Small business owners and risks related to employees work claims

Small business owners and risks related to employees work claims

This morning at a meeting I was talking to an employment attorney I know and the topic got around to small business employment practices and the risks that small business owners might not realize they are taking.

Among many items we discussed 3 stood out. Many small business owners we meet with are unaware of the consequences that could result from their lack of attention to human resource (HR) legal issues. Here’s my list and my take on each one of the topics the attorney reviewed. Obviously seek competent legal advice before taking any actions:

  1. Getting Confidentiality Agreements from employees – I rarely see businesses that have taken this step but I have seen many, many cases of businesses who were damaged and could not go after the offender. The more important the employee the more important this could be.
  2. Documenting overtime practices, payments and procedures – failure to properly pay employees for overtime can have expensive and painful consequences. Those painful consequences could, in some cases, go to the business owner personally, without the corporate shield so many depend on.
  3. Making sure that employees who are not paid by the hour are classified, managed and have responsibilities that are appropriate for the hourly exemption requirements in employment laws. According to the attorney, just because a business owner and an employee agree to weekly pay, instead of hourly, it doesn’t necessarily mean the business owner is not obligated for other expenses and claims which may include back pay for overtime and the significant penalties that could be assessed.
This is a good time of year to start reviewing your employment practices and get good advice from an HR professional or attorney. Also, this is not just an issue for big companies. If you have employees you have risks, generally it’s wise to spend a little money now to avoid a bigger problem later.

Small Business Taxes..the Whole Enchilada for Year-End Planning

 Guest Post by Carol Olson, CPA  – DRDA, LLC

Small Business Jobs Act of 2010

The Small Business Jobs Act of 2010 includes a number of important tax provisions for businesses large and small. While a few of the provisions take effect in 2011, the majority of the provisions are effective retroactively for the 2010 tax year.  Following are some of the major provisions:
Bonus Depreciation. Bonus depreciation has been extended for 2010.  You can deduct 50% of the cost of qualifying new business assets as well as depreciate the remaining basis of the asset.  Bonus depreciation of up to $8,000 may be taken on passenger automobiles.
Section 179.  The Section 179 deduction has been increased to $500,000 for property placed in service in 2010 and 2011.  The $500,000 deduction is limited if a business acquires more than $2,000,000 of qualifying property.  The Section 179 limit for large SUVs ($25,000) remains unchanged.   Normally, Section 179 expensing only applies to tangible personal property used in a trade or business.  For 2010 and 2011, a taxpayer may elect to treat up to $250,000 of qualified real property as Section 179 property.  Qualified real property includes qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.
Self-Employed Health Insurance Deduction.  For tax year 2010, health insurance costs for a self-employed taxpayer and his family are deductible in computing 2010 self-employment tax.
Deduction for Startup Expenses Increased.  For 2010 only, the amount of start-up expenditures deductible in the current year increased to $10,000.  Any remaining start-up expenses can be deducted ratably over 180 months.
100% Exclusion of Gain for Small Business Stock.  For qualified small business stock acquired after September 27, 2010, and before January 1, 2011, the excludible gain is increased to 100% if the stock is held for more than 5 years.

 

Rental Property Owners Required to Issue 1099s.   In 2012, rental property owners will be required to issue Forms 1099 to service providers paid $600 or more.  Beginning January 1, 2011, rental property owners should begin keeping adequate records of payments made to service providers such as plumbers, painters or accountants, in order to issue correct 1099s for 2011 payments.  There has been opposition to this new filing requirement.

Other Provisions
Small Employer Health Insurance Credit.  For 2010 through 2013, the health care act provides small employers with a tax credit for providing health insurance for their employees.  The credit is limited to businesses with no more than 25 full-time employees with annual full-time equivalent wages averaging no more than $50,000.
Standard Mileage Rate.  The standard mileage rate for 2010 business miles is 50 cents per mile.

E-file Mandate.  Tax preparers must electronically file tax returns beginning January 1, 2011, for 2010 individual and trust tax returns.  E-file was already required for corporations with assets > $10 million.
Estate Tax Exclusion.  The estate tax was repealed for 2010 but will reappear in 2011 unless Congress acts before then.
Gift Tax Exclusion.  The gift tax exclusion is $13,000 for 2010.
Payments to Corporations for Good and Services.  After December 31, 2011, payments of $600 or more made to corporations for goods or services must be reported on Form 1099.  (Prior to this change, most payments to corporations were exempt from reporting requirements.)  The law also extends reporting requirements for businesses to file a Form 1099 for any goods purchased from an outside vendor valued at over $600. This information-reporting provision will increase the paperwork burden on all businesses.  However, Congress is currently considering legislation that would repeal this reporting requirement.
American Opportunity Tax Credit.  For 2010,this education credit remains in effect for up to $2,500 (100% on the first $2,000, plus 25% of the next $2,000) for qualified tuition and related expenses including books.  The credit is available for the first four years of the student’s post-secondary education. The credit is phased out at modified AGI levels between $160,000 and $180,000 for joint filers and between $80,000 and $90,000 for other taxpayers. Forty percent of the American Opportunity Tax Credit is refundable, which means that you can receive up to $1,000 even if you owe no taxes.

