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Biz Rules

By Beau Denton October 31, 2011

“If employees do not realize a certain payment is considered deferred compensation, they could already owe penalties.”When Enron executives ran away with sky-high bonuses right before the company filed for bankruptcy in 2001, they benefited from loose regulations concerning deferred compensation. The scandal caused the IRS to add section 409A to its tax code, with much stricter rules for the timing and delivery of deferred compensation—and much higher penalties for businesses of all sizes.

More than six years later, many small businesses still haven’t gotten the message. The problem, says Williams Parker employment attorney Carol Myers, is that many businesses only think of deferred compensation as 401(k)s and pensions, while the IRS definition covers employment agreements (including severance pay), buy-in agreements and stock options. “The law accelerates the time in which the compensation is taxable,” says Myers. If employees do not realize a certain payment is considered deferred compensation, they could already owe penalties that start at 20 percent of their compensation. With increased penalties, some employees could owe up to 80 percent of their compensation in taxes and fines,

she says.

The IRS offers corrections programs that might help offset the increases, but employees need to look into that now, before it’s time to pay. Both the company and the individual employees would need to attach a corrections statement to their next tax return—something that is not easy to do if you are not already familiar with tax verbiage, says Myers. In most cases, you’ll need the help of your accountant or a tax lawyer to review employment agreements for compliance with the new rules.

 

Overheard

“The digital generation is two million people larger than the baby boomers. The future is young people.”­— Futurist David Houle at the Suncoast Workforce annual meeting in September

Metric

3,462

The number of law school graduates who signed up to take the July 2011 Florida Bar, a record.

Source: The Florida Bar

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