Month: September 2021

Preface: Opportunity is missed by most people because it is dressed in overalls and looks like work. — Thomas A. Edison (one of the most influential inventors of all time.)

Employer Tax Credits for Paid Family and Medical Time-Off

Tax legislation with The Consolidated Appropriations Act, 2021 extends the employer credit for paid family and medical time-off through December 31, 2025.

Under unique provisions of the Consolidated Appropriations Act, 2021, the credit for coronavirus related paid sick and family time-off, originally part of the Families First Coronavirus Response Act, was extended through March 31, 2021. The Families First Coronavirus Response Act (Act) provided paid sick leave and expands family and medical time-off for COVID-19 related reasons and creates the refundable paid sick time-off credit and the paid childcare leave credit for eligible employers.

Extended Employer Credit for Paid Family and Medical Leave

Employers who provide paid family and medical time-off to their employees may claim a tax credit which is equal to a percentage of wages they pay to qualifying employees while on family and medical time-off. The credit is effective for wages paid in tax years beginning after December 31, 2017 through December 31, 2025.

With the passage of this legislation employers must have a written policy in place that meets certain requirements, including providing:

• • • • At least two weeks of paid family and medical time-off (annually) to all qualifying employees who work full time (prorated for employees who work part time), and
      • The qualifying paid time-off is not less than 50 percent of the wages normally paid to the employee.

A qualifying employee is any employee under the Fair Labor Standards Act who has been employed by the employer for one year or more and who, for the preceding year, had compensation of not more than a certain amount.

Family and medical time-off for purposes of the employers who want to claim the credit include:

• • • • Birth of an employee’s child and to care for the child.
      • Placement of a child with the employee for adoption or foster care.
      • To care for the employee’s spouse, child, or parent who has a serious health condition.
      • A serious health condition that makes the employee unable to perform the functions of his or her position.
      • Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces.
      • To care for a service member who is the employee’s spouse, child, parent, or next of kin.

The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical time-off for up to 12 weeks per tax year.  The minimum percentage is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%.  In certain cases, an additional limit may apply.

An employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit.  Also, any earned wages taken into account in determining any other general business credit may not be used in determining this credit.

If you have any questions about qualifying for the tax benefits of this credit, please call our office.

Preface: The kiddie tax is a tax imposed on individuals under a certain age (under 19 years old, and full-time students age 19-23 years old), whose investment and unearned income is higher than an annually determined threshold.

Taxpayer Planning for the Kiddie Tax

Taxpayers claiming dependents who have unearned income during the year might want to consider some year-end tax planning strategies to reduce their overall tax burden. In addition, due to recent changes in the tax law, they may also have an opportunity to amend a prior year return.

The Tax Cuts and Jobs Act (TCJA) modified the “kiddie tax” to use the ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child after 2017.

However, the Further Consolidated Appropriations Act, 2020 enacted in 2019, reverts the kiddie tax to the prior use of the parents’ tax rate for tax years beginning after 2019. Therefore, for tax years beginning in 2020, the kiddie tax is calculated using the pre-TCJA rules where a child’s unearned income is taxed at the parent’s marginal tax rate. The Further Consolidated Appropriations Act also allows a taxpayer to retroactively apply the pre-TCJA rules to 2018, 2019, or both.

In general, a child is subject to the kiddie tax if:

• • • the child is required to file a tax return and he or she does not file a joint return for the year;
    • the child’s unearned or investment income is more than a threshold amount ($2,200 for 2019, 2020 and 2021);
    • either parent of the child is alive at the end of the year; and the child is:
      • • • • under age 18 at the end of the tax year;
            • age 18 at the end of the tax year and does not provide more than one-half of his or her own support with earned income; or
            • at least age 19 and under age 24 at the end of the tax year, a full-time student, and does not provide more than one-half of his or her own support with earned income.

Under the rules prior to TCJA, the child’s tax liability is equal to the greater of:

1. 1. 1. The tax on all of the child’s income without regard to the rules for the kiddie tax; or;
      2. The sum of the tax on the child’s total income reduced by net unearned income, plus the child’s share of the allocable parent tax.

In some cases, a parent may elect to report a child’s income on the parent’s return. If a parent makes this election, the child is not required to file a return. If a parent makes the election to report a child’s unearned income on the parent’s return, that income is treated as the parent’s investment income for purposes of figuring the investment interest expense deduction. However, the parent may not claim an itemized deduction for the child’s investment expenses.

Moreover, there are other tax deductions that the parent may not take that the child could have taken on the child’s return. These include the standard deduction for a disabled child, the deduction for a penalty on early withdrawal of the child’s savings, and the itemized deduction for the child’s charitable contributions.

