Know the Tax Rules for Employee Loans

A salary, or wage, advance is a type of short-term loan from an employer to an employee. The employee receiving the advance must pay back the money within a specified time frame, as dictated by the company’s salary advance policy.

Under federal law, employers can make payroll deductions for salary advances even if the transaction causes the employee’s pay to drop below the minimum wage. Many states follow this precedent as well.

No taxes should come out of the actual advance, but you must withhold taxes from the repayment. This way, the employees’ wages will be taxed as normal.

For instance, an employee who earns taxable wages of $1,200 biweekly takes a salary advance of $200. When deducting the repayment from the employee’s next paycheck, withhold federal income tax, Social Security tax, Medicare tax, and any state and local income taxes from the $1,200. Then deduct the salary advance of $200.

Draws against commissions

A draw against commission is essentially a payment advance to a commissioned sales employee. Draws can be recoverable or nonrecoverable.

With a recoverable draw, the employee receives a fixed amount of money in advance and agrees that the draw will be deducted from his or her future commissions. These types of draws are based on a predetermined amount that is paid out regularly.

For instance, a salesperson — whose commissions are paid at the end of the month — receives a draw of $1,000 biweekly. At the end of the month, you would subtract $2,000 in draws from the employee’s commissions and then pay the employee the difference. In the end, all draws taken must be paid back.

With a nonrecoverable draw, the commissioned employee gets a guaranteed periodic amount that the employee repays if the commissions for the pay period exceed the draw amount. If the employee does not earn enough commissions to cover the draw, the employee owes the employer nothing.

If you offer draws against commission, you will need to ensure that the policy complies with the minimum wage requirements. Also, the IRS considers commissions as supplemental wages, which are taxed differently than regular wages. Your payroll provider or CPA can help you navigate the complexities of withholding taxes on draws against commissions.

Compensation-related loans

If a loan from an employer to an employee exceeds $10,000 and is given at a below-market interest rate, then the loan is “compensation related.” This type of loan is usually extended by employers who want to attract and retain key executives and employees.

The difference between what you charged the employee in interest and the applicable federal interest rate is treated as taxable wages paid to the employee and must be reported to the IRS as additional compensation.

No matter which loan structure you choose, be sure to seek legal or financial counsel so that sound policies and procedures can be established.

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Learn the Ins and Outs of Payroll Deductions

The rules for withholding federal payroll taxes are quite straightforward, applying to most employees in the United States, regardless of location. The rules tend to be more complicated on the state side, however, as they are location specific and may even include local tax withholding. Here’s a rundown of the various federal, state, and local withholding taxes.

Federal Income Tax

The Internal Revenue Service (IRS) administers federal income tax, which employers are supposed to withhold from their employees’ taxable wages. Generally, taxable wages are calculated by subtracting employees’ pretax and nontaxable payroll deductions from their gross wages.

Federal income tax withholding is based on the withholding conditions the employee states on his or her W-4 form, the employee’s taxable wages, and the IRS tax withholding table that matches the employee’s situation.

Social Security and Medicare Taxes

The Federal Insurance Contributions Act (FICA) regulates the collection of Social Security and Medicare taxes. For 2019, employers must withhold Social Security tax at 6.2 percent, up to the annual taxable wage limit of $132,900, plus Medicare tax at 1.45 percent. (For 2020, the limit goes up to $137,700.) Medicare tax does not have an annual taxable wage limit and therefore must come out of all taxable wages.

Employees who earn more than $200,000 for the year are subject to an additional Medicare tax withholding of 0.9 percent on the excess amount. (Thresholds may vary based on filing status.)

State Income Tax

The following nine states do not require state income tax withholding. (Note, however, that some of these states may tax income from non-wage sources.)

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

In all other states, employers must take state income tax out of their employees’ taxable wages according to the rules of the state revenue agency.

Many states adopt a withholding model that is similar to the federal income tax withholding. The employer, however, must refer to the employee’s state withholding form and the state tax withholding tables. A few states, such as Pennsylvania and Alaska, require withholding based on a percentage of each employee’s taxable wages.

