The Tax Cuts and Jobs Act of 2017 makes some significant changes to employee benefits which may cause employers to rethink their compensation plans.
The Act limits the deductions employers can claim for employee benefits. Previously, employee transportation benefit programs allowed employees to use pretax dollars and their employers to deduct their own contributions for employees’ qualified mass transit, parking and bike benefits. Effective 2018, the Act eliminates the employers’ deduction for employees’ qualified mass transit, parking and bike benefits. It also eliminates the employer’s deduction for onsite gyms and achievement awards (cash and cash-like awards). Effective 2025, payment of moving expenses will not qualify as a business deduction or tax exclusion for the employee and employee meals prepared onsite will not be deductible.
The Act eliminates employees’ ability to deduct unreimbursed miscellaneous itemized business expenses on their personal tax return. Employees may still receive nontaxable reimbursement from the employer but, if the employer does not reimburse the business expense, that expense is no longer deductible by the employee.
Previously, commissions and performance-based compensation were not subject to the $1 million limit for individual compensation that publicly traded companies can deduct on their tax returns. Now, the Act has amended this IRS code to include commission and performance-based pay and to expand the number of senior level employees to whom this limitation would apply.
The law also creates a paid leave tax credit for employers for certain employees who are on leave under the Family Medical Leave Act. The credit is allowed when the employer pays at least half of the wages for at least two weeks to an employee who is on FMLA leave. It only applies to employees who earn below $72,000 per year. The employer is entitled to a tax credit of between 12.5% and 25% of the cost of each hour of paid leave depending on how much of the worker’s regular earnings the paid leave is intended to place. The credit is 12.5% if the paid leave represents half of the employee’s wages and up to 25% for full wage replacement.