Employee Benefits, Insurance Payroll Deductions And Taxes

Employee Benefits, Insurance Payroll DeductionsAnd Taxes

By Paul A. ThomasThe University of Georgia

Warning: This Is OneVery Scary Lecture !

Vacation PayVacation Pay

Most companies grant paid vacations to Most companies grant paid vacations to their employees.their employees.

Employees earn the benefit by working.Employees earn the benefit by working.Vacation pay must be accrued over the Vacation pay must be accrued over the

period in which it is being earned.period in which it is being earned.

Sick Leave AccrualsSick Leave Accruals

Maximum accrual 200 days

Good news: if you retire from state service, accrued sick leave helps pay foryour health insurance throughout retirement!

Based on Actual Time Put In

Attendance rules coverage:- at least 1/2 time and/or have annual salary- if hourly, at least 1/2 time for 19 pay periods

Earn sick leave, holidays, vacation

5 personal days (use within the year)

Retirement Plans

Can put away money toward retirementon a tax-deferred basis

Investment options

Can start or discontinue at any time.

The real question is, how much are you

willing to contribute to the plan as a

business? Matching? 100% Support?

• Traditional IRA or Roth IRA…what’s best for you

• Simple IRA

• 401(k)

• Annuities

• Wealth Accumulation

Vesting Requirements

Years of ServiceYears of Service Non-forfeitable %Non-forfeitable %

2 20%2 20%

4 40%4 40%

6 60%6 60%

8 80%8 80%

10 100%10 100%

10 years of full-time service credit

Can request refund of contributions after you leave (if under 10 years)

Choose beneficiaries

Death Benefits

Maximum: 3 times salary Minimum: 1/2 salary or $10,000 (whichever is less)

Survivor’s Benefit Program

Remember, the extent of the death benefitsoften affects the overall cost of the plan.

HMO’sHMO’s

Use primary care physician

Referrals for other providers

No claim forms to submit

No deductibles

Small co-pays

Long term care insurance offers the following benefits:

• Financial protection if a disabling injury would require ……..nursing home care

• A monthly income

• Protection for a lifetime of retirement savings

• Group plans available with no initial underwriting

Example: 2003 Bi-weekly Cost

Empire PlanEmpire Plan

IndividualIndividual FamilyFamily

$15.57$15.57 $64.68$64.68

HMO-BlueHMO-Blue $41.39$41.39 $169.84$169.84

CDPHPCDPHP $12.52$12.52 $68.08$68.08

$22.79$22.79 $110.27$110.27MVPMVP

DentalDental

full coverage

Participating dentist:

partial reimbursement on a fee schedule

Non-participating dentist:

VisionVision Participating provider:

free exam

free pair plan-covered glasses or contact lenses with $25 copay

Non-participating provider:

$10 toward exam

$35 toward glasses or contact lenses

Flexible Spending AccountsFlexible Spending Accounts

Health Care Spending Account: a way to use your pre-tax dollars on un-reimbursed medical, dental and vision costs

Dependent Care Advantage Account:a way to use your pre-tax dollars to pay for child and elder care while you are at work

Savings BondsSavings Bonds

Payroll deduct any amounttoward purchase

When purchase price is reached, bond is issued

National Bond and Trust Co.1-800-426-9314

• May be included in the health insurance package

• Group plan with all employees covered for the same amount;

the life insurance ends at termination or retirement

• Employees offered the opportunity to “buy up” to a larger amount

• Permanent insurance is made available through payroll deduct

• Key person insurance

• Executive compensation using life insurance

• AFLAC supplemental insurance provides for a deficiency in health insurance coverage.

• AFLAC supplemental insurance covers things not included in traditional health policies including deductibles, travel expenses, out-of-network charges, and loss of earning power

Forecast for 2004

Double digit increases in cost of employer sponsored health plans

Fact that health plan increases are 8 times current inflation rate

Increases vary little by plan type

National average for typical family premium was $9,068 in 2003 compared to $7,954 in 2002

Estimated than 20% of uninsureds are eligible for employer sponsored health plan

Health Insurance /Health Insurance /Prescription DrugsPrescription Drugs

Most sought after benefit!

Individual / family coverage

Legislation is Changing!

