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MEDICAL PRACTICES

NJ Tax Amnesty: Cool Savings Despite Sizzling Summer Heat

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 Businesses and individuals facing unpaid NJ tax liabilities may be able to get a break on penalties according to the tax amnesty measure signed into law on July 1, 2018. The amnesty period will not begin before November 1, 2018 and will end by January 15, 2019. The program will apply to state tax liabilities for tax returns due on and after February 1, 2009 and prior to September 1, 2017. The measure will apply to all state taxes including gross income, corporate business tax and sales and use tax. However, it does not apply to unemployment type taxes administered by the Department of Labor. 

Why should I do this now? Because under this limited-time offer (remember, the clock runs out by January 15, 2019) the Division of Taxation will forgive all penalties, and one-half of the accrued interest due at Nov. 1, 2018. 

Here are some more details

    • The program will also apply to amounts currently under audit or being contested with the NJ Div. of Taxation.
    • A start date for the program has not yet been announced.
    • NJ Amnesty will provide relief for 2009 – 2016 delinquent individual or business tax return filers.
    • The program also forgives all penalties and 50% of interest for delinquent sales and use tax filings for quarters ending Dec. 31, 2009 – June 30, 2017.

Is there a hitch?  Sort of. The bad news is that if a taxpayer is eligible for amnesty and does not take advantage of it, an additional 5% penalty will be added to the already imposed penalties and interest on the original tax liability.

To see if this program is right for you, please contact our Tax Manager, Steven Citron

 

 

Should I Pay My Child Wages?

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Children Running Office

Does It Make Tax Sense to Pay Jr?

Your child probably knows a lot more about technology—from designing a website to posting on social media—than you ever will. At many family businesses, Junior may already be helping with a variety of digital and other tasks.

Have you considered paying your kids for their work? Besides motivating them, putting kid(s) on the payroll is an attractive way to transfer assets to them while saving taxes. You might be able to help them fund their college costs or purchase a home while getting a tax break.

That’s because your company can take a deduction for the salary you’re paying them. The kid’s tax bracket will almost certainly be lower than yours, so the family unit saves thanks to the difference in the tax rates. It’s up to you to match their skills with your business’ needs, but we can help with some of the tax aspects.

Goodbye to Payroll Taxes

Are your children under 18? And are you a sole proprietor, a single-member LLC, or operate a partnership where the only members are you and your spouse? If so, congrats—your children won’t have to pay Social Security, Medicare taxes or NJ unemployment if they work for you. If your child’s earned income—generally salary, as compared to interest and dividends, is less than the standard deduction of $6,350 in 2017, he won’t have to file his own income tax return.

What are my Tax Savings?

Let’s assume, you pay your high school son, your computer tech, a salary of $6,300. He will pay no US or NJ income taxes on this salary. If you are in a high tax bracket, your US and NJ tax savings can be as high as $3,000!  And he will not have to file a tax return.

What If My Children Are Over 18?

Now let’s assume that your college daughter does the graphics and social media for the business. Or your child is under 18 but you own a “C” or “S” Corporation. You pay her $15,000. These wages are subject to Social Security & NJ unemployment. Her federal and N.J. income taxes plus the payroll taxes will be about $3,500. However, at your higher tax bracket, the federal and NJ income tax savings could be as high as $7,500. So the net tax savings to the family may be $4,000. Still a good deal!

The Retirement Savings Credit Saves More…

If your child over 18 who is not a full-time student contributes up to $2,000 into a Roth or traditional IRA, she will receive a Retirement Savings Credit of up to 50%. In our example, her tax burden of $3,500 will be only $2,600. And the family saves $4,900. A homerun!

The Bottom Line

Hiring your kids can be a good experience, while potentially offering some nice tax breaks. There are some twists: you must pay the salary in that tax year, and the pay must be “reasonable”. If your kid sweeps floors, forget about paying enough to cover his college costs and then trying to deduct it as salary expense. The state tax implications may differ from the federal. Before you go ahead and pay your child, it is a good idea to consult with your tax advisor. It could end up saving you money later.

