What Small Business Owners Need to Know About Offering Employee Benefits

Done right, a thoughtful benefits package can boost employee morale, reduce turnover, and even unlock meaningful tax advantages for small business owners. In today’s market, it’s a strategic investment. 

Below, we’ll break down the key types of employee benefits, how they impact your taxes, and how to make offering them easier for your business. 

Types of Employee Benefits Explained 

Health Insurance 

Health insurance remains the number one benefit employees look for. Covering medical, dental, and vision expenses helps protect your team from significant financial strain and makes your company much more attractive as an employer. Offering even basic health coverage sends a strong message: your business is invested in employee well-being. 

Options for small businesses include: 

• Group Health Coverage 
  This is one of the most common ways small businesses offer health insurance. You choose a plan through a provider and share the premium costs with your employees, often splitting it 50/50 or using a fixed employer contribution model. These plans typically offer better rates than individual coverage because risk is spread across the group. Over 60% of Americans get their health insurance through employer-sponsored plans, making it a familiar and highly valued benefit among workers. 
• Health Savings Accounts (HSAs) 
  These accounts are available only to employees enrolled in a high-deductible health plan (HDHP). Contributions are made pre-tax, grow tax-free, and can be withdrawn tax-free when used for qualified medical expenses including copays, prescriptions, and many over-the-counter items. Funds roll over year to year and can be invested, making HSAs a strong option for long-term healthcare savings. 
• Flexible Spending Accounts (FSAs) 
  FSAs are also funded with pre-tax dollars, but they’re generally tied to traditional health plans and must be used within the same plan year (some plans allow a short grace period or a small rollover). Like HSAs, withdrawals are tax-free when used for eligible medical or dependent care expenses but unused funds typically don’t carry over. 

Retirement Plans 

A strong retirement plan shows employees you're invested in their future and encourages them to stay long-term. 

Options include: 

• 401(k) Plans: Employees contribute pre-tax earnings, and employers can offer matching contributions. Funds grow tax-deferred, meaning employees won’t pay taxes on contributions or investment earnings until they withdraw the money in retirement. 
• IRA-Based Plans: SIMPLE IRAs or SEP IRAs offer tax advantages for both employers and employees with easier administration.  The employer should be able to provide resources for further understanding of how these work. 
• Paid Time Off (PTO): Paid time off, including vacation days, sick leave, and parental leave, has become an expectation, not an extra.  Offering PTO supports employee work-life balance, improves retention, and reduces burnout. Companies that prioritize time off often see gains in both morale and productivity. 

Other Perks 

Small perks can make a big difference in building a positive culture: 

• Gym memberships or wellness stipends 
• Childcare support 
• Education reimbursement for continuing education 
• Professional development opportunities 
• Free lunches or office snacks 
• Pet-friendly policies 
• Profit Sharing 

Creative, thoughtful perks can help your business stand out without dramatically increasing costs. 

Understanding the Tax Benefits for Employers 

Offering employee benefits doesn’t just support your team. It can also deliver substantial tax savings for your business. 

Deductibility of Benefits 

Most employee benefits are considered fully deductible business expenses. Examples include: 

• Health insurance premiums you pay for employees 
• Employer contributions to retirement plans like 401(k)s or SIMPLE IRAs 
• Tuition reimbursement or educational assistance programs 

These deductions lower your taxable income, helping you reduce the amount you owe at tax time. 

Payroll Tax Savings 

Contributions to retirement accounts, FSAs, and HSAs lower the amount of employee wages subject to Social Security and Medicare payroll taxes.  This reduces your overall payroll tax liability and helps your employees save on their own taxes too. 

Tax Credits and Incentives 

Eligible small businesses may qualify for the Small Business Health Care Tax Credit, which can cover up to 50% of the premiums paid for employee health insurance.  This credit directly reduces the taxes you owe and makes offering health insurance even more affordable. 

How to Build and Manage a Benefits Program 

Setting up a benefits package might sound complicated, but it doesn’t have to be. You don’t need to manage every moving part yourself.

Working with a benefits broker or HR consultant can simplify the process. They can help you choose appropriate plans, negotiate better rates, ensure compliance with labor laws, and guide you through open enrollment. Having an expert involved also helps you avoid common pitfalls that can trip up even well-meaning employers.

Using a Payroll Provider 

Managing employee benefits manually can quickly become overwhelming, especially as your team grows. That’s why many small businesses choose to work with a payroll and benefits provider to streamline the process.

A good payroll provider can help automate critical tasks like:

• Payroll deductions for employee benefits
• Direct deposit processing
• Benefits enrollment and updates
• Tax filings, compliance reporting, and recordkeeping
• Year-end forms such as W-2s and 1095-Cs

Automating these functions reduces administrative errors, saves time, and ensures your business stays compliant with evolving tax and labor laws. 

Platforms like Gusto, Paylocity, and ADP are some of the most popular platforms that many small businesses use to manage payroll, benefits, and HR in one place. These tools can simplify complex processes, making it easier for business owners to focus on operations and growth. 

Choosing a provider ultimately depends on your specific business needs, team size, and the level of service you’re looking for. Whatever platform you select, working with a payroll provider can be an important step toward offering competitive benefits while keeping your processes organized and compliant. 

The Bottom Line 

Offering employee benefits isn’t just about making your team happy. It’s an investment in your business’s growth and stability. 

A strong benefits package can help you attract better talent, retain valuable employees, boost productivity, and unlock valuable tax deductions and credits. With modern payroll and benefits, managing your program is simpler than ever.  

If you’re ready to build a benefits package that works for your business, schedule a consultation with DiMercurio Advisors to discover the solution that works best for you.