Reasonable Compensation

What is Reasonable Compensation and Why Should I Care?

If you own all or part of a S-Corporation you are required to receive reasonable compensation as wages — subject to payroll taxes as an employee of that S-Corporation. Positions like President, Treasurer or Manager along with any other positions that requires you to provide services for the business should be included when calculating reasonable compensation. While calculating what is what is not reasonable can be complex, what is simple to understand is; 1) IRS has been talking about the problem of S-Corporate working shareholders failing to properly take reasonable compensation and the deficit this creates in Social Security and Medicare taxes, for a long time. 2) At least part of the 87,000 new employees the IRS is adding will be assigned to audit reasonable compensation.

A reasonable compensation audit could result in owner distribution or even loan payment being reclassified by the IRS to compensation. The result of this reclassification would be the assessment of additional Social Security and Medicare taxes, not to mention interest and penalties.

Now is the time to review exactly what services you provide for your S-Corporation. How much time do you spend and what is the value of those services and the time spent is? While you are at it it’s also important to document how you determined what the number for your reasonable compensation is. Before you get started you may want to learn just what kind of documentation and calculations the IRS looks for in reasonable compensation cases.

Need help evaluating your compensation and the documents required to support your position? Give us a call.

Social Security

Getting Close to Collecting Social Security? Here’s some things to consider.

1) Distributions from your IRA or pension will affect how your social security is taxed.
Single taxpayers receiving social security can pay tax on as much as 85% of their social security if modified adjusted income exceeds $34,000 (or for married couples filing jointly the number is $44,000). If modified adjusted gross income exceeds just $25,000 for single filers and $32,000 for married joint filers, then up to 50% of social security may be taxable.

Hint 1: Time large IRA or pension distributions so they take place BEFORE you start taking social security or in a year where social security is already 85% taxable.

Hint 2: Low-income years and those with net operating losses from business activities are the perfect time to reposition funds out of IRAs and Pensions to non-qualified (ordinary) accounts or ROTH conversion, so that funds will be available when needed without affecting the taxability of social security.

2) If you think you will retire in a higher or the same tax bracket, consider funding a ROTH IRA instead of a traditional IRA.
You will not get the tax deduction for your contribution but as long as you meet the other requirements the money you later take out will be tax free and this includes the growth.

3) Medicare Part B premiums depend on income.
Married taxpayers filing a joint return with income under $182,000 pay only $170.10 per person for Medicare Part B. For all others the threshold is $91,000. Depending on your income the Part B premiums can increase to as much as $578.30 per month per person.


Sales Taxes

Internet Sellers May Be Liable For Multiple State Sales Taxes

 The responsibility for collecting sales tax for internet merchants [and those others selling and shipping products out of their home state] changed in 2018 with the U.S. Supreme Court decision, South Dakota v. Wayfair. This case held that states could require out-of-state (or remote) businesses to collect sales taxes even without a physical presence.

This decision added to the physical presence test an additional economic nexus test that allowed states to set standards for the total sales and/or number of total transactions of an out of state merchant that would trigger a sales tax collection requirement.  The states responded quickly with new remote sales tax requirements, resulting in a complex patchwork of requirements with wide variation.

For example, states established different monetary and transactional (or economic nexus) thresholds exempting some small businesses from remote sales tax requirements and different rules for calculating those thresholds.

This adds to the complexity of interstate commerce and e-commerce when it comes to sales tax, as if sales tax rules for your own state are not already hard enough to navigate.

The chart below from GAO, gives an overview of the sales and transaction numbers each state has established which require out of state sellers that don’t have physical nexus to collect and submit taxes on sales shipped into their state.

Another Court

Another Court Affirms Employees Overtime & Time Worked Pay Requirement

The U.S. Court of Appeals for the Second Circuit has approved a ruling by a New York District Court finding that New York City Emergency Medical Technicians (EMTs) and paramedics were improperly denied overtime pay for all of the time spent on pre- and post-work tasks despite not specifically seeking approval for overtime.

The class action law suit that eventually grew to include over 2,500 New York City EMTs and paramedics alleged that they spent significant time doing necessary tasks before and after their shifts, but were not paid overtime, in violation of the Fair Labor Standards Act (FLSA). The city countered that they were not paid because they did not follow protocol and specifically requested overtime approval.

Trial court jury found that the city willfully violated the FLSA by requiring the EMT/paramedics to perform work before and after their shifts without paying them for that work unless they specifically requested overtime compensation from the city. The judge entered a judgment against the city for $17,780,063, allocated as follows: back pay in the amount of $7,238,513; plus the same amount in liquidated damages; and $3,303,037 in attorneys’ fees.

The Second Circuit affirmed the lower court’s opinion. The court first noted that an “an employee’s failure to report work the employer in fact knew about or required does not protect the employer from FLSA liability.”

This decision again sends the important message that employers must pay employees for all time worked regardless of whether of not the employee reports the time and requests payment. 


No Statute of Limitations

No Statute of Limitations If You Don’t File A Return

The statute of limitations for any given tax year does NOT start if you don’t file a tax return. This means that the IRS can assess taxes and even file criminal charges related to unfiled returns regardless of how long ago they were due.

Failure to File or Filing a False Return: Failing to file a tax return or filing a false, fraudulent return with the intent to evade taxes will NOT stop the statute of limitations from running. In other words, there is no time limit for the IRS; they can assess additional taxes, penalties and even file criminal actions against you, at any time without limitation.

Omission of More Than 25% of Income: If you underreport your income by more than 25%, the statute of limitations is extended to 6 years.

File Your Return On Time: The statute of limitations is 3 years from the date the return was filed or due (whichever is later) as long as there was no intentional underreporting.

