Tag Archives: compensation

Are your company’s job descriptions pulling their weight?

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At many businesses, job descriptions have it easy. They were “hired” (that is, written) many years ago. They haven’t had to change or do anything, really, besides get copied and pasted into a want ad occasionally. They’re not really good at what they do, but they’re used again and again because everyone assumes they’re just fine.

The problem is, they’re not. Outdated, vague or inaccurate job descriptions can lead to longer hiring times, bad hires, workplace conflicts and even legal exposure in employment law actions. So, now the million-dollar question: Are your company’s job descriptions pulling their weight?

Review and revise

There’s only one way to find out: Conduct a thorough review of your job descriptions to determine whether they’re current and comprehensive.

Check to see whether they list outdated procedures or other outmoded elements, such as software you’ve long since phased out. As necessary, carefully revise the wording to describe the duties and responsibilities for a particular position as it exists today.

If you don’t already have formal, written job descriptions for every position, don’t panic. Ask employees in those positions to document their everyday duties and responsibilities. Each worker’s supervisor should then verify and, if necessary, help refine the description.

Put them to work

After you’ve updated or created your job descriptions, you can use them to increase organizational efficiency. Weed out the marginal duties from essential ones. Eliminate superfluous and redundant tasks, focusing each position on activities that generate revenue or eliminate expenses. You may be able to make improvements in other areas, too, such as:

Recruiting. Are you hiring people with the right skills? Up-to-date job descriptions provide a better road map for finding ideal candidates to fill your open positions.

Compensation. A complete and accurate description of the hiring requirements, job duties and responsibilities of a position provide context and rationalization for how that person is compensated.

Workload distribution. Are workloads efficiently distributed among employees? If not, rearrange them. You may find this necessary and beneficial when duties change because of revisions to job descriptions.

Cross-training. Can your employees handle their coworkers’ duties and responsibilities? In both emergencies and non-emergencies (vacations, for instance) — and as a fraud-prevention measure — having workers who are able to cover for each other temporarily is critical.

Performance management. Are employees doing their best? Detailed job descriptions allow supervisors to better determine whether workers are completing their assigned duties, meeting or exceeding expectations and growing with the company.

Stop the slackers

No business should put up with slacker job descriptions that do nothing but hang around the break room exchanging gossip and eating all the donuts. Ensure yours are actively contributing to your company’s success by managing their performance just as you do for real-live humans.

© 2021 Covenant CPA

Know the ins and outs of “reasonable compensation” for a corporate business owner

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Owners of incorporated businesses know that there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Thus, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.

However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.

Determining reasonable compensation

There’s no easy way to determine what’s reasonable. In an audit, the IRS examines the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.

There are some steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation. For example, you can:

  • Keep compensation in line with what similar businesses are paying their executives (and keep whatever evidence you can get of what others are paying to support what you pay). 
  • In the minutes of your corporation’s board of directors, contemporaneously document the reasons for compensation paid. For example, if compensation is being increased in the current year to make up for earlier years in which it was low, be sure that the minutes reflect this. (Ideally, the minutes for the earlier years should reflect that the compensation paid then was at a reduced rate.) Cite any executive compensation or industry studies that back up your compensation amounts. 
  • Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This looks too much like a disguised dividend and will probably be treated as such by IRS.
  • If the business is profitable, pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

You can avoid problems and challenges by planning ahead. If you have questions or concerns about your situation, contact us.

© 2021 Covenant CPA

The new Form 1099-NEC and the revised 1099-MISC are due to recipients soon

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There’s a new IRS form for business taxpayers that pay or receive certain types of nonemployee compensation and it must be furnished to most recipients by February 1, 2021. After sending the forms to recipients, taxpayers must file the forms with the IRS by March 1 (March 31 if filing electronically).

The requirement begins with forms for tax year 2020. Payers must complete Form 1099-NEC, “Nonemployee Compensation,” to report any payment of $600 or more to a recipient. February 1 is also the deadline for furnishing Form 1099-MISC, “Miscellaneous Income,” to report certain other payments to recipients.

If your business is using Form 1099-MISC to report amounts in box 8, “substitute payments in lieu of dividends or interest,” or box 10, “gross proceeds paid to an attorney,” there’s an exception to the regular due date. Those forms are due to recipients by February 16, 2021.

1099-MISC changes 

Before the 2020 tax year, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee (in other words, an independent contractor). These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was introduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that reported NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers.

Payers of nonemployee compensation now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. But for 2020 tax returns, the due date is February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions. 

When to file 1099-NEC

If the following four conditions are met, you must generally report payments as nonemployee compensation:

  • You made a payment to someone who isn’t your employee,
  • You made a payment for services in the course of your trade or business,
  • You made a payment to an individual, partnership, estate, or, in some cases, a corporation, and
  • You made payments to a recipient of at least $600 during the year.

We can help

If you have questions about filing Form 1099-NEC, Form 1099-MISC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

© 2021 Covenant CPA

Saving Tax on Restricted Stock Awards with the Sec. 83(b) Election

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Today many employees receive stock-based compensation from their employer as part of their compensation and benefits package. The tax consequences of such compensation can be complex — subject to ordinary-income, capital gains, employment and other taxes. But if you receive restricted stock awards, you might have a tax-saving opportunity in the form of the Section 83(b) election.

Convert ordinary income to long-term capital gains

Restricted stock is stock your employer grants you subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk (that is, it’s vested) or you sell it.

At that time, you pay taxes on the stock’s fair market value (FMV) at your ordinary-income rate. The FMV will be considered FICA income, so it also could trigger or increase your exposure to the additional 0.9% Medicare tax.

But you can instead make a Sec. 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.

The Sec. 83(b) election can be beneficial if the income at the grant date is negligible or the stock is likely to appreciate significantly. With ordinary-income rates now especially low under the Tax Cuts and Jobs Act (TCJA), it might be a good time to recognize such income.

Weigh the potential disadvantages

There are some potential disadvantages, however:

  • You must prepay tax in the current year — which also could push you into a higher income tax bracket or trigger or increase the additional 0.9% Medicare tax. But if your company is in the earlier stages of development, the income recognized may be relatively small.
  • Any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or sell it at a decreased value. However, you’d have a capital loss in those situations.
  • When you sell the shares, any gain will be included in net investment income and could trigger or increase your liability for the 3.8% net investment income tax.

It’s complicated

As you can see, tax planning for restricted stock is complicated. Let us know if you’ve recently been awarded restricted stock or expect to be awarded such stock this year. We can help you determine whether the Sec. 83(b) election makes sense in your specific situation.

© 2018 Covenant Consulting