Axley & Rode, LLP

A health care plan with fewer than 50 participants that’s administered by a sponsoring employer may have fewer compliance hassles. That’s because it’s excluded from the definition of a “group health plan” under administrative simplification provisions of the Health Insurance Portability and Accountability Act (HIPAA). These provisions include privacy and security requirements. This can be welcome relief for smaller employers, though it should be noted that the definition of “group health plan” for other purposes, such as Employee Retirement Income Security Act (ERISA) and the Consolidated Omnibus Budget Reconciliation Act (COBRA), contain no such exclusion. Many smaller employers encounter uncertainty when determining just how to define “participant.” For example, say a company has 60 employees, all of whom are eligible for a fully insured medical plan and a health Flexible Spending Account (FSA), but only 40 employees enroll in the medical plan and health FSA. Does the health FSA, ...

Many businesses use independent contractors to help keep their costs down. If you’re among them, make sure that these workers are properly classified for federal tax purposes. If the IRS reclassifies them as employees, it can be a costly error. It can be complex to determine whether a worker is an independent contractor or an employee for federal income and employment tax purposes. If a worker is an employee, your company must withhold federal income and payroll taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax. A business may also provide the worker with fringe benefits if it makes them available to other employees. In addition, there may be state tax obligations. On the other hand, if a worker is an independent contractor, these obligations don’t apply. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if it’s $600 or more). What are the factors the IRS considers? Who is an “employee?” Unfortunately,...

Many businesses provide education fringe benefits so their employees can improve their skills and gain additional knowledge. An employee can receive, on a tax-free basis, up to $5,250 each year from his or her employer for educational assistance under a “qualified educational assistance program.” For this purpose, “education” means any form of instruction or training that improves or develops an individual’s capabilities. It doesn’t matter if it’s job-related or part of a degree program. This includes employer-provided education assistance for graduate-level courses, including those normally taken by an individual pursuing a program leading to a business, medical, law or other advanced academic or professional degree. Additional requirements The educational assistance must be provided under a separate written plan that’s publicized to your employees, and must meet a number of conditions, including nondiscrimination requirements. In other words, it can’t discriminate in favor of h...

A critical deadline is approaching for many of the businesses that have received loans under the Paycheck Protection Program (PPP), which was created in March 2020 by the CARES Act. If these borrowers don’t take action before the deadline expires, their loans will become standard loans, and the borrowers could be responsible for repaying the full amount plus 1% interest before the maturity date. In addition, some borrowers could face audits. PPP basics PPP loans generally are 100% forgivable if the borrower allocates the funds on a 60/40 basis between payroll and eligible nonpayroll costs. Nonpayroll costs initially included only mortgage interest, rent, utilities and interest on any other existing debt, but the Consolidated Appropriations Act (CAA), enacted in late 2020, significantly expanded the eligible nonpayroll costs. For example, the funds can be applied to certain operating expenses and worker protection expenses. The CAA also withdrew the original requirement that borrowers d...

Employers that sponsor employee benefit plans under the Employee Retirement Income Security Act (ERISA) face many challenges. Not the least of these is cybersecurity. In an effort to help, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) recently issued guidance identifying best practices to mitigate cybersecurity risks in the administration of ERISA-covered plans. The guidance, which comes in the form of three documents, also offers advice on hiring retirement plan service providers and online security tips for retirement plan participants. An accompanying news release indicates that this is the first time the EBSA has issued cybersecurity guidance. Here are some highlights. Best practices The first document, entitled “Cybersecurity Program Best Practices,” is geared toward plan fiduciaries and recordkeepers. It identifies 12 best practices and then elaborates on each. Key practices include having a formal and well-documented cybersecurity program ...

If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation. Fundamentals of self-employment tax The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($142,800 for 2021) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases. What if you conduct your business as a partnership in which you’re a general partner? In that case, in addition to income tax, you’re subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll ...

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. Monday, August 2 Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941) and pay any tax due. Employers file a 2020 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension. Tuesday, August 10 Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941), if you deposited all associated taxes that were due in full and on time. Wednesday, September 15 Individuals pay the third installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES). If a calendar-year corporation, pay the third installment of 2021 estimated income taxes. If...

Are you thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved in providing a traditional pension plan? Two options to consider are a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE). SEPs are intended as an alternative to “qualified” retirement plans, particularly for small businesses. The relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions, are features that are appealing. Uncomplicated paperwork If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for con...

Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it. However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family. Determining reasonable compensation There’s...

The first advance payments under the temporarily expanded child tax credit (CTC) will begin to arrive for nearly 39 million households in mid-July 2021 — unless, that is, they opt out. Most eligible families won’t need to do anything to receive the payments, but you need to understand the implications and why advance payments might not make sense for your household even if you qualify for them. Understanding the CTC, then and now The CTC was established in 1997. Unlike a deduction, which reduces taxable income, a credit reduces the amount of taxes you owe on a dollar-for-dollar basis. While some credits are limited by the amount of your tax liability, others, like the CTC, are refundable, which means that even taxpayers with no federal tax liability can benefit. Historically, the CTC has been only partially refundable in that the refundable amount was limited to $1,400. The American Rescue Plan Act (ARPA) significantly expands the credit, albeit only for 2021. Specifically, the ARPA bo...

On January 6, 2021, the U.S. Department of Labor (DOL), then under the Trump administration, announced a final rule regarding the employee-versus-independent-contractor standard under the Fair Labor Standards Act (FLSA). The effective date of the final rule was March 8. However, its future was uncertain at the time given that a new presidential administration was incoming. Now the final rule’s fate has been decided. The final rule In the January announcement, the DOL said the final rule reaffirmed an “economic reality” test to determine whether someone is in business for him- or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee). The agency also identified and explained two “core factors” that it said are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him- or herself: The nature and degree of control over the work, and The worker’s opportun...

High-income taxpayers face a 3.8% net investment income tax (NIIT) that’s imposed in addition to regular income tax. Fortunately, there are some steps you may be able to take to reduce its impact. The NIIT applies to you only if modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, $200,000 for unmarried taxpayers and heads of household. The amount subject to the tax is the lesser of your net investment income or the amount by which your MAGI exceeds the threshold ($250,000, $200,000, or $125,000) that applies to you. Net investment income includes interest, dividend, annuity, royalty, and rental income, unless those items were derived in the ordinary course of an active trade or business. In addition, other gross income from a trade or business that’s a passive activity is subject to the NIIT, as is income from a business trading in financial instruments or commodities. Ther...