CPA Blog

Tread carefully when determining compensation for S corp. shareholder-employees

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Published: Tuesday, 17 November 2015 15:28

Written by Phillip Strickler, CPA.CITP

By distributing profits in the form of dividends rather than salary, an S corporation and its owners can avoid payroll taxes on these amounts. Because of the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately), the potential tax savings may be even greater than it once would have been. (S corporation dividends paid to shareholder-employees generally won’t be subject to the 3.8% net investment income tax.)

But paying little or no salary to S corporation shareholder-employees is risky. The IRS has targeted S corporations, assessing unpaid payroll taxes, penalties and interest against companies whose owners’ salaries are unreasonably low. To avoid such a result, S corporations should establish and document reasonable salaries for each position using compensation surveys, company financial data and other evidence.

Do you have questions about compensating S corporation shareholder-employees? Contact us — we can help you determine the mix of salary and dividends that can keep tax liability as low as possible while standing up to IRS scrutiny.

Keep an eye on KPIs as your company rolls along

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Published: Monday, 16 November 2015 09:21

Written by Phillip Strickler, CPA.CITP

Like race car drivers, business owners need to monitor gauges on their dashboards to keep an eye out for serious operational failures before a total breakdown occurs. These gauges are commonly referred to as key performance indicators (KPIs).

There are two broad categories of KPIs: financial and nonfinancial. Financial KPIs often take the form of ratios, such as:

• Debt to Equity: Total Debt / Shareholder’s Equity,
• Current Ratio: Current Assets / Current Liabilities, and
• Days Sales Outstanding: Number of Days × Accounts Receivable / Credit Sales.

Nonfinancial KPIs may include measurable metrics in the areas of customer service, sales and marketing. For example, if a company’s goal is to improve its response time to customer complaints, its KPI might be to initially respond to complaints within 24 hours, and to eventually resolve at least 80% of complaints to the customer’s satisfaction.

KPIs differ from one company to the next based on industry, company type (B2B or B2C, for example) and, most important, strategic objectives. Your KPIs will stem mainly from your mission statement and your short-, medium- and long-term goals.

How to fix a shaky succession plan

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Published: Friday, 13 November 2015 14:05

Written by Phillip Strickler, CPA.CITP

Compare progress to plan. Don’t rely on vague notions of why your succession plan isn’t working. Identify the specific gaps in its execution. Also consider how your impaired plan is affecting your company’s bottom line, productivity and morale.

Be a communicator. Inform key parties about the problems, such as your successor, members of your board of directors or advisory board, managers, family and key nonfamily employees, shareholders and investors, and professional advisors such as your attorney and accountant.

Hit the pause button, if necessary. Don’t be afraid to retain control of the business a little longer while your next-in-line resolves his or her shortcomings or while other problems are resolved. Alternatively, you might name an interim CEO.

Revisit your successor choice. In extreme cases, a business owner may simply need to find a new leader-to-be. Remember, no one can afford to continue investing in someone who can’t successfully drive the company forward.

We’d be happy to review your succession plan and provide insights into its strengths and potential weaknesses.

Ongoing Responsibility for Retirement Plans

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Published: Wednesday, 11 November 2015 10:21

Written by Phillip Strickler, CPA.CITP

Another May 2015 Supreme Court decision may affect business owners. In Tibble v. Edison International (No. 13-550), the Court unanimously held that there is no statute of limitation on fiduciary responsibility for 401(k) plans.

            In this case, employees of a utility company filed suit, alleging that the company had added some relatively high-fee mutual funds to the 401(k) plan’s menu of investment choices. In 1999, the plan added three funds that were sold to ordinary investors; another three similar funds were added in 2002. According to the complaint from plan participants and beneficiaries, versions of the same funds, with lower fees, were available to institutional investors, yet these versions were not in the Edison 401(k) plan. Thus, the plaintiffs said they paid higher fees than necessary, reducing investment returns.

            In the Supreme Court, the case revolved around the funds added in 1999. The company said that such disputes related to employer-sponsored retirement plans have a six-year statute of limitation based on when the funds were selected for the plan. As the action was begun in 2007, the employees’ complaint regarding the funds added 8 years earlier was untimely. A district court and the Ninth Circuit generally agreed with this argument.

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