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STAFFING AGENCIES

Sole Proprietor vs S-Corporation     

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Converting from Sole Proprietor to Sub-S has both tax savings and risks. Review them before making the move.  The structure you choose affects how your business is taxed and the degree to which you can be personally liable. Here’s a comparison of these two popular business structures.

Sole Proprietor This is a classic structure for single-owner businesses. No separate business entity is formed. A sole proprietorship does not limit liability, but insurance may be purchased. You report your business income and expenses on your personal income tax return (Schedule C of Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don’t take paychecks themselves.
S-Corporation A corporation is a separate legal entity that files its own corporate income tax returns. Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they’ve personally guaranteed. If you make a “Subchapter S” election, shareholders will be taxed individually on their share of corporate income. This S-Corporation structure generally avoids federal income taxes at the corporate level.
Are there additional costs to being an S- Corporation? The switch from a Schedule C to an S-corporation increases the costs of doing business. Here are some of the additional expenses:
• Minimum state taxes
• Accounting fees for preparation of separate corporate tax return
• Payroll servicing costs -if business had no employees as a Schedule C, the owner now is required to receive a salary
• Unemployment tax on owner’s salary, in NJ is almost $1,000

Are there any tax savings? The tax you save is the steep 15.3% self-employment (SE) tax. You pay it on the entire sole proprietor earnings. You only pay the SE tax on the salary portion of your S-Corp earnings. For example, if there is net income of $142,800 (the Social Security max wage base for 2021) and you pay yourself a salary of $50,000, it saves you 15.3% of the difference or approximately $14,000. The greater the difference between your wages and net income, the greater the savings of the SE tax.

Both sole proprietorships and S-Corporations generally offer no difference in the calculation of income tax only the SE tax.

Any caveats? There are many considerations. Here are the main concerns:
• The IRS expects you to take a “fair” salary from your business, known as Reasonable Compensation. E.g., A solo physician or engineer with net income of $200,000 can’t justify a salary of only $50,000. Determination of reasonable compensation is complex and based on many factors. At Urbach & Avraham we make these calculations for use in business valuations in both litigation and non-litigated matters. We can assist you in determining a defensible figure should you decide to operate as a Sub-S Corporation.

More often than not, an S corporation has only one owner. This allows the owner to set salaries for employees, including his own salary. The IRS is sensitive to the potential for manipulating the tax laws in this area and is applying extra scrutiny to the salaries of S corporation owners.
• If you are injured or disabled, you can’t claim lost wages of $200,000 but rather only the W-2 wages of $50,000
• Pension contributions are only made on wages of an S-corporation, not on the net income. The lower the wages, the smaller the retirement benefits
• Your Social Security benefits are calculated on an average of 35 years of wages. The lower the wages, the lower the benefits
• Your Qualified Business Interest Deduction may decrease or increase – based on various factors

Which is suitable for my business? Schedule C or S-Corporation?
Different business entities offer different advantages. You should consider all of them and speak to a tax professional at Urbach & Avraham, CPAs to determine which advantages can help you the most given your current circumstances. You may discover, over time, as your circumstances change, so, too, does your choice of preferred business entity.

Tax Gifts for Self-Employed

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Tis the Season – Now is the time for business owners to review potential tax saving possibilities. People who are self-employed have many opportunities to cut taxes that regular employees don’t have.

Health Insurance– Self-employed individuals can deduct health-insurance costs above-the-line. That’s better than deducting them on Schedule A, ( Itemized Deductions) where they are limited.

If the spouse of the owner is an employee and the insured person on the medical insurance, then the medical insurance premiums can be deducted directly on Schedule C as a business expense.

Health insurance premiums paid for long-term care insurance may also be deducted (with some limitations) above-the-line for self-employed business owners.

Qualified Business Income (QBI) Deduction– The 2017 tax overhaul added a QBI deduction of 20% of the net income of self-employed people. Depending upon the type of business, the 20% deduction may be limited when taxable income is $160,700 for single filers and $321,400 for married couples filing jointly. Self-employed workers whose incomes will exceed the limits may get below them by making tax-deductible donations to charity before year-end or contributing more to tax-deductible retirement plans.

Self- employed business owners whose taxable incomes are over the limits, may still receive the QBI deduction depending upon the type of business and subject to additional limits. The amount of the tax deduction will vary depending on the specific taxpayer circumstances.

Office in the Home Deduction– Many self-employed individuals operate their businesses from their home. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

More people are taking the now higher standard deduction or their real estate tax deduction is limited as a result of the state and local income tax limitation. By deducting office in the home expenses, one can deduct a portion of the mortgage interest and real estate taxes that otherwise may be not be deductible.

