Tax Consequences of Employee Benefits

17. 12. 2015

The article concentrates on tax consequences of selected and usual employee benefits, which employers offer to keep their present employees and find new ones. The text does not aim to include and describe all benefits but, by giving numerous examples, to outline the basic 'tax logic' and law application.

At the age of internet and job portals, many people change their jobs more often and more frequently than before. One of the reasons is the fact that present-day achievements enable job applicants to lower the transactional costs, which results in the employers getting under pressure. To cope with these phenomena and in pursuit of finding and keeping the best possible employees, the employers began to offer better working conditions and employee benefits. And it is just the benefits seen through the prism of income tax we shall be focusing on in our text,

One of the most common employee benefits, often provided by employees whose facilities do not boast their own company canteens, are meal vouchers. The basic scheme is fairly simple – for the employer, the vouchers are tax deductible up to 55% of their value and the rest is deducted from the employee's salary. So the only snag is the 70% limit for the maximum tax deductible amount for a meal allowance for a business journey taking between 5 and 12 hours, which is CZK 82. In other words, it means that the maximum tax deductible amount of a meal vouchers is CZK 57.40 with the maximum tax effective amount being CZK104 (the meal voucher companies really issue vouchers of CZK104 value made to order).

Nevertheless, it is necessary to distinguish the provision of meal vouchers to employees to be used in facilities run by other businesses from running of an own canteen. In the latter case, the above-mentioned limits do not apply: the basic rule says that only the canteen operating costs EXCEPT the prices of the food are tax deductible. One can only recommend that the employees should contribute by paying the value of the meals at least.

Other employee benefits, which have widely caught on, are non-financial contributions for cultural, sport or recreational activities of the employees. Commonly, these are gym membership cards or in-workplace pilates or yoga sessions, theatre or football game tickets, spa weeks etc. These benefits are always tax non-deductible for the employer and as such they have to be paid for nett profit. For the employees, however, the benefits are tax exempt not affecting the insurance contributions as long as the non-pecuniary aspect is preserved and the annual limit of CZK 20.000 for tour and holiday is not exceeded.

Yet another thorny issue, often debated in pre-election TV shows, is putting a child to a nursery school since their capacity cannot satisfactorily respond to the demand. Rather a few firms are trying to tackle the issue by running their own preschools or in the form of contributions to other companies providing the 'babysitting' services for the children of their employees. Basically, there are two schemes. One of the options is a "tax-deductible" one for the employer; the employees, however, would have to pay the respective tax and insurance contributions. The other option is, obviously, more convenient – the company preschool operating costs paid by the employer from the income after tax, which would result in the benefit being tax exempted with no effect on the insurance contributions for the employee. It is nobody's choice but the employer's as to which option they decide for. As already pointed out, the latter option is more beneficial for both the employer and the employee in spite of the fact that the Czech Parliament has passed a law addressing the issue with the aim to exempt company preschool provision expenses from the tax. Unfortunately, the corresponding article provides that the non-pecuniary income of the employee may only be tax-exempt only if the supply in question is covered by the employer from the after-tax profit. We can only hope the discrepancy will soon be noticed and rectified.

Many companies also offer non-financial presents on the occasion of significant work-related anniversaries or to appreciate an employee's merits. Such a gift may be virtually anything from a watch to a balloon flight voucher, a coupon for a Christmas tree to collect form a local tree nursery or St Martin's goose from your baker's; these are just a few examples proving that creativity and invention are endless. In respect of taxation, such a present is, up to CZK 2,000, a tax exempt income for the employee, and a tax non-deductible expense for the employer. There are, however, several conditions that need to be met so that the gift may be regarded as such and which are listed in the Directive on the Fund for Social and Cultural Requirements. Otherwise, the exemption might be questioned by the financial authority. Incidentally, these rules are to be followed even by those employers who the aforementioned Directive does not apply to.

To conclude, we may point out that the administrative aspect of the employee benefits as seen from the perspective of taxation is not as difficult and sinister as it may seem at first glance. When being classified, no expensive and complex solutions need to be sought; usually basic logic would suffice, i.e. benefits paid for from the profit after tax are tax exempt for the employee, or vice versa, they are taxed and they influence the national insurance contributions of the employees if they are tax deductible for the employer. Obviously, there are exceptions to this rule, and, again, the law often sets certain limits of the application.

If you face any difficulties in this respect, do not hesitate to turn to us and we shall gladly help you with specific solutions.

Key words: tax, benefit, vouchers, nursery school, a present, culture, sport, recreation

Tomáš Krůl

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