Give your 401(k) plan a checkup at least once a year

In many industries, offering a 401(k) plan is a competitive necessity. If you don’t offer one and a competitor does, it could mean the difference in a job candidate’s decision to accept their offer over yours. It could even send employees heading for the door.

Assuming you do offer a 401(k), the challenge then becomes plan maintenance and compliance. Just as you presumably visit your doctor annually for a checkup, you should review the administrative processes and fiduciary procedures associated with your plan at least once a year. Let’s look at some important areas of consideration:

Investments. Study your plan’s investment choices to determine whether the selections available to participants are appropriate. Does the lineup offer options along the risk-and-return spectrum for all ages of participants? Are any pre-mixed funds, which are based on age or expected retirement date, appropriate for your employee population?

If the plan includes a default investment for participants who have failed to direct investment contributions, check the option to ensure that it continues to be appropriate. If your company plan doesn’t have a written investment policy in place or doesn’t use an independent outside consultant to assist in selecting and monitoring investments, consider incorporating these into your investment procedures.

Fees. 401(k) plan fees often come under criticism in the media and can aggravate employees who follow their accounts closely. Calculate the amount of current participant fees associated with your plan’s investments and benchmark them against industry standards.

Investment managers. Have you documented in writing the processes your plan has in place for the selection and monitoring of investment managers? If not, doing so in consultation with an attorney is highly advisable. If you have, reread the documents to ensure they’re still accurate and comprehensive.

Administrator. Solicit and monitor participant feedback on the administrator so that you know about grumblings before they grow into heated complaints. Further, put criteria in place to assess the plan administrator’s performance on an ongoing basis and to benchmark performance against industry standards.

Compliance. Are your plan’s administrative procedures in compliance with current regulations? If you intend your plan to be a participant-directed individual account plan, are all the provisions of ERISA Section 404(c) being followed? Have there been any major changes to 401(k) regulations over the last year? These are just a few critical questions to ask and answer.

A 401(k) is usually among the most valued benefits a business can offer its employees, but you’ve got to keep a close and constant eye on its details. We’d be happy to help you assess the costs and other financial details of your company’s plan.

© 2020

How business owners may be able to reduce tax by using an S corporation

Do you conduct your business as a sole proprietorship or as a wholly owned limited liability company (LLC)? If so, you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by using an S corporation.

Self-employment tax basics

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 ($137,700 for 2020) 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.

Similarly, if you conduct your business as a partnership in which you’re a general partner, in addition to income tax you are 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 be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.

An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.

Salary must be reasonable

However, be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.

There’s no simple formula regarding what is considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.

Converting from a C to an S corp

There can be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when appreciated assets held by the C corporation at the time of the conversion are subsequently disposed of. However, there may be ways to minimize its impact.

As explained above, an S corporation isn’t normally subject to tax, but when a C corporation converts to S corporation status, the tax law imposes a tax at the highest corporate rate (21%) on the net built-in gains of the corporation. The idea is to prevent the use of an S election to escape tax at the corporate level on the appreciation that occurred while the corporation was a C corporation. This tax is imposed when the built-in gains are recognized (in other words, when the appreciated assets are sold or otherwise disposed of) during the five-year period after the S election takes effect (referred to as the “recognition period”).

Consider all issues

Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, including the built-in gains tax and how much the business should pay you as compensation.

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Do you want to go into business for yourself?

Many people who launch small businesses start out as sole proprietors. Here are nine tax rules and considerations involved in operating as that entity.

1. You may qualify for the pass-through deduction. To the extent your business generates qualified business income, you are eligible to claim the 20% pass-through deduction, subject to limitations. The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction.

2. Report income and expenses on Schedule C of Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have losses, they will generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”

3. Pay self-employment taxes. For 2020, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment of up to $137,700, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

4. Make quarterly estimated tax payments. For 2019, these are due April 15, June 15, September 15 and January 15, 2021.

5. You may be able to deduct home office expenses. If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.

6. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.

7. Keep complete records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.

8. If you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.

9. Consider establishing a qualified retirement plan. The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re are withdrawn. Because many qualified plans can be complex, you might consider a SEP plan, which requires less paperwork. A SIMPLE plan is also available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.

Seek assistance

If you want additional information regarding the tax aspects of your new business, or if you have questions about reporting or recordkeeping requirements, please contact us.

© 2020

How to make the most of your multigenerational workforce

Many of today’s businesses employ workers from across the generational spectrum. Employees may range from Baby Boomers to members of Generation X to Millennials to the newest group, Generation Z.

Managing a workforce with a wide age range requires flexibility and skill. If you’re successful, you’ll likely see higher employee morale, stronger productivity and a more positive work environment for everyone.

Generational definitions

Definitions of the generations vary slightly, but the U.S. Chamber of Commerce Foundation defines them as follows:

• Members of the Baby Boomer generation were born from 1946 to 1964,

• Members of Generation X were born from 1965 to 1979,

• Members of the Millennial generation were born from 1980 to 1999, and

• Members of Generation Z were born after 1999.

