FICA HI Health insurance

Employee Benefits, Insurance
Payroll Deductions
And Taxes
Warning: This Is One
Very Scary Lecture !
By Paul A. Thomas
The University of Georgia
Vacation Pay
Most companies grant paid vacations to
their employees.
 Employees earn the benefit by working.
 Vacation pay must be accrued over the
period in which it is being earned.
Sick Leave Accruals
 Maximum accrual 200 days
Good news:
if you retire from state service,
accrued sick leave helps pay for
your 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 retirement
on 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
10 years of full-time service credit
Can request refund of contributions
after you leave (if under 10 years)
Years of Service
Non-forfeitable %
Death Benefits
Remember, the extent of the death benefits
often affects the overall cost of the plan.
Choose beneficiaries
Maximum: 3 times salary
Minimum: 1/2 salary or $10,000
(whichever is less)
Survivor’s Benefit Program
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
2003 Bi-weekly Cost
Empire Plan
Participating dentist:
full coverage
Non-participating dentist:
partial reimbursement on a fee schedule
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 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 Bonds
Payroll deduct any amount
toward purchase
When purchase price is reached,
bond is issued
National Bond and Trust Co.
• 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 /
Prescription Drugs
Most sought after benefit!
Legislation is Changing!
Prescriptions may be included in
health insurance plan
Individual / family coverage
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 Considerations
Medical Assistance
 Police Department & Security
 Fire Department
 Neighborhood Conditions - Is it changing?
Basic Stock Bonus Plans
This is a defined contribution plan that provides
for employee benefits in the form of employer
stock unless the employee elects to receive
“Employer contributions need not be dependent on employer’s
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
sharing plans, there must be a definite predetermined formula for
allocating contributions among participants, but no formula for
determining the amount of overall contributions is required.”
Reg. 401-1(b)(1)(iii).
Basic Stock Bonus Plans
Advantages of Stock Bonus Plans:
 No cash flow drain on corporation since it usually
contributes its own stock rather than cash. The stock
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
stock, with no gain or loss recognized by the employer
on the excess market value over cost.
 If employees receive stock, the tax on its appreciation
is deferred until its taxable sale. If employees receive
cash, then they are taxed upon distribution.
Employee Stock Ownership Plans (ESOPs)
This is a stock bonus trust that is tax exempt
under Code Sec. 401(a). Technically, it is a
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
Roth IRAS—
Comparison with Traditional IRAs
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 a traditional IRA are taxed when withdrawn.
 Contributions to a Roth IRA are never tax deductible; contributions to a
traditional IRA may be tax deductible.
 The owner of a Roth IRA has penalty-free access to contributions (but
not to accumulated earnings), at anytime.
 Individuals with earned income cannot contribute to traditional IRAs
beginning in the year they reach age 70½. Age is not a restriction for
Roth IRA contributions.
 The minimum distribution and incidental death benefit rules that apply
to traditional IRAs do not apply to Roth IRAs prior to the owner’s
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 Taxes
Social Security (FICA) tax
 State unemployment compensation tax
 Federal unemployment compensation tax
I want your
Salary Expense
Salary Expense to the employer is the
gross salary of all employees.
 Employees pay their own income and
FICA taxes as well as union dues.
 The employer serves as a collecting agent
and sends these amounts to the
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.
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
0.8% to the federal government on the first
$7,000 of each employee’s annual
The state government uses the money to
pay unemployment benefits to people who
are out of work.
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
Health insurance (FICA-HI) (1.45% applied
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
Calculating Tax Rates – Joint Tax Filing
1997 Example: $00000 - $41,201
$41,201 - $99,600
$99,601- $151750
$271,051- and up
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
Types Of Taxes
A tax can be progressive, proportional, or
A tax whose average rate increases as income
Proportional tax
A tax whose average rate is constant at all
income levels.
Regressive tax
A tax whose average rate decreases as income
How Taxes Work:
The division of the burden of a tax between the buyer
and the seller.
If the price rises by the full amount of the tax, then the burden
of the tax falls entirely on the buyer.
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
If the price doesn’t change, then the burden of the tax falls
entirely on the seller.
Figure 8.1 shows the
effects of a tax on CD
With no tax, the price of a
CD player is $100 and 5,000
CD players a week are bought.
A $10 tax on CD players shifts
the supply curve to S + tax.
3. The price rises to
$105—an increase
of $5 a CD player.
4. The quantity decreases
to 2,000 CD players a
5. Sellers receive $95—a
decrease of $5 a CD
The government
collects tax revenue
of $20,000 a week
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 System
Record Hours
Worked or
Units Produced
Compute Gross
Pay, Deductions,
and Net Pay
Complete Payroll
Payroll Ded
Update Emp
Payroll in
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
---------------------------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 $1000
of 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)
Local Example
Athens Property Taxes
State Tax
Athens Clarke Co M&O
School M&O
Millage Rate
Taxes May Be Paid Through A Mortgage Escrow Acct.
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!
Current Assets are taxed!
Because assets such as durable goods wear out
They depreciate in value with use. Most depreciation
occurs in the first few years ( New Cars!) You can report
This to the IRS and save money!
Depreciation Methods
Straight Line Depreciation:
Yearly depreciation =
Initial Cost - Salvage Value
--------------------------------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 $60,000
1st year use: 100,000 welds / 400,000 lifetime welds = 25%
A $240,000.00 machine would be depreciated 25% = $60,000
Exit Strategy
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
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
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
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
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?
• active/inactive
• What if there are two children? • get along/don’t speak
• smart/smart
• smart/dumb
Running A Greenhouse Business
Is Really Complicated!