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STAFFING AGENCIES

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.

States Conforming to IRS Employee Classification Amnesty

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When the IRS announced its employee classification amnesty, it caused a number of concerns for employers. A primary concern was whether the States would conform, or if they would just consider the IRS application a confession and prosecute taxpayers that take advantage of the program. While it may be too soon to tell in many states, some have conformed already. [Read more…] about States Conforming to IRS Employee Classification Amnesty

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

NJ Office of Taxpayer Advocate Taking Sales & Use Tax Cases

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Beginning, Aug. 1, 2011, the Office of the Taxpayer Advocate (OTA) will start considering cases involving sales and use tax. Previously, the OTA had only considered cases that involved gross income tax. To be deemed eligible for OTA assistance, the following conditions must be met:

  • You face a threat of immediate adverse action for a disputed liability, or believe that you did not receive adequate notification of the Division’s actions or that the Division’s actions are unwarranted, unfair, or illegal.
  • You have experienced a delay of more than 120 days to resolve a tax account problem or in receiving a response to an inquiry to the Division.
  • You are experiencing undue hardship or are about to experience undue hardship, which is defined as undue economic harm resulting from the way in which the tax laws, regulations or policies are being administered by the Division of Taxation. Personal or economic inconvenience is not considered undue hardship. [Read more…] about NJ Office of Taxpayer Advocate Taking Sales & Use Tax Cases

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.