Choosing the right sales compensation model for your business

Choosing the right sales compensation model for your business

A strong sales team is the driving force of most small to midsize businesses. Strong revenue streams are hard to come by without skilled and engaged salespeople.

But what motivates these valued employees? First and foremost, equitable and enticing compensation. And therein lies a challenge for many companies: Choosing the right sales compensation model isn’t easy and may call for regular reevaluation. Let’s review some of the most popular models and note a recent trend.

Straight salary (or hourly wages)

The simplest way to pay sales staff is to offer a “straight salary,” meaning no commissions or other incentives are involved. (Some businesses may pay hourly wages instead, though this generally occurs only in a retail environment.)

The straight salary model’s advantage is that it’s easy for the company to administer and keeps payroll expenses predictable. It also provides financial stability for employees. The approach tends to work best in industries with long sales cycles and for particularly collaborative sales teams.

As you may have guessed, the downside is that it offers no financial incentive for salespeople to go beyond the status quo. This can result in flat sales and difficulty drawing new customers.

Commission only

Quite the opposite is the commission-only model. Here, sales team members earn income as a predetermined percentage of sales revenue. There are various ways to do this, but the bottom line is that staffers are compensated purely through sales wins; they don’t receive salaries.

The advantage is that they’re strongly motivated to succeed — one could even say it’s a “do or die” approach. This model often suits start-ups or businesses looking for quick growth without a big payroll budget. The risk for companies is that commission-only positions tend to have high turnover rates because salespeople lack income stability and may change jobs frequently.

Salary plus commission

Traditionally, this has been among the most popular compensation models. It combines the stability of a salary with the financial incentive of commissions. Generally, the salary will be relatively lower because sales staffers can make up the difference through the commissions.

For the business, this model may reduce turnover while still helping motivate employees. Its chief downsides are that salaries add to payroll expenses, and there’s a relatively high degree of administrative complexity involved in tracking and calculating commissions.

Salary plus performance-based incentives (hybrid)

If you’re interested in “what’s hot” in sales compensation, look no further. This model is often called “hybrid” because it combines a salary with various performance-based incentives tailored to the company’s needs.

Just last month, cloud-based sales software provider Xactly released the results of its annual Sales Compensation Report. Of 160 companies surveyed, 62% identified performance-based pay structures for sales reps as the biggest factor driving changes to sales compensation.

Like “base salary plus commission,” a hybrid model offers employees income stability — but it allows them to earn much more through multiple incentives. For businesses, the model may strengthen employee retention while motivating sales team members to meet targeted strategic objectives, such as increasing market share or driving top-line growth.

Companies have a wide variety of performance-based incentives to choose from, including:

• Financial bonuses for acquiring new customers or expanding into new territories,
• Profit-sharing plans that tie additional compensation to the company’s overall success, and
• Long-term incentives, such as stock options, restricted stock units and performance shares.

However, it’s critical to design a hybrid model carefully. One major risk is becoming “a victim of your own success” — that is, running into cash flow problems because you must pay salespeople substantial amounts for earning the incentives offered.

No pressure

If your sales compensation model works well, don’t feel pressured to change it just to keep up with the Joneses. However, as your business grows, you may want to adjust or revise it to sustain or, better yet, increase that growth. We can help you evaluate your current model and make necessary adjustments that fit your company’s needs and budget.

by Zak Barbagallo

Exploring business entities: Is an S corporation the right choice?

Exploring business entities: Is an S corporation the right choice?

Are you starting a business with partners and deciding on the right entity? An S corporation might be the best choice for your new venture.

One benefit of an S corporation

One major advantage of an S corporation over a partnership is that shareholders aren’t personally liable for corporate debts. To ensure this protection, it’s crucial to:

• Adequately finance the corporation,
• Maintain the corporation as a separate entity, and
• Follow state-required formalities (for example, by filing articles of incorporation, adopting bylaws, electing a board of directors and holding organizational meetings).

Handling losses

If you anticipate early losses, an S corporation is more favorable than a C corporation from a tax perspective. Shareholders in a C corporation generally don’t benefit from such losses. However, as an S corporation shareholder, you can deduct your share of losses on your personal tax return, up to your basis in the stock and any loans you made to the entity. Losses exceeding your basis can be carried forward and deducted in the future when there’s sufficient basis.

