Tag Archives | Employment

How Much Compensation Can Corporations Deduct? IRS – It Depends

By on April 16, 2013 in General, Tax

Reasonable CompensationReasonable compensation is quickly becoming an issue again.  For closely held corporations, in the case of S Corporations the IRS often argues that compensation for owner employees is set too low so that it can collect employment taxes on deemed salaries while in the case of C Corporations the IRS argues that compensation may set  be too high so that the corporate payroll deduction becomes a now non-deducted deemed dividend, thus allowing it to be double taxed (on the corporate return as well as the impact on owner employee’s personal return). Compensation scrutiny in C corporations will likely continue in 2013 and beyond. The fact that the first $25,000 of corporate taxable income is taxed at 15% and the next $50,000 is taxed at 25% is increasingly attractive when the top individual tax rate has climbed to 39.6% and even more so in states with high top personal income tax rates (California is 13.3%).

A Current Case Yields Telling Results

A March, 2013 case involved K&K Veterinary Supply, Inc., a large, profitable, closely held business was run by a husband, his wife, his daughter, and his brother. For the two years at issue the corporation had sales of $66 million and $60 million; gross profit of $9,700,000 (both years); and taxable income of $128,000 and $42,000. The corporation paid the husband a $30,000 dividend each year.  Compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion is nondeductible and, if paid to a shareholder, may be taxed as if it were a dividend. Interesting twists and turns aside, all but $13,929 of the the husband’s combined compensation for the two years of $1,727,957 was deemed reasonable. Reasonable compensation determined for the others did not fare nearly as well for a variety of potentially avoidable reasons. The mixed results demonstrate that owners of closely held corporations can largely overcome scrutiny and also highlights some paths to prevailing.

How Much Compensation is “Reasonable”?

While there’s no simple formula, the IRS tries to determine what similar companies would pay for comparable services and under like circumstances. Factors taken into account can include:

  • the employee’s duties;
  • the amount of time required to perform those duties;
  • the employee’s ability and accomplishments;
  • the complexities of the business;
  • the gross and net income of the business;
  • the employee’s compensation history; and
  • the corporation’s salary policy for all its employees.

Protect Your Compensation Decisions with Appropriate Documentation

Take concrete steps to make it more likely that the compensation you receive will be considered “reasonable” and therefore deductible by your C Corporation, such as:

  • Use the board of directors minutes to contemporaneously document reasons for the amount of compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was too low, make sure the minutes reflect this. (Hopefully, the minutes for those earlier years will reflect that the compensation paid in those years was at a reduced rate.)
  • Paying compensation in direct proportion to the stock owned by the corporation’s shareholders can look like a disguised dividend under scrutiny by the IRS. Beware of this.
  • Keep compensation in line with what similar businesses are paying their executives (gather and keep evidence you can get of what others are paying such as salary offers to your executives from comparable companies).
  • If the business is profitable, be sure to pay at least some dividends. This avoids giving a false impression that the corporation is trying to pay out all of its profits as compensation.

The list is not exhaustive, but it points out that planning your compensation strategy now can save you many head-aches and much money later.

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Is that independent contractor really an employee?

By on April 12, 2013 in Construction, General

Construction EmployeesHow to steer clear of worker classification woes

As a construction company owner, you may engage independent contractors to serve on a given project. These arrangements suit both parties well: The independent contractor earns a living with his or her skill set, and your business doesn’t need to provide benefits or deal with the tax and insurance matters related to regular employees.

But beware: The IRS continues to be hot on the trail of any employer that, in its eyes, erroneously treats a bona fide employee as an independent contractor.

Common law factors

Workers are generally employees for federal tax purposes if their employers control and direct the jobs they perform and how they perform them. The IRS streamlined the process for determining worker status under “common law” factors developed through judicial decisions, grouping the degree of control into three categories of evidence.

The first is behavioral control, which is simply the right to control and direct how work is done. The second law is financial control, which gives you the right to oversee the business aspects of workers’ activities. The last law concerns affiliation — that is, the type of relationship between the parties, including each side’s intent and how they perceive their relationship.

The IRS uses many factors to determine whether an independent contractor is a bona fide employee. For example, if you require the contractor to work on the premises, it suggests control if workers could perform their duties elsewhere. This may not be a huge factor if the independent contractor must work on a job site. But if a consultant could work off-site and yet you require him or her to report to your office or trailer, it could be a problem.

