If 2013 has been a profitable year for your business, you may want to share your good fortune with your staff. Typically this is done by giving year-end bonuses. Before you cut a check, understand what these bonuses mean to your business and your employees as well as some alternatives to cash bonuses. The following points apply if December 31 is the end of your business year.
Timing of payments
Your company can pay bonuses before the end of the year and deduct them in 2013. If your business is on the accrual basis, you can declare the bonuses this year, pay them next year, but get a deduction this year as long as the payment is made to an unrelated person (not an owner or someone in the owner’s immediate family). Make sure corporate minutes or other company records reflect the bonus declaration.
0.9% additional Medicare tax
Employees with substantial compensation should be apprised of the new 0.9% additional Medicare tax that applies to earned income (wages, commissions, tips, taxable fringe benefits, and other taxable compensation) over a threshold amount for their filing status ($200,000 for singles; $250,000 for joint filers). Thus, if a manager who is single has a salary of $180,000 and you want to pay a $50,000 year-end bonus, $30,000 of his earnings for the year will be subject to the additional Medicare tax.
Note: As an employer, you must start to withhold this 0.9% tax once earnings exceed $200,000, regardless of the employee’s filing status. Employees can request additional income tax withholding to be applied for this Medicare tax when they file their personal income tax returns.
FICA on deferred compensation
You and other high-earning employees may want to defer compensation to the future, presumably to be received in retirement when tax rates will be lower because income will be less. Strict rules apply to deferred compensation to prevent the earner from tapping the money at will.
For FICA tax purposes, deferred compensation usually is taxable in the year in which it is earned, not the year in which it is received. For example, deferring a 2013 year-end bonus means that bonus is subject to FICA tax this year and not in 2017 when the employee retires and receives the funds. This is advantageous because many high earners have already maxed out on the Social Security portion of FICA; the wage base limit for 2013 is $113,700, so earnings above this threshold are not subject to any additional Social Security tax. Of course, there is no cap on the Medicare portion of FICA.
Using qualified retirement plans
Instead of giving cash, you can use profits to fund a qualified retirement plan, such as a profit-sharing plan. The law restricts how much you can add each year and requires contributions to be nondiscriminatory (they can’t favor owners and managers).
- The good news: You have until the extended due date of the return to fund the plan, so if you obtain a filing extension, you have until October 15, 2014, to make 2013 contributions.
- The bad news: You must sign the paperwork to set up the plan by December 31, 2013, if you want a profit-sharing plan or certain other plans. If you miss this deadline, however, you can still use a SEP plan because this can be set up and funded by the extended due date of the return for the year.
Find details about qualified retirement plans in IRS Publication 560(watch for an update to this publication for 2013).
Giving stock instead of cash
If you are willing to share a bit of ownership with your staff, you can give stock in your corporation. Without your giving them tax advice, you may want to tell them about a Sec. 83(b) election to report the stock as compensation now so that any future appreciation will be taxed to them at capital gains rates.
If your company is a C corporation that meets the definition of a qualified small business, you can issue the stock to employees as compensation. If they hold shares for more than five years, all of their gain will be tax free. Note that stock issued after 2013 will give owners only a 50% exclusion unless Congress extends the current 100% exclusion.
Make sure your year-end bonus plans factor in cash flow considerations. Discuss your options with your tax advisor now so you can take action before the end of the year. And tell employees to talk with their tax advisors as well.
Any time we are met with a disaster like Sandy one of the most common questions that are surface are around show up pay and payment of exempt salaries. Here’s what the law says about it:
Paying Employees Who Show Up and Have No Work to Do
While the FLSA does not address this directly, many states do. It is known as call-in or reporting pay. For example, under Mass. Law:
455 CMR 2.03– (1) Reporting Pay. When an employee who is scheduled to work three or more hours
reports for duty at the time set by the employer, and that employee is not provided with the expected
hours of work, the employee shall be paid for at least three hours on such day at no less than the basic
Here is an excellent summary created by SHRM so you can see the law in your state. http://www.shrm.org/LegalIssues/StateandLocalResources/StateandLocalStatutesandRegulations/Documents/Callbackcallinreportingpay.pdf HR That Works Members should all look at the BNA state law summaries under the Compensation folder.
