As businesses look to maximize their financial strategies, understanding payroll fringe addbacks is crucial, especially for S corporations. These addbacks can significantly impact taxable income and the overall financial health of a company. This article serves as a reminder for employers to navigate payroll fringe addbacks effectively, particularly concerning S corporation shareholder addbacks. What are year-end payroll (fringe) addbacks? Payroll addbacks refer to certain fringe benefits that must be added back to an employee's or shareholder's income when calculating taxable income for the business. While these benefits provide value to employees, they can also affect tax liabilities for S corporations and their shareholders. Common fringe benefits that may require addbacks include: Health insurance premiums: Premiums paid for health insurance can sometimes be added back for S corporation shareholders. Personal use of company vehicles: If an employee or shareholder uses a company vehicle for personal purposes, the value of that use may need to be added back. Life insurance premiums: Premiums for life insurance policies may also require an addback, particularly if the company is the beneficiary. S corporation shareholder addbacks For S corporations, the tax treatment of shareholder benefits can differ from that of regular employees. Shareholders must be aware of specific addback rules that can impact their personal tax situations. Here are key considerations: Health insurance premiums: If an S corporation pays for a shareholder’s health insurance, the premiums must be reported as income on the shareholder’s personal tax return, but some shareholders are also eligible for an above-the-line deduction. This means the amount is added back to the corporation's income when calculating pass-through taxation. Distributions vs. salary: S corporation shareholders should be cautious about how they categorize their earnings. Distributions are not subject to self-employment tax, while salaries are. Misclassifying payments can lead to addbacks and tax complications. Employee vs. shareholder benefits: Distinguishing between benefits provided to employees versus those provided to shareholders is crucial. Some benefits may qualify as legitimate business expenses for employees but could require addbacks for shareholders. Why are addbacks important? Understanding payroll fringe addbacks is essential for several reasons: Tax compliance: Incorrectly reporting benefits can lead to IRS scrutiny and potential penalties. Employers must ensure they comply with tax laws to avoid complications. Accurate financial reporting: Addbacks can affect the taxable income reported by the S corporation, impacting both the corporation’s tax liabilities and the shareholders' personal tax situations. Strategic planning: Recognizing which benefits require addbacks allows employers to structure their compensation packages more strategically, minimizing tax liabilities while still providing attractive benefits. Best practices for managing payroll fringe addbacks Educate shareholders and employees: Ensure that all employees, particularly S corporation shareholders, understand the implications of payroll fringe benefits and addbacks. Clear communication can prevent misunderstandings and tax issues. Maintain accurate records: Keep detailed records of all fringe benefits provided to employees and shareholders. This documentation will be essential for tax filings and audits. Consult tax professionals: Given the complexity of payroll fringe addbacks, it’s advisable for employers to consult with tax professionals or accountants who specialize in S corporations. They can provide tailored advice and ensure compliance with tax laws. Review benefits regularly: Periodically assess your benefits offerings and the associated addbacks. This review can help you make informed decisions that align with your business goals and tax strategy. Payroll fringe addbacks are an important consideration for employers, especially those operating as S corporations. Understanding which benefits require addbacks and how they affect taxable income is crucial for compliance and strategic financial planning. By educating shareholders and employees, maintaining accurate records, and consulting with tax professionals, employers can effectively navigate the complexities of payroll fringe addbacks. Taking these steps not only ensures compliance but also fosters a more transparent and informed workplace, ultimately contributing to the long-term success of the business. 