Non business Energy Property Credit.  The non business energy property credit remains for 2010 only.  Property qualifying for the credit includes windows (including skylights), exterior doors, insulation, metal roof, advanced main air circulating fans, natural gas, propane, or oil furnace or hot water boilers, and other energy efficient building property that meets certain energy standards. The credit is 30% of the cost of the improvement(s) up to a maximum credit per year of $1,500.
State and Local Sales Tax Deduction, Additional Standard Deduction for Real Property Taxes, Above-the-Line Deduction for Educators.  These deductions were not included with the Small Business Jobs Act of 2010 which passed September 27, 2010.  However, Congress may consider extending these deductions before year-end.
 Retirement Savings Rules for 2010

401(k) Contributions.  The § 401(k) elective deferral limit is $16,500 for 2010 and 2011. If you will be 50 years old by December 31, 2010, you may contribute an additional $5,500 to your §401(k) account, for a total maximum contribution of $22,000 ($16,500 in regular contributions plus $5,500 in catch-up contributions).
IRA Contribution Limit.  The IRA contribution limit remains at $5,000 for 2010 ($6,000 if you’re over 50).
Roth IRA Conversion Rule.  Funds in a traditional IRA or other retirement plan may be rolled over into a Roth IRA (earnings and distributions are tax-free). Such a rollover is treated as a taxable event, and you will pay tax on the amount converted.   In the past, a taxpayer’s AGI for conversions (whether married or filing jointly) was limited to $100,000.  This limit has been repealed, and taxpayers are now able to make the conversions without regard to their AGI. (However, the AGI income limits still apply to current contributions to Roth IRAs.) If you are eligible to convert to a Roth IRA in 2010, you will have the option of spreading the income ratably over two taxable years (2011 and 2012).  This deferral and two-year spread for distribution income applies to 2010 distributions only.

Interesting Small Business Tax Information

Time to start [preparing for 2010 and 2011 tax issues…the IRS never sleeps! Here are a few small business tax items that may apply to you. Talk to your CPA about them.

Deduction for Start up Expenses Increased.  For 2010 only, the amount of start-up expenditures deductible in the current year increased to $10,000.  Any remaining start-up expenses can be deducted ratably over 180 months.

Self-Employed Health Insurance Deduction.  For tax year 2010, health insurance costs for a self-employed taxpayer and his family are deductible in computing 2010 self-employment tax.

Small Employer Health Insurance Credit.  For 2010 through 2013, the health care act provides small employers with a tax credit for providing health insurance for their employees.  The credit is limited to businesses with no more than 25 full-time employees with annual full-time equivalent wages averaging no more than $50,000.

 

More to come. It’s time to start your tax planning.

Consult with your CPA before making decisions.

When is 95% less than 20%? When the 95% is wrong!

In my day to day activities I meet with 250 – 350 small business owners a year who are considering selling a business for one reason or another. In discussing their business the topic of customer service is brought up by me. The reason it is discussed is because significant value is added to a business with a loyal and happy customer base.

It is extremely rare (I can only remember 1 instance is last 5 years) when the business owner actually has any real data to determine their performance. In most cases the owner doesn’t even track the number of complaints the business receives each year. Nor do they track repeat customers.

So therefore, in my discussions with the business owner what I am told about customer service is what the business owner thinks is true as opposed to any evidence it is true.

When I ask the question “How is your customer service?” about 95% of the time the answer is “good” or “great”!!

In thousands of discussions with business owners over the years I have never had a business owner answer, “Our service is really lousy but we’re the cheapest in town so some customers put up with it.” I may not have gotten that answer from business owners but it has been true for many, many businesses.

So….. 95% of the business owners think their service is good or great. Hmmmm, I consistently see customer surveys whose results state that customers get good or great service less than 20% of the time. I wonder which is closer to true?

Why don’t most business owners track their customer service results? My guess is they really don’t want to know the answer. If they knew the answer they would be faced with the choice of ignoring the issue or doing the hard work of fixing their customer service problems.

If you are a small business owner which category do you fit into:

  1. You know (through reliable data and survey results) what your customers think and you manage your business to improve your customer service?
  2. You don’t really know what your customers think about your service and you really don’t want to find out.

 If you are serious about increasing the value of your business and your profits it’s time to take customer service issues seriously.

New 1099 Rules effect on Small Business

    This post provided by Paul Ikard, CPA

March 17, 2012  – Some of the below rules may have been modified, check with your CPA before taking any action.

