Source: RSM US LLP.  PBMares is a member of RSM US Alliance. 

ARTICLE | October 10, 2023

Labor shortages, wage inflation and the rise of worker expectations around employee experience: If these factors are hampering your ability to attract and retain talent, you’re not alone. To address them, many organizations are reassessing their compensation and benefits packages.

What you may not know is there are tax implications that should be included in these benefits discussions. After all, taxes are part of the cost of labor.  Understanding them will help you to keep liabilities in check; ensure compliance with local, state and federal regulations; and, perhaps most importantly, strengthen the return on your investments in talent.

If any of the five scenarios below apply to your organization, a thorough review of your employee benefits is in order.

1. Your business has grown significantly

For many small businesses, employee benefits plans are limited and straightforward. But as these organizations grow, basic salary and wages are replaced by plans with greater complexity. If your company doesn’t review those plans for the tax implications, it could end up paying more than expected.

Enhancing employee benefit packages can help attract and retain top talent, which you’ll need for continued growth. However, offering equity and other fringe benefits adds complexity, so the right tax advice is important. By understanding the full cost of an employee’s compensation and benefits package, you’ll be better equipped to determine ROI for spending on employees, which is central to a sustainable workforce strategy.

Another change that impacts growing organizations is equity or other long-term incentives for key employees. Stock options are one example. If your company has not had anyone exercise their options, your team may not know what’s required of them the first time it happens. Beyond determining a process for verifying and issuing options to the employee, there are tax considerations both the company and the employee will want to understand.

Just over half of executives surveyed in 2023 said their hiring needs over the next year would be significantly to moderately higher.  While that figure has declined compared to a year earlier, it remains high.

“We have had a very tight labor market. The demand for labor has been high, while the supply of labor has been a lot lower than the pre-pandemic level. That imbalance provides a lot more bargaining power to the workers.”

Tuan Nguyen, RSM economist

2. You want to retain employees in a competitive market.

Benefits packages can make a big difference in your ability to draw and retain talent, especially with members of the management team and other high-value employees who may be tempted to leave for other opportunities. Sometimes this means coming up with creative solutions, but in all cases, your tax and finance departments need to know exactly what each benefit entails and how that will impact the company’s overall tax liabilities.

Especially with leadership positions, job seekers may expect equity arrangements as part of their package. Some organizations may hesitate to offer equity as part of compensation because they don’t want to dilute their ownership. An experienced tax advisor can help by suggesting ways to mimic equity without issuing shares.

58% percent of midsize companies gave raises in the second quarter of 2023, holding steady with last quarter. Those expecting to boost wages over the next six months increased from 64% to 72%.

3. You now have more remote, hybrid and traveling employees.

In a tight labor market, many organizations are using the flexibility of remote and hybrid models to attract and retain talent. But from a tax perspective, where your employees are working matters.

If an employee logs in to work from someplace other than your offices, your employer reporting responsibilities for both income and payroll taxes may differ. Organizations may fail to realize these taxes are owed for several reasons, and getting your human resources, tax and finance teams on the same page about the location of your workers is an important step in addressing those oversights.

Another category of worker with special tax implications is the traveling employee. Whether they travel inside the U.S. or abroad, if they’re “on the clock” while in transit, you need to monitor the impact on your tax liabilities.

Among senior middle market executives surveyed in RSM’s MMBI 2023 Workforce Report, 74% allow for hybrid work and 54% provide an option to work full-time off-site.

“Employees care a lot about flexibility. How do you turn that into part of a compensation package when it’s not directly part of compensation, but it is value? Flexibility is value to a lot of people.”

Anne Bushman, Partner and leader of the Washington National Tax compensation and benefits group

4. Your compensation and benefit packages have been the same for years.

Many organizations don’t think about the tax implications of benefits plans because the same policies have been in place for years. If “it’s always just been this way” is your answer to questions about benefits, it’s time for a review.

The reality is your current tax and finance teams may not even know certain legacy benefits exist. Comprehensively reviewing employee benefits plans and establishing clear communications between HR, tax and finance can address knowledge gaps and facilitate compliance.

Midsize organizations boosted payrolls in the second quarter of 2023, with 50% increasing hiring, up from 47% in the prior quarter.

5. You’re concerned about compliance with IRS or Department of Labor requirements.

No organization wants to be out of compliance, especially when it comes to tax regulations. But even an experienced team may be unaware of what’s owed and to whom. Bringing HR, tax and finance together and seeking professional tax advice can ensure your team is aware of oversights.

Sometimes a review of benefits plans is triggered by a new employee who comes with prior knowledge of plan tax requirements. In other cases, inconsistencies or reviews will prompt taxing bodies to audit your organization. If possible, it is always preferable to be proactive and approach the IRS or other taxing authorities with your discovery and a plan for repayment.

If possible, it is always preferable to be proactive and approach the IRS or other taxing authorities with your discovery and a plan for repayment.

Review your plans for opportunities and risks

If one or more of the above scenarios applies to your business, it may be time for a review. The tax world is wide, and tax consulting for compensation and benefits packages is just one specialty in that very wide world, so it’s understandable many don’t know all the rules.

Seeking professional tax guidance and aligning HR, tax and finance together are important steps that can help you:

  • Attract and retain talent for crucial roles with the right employee benefit plans
  • Factor tax liability into cost equations and right-size spending on compensation and benefits
  • Avoid the penalties associated with local, state and federal tax noncompliance
  • Prevent communication and morale issues with employees who may receive incorrect payroll reporting
  • Map how your workforce strategy can scale with your business

Schedule an assessment with an RSM advisor now to uncover the opportunities and risks associated with your current compensation and benefits plans.

This article was written by RSM US LLP and originally appeared on 2023-10-10.
2022 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.


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