Individuals whose businesses are incorporated typically do not have to worry about self-employment tax if they are paying themselves a reasonable salary. Any salary taken by owner-employees is subject to FICA taxes (Social Security and Medicare). FICA taxes are deducted from the shareholder’s paycheck and are remitted regularly through payroll tax payments to the IRS. Owners of sole proprietorships, partnerships, and limited liability companies (LLCs)—are not considered “employees” but “self-employed individuals”. Instead of paying FICA tax through wages, self-employed people pay self-employment tax. Partners, sole proprietors and LLC members do not take a regular salary through payroll, so there is no tax withheld from the payments they take which are called “draws”.
Self-employed individuals pay self-employment tax equal to the employer and employee share of FICA tax. In other words, they pay 15.3% (comprised of 12.5% for Social Security tax and 2.9% for Medicare tax) on the net earnings of their business. In basic terms, net earnings from self-employment is calculated by subtracting total expenses from total income. Oftentimes, self-employed clients get confused because they think they only pay tax on the draws they pay themselves from the business. This is not the case, however, because if the business is profitable and no draws are taken, the owner will still pay 15.3% self-employment tax on those profits. The draws that the owner takes do not decrease the net profits of the business and generally have no effect on self-employment tax. There are some “draws” called ‘guaranteed payments” taken by some partners in a partnership that do decrease the profits of the other partners, but those guaranteed payments are still subject to the 15.3% self-employment tax for the partner who has received such payments. An LLC can elect to be taxed as a corporation thereby allowing the owners to take a regular salary and have some control over the self-employment tax that they pay. This is a good option for LLCs that are profitable.
Using the “per diem” approach when reimbursing employees for lodging, meals and incidental expenses requires the use of either IRS tables or a simplified high-low method to reimburse workers up to specified limits. Organizations seem to really like the per diem approach because of its simplicity. It doesn’t require too much record keeping and keeping up with receipts. However, the per diem method may put your organization at risk if you exceed the per diem limits. Exceeding the per diem limits exposes your organization to IRS penalties and your employees to higher tax liabilities. This is typically why organizations will often switch to an “accountable plan” for handling employee expense reimbursements.
Tax Advantages of An Accountable Plan
An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. The biggest advantage is that your organization can deduct expenses (subject to a 50% limit for meals and entertainment), and employees and subcontractors can usually exclude 100% of advances or reimbursements from their incomes. Workers whose jobs involve frequent travel may realize significant tax savings.
How to Qualify As An Accountable Plan
Under IRS rules, your accountable plan must meet the following three criteria:
- The plan must only reimburse “ordinary & necessary” business-related expenses that would otherwise be deductible by the employee or subcontractor.
- Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly by turning in receipts.
- Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.
Failure to meet these conditions, will cause the IRS to treat your plan as “non-accountable”, which then transforms all reimbursements into wages taxable to the employee and subject to income and employment taxes.
Need Some Help?
Accountable plans take time to establish and require meticulous record keeping. Let us help. We’d be happy to assist you in setting up your accountable plan and regularly reviewing its compliance with IRS rules.
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Mitigating the risks of IT outsourcing
Nowadays it is common for many businesses to outsource at least one or more of their IT functions. The goal is usually to save money and work more efficiently and effectively. Yet if you don’t mitigate the risks involved, you could end up both losing out financially and failing to get the most from the outsourcing arrangement.
Here we suggest a few best practices to consider when outsourcing your IT functions:
- Consult your internal users – Ask for candid feedback about whether your organization’s technology is meeting your employees’ needs. What help from an outside provider do they really need?
- Consult with other organizations – Contact other organizations that have outsourced their IT functions. Much can be learned by talking with trusted colleagues about their outsourcing experience. Ask them how outsourcing actually helped — or hurt — them.
- Weigh opportunities vs. risks – Identify opportunities beyond cost savings. For example, outsourcing non-core IT functions — such as management of HR systems and supply-chain technology — could free up internal resources for projects you’ve put on the back burner but that have strategic importance. Keep in mind though, outsourcing too many non-core processes, or doing so improperly, could leave you with too little control of these functions and expose you to inefficiency or compliance risks.