It is important to review all the facts and circumstances of your situation in order to determine whether you should use the TCJA or the non-TCJA kiddie tax rules to amend your 2018 and 2019 tax returns to secure potential refunds. You might also consider if there is a benefit to reporting your child’s income on your tax return.

Preface: Each payroll provider should be able to articulate how their company has developed a niche in the payroll industry, and this can help you understand how well each company will be able to serve you.

How to Choose the Right Payroll Provider

Credit: Matthew P. Glick

Payroll processing is one of those crucial back-office operations that every business needs, but few people fully understand. HR laws are complex, and are continually evolving. Processing payroll can easily feel like a process that is just beyond your control, where you press buttons, and employees get paid. In this article, we will be breaking down what it is that you should look for in a payroll provider by classifying three phases (Evaluating what you need, Searching the market for available solutions, and RE-searching the list of available solutions by comparing each contender with the competition).

1. Evaluating

In this phase, you will mainly be concerned with evaluating your current needs. A good starting point would be understanding why you are looking into switching providers. By identifying the “pain points” with your current provider, you should be able to more easily identify a solution that will satisfy your needs much better. For instance, if customer service regularly fails to deliver on expectations, consider locating a provider that has a dedicated team or account manager to handle customer service, instead of a call center.

Some other points to consider would be the complexity of your payroll situation. What kind of benefits do you offer employees? Always be sure they are prepared to handle anything unique you bring to the table. The more complex your situation, the less willing you sould be to compromise on having a knowledgeable onboarding team that will be able to configure your solution just the way you need it. Some companies with a higher employee turnover may find it beneficial to invest in an integrated HCM module, which would allow them to process onboarding paperwork online, eliminating the need for paper forms.

Remember to look into what kind of integrations you will need. Making sure that your payroll provider integrates with your accounting software can save valuable time. Another integration that may save time depending on the size of your company would be timesheets automatically importing into your payroll system.

Don’t forget to evaluate you company’s future growth plans as well. Identifying a solution that has room to grow with your company will save you much time and hassle, and will allow you to focus on those growth plans rather than medicating the growing pains in HR.

Note: If your company has relatively few needs with minimal complexity, an option to consider would be Quickbooks Payroll (especially if you already use them for accounting). Their pricing structures are pretty transparent, and their online version even offers an automatic payroll option for salaried employees, or hourly employees who regularly work the same number of hours.

2. Searching

In this phase of the journey to finding the perfect payroll provider you will want to focus on searching the market for what is available. Use the list of needs that you came up with in the previous phase to quickly “weed out” any obvious misfits. Use that list to keep focused as you browse each company’s carefully curated public image. It’s easy to get taken in by all the bells and whistles that a solution offers, but keep in mind that a great solution that may not have all the bells and whistles is far better than one that looks shiny but repeatedly fails to deliver. Staying objective is the key here.

Tip: Avoid filling out forms that ask for contact information at this stage. You’re just trying to get a high-level overview of each company, and once you get on their marketing lists, it can be very difficult to get off. In order to get pricing data, you will most likely need to contact the company, but avoid doing so until you have identified a few clear front-runners.

3. RE-searching

By the time you get to the end of this phase, you should have a clear idea of which direction you are headed. This is the part where you will want to meticulously compare each company with the competition. Remember, this company will be handling sensitive payroll information, and will be the conduit through which your largest expense sources flow. No pressure, but don’t mess this one up!

Develop a list of questions to ask each company. A few examples would be: “What sets your company apart from the competition?” or “How has your company fared during the COVID-19 pandemic?” Each company should be able to articulate how their company has developed a niche in the payroll industry, and this can help you understand how well each company will be able to serve you. As of the date of this publication, the pandemic is nearly two years old, but the second question should serve you well in identifying a company that is able to adapt to change quickly, which is crucial for any payroll company.

You will also want to scour reviews. Websites like G2 and Capterra are great for this. They will even find the most helpful critical reviews for you, so you can get a balanced perspective on the best and worst parts about a company.

In the end, the company that is perfect for you may not be perfect for the next person, which can make this search a little more complex than we would like, but keeping your company’s goals in mind can go a long way in finding the right solution for you.

This article is general in nature, and it does not contain legal advice.  Contact your advisors to discuss your specific situation.

Preface: When inventory costs catapult, a business owner may find himself in the strange position of making higher profits but having less cash.

Catapulting Costs

Credit: Jacob M. Dietz, CPA

Catapult on the Job Site

Imagine Abner’s hammer crash into another nail as he fastens another 2X4 to connect another truss on another building.  Abner is simply doing his honest work. He has done this for years.  His father started the business, and he has been building even longer than Abner.  The gentle breeze blows across his sweated face and tugs at his hat.