Profits and taxes

Once the S corporation starts earning profits, the income is taxed directly to you, whether or not it’s distributed. It will be reported on your individual tax return and combined with income from other sources. Your share of the S corporation’s income isn’t subject to self-employment tax, but your wages will be subject to Social Security taxes. If the income qualifies as qualified business income (QBI), you can take the 20% pass-through deduction, subject to various limitations.

Note: The QBI deduction is set to expire after 2025 unless extended by Congress. However, the deduction will likely be extended and maybe even made permanent under the Tax Cuts and Jobs Act extension being negotiated in Congress.

Fringe benefits

If you plan to offer fringe benefits like health and life insurance, be aware that the costs for a more than 2% shareholder are deductible by the entity but taxable to the recipient.

Protecting S status

Be cautious about transferring stock to ineligible shareholders (for example, another corporation, a partnership or a nonresident alien), as this could terminate the S election, making the corporation a taxable entity. To avoid this risk, have each shareholder sign an agreement not to make transfers that would jeopardize the S election. Also, be aware that an S corporation can’t have more than 100 shareholders.

Final steps

Before making your final decision on the entity type, consult with us. We can answer your questions and help you launch your new venture successfully.

by Zak Barbagallo

Riding the tax break train: Maximizing employee transportation fringe benefits

Riding the tax break train: Maximizing employee transportation fringe benefits

There are some nice tax breaks for transportation-related employee fringe benefits. If your employer offers these tax-favored fringes, you should probably take advantage of them by signing up. Here’s a quick summary of the current federal tax treatment of transportation-related benefits.

Mass transit passes

For 2025, employer-provided mass transit passes for train, subway and bus systems are tax-free to a recipient employee up to a monthly limit of $325. Thanks to an unfavorable change in the 2017 Tax Cuts and Jobs Act (TCJA), your company can’t deduct the cost of this benefit. However, your company may offer a salary-reduction arrangement that allows you to set aside up to $325 per month from your salary to pay for transit passes with your own money. That way, you pay for the passes with before-tax dollars.

For example, let’s say you set aside the maximum $325 per month to pay for train passes. If you’re in the 24% federal income tax bracket, you could save $993 a year in federal income and Medicare taxes. If Social Security tax is being withheld from your paychecks, you could save $1,235.

Parking allowances

For 2025, employer-provided parking allowances are also tax-free up to a monthly limit of $325. You can be given this fringe on top of the tax-free $325 a month for transit passes. For example, you can get $325 per month to pay for the train, plus another $325 to pay the park-and-ride fee at the station. Or you can simply drive to work and get $325 in tax-free bucks to help cover parking near your office or worksite.

Van pooling

For 2025, an employer can provide employees with tax-free transportation of up to $325 per month in a commuter highway vehicle if the transportation is for travel between employee residences and the workplace. This arrangement is often called van pooling.

To be a commuter highway vehicle, the vehicle must meet the following conditions:

1. It has a seating capacity of at least six adults (not including the driver),
2. At least 80% of the mileage is reasonably expected to be for transporting employees between their residences and their workplace, and
3. It’s used for such trips during which the number of employees transported is at least 50% of the adult seating capacity (not including the driver).

Your company cannot deduct the cost of this benefit. But as explained earlier, the company may offer a salary-reduction arrangement that allows you to set aside up to $325 per month to cover van pooling. That way, you pay with before-tax dollars, which will cut your tax bill.

Job-related moving expenses

Your company may give employees allowances to cover job-related relocation expenses. Through 2025, the TCJA generally doesn’t allow tax-free treatment for these allowances. The exception is when the employee is on active duty as a member of the U.S. Armed Forces and the move is pursuant to a military order involving a permanent change of station.

Hopefully, your company still provides this benefit because it can deduct the cost. If so, you come out ahead even though whatever the company pays to cover moving expenses is treated as additional taxable salary. Getting a taxable benefit is better than getting no benefit at all!

Save money, ease stress

If your company pays for these tax-free transportation-related fringe benefits, you should strongly consider signing up. Saving on commuting costs can make your trips to work less stressful. Contact us if you have questions about these benefits or want more information.

by Zak Barbagallo

How to evaluate and undertake a business transformation

How to evaluate and undertake a business transformation

Many industries have undergone monumental changes over the last decade or so. Broadly, there are two ways to adapt to the associated challenges: slowly or quickly.

