Most fraud-prevention guidance advises owners and manager to monitor employees. But what exactly does this mean? Are you legally entitled to monitor employee computer use? What about security cameras in the workspace? Can you search an employee’s desk if you suspect the person is hiding something? The simple answer is that to stay on the right side of the law, your business must be careful about invading employee privacy.

Their rights

Many employment laws apply to employees’ privacy rights. In general, they attempt to balance employers’ interests in minimizing losses and injuries and maximizing production with employees’ interests in being free from intrusion into their private affairs.

By adopting and clearly communicating employment policies, your company can, within limits, establish its authority to conduct searches and surveillance that might otherwise be deemed intrusive. But before you communicate your policies, check with your attorney to ensure they don’t violate any federal or state laws.

Your rights

In most cases, federal law allows employers to monitor employees’ use of company-owned electronic devices (including tracking web use) without their knowledge. But you need to have a legitimate business reason to do so—for example, to prevent losses from fraud. You’re also generally allowed to read both work-related and private employee emails if they’re accessed on work devices.

If your company clearly states a policy to monitor communications, an employee is usually considered to have consented by remaining in the job or by using electronic devices. Keep in mind that some state laws may have more restrictive consent rules.

Other surveillance

In general you can also monitor business-related phone conversations to and from the workplace. However, you can’t monitor personal calls and must hang up as soon as it’s apparent the call isn’t work-related. There’s one exception to this rule: if the employee has given you permission to listen in.

As for camera surveillance, you’re allowed to install cameras in your company’s offices or production areas, but usually not in “private” areas such as restrooms and locker rooms. And surveillance records must be kept confidential. Only individuals who must know the information to properly perform their duties should have access to evidence of possible wrongdoing.

Physical searches require more care. If possible, you should consult with your attorney before performing a body search. When searching a worker, don’t threaten or apply physical force or restrain or otherwise prevent the employee from leaving the workplace. Aside from possible referral to law enforcement, keep any physical search results confidential to prevent leaks that could form the basis for libel or slander suits.

Threat is real

The threat of lawsuits for violating employee rights is real and such litigation can end up being very expensive. So, of course, is the risk of fraud losses. To walk this thin line, work with your attorney, and if you suspect fraud, enlist the help of a forensic accounting expert.

© 2020 Covenant CPA

If your small business is planning for payroll next year, be aware that the “Social Security wage base” is increasing.

The Social Security Administration recently announced that the maximum earnings subject to Social Security tax will increase from $137,700 in 2020 to $142,800 in 2021.

For 2021, the FICA tax rate for both employers and employees is 7.65% (6.2% for Social Security and 1.45% for Medicare).  

For 2021, the Social Security tax rate is 6.2% each for the employer and employee (12.4% total) on the first $142,800 of employee wages. The tax rate for Medicare is 1.45% each for the employee and employer (2.9% total). There’s no wage base limit for Medicare tax so all covered wages are subject to Medicare tax.

In addition to withholding Medicare tax at 1.45%, an employer must withhold a 0.9% additional Medicare tax from wages paid to an employee in excess of $200,000 in a calendar year.

Employees working more than one job

You may have employees who work for your business and who also have a second job. They may ask if you can stop withholding Social Security taxes at a certain point in the year because they’ve already reached the Social Security wage base amount. Unfortunately, you generally can’t stop the withholding, but the employees will get a credit on their tax returns for any excess withheld.

Older employees 

If your business has older employees, they may have to deal with the “retirement earnings test.” It remains in effect for individuals below normal retirement age (age 65 to 67 depending on the year of birth) who continue to work while collecting Social Security benefits. For affected individuals, $1 in benefits will be withheld for every $2 in earnings above $18,960 in 2021 (up from $18,240 in 2020).

For working individuals collecting benefits who reach normal retirement age in 2021, $1 in benefits will be withheld for every $3 in earnings above $46,920 (up from $48,600 in 2020), until the month that the individual reaches normal retirement age. After that month, there’s no limit on earnings.

Contact us if you have questions. We can assist you with the details of payroll taxes and keep you in compliance with payroll laws and regulations.

© 2020 Covenant CPA

Whether it’s a smart phone, tablet or laptop, mobile devices have become the constant companions of today’s employees. And this relationship has only been further cemented by the COVID-19 pandemic, which has thousands working from home or other remote locations.