It’s important to note that statutes of limitations can be complex and may vary depending on specific circumstances and changes in laws. Always consult with a legal professional or tax advisor to get the most accurate and up-to-date information regarding statutes of limitations on tax fraud.

Hurricane Idalia

Florida Victims of Hurricane Idalia Get Tax Relief

The IRS has provided tax relief to victims of Hurricane Idalia in Florida.

These taxpayers now have until February 15, 2024, to file various individual and business tax returns and to make certain tax payments.

This is a postponement period. The tax relief postpones filing and payment deadlines that were originally due between August 27, 2023 and February 15, 2024 to February 15, 2024 including:

  • Individuals with a valid extension, to October 16, 2023, to file their 2022 returns
  • Quarterly estimated income tax payments normally due on September 15, 2023, and January 16, 2024
  • Quarterly payroll and excise tax returns normally due on October 31, 2023, and January 31, 2024
  • Calendar-year partnerships and S corporations with valid extensions, to September 15, 2023, to file their 2022 returns
  • Calendar-year corporations with valid extensions, to October 16, 2023, to file their 2022 returns, and
  • Calendar-year tax-exempt organizations with 2022 extensions to November 15, 2023

Additionally, the IRS will abate penalties for failure to make payroll and excise tax deposits due on (or after) August 27, 2023 and before September 11, 2023, if the deposits are made by September 11, 2023.

Disaster area taxpayers are those that reside or have a business in 46 Florida counties qualify for this relief.

IRS Fails

IRS Fails to Follow the Rules

According the Treasury Inspector General for Tax Administration, IRS employees have not always followed the rules when it came to directly contacting taxpayers (instead of their representatives like CPAs, enrolled agents and attorneys).

Tax code provides taxpayers the right to representation during interviews and protect taxpayers’ rights by prohibiting IRS contact of a taxpayer if it knows they are represented. However, TIGTA’s effort to determine whether the IRS was complying with the law was complicated by the fact that the IRS doesn’t have a system to identify IRS employee violations of the law.

Tax professionals have been complaining for years about IRS employees contacting clients directly who had a valid Power of Attorney on file and the report seems to confirm that the IRS does not always comply with this requirement.

If you are a client that is represented by a CPA, enrolled agent, or attorney and find yourself being contacted by the IRS you should not respond to them other than to let them know you are represented and that there is a power of attorney on file for your representative. It might also be a good idea to have a copy of the Power of Attorney on file available to give to the IRS employee.

Remember you have a right to having contact go through your representative. If you are represented it’s best not to answer any questions or provide any information without having your representative present.

Don’t Be A Target

Older People Are Targeted

It seems that as soon as I turned 65 I became a target for everyone with something to sell. My mail is filled with invitations for “free” dinners at local restaurants — all that is required is I disclose my net worth and investable assets. If I want to travel a little further from home I can get a “free” vacation — all I have to do is attend a “Vacation Ownership Presentation.” There is land in Tennessee with beautiful views (but often they fail to mention the lack of roads or utilities). Not to mention it appears I have won the Canadian lottery, even though I never bought a ticket — all I have to do is give them my credit card information for the taxes and they will send me a check.

Now some of these things are coming from salespeople that want me to invest or buy something while others are from scammers who only want to help separate me from my money. Being a financial professional I know how to deal with all these offers but I am surprised how often I get a call from a client because they just won the Canadian lottery, are getting ready to buy a timeshare, or have found a one-of-a-kind investment where they can’t lose and they just want my help. While some of these calls come before the damage is done and money has changed hands, others come after the client has invested, purchased, or given out their credit card information. At that point all I can do is to help they mitigate the damage.

Too many older people are sitting at home with time on their hands and enjoy the break in monotony with a phone call from a friendly voice or a piece of mail that offers a freebie and makes them feel special — but as we all know there is no such thing as a free dinner (or an offer that is not intended to get something from you). Make sure you don’t fall for these offers that will end up pressuring you to do something that could end up costing you part of your hard-earned savings. When in doubt get a second opinion from a trusted advisor like your tax advisor or attorney.

Crypto Currency Can Complicate Taxes

When you invest in crypto and other digital currencies don’t be surprised by the complications this adds at tax time. These transactions can take many forms and each form can result in a unique tax reporting challenge.

Things as simple as trading or buying one kind of crypto or digital currency with another results in a taxable transaction and must be reported in U.S. Dollars — even if no dollars were involved. These transactions are not eligible for like kind exchange deferrals.

Take digital currency in payment for goods or services; you must report the FMV of the digital currency in the gross sales (revenue) reported for the business. Sell that same digital currency received and reported as business revenue? You will need to recognize gains or losses on the sales based on the current price and FMV recognize at the time received. Receive proof-of-stake blockchain rewards as additional units of cryptocurrency? These must be reported in the year received at their FMV at the time received. Mining crypto or digital currency? You now have business income based on the FMV when mined and business expenses to deduct based on the cost of mining.

If you think this seems very complicated, you’re starting to get it. While the IRS is working hard to make sure the government gets its “fair share”, it’s not always clear just what goes where on a tax return. The accounting practices to figure out just what is and is not taxable can be complex and expensive.

When it comes to crypto and digital currency not every tax professional knows what to do. It’s important to make sure you have someone that can not only get the tax reporting correct but can also defend the reporting should the IRS come calling is important.

How Do I Qualify For Social Security?

Anyone born in 1929 or later needs 10 years of work (40 credits) to be eligible for retirement benefits.

The maximum credits that can be earned per year is 4. Credits are earned based on wages as an employee or self-employment income. The amount of earning required per year per credit was $1,510 Therefor earning of $6,040 or more would equate into 4 credits. The earning requirements are currently indexed for inflation.

For more information on past earnings required for credit see the attached chart.