In the wake of an economically grim year, many organizations will be looking for ways to minimize their expenditure as much as possible. But with their employees also facing hardships and a still uncertain future, most organizations don’t want to cut costs at the expense of employees.
One way brokers can help their clients cut costs without causing their employees to suffer is by helping them reduce tax liabilities. In fact, reducing employer tax liabilities is an opportunity to invest more in employees -- a win-win solution.
Helping clients understand tax liabilities
Most of your clients are probably familiar with tax liabilities, the total amount of taxes they owe to the IRS, state and local governments. It encompasses their income taxes, employment taxes, capital gains tax and any past taxes that are owed.
What organizations may not realize, however, is that they can make strategic decisions that decrease their tax liability. Here are a few methods you can share with your clients. These typically take one of two forms: reducing taxable income and receiving tax credits.
Taking advantage of deductions
Remind your clients to take advantage of all possible tax deductions. These include, but are not limited to:
- Expenses for personal vehicles used for business
- Cell phone bills for phones that are used primarily for business
- Costs of operating a business from home, if applicable
- Partial costs of meals or entertainment for clients, partners, contractors or employees
- Contributing to retirement plans
For larger companies, the last item is going to be what makes the biggest impact on their bottom line, so let’s dive into that a little more.
Reducing taxable income: IRA and 401(k) contributions
Setting up and contributing to a 401(k) or IRA can help reduce taxes while providing additional benefits to employees.
Since retirement accounts are employee benefits, the expenses paid into them are tax deductible. Also, since contributions and profit-sharing dollars go directly into the retirement account, they do not count towards taxable wages and lead to lower payroll taxes.
There are also tax credits available for your clients who contribute to retirement accounts. For example, in 2021 employees can receive a maximum tax credit of $500 per year when a 401(k) or SIMPLE IRA plan with automatic enrollment.
Offering and contributing to 401(k) or IRA plans for employees is a great option for your clients looking to reduce tax liability because it both lowers taxable income and creates an opportunity for tax credits.
What’s even better is that this option is also beneficial for employees. They can contribute pre-tax dollars to retirement savings, which is a high priority for a lot of individuals.
Expanding benefits options
Another way your clients can reduce their tax liability is by halting pay raises to avoid an increase in payroll taxes. They may be hesitant to go this route since it sounds like a punishment for employees, but the goal is to replace the raise with improved or expanded benefits.
For example, offering more paid days off in the upcoming year essentially allows employees to be paid more per day they actually work, without increasing taxable payroll.
Expanding benefits offerings to add customizable, flexible options is another route to go. Employees will respond well to the value added in benefits that specifically help their unique situations, even without an increase in their paychecks. You can share this recent article with your clients to give them ideas for customizable and flexible benefits they can offer.
Remember, one of your roles as a broker is to provide guidance for your clients when they need it the most. After a pandemic-plagued 2020 that left organizations struggling to get back on their feet, they need that guidance more than ever. Helping them reduce tax liability is a great way to help them protect their bottom line without sacrificing anything for their employees, who need support during this time too.