- Refine your relationship expertise – Many business owners believe that, once they sign the deal, the contract will take care of itself. As a result, they don’t adequately manage the relationship and often find themselves in conflict with the vendor or stuck with unsatisfactory results. Clarify your expectations at the onset of the relationship and revisit them often by keeping the lines of communication open between you and your outsourced provider. You may need to develop new skills, processes and metrics to ensure the service provider deliver the results expected.
In today’s global economy, IT outsourcing has become — in many industries — a competitive necessity. Whether your company is large or small, we can help you assess, negotiate and maximize the bottom-line benefits of an outsourcing arrangement. Give us a call to let us know what we can do for you.
In many industries, quality customer service has become a quaint, distant memory. Customers are often reduced to selecting the provider that costs them the least. But the golden rule has not been repealed. Pleasing customers can create a powerful competitive advantage – and a few simple changes may increase your bottom line.
To distinguish your organization from the rest, we recommend establishing the following best practices for your customer service policies and procedures:
- Communicate with your customers. Return calls, emails, and social media contacts promptly, send updates about matters in progress, and explain delays as soon as you can.
- Make life easy. Offer discounts at the point of sale rather than giving out coupons or making buyers apply for mail-in rebates. If you use an automated phone system, provide a simple method for reaching a live person.
- Apologize early and whenever necessary. If you’re even partly wrong, apologize and proceed to a resolution. Train your employees to do the same and reward them for positive outcomes.
- Put customers first. Let your customers know you’re there for them and that you regard them as more than “dollar signs.” Listen to their concerns and then do whatever you can to address them promptly. If a customer is unhappy with a purchase of your product or service, fix it, replace it, or refund the payment in full. At worst, the loss won’t be compounded by damage to your reputation. At best, the money will come back multiplied by repeat business and referrals.
Quality service is a powerful marketing tool that’s surprisingly easy to implement. Simply imagine how you would want to be treated and provide that treatment to your customers. As customer satisfaction increases, so too will your profitability.
If you die without addressing your digital assets (such as online bank and brokerage accounts) in your estate plan, your loved ones or other representatives may not be able to access them without going to court — or, worse yet, may not even know they exist.
The first step in accounting for digital assets is to conduct an inventory, including any computers, servers or handheld devices where these assets are stored. Next, talk with your estate planning advisor about strategies for ensuring that your representatives have immediate access to these assets in the event something happens to you.
Although you might want to provide in your will for the disposition of certain digital assets, a will isn’t the place to list passwords or other confidential information, because a will is a public document. One solution is writing an informal letter to your executor or personal representative that lists important accounts, website addresses, usernames and passwords. Another option is to establish a master password that gives the representative access to a list of passwords for all your important accounts, either on your computer or through a Web-based “password vault.”
If you have significant digital assets and need help incorporating them into your estate plan, please give us a call.
Don’t underestimate the tax impact of an acquisition
If your company wants to acquire another business, you’ll need to anticipate many challenges. To improve your odds of success, it’s important to devote resources to intensive tax planning before — and after — your deal closes.
During deal negotiations, you and the seller will likely discuss issues such as to what extent each party can deduct their transaction costs and how much in local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures (such as asset sales) that typically benefit buyers have negative tax consequences for sellers and vice versa.
Tax management during integration is also important. It can help your company capture synergies more quickly and efficiently. You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via postmerger synergies. But if your tax projections are flawed or you fail to follow through on earlier tax assumptions, you may not realize such synergies.
Negative tax consequences of an acquisition can haunt a company for years. Let us help you avoid them and identify tax benefits that can improve the acquisition as a whole. Please contact us for more information.
Prudent business owners take measures to smooth out cash fluctuations that are a normal part of the business cycle. Follow these four practices to moderate the ebb and flow of your cash:
- Analyze cash every month: Analyzing cash doesn’t have to be complicated. Start by writing down your cash balance at the beginning of the month, then add all the cash that came in during the month from all sources. Finally subtract all of the outgoing cash and calculate the ending cash balance. After a few months, review the ending cash balances of each month and compare them. If your cash balance is decreasing month after month, then your business has a negative cash flow (not good). If the ending balance is increasing, then your cash flow is positive (the goal). You should keep record of the cash balances over the course of a and run a trend analysis to determine the causes ups and downs. If you are funding your business with loans, be sure to leave this money out of the analysis so you can gauge the true cash flow from operations.
