Payroll, Accountable Plans and Employee Benefits

Payroll for the owners of the business will come with many benefits. The benefits cover a spectrum and different areas.

The IRS code states that owners in a corporation will have to pay themselves a reasonable salary. The detail of the reasonable salary is detailed in the next chapter.

Accountable plans can be a useful tool in the income tax reduction strategies in a corporation. Retirement planning is another useful tool in the employee benefit plans.

But, for now we will stick with the high-level overview of the employee’s benefits that include payroll, accountable plan and retirement options.

In general terms, the IRS states that you have to take a reason salary for the work that you preform for the company that you own.

What is a reasonable salary? The IRS code states that you must pay yourself 35% of the average industry salary for your industry. Do you know the average industry salary for your industry? If not, then we guess. And the guesstimate needs to be reasonable.

For an example $2,000 salary for someone making $100,000 net profits is not reasonable. But $35,000 is reasonable.

I usually determine the reasonable salary based on a couple of tax planning strategies. I look at multiple areas or variables to determine your salary. I look at prior year tax returns to see if you had a tax liability. Are you having enough income taxes withhold from your paychecks to cover the liability? I discuss and review your retirement planning goals with you. With this data then we can implement tax planning strategies to reduce taxes, meet the tax liabilities and save for retirement.

In addition, we can review the ideas of reducing your income taxes on your net profits by setting up an accountable plan.

W2 Income.

W2 Income is income earned from a standard job within an employer. This is considered earned income. The income is normally paid out to the employee on a frequent basis. Most of the time is every two weeks. At the end of the year the employer will supply the employee with a W2 postmarked by the end of January of the following year.

Accountable Plans.

An accountable plan is an employee reimbursement allowance arrangement or a method for reimbursing employees for business expenses by the employer. If your business has an accountable plan, the reimbursement of certain business expenses is not taxable to the employee. The accountable plan must comply with the IRS regulations. The plan is usually drafted as a company policy and later adopted through corporate minutes/

An accountable plan is a reimbursement or other expense allowance arrangement that satisfies three basic requirements: a business connection; substantiation; and return of excess amounts.

Business Connection.

The expense must have a business connection. Typically, expenses incurred by an employee while doing his or her job usually have a business connection. It might be a good idea to list some examples of such as home office, cell phone, internet, mileage and meals. Health insurance premiums for the owners should also be detailed.

You could also list conditions and parameters for reimbursement. Must answer phone calls outside the office to claim reimbursement. Or only mileage to and from client meetings, delivering product, running errands for supplies, etc. The more comprehensive and detailed the allowable business connections, the safer your plan will be.

Proper Substantiation.

The employee must adequately account to the company for expenses within a reasonable time. Adequate accounting means completing expense reports and providing the company with receipts, invoices, and other documentary evidence of the expenses. Using a separate credit card and requesting credit card statements is a great recordkeeping technique.

Excess Reimbursements.

Excess reimbursement is reimbursement greater than allowable amounts. If the employee doesn’t return excess reimbursements within a reasonable period of time, these excess amounts are taxable to the employee. The most common circumstance would be a case in which you give an employee an advance before she leaves for a trip, and her expenses during the trip are less than the amount advanced.

A reasonable period of time for a return of excess reimbursements is determined by the IRS as, for example

An advance received within 30 days of the time of the expense

The employee furnishes an adequate account of expenses within 60 days after they were paid or incurred.

The employee returns any excess reimbursement within 120 days after it was paid or incurred.

The employee is given a statement (at least quarterly) that request return or adequate accounting for outstanding advances, and the employee complies within 120 days after receiving the statement.

An arrangement between an employer and employee for advances, allowances, or reimbursement of business expenses that does not satisfy one or more of the three basic requirements of an accountable plan is treated as a non-accountable plan.

Cover health care premiums and unreimbursed business expenses like mileage costs.

Owner Benefits.

For many businesses, payroll is the largest monthly expense, and it can be extremely complex. There are multiple forms to be filled out, calculations to be made and reports to be filed. Checks must be cut or directly deposited on time—every time. Mistakes on those forms or late reporting or payments to the IRS or State can be extremely costly. But with RMH Payroll Services, you won’t ever have to worry about any of that.

The Source of the Savings.
The S Corp election of your Partnership, LLC or C Corporation changes how the business reports income to the IRS. An S Corp prepares and files a Form 1120S which is a corporate tax return. That in turn generates a K-1 for each shareholder. Remember, shareholder, investor and owner are synonymous terms for our discussions.

As stated earlier, a K-1 is a statement that each shareholder receives, and it is similar to a W-2 since it reports the income that each shareholder is responsible for from a taxation perspective. As we discussed earlier, there are three types of tax returns that generate a K-1.

Partnership (Form 1065)

S Corporation (Form 1120S), and

Estate or Trust (Form 1041)

There are two types of K-1s for the purposes of our self-employment tax conversation- one is generated from a partnership tax return and the other is generated from an S corporation tax return. These K-1s look nearly identical and both are reported on page 2 of Schedule E and your Form 1040. Schedule E is the tax form used for rental properties, royalties and other investment income including business income from a partnership or an S Corp.