How to Choose Employee Benefits?

In Finland, typical fringe benefits include meal and commuting benefits and communication devices. Many employers wish to provide more extensive selection and benefits may vary widely.

Selecting employee benefits is a multifaceted process that requires consideration from various perspectives. This blog provides insights and tips on the topic from the standpoint of HR, payroll, and financial management. We will also discuss the tax implications of different benefits, how they affect employees' salaries, and the overall costs these benefits incur for employers.

Employee Benefits from HR's Perspective

From an HR perspective, factors such as the industry and work environment influence the choice of employee benefits. Below, we explore other influencing factors:

1. Variety of Benefits and Employee Preferences

Employee benefits can encompass a wide range of possibilities, such as flexible working hours and locations, extended occupational healthcare, as well as education and recreational benefits. It is crucial to select benefits that employees truly value and that support their well-being both at work and outside of work. Listening to employees and considering their wishes are key when choosing benefits.

2. Employer Image and Recruitment

Well-designed employee benefits can enhance the employer's image and facilitate recruitment. Especially in competitive situations, distinctive benefits can attract top talent. It's important to consider what types of benefits to highlight and how to present them to potential employees.

3. Budget and Costs

The selection of employee benefits is limited by the budget. It's advisable to assess the costs of different benefits in advance and the workload they generate to make cost-effective decisions. When choosing benefits, it's good to prioritize those that provide the most value relative to their cost.

4. Importance of Communication

Employee benefits must be communicated effectively so that all employees are aware of them. It is unfortunate if well-designed benefits go unused due to poor communication. Sometimes benefits are also seen as self-evident and not recognized as advantages. Regular communication and reminders about benefits help keep them visible and appreciated.

5. Equity in Benefits

Benefits should be equitable for all employees in the same role. If there are operations in multiple countries, it is important to ensure equality among employees working in different countries. For example, if a benefit offered in Finland cannot be provided in Sweden, how is it compensated?

Payroll Perspective

1. Tax-Exempt Benefits and Employee Profitability

One of the key questions is whether the benefit is tax-exempt or tax-advantageous for the employee. It's good to note that many collective benefits are tax-exempt, while individual ones are taxable. Typical examples are total salary packages that include a wide range of different benefits. Practically, an agreement is made in the employment contract on the cash salary, which includes all fringe benefits. The cash salary can then be partially transferred, for example, to housing or car benefits. If, for instance, rent is deducted from the salary, significant tax advantages can arise.

2. Social Costs

The tax exemption of benefits and social costs often go hand in hand. Costs can be over 20 percent. There are exceptions: for example, stock and option benefits are typically taxable but not subject to social security contributions.

3. Increase in Other Salary Components

Taxable benefits can also increase other payroll costs such as holiday pay and overtime compensation. The impact of fringe benefits depends on the collective agreement (TES), so it is good to check what is agreed upon in the industry’s TES. The total salary solution is usually cost-neutral.

4. Additional Work and Administrative Costs

Managing benefits can create additional work in payroll processing. For example, handling a phone benefit is simple, but calculating and reporting car and bicycle benefits and allocating option benefits can be more complex and labour-intensive. This increases the risk of errors and administrative costs.

Financial Management Perspective

From a financial standpoint, there are two approaches to benefits: considering the existing budget for benefits and evaluating the costs of selected benefits for the employer. Here we discuss the costs of benefits.

1. Total Costs and Tax Practices

From a financial management perspective, the most cost-effective benefits are those with easily determinable total costs and predictable tax practices. Retrospective corrections are costly, especially in terms of work time, depending on whether payroll is outsourced or handled in-house. There may also be direct penalty payments or other sanction-like costs. Clarity helps in budgeting and reduces administrative work.

2. Direct and Indirect Costs

Employee benefits incur various costs such as purchase price, VAT, and employer side costs for taxable benefits. Indirect costs, such as payroll costs and purchase invoice handling fees, should also be considered, as they can accumulate unnoticed depending on how labour-intensive the benefits are. Some benefits also incur more than one-time costs. For example, maintenance and service costs may arise sporadically and should be considered as well.

3. Tax Deductions and Exceptions

Personnel costs related to wages are deductible in corporate taxation, meaning the company gets a 20% tax benefit and does not bear the full cost. Exceptions include situations deemed as hidden dividends, which mainly concern owner-entrepreneurs.

4. VAT on Purchases

VAT is a consumption tax and has a deduction right when purchases are made for taxable business activities. When a purchase is part of employee benefits or fringe benefits, it is generally considered private consumption, limiting its deductibility. Exceptions include employer-organized training or recreational events during working hours.

Summary

Choosing employee benefits is a balancing act between employee preferences, company budget, and administrative costs. It is important to consider the tax and social costs of benefits and their impact on total payroll costs. Clear communication and equity in distributing benefits are crucial to ensure that benefits provide maximum value to both employees and the employer.

When considering employee benefits, it is good to take into account the perspectives of HR, payroll, and financial management to make sustainable and cost-effective decisions. This ensures that employee benefits support the company’s strategic goals and promote employee well-being and satisfaction.