Prescriptions may be included in health insurance plan

No single factor…all issues add to increases

Malpractice insurance rates

Rising hospital and physician costs

Newer and more expensive technology

Longer life expectancy

Prescription drugs

Loss of investment income

Mandated benefits and government regulations

• Group or individual

• Safety net if employee is unable to work for an extended period

of time

• Can be offered on a voluntary basis

• Relatively inexpensive group plan if paid for by the employer

• Important as part of a Buy/Sell Agreement

Other Insurance ConsiderationsOther Insurance Considerations

Medical AssistanceMedical AssistancePolice Department & SecurityPolice Department & SecurityFire DepartmentFire DepartmentNeighborhood Conditions - Is it changing?Neighborhood Conditions - Is it changing?

Basic Stock Bonus Plans

This is a defined contribution plan that provides This is a defined contribution plan that provides for employee benefits in the form of employer for employee benefits in the form of employer stock unless the employee elects to receive stock unless the employee elects to receive cash.cash.

““Employer contributions need not be dependent on employer’s Employer contributions need not be dependent on employer’s profits as is the case with 401(k) plans. If stock is distributed, the profits as is the case with 401(k) plans. If stock is distributed, the

tax on its appreciation is deferred until its taxable sale. As with profit tax on its appreciation is deferred until its taxable sale. As with profit sharing plans, there must be a definite predetermined formula for sharing plans, there must be a definite predetermined formula for

allocating contributions among participants, but no formula for allocating contributions among participants, but no formula for determining the amount of overall contributions is required.” determining the amount of overall contributions is required.”

Reg. 401-1(b)(1)(iii).Reg. 401-1(b)(1)(iii).

Advantages of Stock Bonus Plans:Advantages of Stock Bonus Plans: No cash flow drain on corporation since it usually No cash flow drain on corporation since it usually

contributes its own stock rather than cash. The stock contributes its own stock rather than cash. The stock is either:is either:

unissued stock or treasury stock (stock purchased by the corporation on the

open market). The corporation may deduct the market value of the The corporation may deduct the market value of the

stock, with no gain or loss recognized by the employer stock, with no gain or loss recognized by the employer on the excess market value over cost.on the excess market value over cost.

If employees receive stock, the tax on its appreciation If employees receive stock, the tax on its appreciation is deferred until its taxable sale. If employees receive is deferred until its taxable sale. If employees receive cash, then they are taxed upon distribution.cash, then they are taxed upon distribution.

Basic Stock Bonus Plans

Employee Stock Ownership Plans (ESOPs)

This is a stock bonus trust that is tax exempt This is a stock bonus trust that is tax exempt under Code Sec. 401(a). Technically, it is a under Code Sec. 401(a). Technically, it is a defined contribution plan that is either:defined contribution plan that is either:

A qualified stock bonus plan; or, A stock bonus and money purchase plan.

An ESOP must invest primarily in employer An ESOP must invest primarily in employer securities.securities.

Roth IRAS— Comparison with Traditional IRAs

The major differences between a traditional IRA and a Roth IRA include: The major differences between a traditional IRA and a Roth IRA include:

Earnings from a Roth IRA may be exempt from income tax; earnings from Earnings from a Roth IRA may be exempt from income tax; earnings from a traditional IRA are taxed when withdrawn.a traditional IRA are taxed when withdrawn.

Contributions to a Roth IRA are never tax deductible; contributions to a Contributions to a Roth IRA are never tax deductible; contributions to a traditional IRA may be tax deductible.traditional IRA may be tax deductible.

The owner of a Roth IRA has penalty-free access to contributions (but not The owner of a Roth IRA has penalty-free access to contributions (but not to accumulated earnings), at anytime. to accumulated earnings), at anytime.

Individuals with earned income cannot contribute to traditional IRAs Individuals with earned income cannot contribute to traditional IRAs beginning in the year they reach age 70½. Age is not a restriction for Roth beginning in the year they reach age 70½. Age is not a restriction for Roth IRA contributions.IRA contributions.

The minimum distribution and incidental death benefit rules that apply to The minimum distribution and incidental death benefit rules that apply to traditional IRAs do not apply to Roth IRAs prior to the owner’s death. traditional IRAs do not apply to Roth IRAs prior to the owner’s death.

Payroll Deductions

When you pay someone $8.00 an hour, this is just the beginning of what you

actually have to pay out for that employee.

