Employer Contribution in Benefits, Payroll & Compensation

Instructor: Timothy Sprague
In this lesson, learn about the various types of employer contributions towards benefit plans, payroll taxes, and employee compensation while exploring the common types of plans most employers contribute towards. We will also detail different tax relief incentives offered to employers currently participating in such programs.

Employer Contribution Benefit Plan

One of the most exciting perks about any employer is probably their benefits plan. Today, many companies are beginning to offer an employer contribution on many types of benefits packages in order to give added incentive to the employee.

An employer contribution is any amount of money the employer decides to pay into a specific benefits option. One of the most popular types of employer contributions revolves around retirement plans, especially 401(k) plans, where an employer is likely to contribute a 'match' on the amount of money the employee put in towards a retirement savings plan (up to a certain percentage, that is).

Of course, there are many other types of benefits that include employer contributions, such as Employee Stock Ownership Plans (ESOP), which is a special type of benefit that gives ownership interest of the company to the employee. Imagine not only working for Apple, but owning a share in their company. Pretty nice, right?

One more common type of an employee benefit that includes an employer contribution is a profit-sharing plan. A profit-sharing plan is another incentive that allows employees to receive a percentage of the company's profits but only as the company experiences increased revenue. So find a company that offers this reward, work hard, and enjoy that added bonus after your next annual review!

Payroll Taxes and Compensation

Aside from just benefits, an employer is also mandated by federal law to contribute towards payroll taxes.

Social Security and Medicare

Many employees are unaware that their employer actually pays a rather large percentage of their Social Security and Medicare tax. In fact, employers are required to contribute 6.2% of their employee's Social Security bill and another 1.45% for Medicare. Let's take a look at how that breaks down on an average salary:

Say Juan makes $40,000 a year. His portion of Social Security equates to 6.2% and for Medicare, 1.45%.

Annual Compensation $40,000
Less Medicare @ 1.45% ($580)
Social Security @ 6.2% ($2,480)
Total Tax Liability ($3,060)

Now, let's take a look at how the employer contribution breaks down in this case:

Annual Compensation $40,000
Less Medicare @ 1.45% ($580)
Social Security @ 6.2% ($2,480)
Total Tax Liability ($3,060)

As we can see, Juan's employer will end up contributing $3,060 in annual tax expenses for every employee making at least $40,000. That's not a bad deal, for the employee, anyway!

Transit Costs

Another employer contribution program growing traction in the workforce is tied to commuter and transit costs.

For many of us who use our cars to get to work each day, traffic can be hectic at best. This doesn't even account for the growing pollution that mass commuters contribute each day!

This is why many employers have offered to contribute toward what are commonly referred to as ride-share programs, a commuter program that offer employees discounts on public transportation, compensation for those who participate in car-pools, and even contributions towards their down-payment on an electric vehicle. Now that's not a bad way to roll!

Let's go ahead and take a minute to review how a typical ride-share program works in terms of employee payroll and compensation.

Example

Say Juan decides he wants to opt in for his employer's Ride-Share program and offer to pick up a co-worker or two on his way to the office. This would likely make Juan eligible to receive mileage compensation on his paycheck.

Let's assume Juan's employer is very generous (and environmentally conscious) and offers Juan a dollar for every mile his car-pool initiative adds to his commute. If Juan's car-pool adds just five miles a day, and he works five days a week, that means Juan would pick up an extra $25 a week on his paycheck ($5 per mile x 5 workdays = $25).

Annually, that's $1,300! ($25 a week x 52 weeks). As we can tell, it doesn't hurt to become active in the world of employer-compensation programs!

Now, let's take a look at how some of the contribution programs we just discussed have a positive impact on your employer!

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