compensation_notes - 1 TAX 6845 Tax Planning &...

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1 TAX 6845 – Tax Planning & Consulting (October 12) Topic: Employee compensation, fringe benefits and equity-based compensation updated: September 28, 2010 I. Employee Compensation – much tax planning relating to employee compensation involves four issues: A. Regulating the amount of compensation: Too high or too low . Unreasonably high compensation is sometimes paid to the C corporation shareholder/employees and their relatives in order to reduce the corporate income tax. The current low tax rate for “qualified” dividend income makes this less beneficial especially when payroll taxes are considered. The favorable 15/0% rates applied to “qualified” dividends is set to expire at the end of 2010. Low compensation is sometimes paid to owners of S corporations in an effort to avoid payroll taxes or to effectively shift income to other family members who are shareholders. High compensation can be paid to family members in an effort to shift income to such members, but that can be at the cost of payroll taxes. Such shifts are done to move income to individuals in lower income tax brackets and to move income between generations without transfer taxes. B. Controlling the employee/independent contractor status . Whether a worker is "controlled" by a business is a critical factor in deciding whether that worker is an employee or an independent contractor. If a business is successful in avoiding control, a business is able to avoid payroll taxes, worker's compensation, fringe benefit coverage, and even liability for the worker's actions. Avoiding "control" can also permit the worker to deduct the cost of equipment, tools, transportation, travel, etc. (deductible for AGI on Schedule C & the costs are not subject to the 2% of AGI floor) for payroll tax purposes as well as income taxes (taxpayer can still receive a benefit even if they use the standard deduction). Expense reimbursement can sometimes be used as an alternative to assist employees. Often under-reporting of income is a hidden motive behind efforts to avoid employee status. Employment status is often an important issue for drivers, plumbers, electricians, real estate professionals and other outside sales personnel (appraisers, surveyors, etc.). C. Effectively utilizing fringe benefits and deferred compensation . As noted later (section IV), many fringe benefits are tax favored which means employers should effectively utilize "desired" benefits. Some benefits produce employer deductions without employee income (e.g., health insurance). Next week we look at retirement benefits and deferred compensation. Some benefits, profit sharing in particular can be used to "zero out" a business’s taxable income. Other benefits provide employers with deductions without any cash outflow
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This note was uploaded on 09/09/2011 for the course TAX 6845 taught by Professor Kelliher,c during the Fall '08 term at University of Central Florida.

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compensation_notes - 1 TAX 6845 Tax Planning &...

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