Linkd In

Kristen Matkowsky, CPA

Gold Gerstein group LLC a South Jersey CPA firm with offices in Moorestown and Voorhees New Jersey is pleased to announce that Kristen Matkowsky, CPA will assume the position of Manager effective September 1, 2020.

Kristen has been with the firm for 12 years and specializes in tax, accounting and business valuation/litigation support services. Kristen has attained the QuickBooks Online ProAdvisor Certification and heads up the Small Biz Guru division.

IRS Tax Deadline Extensions

IRS extends more tax deadlines to cover individuals, trusts, estates corporations and others

To help taxpayers, the Department of Treasury and the Internal Revenue Service announced today that Notice 2020-23 extends additional key tax deadlines for individuals and businesses.

Last month, the IRS announced that taxpayers generally have until July 15, 2020, to file and pay federal income taxes originally due on April 15. No late-filing penalty, late-payment penalty or interest will be due.

Today’s notice expands this relief to additional returns, tax payments and other actions. As a result, the extensions generally now apply to all taxpayers that have a filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020. Individuals, trusts, estates, corporations and other non-corporate tax filers qualify for the extra time. This means that anyone, including Americans who live and work abroad, can now wait until July 15 to file their 2019 federal income tax return and pay any tax due.

Extension of time to file beyond July 15

Individual taxpayers who need additional time to file beyond the July 15 deadline can request an extension to Oct. 15, 2020, by filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. Businesses who need additional time must file Form 7004. An extension to file is not an extension to pay any taxes owed. Taxpayers requesting additional time to file should estimate their tax liability and pay any taxes owed by the July 15, 2020, deadline to avoid additional interest and penalties.

Estimated Tax Payments

Besides the April 15 estimated tax payment previously extended, today’s notice also extends relief to estimated tax payments due June 15, 2020. This means that any individual or corporation that has a quarterly estimated tax payment due on or after April 1, 2020, and before July 15, 2020, can wait until July 15 to make that payment, without penalty.

Coronavirus Aid Relief and Economic Security (CARES) Act

Coronavirus Aid Relief and Economic Security Act (CARES Act) Paycheck Protection Program Information:

In addition to the expansion of the Economic Injury Disaster Loan (EIDL) Program enacted in earlier Coronavirus relief legislation the federal government has, through the passage of the CARES Act, expanded the Small Business Administration (SBA)’s 7(a) Loan Program and created the Paycheck Protection Program (PPP). Between February 15, 2020 and June 30, 2020, the new law allows the SBA to provide a total of $350 billion in loans to eligible small businesses. A direct comparison of the two programs can be seen below this overview.

Eligible small businesses include most businesses, not-for-profits, veteran’s organizations, and tribal organizations with 500 or fewer employees. The purpose of these loans is to help pay operational costs such as payroll, rent, health benefits, insurance premiums, utilities, etc. Loan amounts can be forgivable, subject to certain conditions, and the forgiven amounts, for federal tax purposes, are excludable from gross income. The following is an overview of the new Paycheck Protection Program.

Loans made under the Paycheck Protection Program will have a maximum interest rate of 4% and a maximum loan amount of the lesser of $10 million or 2.5 times the average total monthly monthly payroll costs for the one-year period before the loan is made, or for seasonal employers, the average monthly payroll costs for the 12 weeks beginning either on February 15, 2019, or from March 1, 2019 to June 30, 2019.

 

These loans will require no collateral or personal guarantee and the lender will have no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment as long as the business uses the loan proceeds only for authorized purposes.

As part of the application process a good-faith certification must be made stating that the loan is needed to continue operations during the COVID-19 emergency; proceeds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments; the applicant does not have any other application pending under this program for the same purpose; and from February 15, 2020 until December 31, 2020, the applicant has not received duplicative amounts under this program.

