Employee Loans and Their Tax Consequences

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. Feel free to reach out to us at Payroll Dynamics with any questions or concerns!

 

Advertisements
Posted in Uncategorized | Leave a comment

ACA Affordability Threshold to Rise in 2019

The ACA requires that employers with 50 or more full-time-equivalent employees provide minimum essential coverage that is affordable — or face a penalty for not complying. The affordability requirement is satisfied if an employee’s premium for self-only coverage does not exceed a specific percentage of their household income or a certain safe harbor amount.

Percentage increase for 2019

Each year, the affordability percentage for health coverage is adjusted for inflation. For 2018, the rate is 9.56 percent of the employee’s household income, down from 9.69 percent in 2017.

On May 21, 2018, the IRS released Revenue Procedure 2018-34, which states that for plan years starting in 2019, the affordability percentage will increase to 9.86 percent — the highest amount since the ACA’s passage. This means that employees’ premiums for the lowest-cost self-only coverage cannot be more than 9.86 percent of their household income.

Three safe harbor options

As noted, the affordability percentage threshold applies to employees’ household income. But since it’s difficult for employers to know their employees’ household income, the ACA provides three safe harbor alternatives, which can be used instead of household income. You do not have to meet all three requirements; just one will do.

1. The employee’s W-2 wages, as shown in Box 1 of the form. For plan years starting in 2019, coverage is affordable if the employee’s premium does not exceed 9.86 percent of the amount in Box 1 of the W-2. Although this method is relatively simple to apply, keep in mind that it uses current-year wages. Therefore, you won’t know whether the affordability requirement for an employee has been met until the end of the year.

2. The employee’s rate of pay. Coverage is affordable if the employee’s premium does not exceed 9.86 percent of their monthly salary or wages. To determine the monthly rate of pay for an hourly worker, multiply the hourly pay rate by 130 hours.

For instance, an employee makes $15 per hour at the start of 2019. Multiply $15 by 130, which equals $1,950. Then multiply $1,950 by 9.86 percent, which comes to $192.27. Coverage is affordable as long as the employee’s premium does not exceed $192.27. For salaried employees, affordability is based on monthly salary.

The rate-of-pay method cannot be used for employees who are paid solely by commission, nor can it be used for tip wages.

3. The federal poverty level. The employee’s premium for the lowest-cost self-only coverage cannot be more than 9.86 percent of the most recently published FPL for a single person.

Applicable large employers should take the affordability standard into account when designing their 2019 health care plans — since pricing below the threshold could trigger penalties, as mandated by Section 4980H(b) of the ACA.

 

 

Posted in Uncategorized | Leave a comment

Should You Honor All W-4 Requests?

Form W-4 helps employers determine how much federal income tax to take out of their employees’ wages. On the form, employees state their withholding conditions, such as filing status, number of allowances and any additional amount they want withheld. It is the employee’s responsibility to fill out the form so that the right amount is withheld.

As the employer, you must honor all W-4 requests, except if the form is invalid or you’re notified to do otherwise by the IRS.

What is an invalid W-4?

If the employee alters or makes any additions to the IRS’s official W-4 — such as removing the IRS’s language and replacing it with his or her own — then the form is invalid. Further, the form is invalid if on the date that the employee submits the form, he or she clearly indicates that it is false.

A few more instances in which a W-4 is invalid:

  • The form is missing information, such as Social Security number, filing status and signature.
  • The form is illegible.
  • The employee claims both allowances and “exempt” (it must be one or the other).
  • The employee gives you a substitute W-4, developed by him or her.

In such cases, ask the employee to submit a valid W-4. Until the employee submits a valid form, withhold federal income tax from his or her wages based on single filing status and zero allowances. If you have prior valid W-4 on file for the employee, you can use that form instead of withholding at “Single-0.”

What if the employee’s withholding amount appears to be wrong?

