One of the common questions I hear is, “Wouldn’t your employees rather have higher pay checks and less benefits?” It’s true that more individual choice is often the better route, and I’m a fan of pushing the decision making down as far as possible. There’s two factors at play here 1) the culture of the company with it’s values and 2) the government’s tax code. Assuming the company places a high value on great benefits, let’s look at how the tax code promotes employer paid benefits.
Take an example benefit of $1,200 per year per employee for housecleaning provided to all employees:
- Employer paid benefit cost: $1,200
- Employee paid benefit cost: $1,200
Plus employee paid federal income taxes (~30%): $514
Plus employee paid state income taxes (~6%): $77
Plus employee paid payroll taxes (~6%): $77
Plus employer paid payroll taxes (~6%): $77
Total cost for the employee paid benefit including the employer’s taxes: $1,945
So, for the employee to pay for the same $100 per month housecleaning on their own, it costs a total of $1,945 to be paid by the employer to a combination of the government and the employee. For the employer to pay directly for the employee’s housecleaning, it costs $1,200, or 38% less. There’s a serious difference between employee and employer paid costs for benefits.
What else? What are some other thoughts on the cost difference between employee and employer paid benefits?