Tax Cut Impact on Business Employment Practices Main Street vs. Wall Street Reactions

As it currently stands, record low levels of unemployment are being reported and the employment participation rate is the highest it’s been in years.  This begs to question how employers are finding ideal candidates for open positions.  Competition is rampant among employers as they all are essentially pursuing the same candidates. Businesses, from small to big, must also focus on how they can retain their employees. This article will focus on how big business is spending any savings from the enactment of the Tax Cut and Jobs Act (TCJA), and the path, that small business is taking in the same scenario and whether or not making any changes to your businesses’ compensation model makes sense at this point in time.

How Large and Mid-sized Firms are Using Tax Savings

By the middle of February 2018, over 270 large businesses had publicly announced their intentions to reward their staffs with bonuses in the monetary range of $1,000 to $2,500.  Apart from bonuses, big business is taking action related to employee compensation.  Those additional actions being taken are as follows:

• Wage raises
• New employee hiring
• Workplace investment (facility refurbishing, training)
• Increasing matching for employee 401(k)s
• Offering restricted stock
• Broadening maternity leave and “partner and family sick time”
• Employee education reimbursement

A survey conducted by Towers Watson revealed that 66% of large and mid-sized businesses are preparing for changes to their benefits framework, with some of those businesses already taken action to do so.  Additional actions that have been or are planned to happen include:

• Opportunities for complementary financial planning advice
• Increasing of Healthcare subsidies     

How Small Businesses are Using Tax Savings

As a small business owner, it is your responsibility to assess the impact that the TCJS will have on your business’ wage and bonus plans, and take appropriate action as needed. Due to the fact that most small businesses are not registered as C corporations, they will be prevented from reaping the benefits included the TCJA’s revised 20% corporate tax rate. A majority of small companies are pass-through businesses, meaning business owners pay taxes on their proportionate share of profits via their personal tax returns.  This is more or less an indication that it is doubtful that benefits from tax cuts will have an impact on anything compensation-related.  Keeping this in mind and knowing that spare income is hard to come by, how is a small business supposed to compete for talent in the marketplace?  Let’s take a look at some methods that are being used:

• Profit Sharing: As an S corporation, an employee stock ownership plan (ESOP) is a good tool.  An ESOP is a plan in which company employees gain ownership interest. Should your business not be incorporated, try opting for a profit-sharing plan before you deem it as qualified retirement funds. This is a win-win situation as you can always decide to increase wages and/or bonuses to reward employees with good performance, especially if an employee’s performance has contributed to higher revenues.
• Internal Promotions: Promoting from within is a way of recognizing brand and business loyalty and, as a hiring manager, you are already familiar with the individual you’re promoting.  
• Development of a Qualified Small Employer Health Reimbursement (QSEHRA) Arrangement: A QSEHRA, for simplicity purposes, permits a business to reimburse its workers (up to pre-established limits) for money spent on individually-obtained health insurance coverage.  
• Enhanced Retirement Plans: Should your company be lacking an established qualified retirement plan, definitely consider establishing one.  In this case, the most reasonable option would be the creation and implementation of setting up an automatic 401(k) plan which can minimize some nondiscrimination intricacies. The cost of employer contributions can be determined up front, and your business may even get a tax credit if the plan qualifies.  That credit would offset the administrative expenses needed to set up the plan and teach employees about their participation.
• Mentoring Program Establishment: It’s a proven fact that mentoring increases employee job satisfaction.

Reasons to Consider Waiting Tax-Related Raises and Bonuses

A majority of company owners say they do not make or base decisions, including those related to wage increases and bonuses, only on how much money can be saved on taxes. Small business advisers note that they have been noticing clients holding on to a conservative approach since the TCJA’s implementation in late 2017.

Large businesses will always possess an advantage as their cash reserves tend to be billions of dollars. Small and mid-size companies, on the other hand, don’t really have such cushions or ready access to large lines of credit to assist in the payment of operating costs should revenue generation slow down. Offering bonuses or raises as a reaction to a potential tax cut could make smaller companies vulnerable to a cash flow crisis.

“We didn’t base any raises or bonuses on the tax situation because, quite frankly, until it actually happens, no one’s sure what’s going to happen,” says Rod Hughes, a vice president at Kimball Hughes Public Relations in Blue Bell, Pennsylvania. His business handed its seven full-time employees year-end bonuses just recently.

Larger companies, such as Walmart or Home Depot, opted to give bonuses because they already knew their top tax rate would be dropping to 21 percent from 35 percent under the old law. Unfortunately, small company owners cannot and do not have such certainty.

The TCJA stipulates a break for the owners of sole proprietorships, partnerships and small businesses structured as S corporations. But, although S corporations can deduct 20 percent of their business income, the dollar amount of the deduction declines when an individual owner’s taxable income hits $157,500.  Currently, the IRS still needs to issue and explain certain regulations on how such owners’ business income is determined.

“The 20 percent deduction is extremely complex and it’s going to require a complete understanding of how the statute works,” says Scott Aber, an accounting CPA at the firm Aber CPA in New City, New York

That said, even when tax professionals possess more clarity about the TCJA, small and mid-sized companies will likely still hold off on changing their compensation structure. Business owners generally issue raises at year-end or very early in the new year.  This is done after those businesses have evaluated how employees, as well as the overall business, have performed.  In the event that owners have a sense of what their future revenue and profits will be in the new year ahead, that will contribute to such a decision also.   

Conclusion

As previously mentioned, the trend in big business has been doling out savings from lower taxes to business employees.  It remains to be seen how employee compensation benefits are stemming from tax savings.  In the event that they are, small businesses are challenged to do so as well.  Business owners must consider their options regarding the money a business requires to remain competitive in the job market.  Thomas Huckabee, CPA of San Diego, California can help your business navigate the current job marketplace.