Baker Tilly Advantage

Human Capital

Payroll, Time Tracking & Leave of Absence 

Year-end payroll addbacks: A reminder for employers

Managing payroll can be a complex task for employers, especially when it comes to navigating payroll taxes. These taxes are crucial for funding social programs and ensuring compliance with federal and state regulations. However, a variety of pitfalls can arise that may lead to financial penalties or legal issues. Here are some common payroll tax hang ups that employers should be aware of and proactive in addressing. Failing to withhold and remit taxes Employers are responsible for withholding federal income tax, social security, Medicare and, in some cases, state and local taxes from employees’ wages. Failing to accurately withhold and remit these taxes can result in significant penalties. It’s essential for employers to stay informed about tax rates and changes to legislation, as well as to use reliable payroll software or services that ensure compliance.   Ignoring state and local payroll taxes While many employers focus on federal tax obligations, state and local payroll taxes can often be overlooked. Each state has its own tax regulations, which can include unemployment insurance, disability insurance and income tax withholdings. Failing to comply with these requirements can lead to fines and increased scrutiny from tax authorities. Multi-State taxation, traveling and remote employees With the rise of remote work and travel for employees, multistate taxation has become a significant concern for employers. Each state has different tax laws and employees working in multiple states may create complexities in payroll tax compliance. Employers must determine where employees are performing their work and understand the tax implications in those jurisdictions. This may involve registering in multiple states, withholding the correct taxes and filing appropriate tax returns. Failing to comply with multistate tax requirements can result in audits and penalties, making it crucial for employers to seek guidance on these issues and implement robust tracking systems. Changes in tax laws and regulations Tax laws are subject to change and staying informed can be a challenge for many employers. New regulations may affect withholding rates, tax credits, or reporting requirements. Employers should establish a process for monitoring tax law changes, which may include subscribing to industry newsletters, consulting with tax professionals, or attending relevant training sessions. Deadlines and Filing Requirements Each payroll tax has specific deadlines for filing and payment. Missing these deadlines can lead to interest and penalties. Employers should create a calendar with all critical tax dates, ensuring that payroll departments are aware of these timelines. Utilizing payroll software that automatically tracks deadlines can also help prevent oversight. Lack of Employee Education Employees may not fully understand their payroll tax deductions or how their taxes contribute to social programs. This lack of understanding can lead to dissatisfaction or confusion, especially during tax season. Employers can foster transparency by providing resources and holding informational sessions that explain payroll deductions and the overall tax process. Penalties  The IRS, the states, and the various localities assess significant penalties for the smallest payroll oversight.  Each governmental agency has its own penalty assessment statutes.  Penalties can be significant.  Navigating payroll tax issues requires diligence and a proactive approach. By being aware of these common hang ups, employers can mitigate risks, avoid penalties all the while ensuring compliance with tax regulations. Implementing robust payroll systems, staying informed about legislative changes and fostering a culture of transparency will not only safeguard the business but also enhance employee satisfaction and trust. Taking the time to address these issues will ultimately lead to smoother payroll processes and a more compliant workplace. 

Multistate Payroll & HR Compliance Management

Navigating payroll tax issues: Common hang ups for employers

Employers and payroll professionals face complex challenges with state income tax withholding and labor law compliance in remote and hybrid work setups. Clear policies, effective communication, and leveraging technology are key to navigating these issues.  Read more insights from Kim Wylam, managing principal of Baker Tilly's human capital consulting practice, and Timothy Beary, state and local tax (SALT) principal, on how organizations can overcome these obstacles in Thomson Reuters. Read the article

Employers and payroll professionals face complex challenges with state income tax withholding and labor law compliance in remote and hybrid work setups.

Compliance

State & Local Tax

Accounting Firm Leaders Discuss Challenges/Benefits of a Remote Workforce

The Department of Labor recently announced new overtime rules for workers that will go into effect July 1. As these changes quickly approach, it's crucial for employers to stay informed and proactive. Deanna Kempinski, with Baker Tilly’s HR consulting team, highlights a key aspect that often gets overlooked: the duties aspect of overtime eligibility.

Back to Basics: What to do when salaried employees fall below the new overtime threshold

The Department of Labor’s (DOL's) new salary threshold for exempt workers goes into effect July 1, and it’s crucial that employers prepare for these changes now. Baker Tilly's Deanna Kempinski shares five questions employers must consider to ensure they are in compliance with these rules. Read the article

Baker Tilly's Deanna Kempinski shares five questions employers must consider to ensure they are in compliance.

New exempt salary thresholds: 5 questions savvy employers need to consider

Human resources (HR) professionals may have noticed some stabilization of the labor market during 2023, but that doesn’t mean the introduction of legislative and regulatory requirements has followed suit. Remote work has brought the issues of fair pay, equity and pay transparency to the top of the priorities list for HR professionals. Add on the layer of multistate compliance for many employers, and the challenge to remain compliant becomes even more complex. Baker Tilly Vantagen senior manager, Deanna Kempinski, authored an insightful article for HR.com around the state of fair pay and how to navigate the regulatory challenges that come with it. Some of the points shared in the article include: The roles of communication and process The cost of denial: fines and penalties Pay equity solutions

Regulatory and legislative requirements remain increasingly complex and remote work brings the issue of fair pay, equity and pay transparency to the forefront.