 

The loan proceeds can be used to pay:

  • payroll costs such as salary, wages, commissions, etc.; paid leave; severance payments; payments for group health benefits; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors up to $100,000 in 1 year, prorated for the covered
  • Group health care benefits during periods of paid sick, medical, or family leave, and insurance
  • Payments of interest on mortgage
  • Rent or lease payments.
  • Utilities
  • Interest on other obligations incurred before February 15, 2020

Payments made in the eight-week period after the loan origination date for covered payroll costs, interest payments on mortgages, rent, and utilities will be forgiven. However, forgiveness amounts will be reduced for any employee cuts. The formula for forgiveness reduction based on employee cuts is:

  • The maximum available forgiveness under the rules described above multiplied by:
  • Average number of full-time equivalent employees (FTEEs) per month during the covered period divided by:

One of the following:

  • Average number of FTEEs per month employed from February 15, 2019 to June 30, 2019; or
  • Average number of FTEEs per month employed from January 1, 2020 until February 29,

Forgiveness is also reduced by an amount equal to any reduction in the total salary or wages of any employee during the covered period that is more than 25% of their compensation during their most recent full quarter of employment before February 15, 2020. This reduction applies only to employees who did not receive during any single pay period during 2019 a salary or wages at an annualized rate of over $100,000.

If you have already reduced your number of employees or reduced your employees’ wages, there is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020.

 

For any amount of the loan that is not forgiven payments will be deferred for a period of at least six months and up to one year. There are also no penalties for early repayment of any amount of the loan not forgiven.

Participation in this loan program can make you ineligible for the employee retention credit and other credits being made available to businesses but does not disqualify you from applying for an EIDL to help cover other expenses not covered by this loan.

This program will be administered through the SBA’s network of approved lender banks. If you have a relationship with an SBA lender already, we recommend reaching out to them as they will have a list of materials they are requiring for consideration for these loans. For more information, assistance in applying for this or other loan and grant programs, or if you have any other questions please contact either the partner or accountant with whom you work.

Additional relief programs for businesses that are too large to benefit from the expanded SBA loan programs will be made available shortly, the CARES Act provided for the development of a program to provide low interest loans to businesses with 500-10,000 employees. As details of these additional programs become available, we will share them with you.

Gold Gerstein Group, LLC

SBA Economic Injury Disaster Loan (EIDL)

Paycheck Protection Program (CARES Act) (PPP)

What Businesses are Eligible?
Small Businesses, Small Agricultural Cooperatives, Aquaculture Businesses, Most Private Non-Profit Organizations Small businesses, Not-For-Profits, Veterans’ Organizations, and Tribal businesses with less than 500 employees.
Who are the Loans Administered Through?
Small Business Administration Directly SBA Authorized Lender
Are Applications Currently Available?
Yes No but anticipated to be available April 6th or before
What is the Loan Application Deadline?
Varies by state but generally December 2020 June 30, 2020
What is the Maximum Interest Rate?
For Profit Businesses 3.75%, Non-Profit Organizations 2.75% 4%
What is the Maximum Loan Amount?
$2,000,000 $10,000,000 (Capped at 2.5 times borrower’s average monthly payroll costs, defined below)
What is the Maximum Repayment Term?
Up to 30 years Up to 10 years
Are There any Collateral Requirements?
Yes None
Is a Personal Guarantee Required?
Yes, for certain loans No
How Long are Payments Deferred?
One year Six months to one year
Is There a Penalty for Pre-Payment?
No No
What can I Use the Loan Proceeds for?
Employee salaries and wages, paid medical or sick leave, insurance premiums, mortgage, rent, or utility payments Payroll costs; Group health benefits during periods of paid sick, medical, or family leave, and insurance premiums; Payments of interest on mortgage obligations; Rent or lease payments; Utilities; Interest on obligations incurred before February 15, 2020
What Amount of the Loan is Forgivable?
None Payments made in the eight-week period after the loan origination date for covered payroll costs, interest payments on mortgages, rent, and utilities will be forgiven. Forgiveness amounts will be reduced for any employee cuts and for reductions in employee salaries.
Can the Businesses Still Qualify for the Employee Retention Credit?
Yes No
Payroll costs are defined as compensation to employees such as salary, wages, commissions, etc.; paid leave; severance payments; payments for group health benefits; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors up to $100,000  per year, prorated for the covered period.
For a more detailed explanation please reach out to the Gold Gerstein Group LLC partner or accountant with whom you work.

Planning for income and deductions can be a challenge post-TCJA

Most of the provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018. But the massiveness of the changes mean that they’re still having a major impact on tax planning.

First, you need to consider that the TCJA reduced the rates for all individual income tax brackets except 35% and 10%, which remain the same, and adjusted the income ranges each bracket covers. These rates apply to “ordinary income,” which generally includes salary, income from self-employment or business activities, interest, and distributions from tax-deferred retirement accounts.

