In the modern economy, more and more households are hiring domestic help, whether it's a nanny, caregiver, or housekeeper. These household employees play a crucial role in keeping our lives running smoothly, and it's important to recognize their dedication and hard work. One effective way to show appreciation and also maximize tax savings for you, and your employee, is by offering a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) or an Individual Coverage Health Reimbursement Arrangement (ICHRA).
Understanding Health Reimbursements: A Win-Win for All
QSEHRA and ICHRA are tax-advantaged benefits which allow small employers, including household employers, to provide a tax-free reimbursement to their employee(s) for qualified medical expenses, including health their insurance premiums. This arrangement benefits both the employer and the employee, creating a real win-win situation.
Employer Benefits: Tax Savings and Retention
The contributions made to the QSEHRA/ICHRA are not subject to payroll taxes for the employer, reducing their overall tax liability. This means more money in your pocket that can be reinvested into other areas of your household employee’s compensation or saved for future household needs.
Moreover, providing benefits like a QSEHRA or ICHRA can improve employee satisfaction and retention. When household employees feel valued and supported, they are more likely to remain in your employ. Offering a QSEHRA/ICHRA not only helps attract top talent but also ensures that your household staff can access necessary medical care without the burden of high healthcare costs.
Employee Benefits: Tax-Efficient Healthcare Coverage
For household employees, a QSEHRA or ICHRA offers a valuable opportunity to access healthcare coverage in a tax-efficient manner. As an example, a nanny who earns approximately $52,000 per year.
Without a QSEHRA/ICHRA, her total income would be subject to income tax and FICA tax. However, with a QSEHRA/ICHRA in place, a portion of her income designated for qualified medical expenses, including health insurance premium, can be excluded from her taxable income. This results in a lower overall tax liability, enabling her to keep more of her hard-earned money, while also having a health care plan in place.
Example Tax Savings Calculation:
Without QSEHRA: Annual Salary: $52,000 Income Tax Rate (approx. for a single filer with no dependents): 22% (varies) Social Security Tax: 6.2% Medicare Tax: 1.45%
Total Taxes (Approx.): $10,232 (excluding state and local taxes)
With QSEHRA: Assuming $4,000 designated for medical expenses through QSEHRA Taxable Income: $52,000 - $4,000 = $48,000
Total Taxes (Approx.): $9,456 (excluding state and local taxes)
Tax Savings with QSEHRA: $776
In this simplified scenario, the employee saves around $776 in taxes annually by utilizing a QSEHRA. This not only makes healthcare more affordable but also contributes to her overall financial well-being.
Offering a QSEHRA or ICHRA to your household employee is a smart and compassionate choice. It provides tax savings for both the employer and the employee, enhances job satisfaction and retention, and ensures that your employee can access essential healthcare coverage without undue financial strain. As the modern economy continues to evolve, embracing innovative solutions like the QSEHRA or ICHRA can help create a more supportive and sustainable working environment for all parties involved.
Reposted with permission from Home Work Solutions (https://info.homeworksolutions.com/)