Businesses and not-for-profit organizations are accustomed to IRS rules that require them to report certain payments on annual Form 1099 information returns. However, the recently enacted healthcare law imposes surprising new Form 1099 reporting requirements. Complying with them may add significantly to your organization’s paperwork burden. While the new rules don’t apply to payments made before 2012, it’s not too early to start gearing up to deal with them.

Current Rules in a Nutshell


Background: For many years, businesses have been required to report various payments on different versions of Form 1099. For instance, when a business pays $600 or more during a calendar year to an independent contractor for services, the business must issue the contractor a Form 1099-MISC that reports the amount paid that year. The business must also furnish a copy of the Form 1099-MISC to the IRS. This reporting procedure helps contractors remember to include the payments on their tax returns, and it helps the IRS ensure that income is reported. Under rules now in effect, other types of payments that businesses must report on Forms 1099
include:
1. Commissions, fees, and other compensation paid to a single recipient when the total
amount paid in a calendar year is $600 or more.
2. Interest, rents, royalties, annuities, and income items paid to a single recipient when
the total amount paid in a calendar year is $600 or more.
When a Form 1099 is required, it must show:
The total amount for the calendar year;
The name and address of the payee;
The tax ID number (TIN) of the payee (For privacy reasons, it’s okay to show a truncated
TIN on a 1099 issued to an individual);

Contact information for the payer; and

The payer’s TIN.

If your business doesn’t have a payee’s TIN, you may be required to institute backup federal income tax withholding at a 28 percent rate on payments under Internal Revenue Code Section 3406. In most cases, the rules summarized above apply to payments made by not-for-profit organizations since they are generally considered to be businesses for Form 1099 reporting purposes. If a payer inadvertently fails to issue a proper Form 1099, the IRS can assess a $50 penalty. The penalty for each intentional failure can be $100 or more.

Reporting Payments to Corporations

Under the rules that currently apply, most payments to corporations are exempt from Form 1099 reporting requirements. However, there are a few exceptions. For instance, payments of $600 or more in a calendar year to an incorporated law firm must be reported on Form 1099-MISC.

Example:  our business makes $30,000 in monthly payments to rent office space from a corporate lessor. Under the current rules that apply today, there is no 1099 reporting requirement for the payments, because they are made to a corporation.

Reporting Payments for Property

Under current rules, there is also generally no requirement to issue 1099s to report payments for property (such as merchandise, raw materials and equipment).

Example: Your business buys a delivery van, display shelving, and computer equipment. Under today’s rules, there’s no 1099 reporting requirement for these purchases.

What Will Change in 2012 and Beyond?

The healthcare legislation makes two big changes to the existing Form 1099 reporting rules and a third change that is hard to assess without further guidance from the IRS.

First Change: Payments to Corporations Must Be Reported. Starting in 2012, if your business pays a corporation $600 or more in a calendar year, you must report the total amount on an information return. Presumably, Form 1099-MISC will be used for this purpose, or the IRS will develop a new form. (Payments to corporations that are tax-exempt organizations will be exempt from this new requirement.)

Examples:
In 2012, your business pays $30,000 to rent office space from a corporate lessor. Under the new rules that take effect in 2012, the $30,000 must be reported on a Form 1099. Your business pays $2,000 for four employees to attend a seminar in 2012 put on by a corporation. Under the new rules that go into effect that year, the $2,000 must be reported on a Form 1099. Several employees go on a business trip in 2012, and your business pays $1,500 to a corporate hotel. The $1,500 must be reported on a Form 1099 for that year.
In 2012, your business spends $1,000 at a local restaurant for an employee holiday dinner. The restaurant is operated by a corporation. Under the rules scheduled to become effective that year, the $1,000 must be reported on a Form 1099.

Second Change: Payments for Property Must Be Reported. Starting in 2012, if your business pays $600 or more in a calendar year to any party (including an individual) as “amounts in consideration for property,” you must report the total payments on an information return for that year. The term “property” means computer equipment, office supplies, raw materials, and just about anything else you can put your hands on. Again, Form 1099-MISC might be used to reported affected payments, or a new IRS form might be created.

Examples:
In 2012, your business buys cash registers from a supplier for $25,000. It also spends $1,000 at a food and beverage store to buy refreshments for a company party. Later that year, the company pays an individual $1,500 for an old pickup truck and spends $750 at an office supply store for copier ink and computer paper. Under the new rules that are scheduled to go into effect in 2012, all these transactions will require your business to issue 1099s. As you can see, the new requirements to report corporate payments and amounts to buy property will undoubtedly result in the issuance of many millions of additional Forms 1099 each year.
(Presumably, payments between related corporations will not be exempt.)

Another Burden. 

Your business must also obtain a TIN from each affected payee to avoid the requirement for backup withholding of federal income tax. On the other side of the coin, if your business sells property or you operate a corporate business, you will have to supply customers with your TIN to avoid backup withholding on payments made to you.

