Posted on Mar 12, 2019

Health care costs have skyrocketed over the last few decades. Fortunately, health savings accounts (HSAs) allow qualifying individuals to pay for certain medical expenses with pretax dollars. Here is what you need to know to put an HSA to work for you.

Healthy Growth

Over the last decade, many people have jumped on the HSA bandwagon. HSA assets exceeded $51 billion as of June 30, 2018, according to a recent survey conducted by HSA investment provider Devenir. That’s an increase of 20.4% compared to the previous year.

In addition, the total number of HSAs grew to 23.4 million as of June 30, 2018, up 11.2% compared to a year earlier. Devenir projects the number of HSA accounts to increase to 29 million by the end of 2020 with assets approaching $75 billion.

The Basics

With HSAs, individuals must take more responsibility for their health care costs, instead of relying on an employer or the government. The upside is that HSAs offer some tax benefits.

Under the Affordable Care Act (ACA), health insurance plans are categorized as Bronze, Silver, Gold or Platinum. Bronze plans — which have the highest deductibles and least generous coverage — are the most affordable. Platinum plans have no deductibles and cover much more, but they’re also significantly more expensive.

In many cases, the ACA has led to premium increases, even for those with less generous plans. However, these less generous plans also might make you eligible to open and contribute to a tax-advantaged HSA.

For the 2018 tax year, you could make a tax-deductible HSA contribution of up to $3,450 if you have qualifying self-only coverage or up to $6,900 if you have qualifying family coverage (anything other than self-only coverage). For 2019, the maximum contributions are $3,500 and $7,000, respectively. If you’re age 55 or older as of year end, the maximum contribution increases by $1,000.

To be eligible to contribute to an HSA, you must have a qualifying high deductible health insurance policy and no other general health coverage. For 2018, a high deductible health plan was defined as one with a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage. For 2019, the minimum deductibles are the same.

For 2018, qualifying policies must have had out-of-pocket maximums of no more than $6,650 for self-only coverage or $13,300 for family coverage. For 2019, the out-of-pocket maximums are $6,750 and $13,500, respectively.

Important note: For HSA eligibility purposes, high deductible health insurance premiums don’t count as out-of-pocket medical costs.

Deductible Contributions

If you’re eligible to make an HSA contribution for the tax year in question, the deadline is April 15 of the following year (adjusted for weekends and holidays) to open an account and make a tax-deductible contribution for the previous year.

So, there’s still time for an eligible individual to open an account and make a deductible contribution for 2018. The deadline for making 2018 contributions is April 15, 2019.

The write-off for HSA contributions is an “above-the-line” deduction. That means you can claim it even if you don’t itemize.

In addition, the HSA contribution privilege isn’t tied to your income level. Even billionaires can make deductible HSA contributions if they have qualifying high deductible health insurance coverage and meet the other eligibility requirements.

Important note: Sole proprietors, partners, LLC members, and S corporation shareholder-employees are generally allowed to claim separate above-the-line deductions for their health insurance premiums, including premiums for high deductible health plans that make you eligible for HSA contributions.

HSAs in the Real World

To show the tax perks of HSAs, consider the following example: Albert and Angie are a married couple in their 30s. They’re both self-employed, and both have separate HSA-compatible individual health insurance policies for all of 2019. Both policies have $2,000 deductibles.

For 2019, Albert and Angie can each contribute $3,500 to their respective HSAs and claim a total of $7,000 of write-offs on their 2019 joint return. If they’re in the 32% federal income tax bracket, this strategy cuts their 2019 tax bill by $2,240 (32% × $7,000). Over 10 years, they’ll save $22,400 in taxes, assuming they contribute $7,000 each year and remain in the 32% bracket.

Tax Treatment of Distributions

HSA distributions used to pay qualified medical expenses of the HSA owner, spouse and dependents are federal-income-tax-free. However, you can build up a balance in the account if contributions plus earnings exceed withdrawals for medical expenses. Any earnings are free from federal income tax unless you withdraw them for something other than qualified medical expenses.

So, if you’re in very good health and take minimal or no distributions, you can use an HSA to build up a substantial medical expense reserve over the years, while earning tax-free income along the way. Unlike flexible spending accounts (FSAs), undistributed balances in HSAs are not forfeited at year end. They can accumulate in value, year after year. Thus, an HSA can function like an IRA if you stay healthy.

Even if you empty the account every year to pay medical expenses, the HSA arrangement allows you to pay those expenses with pretax dollars. But there are some important caveats to bear in mind:

  • HSA funds can’t be used for tax-free reimbursements of medical expenses that were incurred before you opened the account.
  • If money is taken out of an HSA for any reason other than to cover qualified medical expenses, it will trigger a 20% penalty tax, unless you’re eligible for Medicare.

If you still have an HSA balance after reaching Medicare eligibility age (generally age 65), you can drain the account for any reason without a tax penalty. If you don’t use the withdrawal to cover qualified medical expenses, you’ll owe federal income tax and possibly state income tax. But the 20% tax penalty that generally applies to withdrawals not used for medical expenses won’t apply. There’s no tax penalty on withdrawals after disability or death.