Multistate payroll and HR compliance management

U.S. labor trends: the state of fair pay, equity and transparency

A little more than three years ago, everything changed about the way we live and work.  One day, we were talking face-to-face with our friends and family. The next day, we were six feet apart. Masks quickly became a staple of our everyday lives. And the idea of going to restaurants, schools and stores suddenly became more of a fantasy than a reality.  Additionally, there was a massive shift in the way we work. The COVID-19 pandemic rattled everything we knew about our jobs – not only the location from which most of us worked, but also the way we communicated with coworkers, the use of technology to do our jobs, and many other aspects, including the way we attract, hire and retain employees.  These changes were presented as short-term realities at the time, although we now realize that many of these adjustments are here to stay – or, at the very least, they are going to stick around for longer than we originally expected.  While the idea of working remotely existed prior to the arrival of COVID-19, the pandemic certainly brought the concept front and center for many employers as it emerged as a national issue. It quickly became obvious that the way we work was changing and that companies were going to have to swiftly adapt to keep up. The HR and payroll perspective  One of the most significant shakeups to the way we work has taken place within the human resources and payroll departments of companies, both large and small, throughout the U.S.  In the spring of 2020, organizations had to quickly figure out how to interview applicants without meeting them in person. As a result, HR was screening a pool of applicants from different states, including locations that in many cases had never been on their hiring radar previously.  Of course, multistate employment has always existed – particularly at larger companies with many locations – but starting three years ago, an even larger number of organizations found themselves discussing the possibility and practicality of remote work in other states. Companies began recruiting outside of their immediate geographic regions for positions that could be performed from an alternate location. Existing employees who could or were required to work from home, began setting up their offices and in some cases, changing their addresses. Needless to say, internal changes needed to be made to support this multi-location workforce. The idea that an organization in Florida can simply hire a remote worker from California isn’t so simple. It’s easy to say, “You’ve got the job.” But it’s not so basic, from an HR benefits and payroll perspective, to quickly add an employee from across the country. There is a lengthy list of complications within those key areas, and until recently, there was no centralized resource for finding information about HR and payroll compliance for all 50 states. What HR and payroll professionals need to know At the start of the pandemic, companies were reactive to the challenges that emerged on almost a daily basis. The shift in how we worked arrived seemingly overnight, and HR and payroll leaders had to figure out multistate compliance issues in a hurry. This overnight shift was more than three years ago and organizations must now take proactive steps to ensure they are prepared to hire employees from multiple states. That means HR and payroll professionals need to have easy access to the employment rules and regulations that apply in every state from coast to coast. They need to be prepared for a potential hire in California, Florida, New York and everywhere in between. Of course, that doesn’t mean that organizations should not hire people from other states; rather, they just need to be prepared for the possibility and the potential impact upon their compliance requirements, because if they don’t the cost for noncompliance can be staggering. Key HR multistate compliance considerations include: General employment requirements Benefits Equal employment opportunity HR administration Leave of absence/time off Wage and hour Unemployment compensation Additionally, from a payroll perspective, there is a need to understand state and local regulations concerning: Tax and withholding Registrations Required tax forms Unemployment insurance Workers’ compensation Digging deeper into a couple of specific examples, HR leaders need to understand each state’s specific regulations around leave (parental leave, personal leave, paid family leave, etc.). And they need to know whether pre-employment testing is permissible for new hires in their organizations.   Payroll departments must understand what is required of employers in terms of filings, payments and rules for employees who work out-of-state. Who needs to be reported and who is exempt? When and how do they need to file? What local or other taxes need to be considered in addition to federal and state taxes? There are typically no uniform rules for all 50 states. Regulations can vary significantly, and there is generally no flexibility when payroll rules are violated or misinterpreted.  Introducing Baker Tilly’s Employer State Compliance Roadmap Given the major changes to the way we work, and the hiring landscape in particular, Baker Tilly is proud to introduce our Employer State Compliance Roadmap. The Roadmap provides access to HR and payroll compliance information through an easily accessible and searchable state-by-state database, bringing everything together in one convenient location. Through quarterly updates, organizations will be kept informed of HR and payroll regulatory changes across all 50 states.  We want organizations to feel confident hiring and onboarding qualified candidates in any state – without struggling to understand confusing regulations or worrying about notices, penalties, interest and audits because of inadvertent mistakes. The Roadmap will save you time, energy and money. It will help your organization adapt to the new way of working and be strategic in your decisions on where to recruit and hire new employees. It will keep you compliant and avoid fines and penalties. For more information about the Roadmap, click here. And to discuss how it can change the way you work, contact us. 

