Tax Relief for Companies Whose Employees Use Their Own Tools
| Editor's Note: This article outlines a tax position some may consider aggressive. The Automotive Service Association does not know of any definitive IRS ruling that approves the program outlined in the article. As is always the case with any tax issue, we recommend you consult with a certified tax practitioner before implementing such a program for employees who own their own tools. |
Here's some good news about a proven concept that has been used since 1988. However, few companies are taking advantage of it. Section 62c of the Internal Revenue Service code describes how an "accountable plan" is used to separate out the value of tools and equipment of employees who own and use their own tools and equipment on the job from a labor expense into a tool usage expense. Employees who do this pay less FICA and Medicare and other payroll taxes (depends on which state), which reduces matching taxes as well for the employer. Because payroll has been reduced, the employer has the added bonus of reducing workers' compensation premiums and - in some cases - general liability premiums. The amount of savings is dependent upon wage scale, number of employees owning tools, value of the tools, the workers' compensation rate and premium discounts. What are the qualifications? How does this work? What are the downsides?
Which companies qualify for section 62c? Just having at least five employees who own their own tools and equipment ($750 minimum) in their job is a minimum that makes implementing the plan worthwhile. Examples of firms likely to qualify are companies that own and service their own (or their clients) automobiles, trucks, buses, airplanes, etc. All tool and equipment owners must be employees, not contract labor.
The tax code requirements may best be satisfied when a third-party administrator establishes an "accountable plan" and administers the program. The third-party administrator does all the necessary paperwork and accounting to ensure a smooth, timely, and legal transaction. Here's how it works: The employee receives two checks - one from the employer for labor and one from the third-party administrator for the hourly value of his tools and equipment up to 35 percent of wages. This 35 percent is exempt from FICA, Medicare and other payroll taxes. The employer reimburses the third party administrator for the tools and equipment check (typically through electronic banking). The third-party administrator withholds federal income taxes on the tool income for the employee and issues a 1099 annually.
Many companies have been doing this since 1988. Realized savings begin with the first payroll period on money that is now unnecessarily going out the door as taxes. When the employee purchases more tools, there is a 60-day "safe harbor" time frame to report the purchase to the third-party administrator and be reimbursed on a tax-free basis as a business expense reimbursement.
What are the repercussions from the reduced FICA/Medicare and workers' compensation contributions and premiums? Eventual Social Security maximum benefit qualification is not affected under current law if the employee earns at least $28,900 annually. The reduction in wages normally would affect the employee when a disabling injury occurs that is covered under workers' compensation insurance. However, the third-party administrator provides a supplemental disability policy that is included in the administration fee of the policy. Administrative fees (6 percent to 10 percent) vary by industry/trade and by number of employees. Savings to the employer and qualifying employees always far exceed all fees. No IRS tax filings or other expensive "hidden costs" exist. It is not a tool rental program.
Once the program is implemented, it closely resembles a payroll service. Each pay period the payroll clerk faxes the gross payroll of the qualified employees to the third-party administrator. The third-party administrator does the rest. It's a simple concept that is technical but easy to administer.
Ever had a valued employee quit for a slightly higher wage? With the employee receiving the increased take-home pay, he begins receiving a raise that normally costs the employer two to three times more than the net increase in pay. Instead, the employer provides the raises while increasing his bottom line!
In summary, the employer benefits threefold from this program:
- Does not pay matching payroll taxes on the 35 percent of gross payroll.
- Pays significantly less workers' compensation premium because of less reportable payroll of these employees with tools (65 percent vs. 100 percent).
- Recruitment of quality employees becomes easier. Turnover drops significantly.
What are the downsides? If the employees are unionized and the union dues are based on W-2 payroll, the union will likely object because of the reduction in dues. Another downside is if most or all qualifying employees earn less than $28,900 annually. If you do not carry workers' compensation to cover your employees, the savings to the employer is reduced significantly.
What's the bottom line? The employer adds about $1,000 net per enrolled employee per year to his bottom line. The legal authorization to accomplish this has been in the Federal Tax code for years. That's good news! Why not see if this program would benefit your employees?
| Marvin Fletcher, a veteran, has been a business consultant since 1989. He was commissioned a U.S. Army second lieutenant, out of Texas A&M University, in 1969 and served three years' active duty in Europe. He has had various business experiences, including 10 years in the dry cleaning business. He also is a past president of his Rotary Club and is very active in civic and volunteer organizations.
A free worksheet is available upon request from Pro-Check, a third-party administrator. To request additional information (including the worksheet) or to ask questions, contact Fletcher by calling (281) 855-3921 or (800) 447-3921. Or, e-mail him at: him0015@nol.net. |
Does "Hello Tool Truck" Mean "Goodbye Production Time?"
How shop owners handle the situation
What happens to production time when the tool truck pulls up in front of your shop? Does production come to a halt while your technicians check out the latest tools? Is it costing you money?
That's a problem for many shop owners. And it's also one of Dan Frohlich's pet peeves.
