News & Articles

How Much Does the IRS Let Delinquent Taxpayers Live On Each Month?

Posted on Wed, Oct 10, 2018

The IRS uses "Collection Financial Standards" to help determine a taxpayer's ability to pay a delinquent tax liability. Allowable living expenses include those that meet the test of being necessary to provide for a taxpayer's (and his or her family's) health and welfare, as well as his or her ability to produce income.

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Tags: Taxes, IRS, Healthcare

Self-Audit Program May Help Employers Correct Wage Errors

Posted on Wed, May 09, 2018

Eligible employers may now be able to conduct a self-audit of certain wage practices, thanks to a pilot program from the Department of Labor's Wage and Hour Division (WHD). This program — called Payroll Audit Independent Determination (PAID) — was recently launched as a tool for employers to uncover payroll errors on their own. Employers who use the PAID program and discover that they've underpaid some employees can correct their payment errors and coordinate with WHD to avoid penalties.

As a reminder, the Labor Department can pursue administrative solutions or, if necessary, court action to recover back wages when employees have been underpaid. "Violations may result in civil or criminal action, and employers may be assessed civil money penalties of up to $1,100 for each willful or repeated violation of the minimum wage or overtime pay provisions of the law," according to the Labor Department. The ability to avoid such penalties should prompt employers to seek answers and correct their own errors.

Who's Eligible?

To be eligible to use the PAID program, the following must be true:

    • Neither WHD nor a court of law has found within the last five years that your company has violated the minimum wage or overtime requirements under the Fair Labor Standards Act (FLSA) by engaging in the same compensation practices at issue in this proposed self-audit.
    • Your company isn't currently a party to any litigation (private or with WHD) asserting that the compensation practices at issue in the proposed self-audit violate FLSA minimum wage or overtime requirements.
    • WHD isn't currently investigating the compensation practices at issue in the proposed self-audit.
    • You have no specific knowledge of recent complaints by your employees or their representatives made to you, your representatives, WHD or a state wage enforcement agency regarding the compensation practices at issue in the proposed self-audit which violate FLSA minimum wage or overtime requirements.

Important note: This is only a partial list.

To become certified to participate in this program, you'll first need to read through information about the FLSA (called a "compliance assistance review") and PAID on the WHD website (https://www.dol.gov/whd/paid/). This information includes videos and links to WHD webpages that explain overtime pay requirements and who's exempt from overtime eligibility. Also available is an explanation of exemptions for executives, administrative employees, highly compensated employees, computer employees and outside salespeople.

Recordkeeping Requirements

The PAID program provides a list of FLSA recordkeeping requirements to properly document your payroll. This resource specifies which records you must keep and for how long.

Once you've completed the "compliance assistance review," gather the following information to conduct your self-audit:

    • Potential violations that may have occurred in the last two years,
    • Employees that may have been affected in the same period, and
    • Specific timeframes during that period in which each employee was affected.

After you've identified these elements, calculate the amount of back wages owed to each employee.

If a self-audit reveals that your company owes back wages to some employees, simply paying the amounts due before reporting the issue to the WHD doesn't mean that those employees have forfeited their rights to take you to court. Why? In this scenario, WHD didn't supervise the process of the determining the amounts owed, so the agency might still weigh in.

Required Data

When your self-audit is complete, supply the following data to the nearest WHD office:

    • The names, addresses and phone numbers of all affected employees,
    • Your back-wage estimates along with supporting evidence and methodology used to make those calculations,
    • Payroll records and any other relevant evidence,
    • Records demonstrating hours of work for each affected employee during the time frame at issue,
    • Records to show that you have corrected the compensation practices to comply with the FLSA,
    • Concise explanation of the scope of the potential violations for possible inclusion in a release of liability,
    • A certification that you've reviewed the PAID program's information, terms and compliance assistance materials, and
    • A certification that your company meets all eligibility criteria of the PAID program.

