#TaxTipTuesday-If you have an NQDC plan, be sure you’re familiar with the applicable tax rules. Here’s why.

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It’s critical to be aware of the tax rules surrounding your NQDC plan

Nonqualified deferred compensation (NQDC) plans pay executives at some time in the future for services to be currently performed. They differ from qualified plans, such as 401(k)s, in that:
• NQDC plans can favor certain highly compensated employees,
• Although the executive’s tax liability on the deferred income also may be deferred,     the employer can’t deduct the NQDC until the executive recognizes it as income, and
• Any NQDC plan funding isn’t protected from the employer’s creditors.
They also differ in terms of some of the rules that apply to them, and it’s critical to be aware of those rules.

 
What you need to know
Internal Revenue Code (IRC) Section 409A and related IRS guidance have tightened and clarified the rules for NQDC plans. Some of the most important rules to be aware of affect:

 
Timing of initial deferral elections. Executives must make the initial deferral election before the year in which they perform the services for which the compensation is earned. So, for instance, if you wish to defer part of your 2017 compensation to 2018 or beyond, you generally must make the election by the end of 2016.

 
Timing of distributions. Benefits must be paid on a specified date, according to a fixed payment schedule or after the occurrence of a specified event — such as death, disability, separation from service, change in ownership or control of the employer, or an unforeseeable emergency.

 
Elections to change timing or form. The timing of benefits can be delayed but not accelerated. Elections to change the timing or form of a payment must be made at least 12 months in advance. Also, new payment dates must be at least five years after the date the payment would otherwise have been made.

 
Employment tax issues
Another important NQDC tax issue is that employment taxes are generally due when services are performed or when there’s no longer a substantial risk of forfeiture, whichever is later. This is true even though the compensation isn’t actually paid or recognized for income tax purposes until later years. So your employer may:
• Withhold your portion of the tax from your salary,
• Ask you to write a check for the liability, or
• Pay your portion, in which case you’ll have additional taxable income.

 
Consequences of noncompliance
The penalties for noncompliance can be severe: Plan participants (that is, you, the executive) will be taxed on plan benefits at the time of vesting, and a 20% penalty and potential interest charges also will apply. So if you’re receiving NQDC, you should check with your employer to make sure it’s addressing any compliance issues. And we can help incorporate your NQDC or other executive compensation into your year-end tax planning and a comprehensive tax planning strategy for 2016 and beyond.

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Do you own your own business? Here are two factors to consider when determining how much to pay yourself

think-about-1184858_960_720As the owner of your business, you are the decider of salaries for your staff. That’s true for your own salary too. While there is no one-size-fits-all formula for determining how much to pay yourself, here are two factors to consider.

 
● Profitability. Regularly review and update your firm’s cash flow projections to determine the salary level you can sustain while keeping the business profitable. Your compensation may be minimal as you start up your business. However, beware of going too long without paying yourself a salary, and be sure to document that you’re in business to make a profit. Why? Otherwise the IRS may view your perpetually unprofitable business as a hobby – a sham enterprise aimed at avoiding taxes. That can lead to unfavorable tax consequences.

 
● The market. If you were working for someone else, what would they pay for your skills and knowledge? When you’ve answered that question, discuss salary levels with small business groups and colleagues in your geographic area and industry. Check out the Department of Labor and Small Business Administration websites for salary information and national compensation surveys. In the early stages of your business, you may not be able to afford to pay yourself a salary commensurate with the higher ranges, but you’ll learn what’s reasonable.

 
For assistance with payroll issues or salary concerns, contact our office.

 

 

 

 

 

 

 

 

Does your employer award you with stock-based compensations?

 

Awards of RSUs can provide tax deferral opportunity

Executives and other key employees are often compensated with more than just salary, fringe benefits and bonuses: Thbusiness-1219868_960_720ey may also be awarded stock-based compensation, such as restricted stock or stock options. Another form that’s becoming more common is restricted stock units (RSUs). If RSUs are part of your compensation package, be sure you understand the tax consequences — and a valuable tax deferral opportunity.

 
RSUs vs. restricted stock
RSUs are contractual rights to receive stock (or its cash value) after the award has vested. Unlike restricted stock, RSUs aren’t eligible for the Section 83(b) election that can allow ordinary income to be converted into capital gains.
But RSUs do offer a limited ability to defer income taxes: Unlike restricted stock, which becomes taxable immediately upon vesting, RSUs aren’t taxable until the employee actually receives the stock.

 
Tax deferral
Rather than having the stock delivered immediately upon vesting, you may be able to arrange with your employer to delay delivery. This will defer income tax and may allow you to reduce or avoid exposure to the additional 0.9% Medicare tax (because the RSUs are treated as FICA income).
However, any income deferral must satisfy the strict requirements of Internal Revenue Code Section 409A.

 
Complex rules
If RSUs — or other types of stock-based awards — are part of your compensation package, please contact us. The rules are complex, and careful tax planning is critical.