Employee Benefits: What You Need to Know as a Small Business Owner
Updated on November 9, 2026 | 11 min. read
You can build a benefits package that helps you hire and keep good people while meeting legal requirements. Here’s what’s required by law, what employees want most, and how to fit benefits into your budget.
Employee benefits are part of the compensation you offer beyond wages. They can include health insurance, paid time off, retirement plans, and other perks. As a small business owner, you need to know which benefits are required and which ones help you compete for good people without breaking the bank.
This guide covers required benefits in the US, the big three employees care about most, and low-cost perks that sweeten the deal. Because most benefits run through payroll, administering them is easier when your payroll and books live in one place.
🌟 KEY TAKEAWAYS
Start building your employee benefits package with what the law requires, such as FICA contributions, unemployment insurance, and workers’ compensation.
Build your benefits package in stages by adding in a health insurance plan, paid time off, and a retirement plan based on your team’s needs and your budget.
Tax credits and deductions can offset part of the cost of offering employee benefits.
What are employee benefits?
The US Bureau of Labor Statistics (BLS) defines employee benefits as “nonwage compensation provided to employees.” Essentially, it’s the compensation you offer on top of wages. For small businesses, a benefits package is a hiring tool because it helps you compete with larger employers that can outspend you on pay.
Benefits can be required by law or optional.
- Required benefits are those you must offer once you have employees. They include payroll taxes that fund Social Security and Medicare, overtime pay, unemployment insurance, and workers’ compensation (in most states). Federal law generally requires companies with 50 or more employees to offer health benefits and family leave. State laws can add other requirements.
- Optional benefits are those you choose to offer, like student loan repayment assistance, wellness programs, paid volunteer time, or flexible work arrangements. Some cost money, and some cost little or nothing. You select the ones that help you attract and retain talent.
According to the Society for Human Resource Management (SHRM) 2025 Employee Benefits Survey, 88% of employees rank health care as the most important workplace benefit, followed by retirement savings and planning (81%) and paid leave (81%).
Which employee benefits are required by law?
Many employee benefits required in the US depend on your headcount or whether you offer health insurance coverage, so your list depends on your size. In the table below, we indicate the benefits that apply to you if you have only one employee, and those that might be required as you grow.
Benefit | Who it applies to | What to know |
|---|---|---|
Social Security | Employers with employees on payroll | You withhold each employee’s share and match it with your own 7.65% (6.2% for Social Security and 1.45% for Medicare) |
Unemployment insurance (federal and state) | Most employers with employees | You pay FUTA at 6% on the first $7,000 of each employee’s wages, though a credit can lower your effective rate to 0.6%. You also need to register with your state workforce agency and pay the state employment tax. State rates and wage limits vary. |
Workers’ compensation |
| Requirements vary by state, industry, and business size. Some states require coverage as soon as you hire your first employee. |
Paid sick leave | Depends on the state | Some states require paid sick leave |
Retirement plans | Depends on the state | Some states require employers without a retirement plan to enroll employees in a state-run program |
COBRA | Employers that offer a group health plan and have at least 20 employees | COBRA lets former employees and their families keep group coverage for a limited time (usually 18 months), but the employee pays the full premium. Some states have similar laws that affect smaller employers. |
Family and medical leave (FMLA) | Private employers with 50 or more employees | FMLA gives eligible employees up to 12 weeks of unpaid, job-protected leave a year for qualifying family and medical reasons. |
Health insurance | Employers averaging 50 or more full-time employees or full-time equivalents (FTEs) | Applicable large employers (ALEs) must offer minimum essential coverage (MEC) to at least 95% of full-time employees and their dependent children |
Even if you’re exempt from these requirements, you may want to offer health coverage, a retirement plan, and other benefits to compete for good workers.
Health insurance options for small businesses
Traditional group health insurance is typically one of the most expensive benefits for employers to provide. According to the BLS, it made up 8.1% of total compensation for civilian workers as of March 2026, and the average employer premium was $754.83 per employee per month.
Fortunately, you have options for finding a plan that fits your budget and needs:
- Small Business Health Options Program (SHOP): The SHOP marketplace offers group small business health insurance. You can enroll year-round through a SHOP-certified broker or directly with an insurance company, though some states have their own SHOP websites.
- Health reimbursement arrangements (HRAs): You reimburse employees tax-free for coverage they buy themselves. A qualified small employer HRA (QSEHRA) is available to businesses with fewer than 50 FTEs and no group plan. For 2026, the maximum reimbursement is $6,450 per year for employee-only coverage and $13,100 per year for family coverage. Employees can buy health insurance through the official federal or state exchange at HealthCare.gov, directly from a private insurance company, or with the help of an agent or broker.