Paying Exempt Employees Who Cannot Work
Bottom line is that if an employee is ready, willing and able to work, deductions may not be made for time when work is not available (29 C.F.R. 541.602(a)). You can have them use vacation or sick pay under appropriate conditions. Please see this FLSA memo for further instruction http://www.dol.gov/whd/opinion/FLSA/2005/2005_10_24_41_FLSA.htm#.UJFW1IawUYw
We were fortunate to have Cindy Ventrice, author of Make Their Day: Employee Recognition That Works, conduct a webinar for us on Low Cost Recognition Strategies. It is archived on HR That Works in both WMV and MP3 versions. Here are some of the salient points made:
- The most important recognition comes directly from the manager or supervisor.
- The most impactful recognition is no cost praise.
- Employees like time off as a reward.
- Come up with some fun ideas with your management team. Learn from each other!
HR That Works Members should also look at the Keeping Great Employees Training Module.
We’ve been getting a lot of Hotline queries regarding holiday pay. Here’s the basic Federal law on it:
The Fair Labor Standards Act (FLSA) does not require payment for time not worked, such as vacations or holidays (federal or otherwise). These benefits are generally a matter of agreement between an employer and an employee (or the employee’s representative).
On a government contract to which the labor standards of the McNamara O’Hara Service Contract Act (SCA) apply, holiday and/or vacation fringe benefit requirements are stated in the SCA wage determinations in contracts that exceed $2,500.
On a government contract to which the labor standards of the Davis-Bacon and Related Acts apply, holiday pay and/or vacation pay is required for specific classifications of workers only if the Davis-Bacon wage determination in the covered contract specifies such requirements for workers employed in those classifications.
There is no requirement that employers have to pay overtime to eligible employees for holiday work, unless the employees work more than 40 hours in the same workweek, or 8 hours that day in California. Also paid holidays don’t count towards the 40-hour overtime rule.
Remember, exempt employees always get paid for holidays if they worked any portion of the week.
Here’s California FAQ on it: www.dir.ca.gov/dlse/FAQ_Holidays.htm. The theme is the same in the other states as well. Many state regulations don’t mention it at all.
Colorado wage law does not require nor prohibit any paid holidays, and does not require nor prohibit any extra pay for working on holidays. When an employee is paid for a non-work holiday, the holiday hours do not count towards overtime unless actual work was performed on the holiday.
Q: Am I entitled to holiday pay in Illinois?
A: No, unless by employment contract or agreement.
Q: Must an employer pay workers for holidays, sick time and/or vacations?
A: Under the New York State Labor Law, payment for time not actually worked is not required unless the employer has established a policy to grant such pay. Holidays, sick time and/or vacations fall under ‘time not worked.’ When an employer does decide to create a benefit policy, that employer is free to impose any conditions they choose.
Hope that helps!
By January 1, 2013, whenever an employer enters into a contract of employment with an employee for services to be rendered within California and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.
The employer shall give a signed copy of the contract to every employee who is a party thereto and shall obtain a signed receipt for the contract from each employee. In the case of a contract that expires and where the parties nevertheless continue to work under the terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.
…. “Commissions” does not include short-term productivity bonuses such as are paid to retail clerks; and it does not include bonus and profit-sharing plans, unless there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.
The DOL had this to say in their newsletter today:
The Supreme Court’s recent decision to halt the closely watched Wal-Mart class action equal pay case will not affect the Labor Department’s commitment to aggressively pursue pay discrimination cases that fall under its jurisdiction. At the National Employment Law Association’s annual convention last Friday in New Orleans, La., Secretary Solis discussed efforts by the Office of Federal Contract Compliance Programs to ensure that federal contractors honor legal requirements to provide equal pay to men and women who do equal work. An executive order grants DOL legal authority to do so, and OFCCP has stepped up its focus on compensation cases this year. Today in America, women are paid an average of 80 cents for every dollar paid to men. The average woman stands to lose $150 each week, $8,000 each year and $380,000 over her lifetime.