Now, imagine someone installing a small catapult in the middle of the building that is being constructed.   Abner and his dad stare in disbelief at the catapult.  Neither of them has ever seen a catapult come to a job site before.  The catapult flings a stone up through the trusses.  The stone sails mere inches away from Abner’s hat on the way up, and it almost hits Abner’s dad as it descends. The stone could hurt Abner on the way up as the catapult propels it away from the earth, and it could hurt Abner or his dad on the way down as gravity hurls it towards the ground.

Business owners might stress if catapults started flinging stones at their builders, but fortunately I have not heard of any construction companies coming under catapult attack.  Some companies, however, have been threatened by catapulting costs.  Some fluctuations in costs may be a normal part of business, but unfortunately some costs have fluctuated in recent times in ways that current business owners, and perhaps their fathers too, have never experienced.  Although the business owners might desire to be able to simply work a normal day without catapulting costs, unfortunately the catapult has come to the industry.  How do catapulting costs threaten businesses?

Increasing Costs

First, catapulting costs could hammer a company’s bottom line if the company cannot raise prices enough to compensate for their increased costs.  Imagine Abner’s building company normally pays $35 in lumber for every $100 of sales.  That left them with $65 for every $100 in sales to pay labor, subcontractors, and other expenditures and still have some left over for a profit.  Net profits vary from business to business and industry to industry, although for this example we will assume that the company normally kept $15 of profit for every $100 of sales.  If the cost of lumber suddenly doubles on the company, and they failed to raise their prices or make any other adjustments, then lumber would cost them $70 for every $100 in sales.  Instead of making $15 on every $100 of sales, they would lose $20 on every $100 of sales.  The catapulting prices hit this hypothetical company on the way up.

Now suppose the company realized that lumber was shooting up, and they adjusted their prices to make the same profit.  Now they should not lose money for each $100 of sales.  There could still be other challenges, however.

Increasing Prices

One challenge is figuring out how much to raise prices.  First, let’s assume that lumber doubled, so Abner reacted by doubling his prices.  If Abner still sold the same number of jobs, his profits likely will more than double, since his sales price doubled, and his lumber doubled, but his other costs did not double.  Depending on the market, doubling prices when one cost doubles might price yourself out of the market.

Imagine Abner realized that his market would not allow him to double his prices, so he only increased his sales price by the same amount that this lumber increased.  Abner might find that he is less profitable.  One reason is if Abner gives discounts off the total sales price to some customers.  For example, if Abner gives a 2% discount for timely payment, and if he increases his sales price, then 2% of the new sales price is more dollars and cents than 2% of the old sales price.  What if Abner gives discounts to certain other businesses that are even more than 2%?  Those discounts could be even more dollars and cents after Abner increased his prices.  Also, even if Abner were able to maintain the same profit in dollars after increasing prices only enough to offset the increase in lumber, his net profit percentage would decrease, because as a percentage his profits would be lower.  It would be the same profits (numerator), but a higher sales number (denominator).

Increasing Inventory

Another way the cost catapult could hurt Abner’s business is by increasing inventory costs.  Assume that Abner has X quantity of inventory in stock.  Now, assume that the cost of that inventory doubles.  If Abner counts the quantity of inventory, it is the same as it always was.  The money that Abner has tied up in inventory, however, may have doubled along with the cost.  Abner therefore needs more capital to simply sustain his normal inventory.

When inventory costs catapult, a business owner may find himself in the strange position of making higher profits but having less cash.  How is this possible?  If the business owner increases prices enough, there might be more profits.  The profits might need to go to fund the higher cost of inventory.

Increasing Lead Times

Abner may need more capital to sustain his inventory with normal lead times if costs rise. It is even possible that Abner might increase his inventory quantity if he is having trouble getting product in time.  Increasing the quantity of inventory that has already increased in price can be quite capital intensive.  Abner may want to consider these capital needs when he considers how much to charge his customers.  He might also want to consider negotiating with vendors for payment terms, and he might consider talking with his banker.

Gravity

Catapulting a stone causes danger on the way up.  Gravity also poses a risk as the stone hurls earthwards.  What would happen to Abner’s company if suddenly the cost of his inventory fell drastically, after he stocked up on inventory at a high price?  Would the market force him to sell some of the inventory at a loss?  Abner may want to ask himself if he has enough financial margin to sustain the business if his costs of materials drop significantly, potentially forcing him to cut his prices.

Pay Attention

If a real catapult suddenly showed up at work and started flinging stones, it would get the attention of the business.  Action might be taken to mitigate the risk.

Fortunately, real catapults don’t normally show up at jobsites.  However, catapulting prices have affected the economic landscape recently.  Are you paying attention to your costs and your prices?  Are they healthy?

Proverbs 27:23 Be thou diligent to know the state of thy flocks, and look well to thy herds.

This article is general in nature, and it does not contain legal advice.  Contact your advisors to discuss your specific situation.