Tax

Here’s a recent update on the Employee Retention Credit (ERC) and the new IRS payback scheme.

New IRS ERC Payback Program

The IRS introduced a second ERC Voluntary Disclosure Program for 2021 claims. Under this program, you can say, “I didn’t deserve the ERC, so I’ll repay 85 percent of my claimed ERC and retain 15 percent tax-free.”

The program is available only for ERC claims from 2021, and there are specific eligibility requirements. If you claimed the ERC using a third-party payer, the third party must apply on your behalf.

Eligibility Criteria for Payback

You must not be under criminal investigation or an IRS employment tax examination for 2021 returns.

The IRS must not have notified you of ERC recapture or received third-party information about your non-compliance.

Steps to Participate

You need to complete IRS Form 15434 and upload it online by November 22, 2024.

After submitting the form, you will receive a closing agreement, which you must sign and return within 10 days.

No Appeals 

If the IRS denies your request to participate in the payback program, you have no opportunity for judicial review or administrative appeal.

Legislative Changes Pending

H.R. 7024, currently pending in the Senate, could introduce stricter penalties for ERC promoters and extend the statute of limitations for examining ERC claims to six years.

IRS ERC Processing

The IRS is currently processing a backlog of 1.4 million ERC claims. While some payments have begun, and some have been denied, many claims are still under review. It’s likely your wait for your ERC refund will continue.

If you want to discuss your ERC claims, please call me at 408-778-9651.

• By Leon Clinton
• October 11, 2024

Does your business classify workers as independent contractors instead of employees? You should know that the U.S. Department of Labor is trying to make it harder for all businesses to use independent contractors.

The Department of Labor enforces the Fair Labor Standards Act (FLSA), the federal law that requires most employers to pay employees a minimum wage and non-exempt employees time-and-a-half for overtime.

The key word here is “employee.” FSLA does not apply to independent contractors. They need not be paid time-and-a-half for overtime or even the minimum wage.

The question is—who is an independent contractor?

Initially, it’s up to each business to decide how to classify workers. However, your decision is subject to review by the Department of Labor, other government agencies such as the IRS, and your state unemployment and workers’ compensation agencies.

Bad things can happen if the government decides you’ve misclassified an employee as an independent contractor. The Department of Labor can make you pay back overtime pay for two years (three years if the misclassification is intentional). Your workers can also bring lawsuits for violations.

For FLSA purposes, workers are employees if, as a matter of economic reality, they are economically dependent on the hiring firm. The Department of Labor’s new test contains six factors hiring firms must consider: 

1. Opportunity for profit or loss; 
2. Investment in facilities and equipment; 
3. Permanency of the relationship; 
4. Degree of control by the hiring firm; 
5. Integration into the employer’s business; and
6. Skill and initiative required.

This test is complex and hard to apply. No one factor is determinative. Rather, you must examine all the circumstances of the relationship. 

To make worker classification even more challenging, the Department of Labor test is only one of many. The IRS, for example, uses a more business-friendly right-of-control test. Many states use an even stricter ABC test for workers’ compensation, unemployment, and state wage and hour law purposes.

A worker can qualify as an independent contractor under the IRS test but be an employee under the Department of Labor and state ABC tests.

Does this all sound like a mess? It is.

If you use independent contractors, you should review your relationship in light of the new Department of Labor test. 

If your company uses many independent contractors, it should always have them sign an independent contractor agreement with a clause waiving the right to bring or join any class action suit against the company, including suing for workers’ misclassification. The clause can avoid ruinously expensive class action lawsuits brought by plaintiff’s lawyers. 

If you want to discuss your worker classifications, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 8, 2024

I’d like to bring your attention to a recent U.S. Supreme Court decision that could significantly impact your buy-sell agreement if it involves life insurance to redeem shares upon your death.

Impact on Estate Tax

The Supreme Court’s ruling in Connelly established that life insurance proceeds used by a company to redeem a deceased owner’s shares increase the company’s value for estate tax purposes. This could result in a higher estate tax liability than anticipated.

Review Your Buy-Sell Agreement

If your buy-sell agreement uses company-owned life insurance for share redemption, reviewing the structure and terms with your estate planning advisor is crucial. The Connelly decision may require changes to ensure the agreement aligns with your estate planning goals.

Consider Alternative Arrangements

One potential alternative is a cross-purchase agreement, where each owner buys insurance on the others. This structure avoids increasing the company’s value with life insurance proceeds and might better align with your estate planning needs.

Time-Sensitive Considerations

Keep in mind that the current federal estate tax exemption is set to decrease after December 31, 2025. This reduction could further impact your estate planning if your buy-sell agreement is not properly adjusted.

If you want to discuss your buy-sell agreement, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 4, 2024