From a productivity standpoint, this is a good thing. So many tasks that once kept employees tied to their desks are now doable from anywhere on flexible schedules. All this convenience, however, brings considerable risk.

Multiple threats

Perhaps the most obvious threat to any company-owned mobile device is theft. That could end a workday early, hamper productivity for days, and lead to considerable replacement hassles and expense. Indeed, given the current economy, thieves may be increasing their efforts to snatch easy-to-grab and easy-to-sell technological items.

Worse yet, a stolen or hacked mobile device means thieves and hackers could gain possession of sensitive, confidential data about your company, as well as its customers and employees.

Amateur criminals might look for credit card numbers to fraudulently buy goods and services. More sophisticated ones, however, may look for Social Security numbers or Employer Identification Numbers to commit identity theft.

5 protective measures

There are a variety of ways that businesses can reinforce protections of their mobile devices. Here are five to consider:

1. Standardize, standardize, standardize. Having a wide variety of makes and models increases risk. Moving toward a standard product and operating system will allow you to address security issues across the board rather than dealing with multiple makes and their varying security challenges.

2. Password protect. Make sure that employees use “power-on” passwords — those that appear whenever a unit is turned on or comes out of sleep mode. In addition, configure devices to require a power-on password after 15 minutes of inactivity and to block access after a specified number of unsuccessful log-in attempts. Require regular password changes, too.

3. Set rules for data. Don’t allow employees to store certain information, such as Social Security numbers, on their devices. If sensitive data must be transported, encrypt it. (That is, make the data unreadable using special coding.)

4. Keep it strictly business. Employees are often tempted to mix personal information with business data on their portable devices. Issue a company policy forbidding or severely limiting this practice. Moreover, establish access limits on networks and social media.

5. Fortify your defenses. Be sure your mobile devices have regularly and automatically updated security software to prevent unauthorized access, block spyware/adware and stop viruses. Consider retaining the right to execute a remote wipe of an asset’s memory if you believe it’s been stolen or hopelessly lost.

More than an object

When assessing the costs associated with a mobile device, remember that it’s not only the value of the physical item that matters, but also the importance and sensitivity of the data stored on it. We can help your business implement a cost-effective process for procuring and protecting all its technology.

© 2020 Covenant CPA

Wouldn’t it be great if your employees worked as if they owned the company? An employee stock ownership plan (ESOP) could make this a reality.

Under an ESOP, employee participants take part ownership of the business through a retirement savings arrangement. Meanwhile, the business and its existing owner(s) can benefit from some tax breaks, an extra-motivated workforce and a clearer path to a smooth succession.

How they work

To implement an ESOP, you establish a trust fund and either:

  • Contribute shares of stock or money to buy the stock (an “unleveraged” ESOP), or
  • Borrow funds to initially buy the stock, and then contribute cash to the plan to enable it to repay the loan (a “leveraged” ESOP).

The shares in the trust are allocated to individual employees’ accounts, often using a formula based on their respective compensation. The business must formally adopt the plan and submit plan documents to the IRS, along with certain forms.

Tax impact

Among the biggest benefits of an ESOP is that contributions to qualified retirement plans (including ESOPs) are typically tax-deductible for employers. However, employer contributions to all defined contribution plans, including ESOPs, are generally limited to 25% of covered payroll. But C corporations with leveraged ESOPs can deduct contributions used to pay interest on the loans. That is, the interest isn’t counted toward the 25% limit.

Dividends paid on ESOP stock passed through to employees or used to repay an ESOP loan may be tax-deductible for C corporations, so long as they’re reasonable. Dividends voluntarily reinvested by employees in company stock in the ESOP also are usually deductible by the business. (Employees, however, should review the tax implications of dividends.)

In another potential benefit, shareholders in some closely held C corporations can sell stock to the ESOP and defer federal income taxes on any gains from the sales, with several stipulations. One is that the ESOP must own at least 30% of the company’s stock immediately after the sale. In addition, the sellers must reinvest the proceeds (or an equivalent amount) in qualified replacement property securities of domestic operation corporations within a set period.

Finally, when a business owner is ready to retire or otherwise depart the company, the business can make tax-deductible contributions to the ESOP to buy out the departing owner’s shares or have the ESOP borrow money to buy the shares.