Local Income Tax

Some local governments within certain states impose local income tax on employees who live or work in the district. These taxes—which may appear as school district, city, and county taxes—should be withheld according to the specifications of the local tax assessor or state revenue agency. Certain localities in states, such as New York, Ohio, Pennsylvania, Maryland, Alabama, and Indiana, all require local income tax withholding.

Additional State-Based Withholding Taxes

In addition to state and local income tax, employers may need to withhold other types of state taxes besides state and local income taxes. In California, employers must withhold not only state income tax but also state disability insurance. The rules in New Jersey are even more extensive, requiring that employers withhold for state unemployment insurance, workforce development, state disability insurance, and family leave insurance.

Still not clear on your responsibilities? Call us today for additional guidance on payroll tax withholding!

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3 Signs It’s Time to Update Your Benefits Technology

According to a 2018 report by the Harvard Business Review, 51 percent of survey respondents said that outdated or insufficient technology is obstructing their ability to retain top talent. Further, 58 percent said that a company’s technology is a factor for job candidates when deciding where they want to work.

This report highlights the direct link between workplace technology — which includes benefits platforms — and employee attraction and retention. But how can you tell whether your benefits technology is holding you back? Below are three signs.

1. You’re spending too much time on manual processes.

This is most likely to happen if your HR/benefits and payroll systems aren’t integrated. These two functions work in tandem, and separating them only amplifies manual labor for your HR and payroll staff.

When both technologies are not integrated, employee benefits information must be entered separately into each one. This can lead to all sorts of complications, including increased data entry errors, delays in communication between HR and payroll, limited reporting capabilities, frustration among your HR and payroll staff, and regulatory noncompliance.

Also, don’t underestimate the price tag of manual processes. In a 2018 report, Ernst & Young estimated the total labor and nonlabor costs of completing certain HR tasks, including benefits administration. The report concluded that employers can reap significant cost savings by using a fully automated human capital management system that includes self-service and benefits enrollment.

2. Your benefits technology does not have self-service.

As stated earlier, self-service HR technology can lead to major cost savings. In addition, it plays a critical role in delivering a positive candidate and employee experience. Not only does it save your HR and payroll staff tons of time, it also promotes employee engagement and autonomy.

People today demand immediate access to information, and through technology, they’re able to retrieve it. This demand is also embedded in the workplace; therefore, employees are notempowered by having to contact their HR and payroll departments for every related bit of information they need.

Because employees’ benefits are intricately woven into their personal lives, they want to feel as though they have some control over the selection and data retrieval processes.

3. Benefits enrollment and open enrollment are a drag.

The Ernst & Young report notes that the area with the most potential for cost savings is benefits enrollment. This is especially true when it comes to giving employees information about their plan and data for comparing their benefit offerings. These two pieces of information are essential to onboarding and open enrollment.

An upgraded benefits technology can make onboarding and open enrollment less of a drag by:

  • Consolidating various benefit plans onto a single platform.
  • Facilitating personalized benefit options.
  • Simplifying communication.
  • Making it easier for employees to understand their benefit choices.

Note that if your benefits technology is outdated and you’ve expanded your benefit offerings, it could lead to a multitude of problems — including issues with enrollment and compliance.

Give Payroll Dynamics a call today to discuss how we can help upgrade your benefit technology!

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3 Tips for Helping Employees Deal With Job Stress

According to the American Institute of Stress, job stress is an epidemic whose prevalence has escalated over the past few decades. The consequences of job stress can be severe, and even fatal.

Numerous studies have shown a direct link between stress and increased rates of chronic illnesses, such as hypertension, cardiovascular disease and musculoskeletal disorders. Stress can also cause workplace injury and psychological disorders, such as burnout and depression. 

According to a 2019 report by Colonial Life, employers are aggregately losing billions weekly because of stressed employees. Damages arise from decreased productivity, absenteeism, health care spending and turnover.

You can avoid these losses by alleviating job stress. Below are three tips.

Tip No. 1: Know the causes and symptoms.

Studies show that job stress is often caused by:

  • Heavy workload.
  • Unrealistic manager expectations.
  • Strained relationships with co-workers.
  • Problems balancing work and personal responsibilities.
  • Lack of job security.
  • Low salaries.
  • Insufficient opportunities for advancement.

