A few weeks ago, we published guidance, available here, on the New York state overtime credit mechanics.
Today, we are going to continue the conversation by looking at helpful tips and potential pitfalls employers need to understand as they get ready for January 1.
As a starting point, it is important to remember that to claim the credit and advance payment, eligible farmers will need to maintain the following information:
- Employee’s name
- SSN or ITN
- Pay period
- Work location zip code
- Eligible overtime hours worked
- Employee’s overtime rate
- Employee’s normal rate
Regardless of whether the advance payment is utilized or not, the employer’s income tax preparer will have to claim the remaining credit on the income tax return. The efficiencies gained for employers will be in reducing the amount of information gathering time from their payroll processors to their income tax preparers. Additionally, efficiencies are gained by getting the information 100% correct from a reporting standpoint to avoid correspondence, delays or audits from New York state. To that end, let’s look at some helpful tips and pitfalls for employers to consider.
Helpful tips for Employers
- Employers must begin communicating with their payroll processors the number of eligible overtime hours for their employees each pay run and in advance of their January 1 pay run.
- As a reminder, it is only the hours from 56-60 that are eligible, not hours over 60 or hours under 56 that are paid overtime due to working on the seventh day (i.e., day of rest). When reporting overtime hours, employers must break out the eligible overtime from the non-eligible overtime. This way, payroll reporting can complement the information that the income tax preparer will need to accurately apply for the credit and advanced payment. To that end, employers should inform their processors to set up a separate earnings code that notes the eligible overtime per employee.
- Anytime an employee gets a pay raise, the employer communicates that information to their payroll processor. If possible, it may be a good idea to keep raise calendar cycles consistent to make it easier for the income tax preparer to find when the time comes to receive the credit. This is important since every pay increase will increase the overtime rate, which increases the amount of the tax credit. It may be prudent for employers to track all pay rate increases for the year internally that they provide to their income tax preparer to complement any payroll reports when it’s time to apply for the advance payment and/or tax credit.
Potential Pitfalls for Employers
- Employers with multiple entities need to be aware that not all their entities will qualify for the credit. Remember, the entity generally must have two-thirds of their gross revenue from farming. Entities that primarily engage in activities related to farming (i.e., custom harvesting animal care, processing etc.), but that do not report their income on a Schedule F would not have farm income and thus not qualify.
- Employers that have management holding companies that run payroll for multiple eligible farming entities also run the risk of not being able to claim the credit. For example, perhaps there are two farming LLCs that have employees owned by the same individuals who also own a third LLC that manages the LLCs and where payroll is processed from. Harkening back to the first pitfall, the problem there is that the management company would typically not have two-thirds gross farm income.
- Employers that operate a sole proprietorship may have their own outside income, or a spouse with significant outside income. It is critical to not assume that just because a farm is being operated, that it automatically qualifies for the credit. The two-thirds gross income test must be met.
If employers are concerned about their entity structure and ensuring they qualify for the maximum amount of the credit, they should reach out to one of Farm Credit East’s tax consultants who can assist in looking at entity structure optimization for the overtime credit.
We hope all New York farmers have a happy and prosperous New Year. Regarding the payroll overtime credit, we are committed to ensuring you and your business receive the maximum amount you are entitled to in the most effective and efficient manner possible.
Taxes are becoming increasingly more complex every year, don’t try to navigate the waters alone. Contact a Farm Credit East tax specialist today to discuss your situation and options that may be available!