Tax Tips – Employee Plans

Retirement plans are something that people often avoid or put off thinking about.

There may be potential advantages of amending your business’s 401(k) plan, SEP, or SIMPLE IRA plan, to allow employees who will have reached age 50 by the end of a year to make “catch-up contributions” in that year, if your plan doesn’t already provide for them.

The opportunity for an employee to make “elective deferrals,” i.e., to contribute a portion of his compensation, on a tax-deferred basis, to a 401(k) plan, SIMPLE IRA plan, simplified employee pension (SEP), 403(b) plan, and/or governmental section 457 eligible deferred compensation plan, is one of the most attractive means of saving for retirement. But the Code specifically provides annual limits on the amount of elective deferrals, and indirectly limits elective deferrals through nondiscrimination rules and overall limits on contributions. In addition, many plans provide a cap, usually as a percentage of compensation, on the amount that an employee can contribute to the plan on a tax-deferred basis.

Plans providing for elective deferrals may allow employees who will be age 50 by the end of a year to make additional “catch-up contributions” in that year, regardless of otherwise applicable limits.

The maximum annual catch-up contribution for plans other than SIMPLE 401(k) plans or SIMPLE IRA plans is $6,000 for 2019. This amount will be adjusted for inflation in later years. The maximum annual catch-up contribution for SIMPLE 401(k) plans and SIMPLE IRA plans is $3,000 for 2019. This amount also will be adjusted for inflation in later years.

Catch-up contributions provide a significant tax deferral opportunity to employees over age 50—even if the over-age-50 employees are mostly highly compensated. That is, catch-up contributions are not taken into account in applying most of the nondiscrimination rules that otherwise apply to 401(k) plans, SEPs, and SIMPLE IRAs. Thus, an eligible employee would be able to defer compensation up to the catch-up contribution maximum amount, in addition to the amount that the employee would otherwise have been able to defer without the catch-up provision.

The right to make the same catch-up contribution election does have to be available to all eligible employees, if the employer provides for catch-up contributions under any of its plans. But again, there are no adverse tax consequences if the employees that actually elect to make catch-up contributions are mostly highly compensated employees.

Unlike catch-up contributions, any contributions that an employer makes to match catch-up contributions must still meet all the nondiscrimination rules that otherwise would apply. Also, catch-up contributions for prior years are taken into account in applying the top heavy rules and minimum coverage rules, for plans subject to these rules, e.g., 401(k) plans.

You should consider whether the use of one of these types of plans and accounts can benefit you.

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If you want to talk to us about your personal tax situation, please email us via our contact page and visit our website at www.ablonco.com.

© 2019, all rights reserved.

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Employment Tax Credits

Is your business hiring this summer? If the employees come from certain “targeted groups,” you may be eligible for the Work Opportunity Tax Credit (WOTC). This includes youth whom you bring in this summer for two or three months. The maximum credit employers can claim is $2,400 to $9,600 for each eligible employee.

10 targeted groups

An employer is generally eligible for the credit only for qualified wages paid to members of 10 targeted groups:

• Qualified members of families receiving assistance under the Temporary Assistance for Needy Families program,
• Qualified veterans,
• Designated community residents who live in Empowerment Zones or rural renewal counties,
• Qualified ex-felons,
• Vocational rehabilitation referrals,
• Qualified summer youth employees,
• Qualified members of families in the Supplemental Nutrition Assistance Program,
• Qualified Supplemental Security Income recipients,
• Long-term family assistance recipients, and
• Qualified individuals who have been unemployed for 27 weeks or longer.

For each employee, there’s also a minimum requirement that the employee have completed at least 120 hours of service for the employer, and that employment begin before January 1, 2020.

Also, the credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (for example, working as a house cleaner in the employer’s home). And it generally isn’t available for employees who have previously worked for the employer.

Calculate the savings

For employees other than summer youth employees, the credit amount is calculated under the following rules. The employer can take into account up to $6,000 of first-year wages per employee ($10,000 for “long-term family assistance recipients” and/or $12,000, $14,000 or $24,000 for certain veterans). If the employee completed at least 120 hours but less than 400 hours of service for the employer, the wages taken into account are multiplied by 25%. If the employee completed 400 or more hours, all of the wages taken into account are multiplied by 40%.

Therefore, the maximum credit available for the first-year wages is $2,400 ($6,000 × 40%) per employee. It is $4,000 [$10,000 × 40%] for “long-term family assistance recipients”; $4,800, $5,600 or $9,600 [$12,000, $14,000 or $24,000 × 40%] for certain veterans. In order to claim a $9,600 credit, a veteran must be certified as being entitled to compensation for a service-connected disability and be unemployed for at least six months during the one-year period ending on the hiring date.

Additionally, for “long-term family assistance recipients,” there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000 [$10,000 × 40% plus $10,000 × 50%].

The “first year” described above is the year-long period which begins with the employee’s first day of work. The “second year” is the year that immediately follows.

For summer youth employees, the rules described above apply, except that you can only take into account up to $3,000 of wages, and the wages must be paid for services performed during any 90-day period between May 1 and September 15. That means that, for summer youth employees, the maximum credit available is $1,200 ($3,000 × 40%) per employee. Summer youth employees are defined as those who are at least 16 years old, but under 18 on the hiring date or May 1 (whichever is later), and reside in an Empowerment Zone, enterprise community or renewal community.

We can help

The WOTC can offset the cost of hiring qualified new employees. There are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of the credit. And you must fill out and submit paperwork to the government. Contact us for assistance or more information about your situation.

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If you want to talk to us about your personal tax situation, please email us via our contact page and visit our website at www.ablonco.com.

© 2019, all rights reserved.

Tax Benefits From Hiring Your Children

If you’re a business owner and you hire your children (or grandchildren) this summer, you can obtain tax breaks and other nontax benefits. The kids can gain on-the-job experience, save for college and learn how to manage money. And you may be able to:

• Shift your high-taxed income into tax-free or low-taxed income,
• Realize payroll tax savings (depending on the child’s age and how your business is organized), and
• Enable retirement plan contributions for the children.

Employees vs. Independent Contractors

Many employers prefer to classify workers as independent contractors to lower costs, even if it means having less control over a worker’s day-to-day activities. But the government is on the lookout for businesses that classify workers as independent contractors simply to reduce taxes or avoid their employee benefit obligations.

A Refresher on Business Expenses

Have you recently started a new business? Or are you contemplating starting one? Launching a new venture is a hectic, exciting time. And as you know, before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.

Revisiting Business Meal Rules

In the course of operating your business, you probably spend time and money “wining and dining” current or potential customers, vendors and employees. What can you deduct on your tax return for these expenses? The rules changed under the Tax Cuts and Jobs Act (TCJA), but you can still claim some valuable write-offs.

Tax Implications of Divorce

If you’re getting a divorce, you know it’s a highly stressful time. But if you’re a business owner, tax issues can complicate matters even more. Your business ownership interest is one of your biggest personal assets and your marital property will include all or part of it.