- Monitor your customer balances: It is easy to fall short in the management of your accounts receivable (money owed to you from customers). Put in to place adequate pre-qualifying processes before extending credit to customers. Always use a software system to track who owes you money so that you can follow up with customers and send invoices and statements. A last resort would be to factor or sell your receivables to a factoring company to maintain a predictable cash flow. Just keep in mind that factoring isn’t free! There are several new companies out there that will fund your receivables for a fee – check out Fundbox amd Blue Vine.
- Slow down your cash disbursements: Prudent cash flow management dictates that you retain cash as long as possible. This doesn’t mean you become a deadbeat customer to your own vendors – you still have to pay on time, just not too early and not late. If your vendor offers any sort of early payment discount like a 2% 10, net 30 you will always want to take advantage of the cost savings. You can also try negotiating extended payment times with your vendors. The longer the cash stays in your bank account, the better. Try keeping the majority of your idle cash in an interest bearing account when possible as long as the monthly and transaction fees are not too steep or eating up any interest you might be earning.
- Time large expenses: Get in to the habit of setting aside small amounts to fund large expected expenditures such as business license renewals and quarterly estimated tax payments. You may also want to start an equipment fund, to save up for large capital assets that will eventually need to be replaced. Being prepared for large purchases with a fully funded savings account will give you peace of mind all year long. It is best to put the money in a separate account that you don’t have regular or easy access to, that way you are not tempted to “raid’ it for splurge purchases.
Give these cash management techniques a try and give us some feedback on how you made out. Do you have other ideas that work for you? Share them in the comments below.
Are problems beginning to surface in your business? Have profits been dwindling? Are customers complaining with greater frequency? Are competitors encroaching on your market share? These are warning signs that you’re headed in the wrong direction – and you don’t want to ignore them until it’s too late. Here are suggestions for turning things around.
- Focus on the money-makers.
- Perhaps your business has developed products your customers aren’t willing to buy. If so, it may make sense to redirect your company’s available resources. Does that mean you should never create new product lines or expand into new markets? No. But new products must eventually improve the bottom line. If they don’t make money within a reasonable time, refocus.
- Reestablish your brand.
- Identify what you do best; then tell everyone. Your goal is to educate customers, vendors, and employees on the reasons why your product or service is better than the competition. Be specific. Of course, to remain credible you must back up your claims, so be realistic as well. Win trust by following through.
- Track results.
- Once you’re refocused on the money-making segments of your business, keep a close eye on the numbers. Know whether customer complaints are down, cash flow is improving, back orders are declining, and market share is holding steady or increasing. If profits aren’t showing an upward trend, take another look – then adjust and remeasure.
For help getting your business back on track, give us a call (757) 926-4109, it’s what we do.
Considering establishing your own company? Here are a few tips to help your new venture get off to a smart start.
- Choose the right form for your business.
- Sole proprietorship, partnership, corporation, or limited liability company: your decision will depend on questions such as how many owners the business will have, who will be in control of decision-making, and what liability issues exist.
- Set up a good recordkeeping system.
- A business launch means paperwork, including establishing a business bank account, filing for an employer identification number, acquiring a local occupational license, and maybe registering a fictitious name.
- In addition to these permanent records, you’ll also need to track pre-launch costs and ongoing expenses for tax write-offs.
- Understand tax reporting requirements.
- Depending on how you structure your business, you may need to file a separate tax return each year.
- You might also need to make quarterly estimated tax payments.
- Other tax returns include federal and state forms for reporting sales and employment taxes.
Please call for advice before you open the doors of your new business. We’ll work with your legal, banking, and other advisors to help you establish a good foundation for future success.
Does your business have any of the following problems beginning to surface – dwindling profits, complaining customers, encroaching competitors?
Heed the warning signs. Problems such as the ones above are warning signs that you should not ignore. Decreases in sales could be a result of any or all of the following causes – customer retention problems, decreases in product quality or an unmotivated sales force. Turning around a struggling business requires humility and a willingness to make tough choices. Uncovering root causes of your business’s problems and admitting your mistakes won’t be easy but you must face the realities to avoid a sure path to failure.
