Paying Tax on Insurance Premiums and Benefits

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Being aware of your tax situation and where you can avoid paying it could bring considerable savings to both individuals and businesses.

Insurance is a necessity because it protects you from uncertainty. Without this safety net in place, you could end up with out-of-pocket expenses that take you a lifetime to repay. With apologies to Benjamin Franklin, “death and taxes” are the only certainties in life.

But there is undoubtedly a way to minimize the latter part of that idiom. Specific tax considerations go hand-in-hand with insurance premiums and benefits, and you’ll want to learn where you can avoid paying tax and where it’s a requirement.

Tax savings are available to both individuals and businesses that depend on the type of insurance. So let’s look at the ways you might save on your next tax bill:

Tax savings for employees

On a personal level, learning how your taxes and insurance policies are connected can save you money now and in the future.

When it comes to employer-paid life insurance, the premiums paid on these policies count as taxable income, but only if the plan covers an individual for over $50,000. When a policy becomes larger than that number, the premiums are exposed to federal taxation for the excess.

If you have disability insurance, things are a little more complicated, and you’ll have to consider your options carefully. The gist is that self-employed individuals can deduct insurance premiums on policies that cover business overhead while sick or disabled, but not on policies that cover lost wages.

In addition, if you deduct your overhead-covering premiums from your taxes, the benefits you receive become taxable income. If you don’t deduct the premium, however, the benefits aren’t taxable. Carefully decide whether or not to deduct your insurance premiums based on your situation.

Disability benefits are also taxable if your employer pays for your disability insurance. Basically, if you get sick and receive disability benefits, you’ll pay income tax on them.

From a healthcare standpoint, employees who don’t have access to group health coverage can fund a healthcare savings account and receive tax savings. Through this account, you can put tax-deductible money away for medical expenses and then withdraw it, tax-free, when you need it. This policy is like investing in personal medical insurance, and you get tax benefits along with it.

There are many ways for individuals to use insurance for tax benefits, so make sure you’re up to date on the latest rules and regulations to maximize your savings.

Business insurance tax considerations

Things are a little more complicated when buying business insurance, and tax savings (and penalties) could come in various ways.

Multinational insurance

For starters, if you have a global presence, you’ll likely want a policy in every country where you have operations, so it’s consistent with local insurance regulations and tax law.

These insurance considerations are also essential for taxes because if you go with a U.S.-based insurance company that isn’t licensed to insure you in a foreign country, the IRS could view any reimbursement you see as taxable income. Depending on your organization’s configuration and the amount of your payout, you could be on the hook for paying up to 21% on this income.

You could also have to pay taxes or financial penalties in the country where the loss occurred, putting you even further in the hole.

As a rule, you should purchase an insurance policy in every country in which you’re operating to avoid these tax problems if you need to file a claim.

Loss of key personnel

You can protect all kinds of things with business insurance, including the loss of key personnel. The idea is that if an influential individual within the organization passes away or otherwise becomes incapable of working, your insurance will offset some of the financial casualties associated with that loss.

As far as taxes go, you cannot deduct your premiums as a business expense because your organization is a beneficiary of the payout. At the same time, the company isn’t responsible for paying federal income on the proceeds.

Property and liability insurance

Your business will undoubtedly have property and liability insurance because these policies protect the organization from significant losses, many of which will be outside your control.

You are permitted to deduct the premiums for this insurance from your taxes because they’re considered ordinary and necessary expenses for tax purposes. If the reimbursement you receive is less than your financial loss, the difference also becomes tax-deductible.

Life insurance for employees

We went over some life insurance considerations for employees, but it also has tax considerations for the organization.

If you’re offering to pay life insurance premiums for your employees, it could go a long way toward attracting high-quality talent. The more you provide for workers, the easier it gets to retain this talent for years to come, as well.

From a tax standpoint, C corporations can deduct these premiums from their taxes because they won’t benefit from the payout. As mentioned before, this rule only covers policies with payouts up to $50,000. After that, the excess costs count as taxable wages for your employees.

Split-dollar life insurance policies, where you and a worker share the insurance costs and payout benefit, are not eligible for deductions because the company stands to profit from the plan.

