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.
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.
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.
Need Help Navigating the Complexities of Staffing Across State Lines?
Businesses of all sizes that operate interstate are subject to a significant regulatory burden with regard to compliance with non-resident state income tax withholding laws, which can take operating resources away from these businesses. Forty-one states impose a personal income tax on wages and partnership income, and there are many differing tax requirements regarding withholding income tax of nonresidents among those 41 states. The amount of research that goes into determining what each state law requires is expensive and time-consuming. The recordkeeping can be burdensome, particularly since a state’s withholding threshold can be as low as one day’s work in another state. Is your business operating between states or planning to in the future? Todd & Co. CPA Group, Ltd. is a member of the American Institute of CPAs, the professional organization supporting CPAs, which advocates on behalf of CPAs and their small business clients. Our membership helps us keep our clients current on new developments, so we can help you navigate through state laws and determine withholding requirements for mobile staff. Contact us today (757) 926-4109 if you need help determining payroll and income tax withholding rules for your out-of-state operations.
Out of State Operations Require Special Reporting
Considering Crowdfunding as a Means for Raising Funds?
Have you ever thought about raising funds for your small business using online crowdfunding tools? Crowdfunding gives entrepreneurs the ability to raise funds by attracting relatively small amounts of money from large numbers of people. Through a provision in the Jumpstart Our Business Startups Act (JOBS Act), crowdfunding creates a means for allowing startups and small businesses to raise capital through securities offerings using the internet. The JOBS Act permits internet-based platforms, like kickstarter, rockethub and indiegogo, to facilitate the offer and sale of securities. In coming up with the rules, the SEC attempted to create protections for investors while enabling businesses to use crowdfunding effectively. Click on the following link to read the SEC press release and to get a rundown of the new JOBS Act rules pertaining to crowdfunding SEC Press Release 2015-49 .
The CPAs at Todd & Co. CPA Group understand the tax implications of raising funds through crowdfunding. We also understand the Securities and Exchange Commission’s rules, which help small businesses gain access to capital and take advantage of more investment choices. We can help you understand this innovative means for raising capital. Contact us at (757) 926-4109 to find out more.
We often get asked about the requirements for deducting business meals and entertainment expenses. This type of expense requires you to jump through several extra hoops to qualify as deductible and is subject to limitations. Nevertheless, if you pay careful attention to the rules outlined below, the expenses should qualify as deductible.
- Ordinary and necessary business expenses. All business expenses must meet the general deductibility requirement of being “ordinary and necessary” in carrying on the business. These terms have been fairly broadly defined to mean customary or usual, and appropriate or helpful. Thus, if it is reasonable in your business to entertain clients or other business people you should be able to pass this general test.
- “Directly related” or “associated with.” A second level of tests especially applicable to meals and entertainment expenses must also be satisfied. Under them, the business meal or entertainment must be either “directly related to” or “associated with” the business. “Directly related” means involving an “active” discussion aimed at getting “immediate” revenue. Thus, a specific, concrete business benefit is expected to be derived, not just general goodwill from making a client or associate view you favorably. And the principal purpose for the event must be business. Also, you must have engaged actively during the event, via a meeting, discussion, etc. The directly related test can also be met if the meal or entertainment takes place in a clear business setting directly furthering your business, i.e., where there is no meaningful personal or social relationship between you and the others involved. Meetings or discussions that take place at sporting events, night clubs, or cocktail parties—essentially social events—would not meet this test. If the “directly related” test cannot be met, the expense may qualify as “associated with” the active conduct of business if the meal or entertainment event precedes or follows (i.e., takes place on the same day as) a substantial and bona fide business discussion. This test is easier to satisfy. “Goodwill” type of entertainment at shows, sporting events, night clubs, etc. can qualify. The event will be considered associated with the active conduct of the business if its purpose is to get new business or encourage the continuation of a business relationship. For meals, you (or an employee of yours) must be present. That is, for example, if you simply cover the cost of a client’s meal after a business meeting but don’t join him at it, the expense does not qualify.
- Substantiation. Almost as important as qualifying for the deduction are the requirements for proving that it qualifies. The use of reasonable estimates is not sufficient to stand up to IRS challenge. You must be able to establish the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved. Obviously, you must set up careful and detailed record-keeping procedures to keep track of each business meal and entertainment event and to justify its business connection. For expenses of $75 or more, documentary proof (receipt, etc.) is required.
- Deduction limitations. Several additional limitations apply. First expenses that are “lavish or extravagant” are not deductible. This is generally a “reasonableness” test and does not impose any fixed limits on the cost of meals or entertainment events. Expenses incurred at first class restaurants or clubs can qualify as deductible. More importantly, however, once the expenditure qualifies, it is only 50% deductible. Obviously, this rule severely reduces the tax benefit of business meals and entertainment. If you spend about $50 a week on qualifying business meals, or $2,500 for the year, your deduction will only be $1,250, for tax savings of around $300 to $400.
Please call if you have any questions or would like my help in setting up record-keeping procedures.
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.