Risks to consider

An ESOP’s tax impact for entity types other than C corporations varies somewhat from what we’ve discussed here. And while these plans do offer many potential benefits, they also present risks such as complexity of setup and administration and a strain on cash flow in some situations. Please contact us to discuss further. We can help you determine whether an ESOP would make sense for your business.

© 2020 Covenant CPA

Thanks to affordable technology, more and more companies have been allowing employees to work remotely in recent years. It’s become feasible to procure laptops, set up security protocols, use cloud servers and rely on employees’ home Wi-Fi connections to create functional virtual workspaces. In turn, many of these businesses have lowered overhead costs such as office rent and utilities.

Of course, with the onset of the coronavirus (COVID-19) pandemic, many companies have had to mandate that any employees who can work from home do so. As a result, virtual team building has become more important than ever.

Ensure consistency of processes and expectations

When employees work from home, many of the processes they use to complete tasks and fulfill duties may change slightly — or even drastically — to fit the technology used to execute them. This can cause confusion and lead to mistakes or conflicts that affect employee morale.

Make sure every virtual team develops and follows processes that produce results consistent with those generated on your physical premises. Doing so may require a concerted effort that slows productivity temporarily while everyone gets on the same page.

Meanwhile, reinforce with workers that your expectations of them are the same whether they work on-site or remotely. They shouldn’t feel as if they must work extra hard from home to “prove themselves,” but they do need to demonstrate that they’re getting things done.

Hold regular meetings — and “irregular” ones

Among the biggest challenges for work-from-home employees is feeling disconnected from their fellow team members. Brief, regularly scheduled Web-based meetings are a good way to address this dilemma. These gatherings allow everyone to see or hear one another (or both) and provide employees with the opportunity to voice concerns and contribute ideas.

If a given team is relatively new at working remotely, or you just want to bring any group of employees closer together, you could also hold special meetings specifically geared toward team building. There’s a wide variety of icebreakers, games and activities that teams can use to learn more about each other and to gain comfort in communicating.

For example, you can invite participants to share stories and photos of their pets, hold trivia contests or even sing karaoke. Just be sure to tailor such team-building efforts to your company’s culture and be wary of pushing remote workers too far out of their comfort zones.

Find a way

Whether your business has had employees working remotely for years or just recently had to ask workers to stay home because of COVID-19, there are plenty of ways to help them communicate better and enhance their performance as a team. We offer assistance in measuring productivity and making smart investments in the right team-building technology.

© 2020 Covenant CPA

The IRS recently issued Notice 2020-23, expanding on previously issued guidance extending certain tax filing and payment deadlines in response to the novel coronavirus (COVID-19) crisis. This guidance applies to specified filing obligations and other “specified actions” that would otherwise be due on or after April 1, 2020, and before July 15, 2020. It extends the due date for specified actions to July 15, 2020.

Specified actions include any “specified time-sensitive action” listed in Revenue Procedure 2018-58, including many relating to employee benefit plans. The relief applies to any person required to perform specified actions within the relief window, and it’s automatic — your business doesn’t need to file any form, letter or other request with the IRS.

Filing extensions beyond July 15, 2020, may be sought using the appropriate extension form, but the extension won’t go beyond the original statutory or regulatory extension date. Here are some highlights of Notice 2020-23 specifically related to employee benefit plans:

Form 5500. The relief window covers Form 5500 filings for plan years that ended in September, October or November 2019, as well as Form 5500 deadlines within the window as a result of a previously filed extension request. These filings are now due by July 15, 2020. Notably, the relief window does not include the July 31, 2020 due date for 2019 Form 5500 filings for calendar-year plans. Those plans may seek a regular extension using Form 5558.

Retirement plans. The extended deadlines apply to correcting excess contributions and excess aggregate contributions (based on nondiscrimination testing) and excess deferrals. They also apply to:

  • Plan loan repayments,
  • The 60-day timeframe for rollover completion, and
  • The deadline for filing Form 8955-SSA to report information on separated plan participants with undistributed vested benefits.

The relief for excess deferrals is a change from previous guidance indicating that 2019 excess deferrals still needed to be corrected by April 15, 2020. In addition, while loan relief is already available to certain individuals for specified reasons related to COVID-19, this relief appears to apply more broadly — albeit for a shorter period. The Form 8955-SSA due date is the same as for the plan’s Form 5500, so the extension applies in the same manner.