Alternatively, you can use your HSA balance to pay uninsured medical expenses incurred after reaching Medicare eligibility age. If your HSA still has a balance when you die, your surviving spouse can take over the account tax-free and treat it as his or her own HSA, if he or she is named as the account beneficiary. In other cases, the date-of-death HSA balance must generally be included in taxable income on that date by the person who inherits the account.

For More Information

HSAs can provide a smart tax-saving opportunity for individuals with qualifying high deductible health plans. Contact us to help you set up an HSA or decide how much to contribute for 2019. And, remember, there’s still time to make a deductible contribution for your 2018 tax year, if you’re eligible.

Posted on Mar 3, 2019

The U.S. Department of Labor’s Wage and Hour Division (WHD) recently finished several investigations aimed at employers. The agency announced that seven different employers had violated federal laws involving minimum wages, overtime calculations, family and medical leave, the tip credit and work visas.

Court: Off-Duty Officers Were Entitled to Overtime

A federal appeals court recently ruled that a group of off-duty police officers who held side jobs with a private security company were employees of the company. Therefore, they were entitled to overtime pay under the Fair Labor Standards Act (FLSA).

What the Law Requires. The FLSA requires employers to pay overtime to employees who work more than 40 hours a week. Courts commonly use a “six factor” test to determine whether a worker is a contractor or an employee:

  • The degree of control exercised by  the employer over the business operations;
  • The relative investments of the employer and worker;
  • The degree to which the worker’s opportunity for profit and loss is determined by the employer;
  • The skill and initiative required to perform the job;
  • The permanency of the relationship; and
  • The degree to which the worker’s tasks are integral to the employer’s business.

Facts of the Case. The company provided private security and traffic control services to customers. It generally employed sworn law enforcement officers, although some had no police training. The company paid sworn officers more per hour than it paid nonsworn workers, but the duties performed by both groups were the same. A scheduler kept track of customer work requests and offered assignments to the security workers.

The company told workers when and where to report, and whom to report to upon arriving at a job. Occasionally, depending on the job, the workers were provided with equipment such as reflective jackets, stop/go signs and badge-shaped patches.

Workers who weren’t sworn police officers were required to buy police model vehicles. They followed customers’ instructions, complied with the security company’s standard policies, and sometimes were supervised by other workers from the company. Sworn police officers wore their official police uniforms. Nonsworn workers wore police-style uniforms that bore branded patches from the company. At the end of assignments, workers submitted invoices detailing the hours spent on the job. The workers, both sworn and nonsworn, were treated as independent contractors and were never paid overtime.

Appeals Court Ruling. The U.S. Court of Appeals for the Sixth Circuit found that all the workers were employees and should have been paid overtime. (Acosta v. Off Duty Police Services, Inc., Dkt. No. 17-5595/6071, 2/12/19)

Here are brief descriptions of the cases.

1. Minimum wage violations.

A Tennessee motel company owes $58,894 in back wages to four employees for minimum wage and overtime violations. The employers provided homeless individuals with rooms in exchange for front desk work without pay.

The maximum lodging credit allowed for the rooms totaled less than the required federal minimum wage of $7.25 per hour. Overtime hours weren’t accounted for because compensation consisted of housing only. The employer also didn’t maintain accurate records of hours worked.

2. Overtime calculation errors case #1.

A lighting manufacturer failed to include employees’ shift differentials when computing their overtime pay by basing the time-and-a-half calculation only on the workers’ hourly base rates. Failure to use shift differentials resulted in lower overtime than required by law.

In addition, the employer failed to maintain complete and accurate records of the hours that employees worked. The employer must pay $138,753 in back wages and liquidated damages to 829 employees.

3. Overtime calculation errors case #2.

A continuing care retirement community failed to include workers’ shift bonuses when calculating their overtime rates. The employer also failed to maintain accurate records of employee bonuses and hourly rates.

4. Tip credit violations.

WHD investigators uncovered willful violations of the Fair Labor Standards Act (FLSA) at a Pennsylvania restaurant chain. The employers shorted employees and pocketed 15% of customer tips charged on credit cards — well in excess of the 4% charged by credit card processors.

Additionally, the employers failed to notify tipped workers that they were using the tip credit against the minimum wage, a violation of the FLSA. The employers also paid some workers flat daily rates for all hours worked, even when their time records clearly showed them working upwards of 50 to 60 hours per week.

The employers agreed to pay $935,000 in back wages and liquidated damages and $65,000 in civil penalties to 201 employees for the willful violations.

5. Infringement of family and medical leave law.

An Alabama medical services company will pay lost wages to an employee for violating the Family and Medical Leave Act (FMLA).

The FMLA allows qualifying employees to take up to 12 weeks of unpaid leave for a serious health condition. WHD investigators determined that an employee who had taken time off to seek medical care for an FMLA-covered condition was unlawfully terminated. The company must pay lost wages of $1,859 and reimburse the employee $4,729 in medical expenses incurred due to losing her health insurance coverage when the employee was terminated.

