New tax law impacts retirement benefits

As you’re likely aware, Congress passed and the president signed into law a new tax bill in December. The technical name of the act is rather long and unwieldy, so it’s commonly referred to by an earlier and simpler title: the Tax Cuts and Jobs Act (TCJA). Naturally, most of the TCJA’s provisions have to do with income taxes. But it also impacts retirement benefits.

Loan balances

The new law gives a break to plan participants with outstanding loan balances when they leave their employers. Ordinarily, participants with outstanding loans who fail to make timely payments after separation from an employer are deemed to have received a distribution in the amount of that outstanding balance. Under pre-TCJA law, they could, however, roll that amount (assuming they have sufficient funds available) into an IRA without tax penalty if they do so within 60 days.

Under the TCJA, beginning in 2018, former employees in this situation will have until their tax return filing due date (including extensions) to move funds equal to the outstanding loan balance into an IRA or qualified retirement plan without penalty. They’re given the same opportunity if they’re unable to repay a loan because of the plan’s termination.

Roth conversions

The TCJA also restricts individuals’ ability to recharacterize conversion contributions to a Roth IRA as if they were still making contributions to a traditional IRA. In other words, beginning in 2018, individuals can no longer convert a traditional IRA to a Roth IRA and then later recharacterize that Roth IRA contribution back to a traditional IRA contribution to essentially undo the conversion. However, taxpayers can still recharacterize new Roth IRA contributions as traditional contributions as long as they do it by the applicable deadline and meet all other rules.

This provision may portend additional 401(k) restrictions in years to come. Roth 401(k)s are favored by revenue-seekers in Congress, because the after-tax nature of contributions to Roth plans — IRAs or 401(k)s — enables the federal government to collect more tax revenue in the present, pushing off into the future the drain on tax revenue because of the tax-free nature of Roth withdrawals.

Future possibilities

Indeed, the federal government will likely continue to look at changes to retirement plans as a means of generating revenue. One proposed, but eventually eliminated, provision would have required that all contributions to any defined contribution plan sponsored by the same employer (including mandatory employee contributions to a defined benefit plan) be aggregated when determining whether contributions to a participant’s account satisfy IRC Sec. 415(c) limits. This would have raised $1.7 billion over a 10-year period, the Committee’s staff estimated.

Similarly, Congress considered imposing a low ($2,400) cap on pre-tax 401(k) contributions, requiring the balance of the total $18,000 limit on contributions ($18,500 for 2018) to be made on an after-tax basis. Congress could someday revisit this concept and push employers to convert traditional 401(k) plans to Roth plans.

Joining the effort to end sexual harassment

It will surely go down as one of the biggest news stories of the year. From the world of entertainment to Capitol Hill, allegations of sexual harassment have disrupted the status quo and made headlines at a remarkable rate. Meanwhile, on social media, the #MeToo movement has sparked widespread discussion.

Employers can play an important role in leveraging the momentum of this historic effort to end sexual harassment. Although you can’t and shouldn’t try to completely control employees’ behavior, you do have the power to establish a workplace culture that discourages wrongdoing and helps every employee feel safe.

Recognize the problem

The first step in solving any problem, of course, is recognizing it. According to the Equal Employment Opportunity Commission (EEOC), the law “doesn’t prohibit simple teasing, offhand comments, or isolated incidents that are not very serious.” Where such behavior goes too far is “when it is so frequent or severe that it creates a hostile or offensive work environment, or when it results in an adverse employment decision, such as the victim being fired or demoted.”

A harasser can be anyone within an organization, not just a supervisor. Even a client, customer or constituent can fit the definition, though the victim would have to show that certain conditions were present. That is, from a legal liability standpoint, there generally would have to be evidence that the employer knew about the behavior and did nothing to stop it and that the victim had no way to avoid contact with the offender.

The EEOC also suggests, “It is helpful for the victim to inform the harasser directly that the conduct is unwelcome and must stop.” This reduces the chance that a simple misunderstanding has become overblown.

Take steps to prevent it

All that said, employers can’t expect employees to work out every such conflict on their own. Here are a few steps you might take to create a safe culture that discourages bad behavior and encourages openness in immediately dealing with questionable incidents:

  • Conduct periodic “climate surveys” to assess the extent to which harassment may be occurring.
  • Implement a method to measure how effective supervisors are in preventing and responding to harassment, including it in their performance reviews.
  • Conduct regular and various harassment prevention training sessions with topics such as “workplace civility” and “bystander intervention.”
  • Partner with researchers to benchmark your organization’s workplace harassment prevention efforts with those of similar entities.