If your company is starting to struggle, consider these three tips to help you get it back on track:
- Focus on the money-makers – Has your business focused on products and services that customers are no longer willing to buy? It makes sense to redirect your company’s available resources toward your most profitable offerings. Do you have a system for determining your margins on your products or services? Is there an accurate way for you to track your expenses and assign them to costs of goods and services sold? These are the factors which determine your profit margin (revenue – cost of sales) and will help you weed out the most unprofitable items you offer. You may be surprised to find that some of your products are loss leaders that actually cost you money instead of making you money.
- Establish your brand identity – This step starts with identifying what you do best and then telling your target market all about it. Your main goal must be to educate not only your customers, but your vendors and your employees on the reasons why your products and services are better than your competition. Be realistic and follow through on any claims you make about your offerings and core competencies or you will lose credibility in the market place. The best way to re-establish your brand identity is to be specific in your value proposition by plainly stating the benefits your customers receive when they buy from you.
- Track your results – This is a biggie, probably the biggest of the three tips presented in this post. Keeping a close eye on your numbers is paramount to managing your business and maintaining or growing your market share. You must measure what matters. This means tracking both quantitative (numeric) and qualitative (non-financial) data and once gathered, analyzing the results. Examples of some things to track include # of customer complaints, cash flow status, trends of items on back order, and profit trends.
Customizing these three tips to suit your particular business will allow you to think more strategically and help you to identify root causes of problems before it’s too late to take corrective measures. If you’d like help getting your business back on track, give us a call, it’s what we do. Our business coaching is an intensive one-on-one program that can help you identify issues you can work on to reach your goals.
Analyze your break-even point (B/E Point) to make better business choices. Sounds simple enough right? Read on for a little basic guidance on this fundamental business tool.
Break-even analyses are an important and useful tool in business financial management. You can use break-even analysis to help evaluate:
- Starting a new business,
- Expanding current operations,
- Developing a new product line or service offering,
- Contemplating an acquisition,
- Downsizing operations, or
- Approaching banks and other potential lenders,
When we talk about “break-even” we simply mean the point at which costs equal income – no profit, no loss. In other words, it’s a determination of how much income you need to cover all of your costs.
Why calculate break-even?
- The break-even point an excellent starting point for finding out where the business is and where it can go.
- It’s the first step in planning future growth.
- It shows how much sales volume is needed to cover fixed and variable expenses so it’s an excellent budget tool.
- Once a company has reached break-even, all gross profit beyond that point goes directly to improving the bottom line, growing and prospering.
How to calculate a break-even point:
Break-even is relatively easy to understand and use. First, review the annual financial statement in order to figure out fixed and variable expenses. Variable expenses are the cost of goods or services sold and other costs of sales, such as direct labor and sales commissions. They are called variable expenses because the quantity of products (produced/ordered/sold or – in the case of services – hours worked) causes the expenses to either decrease or increase with volume. You must know your unit selling price and the variable costs associated with each unit sold (production or acquisition costs) to be able to compute the gross profit percentage. You will also need to know your fixed costs. Fixed costs are those expenses that are not affected by production such as rents, insurance, telecommunications, and fixed salaries. Once you know all the variables (unit selling price, variable and fixed costs) the rest is just plain-old arithmetic. You will divide your fixed costs by your gross profit percentage to arrive at the break-even point. For example, if you have fixed costs of $10,000 and your gross profit percentage is 25%, your breakeven point is sales of $40,000 ($10,000 ÷ 25% = $40,000). You would have to sell $40,000 worth of products or services in order to cover all of your costs and not be in the red or black.
There are, of course, some costs that are, or seem to be, part fixed and part variable. Management will have to use good business judgment to split these items into reasonable proportions.
There are certain limitations for the use of break-even analysis. It ignores the importance of cash flow and makes the assumption that fixed and variable expenses will stay within the parameters used to calculate the break-even. Again, sound business assessment will overcome these shortcomings.
Call us – we would be happy to assist you with calculating your business’s break-even point to help you with budgeting and evaluating your profit structure.