Frohlich, AAM, owner of A.R.S. Automotive in Pittsburgh and an ASA national affiliate director, says he has tool trucks from Matco Tools, Cornwell Quality Tools Co., Snap-on Tools Corp. and an independent operator come by weekly.
"If a truck pulls up and all eight of my technicians go out at the same time, it becomes a social time instead of a tool-purchasing time," says Frohlich. "There's always a lot of horsing around, razzing and hoopla. It turns into a social gathering. Every guy has to touch the latest, greatest tool and then discuss it with his co-workers, and it just wastes time."
Frohlich says that if he permitted his entire work staff to go out at one time, he would be looking at two hours of lost time.
To combat the problem, he lets one technician go out to the truck at a time. "I find that helps the tool guy too," says Frohlich. "He can control the situation better, and it gives him an incentive to get the technician in and out." It works to the tool salesman's advantage because the quicker he gets his business done at Frohlich's shop, the quicker he can move on to another shop. And a vendor usually likes to visit as many shops as possible in a day.
Four of A.R.S. Automotive's technicians are collision repair specialists and they get paid a flat rate, which means they only get paid for what they do, so it's to their advantage too. His four mechanics are paid hourly.
"I haven't limited my technicians' ability to shop for tools," says Frohlich, "and the tool guys seem to understand."
In fact, because Frohlich started out as a mechanic, he realizes the need and importance of being able to shop for tools. He requires his technicians to buy their own hand tools and specialty tools, while his shop furnishes the bigger tools and pieces of equipment needed.
"It's a double-edge sword," says Frohlich. "To say they shouldn't go out to the tool truck wouldn't be right, because I require them to buy their own tools and they need them to do their work. But at the same time, they shouldn't abuse the privilege of having time to shop."
Frohlich isn't against socializing. He wants his technicians to like each other and be friends. "In fact, I encourage a degree of socializing - I just don't want it to get out of hand," says Frohlich.
Sometimes a tool vendor will come into the shop and talk to a technician at his tool box, maybe to collect payment on some tools, and that's OK with Frohlich.
And once in a while, Frohlich wants all of his technicians on hand to check out a new tool or piece of equipment that he wants to buy for the shop. For example, right now the state of Pennsylvania is requiring all inspection shops to have the "latest and greatest" headlight aimers. Frohlich likes to get his technicians' input on equipment like that. "If I just buy it myself, the technicians later may say, 'gee, what a piece of junk,' but if they have had input, they're more apt to be happy with whatever I buy." Moreover, says Frohlich, he values his technicians' opinions. "I really want their input, plus they're the guys who will have to work with it, so I want them to be happy with whatever I purchase."
Occasionally, when he wants all of his technicians on hand at one time, he'll talk the tool vendor into buying pizza and soft drinks for everyone and coming shortly after 5 p.m. when his shop closes. And he'll ask his technicians to stick around for free drinks and pizza. Technicians like that sort of thing, says Frohlich, and usually are glad to hang around a little while after work.
To give you an idea of how often tool vendors visit the shop: One of the tool trucks that visits A.R.S. Automotive comes on Tuesday, two on Thursday and one on Friday. The trucks usually arrive about the same time each week. Two of the trucks come during the morning, one comes early afternoon and one late afternoon. The independent tool vendor comes late on Friday afternoon. Frohlich has noticed that his technicians don't spend much time shopping when the independent tool salesman comes because they're trying to finish up and get off at 5 p.m. They don't want to work late.
Frohlich says he used to ask the tool representatives to come during the lunch hour, but that didn't work out very well. "Their arrival here depends on how quickly they get away from their previous stop," says Frohlich. "And although they come about the same time each week, it's difficult for them to pinpoint the exact time."
So he has found that allowing one technician at the time to go out to a tool truck works best for him.
"I've talked to a lot of other shop owners about this problem," he says. "And my solution is a combination of many shop owners' ideas."
Juel Clevenger, AAM, owner of Delta Diagnostic & Repair Inc. in Lees Summit, Mo., says it's not much of a problem for him. "We have three tool vendors who visit, two more regularly than the third, but we have asked them to come toward the end of the day when things are rolling toward a halt. We ask them to park in the back and they usually come in and ask if anyone needs anything. We have four technicians. One older technician never goes out ... I guess he has all the tools he wants ... and I have another technician who seldom shops. So there's really just two of them who look, and they kind of police themselves."
Clevenger says the vendors sometimes come so late that it's quitting time and if someone goes out to shop for tools, that's fine with him - they're on their own time.
Ed Cushman, AAM, owner of C&H Foreign Auto in Spokane, Wash., also says it's not an issue with his shop.
He has two tool companies that call on his shop. The Matco Tools vendor comes on Mondays about 10 minutes before 8 a.m. when they go to work and the Snap-on Tools salesman comes at 5 p.m. on Wednesdays. His shop closes at 5 p.m. So in both cases, it's not a problem. His five technicians buy tools on their own time.
AutoInc. Magazine ® Vol.XLVIII, April 2000 E-mail: asainfo@asashop.org, Web Site: http://www.asashop.org Copyright © 2000 Automotive Service Association (ASA). All rights reserved.