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Avoid NJ DOL Audits- S-Corp Owners Should Take Reasonable Compensation

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Wages vs. S Corp. Income

In an S-Corporation, a popular choice of tax entity among businesses, an owner who works for the company is required to take wages. How much of the company’s income is classified as wages versus S Corp. income (reported to the owner on Form K-1) is up to the owner. The net income will be taxed regardless of how it’s classified. The big difference lies in federal employment taxes, which are not paid on K-1 income. Another consideration is that K-1 income is exempt from the new 3.8% Medicare tax. So it would seem like a no brainer to take the lowest salary possible, right? Think again. There are significant downsides to consider before taking an unreasonably low compensation.

Risk of IRS Penalties

Let us assume Sam Success worked full-time as the manager of his staffing agency, which has net income of $200,000 this year. If he decides to avoid payroll taxes and classify $20,000 as wages and $180,000 as K-1 income, the IRS will probably notice. Using industry averages and other factors, it will argue that the compensation was unreasonable and will therefore impose steep penalties on top of the payroll taxes owed for the difference between the unreasonable $20,000 and what they determined is reasonable compensation.

Avoid NJ DOL Audits

Even if the IRS doesn’t take notice, the State of New Jersey has taken an aggressive stance with regard to unreasonable compensation. New Jersey is looking to collect state unemployment insurance (SUI), and if Sam Success’ salary is less than the SUI threshold ($31,500 in 2014) it will likely be scrutinized.  The number of such NJ DOL audits is on the increase. Moreover, New Jersey will inform the IRS after taking its share.

Less Disability Coverage

If Sam Success was injured by an insured party, he wouldn’t be able to argue that as manager of a staffing agency he deserves at least $100,000 for lost wages. Since he only classified $20,000 as wages, he cannot claim that his lost wages are greater.

Goodbye Social Security and Pension Benefits

The amount one receives from Social Security depends on one’s wage income or other income subject to Social Security tax. By minimizing his wages, Sam is also minimizing his potential benefits. In addition the company’s contribution to his pension is based on his wages. Lower wages equals lower pension benefits.

Keep it Reasonable

When it comes to determining wages from your S-Corporation, reasonable compensation is the way to go. Your tax professional can advise you in determining just the right amount to classify as wages in order to maximize the tax advantages, while avoiding the aforementioned pitfalls.  

Upcoming UA Seminar: Do You Know the Real Value of Your Medical Practice?

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You probably think you already know the value of your business. After all, who would know it better than the owner? The reality is, however, that there are several factors that impact the value that many business owners are unaware of.  This topic will be addressed at the upcoming complimentary U&A seminar, the first installment in a four part series tailored to medical and healthcare professionals. Issues covered will include:

  • What elements and factors enter into the value of your healthcare practice?
  • How can you increase and maintain the value of your medical practice?
  • How and why CPT codes and RVUs impact value
  • Value for Divorce vs. Value for Buy-Ins/Buy Outs
  • Starker I and II: a brief overview of these fundamental laws 

 The seminar will take place in our office (1581 Route 27, Edison, NJ) on Tuesday morning, Dec. 10th, at 8:30 am to 10:00 am and will be presented by Jeffrey D. Urbach CPA/ABV (Accredited in Business Valuations). Jeff, who has co-authored Continuing Professional Education (CPE) courses in the field of business valuation, will explain the benefits of understanding your practice’s value. He will also highlight the various factors that can impact its value.

For more information, click here: Medical Seminar Flyer

 

 

Executors Beware: NJ Law Requires Child Support Search Prior to Distribution

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If you are executor of an estate in New Jersey and intend to make a distribution to the beneficiaries, there’s one important step you need to take first. NJ law requires an executor/administrator to initiate a child support enforcement order for any beneficiary receiving in excess of $2,000 prior to the distribution. The executor is personally liable for making a distribution without initiating the order, as the Child Support Judgment is a lien against the net proceeds of any inheritance in NJ.

The search must be conducted by a private judgment search company that will verify results. Urbach & Avraham’s estate administration services include the performance of Child Support Searches. If you would like assistance with your Child Support Search, call us at 732-777-1158 or email Pamela at pma@ua-cpas.com

 

 

 

Good News for NJ Employers: Federal Unemployment Tax (FUTA) Surcharge Avoided

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New Jersey employers can breathe a sigh of relief, as Governor Christie has announced that new fiscal management practices have brought New Jersey’s Unemployment Insurance Trust Fund into solvency for the first time since 2009. This spares businesses from a drastic tax surcharge, as Federal Unemployment Tax (FUTA) was set to increase from the base rate of 0.6% ($42 maximum per employee) to 1.5% ($105 maximum per employee).  The surcharge is imposed when a state has borrowed from the Federal Unemployment Trust Fund and increases each year. In 2012, NJ employers paid 1.2% due to the surcharge ($84 maximum per employee). By repaying the loan to the Feds, employers will not be subject to this surcharge on their 2013 FUTA wages and will only pay the base rate of 0.6% ($42 maximum per employee).   

Hit by the NJ Exit Tax for Selling Real Estate? Recover Your Money Quickly

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If you’re a non-resident selling investment real estate in New Jersey, there’s a unique NJ tax you should be aware of. Both residents and non-residents always had to pay income tax on the gain upon the sale of real estate. This tax is required to be withheld for non-residents.  The “Exit Tax”, which came into law six years ago, requires the seller to file a GIT/REP form (Gross Income Tax form) in order to record a Deed for the transfer of his property. When a non-resident sells the property, New Jersey will withhold this income tax in the amount of either 8.97 percent of the profit or 2 percent of the total selling price, whichever is higher. Therefore, even if the property is sold at a loss, tax must be withheld to fulfill the two percent requirement.

You Can Recover Your Money

It’s important to realize that while the Exit Tax requires a substantial withholding, it doesn’t have any impact on the tax liability. When the seller eventually files his NJ tax return he is refunded the difference between what was withheld and what was owed. This recovery can be very significant when one factors in the selling costs and original purchase price, both of which reduce the taxable gain.

Estates Often Recover Most if Not All of the Tax Withheld

The recovery is often even greater in the case of real estate sold by an estate, as there is a step up in cost basis which would typically minimize a gain on the sale, often resulting in full recovery of the entire withholding. If a taxpayer has excess withholding it would be prudent to file Form NJ1040 (individual) or NJ1041 (estate) quickly to expedite the recovery of the excess withholding. 

 So who’s considered a “resident” and who’s a “non-resident” with regard to this tax? The law defines a resident taxpayer as one of the following:

  • An individual who is and intends to continue to maintain a permanent place of abode (home, residence) in New Jersey on/after the day of transfer
  • An estate established under the laws of New Jersey
  • A trust established under the laws of New Jersey

A nonresident is simply defined as “any taxpayer that does not meet the definition of resident taxpayer.”