5 Legitimate Ways to Reduce Payroll Tax as an Employer
Published December 22, 2022.
As a business owner, you should always be looking for ways to increase revenue and reduce costs, while making sure you maintain payroll compliance with local laws. One of the biggest costs businesses have are payroll taxes, which refer to the employer's tax obligation related to their employees' compensation. Payroll taxes are used to fund federal programs like Social Security and Medicare, which is why they're seen as crucial by the government.
Still, implementing certain tax-saving strategies can help you reduce the total payroll tax you pay while keeping employees satisfied and your business compliant. Read on to learn about multiple legal strategies business owners can use to reduce the amount of payroll tax they pay.
» What type of tax should employers pay? Learn about income tax vs. payroll tax
How to Save Money on Payroll Tax as an Employer
Before deciding where and how to cut down, there are some considerations employers should take. This includes determining whether you’re a small business owner, as different strategies may be available for larger companies. Additionally, it's important to properly classify your employees, as different tax rules apply based on employee status.
Regardless, there are some universal strategies you can implement to reduce your payroll tax burden:
1. Work With Independent Contractors
Hiring independent contractors is one of the easiest legal ways to reduce payroll taxes, as employers don’t need to pay any employment taxes on the income they give out to freelancers and other contractors. Moreover, contractors can be paid on a per-project basis, which gives employers much more control over their payroll costs. However, it's important to avoid employee misclassification when hiring contractors, as this can lead to fines and other legal implications.
» Want to convert independent contractors to employees instead? Here's what to consider
2. Offer Tax-Exempt Fringe Benefits
Fringe benefits are rewards employers give to their employees beyond salaries and wages, such as health insurance, retirement plans, and more. In certain situations, these can be offered on a tax-exempt basis if they meet specific criteria set by the Internal Revenue Service (IRS). By carefully positioning fringe benefits as tax-exempt contributions, you can lower your payroll taxes without affecting employee satisfaction and jeopardizing workplace culture.
3. Use an Accountable Plan for Employee Reimbursements
Under an accountable plan, employers can give their employees a certain amount of money to cover all of their work-related expenses, such as travel and training. This is an excellent way to reduce payroll taxes, as employers don’t need to pay them on these reimbursements. However, it's important to properly document all reimbursements under the plan to avoid any legal issues.
4. Improve Employee Retention
Retaining valuable employees can be one of the most effective ways to reduce payroll taxes, as it decreases overall turnover costs and allows businesses to avoid paying taxes on the income they give out to newly hired employees.
In most cases, it's much cheaper to keep existing talent and reward them than to hire and train new employees through efficient onboarding processes. In addition to cost savings, retaining current employees can lead to better productivity and team morale, which is why businesses should make employee retention a priority.
5. Offer Remote Work
Employers willing to give their employees more flexibility in terms of where and when they work can enjoy significant savings. By allowing employees to work remotely at least some of the time, businesses can avoid payroll taxes on certain benefits related to commuting. Additionally, offering a remote work option can give employers access to a much wider talent pool.
In addition to reducing costs, offering your employees the option to work remotely has a number of benefits, including:
- Drastically improved worker satisfaction: Employees that have the option to work remotely usually have a better work-life balance, leading to higher satisfaction and better results down the road.
- Increased productivity due to less time spent commuting: On average, employees waste around 30–40 minutes a day commuting, amounting to 5–10 days spent commuting on a yearly basis. Instead of wasting this time on commuting, employers can give their workers these 5 days as paid time off, leading to improved productivity and satisfaction.
- Reduced office overhead: Overhead expenses usually refer to telephone bills, repairs, supplies, and utilities. Having at least some of your employees work remotely can quickly add up, putting substantial amounts of money in your business's pocket.
- A decrease in unexcused absences: Employees that have to commute usually call in sick when they don't feel 100% healthy, as they'd rather rest than commute. On the other hand, remote employees could just continue working from home when they're feeling better, as all they have to do is sit at their home desks.
» Considering hiring remote employees? Here's how to set up their payroll
Reduce Payroll Tax and Save Money in the Long Term
Although reducing payroll taxes can be a difficult task, it’s far from impossible. By following the methods outlined above and being mindful of different legal regulations, employers can take advantage of several strategies that allow them to save money while providing their employees with fair wages. In some cases, it might be beneficial to even hire a tax professional to oversee the entire process and help you minimize costs.
It's also worth mentioning that using a payroll software solution to handle the cumbersome payroll process could be quite helpful. By implementing automated payroll software, businesses can quickly and accurately calculate all payroll taxes (and other types of spending) while remaining compliant with all relevant tax laws and regulations.
» Want to reduce payroll tax more easily? Read TBR's payroll software reviews and find the right solution to help you along the way.