Remember, sexual harassment isn’t just a problem for the victim and perpetrator. It can have negative effects on morale and productivity throughout the organization and severely damage your reputation.

Keep an eye out

No employer is immune from the possibility of sexual harassment occurring within its four walls. Therefore, it’s prudent to regularly take a fresh look at your policies and procedures in this area to be confident they’re robust enough to minimize the probability of any problem behavior. 

3 good reasons to conduct background checks when hiring

Many employers use background checks as a regular part of their hiring processes. But “many” does not mean “all.” In fact, recent research conducted by the Society for Human Resource Management indicates smaller businesses tend to skip this important hiring step. Among companies with fewer than 100 employees, fewer than half conduct criminal background checks on job candidates vs. 83% for employers with at least 2,500 employees.

If yours is a smaller organization, you may understandably feel pressured to hire good candidates quickly. After all, you don’t have the hiring resources of a larger organization and might really need the help. But, in today’s complex and often litigious working world, background checks remain highly advisable. Here are three good reasons to conduct them:

1. To protect yourself legally. Among the various legal risks you face is being accused of “negligent hiring.” This is a legal concept used in lawsuits against employers that alleges an employee’s harmful actions (such as assault of a co-worker) could have been avoided had the employer more thoroughly vetted the worker before hiring. The cost of a background check today is likely a tiny percentage of the legal costs your organization could incur if such a lawsuit were filed.

2. To safeguard your business data and customers’ personal info. Although many data breaches are perpetrated by distant outsiders breaking into proprietary systems, the threat of an inside job is very real. A dishonest job candidate may be playing a “long game” of getting hired and then gradually siphoning data (or money) from your organization. Or he or she may simply steal sensitive information as soon as possible. In either case, a background check can raise red flags that warn you of these possibilities.

3. To improve your hiring process (and background checks aren’t that expensive anymore). Sometimes the hardest part of doing anything is changing existing processes. If you’ve hired new employees the same way for ages and never had a problem, background checks may seem unnecessary. But a hiring process that involves background checks is simply better. And they’re not as expensive as they used to be. Providers now have technology that makes the process much more efficient, and they have to price their services competitively.

If your organization is inexperienced in obtaining background checks, approach the matter carefully. You’ll need to jump through some legal hoops to comply with existing laws and regulations

How Long Should You Retain Payroll Records?

Employers must exert a certain amount of time and resources to properly retaining their income tax records. But these aren’t the only documents you need to maintain. Retention of your organization’s payroll records is also important.

Rule of thumb

Most employers must withhold federal income, Social Security and Medicare taxes from their employees’ paychecks. As such, you must keep records relating to these taxes for at least four years after the due date of an employee’s personal income tax return (generally, April 15) for the year in which the payment was made. This is often referred to as the “records-in-general rule.”

These records include your Employer Identification Number, as well as your employees’ names, addresses, occupations and Social Security numbers. You should also keep for four years the total amounts and dates of payments of compensation and amounts withheld for taxes or otherwise including reported tips and the fair market value of noncash payments.

It’s also important to track and retain the compensation amounts subject to withholding for federal income, Social Security and Medicare taxes, and the corresponding amounts withheld for each tax (and the date withheld if withholding occurred on a day different from the payment date). Where applicable, note the reason(s) why total compensation and taxable amount for each tax rate are different.

Other data and documents

A variety of other data and documents fall under the records-in-general rule. Examples include:

  • The pay period covered by each payment of compensation,
  • The employee’s Form W-4, “Employee’s Withholding Allowance Certificate,”
  • Each employee’s beginning and ending dates of employment,
  • Statements provided by employees reporting tips received,
  • Fringe benefits provided to employees and any required substantiation,
  • Adjustments or settlements of taxes, and
  • Amounts and dates of tax deposits.

Follow the rule, too, for records relating to wage continuation payments made to employees by the employer or third party under an accident or health plan. Such records should include the beginning and ending dates of the period of absence, and the amount and weekly rate of each payment (including payments made by third parties). Also keep copies of each employee’s Form W-4S, “Request for Federal Income Tax Withholding From Sick Pay,” and, where applicable, copies of Form 8922, “Third-Party Sick Pay Recap.”

Simple rule, complex info

As you can see, the records-in-general rule is fairly simple, but the various forms and types of information involved are complex.

The Importance of Form I-9

Completing Form I-9 is a requirement of all new employees.  In July 2017 the form was revised and employers are required to start using the new version of the form.  Below are some topics that can help you understand the importance of the form and what to do if you are required to provide a completed Form I-9 to an official from the United States Citizenship and Immigration Services (USCIS).