But there are other taxes you need to keep in mind as well, such as the alternative minimum tax (AMT), for which the TCJA provides some relief, and employment taxes, which the TCJA generally doesn’t affect.

You also need to consider the various tax deductions and credits that could save you taxes. The TCJA expands some tax breaks, but it also reduces or eliminates breaks that had been valuable to many taxpayers. And you need to keep in mind that income-based phase-outs and other limits can reduce or eliminate the benefits of these breaks, effectively increasing your marginal tax rate.

The standard deduction vs. itemized deductions

Taxpayers can choose to itemize certain deductions on Schedule A or take the standard deduction based on their filing status instead. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.

The TCJA nearly doubled the standard deduction for each filing status. Those amounts are to be annually indexed for inflation through 2025, after which they’re scheduled to drop back to the amounts under pre-TCJA law. The combination of a higher standard deduction and the reduction or elimination of many itemized deductions means more taxpayers will find that the standard deduction exceeds their itemized deduction. This could have a significant impact on timing strategies.

Timing income and expenses

Smart timing of income and expenses can reduce your tax liability, and poor timing can unnecessarily increase it.

When you don’t expect to be subject to the AMT in the current year or the next year, deferring income to the next year and accelerating deductible expenses into the current year typically is a good idea. Why? Because it will defer tax, which is usually beneficial.

But when you expect to be in a higher tax bracket next year — or you expect tax rates to go up — the opposite approach may be beneficial: Accelerating income will allow more income to be taxed at your current year’s lower rate. And deferring expenses will make the deductions more valuable, because deductions save more tax when you’re subject to a higher tax rate.

Whatever the reason behind your desire to time income and expenses, here are some income items whose timing you may be able to control:
• Bonuses,
• Consulting or other self-employment income,
• U.S. Treasury bill income, and
• Retirement plan distributions, to the extent they won’t be subject to early-withdrawal penalties and aren’t required.

And here are some potentially controllable expenses:
• State and local income taxes,
• Property taxes,
• Mortgage interest,
• Margin interest, and
• Charitable contributions.

Impact of the TCJA on timing strategies

The TCJA makes timing income and deductions more challenging, because some strategies that taxpayers have implemented in the past may no longer make sense. Here’s a look at some significant changes affecting deductions:
Reduced deduction for state and local tax. Property tax used to be a popular expense to time. But with the new limit on the state and local tax deduction, property tax timing will likely provide little, if any, benefit for many taxpayers.

Through 2025, the TCJA limits your entire deduction for state and local taxes — including property tax and either income tax or sales tax — to $10,000 ($5,000 if you’re married filing separately). This is having a significant impact on higher-income taxpayers with large state and local income tax and/or property tax bills.

Individuals generally can take an itemized deduction for either state and local income tax or state and local sales tax. For most taxpayers, deducting state and local income taxes will provide more tax savings. But deducting sales tax can be more valuable to taxpayers residing in states with no or low income tax or who purchase a major item, such as a car or boat.

Except for major purchases, you don’t have to keep receipts and track all the sales tax you actually paid during the year. Your deduction can be determined using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually pay on major purchases.

Suspension of miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses is suspended through 2025. If you’re an employee and work from home, this includes the home office deduction. (If you’re self-employed, you may still be able to deduct home office expenses.)

More-restricted personal casualty and theft loss deduction. Through 2025, this itemized deduction is suspended except if the loss was due to an event officially declared a disaster by the President.

Health care breaks

If medical expenses not paid via tax-advantaged accounts or reimbursable by insurance exceed a certain percentage of your adjusted gross income (AGI), you can claim an itemized deduction for the amount exceeding that “floor.”

The TCJA had reduced the floor from 10% to 7.5% for 2017 and 2018, but it will be 10% when you file your 2019 tax return unless Congress extends the 7.5% floor. (Check back here for updates.)

Eligible expenses may include:
• Health insurance premiums,
• Long-term care insurance premiums (limits apply),
• Medical and dental services,
• Prescription drugs, and
• Mileage (20 cents per mile driven in 2019).
When a deduction is subject to a floor, “bunching” expenses into one year that normally would be spread over two years can save tax. So consider bunching elective medical procedures (and any other services and purchases whose timing you can control without negatively affecting your or your family’s health) into alternating years if it would help you exceed the applicable floor and you’d have enough total itemized deductions to benefit from itemizing.

