Do you want to provide a payroll tax break for employees who are required to have their own tools? To help carpenters or mechanics who need tools as a condition of employment, a company called Toolchex offers a method to administer reimbursement of this business expense.

Similar to a 401(k) retirement plan or a cafeteria health insurance plan offered by an employer, the tool plan allows money to be deducted from an employee's paycheck before payroll taxes are withheld.

The plan apportions an employee's wages between time/labor and tool/equipment expenses. The employer pays the employee for time/labor, withholding all necessary taxes. Toolchex provides the employee with a separate check for tool/equipment expenses, which is totally tax-free. Toolchex president Gary Leavitt says employees receive, on average, an additional $200 per month. “The owner is giving his crew a raise without actually paying them more money,” Leavitt explains.

CHECK ONE, CHECK TWO Take the example of an employee making $15 per hour. If enrolled in the plan, he receives two checks: one check from his employer for time and labor of $10 per hour with the usual taxes deducted; and a second check based on a portion of his salary, in this example, $5 per hour, but without taxes deducted and minus the 10% administration fee that Toolchex charges.

Toolchex benefits are not subject to federal income tax, Social Security, or Medicare. In addition, most states “piggyback” off of federal law, making the Toolchex benefit also exempt from state income tax.

Employees purchase the tools themselves. “They must keep receipts for purchases going forward and submit those receipts. We take digital pictures and fill out an inventory booklet to track the tools they own,” Leavitt says.

A company owner can offer the tool plan to his employees, and Toolchex handles the payroll deductions and paperwork. “We have an enrollment meeting with the crew,” Leavitt says. “They decide if they want to join the program.”

Remodeling companies do not have to pay taxes on the portion of the employee's income that Toolchex uses to reimburse the employee, so they also save in taxes.

According to Toolchex, an employee can write off tool expenses on his personal tax return, but must itemize them. If he does that, to reduce taxable income and produce a tax benefit, the total itemized deductions must exceed the standard deduction.

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