- Health savings accounts (HSAs) paired with a high-deductible health plan (HDHP): An HDHP typically costs less in premiums but has higher out-of-pocket costs. Employees can contribute to an HSA, a tax-advantaged account for paying out-of-pocket expenses, and you can contribute too.
If you buy a plan through SHOP, you may qualify for the Small Business Health Care Tax Credit. You qualify if you:
- Have fewer than 25 full-time equivalent employees
- Pay average wages of less than $69,000 per FTE in 2026
- Offer a qualified health plan to employees through the SHOP marketplace
- Pay at least 50% of the cost of employee-only health care coverage for each employee
You can claim the credit for two consecutive years.
Talk to a health insurance broker before you choose a plan. They can help you compare options, determine whether you qualify for the credit, and explain which option best fits your team.
Retirement plans for small businesses
Small business owners have several options for offering retirement benefits as part of their employee benefits package. The following table outlines several options.
Plan type | Who it’s for | Employer contribution | What to know |
|---|---|---|---|
Any size employer | Optional | Costs include one-time setup fees, annual administration, recordkeeping fees, and per-participant fees. May need to perform annual nondiscrimination testing. Must file Form 5500 annually. Annual audit required with 100 or more participants. | |
100 or fewer employees | Required employer match up to 3% of pay or 2% of pay for all eligible employees | No annual nondiscrimination testing; Must file Form 5500 annually | |
Any size | Required employer match of 3% of pay for everyone or a set matching formula | No annual nondiscrimination testing | |
100 or fewer employees | Required employer match of 3% of pay or 2% of pay for every eligible employee | No annual filing requirement. Employees are always 100% vested in their account balance. | |
Any size | Only the employer contributes and every eligible employee gets the same percentage of pay | No annual filing requirement. Employees are always 100% vested in their account balance. |
Tax credits for new plans
When you set up a new qualified retirement plan, you may qualify for up to $16,500 in tax credits over the first three years of the plan. The retirement plans startup costs tax credit combines two potential credits. You can claim up to $5,000 per year to cover plan startup costs and up to $500 per year for adding automatic enrollment, which signs employees up unless they opt out.
A third credit for employer contributions is worth up to $1,000 per employee per year for the first five years of the plan. Talk to a tax advisor to discuss your plan options and eligibility for tax credits before you choose a plan.
State retirement programs
Fifteen states currently offer programs for employees without access to a retirement plan at work. These states require certain private-sector employers without a retirement plan to automatically enroll their workers into a state-run individual retirement account (IRA) unless the employee opts out.
According to Pew Research, more than 1.3 million participating workers have saved over $3 billion in these plans. Enrollment rules and deduction percentages vary from state to state, so check the rules in each state where you have employees.
Paid time off and paid leave
Federal law doesn’t require you to pay employees for time not worked, such as vacation, sick leave, or holidays, apart from some federal contract work. However, 17 states and Washington, D.C., have mandatory paid sick leave laws. Some cities and counties have their own requirements, so check the state and local jurisdictions wherever you have employees.
Even when the law doesn’t require it, paid time off (PTO) helps you attract and retain talented employees.
A study of about 32,000 early-career workers published in the Journal of Strategy and Management found that 6 to 10 days of paid time off significantly reduced resignations, but workplaces offering 11 days or more see the strongest employee retention benefits.
Small businesses tend to choose one of two setups for paid time off:
- Separate buckets: You can give employees a certain number of sick, personal, and vacation days. This makes it easier to track state-mandated sick leave rules.
- One combined PTO bank: Employees draw from a single balance for any reason. This is easier to track. But in states with paid sick leave laws, make sure the bank meets the state requirements.
Whichever method you choose, put your policy in writing. Spell out how employees earn time, whether it carries over, and what happens to unused time when someone leaves. State law may inform your payout options, so check with your attorney before deciding.
Low-cost perks that still matter
Small perks help you stand out when you can’t match bigger employers on pay, healthcare coverage, retirement, and paid time off. Here are a few to consider:
- Flexible scheduling: Let team members control their start times, end times, or workdays
- Remote or hybrid work: Allow employees to work full-time location-independent or blend remote work days with 2 or 3 in-person days each week
- Mental health support: An employee assistance program (EAP) gives employees, and often their household members, confidential, short-term counseling. It often costs only a few dollars per employee per month.
- Employee discounts: Offer special employee pricing on your own products or services, or team up with another local business to exchange staff discounts
- Time or budget for learning new skills: Fund certifications or courses for employees. Under a written educational assistance program, up to $5,250 per employee per year is tax-free.
