Smart Strategies for Reducing Payroll Taxes

Can employers reduce their payroll taxes without shedding employees? It may be possible if you implement certain strategies that can trim your tax burdens and boost your balance sheet.

Tax-savings strategies
Employers must pay Social Security, Medicare and federal unemployment taxes, as well as state unemployment tax in most states, on their employees’ wages. Collectively, these are called payroll taxes, and they can take a big bite out of employers’ pocketbooks.

To reduce your company’s payroll tax burden, consider these strategies:
Offer tax-exempt fringe benefits instead of more money
Even though you may want to reward employees with bonuses or raises, consider tax-exempt fringe benefits instead. You can deduct the cost of the benefits just as you would wages or bonuses, but you won’t owe payroll taxes on them. Employees also won’t owe income or payroll taxes on the benefits, and because they might otherwise have to buy these services with their after-tax wages, fringe benefits can also help their dollars go further.

Examples of tax-exempt fringe benefits include health benefits, education assistance, dependent care assistance, group term-life insurance, certain meals on the business’s premises and retirement planning services. Dollar limits and exceptions apply to some benefits, so consult your tax advisor before launching a benefits program.

Establish an accountable plan for employee reimbursements
If you reimburse workers for mileage, tools or other job-related expenses, those payments generally are subject to payroll taxes. But by establishing an accountable plan, you can avoid owing payroll taxes on those reimbursements (plus they’ll be excluded from employees’ taxable income).

Expenses need to have a business connection to be included in an accountable plan. Employees also need to provide you with proper documentation for each expense, generally including an expense report and a receipt, within 60 days of incurring it.

You can use the accountable plan to pay employees in advance for upcoming expenses, but employees must return any excess reimbursements within a reasonable timeframe, typically 120 days.

Use independent contractors when possible
Bringing on independent contractors can save you payroll taxes because these workers are responsible for their own taxes. You must be wary, however, of the pitfalls that come with misclassifying workers. If you have too much control over a worker, the IRS will consider the worker an employee, even if you’ve treated the worker as an independent contractor. This could result in back taxes, interest and penalties.

Typically, a worker who completes work related to your core business is considered an employee. Employers often use independent contractors for maintenance, sales or other noncore functions.

Before engaging potential independent contractors for a particular task, evaluate the degree of control you’ll have over the workers and look at how other employers classify workers who do the same work. If independent contractor status is warranted, have workers sign an agreement stating they are independent contractors and responsible for their own taxes, and issue a Form 1099 to each one.

Ease the tax pain
In addition to these strategies, discuss with your tax advisor additional ways to ease the payroll tax burden. Payroll taxes are a part of doing business, but with a little planning they can be much less painful.

Talk to Us
If you want to explore tax-saving options for your company, our firm can help make your plan more realistic and effective. Please contact us to discuss how we can help.
For more tax-related articles, explore our Tax Planning Guide.

Make a 2013 IRA Contribution… Still

Tax-advantaged retirement plans allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years. So it’s a good idea to use up as much of your annual limits as possible.

Have you maxed out your 2013 limits? While it’s too late to add to your 2013 401(k) contributions, there’s still time to make 2013 IRA contributions. The deadline is April 15, 2014. The limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on Dec. 31, 2013).
A traditional IRA contribution also might provide some savings on your 2013 tax bill. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — your traditional IRA contribution is fully deductible on your 2013 tax return.

If you don’t qualify for a deductible traditional IRA contribution, consider making a Roth IRA or nondeductible traditional IRA contribution. We can help you determine what makes sense for you.

Can I claim my elderly parent as a dependent?

For you to deduct up to $3,900 on your 2013 tax return under the adult-dependent exemption, in most cases the parent must have less gross income for the tax year than the exemption amount. Generally Social Security is excluded, but payments from dividends, interest and retirement plans are included.
In addition, you must have contributed more than 50% of your parent’s financial support. If the parent lived with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence.

If you shared caregiving duties with a sibling and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption.

The adult-dependent exemption is just one tax break that you may be able to employ to ease the financial burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.

If you have questions, please let us know.

IRS Tax Filing Deadlines: Be On Time

If you still file a paper return, it is important to know the IRS’s “timely mailed equals timely filed” rule: If your tax return is due April 15, it is considered timely filed if it is postmarked by midnight on April 15. But just because you drop your return in a mailbox on the 15th does not mean you are safe.

Consider this example: On April 15, Susan mails her federal tax return with a payment. The post office loses the envelope, and, by the time Susan realizes what has happened and re-files, two months have passed. She is hit with failure-to-file and failure-to-pay penalties totaling $1,000.

To avoid this risk, use certified or registered mail. Alternatively, you can use one of the private delivery services designated by the IRS to comply with the timely filing rule, such as DHL Same Day service. FedEx and UPS also offer a variety of options that pass muster with the IRS. But beware: If you use an unauthorized delivery service — such as FedEx Express Saver or UPS Ground — your document isn’t “filed” until the IRS receives it.

If you have not filed your return yet and are concerned about meeting the deadline, another option is to file for an extension. Doing so has both pluses and minuses, depending on your situation. Please contact us if you have questions about what you should do to avoid penalties for failing to file or pay.