United States

Employment tax and employee benefits: 5 issues for growing companies

A growing workforce means growing tax and employee benefit challenges


A growing business usually means a growing head count. Accurately understanding and effectively managing the tax challenges of a growing payroll is central to success. Focusing on the following five tax and employee benefit issues will allow business leaders to properly staff for business growth without creating unnecessary headaches.

1.     Make sure you know whether you are adding employees or utilizing contractors

Many growing businesses rely on independent contractors instead of hiring employees under the assumption that this approach allows for greater flexibility and is a “win-win” for the business and the worker. Contractors can bring the skills you need while minimizing your payroll tax and employee benefit expenses. Calling someone an independent contractor does not make them one, however. You need to consider a series of questions relating to the control you exercise over these workers to determine whether they actually qualify for contractor classification. Federal and state tax authorities are being increasingly aggressive in targeting workers who are inappropriately classified as contractors, and the costs if workers are reclassified as employees can be significant.

While adding employees does bring additional cost, it may also make your company eligible for tax credits or other business incentives. From hiring to training incentives, there may be opportunities to offset some of the hard costs of employment through federal or state programs. Understanding your options can help you determine your most effective hiring strategy and develop tax efficiency related to workforce growth.

2.     Use incentive compensation to drive growth

When employers think of incentive compensation programs, they often think only of their managers and executives. But an increasing number of employers are discovering the benefits of broad-based incentive programs that encourage all employees to drive growth. The key? Understanding exactly which employee behaviors you want to encourage, determining how you can measure them and then designing a plan that rewards workers for results—while still satisfying all related tax obligations. Think outside the box for your key players, too. For many growing companies, especially closely held businesses that don’t want to dilute control through more typical equity incentive plans like stock options, non-qualified deferred compensation plans can offer attractive ways to allow key personnel to share in the success of the company.

3.     Get creative with your employee benefits

Finding the right people to drive your growing business is hard. Turnover makes it harder. Having the right compensation and benefits programs may help you attract and retain talent. Many employers are finding that today’s millennial generation may favor different benefits, causing a need to reevaluate the overall compensation package or employment experience for workers. Cafeteria plans, which give employees more flexibility in creating a customized benefits mix, may be one option. While traditional benefits, such as health and retirement programs still matter, be creative. For example, repaying student loans is a concern for many younger workers, so some employers are adding student debt repayment to their compensation packages. Some often-overlooked options, such as mentorship programs, can be offered at little or no cost but still affect the employees’ work experience. Many employee benefits follow specific tax rules so once you decide on options to provide, pay attention to the rules in order to receive the most beneficial tax treatment.

4.     Understand payroll, even if you outsource it

Growing companies are usually focused on innovation—matching the right products and services with the right opportunities. By comparison, managing payroll seems pretty mundane. But if you think simply hiring a payroll service means that your payroll tax obligations are going to be handled effectively, think again. Payroll servicers structure their agreements to insulate themselves from as much potential liability as possible, and their services are always limited by the information you provide to them. You must still understand the rules and keep appropriate records. As the employer, you are the withholding agent, not your payroll vendor. If something goes wrong, it will likely cost you, not them. It may not be exciting, but investing the resources to ensure that your payroll tax obligations are being met is vital.

5.     Don’t forget employment issues when you go across borders

Growing your business often means pursuing international opportunities, but as your employment footprint crosses borders, your employment-related tax challenges grow exponentially. Many employers that expand abroad fail to fully understand their obligations and total employment costs until it is too late. Social taxes, the possible ramifications of tax equalization agreements, how employees can affect permanent establishment status and a host of other issues must be understood and addressed to control your tax exposure and that of your employees. One example: an employee’s salary may not be the only thing exposed to tax when that employee moves to another jurisdiction; many other sources of wealth that the employee has may be, too—and you might end up footing the bill if you have a tax equalization agreement that isn’t appropriately drafted. Another example involves living allowances and other items which are subject to social taxes in some jurisdictions—failing to understand the rules could result in significant additional expense for you and for your employee.   

As you plan to build your business and expand your workforce, these are some of the critical areas where employment growth and tax considerations intersect. Read our additional insights for more about how tax plays a role in your growth strategy