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MEDICAL PRACTICES

S-Corp Owners- Take a Raise to Keep the IRS Away

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A popular income trick played by S-Corp owners is to take a

significantly deflated salary, and then collect large profit distributions. This
tactic lowers tax liability because income collected as salary is subject to a
2.9% Medicare tax and some is subject to a 12.4% Social Security, or FICA, tax.
By shifting that income to a profit distribution one can sidestep those taxes.
Recent IRS statistics have caused an increased scrutiny of S-Corp owners’
salaries. Over the past decade and a half, while executive paychecks exploded,
the salaries of S-Corp owners declined as a percentage of total income, from
52% in 1995 to 39% in 2007. During the same period, S-Corp income doubled,
while salaries increased only 26%. While many think that the IRS can only force
someone to take a salary decrease, a recent district court case showed that one
can also be forced to increase one’s salary. In David E. Watson P.C. vs. U.S.,
Mr. Watson, a CPA with 20 years of experience, took a salary of $24,000 in 2002
and 2003, and made profit distributions of $203,651 and $175,470, respectively.
Recent graduates with no experience earned an average of $40,000 at that time.
The court determined that a fair salary for Mr. Watson would have been $91,044,
and ordered him to pay back the nearly $20,000 he saved in payroll taxes as
well as interest and penalties. What S-Corp owners have going for them,
however, is that fair salary is a very gray area. While Mr. Watson’s salary was
low enough to attract the attention of the IRS, it would be difficult to prove
that a more appropriate salary is too low, even if it is on the lower end of
the spectrum.

Owe NJ or NY taxes? ? It Could Cost You Your Driving Privileges

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Ignoring a tax debt could cost you more than you might think. Traditionally, states have made use of  liens and wage garnishments as the primary method for collecting delinquent taxes. However, the reeling nature of the economy has emboldened states to employ a much more aggressive tactic.  On October 4, California passed a law mandating that state’s motor vehicle department to suspend the driver licenses of the top 1,000 tax debtors. Moreover, all their names are to be published online. At least 19 states, including New Jersey and New York, have followed California’s lead and are likewise listing the names of tax delinquents online. While they have not yet suspended driver licenses, these states are desperate for additional tax revenue. It would be wise to take care of your tax liability to ensure not having to move over to the passenger’s side.

IRS INTRODUCES COMPLIANCE PROGRAM FOR EMPLOYEE CLASSIFICATION

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As part of the “Fresh start” initiative by the IRS to encourage more corporate and individual tax compliance, a new voluntary program has been announced to encourage employers to properly classify employees as such, rather than as independent contractors. Under the program, employers can obtain substantial relief from federal payroll taxes they would have owed in the past, if they prospectively classify their hires as employees. To be eligible, an applicant must: [Read more…] about IRS INTRODUCES COMPLIANCE PROGRAM FOR EMPLOYEE CLASSIFICATION

Reduce your NJ Unemployment Rates!

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All New Jersey employers received this week a Notice of Employer Contribution Rates. It clearly states, “This is not a bill”, but rather a summary of the manner in which the NJ Department of Labor calculates your employer contribution rate for unemployment and disability. Furthermore, this form enables you to determine whether a voluntary contribution would save you, or your clients, money in the subsequent year. A voluntary contribution increases the reserve balance and may reduce your contribution rate. [Read more…] about Reduce your NJ Unemployment Rates!

Dementia Caregiver Expenses Tax Deductable!

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Dementia: A Growing Challenge

8 million Americans currently exhibit some signs of dementia and this population is steadily increasing. Eventually, few people will be spared the challenge of caring for a relative with this disease.  In many cases, a physician may determine that the patient requires 24 hour supervision. If no relative or friend can provide the required supervision, it can result in considerable caregiver expenses. Often, people will hire unlicensed caregivers to minimize this cost.   In a recent Tax Court case, the issue presented was whether or not these expenses are deductible for income tax purposes. [Read more…] about Dementia Caregiver Expenses Tax Deductable!

NJ New Budget Decreases S-Corp Minimum Tax

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On June 30th, 2011, New Jersey Governor Chris Christie signed into law portions of the legislature’s New Jersey budget that included a 25% decrease for the minimum corporate business tax on S-corporations. The new rates are as follows:

Gross Receipts               Minimum Tax

$1 million or more         $1,500

$500,000-$999,999       $1,125

$250,000-$499,999       $750

$100,000-249,999         $562.50

Less than $100,000       $375

The only exception to the decrease will be S-corporations which are members of affiliated or controlled groups with payrolls of $5,000,000 or more. Their minimum tax remains at $2,000.

This last exclusion from the new minimum corporate tax law seems to unfairly discriminate against staffing agencies and service corporations, as their primary expense is payroll. In fact, payroll IS the product being sold. Typically staffing agencies  have controlled groups and reach the $5,000,000 threshold. Yet, solely due to their line of business, they will not benefit from the new reduction.