Retirement Plan Contributions- Self-employed individuals can often make larger tax-deductible contributions to retirement plans than employees. The 2019 contribution to a traditional IRA is a maximum of $7,000. The 2019 limits are over $50,000 for SEP IRAs and Solo 401(k)s.

Retirement Plan Deadlines– For 2019, traditional IRAs can be set up and funded until April 15, 2020. The deadline for a SEP-IRA maybe as late as Oct. 15, 2020 if a valid extension is filed. It is important to remember that requesting a filing extension does not provide an extension on paying the taxes that will eventually be due. The Solo 401(k)s have a catch: for 2019, the contribution deadline can be as late as Oct. 15, 2020. However, the plan must be set up by Dec. 31, 2019.

Review Estimated Taxes– Self-employed workers usually owe estimated taxes. There is a penalty for underpayment. For self-employed who also have W-2 wage income earned either by them or their spouses one can avoid quarterly taxes by increasing their withholding on wages. If the wage-earner doesn’t increase his withholdings until late in the year, that is fine- as long as the IRS receives about 90% of the total tax due by year-end.

Everyone’s tax and financial situation is different. Please contact a tax professional at Urbach & Avraham, CPAs about your business tax options.

 

Handling Employees in Several States

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When you have employees who live in one state and work in another, things can get a bit tricky. Learn the basic rule — you generally pay taxes in the state where your team works, but it can get complicated.

Do you have employees who live in one state and work in another? You may run into this if:

  • Your company is located near a state border.
  • You have employees who travel to job sites in other states.
  • You have employees who work remotely.
  • You are expanding into new states.

Having some basic understanding of what happens will help you make the right decisions about classifying wages and avoiding penalties or amended filings later. Both state unemployment and withholding taxes should generally be paid to the employee’s work state, but there are exceptions; the twist is that state laws are quite literally all over the map. You may want to be familiar with the state legislation that applies to your team. Here are the basics.

Reciprocity agreements

Some states that border each other have entered into agreements related to allowing employees who live in one state but work in another, to have their withholding tax paid to the work state.For example, an employee who lives in Pennsylvania but commutes to southern New Jersey, for a job can have withholding tax paid to Pennsylvania rather than the work state. This is also known as courtesy withholding, and it means the employee can file one tax return each year, which helps simplify things. Have your employee complete a nonresidency certificate to excuse him/her from tax withholding in the work state. Let your payroll provider know that your employee has an agreement in place.

If there’s no reciprocal agreement, your employee will most likely have to pay both nonresident and resident state income tax. But luckily, most states grant a tax credit to avoid being taxed twice.

Each state may have its own twist on taxation, so it’s best to check the local situation and not make any assumptions.

The unemployment tax situation is usually straightforward. When an employee is working in multiple states or working remotely for a company based in another state, you withhold state unemployment tax only in the state in which the employee is working.

When it gets complicated

Today’s remote-work world means situations that were rare or unheard of a generation ago are now commonplace. That means more tax complexity.

For example, consider an employee who works from his log cabin in upstate New York, but your company is located in Maryland — you’ll have to pay all state taxes to New York because that’s where the work is actually being completed.

Or at that same Maryland company, you have an employee who needs to work in Maine temporarily for three months. For nine months, you pay taxes in Maryland, and for three months, you pay taxes in the Pine Tree State.

Most of this information is general. It can get complicated, and there are exceptions and special circumstances. Consult with a tax professional at Urbach & Avraham, CPAs  to review your cross-border workforce, and we’ll help you organize your payroll tax system accordingly.

Conducting Business in Multi-States

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Year-end is a good time to review all operations and to ascertain if you are doing business in additional states. No matter where your company is headquartered, there’s a good chance you conduct business across other state borders. How do taxes work in this situation? Learn about multi-state taxes  to ensure that your business is registered with each appropriate secretary of state, and collecting and submitting the proper taxes.

If your business is headquartered in one state, but you sell your products across the border, do you have to pay taxes in the recipients’ state? This answer depends largely on whether you have what is referred to as a “nexus,” meaning an establishment in the recipients’ state. So what is a nexus and what constitutes an establishment?

