Although productivity and automation has become more prevalent in the manufacturing world due to technology, the industry remains labor-intensive and more manual than most. Employment costs continue to rise and it is more difficult than ever to hire and retain quality employees.
Fortunately, opportunities exist within the IRC (Internal Revenue Code) that can help limit payroll taxes and boost an employee’s overall compensation package.
Non-Taxable Fringe Benefits
Fringe benefit programs are provided by the employer to the employee, or in this case an independent contractor or partner, in the form of pay for services. The following are examples of fringe benefits that manufacturers might consider offering to an employee:
- No additional-cost services
- Working condition fringe benefits
- Transportation expenses
- Retirement planning services
- Meals or lodging
- Cafeteria plans
- Educational assistance programs
Accountable Expense Reimbursement Plans
Most companies are familiar with expense reimbursement plans – especially in the manufacturing industry. It is important to understand the difference between an expense reimbursement plan and one that is ‘accountable’. Tax legislation provides that reimbursements under accountable plans are excluded from gross income, not reported as wages and not subject to income tax and employment taxes.
Accountable plans have several requirements so it is important to consult with a tax advisor to implement the right plan for you. If implemented correctly, an accountable plan’s reimbursements are not reported as income, so the employer avoids payroll taxes.
Independent Contractors & Temporary Labor Assessment
It is necessary to evaluate if independent contractors and/or temporary labor are cost effective for your manufacturing or supply chain company. You may be surprised at the cost differential for an employee compared to one of these classifications. Though companies see a lessened payroll tax burden for these types of employees, the costs could end up being greater due to a higher rate per hour to cover the independent contractor’s own taxes and fringe benefits. The IRS can also claim that the company misclassified a member of its workforce. Misclassification from independent contractor to employee status can lead to payroll tax assessments, interest & penalties.
For more ways to reduce employment costs, reach out to Rick Rosell, CPA, at Bennett Thrasher. With more than 15 years of experience in the industry, he can help with corporate taxation and tax compliance.