Warning signs of job stress include:

  • Loss of confidence.
  • Reduction in work quality.
  • Anger, frustration or irritability.
  • Social withdrawal.
  • Trouble concentrating.
  • Apathy or disengagement.
  • Trouble learning.
  • Using tobacco, alcohol or drugs to cope.

Tip No. 2: Champion open communication.

According to SHRM, “A high degree of work-related stress arises from the fact that employees find it difficult to communicate or speak about it.”

Consequently, you must develop safe communication channels for employees to
report workplace stress. Let employees know that it’s okay to speak with their managers
about the issues they are facing. Managers should be receptive to these talks. They should
also know how to handle employees who are reluctant to discuss being stressed at work.

Tip No. 3: Aim to snuff out the root causes.

This requires knowing the source and symptoms of the stress (Tip No. 1) and engaging in
open communication with the employee (Tip No. 2) to arrive at solutions. Often, these
solutions are probably within your grasp. As noted by SHRM, the main reasons employees
give for being stressed are related to workplace conditions that employers might be able to
improve.

Here are some possible solutions:

  • Ensure employees have the resources they need to do their work.
  • Keep workloads and deadlines realistic.
  • Offer flexible work arrangements.
  • Adopt a wellness program that includes stress management.
  • Support employees’ need to take a vacation.
  • Make sure employees take their rest and meal breaks.
  • Offer competitive wages and benefits.
  • Train employees on how to effectively manage their time and prioritize their workload.
  • Remain vigilant about spotting and managing employee stress.

Ultimately, the goal is to pursue measures that are likely to promote a happier, healthier and more productive workforce.

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Recent Promotion not working out? Here are 3 things to consider before demotion

Employee demotions occur for various reasons, including:

  • Poor job performance.
  • The position being eliminated.
  • Disciplinary action (for conduct issues).
  • The organization being restructured.
  • Seeking a better fit for the employee’s skill set.
  • Changing business needs.
  • Voluntary decision by the employee.

According to a study by OfficeTeam, poor performance is the No. 1 reason for demotions. In second place is a recent promotion not working out.

Although demotion may seem like the best course of action, industry experts caution that, if improperly done, the employer could face legal challenges. Consequently, demotions should be approached carefully and legally.

Before you demote an employee, keep the following three tips top of mind:

1. Identify the legal risks.

Demotions gone wrong could lead to employees filing discrimination or retaliation claims against their employers. Depending on the case, employees might claim that they’re being demoted for discriminatory reasons, such as race, gender, disability, age, religion or sexual orientation. Or they might claim they’re being retaliated against for exercising their employment rights.

Second, there’s the matter of pay cuts, which tend to accompany demotions. To avoid legal fallout, the employer must ensure that pay reductions are lawfully executed.

Third, employers need to be mindful of using demotions as a strategy for eventually terminating an employee. According to an article published by Workforce.com, employers should not use demotions as a way of getting employees to quit, as this could result in employees filing a claim alleging that they were pressured into quitting.

2. Document the reasons for the demotion.

It’s essential that you accurately and thoroughly document the reasons for the demotion, including the circumstances leading up to it — as this goes a long way in protecting you during potential litigation. This is especially important when dealing with demotions that stem from performance or conduct issues. In these situations, you’ll need to draw on key documents, such as the job description, performance reviews, action or improvement plans, company policies, and disciplinary actions taken thus far.

3. Get legal advice.

Even if your company has an established policy for handling demotions, you may still want to consult with an employment law attorney before demoting an employee. You’ll probably have many questions that require expert input, such as:

  • Is a demotion likely to correct the issue?
  • Would termination be more practical?
  • What message will the demotion send to other employees?
  • How will the demotion likely affect the employee in question?
  • What legal blowbacks are possible in this situation?
  • If demotion is the best solution, when and how should I communicate it to the employee?
  • Who else besides the employee should I tell about the demotion?

An employment law attorney can guide you in the right direction.

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3 Tips for Explaining Health Insurance to Your Employees

According to a 2016 report by the International Foundation of Employee Benefit Plans, just 19 percent of employers say their employees had a high level of understanding of their benefits.” The report cites three main reasons for this:

  • Employees don’t open or read the materials.
  • Employees don’t understand the materials.
  • Employees don’t see the value in their benefits.

