- Federal Rule Changes 12/01/16 Affecting Salaried- Exempt Employees (Pending Per Lawsuit Filed)
- IRS to Subject ALL Income of LLC Members to Self-Employment (S/E) Tax
- IRS Waging New Audit Campaign Against Businesses
- Workforce shifting from W-2 Workers to Independent Workers
- Are you Setting Yourself Up for an Underpayment Penalty? Check your Withholding
- Foreign Worker Visas Increased
- Home energy system loan programs: Payments are not deductible real estate taxes
- Healthcare Coverage “silent” Returns Will Be Rejected Next Year
- Social Security Taxable Wage Base Increased
1. Federal Rule Changes 12/01/16 Affecting Salaried- Exempt Employees (Pending Per Lawsuit Filed)
Many confuse the Labor Law terms “Salaried” and “Exempt” and use them interchangeably. Just because by contract you are paid a Salary does not make you an Exempt employee. Both the State and the Feds have extensive laws and rules about that. Effective December 1, the salary threshold for “exempt” status under the (Federal) Fair Labor Standards Act will jump to $47,476 a year ($22.83/hour full time) from the current $23,660, allowing more workers to qualify for time-and-a-half pay if they work more than 40 hours a week—without the wage increase they will not be exempt and must be paid overtime.
This Federal rule change is expected to significantly impact industries such as construction, hospitality and retail which have high concentrations of low-salaried managers—a key target of the new rule, see www.dol.gov/whd/overtime/final2016/. California Labor Law presumes that ALL employees are non-exempt employees whose pay is controlled by the Labor Code requirements for overtime pay, meal and rest beaks, number of consecutive work days, and Minimum Wage. One then justifies a classification change to exempt status. In almost all cases, Exempt employees will usually have fewer rights than non-Exempt employees.
2. IRS to Subject ALL Income of LLC Members to Self-Employment (S/E) Tax
The IRS Code and Regulations have not changed in this area since 1977, however, just this October IRS issued Chief Counsel Memo 201640014, which represents the Service’s most expansive application to date of the self-employment tax rules to an LLC member: if the Member performs ANY service for the LLC, then ALL of the income distributable (regardless of whether or not given to the Member) is subject to S/E tax. Not only will the Member’s “Guaranteed Payments to Partner” (that they actually receive for services) be so taxed for S/E, ALL other Income will also be subject to S/E Tax. If you operate a business within an LLC come see us to execute an Entity Classification Election that can yield a better (lower tax) result.
3. IRS Waging New Audit Campaign Against Businesses
Over the last several years, the IRS has flexed its muscles by issuing summonses to obtain documents from taxpayers, typically in response to a privilege claim. Many of these encounters have ended up in court. For example, in Schaeffler v. U.S., the IRS issued a summons during an audit seeking advice and communications between a taxpayer and his tax advisors. The taxpayer produced thousands of documents, and claimed that certain responsive documents could not be disclosed on the grounds that they were privileged communications. Taxpayer had to appeal the lower court’s decision, but ultimately prevailed. To retain the privileged communications mantle, the Client must NOT discuss those topics during or in connection with your Tax Return preparation process. By definition anything you say for or during tax preparation can be subpoenaed.
4. Workforce shifting from W-2 Workers to Independent Workers
Traditional 9-to-5 W-2 jobs are evaporating as more people make a living as independent workers. Now a major study from McKinsey Global Institute has found that the “Gig economy” is much bigger than previously thought. “Up to 30 percent of working-age people in the United States and Western Europe are engaging in independent work, either as their primary source or supplemental source of income,” said Susan Lund, a partner at the McKinsey think tank. “That’s 162 million people — almost 60 million in the U.S.” An Intuit study projects 40 percent by 2020.
Some 70 percent reported that they fly solo out of choice. “They enjoy being their own boss, they have more creativity, and more opportunity to learn and grow,” Lund said.
The study shattered some common perceptions. Only a minority of independent workers are Uber or Lyft drivers, a visible segment that many people think of first when the subject of gig workers comes up. Instead, most have more familiar occupations: doctors and dentists, accountants and therapists, plumbers and electricians, gardeners and construction workers, retail clerks and computer programmers. A word of caution, the worker is not an independent contractor just because you all agree, there are several elements defining the control the employer has over the worker. Further, under CA law the worker must have a license for the work involved for CA to accept the independent contractor status – selling your labor is not enough.
5. Are you Setting Yourself Up for an Underpayment Penalty? Check your Withholding
It is a familiar game we all play to some degree: “…Since I cannot save a Dollar to save my soul (I just spend it all), how much to withhold so I can pay my House taxes in the Spring (or take that world cruise/vacation in the Fall)…” The underpayment Penalty is 5% per month up to a maximum of 25% of the tax due at filing time if you owe more than $1,000 with your tax return.