Although there’s much to be said about small, measured responses to economic change, some companies might want to undertake a more urgent, large-scale revision of their operations. This is called a “business transformation” and, under the right circumstances, it can be a prudent move.

Defining the concept

A business transformation is a strategically planned modification of how all or part of a company operates. In its broadest form, a transformation might change the very mission of the business. For example, a financial consulting firm might become a software provider. However, there are other more subtle variations, including:

• Digital transformation (implementing new technologies to digitalize every business function),
• Operational transformation (streamlining workflows or revising processes to change operations fundamentally), and
• Structural transformation (altering the leadership structure or reorganizing departments/units).

The overarching goal of any transformation is to boost the company’s financial performance by increasing efficiencies, improving customer service, seizing greater market share or entering a new market.

Making the call

Choosing to undertake a business transformation of any kind is a major decision. Before making the call, you and your leadership team must evaluate your company’s market position and identify what’s inhibiting growth and possibly even leading toward a downturn. Common indicators that a transformation may be needed include:

• Declining revenues with little to no projections of upswings,
• Outdated processes that are creating errors and upsetting customers,
• Intensifying competition that will be difficult or impossible to counter, and
• Shifts in customer expectations or demand that call for substantive changes.

To decide whether a business transformation is appropriate, you must conduct due diligence through measures such as analyzing financial data and market trends, gathering customer feedback, and obtaining the counsel of professional advisors.

5 general steps to follow

So, let’s say you do your due diligence and decide to move forward with a business transformation. Generally, companies follow five steps:

1. Set a clearly worded objective. The more specific you are in describing how you intend to transform your business, the more likely you are to accomplish that objective. Set aside the time and exercise the patience needed to find specificity and consensus with your leadership team, key employees and professional advisors.

2. Forecast the financial, legal and operational impacts. You must paint a realistic picture of how the big change will likely affect the business during and after the transformation. This is another step in which your professional advisors are critical. With their help, generate financial forecasts related to expenses and revenue changes, identify potential compliance risks and so forth.

3. Map out the road ahead. With a clear vision in mind and a wealth of information in hand, create a detailed roadmap to the transformation. A phased approach is typically best. Define milestones and align performance metrics to each phase. In addition, develop contingency plans in case you wander off course.

4. Communicate with stakeholders. Devise a communication strategy that addresses all key stakeholders — including employees, independent contractors, customers, vendors, suppliers, investors and lenders. Tailor the strategy to each audience, promoting transparency and encouraging buy-in.

5. Monitor progress and adapt as necessary. To increase your odds of success, you and your leadership team need to “stay on it.” Track metrics, allocate time to discussing progress, and be ready to overcome internal and external challenges.

Bold move

Business transformations are difficult to achieve. Insufficient planning, lack of financial oversight and employee resistance can derail efforts. Meanwhile, the necessary investments may strain cash flow. Worst of all, if you fail, you’ll have squandered all those resources.

On a more positive note, a successful business transformation can be a bold and powerful move toward achieving substantial growth and resilience. If you’re considering one, we can help you evaluate the concept and undertake the appropriate financial analyses.

by Zak Barbagallo

Weighing the pluses and minuses of HDHPs + HSAs for businesses

Weighing the pluses and minuses of HDHPs + HSAs for businesses

Will your company be ready to add a health insurance plan for next year, or change its current one? If so, now might be a good time to consider your options. These things take time.

A popular benefits model for many small to midsize businesses is sponsoring a high-deductible health plan (HDHP) accompanied by employee Health Savings Accounts (HSAs). Like any such strategy, however, this one has its pluses and minuses.

Ground rules

HSAs are participant-owned, tax-advantaged accounts that accumulate funds for eligible medical expenses. To own an HSA, participants must be enrolled in an HDHP, have no other health insurance and not qualify for Medicare.

In 2025, an HDHP is defined as a plan with at least a $1,650 deductible for self-only coverage or $3,300 for family coverage. Also in 2025, participants can contribute pretax income of up to $4,300 for self-only coverage or $8,550 for family coverage. (These amounts are inflation-adjusted annually, so they’ll likely change for 2026.) Those age 55 or older can make additional catch-up contributions of $1,000.