From your vantage point, it may seem as though the employee’s withholding conditions are incorrect. For instance, he or she may appear to be claiming too many or too few allowances.

In that situation, withhold federal income tax according to the withholding conditions stated on the form; do not change anything. If the employee seems to have too little taxes coming out of his or her wages, explain to him or her that the IRS might assess the situation and order you to withhold at the appropriate rate. The IRS issues this directive via a lock-in letter.

Depending on the situation, the lock-in letter may state the maximum number of allowances the employee can claim, the permitted filing status or whether the employee is entitled to claim exemption from withholding. Give the employee his or her copy of the lock-in notice and implement the changes according to the instructions in the letter.

The employee cannot decrease his or her withholding once the lock-in letter goes into effect — only the IRS can change the terms of the letter. If you allow employees to make W-4 changes via an online system, make sure those subject to a lock-in letter do not have the ability to decrease their withholding online.

Posted in Uncategorized | Leave a comment

4 Tips for Successful Absence Management

 SAVE

Absence management is a strategic weapon that employers leverage to help maximize employee productivity. It involves administering programs designed to reduce absenteeism and return employees to work as quickly and as safely as possible.

Employers are increasingly viewing absence management as a top priority. Per Guardian’s “2017 Absence Management Index and Study,” companies with 250 to 1,000 employees are starting to catch up with larger businesses in realizing the significance of a robust absence management strategy.

Absence management interventions should be tailored to meet the specific needs of the organization. Below are four tips to consider.

1. Develop “caring” leave policies.

According to the Society for Human Resource Management’s “2017 Employee Benefits” report, 96 percent of organizations offered paid vacation leave, 81 percent provided paid sick leave and 33 percent gave paid personal leave.

Employers offer paid time off because it matters greatly to job seekers and employees. But while it’s important to provide this benefit, it’s just as crucial to encourage employees to take time off when appropriate. Employees are likely to feel supported when they know that reasonable requests for time off will be graciously endorsed. If they don’t feel supported, they are more likely to become disengaged — a common reason for absenteeism.

Time off required by federal or state laws should be properly incorporated into your leave policies. Also, try to implement wellness programs that encourage healthy behaviors and less absenteeism.

2. Create a return-to-work program.

Workplace illnesses and injuries impact the bottom line and cause employees to lose wages. A return-to-work program can help reduce workers’ compensation costs while restoring employees’ earning power. Strategies for the program may include:

  • Switching the employee to part time.
  • Providing telecommuting opportunities.
  • Modifying work duties and schedules.
  • Instituting reasonable accommodations for disabled employees.

Though the goal is to bring employees back to work as early as possible, remember to demonstrate empathy towards those recovering from a sickness or injury.

3. Hire the right people.

Sometimes you just don’t see a bad hire coming, as the employee may start off on a promising note only to later disappoint. However, by recruiting candidates who appear to understand the importance of punctuality and showing up, you lower the chances of hiring people who are likely to miss work for no good reason.

4. Outsource absence management.

As leave-of-absence administration becomes more complex, more employers are turning to outsourcing. According to a 2018 article published by HR Dive, 40 percent of businesses with 1,000 or more workers plus 27 percent of businesses with 50 or more employees outsource leave administration.

Outsourcing absence management to an HR solutions firm can help you achieve compliance with leave of absence laws, cost savings stemming from fewer lost-time events and faster returns to work, and prevention via a road map built to thwart absenteeism.

Posted in Uncategorized | Leave a comment

How to Handle Unemployment Claims

Unemployment benefits are provided through a federal-state unemployment program, which is funded largely by federal and state taxes imposed on employers. The Internal Revenue Service enforces federal unemployment tax laws. The state unemployment agency oversees state unemployment tax as well as the determination and disbursement of unemployment benefits.

When an employee files a claim for unemployment benefits with the state unemployment agency, the latter notifies the employer accordingly. It is then up to the employer to handle the issue appropriately. Consider the following suggestions.