6. Work visa violations case #1.

An owner and operator of two horse training facilities must pay $1,270,683 in back wages and damages to 30 employees for work visa and wage violations. WHD investigators discovered the employers had failed to pay prevailing wages required under the H-2B visa program and the promised rates under the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

Violations also included:

  • Collecting kickbacks from H-2B visa fees;
  • Impermissible deductions for transportation costs to and from the workers’ home countries;
  • Unsafe and unhealthy housing conditions; and
  • Failure to record overtime worked and deductions from wages.

A consent judgment filed in a federal district court requires the business to pay back wages and damages, plus an additional $100,000 in civil penalties. The company and its owner are enjoined from applying for any labor certification applications, including under the H-2B temporary visa program, for one year.

7. Work visa violations case #2.

In another work visa violation case, an administrative judge ordered an employer to pay an engineer employed through the H-1B visa program $43,366 in back wages and interest for failing to pay required wages as stated on the H-1B visa application. Additionally, the employer was found to have failed to maintain required records.

The judge denied the employer credit for $14,150 in cash payments to the worker because it had failed to report the payments on its payroll records and to report the wages to the IRS as required for the credit.

Cautionary Tales

These recent cases serve as a warning to employers about the implications of failing to comply with employment laws. When it comes to labor and payroll laws, there are many ways that your organization can get into trouble. Contact your HR, payroll and tax advisors for assistance staying in compliance.

Posted on Jan 18, 2019

The IRS is explaining, in a recent release, what employers should do if they become the victim of a W-2 scam.

Background Information

Any employer could become the target of a W-2 scam. In recent years, these scams have become one of the more dangerous e-mail crimes involving tax administration. The e-mails appear to be from an executive or organization leader to a payroll or human resources employee. It may start with a simple, “Hey, you in today?” and then asks for tax and personal information about employees. By the end of the exchange, all of an organization’s Forms W-2 for their employees may be in the hands of cybercriminals. This puts workers at risk for tax-related identity theft.

Because payroll officials believe they are corresponding with a company executive, it may take weeks for someone to realize a data theft has occurred. Generally, the criminals are trying to quickly take advantage of the theft. In some cases, they file fraudulent tax returns within a day or two to steal tax refunds. This scam is such a threat to taxpayers that a special IRS reporting process has been established. 

The IRS is advising employers who are the victims of this scheme to report it as follows:

  • E-mail dataloss@irs.gov to notify the IRS of a W-2 data loss and provide contact information. In the subject line, type “W2 Data Loss” so that the e-mail can be properly routed. Don’t attach any information about employees’ personally identifiable data.
  • E-mail the Federation of Tax Administrators at StateAlert@taxadmin.org to get information on how to report victim information to the states.
  • A business/payroll service provider should file a complaint with the FBI’s Internet Crime Complaint Center (IC3.gov). A business/payroll service provider may be asked to file a report with their local law enforcement agency.
  • Notify employees so they can take steps to protect themselves from identity theft. The Federal Trade Commission’s www.identitytheft.gov provides guidance on general steps employees should take.
  • Forward the scam e-mail to phishing@irs.gov.

The IRS is also encouraging employers to put steps and protocols in place for the sharing of sensitive employee information such as Forms W-2. One example would be to have two people review any distribution of sensitive W-2 data or wire transfers. Another example would be to require a verbal confirmation before e-mailing W-2 data. Employers also are urged to educate their payroll or human resources departments about these scams.

Posted on Jan 8, 2019

The trust fund penalty is one of the more onerous tax provisions on the books. In short, a company owner or officer, or another “responsible person,” may be held personally liable for any unpaid payroll taxes. Because the assessment is for 100% of the tax due, this provision is sometimes called the “100% penalty.”

The IRS is allowed to pursue more than one person for this tax obligation. In a recent Third Circuit Court of Appeals case, USA v. Darren Commander, the court imposed the trust fund penalty against a corporate co-owner even though it was the other owner who was responsible for payroll. The U.S. Supreme Court has declined to review the appeals court’s decision, so the decision stands.

Who’s Responsible

Can You Settle with the IRS?

As with other types of tax debt, taxpayers who owe the trust fund penalty have options. For instance, if you can’t pay the full amount owed, you may apply for a payment plan or installment agreement. Alternatively, you can try to settle the debt for less than you owe through the “offer-in-compromise” program or a partial payment installment agreement.

The most important thing is to contact the IRS and set up an arrangement before the agency tries to garnish your wages or seize your assets. You can’t discharge those penalties in bankruptcy.

The trust fund penalty may be assessed against any person who:

  1. Is responsible for collecting or paying withheld income and employment taxes or for paying collected excise taxes, and
  2. Willfully fails to collect or pay those taxes.

Typically, this liability is imposed on a company owner or president, but it potentially could extend down the ranks to a mid-level manager or bookkeeper.

Notably, a responsible person for these purposes is any person — or group of people — who has the duty to perform and the power to direct the collecting, accounting and paying of trust fund taxes. Accordingly, the IRS says this could be:

  • An officer or employee of a corporation,
  • A member or employee of a partnership,
  • A corporate director or shareholder,
  • A board of trustees member of a not-for-profit organization,
  • Someone with authority and control over funds to direct their disbursement,
  • Another corporation or third-party payer,
  • Payroll Service Providers (PSP) or responsible parties within a PSP,
  • Professional Employer Organizations (PEO) or responsible parties within a PEO, or
  • Responsible parties within the common law employer (PSP/PEO client).