Not many folks enjoy making Quarterly Estimated Tax payments to supplement withholding, and yet, if at the end of the tax return you OWE more than $1,000 and have NOT paid in at least as much as the previous year’s tax liability (before credits and payments are counted) you will receive an “Underpayment Penalty.” The “game” above is to make sure you pay enough but not too much (unless you really are unable to save money on your own).
6. Foreign Worker Visas Increased
H-1B Court ruling proves existing law allows employers to replace American workers. A federal judge in Orlando, Fla. ruled recently that the Walt Disney Company did not violate the law when it laid off roughly 250 high-tech American workers in 2014 and forced them to train their H-1B, foreign-worker replacements as a condition of their severance.
Furthermore, the H-1B worker CANNOT quit and change jobs since under the H-1B rules if they quit (or even if laid off for lack of work) they MUST be returned to their Country of Origin—they cannot stay in the US.
7. Home energy system loan programs: Payments are not deductible real estate taxes
Some homeowners finance energy saving improvements through government-approved loan programs. The payments on these loans are collected through your tax bill, so they may appear to be deductible real estate taxes. However, the payments are not deductible real estate taxes. If you are such a homeowner, here are the details that may be important to you.
Generally, the loan programs have similar facts. You sign up for a home energy system loan and use the proceeds to make home energy improvements to your home. The home energy system loan is secured by a lien on your home.
You repay the principal and interest associated with this home energy system loan over some period agreed to in the documents you signed. This is billed to you through specific assessments, i.e., additional amounts due to the governmental entity. These specific assessments appear on your real estate property tax bill over the period of the loan.
Your real estate tax bill may not list the breakdown between principal and interest. However, in reality, the total amount due reflects an amount for principal repayment and an amount for interest expense, using the interest rate applicable to the loan. The documents you signed may list this breakdown.
As stated above, the amount that is billed to you through the specific assessment is not deductible as a real estate tax. This amount is not deductible because it is a specific assessment associated with a specific improvement benefitting your home. In other words, it is not in the nature of a general assessment. It is not similar to other typical real estate tax assessments that are levied against all real estate in your jurisdiction for more general governmental funding purposes, i.e., to fund public schools, fire departments, bridge construction projects, etc.
However, the interest portion of your payment may be deductible as “qualified residence interest,” i.e., home mortgage interest expense. Refer to Publication 936, Home Mortgage Interest Deduction, to see whether you might qualify for a deduction of home mortgage interest expense.
8. Healthcare Coverage “silent” Returns Will Be Rejected Next Year
A silent return refers to individual tax returns where the box for healthcare coverage is not checked (“yes” or “no”), no shared responsibility payment is made, or there is no exemption claimed for not carrying healthcare coverage. The IRS shared with us that such e-filed returns will be rejected next filing season; our software will default to “no.”.
9. Social Security Taxable Wage Base Increased
The Social Security Administration (SSA) has just announced that the “wage base” for purposes of the Old-Age, Survivors, and Disability Insurance (OASDI) portion of Federal Insurance Contributions Act (FICA) tax, commonly referred to as Social Security tax, is jumping from $118,500 in 2016 to $127,200, a hike of $8,700 (SSA Fact Sheet, 10-18-16). Annual increases are tied to cost-of-living adjustments in the Consumer Price Index (CPI) as determined by the Department of Labor (DOL) Bureau of Labor Statistics.
Both employees and employers are responsible for paying FICA tax. For instance, an employee earning $150,000 in wages in 2017 will have to pay $7,886.40 in OASDI tax and $2,175 in Medicare tax for a total of $10,061.40. The employer must pay the same amount. An additional 2.35 percent Medicare tax applies to filers with wages above $200,000 and joint filers above $250,000. Therefore, a joint filer earning $300,000 will owe $13,411.40 in tax.
Self-employed individuals don’t get away any easier. The tax rates are effectively doubled for these individuals to 12.4 percent on self-employment income up to the base of $127,200 in 2017 and 2.9 percent on all self-employment income. A 3.8 percent tax is tacked onto single filers with self-employment income above $200,000 and joint filers above $250,000. But self-employed taxpayers can still deduct, as an Adjustment to Income, half of the self-employment tax the pay.
Additional IRS resources:
- Instructions for Form 5695, Residential Energy Credit
- Topic 503 – Deductible Taxes
- Publication 17, Your Federal Income Tax for Individuals, has information on nonbusiness tax deductions
- Publication 530, Tax Information for Homeowners, contains deductions for homeowners
- Residential Energy Efficient Property Credit (Section 25D) at a Glance
- Energy Incentives for Individuals: Residential Property Updated Questions and Answers
- Home Energy Credits Save Money and Cut Taxes