As Larry the Payroll Guy, I have been working with employers on payroll, HR, taxes, benefits, etc for decades. This PayDay is my listing of ten subject areas every employer (for profit or non-profit) should consider for their organization. AccuPay/I are happy to discuss any of these subject areas with you or your CPA, at no charge, and at your convenience. Reach out to your payroll specialist or larry@accupay.com if you have questions about my “top ten list”.
SMALL BUSINESS OWNERS AND S CORPORATION TAX ELECTIONS
Many small business owners elect “S” corporation tax status for their LLC’s or corporations. This often used tax strategy will help minimize FICA and Medicare taxes on profits of the business. It is very important that the company pay a “reasonable compensation” to employee-owners of the S entity to safeguard the payroll tax savings available with a S tax status. LLC owners, partnerships and sole proprietors should discuss the pros/cons of a S tax election with their CPA firm/tax advisor.
DESIGN A RETIREMENT PLAN WHICH MEETS THE OBJECTIVES OF THE EMPLOYEES AND THE OWNER—NO OUT OF THE BOX RETIRMENT PLAN!
Employer-sponsored retirement plans come in all shapes and sizes. Many of the large payroll companies sell a “one sized fits all” 401K plan to employers—which is not the way to adopt a retirement plan! If you already have a retirement plan or are considering adding a plan to your organization, you should consult with retirement plan experts who can listen to your own objectives, and provide you with options available to meet your unique objectives. How much do you wish to contribute on behalf of owners/key executives? Do you wish to include a Roth funding option in your plan? Does a Simple IRA plan meet your objectives, or would a 401k plan with its many options (and also complexity) be a better fit to meet your objectives? Retirement plans should be designed by experts, not sold as “one size fits all.” Make sure that your retirement plan consultant is well versed with the recently passed Secure Act 2.0 legislation since many favorable options exist in the new law enacted within the past 6 months. AccuPay works with some local firms who are experts in retirement plans, and we are happy to refer them to you.
EMPLOYEE RETENTION TAX CREDITS—-OPPORTUNITIES AND RISKS
The Cares Act provides that employers may be eligible for Employee Retention Tax credits if they had certain levels of declining sales during 2020/2021 and/or had normal operations disrupted by government ordered COVID restrictions/mandates during the 2020/2021 timeframe. These tax credits can be very significant and thus all employers (both for and non-profit/churches) should review their eligibility for the ERC tax credits, which are procured on amended payroll tax returns. However, as with any government program of financial relief, “bad actors” are drawn to the opportunity for “free Federal government cash” and have aggressively been promoting their services to employers for some time now. The IRS has now issued about ½ dozen “warnings” to employers about making sure the firm they choose to review ERC options is an honest expert in this new tax law, not what the IRS refers to as “ERC mills”—-so work with an expert (your CPA may be able to assist you) and avoid most of the ERC mills who reach out to you via email, text, etc.
DESIGN A BENEFITS PLAN WHICH IS BOTH TAX FAVORED AND COST EFFECTIVE
AccuPay has worked with many benefits consultants who provide health insurance, HRA/HSA’s, etc for employers. As with retirement plan selection, you must work with experts in benefit/group insurance “design,” which generally includes a review of cost savings from being “partially self-insured/level funding” as to your employee group. Do not simply get annual quotes for renewals from brokers, but instead focus on the design of your plan with “consultants.” Smaller employers should work with consultants who can educate and advise you as to ICHRA and QSEHRA plan options, along with exploring the use of ACA subsidies for individual insurance policies. We have found that employer-designed benefit programs are very complex (same with retirement plans) and it pays to seek out experts who can help you obtain coverages at costs which are reasonable-–if you simply receive annual renewal quotes and select one, you are likely leaving value and money on the table! If you would like to review your benefits package, we can refer you to some local experts in the benefits industry.