Also keep in mind that if one spouse has high medical expenses and a relatively lower AGI, filing separately may allow that spouse to exceed the AGI floor and deduct some medical expenses that wouldn’t be deductible if the couple filed jointly. Warning: Because the AMT exemption for separate returns is considerably lower than the exemption for joint returns, filing separately to exceed the floor for regular tax purposes could trigger the AMT.

Expenses that are reimbursable by insurance or paid through a tax-advantaged account such as the following aren’t deductible:

HSA. If you’re covered by a qualified high-deductible health plan, you can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to an HSA you set up yourself — up to $3,500 for self-only coverage for 2019 (up from $3,450 for 2018), and $7,000 for family coverage for 2019 (up from $6,900 for 2018). Moreover, you may contribute an additional $1,000 if you’re age 55 or older.

HSAs can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.

FSA. You can redirect pretax income to an employer-sponsored Flexible Spending Account up to an employer-determined limit (not to exceed $2,700 for plan year beginning in 2019, up from $2,650 for 2018). The plan pays or reimburses you for qualified medical expenses. With limited exceptions, you have to make your election before the start of the plan year. What you don’t use by the end of the plan year, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 2½-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.

Smaller AMT threat

The top AMT rate is 28%, compared to the top regular ordinary-income tax rate of 37%. But the AMT rate typically applies to a higher taxable income base.

The TCJA has increased the AMT exemptions through 2025. (See the Chart “2019 individual income tax rate schedules.”)

There are now fewer difference between what’s deductible for AMT purposes and regular tax purposes, (see the Chart “Regular tax vs. AMT: What’s deductible?”) which also will reduce AMT risk. However, AMT will remain a threat for some higher-income taxpayers.

So before taking action to time income or expenses, you should determine whether you’re

already likely to be subject to the AMT — or whether the actions you’re considering might

trigger it. Deductions used to calculate regular tax that aren’t allowed under the AMT can trigger AMT liability. Some income items also might trigger or increase AMT liability:

• Long-term capital gains and dividend income, even though they’re taxed at the same rate for both regular tax and AMT purposes,

• Accelerated depreciation adjustments and related gain or loss differences when assets are sold, and

• Tax-exempt interest on certain private-activity municipal bonds.
Finally, in certain situations incentive stock option (ISO) exercises can trigger significant AMT liability.

If you pay AMT in one year on deferral items, such as depreciation adjustments, passive activity adjustments or the tax preference on ISO exercises, you may be entitled to a credit in a subsequent year. In effect, this takes into account timing differences that reverse in later years.

Avoiding or reducing AMT

If your income is high enough that you’re at AMT risk for 2019 or 2020, with proper planning, you may be able to avoid the AMT, reduce its impact or even take advantage of its lower maximum rate. (See the Chart “2019 individual income tax rate schedules.”)

To determine the right timing strategies for your situation, work with your tax advisor to assess whether:

You could be subject to the AMT this year. Consider accelerating income and short-term capital gains into this year, which may allow you to benefit from the lower maximum AMT rate. Also consider deferring expenses you can’t deduct for AMT purposes until next year — you may be able to preserve those deductions (but watch out for the annual limit on the state and local tax deduction).

Additionally, if you defer expenses you can deduct for AMT purposes to next year, the deductions may become more valuable because of the higher maximum regular tax rate. Finally, carefully consider the tax consequences of exercising ISOs.

You could be subject to the AMT next year. Consider taking the opposite approach. For instance, defer income to next year, because you’ll likely pay a relatively lower AMT rate. Also, before year end consider selling any private activity municipal bonds whose interest could be subject to the AMT.

Employment taxes

In addition to income tax, you must pay Social Security and Medicare taxes on earned income, such as salary and bonuses. The 12.4% Social Security tax applies to earned income up to the Social Security wage base of $132,900 for 2019 (up from $128,400 for 2018). All earned income is subject to the 2.9% Medicare tax. Both taxes are split equally between the employee and the employer.

Self-employment taxes

If you’re self-employed, your employment tax liability typically doubles, because you also must pay the employer portion of these taxes. The employer portion of self-employment taxes paid (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line.