The IRS broadly interprets “willful failure.” The failure doesn’t have to be intentional. For example, the trust fund penalty may be applied in situations where someone knew, or should have known, about the taxes that should have been paid, but weren’t. In other words, the penalty may be imposed on someone regardless of their intentions. 

Summary Judgment

In Darren Commander, a trial court granted summary judgment against a 50% owner of a woodwork fabrication and installation business.

He and his co-owner (who died during the court proceedings) formed the woodworking company in New Jersey in 2003. They were the sole officers and owners. All decisions and actions, as well as most significant financial transactions, could only be made with the consent of both parties. However, the other co-owner was responsible for hiring field employees, assigning employees to each job, ensuring work was completed in the field, recording hours worked and distributing paychecks to employees.

From 2007 through 2009, the company failed to pay income and employment taxes for its employees even though workers were being paid. The IRS imposed trust fund penalties totaling $1.6 million against the defendant in 2010.  

The trial court granted summary judgment to the government. It concluded that there is no factual dispute that the defendant was a responsible person who willfully failed to pay the company’s taxes. In support of this decision, the court noted that:

  • The defendant was a 50% owner and one of two officers of the company.
  • His approval was required for all company decisions and actions and many significant financial transactions, and
  • He had check-signing authority and power to pay the company’s bills and sign paychecks.

The defendant argued that his co-owner was solely responsible for paying the taxes. But the court found this to be irrelevant because the defendant was, in fact, a responsible person. The court concluded that the defendant had actual knowledge, or should have known, that the taxes weren’t being paid and that he acted willfully within the meaning of the trust fund penalty provision.

The appeals court rejected the defendant’s arguments and upheld the trial court’s grant of summary judgment for the government. Critical to the court’s decision: Liability for the trust fund penalty can be extended to more than one person.

The appeals court also dismissed the defendant’s claim that he had originally misspoken in saying that he was aware of the tax deficiencies during the tax years in question and actually learned of it “later.” The court determined that the defendant didn’t produce any evidence to substantiate this assertion. Finally, it disagreed with the defendant’s complaint that he wasn’t granted sufficient opportunity to prove his arguments.

The defendant appealed the Third Circuit’s decision to the U.S. Supreme Court. The Court has declined to review the case.

Letter of the Law

If the IRS determines in a payroll tax dispute that you’re a responsible person, it will issue a letter stating that it plans to assess the trust fund penalty against you. You then have 60 days (75 days if the letter is sent to an address outside the U.S.) from the date of the letter to appeal. This communication will explain your appeal rights. If you don’t respond to the letter, the IRS will assess the penalty against you and send you a Notice and Demand for Payment.

Once the trust fund penalty is assessed, the IRS can take collection action against your personal assets. For example, it may file a federal tax lien or take levy or seizure action.

You should, of course, do everything in your power to avoid the trust fund penalty. Prioritize the IRS over any other creditors you might have. And if you can’t meet your payroll tax obligations, arrange to meet with the IRS to investigate your options (see right-hand box). Also contact your professional advisors for guidance.

Posted on Mar 30, 2018

Every company or organization will have different needs for payroll administration based on business and compensation structures, benefit offerings, the specific industry and the state and local tax laws. While determining a good fit for outsourced payroll, anticipate how much time the set-up of such services could take. A long set-up time and possible mistakes could have a significant impact on business management and employee morale. Rather than having our clients input all of their data, we walk them through the data collection process. We also provide consultation on areas where the company has had questions or problems, such as garnishment deductions or shareholder compensation. We alert them to any changes in wage and hour laws or multi-state laws that could affect them.

Our goal is to limit client exposure to penalties as we manage payroll. Common questions include:

  • Structure of the payroll
  • How often employees are paid
  • Direct deposit or by check (or both!)
  • Structure of the company and number of offices and employees
  • Location of offices (multi-state?)
  • Types of benefits
  • Unusual deductions
  • Unusual compensation

Collecting this information up front allows us to help clients design an outsourced model that makes sense for them, and doesn’t leave them trying to figure it out for themselves. We find that some clients like to manage parts of the payroll and benefits process themselves, while other parts are best handled through outsourcing.

The Outsourced Payroll Onboarding Process

As a CPA firm dedicated to payroll administration and consulting, Cornwell Jackson has onboarded new clients in less than a month depending on the level of payroll complexity. Our goal is always onboarding within 30 to 45 days. We typically recommend that companies convert at the beginning of a new quarter or pay period — or at year-end — to make the transition align with financial reporting deadlines. A typical onboarding process with our firm looks like this:

  • Client consultation to design the outsourced model
  • Client data gathering
  • Buildout of the payroll account
  • Payroll set-up checklist to cover all items

Once your company has an efficient model for payroll administration, it is much easier to adjust items as needed through the year. For example, we run across a lot of questions regarding personal use of a company-owned vehicle as a benefit. The ratio of personal use must be calculated for the employees’ W-2s and the benefit run properly through payroll. New hires and promotions also bring with them a wealth of payroll questions, but are more easily handled with an efficient system.

