Health Insurance Premiums Paid to 2% Shareholders
The Internal Revenue Service requires health insurance premiums paid by Subchapter S corporations for employees owning more than 2% of the corporation and/or their family members (“2% shareholders”), to be treated as additional wages to the employee. These wages are subject to federal income tax withholding, but exempt from FICA, Medicare and FUTA. Beginning with 2009, if these premiums are not included on the W-2 of the 2% or more shareholders, they may not be deducted.

Group Term Life Insurance
The value of company-provided group term life insurance in excess of $50,000 must be included in the employee’s income and is subject only to FICA and Medicare withholding. The value of includable compensation is calculated according to the following table:

UNIFORM PREMIUMS FOR $1,000 OF
GROUP-TERM LIFE INSURANCE PROTECTION
———————————————————–
5-year Cost per $1,000
Age Bracket for one month
———————————————————–
Under 25 $0.05
25 to 29 .06
30 to 34 .08
35 to 39 .09
40 to 44 .10
45 to 49 .15
50 to 54 .23
55 to 59 .43
60 to 64 .66
65 to 69 1.27
70 and above 2.06

For 2% shareholders, the entire amount of premiums paid must be included as income on the shareholder’s W-2, subject to federal income tax withholding, but exempt from FICA, Medicare and FUTA.

Personal Use of Auto
When providing an employee (including shareholder/employees in corporations) the use of a company-provided vehicle, a value representing the personal portion of usage of the vehicle must be included in the employee’s W-2 income. The value computed must be included in the employee’s W-2 as wages and is taxable for federal income tax, FICA, Medicare and FUTA. Although FICA and Medicare withholding is required, federal withholding is not required if notice was provided to the employee of the Company’s decision not to withhold by January 31st.

The IRS requires that compensation must be reasonable for the personal services actually rendered by a shareholder-employee. This reasonable compensation standard can be applied to adjust compensation that is either too high or too low.

There is no rigid set of rules for measuring the reasonableness of compensation. No definition of “reasonable” is contained in the Code; the regulations provide only that reasonable compensation is an amount paid for like service by like enterprise under like circumstances. Court cases have shown, however, that each situation must be resolved based on its unique facts and circumstances. Some Tax Court decisions have focused on the following five factors:

1. the character and financial condition of the corporation;
2. the role the shareholder plays in the corporation, including the employee’s position, hours worked, and duties performed;
3. the corporation’s compensation policy for all employees and the shareholder’s individual salary history including the corporation’s internal consistency in establishing the shareholder’s salary;
4. how the compensation compares with similarly situated employees of similar companies; and
5. whether a hypothetical independent investor would conclude that there is an adequate return on investment after considering the shareholder’s compensation.

In these and other cases, the courts have also considered additional factors in deciding whether the amount of compensation is reasonable, including:
1. the employee’s qualifications;
2. the size and complexity of the business;
3. a comparison of salaries paid to sales and net income;
4. general economic conditions;
5. comparison of salaries to shareholder distributions and retained earnings;
6. compensation paid in prior years;
7. the corporation’s dividend history;
8. whether the employee and employer dealt at arms’ length; and
9. whether the employee guaranteed the employer’s debt.

The court decisions confirm that no single factor controls, but rather a combination of the factors must be considered. Furthermore, these factors are not all-inclusive (and may not be given equal weight). Fewer or additional factors may be appropriate, depending on the surrounding facts and circumstances.

Health coverage legislation enacted this year (March 23, 2010) includes a Small Business Health Care Tax Credit to help small businesses and small tax-exempt organizations afford the cost of covering their workers. The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010. An enhanced version of the credit will be effective beginning in 2014.

Eligibility Rules
• Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
• Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
• Average annual wage. A qualifying employer must pay average annual wages below $50,000.
• Both taxable (for profit) and tax-exempt firms qualify.

Amount of Credit
• Maximum Amount. The credit is worth up to 35 percent of a small business’ premium costs in 2010. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers).
• Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

Three Simple Steps for Employers to Qualify
To determine if your small business or tax exempt organization qualifies for the Small Business Health Care Tax Credit, follow the three simple steps on the IRS fact sheet (see next page)

http://www.irs.gov/newsroom/article/0,,id=220809,00.html INSTRUCTIONS

http://www.irs.gov/pub/irs-news/health_care_postcard_notice.pdf SAMPLE POSTCARD

The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations.
In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible employers that are tax-exempt organizations.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit.

http://www.irs.gov/pub/irs-utl/3_simple_steps.pdf 3 STEP WORKSHEET

Time Cards and Records: In an era of increasing Wage & Hour Audits, we find that many employers do not keep accurate time records. Time cards are REQUIRED under both federal and state law for all non-exempt employees. Employers must keep accurate records of the time worked by their non-exempt employees (and preserve these time records for at least three years). This can be done by writing out the time worked or by punching a time clock or computer log/on-off, for example. The time records must show when the employee begins and ends each work period, as well as meal periods, split shift intervals and the total daily hours worked. Meal periods during which all operations cease and authorized rest periods need not be recorded. (Labor Code § 1174 and the appropriate IWC Order). As a recommended practice, the employee should sign the cards as verification of hours worked and meal breaks taken in accordance with law (please note that it is illegal to force an employee to sign a timecard for falsified hours).

Overtime: Another area that employers make mistakes is failing to comply with CA’s daily OT requirements. Employees are due 1.5 times the employee’s regular rate of pay for all hours worked in excess of eight in any workday. In addition, the employee is due twice their regular rate of pay for all hours worked in excess of 12 hours in any work day.

Moreover, many employers may the mistake of assuming that salary pay for an employee means no overtime is owed. That is not right and they need to speak with their payroll specialist about the difference between salary exempt and salary non-exempt. A salaried employee MUST be paid overtime unless they meet the test for exempt status as defined by federal and state laws, or unless they are specifically exempted from overtime by the provisions of one of the IWC Wage Orders.

Our Payroll Company, RedWolf Payroll, can help you make payroll less burdensome and spot problem areas to try to keep you out of harm’s way. Give us a call today to see how we can help you.