Health Savings Accounts (HSAs). The notice extends the 60-day timeframe for completing HSA or Archer Medical Savings Account (MSA) rollovers. It also extends the deadline to report HSA or Archer MSA contribution information by filing Form 5498-SA and furnishing the information to account holders. The regular deadline for the 2019 Form 5498-SA would be June 1, 2020, placing it squarely within this relief period.

Business owners and their plan administrators should carefully review Notice 2020-23 in conjunction with Revenue Procedure 2018-58 to determine exactly what relief may be available. For example, the revenue procedure covers various cafeteria plan items, but many deadlines may fall outside the notice’s window. We can provide you with further information about this or other forms of federal relief.

© 2020 Covenant CPA

Paying workers “under the table” or with cash can save businesses a bundle in taxes. But the potential consequences are grave. Not only is this practice illegal and could result in severe financial penalties, but it also shortchanges employees.

The novel coronavirus (COVID-19) pandemic has made this abundantly clear. As many laid-off workers who were paid under the table have learned, they don’t qualify for unemployment benefits if their state has no record of their employer contributing to the insurance pool. They may have trouble getting other financial assistance as well. You should protect your business and its workers by following the rules.

Paying the piper

In general, compensation is subject to federal income and employment taxes, as well as taxes that may be assessed on state and local levels. Employees are personally responsible for federal income tax on their wages, and both employees and employers are responsible for paying employment taxes.

The main employment tax, mandated by the Federal Insurance Contributions Act (FICA), comprises three elements:

1. A 6.2% OASDI, or Old-Age, Survivors and Disability Insurance (or Social Security tax),

2. A 1.45% Hospital Insurance (HI) tax on all wages (known as the Medicare tax), and

3. An additional 0.9% Medicare surtax on wages exceeding $200,000 for single filers and $250,000 for joint filers.

Employers must also pay unemployment tax under the Federal Unemployment Tax Act (FUTA). That tax is 6% on the first $7,000 of wages, but it may be effectively reduced to as little as 0.6% due to credits for state unemployment programs.

Other responsibilities

Employers’ responsibilities usually extend beyond taxes. You may be required to pay overtime and provide benefits to employees — ranging from qualified retirement plans to family medical leave time — all governed by federal laws. Employees without such benefits who become sick with COVID-19 don’t qualify for paid leave. They may be forced to work anyway to support their families and, thus, spread the infection further.

To support employees in the event they’re laid off, employers often must pay for different types of employee insurance, including Workers’ Compensation, unemployment insurance and, depending on the state, disability insurance. In addition, the Affordable Care Act imposes minimum health insurance coverage requirements on employers with 50 or more full-time employees (and full-time equivalent employees).

Note: These warnings don’t apply to workers who are legitimate independent contractors. Contractors, who work for themselves, are responsible for paying their own taxes and providing their own benefits. But you must properly handle these workers by meeting certain tests in order to have them classified as independent contractors.

Consider the real cost

Paying taxes and providing benefits to employees are necessary costs of doing business. While they take a chunk out of your bottom line, not paying them can cost you, your workers and, ultimately, the general economy, even more. Contact us for help managing expenses and reducing taxes legally.

© 2020 Covenant CPA

The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 pandemic. The employee retention credit is available to employers, including nonprofit organizations, with operations that have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings.

The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.

IRS issues FAQs  

The IRS has now released FAQs about the credit. Here are some highlights.

How is the credit calculated? The credit is 50% of qualifying wages paid up to $10,000 in total. So the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.

Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Therefore, an employer may be able to claim it for qualified wages paid as early as March 13, 2020. Wages aren’t limited to cash payments, but also include part of the cost of employer-provided health care.

When is the operation of a business “partially suspended” for the purposes of the credit?The operation of a business is partially suspended if a government authority imposes restrictions by limiting commerce, travel or group meetings due to COVID-19 so that the business still continues but operates below its normal capacity.

Example: A state governor issues an executive order closing all restaurants and similar establishments to reduce the spread of COVID-19. However, the order allows establishments to provide food or beverages through carry-out, drive-through or delivery. This results in a partial suspension of businesses that provided sit-down service or other on-site eating facilities for customers prior to the executive order.

Is an employer required to pay qualified wages to its employees? No. The CARES Act doesn’t require employers to pay qualified wages.

Is a government employer or self-employed person eligible?No.Government employers aren’t eligible for the employee retention credit. Self-employed individuals also aren’t eligible for the credit for self-employment services or earnings.