When your CPA is in touch with daily business realities through payroll administration, the long-term value extends beyond payroll accuracy. A dedicated team can consult with you on decisions such as when to hire more employees, when to adjust tax planning and cash flow strategies and timing of bonuses. Payroll efficiency even ties into business valuations as a consideration of overall processes and systems in place to run the business.

Payroll is the most up-to-date KPI in a business — and the most expensive.  Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Download the Whitepaper: With Payroll Outsourcing, Don’t Go it Alone

Scott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published May 13, 2016. Updated on March 30, 2018. 

Posted on Mar 20, 2018

Payroll Outsourcing

For many small businesses, payroll may be handled in-house. And yet, the laws and regulations surrounding employee compensation and benefits can challenge owners and back office staff to stay efficient and compliant. Payroll ties directly into individual and company tax reporting as well as employee benefit compliance. If and when companies choose payroll outsourcing, they must weigh the potential benefits against the ability of the payroll provider to deliver a high level of customer service and communication. Companies and industries differ on how they structure payroll and benefits. Laws and regulations also vary state by state. Consulting on payroll structure, schedules, regulatory changes and reporting, therefore, should be part of the relationship while still being cost effective for the company. It’s helpful to start this discussion with your CPA.

What to Ask your CPA about Payroll Outsourcing

Some CPA firms offer payroll administration as part of basic or strategic Payroll Outsourcing WP Downloadaccounting services. The level of administration and services vary widely. The potential benefit of having your CPA firm handle payroll administration, however, is that the team understands the world of taxes and accounting. They can streamline payroll reporting, deposits and filing schedules into the audit or tax deadlines they already handle for the business.

However, not every CPA firm offers payroll administration. Due to its complexity, it’s also important that the firm has a staff of professionals dedicated to this area of your business. If, in fact, the firm offers a focused niche in payroll administration and consulting, there are several benefits to the arrangement:

  • Expanded resources to monitor new compliance issues
  • Reduced overhead costs (assuming a packaged engagement with other services)
  • Multi-state payroll experience
  • Corrected instances of overpayment or underpayment
  • Managed filing and payment schedules with IRS, state and local tax authorities
  • Limited client exposure to potential penalties
  • Consulting on software options and efficient payroll structures
  • Streamlined communication with other tax, audit and business needs

At Cornwell Jackson, we offer payroll administration and consulting services to our clients. We have invested in software and training for a team dedicated to this service, including certification as a CPP through the American Payroll Association.

The need was evident after too many instances of misclassification 1099 errors as well as W2 mistakes at tax time. We also noted mistakes in HSA and life insurance reporting and general improper reporting of cash and non-cash benefits. Our clients were paying for payroll administration, and then paying our firm to fix mistakes. We realized that our experience could help reduce or prevent problems before they even happen — and reduce our clients’ expenses.

After investigating the value our firm could provide in this area, we learned about many differences between payroll providers. When discussing payroll administration with your CPA firm or an outsourced service, there are several questions you should ask:

  • How much experience does the provider have in payroll administration — and is there a dedicated team?
  • Will the team walk you through data collection and set-up or are you on your own?
  • Who is your go-to contact to ask questions about liabilities or deadlines?
  • Is the provider NACHA compliant for ACH direct deposits?
  • Can you arrange for payroll tax payments on a schedule that supports cash flow along with compliance?

This last question is an important business consideration that most companies don’t know about. Some payroll services withdraw all funds from the business account for payroll transfers and taxes all at once, even if taxes aren’t due for a few weeks. If your receivables come in the first week of the month and payroll taxes are due on the 15th of the month, you can schedule payments in a way that supports cash flow while still being compliant. In addition, payroll services may not provide guidance on industry-specific issues like auto dealer comps or law firm shareholder bonuses, for example. Business owners must carefully consider the level of expertise a provider has in your industry.

Payroll is the most up-to-date KPI in a business — and the most expensive.  Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Continue Reading: Outsourced Payroll Onboarding: Build in time for transition and results

SB HeadshotScott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published April  18, 2016. Updated on March 20, 2018. 

 

Posted on Mar 12, 2018

The Tax Cuts and Jobs Act (TCJA) is the biggest overhaul of the tax code in more than 30 years.

For instance, the TCJA cuts income tax rates for individuals and corporations, doubles the standard deduction, eliminates personal exemptions and repeals or modifies numerous deductions. It will have a major impact in 2018 and beyond.

But there’s more. In addition to withholding changes already reflected in employees’ paychecks, the TJCA includes other benefit-related provisions affecting payroll. Following are six prime examples:

1. Credit for employer-paid family and medical leave.

This is brand new. The TCJA creates a tax credit for wages paid to qualifying employees on family and medical leave. This credit can be as high as 25% of the wages paid.

To qualify, an employer must offer at least two weeks of annual paid family and medical leave, as described by the Family and Medical Leave Act (FMLA), to qualified employees. The paid leave must provide at least 50% of the employee’s wages.

Qualified individuals are those who have been working for the employer for at least one year, and, in the preceding year, weren’t paid compensation that exceeded 60% of $72,000 (threshold will be indexed for inflation).