Purpose of Form I-9

Form I-9 is used for verifying the identity and employment authorization of individuals hired for employment in the United States. All U.S. employers must ensure proper completion of Form I-9 for each individual they hire for employment in the United States. This includes citizens and noncitizens. Both employees and employers (or authorized representatives of the employer) must complete the form. On the form, an employee must attest to his or her employment authorization. The employee must also present his or her employer with acceptable documents evidencing identity and employment authorization. The employer must examine the employment eligibility and identity document(s) an employee presents to determine whether the document(s) reasonably appear to be genuine and to relate to the employee and record the document information on the Form I-9. The list of acceptable documents can be found on the last page of the form. Employers must retain Form I-9 for a designated period and make it available for inspection by authorized government officers. NOTE: State agencies may use Form I-9. Also, some agricultural recruiters and referrers for a fee may be required to use Form I-9. Form instructions can be found here.

Questions and Answers

Click here to go to the United States Citizenship and Immigration Services (USCIS) Question and Answers web page.

Revised Form I-9 Now Available

USCIS released a revised version of Form I-9, Employment Eligibility Verification, on July 17.  On Sept. 18, employers must use the revised form with a revision date of 07/17/17 N. Employers must continue following existing storage and retention rules (discussed later) for any previously completed Form I-9.

Inspections

Officials from the Department of Homeland Security, employees from the Immigrant and Employee Rights Section (IER) at the Department of Justice, and employees from the Department of Labor may inspect an employer’s Form I-9, Employment Eligibility Verification. Employers will generally receive a written Notice of Inspection at least 3 days before the inspection. These officials can inform the owner, designee, senior management official or registered agent of the business entity of an inspection in person or by certified U.S. mail, return receipt requested. Officials may also use subpoenas and warrants to obtain the forms without providing 3 days’ notice.

Officials generally choose where they will conduct a Form I-9 inspection. For example, officials may ask that an employer bring Form I-9 to a U.S. Immigration and Customs Enforcement field office. Sometimes, employers may arrange for an inspection at the location where the forms are stored.

When officials arrive to inspect an employer’s Form I-9, the employer must:

  • Retrieve and reproduce electronically stored Form I-9 and any other documents the officer requests;
  • Provide the officer with the necessary hardware and software to inspect electronic documents; and
  • Provide the officer with any existing electronic summary of the information recorded on the employer’s Form I-9.

Employers who refuse or delay an inspection may be in violation of the law.

 

Storage and Retention of Form I-9

How to store Form I-9

  1. On-site or at an off-site storage facility
  2. In a single format or a combination of formats, such a
  • paper
  • microfilm or microfiche
  • electronic

Officers from the Department of Homeland Security, employees from the Immigrant and Employee Rights Section (IER) at the Department of Justice, and employees from the Department of Labor may ask to inspect these forms.

No matter how you choose to store your Form I-9, you must be able to present them to government officials for inspection within 3 business days of the date when the forms were requested.

Form I-9 contains personal information about employees. When storing these forms (regardless of the format you choose), USCIS recommends that employers provide adequate safeguards to protect employee information.

How long to Retain Form I-9

To calculate how long to keep an employee’s Form I-9, enter the following:

1.  Date the employee began work for pay 1. ________________________

      A.  Add 3 years to the date on line 1.          A. ______________________

2.  The date employment was terminated2.  _______________________

     B.  Add 1 year to the date on line 2.            B.  _____________________

3.  Which date is later; A or B?                   3.  _______________________

      C.  Enter the later date.                               C. _____________________

The employer must retain Form I-9 until the date on Line C.

Should you sail your 401(k) into a safe harbor?

Employers tend to feel like they have to offer a 401(k) retirement plan. But many organizations, particularly smaller ones, run into trouble with complex rules for discrimination testing. If all of this sounds familiar, you might consider adding a safe harbor feature to your 401(k).

A safe harbor 401(k) plan automatically satisfies the nondiscrimination testing rules by satisfying certain contribution, vesting and notice requirements. Safe harbor 401(k)s differ from traditional 401(k)s in ways that are attractive to both employers and employees.

Key differences

So what are the differences between safe harbor and traditional 401(k) plans? First, the nondiscrimination testing that's required for traditional 401(k)s isn't required for safe harbor 401(k)s. This can be enticing to small employers because it allows for maximum deferrals by and contributions to owners and highly compensated employees without having to worry about actual deferral percentage (ADP) and actual contribution percentage (ACP) testing - or correcting testing failures.