Confidently manage your organization's HR and payroll compliance needs.

Managing multistate HR and payroll compliance for today’s remote workforce

Today's global economy and workforce require organizations to stay current on ever changing payroll, time and absence management requirements, while maintaining the ability to pay and monitor employee time with the highest level of precision. 

In many instances, companies find themselves going to great lengths to ensure accurate payroll, time and leave tracking. This effort is compounded by global regulations and geographical differences.

Baker Tilly's Human Capital consulting team can help you develop a consistent and efficient strategy for deploying payroll, time tracking and absence management policies, as well as rules and processes to administer the critical functions to pay employees, track absenteeism and monitor their time.

Coming out of the last recession, companies were asking lots of questions. With those questions now answered, organizations want to execute against these strategies for growth.

Why should organizations care about their human capital today?

Baker Tilly Human Capital consultants develop consistent and efficient strategies for deploying payroll, time tracking and absence management policies.

Ann Blakely is the managing principal of Baker Tilly’s digital solutions practice.

As managing principal of Baker Tilly Vantagen, Kim has created the overall vision, which is focused on bringing human resource strategies in a customized fashion to our clients.

Baker Tilly’s human capital consulting teams help organizations leverage the most updated approaches and latest technologies to reshape the employer/employee relationship, driving success and business returns. 

Baker Tilly’s human capital consulting teams help organizations leverage the latest technologies to reshape the employer/employee relationship.

Every day, companies are aware of the pressure and need to attract, retain and motivate top talent, but struggle to understand how to develop effective strategies and launch initiatives that will engage their workforce. 

Baker Tilly’s experienced benefits and compensation consultants develop holistic benefits and compensation strategies that can be executed globally.

It is important for any organization, large or small, to continue to fine-tune its human resources capabilities by way of training and compliance education.

Baker Tilly offers many compliance training programs that are designed to communicate laws and guidelines in an effective and concise manner.

With the increasing pace of business and economic change, companies are challenged to remain nimble in managing the workforce required to achieve an evolving strategy.

Baker Tilly Human Capital consulting can help establish a foundational infrastructure to alleviate administrative burdens from legacy HR process and systems.

Baker Tilly’s human resources information systems (HRIS) consultants leverage the power of HCM Cloud technology and drive value from your technology investment.

HR departments are expected to provide efficient and effective human capital management services to their employees. What’s the best model for delivering HR services in your organization?

HR  departments are expected to provide efficient and effective human capital   management services to their employees. What’s the best model for delivering HR services in your organization?

Through collaboration, the expatriate tax specialists of Baker Tilly and the employee benefits and human resources specialists at Baker Tilly provide a full-service offering to international businesses.

Baker Tilly assists organizations looking to expand to international markets by offering turn-key growth strategies that typically have them operating abroad within 12 months.

Baker Tilly’s human capital consultants design and build tailored sourcing, recruiting, and onboarding solutions to reduce new hire time to productivity.

Having a culture of high performance, development opportunities and a full view of your talent plays a significant role in achieving both organizational and employee goals.

Aligning the business strategy to individual performance, while anticipating your organization’s future talent needs is fundamental to talent management.

Payroll, Time Tracking & Leave of Absence

Year-end payroll addbacks: A reminder for employers

Navigating payroll tax issues: Common hang ups for employers

Accounting Firm Leaders Discuss Challenges/Benefits of a Remote Workforce

Back to Basics: What to do when salaried employees fall below the new overtime threshold

New exempt salary thresholds: 5 questions savvy employers need to consider

U.S. labor trends: the state of fair pay, equity and transparency

Managing multistate HR and payroll compliance for today’s remote workforce

Human Capital

Benefits & Compensation

Compliance

Employee Management

Human Resources Information Systems

Human Resources Shared Services

International Human Resources

Talent Acquisition

Talent Management

Ann E. Blakely

Kim Wylam

Service Offerings:

Why should organizations care about their human capital today?

Our professionals