Davidson / Pargman and Company

Certified Public Accountants and Advisors

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How employers can build trust in their HR departments

In many workplaces, the human resources (HR) department is the de facto face of the employer. HR departments are, after all, generally responsible for communicating new employment policies and enforcing existing ones. Even if leadership is making the rules, HR is the one primarily interacting with job candidates when hiring, new hires when onboarding and established employees thereafter.

For employers, the end result is that it’s imperative to have an HR department that your workforce trusts to address their needs efficiently, competently and pleasantly. But this can be a challenge. A recent study by Secure Data Recovery found that more than a third of the 1,005 U.S. workers surveyed said they don’t trust their employers’ HR departments. (Note: All survey respondents worked for companies with less than 50 employees.)

Exercise transparency and clarity

It may not take much to compromise the trust of your employees in your HR department if you aren’t proactively building and maintaining that trust. A pattern of miscommunications or even one big negative incident could cause a breakdown that leads to costly drops in morale, productivity and employee retention.

The roots of mistrust often lie in confusion. If employees aren’t provided with clear information about policies, procedures and rules, they may misinterpret those in place or make up their own. In either case, discord and distrust are likely to develop when supervisors start calling them out on infractions and HR must move in as enforcement.

Be sure your organization is spelling everything out clearly. A good place to begin is with a comprehensive, well-written, legally compliant and regularly updated employee manual. When new hires are onboarded, ask them to read it and sign an acknowledgment. But don’t stop there. Have someone — whether a supervisor, mentor or HR staffer — review the manual with them and be available to answer questions.

In addition, when new policies, procedures or rules are rolled out, communicate them strategically. That is, leadership and HR should collaborate to identify the optimal way to explain both the change itself and the rationale for it. Focus on clarity and choosing the best medium (or media) for communicating.

Establish and maintain visibility 

HR departments that largely hide in the shadows, emerging only during open enrollment for benefits, risk being cast by default in a negative light. This often occurs when employees don’t hear from or interact with HR unless something bad has happened — say, a disciplinary action, termination, conflict between two staff members, or when someone levels a harassment or discrimination charge.

HR staff tend to be viewed from a much more trustworthy perspective when employees know them — literally. Make sure that new hires are formally introduced to HR staff members. Employees should be able to attach faces to names and know who their respective HR contacts are without having to ask their supervisors, or leaf or scroll through the employee manual.

From there, HR should continue to communicate regularly with employees as individuals and the organization as a whole. There are many ways to go about maintaining visibility and strengthening HR engagement. Conduct annual surveys to get a sense of how employees are feeling about the department. Offer “lunch and learn” seminars either hosted or led by HR to educate employees about topics such as benefits and wellness. Send out an e-newsletter with the latest HR-related news, profiles of HR staffers and other fun content.

Promote the brand

What will work best for your organization depends on its size, mission and culture. Just make sure that you’re not taking your HR department’s reputation among employees for granted. Promote its brand just as you do your own.

© 2024
TopLine Content Marketing Team

Keep these 3 issues in mind after you file your return

The tax filing deadline for 2023 tax returns is April 15 this year. If you need more time, you can file for an extension until October 15. In either case, once your 2023 tax return has been successfully filed with the IRS, there may still be some issues to bear in mind. Here are three considerations.

1. Waiting for your refund? You can check on it

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get your refund status” to find out about yours. You’ll need your Social Security number or Individual Taxpayer Identification Number, filing status, and the exact refund amount.

2. Throwing away tax records

You should hold on to tax records related to your return for as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after you file your return.

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should keep certain tax-related records longer. For example, keep your actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

What about your retirement account paperwork? Keep records associated with a retirement account until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

3. Filing an amended return if you failed to report something

In general, you can file an amended tax return on Form 1040-X and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2023 tax return that you file on April 15, 2024, you can generally file an amended return until April 15, 2027.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

We’re here all year

Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re not just available at tax filing time. You can reach us year-round.

© 2024
TopLine Content Marketing Team

IRS to employers: Only medical expenses qualify for tax-advantaged accounts

Tax-advantaged accounts or reimbursement arrangements for health care have become popular employer-sponsored benefits. And for good reason — these accounts or arrangements ease the burden of high costs on organizations while giving employees a tax-friendly way to manage medical expenses.

The IRS, however, has concerns. The tax agency recently issued a news release (IR-2024-65) warning plan administrators that only qualified medical expenses are eligible for deductions or reimbursements under these accounts or arrangements. Personal expenses for “general health and wellness” aren’t.

4 common vehicles

The IRS news release specifically addresses four commonly used vehicles for helping employees manage medical expenses:

1. Health Flexible Spending Accounts (FSAs). Participants can channel up to $3,200 in 2024 (up from $3,050 in 2023) of pretax income into these standalone, employer-owned accounts. The account then reimburses the participant for qualified medical expenses.