The credit equals 12.5% of the amount of wages paid during a leave period and tops out at 25%. The credit is increased gradually for payments above 50% of wages paid. No double-dipping: Employers can’t also deduct wages claimed for the credit.

Note that the new credit is only available for 2018 and 2019. It could, however, be extended by a future act of Congress.

2. Transportation benefits.

Prior to 2018, employers could deduct certain transportation benefits of up to $250 a month (indexed to $255 per month in 2017) that were provided tax-free to employees. These included:

  • Mass transit passes. This is any pass, token, fare card, voucher or similar item entitling a person to ride free of charge or at a reduced rate on mass transit or in a vehicle seating at least six adults plus the driver if the person operating the vehicle is in the business of transporting persons for pay or hire.
  • Commuter highway vehicle expenses. These vehicles must seat at least six adults plus the driver. There must have been a reasonable expectation that at least 80% of the vehicle mileage would be for transporting employees between their homes and workplaces. Employees also had to occupy at least 50% of the seats (not including the driver’s seat).
  • Qualified parking fees. This benefit covered employer-provided parking for employees on or near the business premises. It also provided fees for parking on or near the location from which employees commuted to work using mass transit, commuter highway vehicles or carpools, such as the parking lot of a train station.

A tax-free benefit of up to $20 a month was allowed for bicycle commuting.

The TCJA eliminates the tax deduction for these three main transportation benefits beginning in 2018. But the benefits remain tax-free to employees. The tax exclusion for bicycle commuting is repealed.

3. Entertainment expenses.

Under prior law, an employer could deduct 50% of the cost of business entertainment and meal expenses that were “directly-related to” or “associated with” the business. Notably, this included entertainment in a clear business setting and meals immediately preceding or following a “substantial business discussion.”

Tax regulations imposed strict recordkeeping requirements for deducting business entertainment expenses. For example, you had to record the time, place and date of the entertainment, the person or people entertained and the business relationships of the parties.

Beginning in 2018, this deduction is repealed. However, employers may still deduct 50% of the cost of business meals while traveling away from home.

4. On-premises meals.

In the past, employers could deduct certain meals provided to employees on the business premises if those meals qualified as a de minimis fringe benefit. For instance, the deduction could be applied to meals furnished while employees worked late hours, as well as food and beverages provided to employees at on-site eating facilities such as a company cafeteria. The value of these benefits was tax-free for employees.

An employer could deduct 100% of the cost of these benefits.

Under the TCJA, the deduction is reduced to 50% of the cost and is eliminated after 2025. However, the value continues to be tax-free to employees.

5. Moving expense reimbursements.

Previously, if employees qualified under a two-part test involving distance and time, they could deduct their out-of-pocket job-related moving expenses on their personal income tax returns. The deductions were claimed “above-the-line,” so they were available to both those who itemized and those who claimed the standard deduction. Alternatively, employers may have reimbursed employees tax-free for qualified moving expenses.

Now, starting in 2018, the TCJA repeals both the moving expense deduction and the tax exclusion except for active duty military personal.

6. Achievement awards.

Currently, an employer can deduct up to $400 of the value of achievement awards to employees for length of service or safety. The tax exclusion is multiplied by four to $1,600 for awards under a written nondiscriminatory achievement plan. On the receiving end, employees aren’t taxed on the value of the awards that don’t exceed the employer’s deduction.

Beginning in 2018, the TCJA clarifies that the tax deduction and corresponding tax exclusion don’t apply to cash, gift coupons or certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and “other similar items.” However, the tax breaks are still available for gift certificates that allow the recipient to select tangible property from a limited range of items preselected by the employer.

Reminder: This is only an overview of six of the key tax law changes affecting payroll matters. Do you have any questions about the new law’s impact on benefits? Don’t hesitate to contact your payroll providers for more details.

Fringe Benefits Surviving the Axe

Several fringe benefit crackdowns threatened by Congress didn’t make it into the final version of the new tax law. The items on the chopping block that were eventually spared include:

  • Dependent care assistance plans,
  • Adoption assistance programs,
  • Employer-provided housing, and
  • Educational assistance programs.

Also, certain liberalizations of the hardship distribution safe-harbor rules were contemplated, but eventually skipped by the lawmakers.

Posted on Mar 8, 2018

Payroll Outsourcing and Payroll Administration

There is a common story we see across small businesses of all sizes. Owners and operators of the company are focused on top line growth, hitting the pavement to bring in new business. They add employees to support the new business growth. They add benefits to keep those great employees. Before realizing it, the owners and small bookkeeping staff are overwhelmed with benefit and payroll administration. Is the company doing it right? Do owners and employees know what they don’t know?

At this point, the owners seek advice from other business owners and their CPA. Would outsourcing payroll make sense or should they add in-house staff to manage it better? After reviewing a few payroll services, the company is understandably faced with more questions about which service provides the best options — not to mention price.