Any of the following might create a nexus in a given state:

  • A temporary or permanent office
  • A warehouse
  • A storage locker
  • A sales representative based in that state

The rules have a lot of subtleties, however, and each state may have slightly different interpretations of how the rules work, further complicating the issue. Take for example, New Jersey, which does a lot of cross-border business with New York and Pennsylvania. New Jersey says any of the following may create nexus:

  • Selling, leasing, or renting tangible personal property or specified digital products or services
  • Maintaining an office, distribution house, showroom, warehouse, service enterprise (e.g., a restaurant, entertainment center, business center), or other place of business
  • Having employees, independent contractors, agents, or other representatives (including salespersons, consultants, customer representatives, service or repair technicians, instructors, delivery persons, and independent representatives or solicitors acting as agents of the business) working in the state

Of course, regulatory changes and court cases can change this interpretation at any time. Indeed, the New York State Department of Taxation and Finance issues more opinion letters on sales tax issues than on all other state taxes combined. Many states are desperate for additional tax revenues and are very ingenious at identifying out-of-state businesses operating in their jurisdiction.

With 45 states imposing a sales tax, it’s essential you stay in touch with us to ensure that you’re in compliance. Contact one of our tax professionals at Urbach & Avraham, CPAs to review your multi-state tax situation.

Wage Violations Put Construction Company in the Hole with NJ DOL

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First-ever Stop-Work Order Deconstructs Operations: Citing wage violations, the NJ Department of Labor shut down a construction site managed by a building restoration and rehabilitation company. The action was the first-ever taken by the department under its recently expanded authority, according to an NJDOL announcement.
Digging Deeper: Three Sons Restoration LLC was cited for allegedly failing to pay the prevailing wage, for unpaid and late wages, and for failure to keep accurate, certified payrolls. The company has appealed, and the matter has been referred to the Office of Administrative Law for a formal hearing
Here’s What Happened: On August 22, in a coordinated sweep that involved local law enforcement, NJ DOL investigators issued notices at Maurice Hawk Elementary School in West Windsor, Bayonne Fire House at Engine 6 in Bayonne, and at the company’s Union headquarters.
At a September 4 hearing, a determination was made to lift the Stop Work Order at the Bayonne location; but the order at Maurice Hawk Elementary School was affirmed and remained in effect pending the formal hearing.
The state DOL is stepping up its wage-violation efforts, according to Division of Wage and Hour Compliance Assistant Commissioner Joseph Petrecca. “With these new authorities given to us by Governor Murphy and the Legislature, this administration will continue to fight for our workers using all means necessary, especially when it comes to making sure our workers are being paid properly, and the playing field is level for our employers,” he said. Under a new law, a company may be assessed civil penalties of $5,000 per day for each day it conducts business in violation of a Stop Work Order.
Don’t get steamrolled by the state: Prevailing-wage, record-keeping and other issues can be complex. We will review your company’s unique circumstances to make sure you are in compliance with the latest developments in state and US wage-and-hour regulations.  We handle many NJ and US DOL audits. We frequently work with qualified employment attorneys, if necessary in each case. Consult with your legal and accounting advisers to stay on the tight side of the fence.

Trucking Co. Hits NJ DOL Pothole Over Employee Status

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Collision with the DOL   A national trucking company operating in NJ had to deliver more than $1 million to the NJ Dept.of Labor after allegedly misclassifying employee drivers as independent contractors for more than a decade.

The Package Deal Eagle Intermodal Inc. agreed to pay $1.25 million in back unemployment and disability contributions, and pledged to come into compliance with the law, the NJ DOL announced on September 12, 2019.

The Dispute began in 2006 when an audit flagged the alleged misclassification, which meant the company had not paid employer payroll contributions, including NJ Unemployment and Temporary Disability Insurance. A special exemption does exist for services performed by certain operators of large trucks. The DOL concluded that Eagle’s operations didn’t qualify for it; and that the company also failed to establish that the drivers were independent contractors, rather than employees, per                 NJ’s ABC Test:

  1. The worker’s performance is not under the control or direction of the firm, and
  2. The services performed are outside of the usual course of the business, and
  3. The worker is customarily engaged in an independently established trade,    occupation, profession or business.

Gov. Phil Murphy has declared a crackdown on employee misclassification, with the NJDOL required to audit 1% of active NJ businesses. Murphy’s Task Force on Employee Misclassification says these audits have uncovered “tens of millions of dollars in employee-related taxes not paid to the state.” The task force report identified trucking, transportation, delivery services, construction, janitorial services, home care, and other labor-intensive, low-wage sectors as “industries where misclassification is widespread.”

The Safer Road Firms who want to avoid fines and penalties should consult with their legal and accounting advisors. Companies should consider issues like employee classification and overtime, and work with their advisors to keep up with the latest developments in state and federal wage and hour regulations. At Urbach & Avraham we work with many qualified employment attorneys who handle these issues. We also represent many companies at US and NJ DOL audits.