2. Health Savings Accounts (HSAs). These participant-owned accounts must be offered in conjunction with a high-deductible health plan. In 2024, participants can contribute pretax income of up to $4,150 for self-only coverage (up from $3,850 in 2023) and $8,300 for family coverage (up from $7,750 in 2023).

3. Health Reimbursement Arrangements (HRAs). Rather than being individual participant accounts, HRAs are employer-sponsored plans that reimburse participants for eligible medical expenses. There are several different versions. Generally, employers may claim a tax deduction for reimbursements, which are typically tax-free for participants.

4. Medical Savings Accounts (MSAs). These participant-owned accounts, sometimes referred to as “Archer MSAs,” are a precursor to HSAs intended for self-employed people and very small businesses. Congress discontinued the creation of new MSAs in 2007, but some employers still sponsor accounts created before then.

Aggressive marketing 

The IRS’s concerns spring largely from what it calls “aggressive marketing.” That is, according to the news release, “… some companies are misrepresenting circumstances under which food and wellness expenses can be paid or reimbursed under FSAs and other health spending plans.”

The tax agency says certain businesses are telling customers that, if they can get a doctor’s note supporting purchases of nonmedical food, wellness or exercise products or services, the associated costs can be converted to tax-qualified medical expenses. But this generally isn’t true. The news release even includes an example in which a company offers to provide a doctor’s note to a customer, for a fee, that would allow the individual to claim an FSA reimbursement for low-carb food products targeted at people with diabetes.

Under Internal Revenue Code Section 213, qualifying medical expenses are defined as amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting a structure or function of the body. They don’t include expenses related to products or services that are merely beneficial to health and wellness.

Friendly reminder

If your organization sponsors one of the accounts or arrangements mentioned above, you may want to pass along the IRS’s friendly reminder to participants. The tax agency warns in the news release that if a health FSA, HSA, HRA or MSA is used to pay or reimburse nonmedical expenses, all payments from the account or arrangement — including valid reimbursements — may be includible in the participant’s income. Contact us for more information.

© 2024
TopLine Content Marketing Team

When businesses may want to take a contrary approach with income and deductions

Businesses usually want to delay recognition of taxable income into future years and accelerate deductions into the current year. But when is it wise to do the opposite? And why would you want to?

One reason might be tax law changes that raise tax rates. The Biden administration has proposed raising the corporate federal income tax rate from its current flat 21% to 28%. Another reason may be because you expect your noncorporate pass-through entity business to pay taxes at higher rates in the future and the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates.

If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may want to postpone deductions into a later tax year, when rates are higher and the deductions will be more beneficial.

To fast-track income

Consider these options if you want to accelerate revenue recognition into the current tax year:

  • Sell appreciated assets that have capital gains in the current year, rather than waiting until a later year.
  • Review the company’s list of depreciable assets to determine if any fully depreciated assets are in need of replacement. If fully depreciated assets are sold, taxable gains will be triggered in the year of sale.
  • For installment sales of appreciated assets, elect out of installment sale treatment to recognize gain in the year of sale.
  • Instead of using a tax-deferred like-kind Section 1031 exchange, sell real property in a taxable transaction.
  • Consider converting your S corporation into a partnership or LLC treated as a partnership for tax purposes. That will trigger gains from the company’s appreciated assets because the conversion is treated as a taxable liquidation of the S corp. The partnership will have an increased tax basis in the assets.
  • For construction companies with long-term construction contracts previously exempt from the percentage-of-completion method of accounting for long-term contracts: Consider using the percentage-of-completion method to recognize income sooner as compared to the completed contract method, which defers recognition of income until the long-term construction is completed.

To postpone deductions

Consider the following actions to postpone deductions into a higher-rate tax year, which will maximize their value:

  • Delay purchasing capital equipment and fixed assets, which would give rise to depreciation deductions.
  • Forego claiming big first-year Section 179 deductions or bonus depreciation deductions on new depreciable assets and instead depreciate the assets over a number of years.
  • Determine whether professional fees and employee salaries associated with a long-term project could be capitalized, which would spread out the costs over time.
  • Buy bonds at a discount this year to increase interest income in future years.
  • If allowed, put off inventory shrinkage or other write-downs until a year with a higher tax rate.
  • Delay charitable contributions into a year with a higher tax rate.
  • If allowed, delay accounts receivable charge-offs to a year with a higher tax rate.
  • Delay payment of liabilities where the related deduction is based on when the amount is paid.

Contact us to discuss the best tax planning actions in the light of your business’s unique tax situation.

© 2024
TopLine Content Marketing Team

Watch out for “income in respect of a decedent” issues when receiving an inheritance

Most people are genuinely appreciative of inheritances, and who wouldn’t enjoy some unexpected money? But in some cases, it may turn out to be too good to be true. While most inherited property is tax-free to the recipient, this isn’t always the case with property that’s considered income in respect of a decedent (IRD). If you have large balances in an IRA or other retirement account — or inherit such assets — IRD may be a significant estate planning issue.