Once decided on a payroll service, the real education begins. The company is still providing a lot of information to the payroll service to set up the structure and system, such as personnel information, their employment status, types of benefits and how each employee wants those wages and benefits managed through payroll. Later, staff also must reach out when there are new hires, promotions and changes to benefits. Depending on the payroll service, owners and operators might not get a lot of help understanding everything. They are also on their own to figure out internal processes that make information gathering and sharing simpler.

Let’s say the business expands even more to another state. Then the owner is faced with multi-state payroll complications. Although the solution to a well-managed payroll and benefits system takes time and strategy, the opportunity to address payroll complexity first lies with your CPA. This relationship can either simplify or increase complexity, so let’s look at some of the payroll pitfalls and questions every business owner should consider.

Pitfalls of Poorly Managed Payroll Administration

Businesses can face serious fines and penalties from the Internal Revenue Payroll Outsourcing WP DownloadService and other tax authorities for failing to comply with timely payments and reporting. At a minimum, employers must account for federal income tax, federal and state unemployment tax, Social Security and Medicare. Many companies have run into trouble in the areas of paying unemployment taxes, making late payroll deposits, incorrectly classifying employees as independent contractors on 1099s and assuming that depositing payroll is the same as reporting.

Penalties can be classified and pursued as “failure to deposit,” “failure to pay” or “failure to file.” Worst-case scenarios if payroll issues aren’t resolved could include losing the business and/or being charged with a federal crime. Individual shareholders and even corporate officers can be pursued and assessed penalties under certain circumstances.

The Department of Labor’s impending changes to overtime exemption rules are creating even more angst in the area of wage and hour compliance. Employees previously exempt from overtime rules may now be considered non-exempt, leading to the need to track overtime hours and communicate possible changes in benefits. It may even require employers to dictate how employees can take time off or how they work outside of normal business hours. These changes tie directly into payroll administration and tax planning.

On the benefits side, employers can offer a variety of things to compete for talent as well as help employees work efficiently. Properly classifying these benefits and properly withholding for pre-tax or taxable benefits simply adds to the complexity. Handle something wrong, and you will have compliance problems as well as upset employees.

It is fair to say that payroll administration and compliance is a big deal, and the decision on whether or not to outsource should not be taken lightly.

Payroll is the most up-to-date KPI in a business — and the most expensive.  Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Continue Reading: Things to Ask your CPA about Payroll Outsourcing

SB HeadshotScott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published April 6, 2016. Updated on March 8, 2018. 

 

Posted on Feb 13, 2018

The new Tax Cuts and Jobs Act (TCJA) eliminates some deductions that have been staples of businesses for years.

Case in point: The TCJA repeals the employer deduction for providing transportation fringe benefits, although the perks presumably will remain tax-free to employees if they are still offered.

The Way It Was: Three Eligible Benefits

Under the previous law, employers could deduct expenses for certain transportation fringe benefits. There are three main types of fringe benefits that employers were allowed to provide, either individually or in any combination.

1. Mass transit passes. This category includes: Any pass, token, fare card, voucher or similar item, entitling a person to ride free or at a reduced rate on mass transit or in a vehicle seating at least six passengers, if a person in the business of transporting for pay or hire operates it. Mass transit may be publicly or privately operated and includes transportation by bus, rail or ferry.

2. Commuter highway vehicle expenses. These are vehicles that carry at least six passengers. There must be a reasonable expectation that at least 80% of the vehicle mileage will be for transporting employees between their homes and workplaces and employees must occupy at least 50% of the vehicle’s passenger seats.

A tax-free arrangement may involve van pooling in one of the following forms:

  • Employer-operated van pools. The employer either purchases or leases vans so employees may commute together to work, or the employer contracts with and pays a third party to provide the vans, and pays some or all of the costs of operating the vans.
  • Employee-operated van pools. In this arrangement, employees independently operate a van for commuting purposes.
  • Privately or publicly operated van pools. The arrangement qualifies if the van seats at least six passengers, but the “80/50 rule” (see above) doesn’t have to be met.

3. Qualified parking fees. This benefit features employer-provided parking for employees on or near the workplace. It also covers fees for parking on or near the location from which employees commute using mass transit, commuter highway vehicles or carpools (for example, the parking lot for a train station). However, it doesn’t extend to parking at or near the employee’s home.

The Protecting Americans from Tax Hikes (PATH) Act, eventually placed these three fringe benefits on an equal footing with a maximum exclusion of $250 per month. The PATH Act also provided inflation indexing in future years. For 2017, the maximum that could be excluded by employees was increased to $255 a month, and for 2018, it increases to $260 a month.

Qualified transportation benefits may be provided directly by an employer or through a bona fide reimbursement arrangement. However, cash reimbursements for transit passes qualify only if a voucher or a similar item isn’t readily available for direct distribution by the employer.

The Way It Is Going Forward: Changes

The TCJA includes significant changes for the deduction of transportation fringe benefits. No deduction is allowed for the expense of a qualified transportation fringe benefit an employer provides. However, the law generally doesn’t address the tax-free treatment afforded to employees receiving the benefits (see box below, Bicycling Benefit Comes to Screeching Halt). As a result, the benefits appear to remain tax-free for now.

Moreover, an employer can’t deduct any expense incurred for providing transportation — or any payment or reimbursement — to its employees. In other words, you can’t circumvent the crackdown by simply reimbursing employees for their commuting costs.