Verify the Claim Notice

The claim notice from the unemployment agency contains information provided by the employee. For this reason, you should make sure the notice is correct. Verify whether—

  • the claimant is a former employee,
  • the wages and employment dates on the notice match your records, and
  • the notice’s description of the events surrounding the termination correlates with your documentation.

Determine Eligibility

Each state has its own guidelines regarding unemployment eligibility plus the amount of benefits eligible claimants will receive and for how long. Typically, claimants must have worked for at least a certain period of time, lost their job through no fault of their own, and met the minimum earnings requirement.

Employees who were laid off are eligible for unemployment benefits. Those who were let go because they were not a good fit may be eligible as well. However, employees who voluntarily left their job or were fired for misconduct generally do not qualify for unemployment.

Respond in a Timely and Adequate Manner

The Unemployment Insurance Integrity Act of 2011 says that employers must respond to requests by the state unemployment agency in a timely and adequate manner so that claimants will receive the benefits to which they’re entitled. Under the Act, if an employer fails to properly respond, the state unemployment agency will charge the company’s account for benefits, even if the claimant is later disqualified.

The Act allows states to make their own determination as to what constitutes a “timely” and “adequate” response. In addition, states can implement stricter standards, such as revoking the employer’s rights to appeal the claim in question.

Decide Whether to Contest the Claim

If, based on your evidence, you believe the employee is not entitled to unemployment benefits, you may dispute the claim by following the unemployment agency’s guidelines. The burden is on the employer to prove that the employee should not receive benefits, so make sure you have credible written evidence supporting your position, such as attendance, disciplinary, and termination records. The state unemployment agency will decide whether the employee should receive benefits.

Often, employers fight unemployment claims because they understand the effect of benefits on their state unemployment tax rate, which is influenced by the number of claims charged to the employer’s account. The more former employees who are receiving benefits, the higher the employer’s state unemployment tax rate. Therefore, it is in a company’s best interest to appeal unwarranted claims.

Contact us today for more information about handling unemployment claims.

Posted in Uncategorized | Leave a comment

Top 5 Payroll Mistakes to Avoid

The ramifications of payroll mistakes emanate from external and internal sources. Externally, the government can levy fines and penalties for payroll noncompliance. Internally, employees tend to become seriously concerned when an error shows up on their paycheck. There are many possible reasons for these mistakes, but the following five are the most common.

1. Timekeeping Errors

A manual timekeeping system means that employee hours are recorded and computed by hand, increasing the chances of mistakes. Although a computerized or web-based timekeeping system can reduce mistakes, manual adjustments are still necessary at times with these systems—such as when employees take vacation, personal, or sick time. One wrong entry can snowball into an incorrect paycheck.

How to avoid the problem: Double-check employees’ hours and wages before distributing paychecks.

2. Improper Withholding

The complexity of payroll withholding makes the process highly susceptible to mistakes, which may stem from the following:

  • Inaccurately setting up employees’ W-4 and state tax information
  • Incorrectly withholding federal and state taxes
  • Erroneously calculating deductions for employee benefits
  • Improperly handling wage garnishments

How to avoid the problem: Use a payroll system that simplifies payroll processing, including withholding, to minimize data entry errors.

3. Misclassifying Employees

Employers who intentionally misclassify employees as independent contractors often do so to avoid paying their share of payroll taxes. Employee misclassification also may be a tactic to escape providing certain benefits, such as health insurance and unemployment.

The Internal Revenue Service (IRS) and Department of Labor take this issue seriously and may impose fines and penalties, including imprisonment, on employers who misclassify employees as independent contractors. The severity of the penalty depends on whether the misclassification was intentional.

How to avoid the problem: Follow all federal and state laws, including IRS guidelines, pertaining to classifying employees and independent contractors.

4. Incorrect Payroll Tax Reporting

Employers must report the taxes they withhold from employees’ wages plus their own share of taxes to the IRS and the respective state revenue agency. With so many reports to file at different times, it can be easy to miss deadlines or submit incorrect information.