Companies may choose to make tax-deductible contributions to employees’ HSAs. However, the aforementioned limits still apply to combined participant and employer contributions.

Participants can make tax-free HSA withdrawals to cover qualified out-of-pocket medical expenses, such as physician and dentist visits. They may also use their account funds for copays and deductibles, though not to pay many types of insurance premiums.

Pluses to ponder

For businesses, the “HDHP + HSAs” model offers several pluses. First, HDHPs generally have lower premiums than other health insurance plans — making them more cost-effective. Plus, as mentioned, your contributions to participants’ HSAs are tax deductible if you choose to make them. And, overall, sponsoring health insurance can strengthen your fringe benefits package.

HSAs also have pluses for participants that can help you “sell” the model when rolling it out. These include:

• Participants can lower their taxable income by making pretax contributions through payroll deductions,
• HSAs can include an investment component that may include mutual funds, stocks and bonds,
• Account earnings accumulate tax-free,
• Withdrawals for qualified medical expenses aren’t subject to tax, and the list of eligible expenses is extensive,
• HSA funds roll over from year to year (unlike Flexible Spending Account funds), and
• HSAs are portable; participants maintain ownership and control of their accounts if they change jobs or even during retirement.

In fact, HSAs are sometimes referred to as “medical IRAs” because these potentially valuable accounts are helpful for retirement planning and have estate planning implications as well.

Minuses to mind

The HDHP + HSAs model has its minuses, too. Some employees may strongly object to the “high deductible” aspect of HDHPs.

Also, if not trained thoroughly, participants can misuse their accounts. Funds used for nonqualified expenses are subject to income taxes. Moreover, the IRS will add a 20% penalty if an account holder is younger than 65. After age 65, participants can withdraw funds for any reason without penalty, though withdrawals for nonqualified expenses will be taxed as ordinary income.

Expenses are another potential concern. HSA providers (typically banks and investment firms) may charge monthly maintenance fees, transaction fees and investment fees (for accounts with an investment component). Many companies cover these fees under their benefits package to enhance the appeal of HSAs to employees.

Finally, HSAs can have unexpected tax consequences for account beneficiaries. Generally, if a participant dies, account funds pass tax-free to a spouse beneficiary. However, for other types of beneficiaries, account funds will be considered income and immediately subject to taxation.

Powerful savings vehicle

The HDHP + HSAs model helps businesses manage insurance costs, shifts more of medical expense management to participants, and creates a powerful savings vehicle that may attract job candidates and retain employees. But that doesn’t mean it’s right for every company. Please contact us for help assessing its feasibility, as well as identifying the cost and tax impact.

by Zak Barbagallo

6 essential tips for small business payroll tax compliance

6 essential tips for small business payroll tax compliance

Staying compliant with payroll tax laws is crucial for small businesses. Mistakes can lead to fines, strained employee relationships and even legal consequences. Below are six quick tips to help you stay on track.

1. Maintain organized records

Accurate recordkeeping is the backbone of payroll tax compliance. Track the hours worked, wages paid and all taxes withheld. Organizing your documentation makes it easier to verify that you’re withholding and remitting the correct amounts. If you ever face an IRS or state tax inquiry, having clear, detailed records will save time and reduce stress.

2. Understand federal withholding

• Federal income tax. Employees complete Form W-4 so you can determine how much federal income tax to withhold. The amounts can be calculated using IRS tax tables.
• FICA taxes (Social Security and Medicare). Your business is responsible for withholding a set percentage from each employee’s wages for Social Security and Medicare, and you must match that amount as an employer. The current tax rate for Social Security is 6.2% for the employer and 6.2% for the employee (12.4% total). Taxpayers only pay Social Security tax up to a wage base limit. For 2025, the wage base limit is $176,100. The current rate for Medicare tax is 1.45% for the employer and 1.45% for the employee (2.9% total). There’s no wage base limit for Medicare tax. All wages are subject to it.

3. Don’t overlook employer contributions

Depending on your state and industry, you may need to contribute additional taxes beyond those withheld from employee paychecks.

• Federal Unemployment Tax Act (FUTA) tax. Employers pay FUTA tax to fund unemployment benefits.
• State unemployment insurance. Requirements vary by state, so consult your state’s labor department for details. You can also find more resources at the U.S. Department of Labor.

