There are several fringe benefits that small business owners consider. If you can afford the relatively high cost (many companies find that a package of benefits can add 20% to 30% to the cost of labor), fringe benefits can help retain the loyalty of good employees, and may give you a tax break in some circumstances.

Health insurance is the most common benefit offered by small businesses. To help subsidize the cost, many business owners deduct a portion of the premiums from employee paychecks. There may be state laws limiting how much of the cost you can pass on to employees. Your insurance agent should have all the forms necessary to set up a group plan, authorize payroll withholding, provide proper employee notification, etc.

To help cut your costs, you can adopt a Section 105 plan, which is one of the few which require no government filings. The only item you can run through a Section 105 plan is the health insurance premiums. You must have a written plan on file to prove that your company has adopted the plan. Alternately, you can adopt a medical reimbursement plan to reimburse selected employees for medical costs that are not covered by health insurance. Both you and the employee can receive some tax relief by using a medical reimbursement plan. The Section 105 plan provides income tax relief for the employee, but does not cut any of your tax bill. If you provide group health insurance, be aware that you must offer continuing coverage up to 18 months after an employee leaves your company under the COBRA law. However, you can bill the former employee up to 102% of the premium costs.

Health insurance can also be provided as part of a more comprehensive package of benefits under a Section 125 plan, usually referred to as a cafeteria plan. The plan will need to file its own annual tax return (a Form 5500), but this type of plan can cut your payroll tax bill, and will save employees both payroll and income taxes. The easiest way to provide a cafeteria plan is to hire a third party administrator to manage all the paperwork hassle.

Like the name sounds, the cafeteria plan allows employees to select from a menu of tax-free benefits. Each employee can select something different, or mix and match benefits to meet their own unique needs. The employee pays for the benefits with salary reduction elections via an irrevocable election that is made at the beginning of the year. However, the tax code requires a "use it or lose it" approach - i.e. any unused monies will revert to the employer (not the employee). The types of benefits currently allowed are:

You need not offer all of these benefits. The company can choose which benefits to offer.