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Come tax time, you'll want to deduct as many business expenses as you can.
There are many deductible expenses related to having employees. To make sure
you don't miss any, read on.
Employee Pay
You can, of course, deduct the money you pay to your employees for their services.
Typically, this will be the gross amount of your employees' paychecks for the year.
You can also deduct bonuses and commissions, and vacation pay and sick pay that isn't
covered by insurance.
Reimbursements
Maybe you reimburse your employees for business-related expenses, such as airfare,
lodging, meals and entertainment. Or perhaps you advance money to cover such costs.
In either case, you can deduct these expenses. There are some limitations, however.
You can deduct only 50% of any meal and entertainment expenses, even if you reimburse
your employees for 100%.
The IRS requires you to carefully monitor these reimbursements and advances. Make
sure your employees account for them within a reasonable time after incurring them.
Get receipts, and have your employees promptly return any excess amounts.
Payroll Taxes
As an employer, you must pay certain payroll taxes, including the following:
- The employer's share of Social Security and Medicare taxes.
- Federal unemployment tax.
- State payroll taxes, such as state unemployment tax.
You can deduct these payroll taxes as employment expenses.
Workers' Compensation Insurance
Most states require your business to carry workers' compensation insurance. Even if
it's optional, you should spring for the coverage. It pays wage and medical benefits if
an employee is injured at work or suffers a work-related illness. You can deduct the
cost of this insurance.
Education and Training Costs
You can deduct what you spend for training your employee. This includes the cost of
educational seminars related to the business.
Association Dues and Subscriptions
If you pay for your employee's membership in a trade association, or for subscriptions
to business publications, you can deduct these costs.
Equipment and Furniture
You can deduct the cost of equipment and furniture that you buy for your employees to
use while conducting business for you. This might include, for example, a desk, chair,
lamp and computer.
Ordinarily, you're supposed to depreciate the cost of equipment and furniture by
writing it off through tax deductions over a number of years. This is known as
depreciation.
But another method allows you to write off the entire cost during the year in which
you first use it. This option is called a Section 179 deduction. In 2008, you can
immediately deduct up to $128,000. Using the Section 179 option, you won't need to
fiddle around with depreciation schedules and the record keeping they entail.
Inexpensive Gifts and Benefits
The IRS lets you deduct certain low-cost benefits that you occasionally provide
to your employees. Examples include the following:
- Occasional cocktail parties, company meals, or picnics for employees and guests.
- Traditional birthday or holiday gifts of property (not cash) with a low fair-market
value: for example, a turkey at Thanksgiving.
- Occasional theater or sporting event tickets.
- Coffee, doughnuts and soft drinks.
- Flowers, fruit, books or similar property you provide to your employees under
special circumstances: for example, because of illness, outstanding performance
or family crisis.
- Occasional meals, meal money or local transportation to enable your employees
to work overtime. For example, ordering a pizza to be eaten at work or paying for
a taxi ride home.
You can't deduct cash or cash equivalent benefits, such as use of a gift card, charge
card or credit card, except for occasional meal money or transportation fare.
Other Fringe Benefits
Your business can deduct fringe benefits in addition to the minimal-cost benefits
just described. Examples include adoption assistance, educational assistance and
group life insurance. For details, see IRS Publication 15-B, Employer's Tax Guide
to Fringe Benefits, available at
www.irs.gov.
Bookkeeping and Accounting Expenses
You may prefer to farm out all or part of your accounting work. You may, for example,
sign on with a payroll service, or retain a bookkeeper or accountant to relieve you
from payroll and tax compliance chores. If you hire such outside help, your business
can deduct the cost.
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