As a self-employed taxpayer, you may benefit from other above-the-line deductions as well. You can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You also can deduct contributions to a retirement plan and, if you’re eligible, an HSA for yourself. And you might be able to deduct home office expenses. Above-the-line deductions are particularly valuable because they reduce your AGI and, depending on the specific deduction, your modified AGI (MAGI), which are the triggers for certain additional taxes and the phaseouts of many tax breaks.

Additional 0.9% Medicare tax

Another employment tax that higher-income taxpayers must be aware of is the additional 0.9% Medicare tax. It applies to FICA wages and self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately).

Note that there’s no employer portion of this tax. So unlike the Social Security tax and the regular Medicare tax, the additional Medicare tax doesn’t double for the self-employed. But this also means that no portion of the tax is deductible above the line against self-employment income.
If your wages or self-employment income varies significantly from year to year or you’re nearing the threshold for triggering the additional Medicare tax, income timing strategies may help you avoid or minimize it. For example, if you’re an employee, perhaps you can time when you receive a bonus, or you can defer or accelerate the exercise of stock options. If you’re self-employed, you may have flexibility on when you purchase new equipment or invoice customers. If you’re a shareholder-employee of an S corporation, you might save tax by adjusting how much you receive as salary vs. distributions.

Also consider the withholding rules. Employers are obligated to withhold the additional tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So your employer might withhold the tax even if you aren’t liable for it — or it might not withhold the tax even though you are liable for it.

If you don’t owe the tax but your employer is withholding it, you can claim a credit on your income tax return for the year the tax was withheld. If you do owe the tax but your employer isn’t withholding it, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or you can make estimated tax payments.
Employment taxes for owner-employees

There are special considerations if you’re a business owner who also works in the business, depending on its structure:

Partnerships and limited liability companies. Generally, all trade or business income that flows through to you for income tax purposes is subject to self-employment taxes — even if the income isn’t actually distributed to you. But such income may not be subject to self-employment taxes if you’re a limited partner or an LLC member whose ownership is equivalent to a limited partnership interest. Whether the additional 0.9% Medicare tax on earned income or the 3.8% net investment income tax (NIIT) will apply also is complex to determine. So, check with your tax advisor.

S corporations. Only income you receive as salary is subject to employment taxes and, if applicable, the 0.9% Medicare tax. To reduce these taxes, you may want to keep your salary relatively — but not unreasonably — low and increase the income that is taxed to you through your Schedule K-1 by virtue of your share of the earnings from the business. That income isn’t subject to the corporate level tax or the 0.9% Medicare tax and, typically, is not subject to the 3.8% NIIT. Plus, you may be able to benefit from the Section 199A deduction on the K-1 earnings.

C corporations. Only income you receive as salary is subject to employment taxes and, if applicable, the 0.9% Medicare tax. Nonetheless, you may prefer to take more income as salary (which is deductible at the corporate level) as opposed to dividends (which aren’t deductible at the corporate level yet are still taxed at the shareholder level and could be subject to the 3.8% NIIT) if the overall tax paid by both the corporation and you would be less.

Warning: The IRS scrutinizes corporate payments to shareholder-employees for possible misclassification, so tread carefully.

Estimated payments and withholding

You can be subject to penalties if you don’t pay enough tax during the year through estimated tax payments and withholding. Here are some strategies to help avoid underpayment penalties:

Know the minimum payment rules. For you to avoid penalties, your estimated payments and withholding must equal at least 90% of your tax liability for the year or 110% of your tax for the previous year (100% if your AGI for the previous year was $150,000 or less or, if married filing separately, $75,000 or less). Warning: Watch out for under withholding. See “What’s new! Under withholding may still be a risk.”

Use the annualized income installment method. This method often benefits taxpayers who have large variability in income by month due to bonuses, investment gains and losses, or seasonal income (especially if it’s skewed toward the end of the year). Annualizing computes the tax due based on income, gains, losses and deductions through each estimated tax period.

Estimate your tax liability and increase withholding. If as year-end approaches you determine you’ve underpaid, consider having the tax shortfall withheld from your salary or year-end bonus by December 31. Because withholding is considered to have been paid ratably throughout the year, this is often a better strategy than making up the difference with an increased quarterly tax payment, which may still leave you exposed to penalties for earlier quarters.