The assistance you need

When you’re unsure about your taxes and whether or not a premium is deductible, you’ll want an expert on your side. Provident CPA & Business Advisors is standing by to answer your tax questions and offer professional advice. Contact us to learn more about our tax strategy services.

Why Keeping Accurate Tax Records Is Vital for Business Owners & Professionals

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Spending a little time creating tax records and holding onto documentation could save you a lot of hassle in the future.

Business owners and individuals must, of course, retain relevant tax information to file accurately. But you’ll also want to hold onto all of your documentation in case the IRS wants to see it later. 

Saving your receipts, bank statements, invoices, and payroll records proves your income, expenses, and deductions, ensuring you have the right answers when the taxman comes calling. Other documentation you’ll require includes employment tax records and any supporting documentation that proves your financial picture to the IRS.

Keeping this tax information on-hand also makes it possible to deduct more business expenses and, potentially, save you significant money.

Here’s some information on why thoroughly organizing and holding onto tax records is essential to your bottom line:

Which documents you need

Many different recordkeeping systems exist, and the goal of each of them is the same: to show your income and expenses clearly.

As a result, whichever system you employ should include a summary of all of your business transactions and have information on your gross income, credits, and deductions. If you’re running a small doctor’s office, for example, having a business checking account makes it simpler to monitor your income and expenses. If your organization is a little more complicated, you might use a different system.

In addition to the numbers, you’ll need your gross receipts, which can include documentation like deposit information, receipt books, register tapes, your 1099-MISC form, and invoices. 

If you buy items and resell them to customers, including manufacturers that purchase raw material and sell the finished product, records of your purchases are required. Supporting documentation here includes canceled checks, invoices, credit card statements, and cash register tapes. 

Similar documentation can prove your business expense claims, which are any costs you incur, not including purchases, that you require to carry on the business. You’ll also need to substantiate travel, entertainment, transportation, and gift expenses on your return.

Assets are a vital part of your tax records, including your office furniture and any equipment you purchase. In this case, you’ll need documentation showing when you bought these assets, the cost, how you used it, and how and when you disposed of any old assets. If you’ve sold off some business assets, you must also include information on the selling price.

Finally, if you have employees, you’ll have to hang onto your employment tax records for the IRS to review. These records include all wages and benefit payments you make, employee information, and copies of your employees’ income tax withholding certificates.

Organizing all of this documentation in case the IRS wants more information from you can make your life much easier down the line. 

How long you need the records

The amount of time to hold onto tax information depends on your situation. 

If you end up owing on your taxes, you’ll want to keep your records on-hand for at least three years from their due date. After three years, the period of limitations for assessing tax ends, and the IRS can no longer amend a return and demand additional payments.

However, there are always exceptions, as the period of limitations never expires for a fraudulent claim or if you fail to submit your return. The IRS also has six years to audit if they believe you’ve underreported income by 25% or more. As a result, many businesses hold onto their detailed annual financial statements for as long as seven years, just to be safe.

There’s a slightly different employment tax process, and you’ll want to keep these records for at least four years from the date the tax is due or paid, whichever is later.

The gist is that as long as you keep diligent records, file your taxes on time, and make accurate claims, you’ll only need to hold onto your business tax records for at least three years and employment tax records for four years from their due date.

Avoiding fines and saving money

Of course, the main reason you’re keeping all of these records is that you don’t want to get on the wrong side of the IRS.

If the IRS goes back and looks over your tax returns, it’s up to you to prove expenses and deductions. If you don’t have the documentation to verify the return information, the IRS can demand back taxes and issue a penalty for tax underpayment. 

The penalty depends on a business’s structure and the reason the IRS audits you. Your business could also end up paying interest on late tax installments. In short, you don’t want to end up in this situation because it will lead to significant financial losses.

The other benefits of keeping tax records

Beyond using tax records to satisfy the IRS, you can use this information to monitor the business’s progress and provide an accountant with more items to deduct.

In the retail environment, you’ll see which items are selling as you go through these documents, providing insight into any changes that may affect projections. The same can be said for any business type because financial records show managers what’s working and what needs improvement. 

