Yes, corporate wellness programs are tax deductible expenses in the United States. Although you might not find a line for “wellness programs” on a Schedule C or an 1120 corporate income tax return, these expenses fit into existing categories of allowed write-offs.
In the United States, the IRS has for a long time allowed employers to write off the perks that it provides to employees, covering many wellness programs. In addition, employers have been offering tax-free health insurance coverage to employees since the 1940s.
Also, some health insurance companies offer corporate wellness programs for an additional premium. Workers can choose to include the wellness program in their coverage. If you as an employer you pay employee’s premiums or part of the premiums you can write off this expense on your company’s taxes.
You can also tie some wellness programs to an achievement in the United States. For instance, you can set a goal of a specific cholesterol count for employees. You can also set weight, lung-capacity or walking-distance goals. The reward for these achievements can be cash or a reduction in the employee’s share of health insurance payments. Any reward your company pays in a wellness program is also tax deductible.
Also have it in mind that you can offer corporate wellness program that doesn’t include specific achievements by employees. It can be simply reimbursing the cost of joining a fitness centre or offering a waiver of co-payments for preventive care such as prenatal examinations. These costs are tax deductible as part of your business expenses.
The items you buy such as massage chairs can also be tax deductible if the wellness coordinator or a physician recommends them. If you can get documentation from a qualified wellness provider that says specific equipment is part of the program, you can write off this expense.
However, the IRS has warned employers that many popular wellness incentives are not tax-free health plans, but instead are taxable to employees. In recent years, in a legal memo, the IRS considered three scenarios under which an employer provided wellness program incentives to employees. The three types of incentives the IRS identified as taxable are:
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3 Types of Corporate Wellness Incentives That are Taxable
- Employee cash rewards for participating in wellness programs as an extra bonus under an otherwise qualified accident and health plan. Note that the wellness program provides health screening and other health benefits. Additionally, employees who participate in the program may earn cash rewards or benefits that do not qualify as deductible medical expenses, such as gym membership fees.
- Employees’ contributions to a wellness program by salary reduction through a Sec. 125 cafeteria plan. Have it in mind that employees who participate in the program may earn cash rewards that do not qualify as medical expenses, such as gym membership fees.
- Employer reimbursements for employee contributions by salary reduction through a Sec. 125 cafeteria plan. Employees who participate in the program may earn cash rewards or benefits that do not qualify as deductible medical expenses, such as gym membership fees.
The IRS maintains that cash rewards received from the wellness program do not qualify as a reimbursement of “medical care” which can be excluded from an employee’s income. The cash rewards also do not qualify as an excludable fringe benefit.
Howbeit, cash rewards are seen to be payment of wages subject to both income and employment taxes. The IRS also maintain that any reimbursement by the employer of an employee’s cafeteria plan wellness contributions also is expected to be included in the employee’s income and is subject to employment taxes.
How to Deduct Corporate Wellness Programs from Your Company Taxes
The IRS regulations on deducting employee pay and benefits are complicated. Each type of payment has restrictions and qualifications, and every business situation is unique. However, here are few steps to leverage when looking to deduct corporate wellness programs from your taxes.
1. Value Employee Benefits
For most benefits, you are expected to use a fair market value (FMV) rule to determine the cost you can deduct. FMV is the amount an employee would have to pay someone else in an arm’s length transaction to buy or lease the benefit. In addition, the payment amount must be reasonable, based on the circumstances and an amount a similar business would pay for the services, and you must be able to prove that the employee actually performed services for these payments
2. Consider Your Filling Status
How you claim these business expenses will depend on your specific business structure. Sole proprietorships and single-member LLCs use the “Expenses” section of Schedule C, Partnerships and multi-member LLCs use the “Deductions” section of Form 1065, while Corporations use the “Deductions” section of Form 1120 or Form 1120S (for S Corporations).
3. Itemize on your taxes
Also note that you will have to itemize instead of taking the standard deduction. Note that this simple difference can mean spending more time on tax prep, but if your standard deduction is less than your itemized deductions, you should itemize and save money anyway. Also, if your standard deduction is more than your itemized deductions, take the standard deduction and save some time.
4. Always Keep Good Records
Keep all documentation and written recommendations on file in case you have to support your claim for the deduction. The expense for a massage therapist may also be tax deductible if it is recommended by the wellness provider.
5. Consult an Expert
Each type of payment has restrictions and qualifications, and every business situation is unique. Consider looking up the IRS Publication 535 Business Expenses for more details. Also, to be safe, ensure accuracy, and save you from costly errors when filing your business tax return, consider getting help from a tax professional before you attempt to take deductions.
Have it in mind that states like North Carolina and Indiana offer tax credits to businesses that start employee wellness programs. To be eligible for state tax credits, you must demonstrate you are using an approved wellness program. Check with your state to see if this tax credit is available. A tax credit comes off of your tax bill, unlike a tax deduction, which reduces your taxable income. Tax credits are usually more beneficial to a business than deductions.