Can an employer receive both the tax credits for the qualified leave wages under the Families First Coronavirus Response Act (FFCRA) and the employee retention credit under the CARES Act? Yes, but not for the same wages. The amount of qualified wages for which an employer can claim the employee retention credit doesn’t include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.

Can an eligible employer receive both the employee retention credit and a loan under the Paycheck Protection Program? No. An employer can’t receive the employee retention credit if it receives a Small Business Interruption Loan under the Paycheck Protection Program, which is authorized under the CARES Act. So an employer that receives a Paycheck Protection loan shouldn’t claim the employee retention credit.

For more information

Here’s a link to more questions: https://bit.ly/2R8syZx . Contact us if you need assistance with tax or financial issues due to COVID-19.

© 2020 Covenant CPA

If you’re a business owner, be aware that a recent tax law extended a credit for hiring individuals from one or more targeted groups. Employers can qualify for a valuable tax credit known as the Work Opportunity Tax Credit (WOTC).

The WOTC was set to expire on December 31, 2019. But a new law passed late last year extends it through December 31, 2020.

Generally, an employer is eligible for the credit for qualified wages paid to qualified members of these targeted groups: 1) members of families receiving assistance under the Temporary Assistance for Needy Families program, 2) veterans, 3) ex-felons, 4) designated community residents, 5) vocational rehabilitation referrals, 6) summer youth employees, 7) members of families in the Supplemental Nutritional Assistance Program, 8) qualified Supplemental Security Income recipients, 9) long-term family assistance recipients and 10) long-term unemployed individuals.

Several requirements

For each employee, there’s a minimum requirement that the employee has completed at least 120 hours of service for the employer. The credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (for example, a maid working in the employer’s home). Additionally, the credit generally isn’t available for employees who’ve previously worked for the employer.

There are different rules and credit amounts for certain employees. The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.

For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.

Here are a few other rules:

  • No deduction is allowed for the portion of wages equal to the amount of the WOTC determined for the tax year;
  • Other employment-related credits are generally reduced with respect to an employee for whom a WOTC is allowed; and
  • The credit is subject to the overall limits on the amount of business credits that can be taken in any tax year, but a 1-year carryback and 20-year carryforward of unused business credits is allowed.

Make sure you qualify

Because of these rules, there may be circumstances when the employer might elect not to have the WOTC apply. There are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of it. Contact us with questions or for more information about your situation.

© 2020 Covenant CPA

All complaints will be swiftly and thoroughly investigated.” No doubt this sentence, or something similar, appears in your company’s employee handbook. Unfortunately, there will likely be a time when you’ll have to put those words into action. Whether an employee alleges discrimination or harassment, or reports a coworker for theft or fraud, you’ll need to handle the complaint appropriately.

Keep these five best practices in mind to avoid unnecessary legal complications:

1. Maintain confidentiality. Take every precaution to keep details of the allegation private — especially the identities of the accused and the accuser. Remind managers that they need to have all conversations behind closed doors, store all meeting notes securely and speak only to those people who are necessary to the investigation. Assure workers involved in the investigation that it will be held in strict confidence and inform them that they aren’t free to talk about any part of the process.

2. Conduct productive interviews. Be prepared with an opening statement that describes what’s being investigated, then ask open-ended questions that encourage employees to say more than “yes” or “no.” Ask all interviewees the same questions so that you can compare answers, identify patterns and uncover discrepancies. Also, have a witness present to verify what occurred during the interviews.

3. Avoid bias. Keep an open mind while gathering facts. Just because an employee has a reputation around the office as a “troublemaker” or “crank,” doesn’t mean that person is lying or guilty of an impropriety. Consider hiring a third-party investigator, such as a fraud expert, to handle interviews. This can help preserve impartiality and show all parties that the investigation is being taken seriously.

4. Document activities. Make detailed notes on all the steps of your investigation. Include the dates and times of workspace searches, computer forensic activity and conversations. After every interview or action taken, review your notes to ensure they capture all relevant information.

5. Close the loops. Even if an investigation turns up no evidence of misconduct or criminal behavior, you need to follow up and close the loop with those involved. When complaints are found to have merit, take appropriate action as quickly as possible. You may be able to handle some minor issues with in-house personnel. But consult your legal and financial advisors — and possibly law enforcement — in more serious cases.

Contact us if you need help investigating a fraud allegation.

© 2020 Covenant CPA