These records also make life easier for your tax professional. The more documentation provided, the easier it is to deduct expenses from a tax bill. For example, executives and investors can use certain travel and transportation expenses to bring about considerable tax savings.

You can even go after tax refunds from past reporting periods if you feel like you’ve overpaid. Taxpayers have three years from the date they filed a return or two years from the date they paid the tax, whichever is later, to revisit a claim. You also have seven years to recover a tax overpayment resulting from a bad debt deduction or worthless securities.

Get the help you need

Taxes can be confusing, but receiving professional advice and assistance delivers a clearer picture of the documentation needed to avoid tax problems. This help can also significantly lower your annual tax bill.

Provident CPA & Business Advisors helps our clients pay the least amount of tax as legally possible. We work with professionals, entrepreneurs, executives, and investors to provide maximum tax savings ethically. Contact us for more information about what we can do for you.

COVID-19 Tax Deductions That You May Qualify For

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The COVID-19 pandemic has activated provisions in the Internal Revenue Code (IRC) that could make you eligible for tax benefits for certain relief payments. Learn more about IRC Section 139 and other applicable tax credits.

Section 139 of the Internal Revenue Code (IRC) outlines rules and guidelines for disaster-relief payments. As COVID-19 continues to impact the economy, causing record unemployment numbers and business closures, this section of the tax code has been triggered.

Whether you’re an employer or individual, you could be eligible for certain tax deductions related to COVID-19. While the CARES Act has provided stimulus payments and other benefits to Americans and businesses, these additional tax credits offer further assistance for those struggling during the pandemic.

Here’s an overview of what you need to know about IRC Section 139, the FFCRA, and other tax credits related to COVID-19 that you could be eligible for.

Section 139 and FFCRA relief payments

Section 139 outlines how employers can handle relief payments to employees during a disaster. Applicable payments are those made to staff members who have been directly impacted by the pandemic. This compensation is deductible for the employer and will also be excluded from the worker’s income.

According to Section 139, a qualified disaster relief payment can include the following:

  • Reimbursement or pay for reasonable and necessary personal, family, living, or funeral expenses incurred directly from COVID-19
  • Reimbursement or pay for expenses to repair or rehabilitate a personal home or its contents, which are attributable to the pandemic

Qualifying payments will be free of income, payroll, and self-employment taxes.

Note that emergency relief payments made to employees from charitable organizations are covered under Section 139. This means that if a business makes disbursements through a controlled private foundation and other applicable guidelines are followed, payments will be tax-free. 

The Families First Coronavirus Response Act (FFCRA) outlines how employers can provide paid sick leave or family and medical leave related to COVID-19. If eligible, business owners can claim tax credits on these leave payments made to employees if they had to take time off work because of COVID-19. These provisions are in place from April 1, 2020, to December 31, 2020.

Eligible employers are businesses with fewer than 500 employees, and those required to pay qualified sick leave wages or family leave wages under the FFCRA.

The FFCRA covers employees for: 

  • Two weeks or 80 hours of paid sick leave at the same rate of pay if the employee is quarantined or experiencing COVID-19 symptoms
  • Two weeks or 80 hours of sick leave at two-thirds of their pay if they need to care for an individual who must quarantine or take care of a child who cannot attend school normally

Other COVID-19 tax benefits

If an individual has experienced significant impacts from COVID-19 and has an IRA, they can borrow up to $100,000 from the account and pay it back within three years of the date of withdrawal. This can all be done as if it is a tax-free rollover. There is also no limit on what can be done with the funds during the three years.

Another credit applicable to employers is the employee retention credit. This tax break encourages employers to keep their workers on the payroll during the pandemic. The credit is 50% of up to $10,000 in payments made by an employer impacted by COVID-19. Eligible employers include those whose business is wholly or partially suspended, or whose gross receipts are less than half of the comparable quarter in 2019. Once the receipts reach above 80% of the comparable quarter in 2019, they no longer qualify.

Additionally, the CARES Act allows for deferment of employment payroll taxes. Both self-employed workers and employers can defer social security tax to be paid at the end of 2021 and 2022.