How to avoid the problem: Hire a qualified onsite staff to handle payroll tax reporting or outsource it to a competent payroll service provider.

5. Violating Minimum Wage and Overtime Rules

The Department of Labor (DOL) says that it collected over $270 million in back wages for more than 240,000 workers in 2017. Claims for back wages are typically linked to violations of the Fair Labor Standards Act (FLSA), which establishes federal minimum wage and overtime laws.

A clear violation of the FLSA would be paying a nonexempt, hourly employee less than the required federal minimum wage or inaccurately classifying a nonexempt employee as exempt.

How to avoid the problem: Comply with the FLSA’s minimum wage and overtime requirements and be sure to consult state law, which may vary from the FLSA.

Honorable Mention: Inadequate Payroll Recordkeeping

Maintaining proper payroll records is essential to minimizing exposure to audits by the DOL, state labor department, IRS, and state revenue agency.

To ensure you avoid these and other common payroll mistakes, contact us today

Posted in Uncategorized | Leave a comment

Know the Rules on Classifying Employees

The Fair Labor Standards Act (FLSA) sets guidelines for whether an employee is exempt or nonexempt under federal law. Exempt means that the employee is excluded from the Act’s overtime pay provisions and therefore does not have to be paid overtime for work hours exceeding 40 hours in a week. Nonexempt means that the employee is covered by the Act’s overtime pay provisions and must receive overtime pay for any hours worked over 40 in a week.

Federal Basis for Exemption

To qualify for exemption from overtime, the employee must perform specific duties equivalent to his or her position, as defined by the FLSA. In other words, exemption is based on job duties, not on job titles. For many jobs, exemption also depends on how much the employee is paid and how that payment is made.

  • Executive, administrative, and professional employees are exempt not only from overtime pay but also from receiving minimum wage, provided they meet the FLSA’s duties and earnings tests. In addition to passing the duties test, these so-called white-collar employees must receive at least $455 per week to qualify for the exemption.
  • Executive employees must be paid on a salary basis.
  • Administrative and professional employees may be paid on a salary or fee basis.
  • Certain computer professionals are exempt from minimum wage and overtime if they pass the duties test plus and also receive a salary or fee of at least $455 per week or a minimum hourly rate of $27.63.
  • Outside sales employees are exempt from minimum wage and overtime pay if they satisfy the duties test, which includes making sales and frequently working away from the employer’s place of business. Outside salespeople do not have to undergo an earnings test.
  • Some positions are exempt from only overtime, rather than both minimum wage and overtime. These jobs include those performed by airline employees, motion picture theater workers, and railroad employees.

A Simple Rule for Nonexemption

If an employee does not meet the qualifications for exempt status, then he or she is nonexempt. In addition to qualifying for overtime, nonexempt employees must receive no less than the federal or state minimum wage, whichever is higher. Blue-collar, clerical, construction, and semiskilled employees are typical examples of nonexempt workers.

A Trap to Avoid

Most salaried employees are exempt and most hourly employees are nonexempt. This general standard, however, should not be used as the definitive guidepost for determining exempt or nonexempt status. Employees can be salaried yet nonexempt, such as those who do not perform the duties required for exempt status despite meeting the minimum salary requirement—in which case, they are eligible for overtime. Similarly, employees can be hourly yet exempt, such as those who perform the FLSA-required duties for their role but are compensated on an hourly basis, as allowed by the FLSA.

An Eye on State Law

The state may have laws on overtime pay and exemption that differ from the FLSA. For instance, California has established job duties tests for executive, administrative, professional, and computer employees as well as tests for inside and outside salespeople. California also has its own minimum salary and overtime pay requirements. Be sure to check both federal law and your state’s rules on wages and overtime.

Contact us today for more assistance with correctly classifying your employees.

Posted in Uncategorized | Leave a comment