Warning: You also could incur interest and penalties if you’re subject to the additional 0.9% Medicare tax and it isn’t withheld from your pay and you don’t make sufficient estimated tax payments.

DOL Releases New Federal Overtime Rule

The U.S. Department of Labor (DOL) has released a final rule to increase the minimum salary required to qualify for certain overtime exemptions. The final rule takes effect January 1, 2020. The DOL estimates that the changes will make about 1.2 million workers newly eligible for overtime, unless employers increase their salaries.

The Fair Labor Standards Act (FLSA) requires virtually all employers to pay most employees at least the federal minimum wage for each hour worked, as well as overtime pay for all hours worked in excess of 40 in a workweek. The FLSA allows for exemptions from these overtime and minimum wage requirements for certain “exempt” administrative, professional, and executive employees. To be considered “exempt,” these employees must generally satisfy specific salary and duties tests:

Meet the minimum salary requirement (currently $455 per week);
With very limited exceptions, the employer must pay the employee their full salary in any week they perform work, regardless of the quality or quantity of the work; and the employee’s primary duties must meet certain criteria.

There is also a special exemption for “highly-compensated employees” who are paid a total annual compensation of at least $100,000 and customarily and regularly perform at least one of the exempt duties of an exempt executive, administrative, or professional employee.

Overtime Rule History:

In 2016, the DOL published a final rule that would have raised the minimum salary requirement for the administrative, professional, and executive exemptions to $913 per week, but a court blocked that rule from taking effect.

On March 7, 2019, the DOL released a proposed rule that would have more modestly increased the minimum salary requirement for these exemptions.

DOL Releases Final Rule Effective January 1, 2020:

Minimum Salary Requirement:

Effective January 1, 2020, the minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions will increase from $455 per week to $684 per week (equivalent to $35,568 per year).

This means that in order to qualify for an administrative, professional, and executive exemption from FLSA’s overtime requirements, employees must be paid a weekly salary of at least $684 and continue to satisfy the applicable duties tests. Exempt computer employees may also be paid hourly, if it is at least $27.63 per hour, which doesn’t change under the new rule.

Inclusion of Nondiscretionary Bonuses in Minimum Salary Requirement:

Beginning January 1, 2020, employers will be allowed to use nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least annually.

The final rule permits employers to make a final “catch-up” payment within one pay period after the end of year to bring an employee’s compensation up to the required level. For example, if an employer chooses this option, each pay period, the employer must pay their exempt executive, administrative, or professional employee at least 90 percent of the salary level ($615.60 per week). Then, if at the end of year, the employee’s paid-out salary plus the nondiscretionary bonuses and incentive payments (including commissions) does not equal at least $35,568, the employer would have one pay period to make up for the shortfall.

Highly Compensated Employee Exemption:

The final rule increases the total annual compensation requirement for the “highly compensated employee” exemption to $107,432 per year (at least $684 must be paid on a weekly salary basis).

For the highly compensated employee exemption, employers are already allowed to include commissions, nondiscretionary bonuses, and other nondiscretionary compensation toward meeting the total annual compensation requirement, but there is no 10 percent cap like the other exemptions. This won’t change under the new rule. Thus, as long as the employer pays the employee at least $684 on a weekly salary basis, the employer will be able to count these other forms of compensation toward meeting the minimum total compensation requirement ($107,432 per year).

No Changes to Duties Tests:

The DOL didn’t make changes to the duties tests.

Future Minimum Salary Increases:

The DOL intends to update the minimum salary requirements more regularly, using the same rulemaking process, which involves publication in the federal register and an opportunity for public comment.

Compliance Recommendations:

Employers should evaluate the potential impact on their business now. This includes identifying those employees who currently earn less than $35,568 annually and are exempt from overtime. If your exempt employees fall below the new salary threshold, you would have two options:

Reclassify the employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek; or raise their salary to meet the new requirement.

Note: Some states have their own salary requirements that already exceed the new federal rule. Some other states may decide to increase their salary thresholds based on the new federal rule. Review both federal and state law to determine whether an employee may be classified as exempt from overtime. If an employee is covered by both the federal and state law but doesn’t meet both sets of tests, consult with counsel to determine how you should classify the employee in that particular situation.

Find Out More About G3CPA