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4 Things You Should Know

Author: Keith Huggett

You know that when you have a new hire that you need to have that person fill out a Form W-4 for tax purposes.  This form tells you the person's marital status, number of withholding allowances, and any additional amount to use when you deduct federal income tax from the employee's pay.

As an employee, Form W-4 includes worksheets to help you figure out the correct number of allowances or there is a withholding calculator available on the IRS website for help in completing the form correctly.

• Exemption - Some employees may qualify for exemption from withholding. Form W-4 is also used for this purpose. To qualify for exemtion an employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. If the employee can be claimed as a dependent on a parent's or another person's tax return, additional limitations may apply. This exemption is valid only for one calendar year. New W-4s need to be submitted each year, before February 15th.
• Invalid W-4 - If an unauthorized change is made to a W-4, it invalidated the form. Any mark made on the form other than the entries requested will invalidate the W-4. If there should be any mark on the W-4 other than the requested entries, ask your employee for another one. If the employee does not give you a valid one, withold taxes as if the employee is single and claiming no withholding allowances. However, if you have an earlier Form W-4 from this employee that is valid, withhold as you did before.
• Keeping Records - You must keep copies of W-4s for at least 4 years. A W-4 serves as verification that you are withholding federal income tax according to the employee's instructions and you have copies available should the IRS need to see it.
• IRS Notices - Should there be a compliance issue, the IRS will send out a notice. Both the employee and the employer will receive a notification that there is a problem. As the employer, you will be required to withhold additional income tax until the employee can explain to the IRS why additional tax should not be withheld. These notices are often referred to as "Lock-in Letters." After the lock-in letter takes effect, any request by the employee to change his withholdings that results in less income withheld than the lock-in letter, the employee must be referred back to the IRS.

W-4s can be changed as needed, as evidenced by the lock-in letters.  They may also be changed in the case of marriage, the birth of children, or in case the employee wishes to have additional withholdings deducted from his pay.  If you received a revised Form W-4 from an employee, you must put it into effect no later than the start of the first payroll period ending on or after the 30th day from the date you received it.

Should you have any questions on W-4s, withholding, new-hire's or any other tax topic our specialists at the Tax Office, Inc. are here to provide you with the answers. You can contact us, or ask us a question on our Facebook page.

It Could Happen to You! 

Author: Keith Huggett 

We have spoken earlier about the conflict between independent contractors and employees. It's a very hot topic and complex issue, in the tax, benefit, and legal worlds. The EDD and the IRS both have their definition of an employee and an independent contractor and the line between the two is a distinctive shade of grey. But what happens when you cannot, or do not, make the distinction, and the IRS decides to "correct" your choice, usually not in your favor? As you might guess, it generally invoves your business making large payments to the IRS in the form of penalties and interest.  If your workers that were classified as "independent contractors" get reclassified as "employees" by the IRS, here are 5 things you will need to be prepared for:

1. Federal Income Tax Withholding - as with your other employees, you are responsible for withholding income and employment taxes. There may be big liabilities in store for failure to withhold in the past. 
2. Social Security Tax - Employer and Employee each pay half of the FICA tax. OASDI payments are also required at 6.2%. As an employer your company is responsible for one half of the Medicare tax. If your workers were to be recharacterized, the past employment tax liability would quickly add up.
3. Federal Unemployment Tax - FUTA allows for the collection of a federal employer tax used to fund state workforce agencies. With reclassification your company would be responsibile for paying the past taxes along with penalties and interest.
4. State Unemployment Taxes - The state portion of this tax is determined by the state agency and depends on the unemployment experience of each company. If a company's independent contractors are recharacterized, the company would be responsible for paying applicable state unemployment insurance for both past and future, plus penalties and interest.
5. Worker's Compensation Insurance - Worker's Comp varies from state to state, and can even vary from employer to employer. The company involved would most certainly be liable for the past and would have to make premium payments for the future.

Classifying your staff correctly is a very important aspect of your business. While having independent contractors makes things easier at first, because you don't have to deal with the tax issues, problems can arise years later. 

If you are uncertain how to classify your employees, the specialists at the Tax Office, Inc. can provide you with the answers. Contact us to find out more about taxes, the effects of classification of employees on your taxes, accounting, representation services, bookkeeping or payroll. 

Offering Benefits May Be the Answer

Author: Keith Huggett

Just about every employer feels that they are overpaying their employees, just as many employees feel that they are underpaid. However, there is much more to a total employee compensation package than just salary or hourly wages. Perks and benefits can add as much as 30 percent to an employee's total income. Furthermore, shifting the way you pay employees to include a higher proportion of benefits and perks can save you a great deal of money.

There are a number of perks and benefits that companies use to attract and retain employees. While some, like health insurance, are practically ubiquitous, others are a bit rarer, but equally valuable. Here are some perks that you should be thinking about:

• Health, dental and vision insurance.

• Life insurance.

• Disability insurance.

• Supplemental insurance.