Third Change: Payments of “Gross Proceeds” Must Be Reported. Here’s where the new upcoming rules get more confusing. Under a third new rule that will take effect in 2012, payments of $600 or more in “gross proceeds” to a payee in a calendar year must be reported on an information return. At this point, it is unclear what this new reporting requirement is meant to cover. The best guess is that it is meant to cover payments add to non-corporate payees, such as restaurants and other small businesses. We are awaiting IRS clarification on this issue.

Action Plan

Dealing with the new Form 1099 reporting rules is going to be difficult for many organizations — resulting in an avalanche of paperwork. Your business will likely have to modify its accounting procedures to capture payee information that will be needed to comply with the new requirements.

Remember: TINs must be obtained from your vendors to avoid having to institute backup federal income tax withholding on payments made to them. By the same token, your business must ensure that your customers have your TIN to avoid backup withholding on payments made to you. What if backup withholding does occur on payments made to you? You must be prepared to track the withheld amounts so you can claim edit for them at tax return time. If your business winds up on either side of the backup withholding rules, it can be a real mess. And with lots more 1099s flying around, the odds of errors rise proportionately. To compound the problems with the new reporting requirements, many businesses use accounting methods other than the cash basis. In addition, a number of businesses file their returns using reporting periods other than calendar years. In an audit, imagine your business and the IRS attempting to reconcile 1099s with these complications.
Fortunately, the new Form 1099 reporting rules (including any backup withholding implications) don’t cover payments made before 2012.

 Click here to visit the website for Mr. Ikard.

The Bush tax cuts debate and the real small business story

It’s hard to avoid the politicians ranting either for or against the extension of the Bush tax cuts. Like many issues in life, for every complex problem there is a simple solution that is absolutely wrong.

Those opposed to the extension often try to separate the issue of “who” gets the extension. The theory is the high income earners should not get the extension and therefore pay more in taxes because they can afford it.

Those in favor of extensions for everyone say if the extension of the cuts isn’t done it will cost jobs and be a drag on the economy.

In this case the unfortunate truth is they may both be right. So if they are both right how do we decide which policy is best.

Let’s take the case of Mary who owns a pest control business. Like many small business owners her income can vary wildly from year-to-year. For the sake of this discussion let’s say that she and her husband, who also works in the business, make $300,000 combined. Since many politicians have said that the tax cuts should not be extended for those who make over $250,000 let’s use that as income above which the Bush tax cuts expire.

So let’s go with that, Mary and Bob currently make $300,000 per year and, if the Bush tax cuts are eliminated, they are going to get a 10% tax increase on income over $250,000. I’ll use round numbers again..their new tax rate goes to 40% from today’s current 36%.

Now Mary and Bob have a good idea. They think they can grow their business next year and increase their income by $50,000 to $350,000 but they will need to hire someone for $32,000 a year to do the job. Seems like a good idea right? Spend $32,000 and make an extra $50,000..easy decision. Well, maybe not. Here’s the math if the Bush tax cuts expire for her:

  1. Mary pays an employee $32,000.
  2. Mary makes additional $50,000 before tax and $30,000 after taxes (40% tax rate)
  3. Mary pays additional tax of 3.6% (difference between old rate and new) on the $50,000 she already makes above the $250,000 tax increase line. That’s another $1,800 in taxes

So what happened here? Mary made $50,000 more and has $3,600 less in cold hard cash. (The math is $50,000 – $32,000- $20,000 – $1,600 = -$3,600)

What would you do? Take the risk of hiring someone for $32,000 so you can lose $3,600?

The same situation if the tax rate for Mary is extended:

  1. Mary hires and pays an employee $32,000
  2. Mary makes additional $50,000 before tax and $32,000 after taxes (36% current tax rate)
In this case if her plan works Mary is break-even. Remember from above, if the tax increase goes into effect Mary will lose $3,600 if her plan works perfectly. Without increasing her taxes she’s break-even.
What’s the difference? If the tax increase goes into effect and Mary decides not to hire the new employee
 the tax effect to Mary is $1,600 and the new employee doesn’t have a job.
If the tax increase doesn’t go into effect what happens? Mary hires the new employee, Mary pays $18,000 MORE in taxes because she made $50,000 more taxed at old rate AND the IRS gets to tax the new employee on his $32,000 salary. Mary makes more money, another person has a job and IRS gets more money. But Mary had to be willing to take the risk! None of this happens unless Mary takes the risk. It’s not the government taking the risk, it’s Mary that has to take the risk. 
There are millions of people like Mary and Bob in the U.S. today making these same decisions every day.
The point of this is that nearly all financial decisions are made at the margin not based on the overall. Mary didn’t make her decision based on the $300,000 she makes, she made the decision based on the next $50,000 she might make.