Key exception: The ban on deductions doesn’t apply to payments made for an employee’s safety. The IRS will likely flesh out this exception in new guidance, but existing regulations point to two possible scenarios:

1. An employer pays for an employee’s transportation home when they work late at night and it’s not safe to ride on public transportation, and

2. The employer provides employees with special vehicles (for example, armored cars) or chauffeurs for safety reasons.

Rethinking Benefits Packages

As a result of the changes under the TCJA, an employer may want to rethink its fringe benefit package for employees. Although the rules can’t be circumvented through reimbursements or similar payments, additional wages can help make up the shortfall for employees, taking into account that wages are taxable to recipients. Consider the best approach for your company under the new law.

Bicycling Benefit Comes to Screeching Halt

Now the Tax Cuts and Jobs Act bars employers from deducting bicycling benefits and eliminates the corresponding tax exclusion for employees (unlike the three main transportation benefits for which only the employer deductions are specifically eliminated).

These changes take effect in 2018, but sunset after 2025.

Before the law change, an employer could provide a tax-free fringe benefit to cyclists who rode their bikes to and from work. The maximum monthly allowance of $20 a month could be used to pay for reasonable expenses such as the cost of a bike, repairs, improvements and storage. However, this bicycling benefit couldn’t be offered in conjunction with any other transportation fringe benefit.

Posted on Feb 6, 2018

Being a joint employer means that you and another employer share, both “individually and jointly,” the responsibility of complying with labor laws and regulations. So if this classification applies to your business, it’s critical that you pay close attention to how your fellow joint employer deals with the employees you share.

Most employers take pains to avoid joint employer status for that reason, but it doesn’t always work out that way. Three years ago, the National Labor Relations Board (NLRB) took a hard line position on this status in a case involving Brown Ferris Industries (BFI).

Union Representation Case

A group of workers employed by Leadpoint (a staffing services company) who performed services for BFI were seeking union representation. The union (Teamsters Local 350) wanted BFI to be ruled a joint employer, with the expectation that BFI could afford to offer a more generous contract than would be possible with Leadpoint. The conflicting opinions were taken to the NLRB for resolution.

BFI argued, in effect, that it wasn’t a joint employer because it only had “indirect” control over those employees, and that although it might in theory be able to exercise some level of control over the employees, it hasn’t done so. But the majority of NLRB members disagreed, ruling that even with only unexercised and indirect control, BFI should be considered a joint employer. BFI appealed the ruling to the federal court system and the case hasn’t yet been decided. However, in light of recent changes at the NLRB, the company may be in a much more favorable position.

After the election of Donald Trump, the composition of the NLRB was modified, resulting in a more business-friendly majority which takes a dim view of the Board’s 2015 ruling in the BFI case. It expressed that opinion in a new case involving an employment services company and a construction company. The majority opinion stated that the “indirect control” standard applied in the BFI case represented a “distortion of common law,” and that it would prevent the NLRB from “fostering the stability of labor-management relations.”

Joint Employment Scenarios

So returning to square one, here are the relevant criteria you can use to assess whether you could be pulled into joint employer status, as described by the Department of Labor (DOL) Wage and Hour Division. The most common joint employment situations are the following:

1. Where the employee has two (or more) technically separated or associated employers, or

2. Where one employer provides labor to another employer and the workers are economically dependent on both employers.

Here are some examples of a possible joint employer relationship under the first scenario offered by the DOL:

The employers have an arrangement to share the employee’s services,

One employer acts in the interest of the other in relation to the employee, or

The employers share control of the employee because one employer controls, is controlled by, or is under common control with the other employer.

Degree of Association

The joint employer status determination will “focus on the degree of association between the two employers,” according to the DOL. Questions that will lead to a determination include:

  • Who owns or operates the possible joint employers?
  • Do the employers have any overlapping officers, directors, executives or managers?
  • Do the employers share control over operations?
  • Are the operations of the employers intermingled?
  • Does one employer supervise the work of the other?
  • Do the employers share supervisory authority over the employee?
  • Do the employers treat the employees as a pool of workers available to both of them?
  • Do they share clients or customers?
  • Are there any agreements between the employers?

Under the second scenario (that is, where one employer provides labor to another employer and the workers are economically dependent on both employers) joint employer status would be evaluated with questions including:

  • Does the other employer direct, control or supervise the work?
  • Does the other employer have the power to hire or fire the employee, change employment conditions, or determine the rate and method of pay?
  • How permanent or lengthy is the relationship between the employee and the other employer?
  • Is the work performed on the other employer’s premises?
  • Does the other employer perform functions for the employee typically performed by employers, such as handling payroll or providing tools, equipment or Workers’ Compensation insurance, or, in the case of agriculture, providing housing or transportation?

There is, inevitably, some subjectivity in joint employer status determination. The DOL says the ultimate focus is on what it calls the “economic realities of the relationship.” But, thanks to the NLRB’s rejection of the broader “indirect control” standard, fewer companies are likely to be deemed as joint employers. When in doubt, however, consult with a qualified employment law attorney.