The good news is that you can help improve this dismal rate of understanding. Below are three ways to do this for health insurance.

1. Make the information appealing.

As stated, employees demand health insurance from their employers. Therefore, the basic interest is already there. Your challenge lies in expanding on that basic interest. One solution is to present health insurance information in a way that captures employees’ interest.

For example:

  • Use short chunks of text, rather than long blocks, when writing emails. Short chunks of text are much easier to absorb and retain.
  • Drop the legalese. Communicate in simple, plain language that the average person can comprehend.
  • Send messages via email or text when announcing open enrollment or health insurance changes.
  • Put the information online. The website should be attractive and materials should be easy to retrieve.

2. Let a broker do the explaining.

The average small business cannot afford to maintain an on-site staff of benefits experts — whose job includes educating employees about their health insurance. A more feasible option is bringing in a health insurance broker.

Health insurance brokers spend the bulk of their time finding the most appropriate health insurance policies for their clients. They understand the ins and outs and peaks and valleys of the health insurance industry.

The broker can teach your employees the fundamentals of health insurance, such as how deductibles and copays work as well as the difference between HMOs, PPOs and health savings accounts. They can also help your employees see the full value of their health plan, so they’ll be able to maximize the choices available to them.

3. Don’t overcommunicate.

While excellent communication is central to helping employees truly understand their health benefits, be careful of flooding them with information. You want them to pay attention whenever you have something important to share, so make sure your messages are streamlined and appropriately timed. To accomplish this:

  • Avoid sending information that delivers little to no value to the recipient.
  • Speak to employees’ logic and emotions. Logic: “Here’s how your health insurance plan will change.” Emotion: “Here’s what you will gain from this change.”
  • Know when to ramp up communication and when to scale back. For instance, communicate heavily in the weeks leading up to open enrollment. Outside of that, keep messaging typically less frequent — though it should still be done as needed.

Too much noise and your employees will cease to listen. So aim for balanced communication!

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Which Employees Are Exempt From Tax Withholding?

Tax withholding is a seemingly inevitable part of working, but there are exceptions, as shown by the following information about employees exempt from withholding.

Student employees

Generally, individuals employed by a school, college or university where they are also pursuing a course of study do not have to pay Social Security and Medicare taxes on wages earned at that institution.

Nonimmigrant and nonresident aliens

Certain classes of nonimmigrant and nonresident aliens are excluded from Social Security and Medicare taxes. They include holders of A visas, D visas, F visas, J visas, M visas, Q visas, G visas and H visas. To determine precisely which nonimmigrant and nonresident aliens fall into each of these visa categories, visit the “International Taxpayers” section of the Internal Revenue Service’s website.

Family employees

Children who are employed by their parents are exempt from FICA withholding until age 18. Those providing domestic services are exempt from FICA withholding until age 21.

Employees of foreign governments

Wages paid to employees of foreign governments are exempt from FICA withholding. These employees include diplomatic and consular officers, nondiplomatic representatives and other foreign government employees working in an official capacity. Also, employees or officers of a qualified “international organization” are exempt from FICA withholding.

Government employees

Most government employees are subject to tax withholding; however, there are some exceptions. For instance, election workers are exempt from federal income tax withholding — and from FICA withholding if they earn less than a certain amount for the year.

Household employees

Employees who perform domestic services in private homes or in college clubs, fraternities and sororities are exempt from federal income tax withholding. Generally, household employees are subject to FICA withholding if they earn at least a specific amount of wages for the year.

Considerations

Employees in general are exempt from federal income tax withholding if they meet the exemption requirements for the respective tax year. For instance, employees are exempt from federal income tax withholding in 2019 if both of the following apply:

  • For 2018, they were entitled to a refund of all federal income tax withheld because they owed no federal income tax.
  • For 2019, they anticipate a refund of all federal income tax withheld because they do not expect to owe any federal income tax.

To claim “exempt” from federal income tax withholding, employees must complete and submit Form W-4 to their employer.

Keep in mind that this is just a general review of employees who are exempt from federal tax withholding. It is not exhaustive, nor does it include exemption rules for state or local tax withholding. Further, there are many nuances to consider. For instance, even though certain employees may be exempt from federal withholding, it doesn’t necessarily mean that they are exempt from paying federal taxes.

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