¶ Tax Benefits of Employee Experiences
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Hey , this is Daniel , the founder of Bookkeeping for Painters .
And this is Richard . I am the tax director for Bookkeeping for Painters .
How's it going , daniel , it's going well . How are you doing today ?
I'm doing great , you know . We just got back from our company retreat in Cancun last week , so I got a little son ate some good food , had a margarita and we got a lot of work done too . Yeah , you had more than a margarita , but Well , don't tell the listeners that I don't want to . No , we had a good time , Yeah it's a good stuff .
Yeah , so we do it . Well , we just started doing a yearly event where we bring together the team . We went to Cancun as our first inaugural yearly retreat , So the idea was let's do a planning session with the team face to face , because we're a remote team so we don't see each other in person . We work over Zoom , So that was kind of cool .
Plus , it was in a really nice resort where there was a pool , there was a beach right there , There was a lot of good restaurants all you can eat . It was pretty fun to see the team and get some good planning . We were able to do a one-year plan , So I think it was a success .
Yeah , I think so too . It was definitely great to be able to see everybody and work together . We did get a lot of work done , but we also had a lot of fun as a team , And so I think that helped to draw us closer . So definitely a good use of the week .
Yeah , and this brings us to our topic of our podcast , which is basically how can you use your business as a vehicle to one kind of do some fun things but also get some work done , and do that in a way that is optimized for tax savings ? So why don't you kind of go through , richard , since you're the tax expert here ?
Why might we want to do something like this , where we're doing a yearly event , or maybe it's not going to Cancun , maybe it's just like doing a barbecue , you know , a monthly barbecue , quarterly barbecue , or something on a recurring basis with your team , instead of maybe doing bonuses or something like that ?
Yeah . So I would say the first and probably the most important reason is to build those friendships and those relationships with your coworkers . That cannot be understated . If you take care of your employees , your employees will take care of your customers , and being able to show that appreciation and have that team building is very important .
That being said , i think what you were alluding to is doing that in a way that is most tax advantaged , so that we are getting the most for our money , because we do live in the real world , we have budgets , and we need to be able to stay within those budgets .
So if you are able to budget a certain amount of money to show employee appreciation , your first thought might be well , everybody loves cash , i will throw a bonus in the paycheck , i will hand them a gift card , that sort of thing , and that's great .
The thing to keep in mind , though , is that anytime an employer gives an employee cash or a cash equivalent , such as a gift card , that is considered to be taxable income by the IRS . They are very strict about this , and , unfortunately , there's not really creative ways around it .
If you put money in an employee's paycheck , or if you hand them $1,000 or whatever , you must recognize that as income and it needs to be reported on their W-2 . Why is that so important to the IRS ? Well , they want to be able to tax it , and it's not just income tax , it's also payroll taxes .
So not only is the employee paying normal income tax on that money , they're also paying , you know , 6 . I'm sorry , 7.65% for Social Security and Medicare .
You , as the employer , you're paying 7.65% Social Security , medicare , and now all of a sudden , that $1,000 bonus becomes worth , you know more like $850 or even less after the employee gets done being taxed on it from federal and state .
So a way that you can kind of maximize your budget is by not giving cash but rather by giving experiences , experiences , entertainment , food , trips to Cancun . These are things that can be written off 100% and they are not subject to payroll taxes .
They are not subject to income taxes as long as it is a part of some kind of like bonafide employee appreciation .
So it sounds like , if it sounds like giving cash bonuses is super expensive , super expensive from a tax perspective to the business owner . So when you pay cash to an employee it's gonna cost you a bunch of extra in taxes .
But if you can , instead of doing that , do some sort of experience where you're doing some sort of leadership meeting , employee appreciation , holiday dinner , something like that , it's a lot You basically get around having to pay those extra taxes because you don't have to run a through payroll .
You just hold the experience and as long as it does have a true business purpose like you're doing some planning or you're showing appreciation to your employees it's the benefit of your employees that that can be tax deductible still to you and then it's not getting taxed to your employees . So it's a kind of a win-win , sounds like .