Second, and attractive to rank-and-file employees, is that, unlike traditional 401(k)s, safe harbor 401(k)s require plan sponsors to make a safe harbor contribution, in one of the following forms:

Matching contribution. This is 100% of the amount of the participant's elective deferrals up to 3% of the participant's compensation, plus 50% of the amount of the participant's elective deferrals between 3% and 5% of the participant's compensation.

Nonelective contribution. This must be a minimum of 3% of the employee's compensation and goes to all eligible participants, whether or not the employees are electing to make deferrals themselves.

Whichever option the employer chooses, the safe harbor employer contribution is immediately 100% fully vested. This benefit can encourage employee participation in the plan and help retain current employees and attract new ones.

Cost / Benefit Analysis of Electing S Corp Status

If you run a small business as a sole proprietor or partnership, you might be considering electing to be taxed as an S Corporation.  The major benefit to S Corp status can sometimes be a reduction in the self-employment tax you’re required to pay on your net income each year.  A shareholder who contributes services to an S Corporation is required to be paid a reasonable salary that is subject to payroll taxes, and payroll taxes are basically self-employment tax.  The possible savings occur because the income the S Corp earns above and beyond your salary will not be subject to self-employment tax. What constitutes a reasonable salary for an S Corp shareholder will be the subject of a future blog, but the IRS has laid out some guidelines that you will have to consider.  You also must be organized as an LLC or corporation to elect S Corporation status.

Of course there is are downsides to an S Corp election.  Among them are the added costs for preparing a tax return for the S Corp, fees for payroll processing, and increased emphasis on good bookkeeping records. 

Tax Preparation Costs

If you are currently a sole proprietor you file your business taxes on Schedule C, which is attached to your 1040.  There’s no need to file a separate tax return for the business. Your financial records can be as simple as tracking revenues, expenses, and fixed assets because balance sheet information is not required to be filed with Schedule C.  An S Corp election will require you to file a separate tax return on Form 1120-S that includes balance sheet information as well as income and expenses.  Consequently, costs for preparing an 1120-S tax return can be significantly higher than a personal tax return and these costs should be considered against your possible savings from reduced self-employment tax. 

If you’re currently operating as a partnership, you are already filing a separate tax return for your business that includes balance sheet information.  The increase in tax preparation costs shouldn’t be too significant.

Bookkeeping Costs

If you a sole proprietor and you currently use a software to keep track of your business’s financial records, then you are already tracking balance sheet transactions.  However, if your financial records consist of a spreadsheet with manually entered revenues and expenses, you’re going to need to make improvements before electing S Corporation status. Those improvements could have associated costs that should be considered in relation to your savings on self-employment taxes related to electing S Corp status.

Payroll Processing Fees

Your election to be taxed as an S Corp means you will have to begin processing payroll if you don’t already have employees.  If you don’t have experience with processing payroll you will definitely want to hire a reliable payroll service to take care of the tax filings for you, as penalties for late submission of taxes withheld from employee checks can be significant. 

Conclusion

Electing to have your business taxed as an S Corp can save you a significant amount in taxes, but it’s not the best choice in all situations.  Talk to a qualified tax professional and if you decide it is right for you and your business make sure your bookkeeping is in order and hire a payroll professional.  Local Economy Payroll Services offers special rates to small employers with 5 employees or less that can help make your decision easier and save you even more money!

When small employers can sign up for SHOP coverage

The Affordable Care Act allows small employers to make health coverage available to their employees through the Small Business Health Options Program (SHOP). Many of these organizations may wonder whether there are limits on when they can sign up for this coverage.

The short answer is that they can sign up anytime — a SHOP must permit a qualified employer to buy coverage for its employees at any point during the year. (This is often referred to as “rolling enrollment.”) But there are some important details to bear in mind.

Minimum participation

Under the Affordable Care Act, SHOPs are intended to allow eligible small businesses to offer employees a variety of qualified health plans. For SHOP purposes, a small employer is one with at least one and not more than 50 employees on business days in the preceding calendar year. (There is an option for states to expand the cutoff to 100 employees.) A SHOP is required to operate in each state. If a state hasn’t established one, the federal government operates a federally facilitated program for small employers in that state.

Under a SHOP’s rolling enrollment, the employer’s plan year is the 12-month period beginning with the plan’s effective date of coverage. But SHOPs may apply a minimum participation requirement. In most states, this means that at least 70% of employees must accept the offer of SHOP coverage (or be enrolled in other qualifying health coverage) in order for the employer to participate in the program. States can’t, however, impose such a requirement during an annual open enrollment period from November 15 through December 15 of each year.