4. Adhere to filing and deposit deadlines

• Deposit schedules. Your deposit frequency for federal taxes (monthly or semi-weekly) depends on the total amount of taxes withheld. Missing a deadline can lead to penalties and interest charges.
• Quarterly and annual filings. You must submit forms like the 941 (filed quarterly) and the 940 (filed annually for FUTA tax) on time, with any tax due.

Under the Trust Fund Recovery Penalty, a “responsible person” who willfully fails to withhold or deposit employment taxes can be held personally liable for a steep penalty. The penalty is equal to the full amount of the unpaid trust fund tax, plus interest. For this purpose, a responsible person can be an owner, officer, partner or employee with authority over the funds of the business.

5. Stay current with regulatory changes

Tax laws are never static. The IRS and state agencies update requirements frequently, and new legislation can introduce additional obligations. A proactive approach helps you adjust payroll systems or processes in anticipation of changes, rather than scrambling at the last minute.

6. Seek professional advice

No matter how meticulous your business is, payroll taxes can be complex. We can provide guidance specific to your industry and location. We can help you select the right payroll system, calculate employee tax withholding, navigate multi-state filing requirements and more. In short, we can help ensure that every aspect of your payroll is set up correctly.

by Zak Barbagallo

Deduct a loss from making a personal loan to a relative or friend

Deduct a loss from making a personal loan to a relative or friend

Suppose your adult child or friend needs to borrow money. Maybe it’s to buy a first home or address a cash flow problem. You may want to help by making a personal loan. That’s a nice thought, but there are tax implications that you should understand and take into account.

Get it in writing

You want to be able to prove that you intended for the transaction to be a loan rather than an outright gift. That way, if the loan goes bad, you can claim a non-business bad debt deduction for the year the loan becomes worthless.

For federal income tax purposes, losses from personal loans are classified as short-term capital losses. You can use the losses to first offset short-term capital gains that would otherwise be taxed at high rates. Any remaining net short-term capital losses will offset any net long-term capital gains. After that, any remaining net capital losses can offset up to $3,000 of high-taxed ordinary income ($1,500 if you use married filing separate status).

To pass muster with the IRS, your loan should be evidenced by a written promissory note that includes:

• The interest rate, if any,
• A schedule showing dates and amounts for interest and principal payments, and
• The security or collateral, if any.

Set the interest rate

Applicable federal rates (AFRs) are the minimum short-term, mid-term and long-term rates that you can charge without creating any unwanted tax side effects. AFRs are set by the IRS, and they can potentially change every month.

For a term loan (meaning one with a specified final repayment date), the relevant AFR is the rate in effect for loans of that duration for the month you make the loan. Here are the AFRs for term loans made in April of 2025:

• For a loan with a term of three years or less, the AFR is 4.09%, assuming monthly compounding of interest.
• For a loan with a term of more than three years but not more than nine years, the AFR is 4.13%.
• For a loan with a term of more than nine years, the AFR is 4.52%.

Key point: These are lower than commercial loan rates, and the same AFR applies for the life of the loan.

For example, in April of 2025, you make a $300,000 loan with an eight-year term to your daughter so she can buy her first home. You charge an interest rate of exactly 4.13% with monthly compounding (the AFR for a mid-term loan made in April). This is a good deal for your daughter!

Interest rate and the AFR

The federal income tax results are straightforward if your loan charges an interest rate that equals or exceeds the AFR. You must report the interest income on your Form 1040. If the loan is used to buy a home, your borrower can potentially treat the interest as deductible qualified residence interest if you secure the loan with the home.

What if you make a below-market loan (one that charges an interest rate below the AFR)? The Internal Revenue Code treats you as making an imputed gift to the borrower. This imaginary gift equals the difference between the AFR interest you “should have” charged and the interest you charged, if any. The borrower is then deemed to pay these phantom dollars back to you as imputed interest income. You must report the imputed interest income on your Form 1040. A couple of loopholes can potentially get you out of this imputed interest trap. We can explain the details.

Plan in advance

As you can see, you can help a relative or friend by lending money and still protect yourself in case the personal loan goes bad. Just make sure to have written terms and charge an interest rate at least equal to the AFR. If you charge a lower rate, the tax implications are not so simple. If you have questions or want more information about this issue, contact us.

by Zak Barbagallo