Employer Payroll TaxesEmployer Payroll Taxes

Social Security (FICA) taxSocial Security (FICA) taxState unemployment compensation taxState unemployment compensation taxFederal unemployment compensation taxFederal unemployment compensation tax

I want your money

Salary ExpenseSalary Expense

Salary Expense to the employer is the Salary Expense to the employer is the gross salary of all employees. gross salary of all employees.

Employees pay their own income and Employees pay their own income and FICA taxes as well as union dues.FICA taxes as well as union dues.

The employer serves as a collecting agent The employer serves as a collecting agent and sends these amounts to the and sends these amounts to the government and union.government and union.

Workmen’s Compensation

The State and Federal governments require that business owners put aside a percentage of each employees income to cover the benefits granted by the government if you are injured on the job. Usually this is about 5% of the employees salary for the first $10,000.

Example:

If your employee earns $10,000, you must pay $500

If your employee earned $34,56, you must pay $172

Unemployment Compensation

Employers pay 5.4% to the states and Employers pay 5.4% to the states and 0.8% to the federal government on the first 0.8% to the federal government on the first $7,000 of each employee’s annual $7,000 of each employee’s annual earnings.earnings.

The state government uses the money to The state government uses the money to pay unemployment benefits to people who pay unemployment benefits to people who are out of work.are out of work.

FICA OASDI

FICA Old Age Survivors and Disability Insurance. FICA OASDI is calculated as your gross earnings times 6.2%. Incomes over $87,000 that have already had the maximum FICA OASDI amount of $5394 withheld will not have additional FICA OASDI withholdings.

FICA Medicare FICA Medicare is calculated as the gross earnings times 1.45%. Unlike FICA OASDI, there is no annual limit to FICA Medicare deductions.

FICA HI Health insurance (FICA-HI)Health insurance (FICA-HI) (1.45% applied (1.45% applied

to all employee earnings)to all employee earnings)

Federal Tax Withholding Calculations Calculate your Federal income tax withholdings by

following these four steps:

1. Take taxable gross wages times pay periods per year to compute your annual wage.

2. Subtract the value of exemptions allowed ($3,000.00 times withholding allowances claimed)

3. Determine annual tax with tables (single and married respectively)

4. The amount of tax is then divided by the number of pay periods per year to arrive at the amount of federal withholding tax to be deducted per pay period.

Calculating Tax Rates – Joint Tax Filing

1997 Example: $00000 - $41,201 15% $41,201 - $99,600 28%

$99,601- $151750 31% $151,751-$270,050 36% $271,051- and up 39.6%

Example: Family Income of $110,000

$41,200 x 0.15% = $ 6,180.00$ 99,600 - $41,200 x 0.28% = $16,352.00$110,000- $99,600 x 0.31%= $ 3,224.00

--------------- $25,756.00

A tax can be progressive, proportional, or regressive.

Progressive taxA tax whose average rate increases as income increases.Proportional taxA tax whose average rate is constant at all income levels.Regressive taxA tax whose average rate decreases as income increases.

Types Of TaxesTypes Of Taxes

SALES TAXES AND EXCISE SALES TAXES AND EXCISE TAXESTAXES

How Taxes Work: How Taxes Work:

The division of the burden of a tax between the buyer The division of the burden of a tax between the buyer and the seller.and the seller.

If the price rises by the full amount of the tax, then the burden If the price rises by the full amount of the tax, then the burden of the tax falls entirely on the buyer. of the tax falls entirely on the buyer.

If the price rises by a lesser amount than the tax, then the If the price rises by a lesser amount than the tax, then the burden of the tax falls partly on the buyer and partly on the burden of the tax falls partly on the buyer and partly on the seller. seller.

If the price doesn’t change, then the burden of the tax falls If the price doesn’t change, then the burden of the tax falls entirely on the seller.entirely on the seller.


With no tax, the price of a With no tax, the price of a

CD player is $100 and 5,000 CD player is $100 and 5,000

CD players a week are bought.CD players a week are bought.

A $10 tax on CD players shifts the supply curve to S + tax.

Figure 8.1 shows the effects of a tax on CD players.


3.3. The price rises to The price rises to $105—an increase $105—an increase of $5 a CD player.of $5 a CD player.

5. Sellers receive $95—a decrease of $5 a CD player.

4. The quantity decreases to 2,000 CD players a week.


The governmentThe governmentcollects tax revenuecollects tax revenueof $20,000 a weekof $20,000 a weekthe purple rectangle.the purple rectangle.