ACCOUNTABLE EXPENSE REIMBURSEMENT PLANS
Several years ago employees could write off their “unreimbursed business expenses” on their personal income tax returns. However, the law was changed 5-6 years ago and no longer can an employee claim tax deductions for business expenses they pay personally and for which they are not reimbursed—business vehicle, supply, travel, etc expenses. As such, employers should consider reimbursing employees for business expenses pursuant to an “accountable expense reimbursement plan.” Such a plan requires that employees obtain and submit receipts/auto logs and other evidence of expenses paid personally to their employer for reimbursement. In this manner, the employer deducts the reimbursed business expenses and the employee reimbursed does not pay tax on the reimbursements. If an employer pays an employee an “allowance” for expenses, such as a fixed monthly amount for use of the employee’s vehicle for business, this “auto allowance” is fully taxable to the employee as wages since an allowance does not require any documentation or accounting to an employer for the business expense.
MAKE SURE YOU USE SECTION 125/CAFETERIA PLANS FOR EMPLOYEE FRINGE BENEFITS—BUT NOT 2% OR MORE EMPLOYEE-OWNERS OF S CORPORATIONS!
Many employer fringe benefit programs, such as group medical, HSA’s, supplemental insurance/Aflac, FSA’s, etc enable employees to deduct their payroll deduction contributions for their share of the benefits, and on a “pre-tax basis.” Pre-tax employee funding of the employee’s share of medical insurance, HSA’s, etc saves the employee income, FICA and Medicare taxes (worth approx 20-25% of the deduction amount), and the employer also saves money since they are not required to “match” the employee’s FICA/Medicare taxes. SO, pre-tax treatment of a fringe benefit plan is virtually a “no brainer” for both employers and employees. However, Section 125 of the tax code indicates that the pre-tax treatment of employee payroll deductions requires a “written” Section 125 plan, also called a “cafeteria plan.” Every employer should have a safe place to keep their written Section 125 plan documents, and if you are pre-taxing employee benefits without having a written plan document, reach out to your insurance broker for their assistance in obtaining a written plan document. Section 125 plan documents are inexpensive to procure and in many cases your insurance consultant can provide you one without any cost at all—–A “no brainer”!
OWNER’S SPOUSE—-SHOULD I PUT HIM/HER ON THE PAYROLL SO HE/SHE RECEIVES SOCIAL SECURITY RETIREMENT BENEFITS?
Over the years, business owners have asked their accountants the question of “My spouse is 55 and does not have any social security benefits accumulated, should I put him/her on the payroll now?” The likely answer is “no,” since a spouse ultimately receives social security retirement benefits based on the greater of their own social security account benefits OR 50% of their spouse’s social security benefits. For a business owner and a homemaker spouse, the business owner may have paid in the maximum FICA taxes each year, based on earnings, while the homemaker has paid in minimal/no social security tax. It is very likely that IF the homemaker-spouse paid into the social security system from ages 55-65, their own account benefits would still be less than ½ of their spouse’s benefits, which are based on a lifetime of social security wages/taxes. As such, the social security retirement benefit earned by the homemaker easily could be less than they otherwise receive as ½ of their spouse’s social security benefits—-and the homemaker’s annual social security taxes paid in from age 55-65 would simply be wasted. However, it may be prudent to put the spouse “on the payroll” for the least amount required to enable optimal funding of a retirement plan such as a 401K plan. Planning for optimum use of social security benefits, to include at what age does one claim them, is a valuable service provided to business owners/others by financial planners and CPA’s.
