The Employee-Employer Tug of War
Money is tight—always—especially for small business owners. Ever considered a pay alternative to simple wage increases?
Employers and employees are locked in an eternal dance when it comes to compensation. Employees want more money to keep up with inflation, rising costs, and their personal financial goals. Employers, on the other hand, need to balance payroll expenses with profitability. When times are tight, raises may not be a viable option—but that doesn’t mean employees have to go empty-handed.
The good news? There are plenty of creative and tax-deductible alternatives to salary increases that benefit both employer and employee. Not only can these strategies put more value into an employee’s pocket, but they also boost morale, retention, and overall workplace happiness. Let’s dive into a few options that can work for businesses of all sizes.
Pay Alternative 1: Retirement Matching
Future-Proofing Your Workforce
One of the best ways to show employees you’re invested in their future is through enhanced retirement matching. This strategy effectively increases their total compensation without adding to their taxable income.
Let’s break it down:
Imagine an employee earning $70,000 annually with a current 401(k) match of 3%. That equates to a $2,100 employer contribution. If the match is increased to 5%, the employer would now contribute $3,500 per year—an additional $1,400 in retirement savings for the employee without them having to pay extra taxes on it.
For the employer, this contribution is tax-deductible, creating a win-win situation. However, before making this move, businesses should ensure they pass discrimination tests designed to prevent highly compensated employees from receiving disproportionately high benefits. Additionally, for businesses using a SIMPLE IRA, the employer match is capped at 3%, so this strategy may not work.
Pay Alternative 2: Education Assistance
Smart Employers Invest in Smart Employees
Investing in employee education doesn’t just help individuals—it strengthens the business as a whole. Employees who continue learning bring new skills and insights to the company, which can lead to increased innovation and efficiency.
Under an educational assistance program, employers can provide up to $5,250 per year per employee for tuition, books, equipment, and even student loan payments. This benefit is tax-free for employees and deductible for employers. While not required for every employee, the program must not disproportionately favor highly compensated employees or company executives.
For businesses that want to help employees with existing student loans, there’s another great option: Instead of contributing to a retirement match, employers can match student loan payments dollar-for-dollar. This is a financial lifeline for employees burdened with student debt and can be a game-changer in retention and job satisfaction.
Pay Alternative 3: More PTO
Time is Money
In recent years, the focus on work-life balance has skyrocketed. Employees value time off just as much—if not more—than a paycheck increase. Adding extra Paid Time Off (PTO) days can be a cost-effective way to increase compensation without inflating payroll.
Let’s do the math:
If an employee earning $70,000 per year is currently offered 10 PTO days and 8 sick days, increasing PTO by just two additional days equates to an extra $538 in compensation (based on $70,000 divided by 260 working days).
To an employee, this translates to an extra long weekend, more time with family, or even a stress-free sick day. To an employer, it boosts morale, reduces burnout, and fosters loyalty—all without significantly increasing costs.
Pay Alternative 4: Food Perks
The Power of a Good Meal
Everyone loves free food, and it turns out that feeding your employees can be both a morale booster and a tax write-off. Many professional kitchens have a tradition called “Family Meal,” where staff share a meal before their shift. This concept works in any workplace—whether it’s bagels and coffee in the morning, pizza Fridays, or a weekly catered lunch.
The best part? Employers can deduct 50% of the cost of meals provided to employees. Not only does this create camaraderie and improve workplace culture, but it also ensures employees aren’t working on an empty stomach. Hungry employees aren’t happy employees—and no one likes dealing with a hangry coworker!
Pay Alternative 5: Wellness Programs
Investing in Employee Health
A healthy workforce is a productive workforce, and many companies are realizing that investing in employee wellness can pay off significantly. Offering wellness benefits—such as gym memberships, mental health support, or onsite fitness programs—can lead to fewer sick days, increased productivity, and higher job satisfaction.
For employers, these benefits are often tax-deductible, especially if they are structured as part of an official wellness program. Some companies even offer stipends for fitness classes or reimburse employees for participating in health initiatives. With more focus on work-life balance and mental health, adding wellness perks can set a company apart as an employer of choice.
Pay Alternative 6: Transportation Benefits
Helping Employees Get to Work
Commute costs can be a significant financial burden on employees. Employers can ease this pain by offering transportation benefits such as:
- Pre-tax commuter benefits
- Qualified parking
- Company-sponsored rideshares or shuttle services
These perks help employees save money on getting to work while also being deductible for businesses. Plus, they support sustainability initiatives by encouraging eco-friendly commuting options.
Pay Alternative 7: Profit Sharing
When the Company Wins, Everyone Wins
If giving direct raises isn’t feasible, sharing company success with employees through profit-sharing plans can be an attractive alternative. This type of plan distributes a portion of the company’s profits to employees based on company performance. Employees feel more invested in the business’s success, and employers only pay out when the company is doing well.
Profit-sharing contributions are tax-deductible, and since they aren’t considered part of regular wages, they don’t inflate payroll taxes. Plus, they provide a sense of ownership and motivation for employees to go the extra mile.
The Bottom Line: There’s More to Compensation Than Pay Raises
Fair compensation is essential, but there are plenty of ways to reward employees without simply increasing their salary. Whether it’s boosting retirement contributions, adding PTO, helping with student loans, or providing meals, these alternative perks enhance job satisfaction while keeping costs manageable.
Finding the right mix of benefits depends on your company’s budget, culture, and employee needs. But one thing is clear: Happy employees are productive employees, and investing in them in creative ways pays off in the long run.
Need help structuring a compensation package that balances costs and employee satisfaction? Volpe Consulting and Accounting can help you navigate tax deductions, benefit structures, and financial planning strategies that make sense for your business.
Let’s build a workplace where both employers and employees thrive!
