Adams' Biz Musings
Unused vacation days? Donate them to disaster relief (everybody wins)!
Are you an employee with unused leave days (vacation, sick or personal days)? As an employer, have you noticed that many employees have a surplus of unused leave?
Labor Day weekend has come and gone and the push towards the end of the year is underway. Are you an employee with unused leave days (vacation, sick or personal days)? As an employer, have you noticed that many employees have a surplus of unused leave? Upon employee request, employers can donate the value of unused leave days to a disaster relief charity to help the Harvey recovery efforts. Keep reading to see how employees AND employers can generate savings and much needed funds can get delivered to the recovery effort.
The IRS has issued a policy, previously used as a relief effort in disasters such as Hurricanes Katrina and Sandy, that allows employees to ask their employers to donate the value of unused vacation, personal and sick days to disaster relief for Harvey (click here to read the IRS press release). Because this effort will require some additional employer effort, the employer is not mandated to comply with your request to donate your daily salary to the relief effort (if the request is denied, you keep your unused days as if the request was never made...no foul for trying). However, the amount of money the employer could potentially save should make it worth their time.
This is how it works...you ask your employer if they would be willing to donate one (or more) days of your salary for unused leave days to disaster relief. If they agree to do so, they simply deduct a day from your balance and you can no longer use, or get paid, for that day. The amount you would have gotten paid for that day will never show up in your income on your w2; you never have to claim the income that the employer will donate. The advantage for the employee is as follows: if you wrote a check or jumped online and donated $100 to charity from your checking account, you do not pay $100 less in taxes. You still pay some tax on that $100 of income because regular charitable contributions are not a dollar for dollar deductions. However, if you have a daily salary of $100 and in lieu of it being paid to you it is donated directly to disaster relief by your employer, you never recognize the income. You pay zero tax on that $100 that was donated because it was never paid to you in the first place. Therefore, based upon your individual tax situation (i.e., if you pay tax), you should generate some savings using this special leave-based donation method.
What makes this worthwhile for the employer, especially if it requires a little extra human-power to execute? When the employer makes the donation to a disaster relief effort, they are allowed to take the donation as a business expense against income. Normally when an employer pays a salary, it is liable for various payroll taxes that can be as high 16% or 17% of the gross salary. When the salary is donated via this disaster relief allowed method, the employer takes the business expense for the gross amount of the salary donated and does not pay any of the payroll taxes. This generates significant savings, in essence offsetting the additional work required to organize this undertaking. Finally, this can also be used as a tax planning strategy (for employees and employers) as the contributions can be made anytime between now and January 1, 2019.
THIS IS EASY! It's a great way for employees and employers to team up and make a difference! Funds get sent to the relief efforts and employees and employers save a little money over traditional methods! It's a cool incentive to generate cash flow for the much needed victims of Harvey! (Author's note: I feel the excessive use of exclamation points is warranted...this is good stuff!)
As always, consult your tax professional if you have questions about how this works and to make sure you execute it properly. Information contained within is subject to change and should always be confirmed prior to use.
Sources/resources:
IRS press release for leave-based donations (the basis for this article)
General Harvey tax relief information
Author:
Adam Ditsky, CPA
President, Ditsky Strategic
Can I get paid to an LLC (or other type of pass-through entity)?
The most popular question I've received since the unveiling of the new tax proposal is, "Can I get paid to an LLC by my employer"?
The most popular question I've received since the unveiling of the new tax proposal is, "Can I get paid to an LLC by my employer"? First and foremost, as I've said in previous posts, we have no idea what the final tax plan will look like. So, for now, some gentle review of potential outcomes is worthwhile but don't spend too much time researching anything in particular and certainly don't make any firm tax planning moves based on the one-page proposal from the White House. If you do have to make any decisions now try and choose options that allow for flexibility.
I know, this is really fun, right? Just wait...we might bust out some sparklers later!
The situation: you are an employee of a company and paid a w-2 salary, replete with federal, state and perhaps local withholdings and FICA and FICA MED deductions. You, too, want to pay the proposed 15% federal corporate tax rate! I don't think you'll love the answer.
There are a few issues with having an employer pay an employee as an LLC. You should, of course, contact your friendly tax professional for advice about your specific situation. In general, employers have to follow very specific guidelines about employee classification. In the vast majority of cases, those who work for an employer are employees and must be paid as w-2, salaried employees. An easy, but unofficial, test for employee classification is simply 'Does this person act like a normal employee...do they have a desk, do they have defined hours, etc.'. Very simply put, if it looks like a duck, walks like a duck and sounds like a duck, it's probably a duck (if you're more comfortable using another animal in your analogies, say a badger for example, feel free...the premise doesn't change).
The primary reason for rigid employee classification rules is that the IRS/Social Security Admin does't want to lose out on employer paid employment taxes (FICA, FICA MED). You might be thinking to yourself 'I thought those who receive profits from their LLCs have to pay the FICA and FICA MED via self-employment taxes on their personal returns.' (Kudos if thats what you were thinking...if it wasn't, go do some research and have a 2 page, double-spaced summary paper in my inbox by tomorrow). That thought is, indeed, accurate. Self-employment tax is 15.3% because it is designed to make up for both the employer and employees share of the payroll taxes. However, LLCs aren't the only type of pass-through entity.
S-corporations are a second entity type that passes income (or loss) through to the owner/s. There are several differences between these 2 types of corporations, but we'll just focus on the self-employment tax for now. Profits passed through from S-corps are not subject to self-employment tax. However, S-corps, unlike LLCs, are supposed to issue salaries to it's owners. The salary has FICA and FICA MED withheld and paid by the corporation just as if the owners were employees for any other company would. Owners of S-corps usually receive a combination of salary and pass-through income. The issue with S-corps from a tax collection standpoint under the new tax proposal, which I will barely stick my toe in the water on here, is that owners will try and drive down salaries and jack up pass-through income. This will drive down tax revenue. More stringent guidelines will be needed on the 'reasonable' salary required by the IRS to police this potential issue. This is certainly more complex than that, but it is an issue and it's final presentation will guide tax planning for the coming years.
A final point worth considering: what is lost by not being a w-2 employee and having income paid to a pass-through entity? Medical insurance, transit checks, 401(k) and other employee benefits are available to salaried employees only. Those benefits go by the wayside if you are not paid as a w-2 employee.
The point to all of this...if you want to have your income paid to pass-through entity (LLC, S-corp, etc.), you need to have a legitimate business. If you are an employee of a company and currently receive a w-2 salary, it's highly unlikely that you'll be able to have your income redirected to a pass-through entity.
Here is an article from Bloomberg on this topic as well...sheds some add'l and different light than my musings.
Author:
Adam Ditsky, CPA
President, Ditsky Strategic