S CORPORATION OWNER MEDICAL INSURANCE PREMIUMS—THE RIGHT WAY TO DEDUCT 100% OF THEM
Employee-owners of S corporations (or LLC’s which have made S tax elections) are treated differently than other employees as to participation in employer-sponsored fringe benefit plans—group insurance, HRA/HSA’s, etc. As a general rule, participation of a 2% or greater shareholder-employee in Section 125 benefit plans of an employer is prohibited, and inclusion of an owner in the plan on a pre-tax basis could result in termination of all tax advantages for the entire employee group. The IRS has prescribed the method of how to pay and write-off the family medical insurance premiums of the shareholder-employee–-the S corp/LLC with S election should pay 100% of the employee-owner’s medical premiums to the insurance company, with no withholding of any portion from the employee-owner. These premiums can include Medicare insurance premiums for older employee-owners—the key is the employer must pay 100% of the owner/s family premiums by the end of each year. The S corporation deducts the owner’s medical premiums on its annual business tax return/1120S, and the total amount of the premiums is added to the owner’s W-2 as income, BUT not in boxes 3/5 for FICA or Medicare purposes. The business owner reports the increased W-2 income on their Form 1040 but also deducts the medical insurance premiums reported in box 1 of the W-2 as “self-employed health insurance” on their personal income tax return. It is important to follow the procedures/paperwork as prescribed by the IRS to write off 100% of your family insurance premiums!
WORK OPPORTUNITY TAX CREDITS FOR HIRING EMPLOYEES WHO ARE ON FOOD STAMPS OR OTHER WELFARE PROGRAMS
The Federal government has long provided generous income tax credits to employers who hire and retain (for at least 120 hours) individuals who are on certain government welfare programs, certain veterans, ex-felons, etc. This federal income tax credit was formerly called a “welfare to work credit,” in that it provides a tax savings incentive to employers to hire and retain people who generally have difficulty finding employment and otherwise are on various government assistance programs. Those individuals who are in households with food stamps, unemployed veterans, temporary assistance for needy families (TANF) and certain other detailed categories can produce federal income tax credits to business organizations who hire them. We know that Walmart, Kroger and other major employers take advantage of these tax credits, but studies indicate that most smaller employers do not apply for WOTC tax credits, which are generally worth $2,400 or more per employee in the year of hire. AccuPay can help our clients obtain these WOTC tax credits for qualified individuals via our onboarding module in isolved software, and other tax credit consulting firms exist which also can obtain WOTC tax credits for their employer-clients. We also know of some employers who have their own internal “do it yourself” WOTC tax credit procurement program. The WOTC program is a federal program which is implemented through each state’s unemployment agency/WOTC coordinator. Employers who have several lower-paying, high turnover jobs are prime candidates to save federal income taxes by “screening” new hires for WOTC eligible people.
AND A FINAL STRATEGY FOR CHURCHES AND COMPENSATION OF PASTORS
Churches, and charities/non-profits which employ pastors/chaplains, have very nuanced tax laws which pertain to the church/employer/ pastor/employee relationship. As a general rule, a church should never withhold any FICA or Medicare tax from any pastor-employee, since “clergy” can “opt out” of social security in certain cases—-so a church should not ever withhold FICA or Medicare tax from an employed pastor since that pastor may have opted out of social security. Another unusual aspect in the employment relationship between a church and a pastor-employee is that a “pastor” can calculate how much they spend each year to “maintain their household,” and can request that their church-employer designate their expected/estimated “annual housing expenses” as a “housing allowance” included in the pastor’s salary. If the church authorizes the pastor’s requested “housing allowance,” that portion of the pastor’s compensation is not subject to federal income tax and in most cases is state tax exempt also. HOWEVER, if the pastor spends more on actual housing expenses in a given year they can not deduct more than their housing allowance. THE PASTOR TIP—-When calculating your annual “housing allowance” to submit to your church-employer, estimate “on the high side”, add in a cushion above your expected spending on housing costs to your housing allowance so that you are not “short” of your housing allowance amount. Using this “estimate high” strategy means you can likely write off unexpected housing expenses for income tax purposes since you have built in a “cushion” for unexpected housing costs (the new riding mower, outside deck, etc)
We are happy to clarify any strategies in this PayDay article —-Feel free to email larry@accupay.com, who is AccuPay’s Tax Director and has worked extensively with employer strategies.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.