The right perks for your team depend on your industry and each person’s role and unique needs. Ask your team members which perks they would use and start by offering one or two they find most valuable.
What do employee benefits cost?
According to the BLS, offering benefits costs an average private business $14.07 per hour worked. Keep in mind this figure includes businesses of all sizes, so treat it as a benchmark, not an estimate. Talk to a broker or advisor for a better idea of your actual costs.
Hard costs aren’t the only consideration. You also need to budget for the administrative burden of offering benefits, such as setting up payroll, notifying employees, and accounting for paid time off.
Offering benefits isn’t cheap, but they can pay you back through lower employee turnover, improved employee satisfaction, and better team performance. In fact, MetLife estimates that small-to-medium-sized businesses get an average of $2.20 in returns for every $1 invested in employee health, resulting from gains in productivity, retention, and lower absenteeism and costs.
How to build your benefits package
Build your employee benefits package in stages, in this order:
- Cover the required benefits first. That includes payroll taxes, unemployment insurance, and workers’ compensation when your state requires it.
- Set a sustainable budget. Choose an amount you can contribute consistently.
- Prioritize healthcare benefits, PTO, and retirement. These are the three benefits employees value most.
- Ask your team what they want. Let their answers guide decisions on optional perks like flexible hours or a learning budget.
- Get expert help. Work with a broker for health coverage and a financial advisor to help you choose a retirement plan.
- Keep payroll in one place. Use payroll software that keeps deductions and tax filing in one place. FreshBooks Payroll runs inside your FreshBooks account and automatically files federal and state payroll taxes.
- Explain and review. Tell employees what’s available and how to use it, then set a date to review the package as your team and budget change.
How benefits show up on a paycheck
Pre-tax deductions come out of pay before you calculate income tax, lowering the employee’s taxable pay. Some common examples include traditional 401(k) contributions, HSA contributions, and most health insurance premiums. Some pre-tax deductions, like health insurance premiums, also skip Social Security and Medicare taxes.
After-tax deductions, such as Roth 401(k) contributions and disability insurance premiums, come out after you calculate taxes, so they don’t affect the employee’s tax withholding.
FreshBooks Payroll calculates payroll deductions, files and pays federal and state payroll taxes, runs direct deposit, issues W-2s and 1099s, and posts pay runs to your books automatically.
What happens to benefits when you switch payroll providers?
Switching payroll companies affects every aspect of your team’s paychecks. Before you move:
- List every benefits deduction and note whether it’s pre-tax or after-tax
- Re-enter the deductions in the new system, then check them against the last paycheck from the old one
- Tell your 401(k) provider and health plan about the switch so contributions keep going to the right place
- Make sure pay periods around the transition don’t skip 401(k) contributions or employer matches
For the full process, read our guide to Switching Payroll Companies: An 8-Step Checklist.
A smart next step
Offering a comprehensive benefits package is doable for small businesses, and you don’t have to offer everything at once. Start with what the law requires, add the benefits your team values most, then review the package as your business and budget grow. A broker, financial advisor, and tax professional can help with the details.
Whichever options you choose, FreshBooks Payroll keeps your payroll deductions, payroll tax filings, and books in one place. Try FreshBooks Payroll.
Frequently asked questions
Do I have to offer benefits to part-time employees?
No, federal law generally doesn’t require you to offer benefits like health coverage or paid time off to part-time employees. One exception is 401(k) plans. If you offer one, SECURE 2.0 requires you to let employees age 21 or older contribute once they work at least 500 hours in each of the two consecutive years. Some states also require sick leave for part-time workers, so check your state’s rules.
Can I offer benefits to just some of my employees?
Yes, you can generally set eligibility by job-related groups, such as full-time versus part-time employees. You can’t base eligibility on protected characteristics like race, sex, or age. Also, tax-favored plans like 401(k)s have rules that prevent you from favoring owners and highly compensated employees.
Do I have to offer benefits to contractors?
No, you don’t have to offer benefits to independent contractors. In fact, the IRS treats benefits like insurance, pensions, and vacation pay as a sign that a worker is an employee. So offering these benefits can lead to worker misclassification penalties.
Are employee benefits tax-deductible for my business?
Yes, employee benefits are generally tax-deductible for your business. You can usually deduct what you spend on benefits like health plans, retirement plan setup costs and contributions, and educational assistance programs.
Can I offer health insurance if I only have one employee?
Yes, you can offer health insurance with one employee. Group options like SHOP generally require at least one employee who is not an owner, partner, or the owner’s spouse to enroll in the plan. If group benefits are prohibitively expensive, a QSEHRA is another option because it reimburses the employee for coverage they buy themselves.