Work with a tax professional to understand COVID-19 deductions

Still have questions about tax deductions related to COVID-19? These changing regulations can be complicated and confusing. Work with a tax professional who can ensure that you’re paying the least amount of tax legally possible. You must always be sure that you’re complying with all applicable laws while taking advantage of any deductions and credits for which you qualify.

The team at Provident CPA & Business Advisors is here to help you during this time of uncertainty and financial distress. If your business is seeing impacts from the pandemic, contact us to find the best way forward. We can help you focus on growth and profit improvement in addition to accounting and tax considerations.

How Physicians Can Protect Themselves Against Tax Fraud

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Tax fraud is rampant, and doctors are a targeted group. Here are steps physicians can take to lower the risks

Tax fraud is an ongoing battle for both U.S. citizens and the IRS. Victims often unknowingly share too much personal information that leads to the filing of fraudulent returns—or they provide false data on their returns after receiving bad advice. 

According to a report from the Treasury Inspector General for Tax Administration, there were 30,038 tax returns with approximately $135.6 million claimed in fraudulent refunds as of February 29, 2020.

Doctors are particularly vulnerable to tax schemes. As large earners, hackers target physicians in efforts to steal their tax refunds or engage in other activities that lead to financial gain. Some speculate—especially in years like 2014, when numerous doctors were attacked—that many physicians experience tax fraud because of medical database breaches. 

Stay ahead of the game by learning how to protect yourself against tax fraud.

1. Know the most common attack methods

First, familiarize yourself with how attackers generally commit these crimes. The following approaches are common:

  • Identity theft and fraudulent returns. A standard method for tax criminals involves stealing your personal information so they can submit fraudulent tax returns. 
  • Phishing. Fraudsters often send out communications that appear to be from organizations like the IRS. Be wary of any email or website asking you for your personal information—the IRS will not contact you via email, text message, or social media about your tax refund. 
  • Preparer fraud. Unfortunately, some people who claim to help you prepare your taxes are looking for ways to scam you and steal your identity or engage in refund fraud. 
  • False promises. If someone advises you to falsely inflate your income or expenses to qualify for deductions, it is likely a scam. 
  • Phone calls (aka “Vishing”). Just as attackers will try to email you posing as a legitimate entity, they will also call you to try to get your information or convince you that you need to deal with a tax issue immediately.

Watch out for these tax scam methods and attempts to steal your personal information. Be especially wary of sharing details like your Social Security number.

2. Understand your responsibility 

If you decide to follow bad advice, whether inflating your income or expenses or providing other fraudulent information on your tax return, you and you alone are legally responsible for that false data. It might seem unfair if you were acting on guidance you thought you could trust. But unfortunately, you’re still the party that lied.

If you work with an abusive tax return preparer, for example, that person could defraud you, and you’re ultimately still responsible for the tax return information you provided. Always be cautious when choosing someone to help you prepare taxes.

3. Be aware of the other risks of identity theft

When someone steals your identity for tax fraud purposes, there are other ways the information could be used to harm your practice. Attackers may not stop with taxes and also gain access to your financial accounts. One sign that someone else is using your identity is if you receive more credit card offers than usual.

Avoiding giving out your personal information to sites, organizations, or individuals you cannot verify is essential to reduce your risk of tax-related fraud—and it’s also crucial for other areas of your life and medical practice. 

4. Check your tax records

The IRS website has a resource called Get Transcript that allows you to search for your tax records. Doctors should especially review their tax records to ensure they have not been an unknowing victim of fraud.

Also, keep an eye on all bank and credit card statements and any changes to your credit score.

5. File your taxes as early as you can

Another step you can take to prevent tax fraud is to file as early as possible in the year. When you have all the relevant tax forms needed, don’t waste any time. Filing quickly will reduce the risk of someone filing dishonestly before you can send your legitimate return. If you submit the documents first, the second fraudulent return will be rejected.

Tax fraud is a serious issue for physicians. But you can reduce your risk by understanding how it usually occurs and implementing these steps to protect yourself. 

Always work with a tax professional you can trust. The team at Provident CPA and Business Advisors can assist you with questions, help you protect your assets, and optimize tax-related aspects of your medical practice. Contact us today to learn more.