Certain stereotypes have long been associated with each generation. Baby Boomers are assumed to be grumbling curmudgeons. Gen Xers were originally consigned to being “slackers.” Millennials are often thought of as needy approval-seekers. And many presume that a Gen Zer is helpless without his or her mobile device.

But successfully managing employees across generations requires setting aside stereotypes. Don’t assume that employees fit a certain personality profile based simply on age. Instead, you or a direct supervisor should get to know each one individually to better determine what makes him or her tick.

Best practices

Here are just a couple best practices for managing diverse generations:

Recognize and respect value differences. Misunderstandings and conflicts often arise because of value differences between managers and employees of different generations. For example, many older supervisors expect employees to do “whatever it takes” to get the job done, including working long hours. However, some younger employees place a high value on maintaining a healthy work-life balance.

Be sure everyone is on the same page about these expectations. This doesn’t mean younger employees shouldn’t have to work hard. The key is to find the right balance so that work is accomplished satisfactorily and on time, and employees feel like their values are being respected.

Maximize each generation’s strengths. Different generations tend to bring their own strengths to the workplace. For instance, older employees likely have valuable industry experience and important historical business insights to share. Meanwhile, younger employees — especially Generation Z — have grown up with high-powered mobile technology and social media.

Consider initiatives such as company retreats and mentoring programs in which employees from diverse generations can work together and share their knowledge, experiences and strengths. Encourage them to communicate openly and honestly and to be willing to learn from, rather than compete with, one another.

A competitive advantage

Having a multigenerational workforce can be a competitive advantage. Your competitors may not have the hard-fought experience of your older workers nor the fresh energy and ideas of your younger ones. Our firm can help you develop cost-effective strategies for hiring, retaining and maximizing the productivity of employees.

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Getting help with a business interruption insurance claim

To guard against natural disasters and other calamities, many companies buy business interruption insurance. These policies provide cash flow to cover revenues lost and expenses incurred while normal operations are limited or suspended.

But buying coverage is one thing — making a claim and receiving the funds is quite another. Depending on the scope of your loss, the insurer may enlist its own specialists to audit and reduce your claim. Fortunately, you can enlist a CPA to help you prepare a claim, quantify business interruption losses and anticipate your insurer’s challenges.

Major roles

There are two major roles your accountant can play in managing the claims process:

1. Point person. He or she can be the primary contact with the insurer, dealing with the typical onslaught of document requests. This leaves you free to run your business and bring it back up to speed.

Your CPA can also keep the claims process on track by informing the insurer about your actions and dealing with requests to inspect the damaged property. It’s possible that your accountant may already have an established relationship with the insurer and knows how its claims department works.

2. Damage estimator. Most policies define losses based on the earnings a company would have made if the interruption hadn’t occurred. To project lost profits, a CPA can analyze, identify and segregate revenues and expenses. The insurer will cover only losses that are directly attributable to the damage, as opposed to macroeconomic or other external causes, such as an economic downturn.

Detailed documentation

Most insurers require you to provide detailed documentation on the steps you took to mitigate losses during the business interruption period, which is the time it took your company to resume normal operations. The steps may involve shutting down all or part of the business or moving to a temporary location. The interruption period is critical and one of the determining factors the insurer will use when examining the total amount of your company’s claim.

Your CPA can review your documentation and, in particular, calculate or double-check any financial information provided to ensure accuracy. It’s also a good idea to work with an attorney who can aid in the legal interpretation of your policy.

A well-crafted claim

Filing a well-crafted business interruption claim can speed processing time and ease the resolution of any disputes that may arise with your insurance company. As a result, you’ll be more likely to receive much-needed cash-flow relief while getting your business back up and running after a disaster. We’d be happy to provide the services mentioned here as well as any other support necessary to pursuing a claim.

© 2020

Do your employees receive tips? You may be eligible for a tax credit

Are you an employer who owns a business where tipping is customary for providing food and beverages? You may qualify for a tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.

How the credit works

The FICA credit applies with respect to tips that your employees receive from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises. Although these tips are paid by customers, they’re treated for FICA tax purposes as if you paid them to your employees. Your employees are required to report their tips to you. You must withhold and remit the employee’s share of FICA taxes, and you must also pay the employer’s share of those taxes.

You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15 per hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.

Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.

How it works

Example: A waiter works at your restaurant. He’s paid $2 an hour plus tips. During the month, he works 160 hours for $320 and receives $2,000 in cash tips which he reports to you.

The waiter’s $2 an hour rate is below the $5.15 rate by $3.15 an hour. Thus, for the 160 hours worked, he or she is below the $5.15 rate by $504 (160 times $3.15). For the waiter, therefore, the first $504 of tip income just brings him up to the minimum rate. The rest of the tip income is $1,496 ($2,000 minus $504). The waiter’s employer pays FICA taxes at the rate of 7.65% for him. Therefore, the employer’s credit is $114.44 for the month: $1,496 times 7.65%.

While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.

Get the credit you’re due

If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. Contact us if you have any questions.

© 2020