or key employees, the cash gets included in their wage reporting. The table below is from IRS Publication 15 B.
The main tax exempt benefit most employers in the US give their employees is health insurance. The benefit is a tax deduction for the employer, but it's not a taxable benefit for the employee. That's the long way of saying the private health insurance purchased by employers in the US is subsidised by workers without health insurance benefits through the higher tax burden they carry, whether through cumulative government deficit or actual robbing from Peter to pay Paul. If you're self employed with no employees, no health insurance, and grossing over thrity thousand and under a hundred thousand a year, you're paying a higher tax rate on your income than anybody else, and some of it is going to pay for the benefits of the time servers.
Planning A New Business | Estimating Business Taxes | Schedule C Deductions | Car Expenses | Freelancer and Contractor Payments | Section 179 Depreciation and Form 4562 | Employee Benefits and Pension Costs | Professional Services, Business Taxes and Fees | Hotel and Travel Expenses | Deducting Food and Entertainment | Inventory and Cost of Goods Sold | Sole Proprietor Statistics | Home Office Deductions | Self Employment Tax | The Self Employed Sole Proprietor