• Flexible savings accounts for health, dependent care or commuting expenses.

• Tuition reimbursement.

• Pre-paid legal.

• Employee discounts at major companies.

• 401(k) accounts (with or without matching)

• SEP accounts.

• Vacation leave.

• Flex time/telecommuting.

The key benefit of using perks and benefits instead of salary as a form of employee compensation is that you avoid paying payroll taxes, unemployment insurance, disability insurance, and worker's compensation on the money that you put into perks instead of into salary. In many cases, you can also avoid making those additional payments on salary money that your employees divert into benefits, such as paying for their own health insurance or funding their 401(k) accounts. A good payroll service can help you to calculate just how much you can save.

These benefits have other advantages, too. Some no-cost benefits, like allowing employees to work flex time, or negotiating employee discounts at companies like cell phone providers, are very effective for retention. Plus, many employees will not take advantage of the perks you offer, saving you more money.

Ultimately, designing an employee compensation package is a complicated process. You need to weigh costs and benefits and balance them against good tax strategy. The Tax Office Inc. can help you to strike the perfect balance and come up with a employee compensation that is far for them and for you. Contact us today to learn more.

Which is Which and Who is Who?

Author: Keith Huggett

This question pops up more often than you would think. Between the Employment Development Department and the Internal Revenue Service, we think we've come with some answers for 10 common misconceptions about employees and independent contractors. But before we get on to those, here are a few "simple" definitions for you.

Who is an employee?

An employee includes all of the following:

• Any officer of a corporation
• Any worker who is an employee under the usual common law rules
• Any worker whose services are specifically covered by law

That's crystal clear isn't it?

Who is not an employee?

Independent contractors are not employees. Independent contractors are engaged in separately established bona fide businesses. A bona fide business is subject to profit and loss. They usually contract to perform a specific task and have the right to control the way the task is to be accomplished. They have a substantial investment in their business and customarily perform services for more than one business.

Now that that's cleared up, we can see where we get the following misconceptions...

1. Family members are not employees... On the contrary, hiring a family member to work for you as an employee can be a great tax planning strategy. In many cases, having family members as employees of a company is more common than having family members as independent contractors. An obvious example of having a family member as an independent contractor would be something like this: Assuming that your business is not a law firm, hiring your son the attorney to handle your bankruptcy.
2. If a worker earns less than $600 a year then the worker isn't subject to payroll taxes... The $600 threshold only applies to whether or not you need to issue an IRS form 1099 MISC to an independent contractor. Before issuing that form, you need to determine if the worker is an employee or an independent contractor. Once that is determined, then the issue of payroll taxes or 1099's is applied.
3. If I issue an IRS form 1099 MISC, then the worker is an independent contractor... If only that were the case. 1099-MISC forms are used by the IRS to track and report certain types of non-employment related income. When you provide a 1099-MISC form to a worker for payment of services, it does not automatically make them an independent contractor. There are other qualifications that must be met in determining the status of the worker.
4. Day laborers or casual laborers are not employees...There are many different types of employees under the law. Many people work part-time or as temporary help. Under the law, services commonly referred to as day labor, part-time help, casual labor, temprary help, probationary or outside labor are all employees.
5. My competitors treat their workers as independent contractors, why can't I do the same... The days of "if he can, so can I..." ended back in grade school. The law defines employment relationships, not your competitors. If you misclassify your employees, it is you who will end up in hot water, dealing with unpaid payroll taxes, penalties and interest, right next to your competitors.
6. My worker does similar work elsewhere. He must be an independent contractor... Just because your employee/worker does similar work at other locations does not automatically make him an independent contractor. There are other qualifications that the employee/worker must meet before he is qualified as an independent contractor. Quite simply, he could just have multiple part-time jobs in the same field.
7. My worker has a business license and business cards. Doesn't that make him an independent contractor... While having those things certainly put him on the road to being an independent contractor, by themselves the do not. Other common law factores need to be met before your worker can be qualfied as an independent contractor.
8. I only pay by commision, so I have no employees only independent contractors... How you pay your employees is not a factor in determining if your workers are employees or independent contractors. With employees commissions are simply another form of wages.
9. I have a written contract with my worker, that makes him an independent contractor... A written contract does not automatically make your worker an independent contractor. How you actually work together in a relationship is more important than the workding of a document in determining whether a worker is an employee or an independent contractor.
10. Who has control determines if a worker is an independent contractor or an employee... The right to control, whether or not exercised, is the most important factor in determing the relationship between an employer and employee. The right to discharge at will and without cause is strong evidence of the right to control.

While we mentioned several times the common law rules. The common law rules are intended to answer two questions: What must be done, and How it must be done. If the person in control of these questions is YOU, your worker is an employee.

As you can see, this is not a black and white issue. There is no bright line test with a simple answer. Many factors play into determining the difference between employee and independent contractor. If we've raised more questions for you than provided answers, please contact us at The Tax Office, Inc. We will gladly answer any questions you have. 