How it works

IRD is income that the deceased was entitled to, but hadn’t yet received, at the time of his or her death. It’s included in the deceased’s estate for estate tax purposes, but not reported on his or her final income tax return, which includes only income received before death.

To ensure that this income doesn’t escape taxation, the tax code provides for it to be taxed when it’s distributed to the deceased’s beneficiaries. Also, IRD retains the character it would have had in the deceased’s hands. For example, if the income would have been a long-term capital gain to the deceased, such as uncollected payments on an installment note, it’s taxed as such to the beneficiary.

IRD can come from various sources, including unpaid salary, fees, commissions or bonuses, and distributions from traditional IRAs and employer-provided retirement plans. In addition, IRD results from deferred compensation benefits and accrued but unpaid interest, dividends and rent.

The lethal combination of estate and income taxes (and, in some cases, generation-skipping transfer tax) can quickly shrink an inheritance down to a fraction of its original value.

What recipients can do

Although IRD must be included in the income of the recipient, a deduction may come along with it. The deduction is allowed (as an itemized deduction) to lessen the “double tax” impact that’s caused by having the IRD items subject to the decedent’s estate tax as well as the recipient’s income tax.

To calculate the IRD deduction, the decedent’s executor may have to be contacted for information. The deduction is determined as follows:

  • First, you must take the “net value” of all IRD items included in the decedent’s estate. The net value is the total value of the IRD items in the estate, reduced by any deductions in respect of the decedent. These are items which are the converse of IRD: items the decedent would have deducted on the final income tax return, but for death’s intervening.
  • Next you determine how much of the federal estate tax was due to this net IRD by calculating what the estate tax bill would have been without it. Your deduction is then the percentage of the tax that your portion of the IRD items represents.

Calculating the deduction can be complex, especially when there are multiple IRD assets and beneficiaries.

Be prepared

As you can see, IRD assets can result in an unpleasant tax surprise. Because these assets are treated differently from other assets for estate planning purposes, contact us. Together we can identify IRD assets and determine their tax implications.

© 2024
TopLine Content Marketing Team

6 major payroll taxes every employer should keep an eye on

As you’re no doubt aware, employers are responsible for withholding and paying payroll taxes. If you don’t use a third-party provider, it’s critical to stay focused on payroll tax compliance. Given the potential penalties involved, you can’t get complacent about proper administration. Let’s review the six major payroll taxes to keep an eye on:

1. Federal. Employers must withhold federal income tax from employees’ paychecks. The amount of income tax withheld from each employee’s pay depends on two factors: 1) the amount of the wages, and 2) information provided on the employee’s Form W-4, “Employee’s Withholding Certificate.” Additional withholding rules may apply to commissions and other forms of compensation.

2. State and local. Be sure to stay apprised of your non-federal payroll tax obligations. State income tax withholding rules, for example, apply to many employers. However, eight states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming) don’t impose an income tax. New Hampshire and Tennessee don’t tax wages. Certain localities also impose income taxes. And in some places, withholding is required to cover short-term disability, paid family leave or unemployment benefits.

3. FICA. Payroll taxes authorized under the Federal Insurance Contributions Act (FICA) comprise two components. The first is a Social Security tax of 6.2% on an amount up to an annual “wage base.” In 2024, that wage base is $168,600. The second FICA component is a Medicare tax of 1.45% on all wages. Both employers and employees must pay FICA tax; employers must withhold the employees’ share.

4. FUTA. The Federal Unemployment Tax Act (FUTA) created a special tax that applies to the first $7,000 of wages of every employee. The purpose of this tax is to help states pay employees who have been involuntarily terminated from their jobs. The basic FUTA rate is 6%, but employers can benefit from a credit for state unemployment tax of up to 5.4%, resulting in an effective tax of 0.6%. However, the credit is reduced if a state borrows from the federal government to cover its unemployment benefits liability and doesn’t repay the funds.

5. State unemployment. Every state also runs its own unemployment insurance program to provide benefits to eligible workers who are involuntarily terminated. Generally, the rate employers must pay is based on their claims experience. The more claims made by former employees, the higher the tax rate. States update these rates annually.

6. Additional Medicare tax. This payroll tax often flies under the radar. Under a provision of the Affordable Care Act, the additional Medicare tax of 0.9% applies to employee wages above $200,000 for single filers, $250,000 for joint married filers and $125,000 for separate married filers. Note that this tax is paid by employees only. However, employers are responsible for withholding it, when applicable.

If your organization has been operational for a while, you’re likely well aware of the additional Medicare tax, as well as the other five common payroll taxes discussed above. Nevertheless, most employers can benefit from taking a continuous-improvement approach to payroll taxes, always looking for ways to improve efficiency and better ensure compliance. We can help you assess the costs and efficacy of your payroll processes.

© 2024
TopLine Content Marketing Team