The Waiting Game

What happens after you've submitted all the required paperwork? You're not off the hook until WHD says so. But, according to the PAID program's description, "If WHD accepts you into PAID, WHD will provide you with the proposed scope of the release of liability for the potential violations presented."

Specifically, WHD will tell you how much it thinks you owe employees who were underpaid (which might be exactly what you already determined), and supply "settlement terms for each employee, which employees may sign to receive payment." Once you've paid all back wages due by the end of the next full pay period and provided proof to the WHD that you have done so expeditiously, then you're done.

Consult with a labor attorney before deciding to participate in the PAID program to ensure that you aren't overlooking any potential legal hazards in doing so.

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Tags: Payroll, Taxes, Department of Labor

Keep Your Fleet Safe and Save Money

Posted on Mon, Mar 19, 2018

Whether your company has one vehicle or dozens on the road, smart management can save you money.

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Tags: Vehicle Maintenance, Vehicle Expense, Taxes

Handle with Care: The Nanny Tax Rules

Posted on Wed, Nov 22, 2017

When you hire a nanny, housekeeper or other domestic worker, pay close attention to the tax rules.

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Tags: Taxes, Independent Contractor, IRS, Social Security

Converting an Unincorporated Business into an S Corp

Posted on Fri, Jun 30, 2017

The federal self-employment (SE) tax just keeps going higher and higher. If you've reached the breaking point, there may be a way to tame the SE tax beast by converting your existing unincorporated small business into an S corporation.

Of Course, There Are Caveats

Potential audit target. The IRS is aware of the strategy of converting an unincorporated business into an S corp to save on taxes. The government is trying to audit more S corps to see if they are paying unreasonably low salaries to shareholder-employees. However, S corp audit rates are still low. The tax-saving advantage of converting is lost if the IRS successfully asserts that S corp distributions to shareholder-employees are actually disguised salary payments. If that happens, the IRS will assess unpaid FICA taxes, interest and penalties. Your tax advisor can help you build a case so that in the event of an IRS audit, you have well-documented support that salaries are not unreasonably low.

Impact on retirement contributions. When considering an S corp, keep in mind that paying a modest salary can reduce the amount you can contribute to a tax-favored retirement program (such as a profit sharing or SEP plan). However, you may be able to mitigate this concern by setting up a 401(k) or defined benefit pension plan.

Other complexities. An S corporation conversion creates some paperwork and other issues.

That is because transactions between an S corp and its shareholders, including asset and liability transfers upon incorporation, must be carefully planned to avoid adverse federal (and possibly state) income tax consequences. You also have to meet state-law corporation requirements such as conducting annual meetings and keeping minutes.

Plus, a number of tax law hurdles must be cleared for S corp status to be available. For example, shareholders must be individuals or specified types of trusts. The Social Security and Medicare tax savings must be big enough justify the extra effort of operating as an S corp.


Partnerships and Multi-Member LLCs

A business operated as a partnership or a multi-member LLC also faces high SE tax bills. Partners and LLC members are considered self-employed individuals for federal tax purposes. Therefore, they generally must pay SE tax on their shares of net SE income from the partnership or LLC.

In this scenario, the same tax strategy is available. The co-owners can consider converting an existing partnership or LLC into an S corporation. Then, they can pay themselves relatively modest, yet reasonable, salaries while paying out the remaining profits as cash distributions. The salaries will be subject to Social Security and Medicare taxes, but the cash distributions will be exempt from those taxes. The tax savings will recur year after year, as long as the business maintains or exceeds its current profits.

How to Evaluate the Option

If you're a self-employed individual — meaning a sole proprietor, partner, or LLC member — you have to pay the SE tax on your net SE income. The SE tax has two parts:

1. The 12.4% Social Security tax. Social Security tax is due on net SE income up to a certain amount. Unfortunately, the ceiling goes up every year because of inflation adjustments. For 2017, the Social Security tax ceiling is $127,200 (up from $118,500 for 2016).

2. The 2.9% or 3.8% Medicare tax. The Medicare part of the tax is due on an unlimited amount of net SE income. In other words, there's no ceiling.