Should I Pay my Spouse a Salary?

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 It’s not worth the Taxes, Right? 

Spouses Working Together

It is not uncommon for one’s spouse to work in the family business, whether as manager or in some other capacity. Assume that Nicole Neurologist owns a medical practice. Her husband, Josh, supervises billing and IT operations. Is it worthwhile for both spouses to receive a salary? It may seem pointless. After all, their money ends up in the same bank account anyway. If Nicole has reached the maximum Social Security and unemployment thresholds, why pay Josh a salary and incur additional steep payroll taxes? While that is true, there are several advantages to employing the spouse that are worth considering.

Social Security Disability Benefits and Lost Wages

If Josh became permanently disabled, he would not receive Social Security benefits for his disability unless he satisfied two different earnings tests.  He must meet a “recent work” test based on his age at disability. For example, at age 31 or more, an individual must work five out of the ten years prior to claiming disability. He must also satisfy a “duration of work” test based on his age at disability. At age 50, he needs to have worked seven years in total prior to his disability.  If Josh was injured by an insured party, unless he has proof of a history of employment, he would not be able to recover any lost wages.

Enjoy Self-Employment Tax Savings

If Nicole’s business income is reported on Schedule C, she deducts the medical insurance expense for her and her family on page 1 of Form 1040. However, if Josh is an employee, then he can be the insured. She can deduct the medical insurance as a business expense on Schedule C.  This would result in significant tax savings, as she now saves the 3.8% Medicare portion of the self-employment tax; good deal for an expense she is incurring anyway.

Good Credit is Essential

Even if Nicole is the breadwinner, there may come a time that Josh will need to rely on his own credit history. If he is paid a salary it will be easier to obtain the credit he will need.

Boost his Social Security Benefits

The amount of Social Security benefits one receives is determined by the average of the 35 highest yearly salaries. Even if Josh’s earning power appears meager, one never knows what the future holds. If he eventually gets a more lucrative job, the years he received a salary from Nicole’s firm may ultimately boost his benefits significantly.

Maximize Pension Contribution

As an employee, Josh can be enrolled in the company pension. This allows the company to make contributions on his behalf. By adding Josh’s pension contribution to Nicole’s, the couple will enjoy increased tax free growth on their retirement funds, while the couple saves on both US and NJ income taxes.

Get a Dependent Care Credit

Unless both spouses have earned income they are not entitled to the dependent care credit, which is currently up to 35 percent of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children.

Additional Benefits

There are additional benefits to paying your spouse a salary. Call for a consultation.

 

 

New NJ Program Offers Siestas instead of Layoffs

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Alternative to Slow-Period Layoffs:

NJ Program Helps Maintain Your Workforce 

Businesses that are thinking about laying off employees because of a slowdown in activity—but fear losing talented labor or getting socked with an increased Unemployment Insurance (UI) tax rate—may have an alternative, thanks to an innovative state program. Under the “shared-work” legislation a company that has to slice payroll expense by significantly cutting employees’ work hours may be able to have the NJ Department of Labor partially offset workers’ reduced pay by giving them “short-time” unemployment benefits. 

Employers may find that their UI tax rate is lower under the “short-time” approach, compared to having laid-off employees collect full unemployment. In addition to getting at least some of their pay, employees will be able to keep their health insurance and other benefits while they work fewer hours.

Here’s the fine print

For each company, the state may approve the program for a period no longer than one year and may, upon employer request, renew the approval of the program for additional periods.  Of course, there are certain filing and other requirements. For one thing, the business needs to complete a formal Shared-Work Plan Application and submit it to the New Jersey Department of Labor, Shared-Work Approval Unit (the application is available at NJ Department of Labor, Shared-Work Application).

 The business must have at least 10 employees; and the “affected unit” of the company—a specified plant or other facility, department, shift or other definable unit, must be composed of two or more employees.  Among other requirements, the reduction in weekly work hours of the affected employees must be not less than 10% and not more than 60% of the “usual weekly hours of work”.