The burden of the tax is split equally between the buyer and the seller— each pays $5 per CD player.

Trimming salary increases

Reducing number of employees

Hiring more part-time or seasonal employees without benefits

Shifting medical costs to employees

Changing to higher deductibles

Increasing co-pays

Cutting benefits for future retirees

Payroll Accounting SystemPayroll Accounting System

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Interest Payments

Simple Interest – A one time fee paid at the end of a lending contract

Discount Interest – A one time fee paid at the beginning of a lending contract

Compound Interest – a fee calculated as a series of payments made at regular intervals during a contract

Investment: The Law Of Seventy

Any investment that earns interest will double in size over a given interval. The doubling time of any investment can be found by dividing the percent annual interest rate into 70.

Doubling Time = 70----------------------------Percent Interest Rate

Example: An investment earning 7% will double in 70 / 7 = 10 Years, ….. And at 14%, 70/14 = 5 Years!

Amortization Schedule

The schedule needed to Kill off the loan.

Equity = Current Market Value – Unpaid Mortgage Value

Points = An up-front, pre-paid interest payment to the bank, in return for a lower interest rate over the life of the loan. 1 Point = ¼ % reduction most years.

Property Taxes

Tax is assessed at a stated millage per $1000of Fair Market Value of the property.

Assessment varies by community

Homestead Exemption Rates may apply. Only 40%Of the Fair Market Vale is assessed for Taxes

School Exemptions (10,000)County Exemptions (10,000)

Athens Property Taxes Millage Rate

State Tax 0.25%Athens Clarke Co M&O 20.8%School M&O 19.25%

Taxes May Be Paid Through A Mortgage Escrow Acct.

Local Example

Fixed Rate Vs Variable Rate Mortgages

Fixed Rate has a permanent Rate for life of loan

Variable Rate floats based upon the Prime Rate

Be sure to ask for a Life Of The Loan Cap!

Depreciation

Current Assets are taxed!

Because assets such as durable goods wear outThey depreciate in value with use. Most depreciation occurs in the first few years ( New Cars!) You can reportThis to the IRS and save money!

Straight Line Depreciation:Initial Cost - Salvage Value

Yearly depreciation = --------------------------------- Estimated Life of Unit

Sum of Years Digits Method – Complicated !

Double Declining Balance Method – Even Worse !!!

Units of Production Method – Based upon miles driven or units produced by a machine.

A $300,000 welding machine has a salvage value of $60,0001st year use: 100,000 welds / 400,000 lifetime welds = 25%A $240,000.00 machine would be depreciated 25% = $60,000

Depreciation Methods

A means of identifying where you are today…

What are your objectives for growth while actively working\

in the business…

And a written plan for the sale or succession of your business

Exit Strategy

Conservatively, 2 out of every 3 family businesses will not survive to the second generation!

Many of these failures are due to poor or no business succession planning.

1. My business will have significant value, whether or not I am involved.Yes or No

2. I am prepared to consider transferring ownership of my business Yes or No

3. I am prepared to consider transferring control of my business lifetime. Yes or No

4. I need the cash flows from the business to support my future life-style.Yes or No

5. My spouse’s financial security is not tied to the future success of the business.Yes or No

6. There is a logical successor to me in the management of the business.Yes or No

7. I believe that ownership interests should be limited to active officers. Yes or No

8. My estate is sufficiently diversified so that inactive children may be fairly treated, compared with those receiving business interests. Yes or No

9. It is very important to me that the transition of my business be orderly.Yes or No

10. My key employees are comfortable with my plans for business continuation and will therefore plan to stay with my firm - rather than seeking more secure employment. Yes or No

11. Death taxes (equal to 50% of my estate) will not interfere with my plans for business continuation and family equity. Yes or No

12. I want my succession plan to be as patriotic as possible (I.e. generate the maximum taxes to support government programs). Yes or No

Succession Planning for the owner of the family business creates family dilemmas and difficult financial decisions.

In the real world, complexities require compromise and often defy EASY solutions:• What if Dad’s pension plan is inadequate or not completely funded?

• What if Dad looks at the Florida condo as his coffin?

• What if the child is skilled, but a nerd? Charming, but a dope?

• What if there are two children?

• smart/smart

• smart/dumb

• active/inactive

• get along/don’t speak

Running A Greenhouse BusinessIs Really Complicated!

Documents

Employee Benefits, Insurance Payroll Deductions And Taxes