Duluth/Gwinnett CPA: The Latest on Tax Law Surrounding S Corporations
Taxation of an S Corporation
The below is a sample letter we might send to a client advising of the tax law items surrounding S Corporations. Be sure you work with a CPA who is seeking to make sure you pay only your lowest legal possible tax.
When a business is an S Corporation all active employee/owners are required to take a fair and reasonable salary. The best test of a reasonable salary is what an owner would have to pay someone else to perform their position and it is a function of their position, responsibilities, and the business’s profit. At present I do not believe your return would pass any type of review and that if you do not go back and declare a salary on your 2009 earnings that you should expect an audit. I would suggest that you ASAP:
-For all active employee owners so that they are receiving a regular paycheck that is reasonable given position and profit.
-That you go back and show a reasonable salary for the prior year while reflecting on the your internal books the payment as a fourth quarter payroll, which will require amending the IRS and State Payroll reports filed and the W-2′s/W-3. If you decide not to do this I believe you should expect and audit.
Tax law does not allow S Corporation owners to deduct the medical insurance premiums paid on their behalf, unless they receive a salary at least equal to the amount of premiums paid. Please be advised that there is a move afoot in Congress to address and change tax law in this area. However, even if such a law is passed limiting the advantage of being an S Corporation it will continue to be a prudent choice for business owners.
Health Insurance Issues
One of the most maligned and misunderstood sections of tax law centers around proper classification of a worker as an employee or an independent contractor. The fact that you choose to pay someone as an independent contractor, when you treat them as an employee, will not preclude you from payroll tax or general liability issues. A careful review of the tax law, established guidelines, as well as a fair and just review of your own facts and circumstances will more aptly enable you to follow the rules to the letter of the law and also its spirit. Independent contractors if they are paid over a prescribed limit are required to receive a Form 1099 from their client which details the independent contractor’s business name, identifying number, address, and amount earned. This form serves, like a W-2 for employees, to notify the IRS of monies earned and taxable. A payroll service will be your most efficient and prudent resource to handle all of your employee’s W-2 filings and payments and Form 1099 issues. As independent contractors are separate and distinct from the firm, it is widely recommended that you do not cover them under your company’s medical insurance plan.
I recommend all of my S Corporation clients utilize the services of a payroll firm as payroll issues are perhaps the most administratively burdensome of all tax issues facing America’s Small Business Owners. To learn more about payroll administration issues see the below:
“Payroll tax returns and their attendant issues are the bane of many business owners both big and small. Tax law at federal, state and local levels often leaves an entrepreneur feeling both dazed and confused. There is no greater area of need for tax simplification than in the area of payroll tax issues. Payroll tax returns and payments are due to the varying regulatory agencies at differing times, unique and special forms and often what appears to be conflicting reporting styles and forms. Unfortunately, this is just the tip of the confusion to which you will help find clarification below.
— Gwinnett CPA, John Dillard CPA
Federal and state withholding (depending upon and varying by state)
Employers are required to submit to their employees a withholding form/certificate, on which the employee documents and confirms their filing status and their number of exemptions. Employers then are required to use this information to determine the statutorily withholding based upon withholding tables required by the IRS and varying states. The withholding certificate for the IRS and Georgia are a W-4 and G-4 form respectively. It is the employees responsibility to complete these forms and then for the employer to withhold these amounts as directed. All withholding taxes are taken out of an employee’s check and then remitted over to the respective taking authority. In this capacity, an employer is required to act in a fiduciary capacity in the withholding and payment of these monies.
Unemployment Insurance/Department of Labor
Both the IRS and the state of Georgia assess against employers an unemployment tax. This tax is paid exclusively by the company, and there are no required withholding or additional taxes being paid by the employee. Both the IRS and Georgia limit the amount of taxes a company will pay on any given employee to a maximum salary amount per year. These monies/taxes are due on the first wages paid a particular employee in any given calendar year. While the IRS assessment rate/percentage is statutory the rate to Georgia fluctuates based upon an individual companies claims experience.
FICA insurance is taken out of an employee’s paycheck and then is matched by the employer. Like withholdings, FICA taxes taken out of an employees paycheck are treated as fiduciary monies and are required to be submitted over to the IRS with rigidly defined dates, dorms and reporting format and method of payment. FICA insurance withholdings are calculated based on a prescribed statutory rate and the maximum amount of salary this is based upon is annually indexed for inflation. These monies are given over to the Social Security Administration for monthly periodic payments to those who qualify when they retire or become disabled.
Medicare Insurance also is an amount an employee is required to be withheld out of their salary and is in turn matched by their employer. Medicare taxes, FICA and federal withholding are all reported and paid concurrently. However, unlike FICA taxes, which are only assessed up to a specified annual amount, Medicare taxes are assessed on all of one’s earned income (W-2 wages) regardless of the amount. Medicare monies are then used to pay for medical expenses for those who qualify.
Electronic Filing EFTPS
EFTPS is the procedure and process that the IRS specifies employers to use to report and pay all payroll taxes. EFTPS is where employers report and pay IRS monies electronically and via magnetic media.
Because of the many varying reporting formats, forms, methods and electronic reporting requirements, it is most advisable that all employers (regardless of size) utilize and retain a payroll service to handle all of its payroll needs. Payroll companies will not only process the actual paychecks themselves, but also prepare the required payroll reports and make the needed tax payments. This process is relatively seamless as most all payroll companies debit your account for the required payroll taxes at the time of payroll check processing. Payroll companies also have the ability to make electronic payments directly to an employee’s account thereby saving time and money.
Small Business Health Care Credit
If you business has an average salary of less than $50,000 (not counting owners, their family members and those not on your medical insurance plan), have less than 25 Full Time Equivalents (FTE’s) and provide over 50% of the insurance for all employees you may qualify for the Small Business Health Care Tax Credit. If you think you might qualify please forward the amount of net medical insurance premiums paid by employee (after deducting the amounts an employee paid) along with whether their medical coverage is Single or Family. To read more about the credit http://www.hiscpa.com/health-care-credit.html
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