What taxes does an entrepreneur pay for a social package in his company?

A benefits package (hereinafter reffered to as benefits) is one of the ways employers can show that they care about their employees. The benefits package in the company to some extent adds to its solidity and creates a competitive advantage in the labor market.

Meanwhile, the current legislation of Ukraine does not define the concept of a "benefits package", so each employer is free to determine which motivational benefits to provide to employees outside of direct labor relations.

But here you can drive yourself into a trap. Do you want to show yourself as a great employer and promise your employees a huge benefits package? Don't forget that all costs need to be reflected in tax accounting, and before that, you should calculate the impact of a social package on your company. 

Read on below how it works in practice. If you don't want to get into the details, but prefer to get a ready-made solution, please contact our experts.

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What are benefits packages for employees, and what can they include?

Many employers confuse the concepts of social guarantees and the benefits package.

Social guarantees are a legally approved obligation of the employer to the employee (official employment, the right to annual leave, payment for sick leave, etc.), while the benefits package is the costs that the employer is willing to pay at its own expense to increase the motivation of its employees.

The benefits package may include:

• free meals;
• use of a corporate car (outside working hours);
• cab fare to and from work;
• medical insurance;
• gym membership;
• arrangement and use by employees of recreational areas on the territory of the office;
• issuance of interest-free loans;
• reimbursement of rental housing;
• зayment for training courses and master classes (on topics not related to staff development or consulting services related to direct functional responsibilities);
• and much more.

The concept of a benefits package and expenses related to direct business activities of the company are often substituted. For example, the use of a company car or cell phone service during work hours to meet with clients or communicate with them is a business activity whose costs are a business expense and in no way affect an employee's motivation.

Incorrect interpretation of benefits and expenses related to the business activity of a company leads to mistakes in accounting and tax accounting. And most importantly - it entails the accrual of taxes not in full, or vice versa, the overstatement of tax liabilities from the company.

In our practice, there were cases when as a result of an audit of the company's activities it was found that the client for their own insurance made additional tax charges on business expenses to avoid the supervisory authorities equating these expenses to the additional benefit.

We, in turn, help our clients to prepare a package of documents and calculate the taxation of the transaction, which will allow appealing in case of problems with the regulatory authorities.

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Taxation of the benefits package for the employee

Let’s consider what exactly is taxable when forming a benefits package for your employees.

Expenses that:

• serve to improve the comfort and working conditions of employees;
• have no direct impact on the economic activity of the company;
• identify the individual who uses the service - the benefits package.

- are recognized as a fringe benefit.

As defined in the Tax Code, fringe benefits are tangible and intangible goods, services, and other types of income that employees receive over their job duties and compensation.

For tax purposes, fringe benefits are divided into:

1) Cash payments. From the amount, which is fringe benefit is withheld 18% PIT and 1.5% VS and accrued 22% ERUs.

For example, the head of a company decided to pay money in the amount of UAH 5,000.00 to an employee for “Personal Growth Training”. Taxation of this transaction will look as follows:

• Withholding of personal income tax = 5,000.00 *18% = UAH 900.00
• Withholding of military fee = 5,000.00 *1.5% = UAH 75,00
• Payment of fringe benefits to employee = 5,000.00 - 900,00 - 75,00 = 4 025,00 UAH
• Accrual of single social security tax = 5,000.00 *22% = UAH 1,100.00

2) Provision of fringe benefits in kind. Under the concept of fringe benefits in kind falls issuance of certificates to employees, transfer of corporate clothing for personal use, cards/certificates for free meals, etc.

Please note! When calculating personal income tax on fringe benefits in kind, a coefficient of 1.219512 is applied. The natural coefficient is calculated by the formula (100 : (100 - personal income tax rate).

For example, the head of a company has decided to give employees a monthly certificate for lunch in a nearby cafe. The cost of the certificate is 6,500.00 UAH/month per employee. Taxation of this operation (for 1 employee) will be as follows:

• Withholding of personal income tax = 6,500.00 *1.219512 * 18% = UAH 1,426.82
• Withholding of military tax = 6,500.00 *1.5% = UAH 97.50
• Accrual of single social security tax = 6,500.00 *22% = UAH 1,430.00
• Personal income tax and military tax on fringe benefits are withheld from the employee at the expense of the wages accrued in the month of the operation.

Exceptions when the fringe benefit is not subject to taxation:

1) Personal income tax, military tax and single social security tax:

• health insurance, medical treatment or services;
• payments for education in domestic higher educational institutions and vocational schools if the amount of payment for each month does not exceed 3 minimum wages (from 01.01.2022 the minimum wage is UAH 6,500.00, from 01.10.2022 it is UAH 6,700.00).
• assistance in the amount not exceeding 2 monthly minimum subsistence levels (from 01.07.2022 the minimum subsistence level will be UAH 2508,00) to pay for the funeral of a deceased employee
• special clothing and corporate clothes, which are given to the employee for temporary use.

2) Single social security tax:

• health insurance, medical treatment or services;
• the cost of transporting employees to work, whether using our own or leased vehicles;
• gifts for employees’ children.

Further, we will talk about practical examples of the application of benefits packages for companies, and options for their taxation.

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If I want to compensate my employee for rent

Since 2014, many companies have had the question, How do to properly handle rent reimbursement for employees from combat zones? Unfortunately, in 2022, this question has gained even more urgency.