Accurate prediction

Thus, while your company may sign up for SHOP coverage at any time during the year, you must satisfy the minimum participation requirement unless it’s an annual open enrollment period. A calculator is available here to help employers predict whether they’ll meet the minimum participation SHOP enrollment requirement. Of course, it’s also important to keep an eye on Affordable Care Act developments in Washington, which could affect the SHOP

Employee or Independent Contractor?

Many employers find it easy to bring on new talent and classify them as independent contractors.  The ease of processing payment to independent contractor is so tempting that it’s hard to pass by.   No federal or state taxes to withhold, no payroll processing fees to incur and the contractor is responsible for reporting their income.  Issue Form 1099-MISC by January 31 of the following year and you’re in compliance.

This decision may be appropriate for some situations.  However, often one can argue that the independent contractor working for you is actually an employee.  There is a method developed by the Maine Department of Labor for determining who can be classified as an independent contractor.  Below is actual language from the law as found on Maine.gov:

Services performed by an individual for remuneration are considered to be employment subject to this chapter unless it is shown to the satisfaction of the bureau, that the individual is free from the essential direction and control of the employing unit, both under the individual's contract of service and in fact, the employing unit proves that the individual meets all of the criteria in Number 1 and three (3) of the criteria in Number 2 as listed below.

1. The following criteria must be met:

  1. The individual has the essential right to control the means and progress of the work except as to final results;
  2. The individual is customarily engaged in an independently established trade, occupation, profession or business;
  3. The individual has the opportunity for profit and loss as a result of the services being performed for the other individual or entity;
  4. The individual hires and pays the individual’s assistants, if any, and, to the extent such assistants are employees, supervises the details of the assistants' work; and
  5. The individual makes the individual's services available to some client or customer community even if the individual’s right to do so is voluntarily not exercised or is temporarily restricted; and

2. At least three (3) of the following criteria must be met:

  1. The individual has a substantive investment in the facilities, tools, instruments, materials, and knowledge used by the individual to complete the work;
  2. The individual is not required to work exclusively for the other individual or entity;
  3. The individual is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work;
  4. The parties have a contract that defines the relationship and gives contractual rights in the event the contract is terminated by the other individual or entity prior to completion of the work;
  5. Payment to the individual is based on factors directly related to the work performed and not solely on the amount of time expended by the individual;
  6. The work is outside the usual course of the business for which the service is performed; or
  7. The individual has been determined to be an independent contractor by the federal Internal Revenue Service. *(an SS-8 determination)

Also included in this new law are clear penalties to deter the intentional misclassification of workers as independent contractors when they are employees per the standard. This practice not only creates a competitive disadvantage for those employers who correctly classify their workers but also increases unemployment tax premiums because fewer employers are paying appropriate taxes. Therefore, penalties ranging up to $10,000 were included in the new law to deter this practice.

Flipping the switch with an employee survey

Many employers operate in the dark. Not literally, of course; there is ample lighting in their workplaces. Rather, they labor along with little to no idea what their employees are really thinking or feeling about a variety of critical employment issues. One way to flip the switch and bring some illumination to the situation is with an employee survey.

Why they’re good

With an employee survey, you can gather open and honest input from those “in the know.” This input is the link between your employees and your company’s productivity, morale and success. Employee surveys help you identify weaknesses, clarify concerns, and enhance communication and cooperation — all in a confidential, nonthreatening style.

Employee surveys, when done properly, are both time- and cost-efficient because they gather vast amounts of data in a short period. Survey data can cover a wide variety of topics, from HR concerns and communication issues to quality control, customer interaction and employee involvement matters.

What can go wrong

Conducting a survey demonstrates your commitment to open communication and your respect for your employees’ opinions and well-being. The very act of conducting a survey can improve morale — as long as you subsequently take appropriate actions regarding the expressed concerns.

And therein lies the double-edged sword of employee surveys. If you conduct your survey incorrectly or halfheartedly, the results might not accurately reflect what your employees are thinking. For example, poorly worded questions or a low response rate could lead to misinformation and misconceptions about your workforce and ineffective follow-up actions.

What’s more, even a thoroughly conducted survey can be harmful if you don’t appear willing to act on the information or you say nothing further about it after gathering the data. If you’re not willing to hear bad news or not seriously committed to putting employee input to use, don’t do a survey. A survey without follow-up communication and action will only increase employee cynicism or reinforce negative perceptions of management.

Reaping the benefits

As long as you’re prepared to put in the time and effort necessary to conduct a high-quality survey, open to hearing the bad as well as the good, and willing to take action to solve problem areas, your organization stands to reap great benefits from implementing an employee survey. Our firm can help you turn the potentially productive ideas of your workforce into greater profitability.