Another factor is whether you offer facilities and equipment. Construction workers usually rely on their employer for tools or at least an allowance to buy tools. You may be able to defend an independent contractor’s status if he or she shows up for work with the necessary items in hand.

Hourly, weekly or monthly payments typically point to an employer-employee relationship. To fortify an independent contractor’s status, pay by the job or on a straight commission basis.

A project’s success or failure usually doesn’t threaten employees’ paychecks. Conversely, those who can realize a profit or suffer a loss as a result of their services are usually deemed independent contractors.

Finally, if you have the power to fire a worker, he or she is likely an employee. Independent contractors generally can’t be dismissed as long as they produce the work under contract.

Best practices

To avoid misclassifying workers, create a questionnaire to gather facts about anyone you currently classify as an independent contractor. Then compare these facts to the common law factors mentioned above.

Also, ask independent contractors for evidence of their autonomy. Acquire copies of letterhead, invoices and business cards. If they operate through their own corporations, record their federal employer identification numbers and equivalent state numbers. Mandate written proof that they’ve obtained or lawfully waived coverage under workers’ compensation and unemployment compensation laws.

In addition, ask your attorney to help prepare a written agreement outlining your relationship with each independent contractor that supports their classification as such. Ask new independent contractors to sign the agreement before starting work.

Penalties and the VCSP

If the IRS determines that you’ve improperly classified an employee as an independent contractor, you might owe back payroll and income taxes that you should have withheld. You may be liable for interest and penalties as well.

To help companies with their worker classification rules, the IRS created the Voluntary Classification Settlement Program (VCSP) in September 2011. The program incentivizes employers to reclassify groups of workers from independent contractors to bona fide employees in exchange for a reduction in liability for back taxes.

The IRS made substantial revisions to the VCSP earlier this year. For example, employers accepted into the program will no longer be subject to a special six-year statute of limitations rather than the usual three years that normally applies to payroll taxes. Ask your tax advisor for further details.

Follow the rules

As a construction company owner, you understand the concept of working under a contract. So, as long as you follow the rules and document your independent contractors, you’ll likely have nothing to worry about.

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Is Your Immigration Program Up to Date?

By on April 23, 2012 in Construction, General, Governments

Sandersen Knox & Associates LLP, CPA, Tax Accountants, Auditors In recent months, U.S. Immigration and Customs Enforcement (ICE) has shifted its focus from employees working in the United States illegally to the employers who hire them.

To protect your company and its management against civil fines and possible criminal charges associated with undocumented workers, it’s important to have an immigration compliance program that’s up to date as part of your business planning process.

Reviewing your program

Here are some questions to ask:

1. Do you have a written immigration policy? Whether it’s part of an employee handbook or a separate document, you should have a written policy that states your company’s intention to comply with the Immigration Reform and Control Act of 1986 and sets forth procedures for ensuring compliance. You also should have employees acknowledge in writing that they understand the policy and will adhere to it.

2. Do you provide training? Training your human resources staff and other employees on your immigration policies and procedures is critical. It minimizes the risk of fines for hiring unauthorized employees and demonstrates to ICE that you’ve made a good-faith effort to comply with the law.Employees should be trained on completing and storing Form I-9 — “Employment Eligibility Verification.” For example, it’s advisable to store I-9 forms and supporting documentation in files separate from ordinary personnel files so that ICE auditors don’t have access to unrelated personnel information. Training also should include how to inspect documents presented to establish identity and employment eligibility, as well as how to respond to ICE visits or subpoenas.

3. Are you using the latest forms? Form I-9 is revised periodically, so be sure you’re using the latest version. At press time, the current version had a revision date of Aug. 7, 2009 (Rev. 08/07/09) printed in the lower right-hand corner. Immigration authorities will also accept the 02/02/09 version. You can download the form from “Most Searched Forms” at http://www.uscis.gov/portal/site/uscis.

Form I-9 Interactive Form I-9 to fill out or save to your PC.

 

 

 

 

 

 

4. Are you required to use E-Verify?Most construction firms with federal contracts are now required to participate in the E-Verify program. In addition, an increasing number of states require contractors doing government work to use E-Verify, and a few states even require large, private-sector contractors to use the program.E-Verify is a free, Web-based system that electronically verifies the employment eligibility of newly hired employees by comparing I-9 information against the Social Security Administration’s database. Even if you’re not required to use E-Verify, voluntary participation can be an easy, effective way to demonstrate good-faith compliance.

 

 

 

Getting Legal Advice

Given the serious consequences of noncompliance, it’s a good idea to consult your legal counsel to make sure your immigration program meets government standards.

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