There are 2 options for employee rental reimbursement:

Option 1. The company pays money to the employee, with which the employee pays his/her rent.

In this case, the company must withhold 18% of personal income tax and 1.5% of the military tax, as well as accrue 22% of the single social security tax.

For example, an employee found himself in a difficult situation and had to move to another city where he does not have his own home. The company allowed the employee to take advantage of a benefits package in the form of monthly compensation of housing rent for UAH 12,500.00.

Taxation of this transaction:

• Withholding of personal income tax = 12,500.00 *18% = UAH 2,250.00;
• Withholding of military tax = 12,500.00 *1.5% = UAH 187.50
• Payment of additional benefit to employee = 12,500.00 - 2,250.00 - 187.50 = UAH 10,062.50
• Accrual of single social security tax = 12,000.00 *22% = UAH 2,750.00.

Based on the calculations, we see that in this situation, the company will pay UAH 2,750.00 in taxes, and the employee in turn will receive compensation for UAH 10,062.50.

Option 2. The company leases the dwelling independently and lends it to the employee.

In this case the company:

• concludes a contract with the landlord and pays the contractual cost from the company's current account;
• forms an order for the company, which provides the employee with housing (for temporary free use);
• determines the estimated value of the employee's free use of the rented accommodation and equates the value to the additional benefit;
• withholds personal income tax from the estimated value (fringe benefit) (using a natural coefficient), the military tax, and accrues the single social security tax.

For example, a clothing company has decided to relocate its business. The administrative staff works remotely, and the production staff needs to be set up in the new city. The company rents apartments on its own to provide them to employees for free use. The contractual price of apartment rent is UAH 15,000.00 (incl. VAT).

The lessor and the lessee have the forms of LLC on the general system of taxation.

Based on the given conditions, taxation of this transaction (for 1 employee) will look as follows:

• Payment of rent cost under the contract = UAH 15,000.00
• Determination of the estimated cost of free transfer of housing = 15,000.00-20% VAT = UAH 12,500.00
• Withholding of personal income tax (using the natural coefficient) = 12,500.00 *1.219512 * 18% = UAH 2,743.90
• Withholding of military tax = 12, 500.00 *1.5% = UAH 187.50
• Accrual of single social security tax = 12,500.00 *22% = UAH 2,750.00

Based on the calculations, we see that in this case:

• the company will pay UAH 2,750.00 in taxes (as in the first option) and receive a tax credit of UAH 2,500.00;
• The employee will pay UAH 2,931.40 in taxes, which is UAH 493.90 more than in Option 1.

This example is more beneficial for the company than for the employee.

Here is another example of a situation according to Option 2, but with the use of other systems of taxation of the participants of the process.

For example, (the conditions are the same as in the previous case) the contractual rent of the apartment is UAH 12,500.00 (without VAT). The lessor is a sole proprietorship on the single taxation system without VAT, and the lessee is LLC on the general system of taxation.

Proceeding from the given conditions, taxation of the transaction will look as follows:

• Determination of the estimated value of the free transfer of housing = UAH 12,500.00.
• Withholding of personal income tax (using the natural coefficient) = 12,500.00 *1.219512 * 18% = UAH 2,743.90
• Withholding of military tax = 12,500.00 *1.5% = UAH 187.50
• Accrual of single social security tax = 12, 500.00 *22% = UAH 2,750.00

Based on the calculations, we see that in this case:

• the company will pay UAH 2,750.00 in taxes (as in Option 1);
• the employee will pay UAH 2,931.40 in taxes, which is UAH 493.90 more than in Option 1.

This example is less profitable, both for the company and for the employee.

Our example calculations show how the form of ownership and taxation of legal entities affects the ultimate benefit of a transaction. Therefore, before entering into contracts, we recommend analyzing the transaction for benefits in terms of taxation. 

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If I want to provide free meals for my employees

Providing employees with a benefits package in the form of free meals may be taxable in several ways:

• tea, coffee, buffet, and others when we cannot determine how much a particular employee will eat/drink - no taxable base. This option does not fall under the concept of fringe benefits and does not require additional withholding of personal income tax, military tax, and accrual of single social security tax;
• issuance of certificates/vouchers to employees for meals in the cafe - falls under additional benefit concept and requires the application of the in-kind coefficient.
• Monetary compensation of catering costs (for example, in the collective agreement specifies that employees are entitled to compensation of catering in the amount of UAH 6,000.00) - this compensation falls under the concept of fringe benefits and is subject to taxation of 18% personal income tax, 1.5% compulsory personal income tax and 22% single social security tax.

The advantages or disadvantages of any benefits package for your employees can be calculated in advance. This will help you find the perfect compromise between the position of a good employer and a reasonable entrepreneur.

What documents should be drawn up if you plan to implement benefits packages within your company?

Each economic operation to confirm the costs incurred and the correctness of the payment of taxes must have documentary evidence, and the benefits package is no exception.

To formalize the benefits package it will be necessary to execute the following documents:

• Regulations on benefits packages for employees;
• Supplement the labor agreement with a clause on the benefits package;
• Decision on the provision of a benefits package and the accrual of additional benefits under it (for each employee who is provided with a benefits package).

Our experts will help you not only to draw up the correct documentation of your business operations but also to choose more appropriate forms of benefits with minimum taxes.

Such planning is just a part of our tax audit and planning services for your business. For more details on pricing and services, please click on the links:

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