Understanding Employee Benefits

Many employees receive a paycheck without realizing the full range of benefits available to them through their employer. Whether you work in healthcare, e-commerce, creative industries, or professional services, understanding your employee benefits is essential for maximizing your income and minimizing your tax burden.

At Velin & Associates, Inc., we often meet W-2 employees — from dentists and doctors to YouTubers, Amazon business owners, and Shopify store operators who employ staff — who are unsure of how their benefits work or how they impact their taxes.

Let’s break down the most common types of employee benefits, how they affect your taxable income, and how to make the most of them in 2025.

What Are Employee Benefits?

Employee benefits are non-wage compensations provided to employees in addition to their regular salaries. While your paycheck is subject to taxes, certain benefits may be excluded from taxable income, helping you save more money overall.

These benefits can include:

• Health insurance coverage
• Employer contributions to retirement plans
• Educational assistance
• Fringe benefits
• Workers’ compensation
• Paid time off and more

Many benefits allow employees to use pre-tax dollars to cover expenses such as healthcare premiums, dependent care, or transportation costs — lowering your taxable income and ultimately, your tax liability.

🚗 Fringe Benefits: Beyond Salary and Wages

Fringe benefits are additional forms of compensation given to employees for their services. Examples include:

• Use of a company car for personal commuting
• Free or discounted travel
• Memberships in clubs or gyms
• Vacation perks, event tickets, or company-paid meals

In most cases, these benefits are taxable unless they qualify for specific exclusions. The taxable amount is typically the fair market value of the benefit, minus any amount the employee pays toward it.

📍 Example:
A YouTube creator’s assistant is allowed to use the company’s production vehicle to commute between film locations. The fair market value of that benefit (e.g., mileage equivalent) may need to be reported as income unless the usage is strictly business-related.

For employers — whether you run a dental practice, a Shopify store, or a film production company — properly classifying and reporting fringe benefits helps avoid IRS penalties and ensures compliance with payroll tax laws.

💰Workers’ Compensation: Protection in Case of Injury

If an employee is injured on the job or develops an occupational illness, workers’ compensation provides essential financial protection.

This program covers:

• Wage replacement benefits during recovery
• Medical treatment and rehabilitation
• Disability payments (if applicable)

While the Department of Labor’s Office of Workers’ Compensation Programs (OWCP) administers federal benefits, most employees working for private businesses or state/local governments are covered under state workers’ compensation laws.

📍 Example:
A dental hygienist in Los Angeles who develops wrist strain from repetitive work may qualify for medical benefits and partial wage replacement under California’s state workers’ comp program.

🏥 Health Plans and Insurance Benefits

Employer-provided health insurance is one of the most valuable benefits available to employees. When an employer pays for your health insurance premiums (including coverage for your spouse and dependents), those payments are generally not considered taxable wages — meaning you don’t pay income tax, Social Security, or Medicare tax on that portion.

However, there are exceptions. For example, S-corporation shareholders owning more than 2% of the business must include the cost of employer-paid health insurance in their taxable wages (although they may still deduct it on their personal tax return).

Employers can also offer long-term care insurance and COBRA coverage to extend benefits if an employee leaves or transitions out of the company.

📍 Example:
A medical practice CPA client offers group health coverage to its employees. The premiums are paid with pre-tax dollars, reducing the overall taxable income of both the employer and the employee.

For self-employed individuals or freelancers — such as TikTok influencers, Amazon sellers, or filmmakers — individual health coverage remains deductible under certain conditions, though not treated as an employer benefit.

🎓 Educational Assistance Programs

Education-related benefits can be both valuable and tax-advantaged. Under an educational assistance program, an employer can pay for an employee’s tuition, books, and other educational expenses — up to $5,250 per year tax-free.

These programs must be formalized in writing and apply equally to all eligible employees. Payments can cover undergraduate or graduate education, and under the One Big Beautiful Bill (OBBB), they can even include student loan repayments made directly to a lender on behalf of an employee.

📍 Example:
A CPA for creators client — a Los Angeles media company — reimburses an employee for film editing courses and pays $3,000 directly toward that employee’s student loan. These payments are excluded from taxable income under current law.

For employees, this benefit helps them advance their career without the financial strain of additional education debt.

Why Understanding Benefits Matters

Failing to understand or utilize your available benefits could mean missing out on thousands of dollars in potential savings each year.

For instance:

• Paying for medical insurance with pre-tax dollars reduces taxable income immediately.
• Contributing to a retirement plan lowers current-year taxes while building long-term security.
• Taking advantage of education reimbursements or fringe benefits can help fund professional development and personal expenses tax-free.

Many workers never take full advantage of these opportunities simply because their employers never explained them clearly.

How Velin & Associates Can Help

At Velin & Associates, Inc., we specialize in helping employees and employers understand and optimize their compensation packages and tax positions.

Whether you’re:

• A doctor or dentist reviewing benefit options for your practice
• A YouTuber or TikToker managing employee compensation
• A Shopify store owner providing benefits to remote workers
• A freelancer transitioning to W-2 employment

…our team of experienced CPAs in Los Angeles can guide you through every detail — from benefit taxation and payroll setup to deduction strategies that make the most of your income.

Final Takeaway

Employee benefits aren’t just “extras” — they’re a crucial part of your financial well-being and tax planning. Understanding which benefits are taxable, which are excluded, and how to use them effectively can make a significant difference in your overall financial picture.

If you’re unsure whether you’re making the most of your benefits, or if you need help structuring benefit programs for your business, our team is here to help.

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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