Providing Employee Benefits

You are free to choose whether to provide benefits, such as paid time off, health insurance, or a retirement plan, for your employees. There are good reasons why you might choose to provide employee benefits.

You have a legal obligation to do so. For example, every state except Texas has a workers’ compensation law that requires employers to participate in a program that compensates employees injured on the job.
Other employers competing for the same employees offer benefits as part of their compensation package.
You want to obtain the benefits for yourself or your family, but are required to provide them to some or all employees either to get them or to get them on a tax-favored basis.

If you can afford it, consider offering some benefits, at least those necessary to match what other employers are providing. Local custom and industry practice may almost require you to offer a benefit package similar to what's available elsewhere.

When you provide employee benefits, you may incur direct costs, such as health insurance premiums, and indirect costs, such as decreased productivity when someone takes paid time off. Also consider the time and cost of administering some benefits. Closing your business on a federal holiday doesn't involve much in the way of administration, but other benefits, such as health insurance, almost require a formal plan.

You can take a tax deduction for the cost of many types of benefits, and your employees can exclude their value from taxable income. Because the government is picking up part of the cost, you actually pay less for the benefits than if the employees purchased them individually.