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Staff leasing is becoming increasingly popular for the small-business owner who wants the advantages of a major corporation's organization without paying the major corporation's cost. However, business owners must be careful in selecting a leasing company because they are entrusting their most valuable resource - their people - to that company.
Such a leasing arrangement involves a business transferring their workers to the payroll and benefit programs of an employee leasing firm. The company then assumes the responsibility of paying the staff's salary, workers' compensation, social security tax, state and federal unemployment tax and other employee benefits. The business writes one check per pay period to the leasing firm to cover the cost of labor.
The business still maintains the regular, dedicated work force. Those employees report to the business for work and their duties continue to be directed by the employer. Both employers and employees profit from this leasing arrangement. Workers tend to have better employee benefits because leasing agencies, having a much larger pool of workers than any one business, receive better group purchasing plans. Employees usually are offered several medical or dental plans, the option to join a credit union or a pension plan and can obtain a wide selection of consumer discounts.
In this type of arrangement, business owners free themselves from the high cost of processing payroll, have an expert to answer legal questions regarding employee relations, reduce a large amount of paperwork and personnel costs and can hire and keep quality employees by offering them benefits comparable to much larger companies. This means a business owner's time can be focused on major business issues such as increasing profits and studying their competition.
While leasing broadens management choices and provides greater flexibility to employers and employees alike, it may not be appropriate in all situations. Before turning to employee leasing, business owners should consider several factors. Determine what your company's human resource needs are. Investigate the leasing firm's administrative competence. Understand how employee benefits are funded. Are the benefits appropriate for your employees? As with any contract, you should review the agreement carefully.
One of the most frequently asked questions is "Should I buy or lease?" Before deciding, the business owner will have to consider the possible tax implications as well as the company's financial position. Automobiles, equipment and commercial real estate used in business can be either bought or leased. Depreciation and appreciation also must be considered as prime factors in making such decisions.
When buying a car or truck, businesses must realize that there are different depreciation rates for each. The depreciation on most trucks can be written off within five years, whereas cars can be written off over five or more years. There is, however, a limitation on the amount of money deducted each year.
Unlike leasing a vehicle, buyers have the opportunity to write off the standard mileage rate (currently 30 cents per mile). If a business uses more than one vehicle, the mileage cannot be written off. For this reason, some businesses may choose to write off the depreciation and other actual expenses, rather than the mileage.
From a tax standpoint, it generally is better to lease a business-use car if it costs over $20,000 and better to buy if it is under $20,000. Lease payments can be written off. The person using the vehicle may have report compensation due to personal use and there may be lease inclusion income.
Similar to the situation with vehicles, a business also must determine the tax implications of leasing or buying equipment. It may be wise to lease equipment with the option to buy because the final purchase cost can be minimal. Also, lease payments can be written off and they may be smaller than financing payments.
The depreciation lifetime for equipment can be anywhere from three to ten years, depending on the item.
If the business chooses to buy the equipment, the interest portion of each payment is a deductible expense. However, if the equipment is purchased outright, the bulk payment must be capitalized and depreciated.
Real estate is often a wise investment purely for appreciation. The depreciation lifetime for commercial, non residential, real estate is 39 years - which leaves the future tax value somewhat unpredictable. In tax terms, lease payments for real estate are deductible in the year paid. If the business chooses to buy real estate, the interest and property taxes are deductible. In financial terms, there are benefits to both leasing and buying commercial real estate. When leasing an office or work space, there is less capital outlay which, when starting a business, is beneficial to keeping overhead to a minimum.
We business owners must always be alert to the pros and cons
of the lease or buy debate. No two situations are exactly the same
so there can be no substitute for a careful analysis of your
options. Be sure to contact your business consultant for
assistance.
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