Yeah , yeah , it really is . The thing to keep in mind is it needs to be illegitimate employee appreciation event , and so the way you kind of determine that is is the food , the entertainment , the whatnot is it primarily for the benefit of the employees and their families , or are you expecting to get some kind of like extra business benefit from it ?
So , for example , you rent a hall , you cater a meal , you have a band and you invite your entire company to come and celebrate the holiday with you . That is for the benefit of the employees and their families . You don't have potential customers there .
You're not trying to strike up deals for new work and that sort of thing , which I mean those things have their place and there are certain tax deductions available . But we're talking about bona fide employee appreciation here . The other thing is it needs to be open to most , if not all , of your employees .
So what you can't do is you can't say , just the highly compensated officers who we're all friends with , we're gonna have a party and nobody else gets to come . We don't want to give the appearance that we're somehow getting a big benefit for ourselves and what really should be like a distribution is being classified as employee appreciation .
That's not to say you have to invite everybody . There may be reasons why you want just the officers or directors of your company for an event , but it needs to be have a legitimate business purpose and , generally speaking , it should be open to most , if not all , of the employees . Cool .
Yeah , so it sounds like experience is definitely something we want to do , not only for the tax benefit , but there's also the soft reasons why you'd want to do that . It's just helps build your team , build rapport with your team .
They get to do something cool , maybe go somewhere new , or maybe it's just something simple , like a company barbecue , which could be relatively inexpensive but still build relationships there .
Yeah , i think you can't really understate the importance of the experience . If I'm being honest , if someone gave me $1,000 , i'd be very grateful for it and I would probably use that money to pay my mortgage , pay off credit card debt , utilities , things like that Very important things . but does that bonus really resonate in my mind ?
No , i'm using it to pay bills . If you took $1,000 and you provided me with a really unique experience with my coworkers , building relationships that is something I'm going to remember for a very , very long time and have lasting benefits from . It's just like how can you use your budget the most effectively , especially if you're on a smaller budget ?
Maybe we're not talking about a trip to Cancun but , as you mentioned , daniel , employee barbecues , holiday parties , even just lunch for the team , can go a long way in showing that appreciation and can be rather cost effective if handled properly .
Yeah , and don't think Cancun is too expensive either , because I think the price per room was like $200 a night , but that included all you can eat , you know , for a breakfast , lunch , dinner is all inclusive resort , and so you had access to pool , beach , food throughout the day , alcohol was included and it was like between $200 and $300 per person per night .
So you know you wouldn't get those kind of prices at that quality anywhere in the United States . So don't leave Cancun off the table if you think it would be super expensive , but actually it's pretty inexpensive . If you can , the biggest thing is just paying for the flights .
Yeah , well , i'll tell you my opinion . if I had to choose between going to Cancun or going to Baltimore , especially in the winter , i'd have to pick against Baltimore , but I think the beaches in Cancun are slightly nicer Yeah awesome .
Yeah , it was a good time , All right . well , I think that is about all we were going to cover today . Was there anything else that you wanted to close out with , Richard ?
No , i think that's it . You know just the value of team building and employee appreciation . it really should be an expense that we budget for at least something .
The return you'll get on the investment is going to be great And if you handle it in a way where you know you're really getting a lot for your money and you're avoiding paying extra taxes on it , it can be an important part of operating your business and building those relationships .
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¶ Thoughts on Events and Tax Savings
right . We'd love to hear your thoughts , comments . Maybe you do something similar a yearly event in your business or maybe you're thinking about doing something like that And you have questions about how can I make sure I maximize my savings for tax purposes . Definitely let us know your questions and comments . Go to Grow Your Painting Business Facebook group .
Just search that in Facebook and join the conversation . Love to hear from you .
Yeah , I would love to see your thoughts , And if you have any plans for summer picnics or holiday parties coming up , we'd like to hear about it . Thank you very much for listening and we will see you on the next episode .