So until your net SE income exceeds the Social Security tax ceiling of $127,200 in 2017 (up from $118,500 for 2016), you owe the SE tax at the painfully high rate of 15.3% consisting of 12.4% Social Security plus 2.9% Medicare.

After the ceiling is exceeded, the Social Security tax portion drops away, and the SE tax rate falls to 2.9% to cover the Medicare tax. However, the Medicare tax jumps to 3.8% once your self-employment income exceeds the applicable threshold ($200,000 for unmarried individuals or $250,000 for married couples filing jointly).

Note: The tax results are the same if you operate your business as a single-member LLC, which is treated as a sole proprietorship for federal tax purposes.

While the SE tax is painful now, it's could get worse in the future.

So it may be time to consider an S corporation conversion. Reason: The SE tax doesn't apply to earnings from an S corporation business.

However, the FICA tax applies to salary compensation paid to an S corp shareholder-employee. In 2017, the FICA tax rate is 15.3% on salary up to the $127,200 Social Security tax ceiling. Salary above the Social Security tax ceiling is subject to a 2.9% or 3.8% FICA tax rate to cover the Medicare tax.

The employee share of the FICA tax is withheld from an S corporation shareholder-employee's salary; the other portion is paid by the corporation directly to the U.S. Treasury.

The Tax Savings

The FICA tax is only due on an S corporation shareholder-employee's salary. So when the company pays only a portion of its profits to the owner, or owners, in the form of a reasonable salary, with the remaining portion paid out in the form of cash distributions, only the salary portion is hit with Social Security and Medicare taxes (in the form of the FICA tax). The profits paid out as cash distributions are exempt from the FICA tax (and exempt from the SE tax too).

Key Point

These tax-saving results are not a one-time phenomenon. You can collect similar Social Security and Medicare tax savings, or better, in future years if the business maintains or exceeds its current level of profitability.

Converting an unincorporated small business into an S corporation is not a great idea in all situations but it works for some businesses. Consult with your EHTC Tax Advisor for more information.

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Tags: Business, S Corporation, Sole Propietorship, LLC, Taxes

Answers to Your Questions about Marital Status and Tax Returns

Posted on Fri, Jun 23, 2017

When a couple ties the knot or gets divorced, taxes are probably not the first thing on their minds. But many decisions that couples make do affect their tax returns — and the amount they ultimately owe the federal government.

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Tags: Marriage, Divorce, Taxes

New IRS Regs on Disguised Sales Affect Partnerships and LLCs

Posted on Mon, Oct 31, 2016

In October, the IRS issued new guidance targeting strategies that are used to exploit the tax benefits associated with partnerships and limited liability companies (LLCs) that are treated as partnerships for tax purposes. In a nutshell, under the new guidance, property transactions between partners and partnerships are more likely to be classified as disguised sales and, therefore, subject to taxes. Here's a summary of the most important aspects of the new temporary and final regulations on disguised sales that apply to these entities.

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Tags: IRS, Section 752, Partnership, LLC, Taxes

Beware of a 100% Personal Liability Penalty

Posted on Mon, Oct 17, 2016

A "100% penalty" can be assessed against a responsible person when federal income tax and/or federal employment taxes are withheld from employee paychecks but aren't handed over to the government.

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Tags: Taxes, Penalty, Tax Penalties, Business Owner

Dividing Assets and Tax Bills in Divorce

Posted on Fri, Oct 14, 2016

When a divorce happens, there are often major financial consequences and some important tax issues too. Here are the tax rules that generally apply when a couple's assets are split up in a divorce property settlement.

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Tags: Divorce, Taxes, State and Local Tax

3 Taxes People Love to Hate

Posted on Wed, Jul 27, 2016

Few people enjoy giving money to the IRS, but some types of taxes are viewed more unfavorably than others. Here are three worthy candidates vying for the title of most-hated tax.

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Tags: Taxes, Affordable Care Act (ACA), Penalty, Health Insurance, Medicare