S Corp Salary Analysis

Worker classification is a hotly contested audit issue that has caused anxiety for business owners all across the country. Whether a worker is classified as an employee or as an independent contractor can mean a substantial difference in the amount of employment taxes that the business pays. In addition, the new health care reform law imposes health care coverage requirements on an employer with more than 50 full-time employees, a fact which may tempt many employers to hire independent contractors instead. It is one thing to legitimately employ an independent contractor. However, an employer who misclassifies his employees either inadvertently or deliberately to minimize its employment tax or health care coverage responsibilities, may become subject to interest, penalties and tax liens. Such measures can cripple an otherwise successful business.

A business that is not currently under audit for employment taxes, but that wishes to correct its workers’ classification, may choose to enter the Voluntary Classification Settlement Program (VCSP). The IRS opened the program in 2011, and it is still in effect. Eligible businesses that enter the program are required to pay only 10 percent of the employment taxes that would have otherwise been due for the most recent tax year. In addition, there would be no interest or penalties, and the IRS would not conduct an employment tax audit of the business.

Additionally, the IRS has a voluntary settlement program to resolve worker classification issues called Classification Settlement Program (CSP). This allows businesses and tax examiners to resolve worker classification cases as early in the administrative process as possible, thereby reducing taxpayer burden. In the CSP, examiners can offer a business under audit a worker classification settlement using a standard closing agreement developed for this purpose. The CSP procedures also ensure that the taxpayer relief provisions are properly applied. The IRS opened the program in March 1996. A taxpayer declining to accept a settlement offer retains all rights to administrative appeal that exist under the Service's current IRS procedures and all existing rights to judicial review.

In light of the IRS's predominantly pro-taxpayer initiatives, you may want to re-examine your worker classifications at this time. Even when potential employment tax liabilities are not overwhelming, it's important to remember that misclassification can also cause pension plan difficulties. If you have discovered a misclassification and wish to determine whether you are eligible to participate in the VCSP, please do not hesitate to call our office for more information.

Landlords should be aware that keeping accurate accounting records is just as important as collecting the rent on time each month. If a taxpayer owns rental real estate, there are federal tax responsibilities. All rental income must be reported on their tax return, and in general the associated expenses can be deducted from their rental income.

If a landlord is a cash basis taxpayer, they will report rental income on their return for the year they receive it, regardless of when it was earned. As a cash basis taxpayer, a landlord generally deducts their rental expenses in the year they pay them. If a landlord uses an accrual method, they generally report income when they earn it, rather than when they receive it and they deduct their expenses when they incur them, rather than when they pay them. Most individuals use the cash method of accounting.

Rental Income

Landlords must include in their gross income all amounts they receive as rent. Rental income is any payment received for the use or occupation of property. Landlords must report rental income for all their properties. In addition to amounts they receive as normal rent payments, there are other amounts that may be rental income that include:

• Amounts paid to cancel a lease

• Advance rent

• Expenses paid by a tenant

• Security deposits

Rental Expenses

If a landlord receives rental income from the rental of a dwelling unit, there are certain rental expenses they may deduct on their tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

Landlords can deduct the ordinary and necessary expenses for managing, conserving, and maintaining their rental property. Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities, and insurance.

Recordkeeping

Good records will help landlords monitor the progress of their rental property, prepare your financial statements, identify the source of receipts, keep track of deductible expenses, prepare their tax returns and support items reported on tax returns. Landlords must be able to substantiate certain elements of expenses to deduct them. Generally, the landlord must have documentary evidence, such as receipts, canceled checks or bills, to support their expenses. Keep track of any travel expenses that are incurred for rental property repairs.

A first step in avoiding costly hassles with the IRS is identifying potential red flags before filing your business’s tax return. For example, a common source of audit conflict between the IRS and small businesses is the documentation of travel expenses. The IRS often has the edge in these disputes because the tax law spells out detailed rules about how these expenses must be verified and documented. Most companies sincerely attempt to comply, but often fall short anyway.

Fortunately, that is one problem for which some relief is available due to a wrinkle in the tax law that waives otherwise rigorous substantiation rules when a particular expense is below a certain minimum dollar level. Put simply, employees don't technically need receipts for non-lodging expenses of under $75 that are reimbursed by their employers. Although this is a big break, it doesn't mean that all recordkeeping can be ignored. Receipts are still needed for all lodging expenses (even if the cost is under $75), unless the company pays traveling employees only the IRS-approved per-diem rate. Those incurring the expense still have to record the time, place, business reason, and amount of each travel expenditure (unless a per-diem is used, in which case amounts don't have to be recorded at all). Businesses should note that an expense for more than $75 unaccompanied by a receipt does not receive a minimum $74.99 deduction by default; an IRS examiner will treat the expense as $0.00 instead.

With this in mind, you may want to consider reviewing your travel expense recordkeeping and substantiation procedures as you adjust your recordkeeping practices. Setting up separate procedures for your own internal tracking of expenses probably makes sense, too. For example, you may want to require employees to show you receipts for non-lodging expenses costing less than $75 before approving them, even though businesses are not required to keep them.