 Not everyone’s eligible

Some kinds of employment—like subsidized seasonal employment during off-season, and employment that is temporary or intermittent on an ongoing basis—are not eligible for this program. 

Our recommendation

This program could cut payroll expenses for some businesses while enabling them to retain valued employees during a time of economic disruption. Still, disclosure, documentation, UI costs and other issues should be considered. Please contact one of our CPAs to see if this program is suitable for you.

                                     

NJ Employers-Reduce Your Unemployment Tax Rates-August Deadline

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Did you check your NJ SUI rates?
In July all New Jersey employers received a Notice of Employer Contribution Rates. This is not a bill, but rather a summary of the manner

in which the NJ Department of Labor calculates your employer contribution rate for unemployment and  disability. This form enables you

to determine whether a voluntary  contribution would save you money in the subsequent year.

Can I reduce the NJ SUI rate?
A voluntary contribution increases the reserve balance and may reduce your contribution rate. Each employer should calculate the amount

of the voluntary contribution required to reduce the rate. The required voluntary payment should be compared to the savings realized from a lower rate.

The unemployment expense is a substantial component of the labor cost of staffing agencies. You should give it careful attention. If you wish to make a

voluntary contribution to your reserve balance you have 30 days from the date of your notice to do so. We recommend that you verify all the NJ DOL

calculations including the amount of the employer contributions and the benefits charged to your account. Report any discrepancies to the NJ Dept. of Labor.

By making a voluntary payment, employers may reduce the NJ SUI rate for the coming year. Please be aware that this payment increases your reserve

balance and helps reduce the NJ SUI rate in future years as well.

Avoid NJ DOL Audits- S-Corp Owners Should Take Reasonable Compensation

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Wages vs. S Corp. Income

In an S-Corporation, a popular choice of tax entity among businesses, an owner who works for the company is required to take wages. How much of the company’s income is classified as wages versus S Corp. income (reported to the owner on Form K-1) is up to the owner. The net income will be taxed regardless of how it’s classified. The big difference lies in federal employment taxes, which are not paid on K-1 income. Another consideration is that K-1 income is exempt from the new 3.8% Medicare tax. So it would seem like a no brainer to take the lowest salary possible, right? Think again. There are significant downsides to consider before taking an unreasonably low compensation.

Risk of IRS Penalties

Let us assume Sam Success worked full-time as the manager of his staffing agency, which has net income of $200,000 this year. If he decides to avoid payroll taxes and classify $20,000 as wages and $180,000 as K-1 income, the IRS will probably notice. Using industry averages and other factors, it will argue that the compensation was unreasonable and will therefore impose steep penalties on top of the payroll taxes owed for the difference between the unreasonable $20,000 and what they determined is reasonable compensation.

Avoid NJ DOL Audits

Even if the IRS doesn’t take notice, the State of New Jersey has taken an aggressive stance with regard to unreasonable compensation. New Jersey is looking to collect state unemployment insurance (SUI), and if Sam Success’ salary is less than the SUI threshold ($31,500 in 2014) it will likely be scrutinized.  The number of such NJ DOL audits is on the increase. Moreover, New Jersey will inform the IRS after taking its share.

Less Disability Coverage

If Sam Success was injured by an insured party, he wouldn’t be able to argue that as manager of a staffing agency he deserves at least $100,000 for lost wages. Since he only classified $20,000 as wages, he cannot claim that his lost wages are greater.

Goodbye Social Security and Pension Benefits

The amount one receives from Social Security depends on one’s wage income or other income subject to Social Security tax. By minimizing his wages, Sam is also minimizing his potential benefits. In addition the company’s contribution to his pension is based on his wages. Lower wages equals lower pension benefits.

Keep it Reasonable

When it comes to determining wages from your S-Corporation, reasonable compensation is the way to go. Your tax professional can advise you in determining just the right amount to classify as wages in order to maximize the tax advantages, while avoiding the aforementioned pitfalls.