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Tax Advantages of Employee Leasing Programs

written by: •edited by: Linda Richter•updated: 1/28/2011

Leasing employees is becoming more popular for all business sizes. If you own a business, you may wonder what employee leasing program tax advantages to the employer will be—as well as what you’re responsible for and what the leasing company must adhere to. Find out what you need to know here!

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    What Is Employee Leasing?

    Employee Leasing Can Bring In New Ideas In the old days, employee leasing companies or professional employer organizations (PEOs) were better known as “temping agencies." Employers that had part-time or full-time needs or the need for specialized workers looked to these temporary agencies to fill those positions without gaining the responsibilities of an employer/employee relationship. Many temp agencies also placed workers in temp-to-permanent positions in which candidates who did a good job often earned a permanent position with the company they were “temping" for. If an employer chose to hire the temp, they would pay a fee to the temp agency for hiring the employee—much like employment agencies' fees.

    These days, it’s more popularly known as employee leasing, and many organizations are jumping on board because it shortens the interview/recruitment process, the employee is only “leased" and is not among the “941 payroll employees," and employee leasing programs offer tax advantages to the employer.

    Image Credit (FreeDigitalPhotos)

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    Tax Advantages of Employee Leasing

    If you choose employee leasing programs, what are some of the tax advantages?

    • Payroll – Other than verifying the leased employee’s timecard, that’s really all you're responsible for as far as payroll goes. That means no 941 taxes; you don’t have to include the leased employee on quarterly IRS wage reports, nor do you have to send out 1099s or a W-2 at year end.
    • Company Expense – Employee leasing is considered an “outside service" or a “professional service," so business owners can utilize every dollar spent as an annual expense for tax purposes. This means along with normal operating expenses such as utilities, vehicle expense, or rent, employee leasing is also a day-to-day expense used to offset your revenues at tax time.
    • FUTA & Other Taxes – With leased employees, you are not responsible for paying any FUTA (federal unemployment tax) or any state or local tax for hiring the leased employee. The employee leasing company pays all of these because the leased employee is considered their employee—not yours.

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    Other Advantage of Employee Leasing

    Employee Leasing and Tax Benefits Along with the employee leasing program's tax advantages to an employer, there are other advantages to employee leasing.

    • Insurance – The leasing company is required to carry workman’s compensation insurance on the leased employee—they are not covered under your policy.
    • Benefits – Any benefits such as health care, vacation, or retirement plans are also the responsibility of the employee leasing company.
    • Recruitment & Qualifications – Employee leasing companies can cut the recruitment process out of the picture if you choose to lease employees. Most companies will put their employee through rigid testing, qualify them as good candidates, do background checks (including drug testing), and check past references. This can be a huge time and money saver for the business owner.
    • Employee Selection Process – Another advantage to leasing an employee is that as the leasing company offers candidates, you can choose to accept or ask for another person to fill your position. You also don’t have to worry about things such as employee warnings or following the steps on terminating a leased employee: A phone call to the leasing company and they handle all of this—as the worker is their employee.

    Image Credit (FreeDigtialPhotos)

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    Things to Keep in Mind

    Beyond an employee leasing program's tax advantages to the employer, there are some things to consider when leasing employees.

    You need to consider them as “an employee" in your workplace bullying, discrimination, or sexual harassment and disability policies. If you have a permanent employee (or even a customer or vendor) that is causing the leased employee harm, you may find yourself in a lawsuit if you do nothing.

    Before you choose employee leasing, make sure you check out the leasing company as well. Ask other business owners for referrals and check with the local Better Business Bureau to see if the company has any unresolved complaints. Also, different leasing companies do charge monthly or annual fees based on the wage rate of the leased employee, so ask about these fees in advance.

    There are many benefits to employee leasing, including tax benefits; however, choose the leasing company wisely and keep its employees safe from harm while they’re on your premises.