Helping to Save the Planet Can Also Save You Money

Author: Keith Huggett

With today's economy every dollar counts. What if you could save a few dollars by eliminating all of the paper you use in your office?  Sounds like a dream, or a child's wish, doesn't it.  Everyone claims to be going paperless these days.  How do you do it? Purchase a quality scanner and start scanning all of your printed documents. Sound fun. Absolutely not. What is the upside here? Why on earth would you want to do ALL THAT WORK?

When you "go paperless" not only are you helping the planet out by saving a few thousand trees, you are also helping yourself and your company. Here are a few benefits that can arise due to you utilizing a good quality scanner:

1. All of the employees in your office will have access to the digital files at the same time. No waiting for Fred to be done with the file in question.
2. Less cost in storage fees. You will no longer have to pay for storage for the bankers boxes of files that need to be kept for 7 years.
3. No shredding costs. Without hard copies of files, you no longer need to pay the shredding company to come and handle the papers you used to have.
4. You can safely and securely backup your data files on your own computer systems as well as in the cloud.
5. You have access to your files, anytime, anywhere, allowing you to work while traveling to meetings, conferences, etc.

While the initial work is time consuming and tedious, the end result benefits both your business and the planet.  What more could you ask for?  One you have your office set up as a paperless office, the goal is to keep it that way.  It is far too easy to backslide into an office that relies on it's paper copies.

The Tax Office, Inc. is a paperless tax corporation and would like to help you become a paperless office. If you have any questions we would be happy to help you.  Our Client Accounting Services program specialists can help you become a paperless office, while assisting you with any other office needs you may have. Contact us if you have any office, tax, accounting, or representation needs.

Let the Cloud Protect You

Author: Keith Huggett

Nothing strikes fear in a business owner’s heart more than the thought of permanently losing critical data. What a disaster! Whether it’s a power outage, a flood or a fire, if your business isn’t properly protected, disaster recovery could be challenging, to say the least.

For every kind of business, core information integrity is key, and ineffective data recovery could be truly devastating. Many companies are turning to the cloud for protection.

The traditional way

The unthinkable happens, and you’ve lost all of your data. You can only hope someone remembered to perform the latest backup, but when was that? Within the last minute, last night, last week? Hopefully it’s current, and your information is housed someplace safe.

Now begins the lengthy and cumbersome restoration task of reloading programs as well as files. It will take many hours – time and money you’ll never recover. Not to mention the lost confidence of your clients. You may never recover from that, either.

Worst case? It could literally mean the end of your company.

Disaster recovery in the cloud

With web-based accounting, information systems, software and documents are all safe, ensuring business continuity even if disaster does strike.

Cloud-based computing uses virtual servers that store your software and data and back it up more than once, in more than one location. Yet it’s always available for immediate retrieval.

There are many benefits, including:

• Real-time data backup and encryption
• Negligible system downtime, important for daily operations as well as disaster recovery
• No time wasted on performing backups
• No space needed for physical backup equipment or off-site storage
• Affordability, allowing small and mid-sized firms to achieve a level of protection that they couldn’t manage on their own
• Scalability – the cloud always fits perfectly regardless of your company's size

Cloud-based computing also gives your business the secure infrastructure and control you need to meet compliance requirements.  

Why take chances? The latest technology can turn disaster recovery into a workflow “glitch,” rather than a serious threat to your company's entire future. Interested in exploring it? Contact us at The Tax Office, Inc. today.

Are You Using A Budget?

Author: Keith Huggett 

We all know how hard it is to come up with a balanced budget. Just take a look at our government, they still can't do it. However, to actually run a profitable business you need to use budgeting properly and have a working budget for good financial management.  Even having a workable budget in your personal lives is tough but it's doable, so we just need to apply that to the business.

A "working budget" means that it's a work in progress. It's adjustable. You, the business owner, need to look at it every day. Follow it and make necessary adjustments.  Consider it your guide book.  A budget gives you the ability to know what dangers or opportunies may lie ahead. The SBA has a budget worksheet that can be downloaded for use or you can always just make your own.

If you've been running your business for a while, you have your financial data to use to formulate your budget.  If you're just starting out it's a little different.  You need to do some research on your competion, and estimate your profit and loss, expenses, etc., based on what you can find on your competitors.

What can happen if you don't have a business budget? You could easily become an employee at someone else's business.  You have to be sure that you can make enough income and profit to cover the expenses associated with your business.  The only way to do that is to have a budget.  With a budget in place, not only do you know how much you need to have in income, you know how much is going out in expenses, and on what.  But you have to maintain the budget.  It's easy to forget about it when you are busy focusing on other parts of your business.

Another option you have to help you with budgeting is to talk to your accountant or tax preparer.  This is a service that is often outsourced. Accounting services is not one of the CORE aspects of your business.  Your time can be better spent, and outsourcing your accounting is an option that can save you time, money and often frustration.

Should you have any questions regarding your budget, budgeting practices, or outsourcing your accounting, please contact us.  The specialists at the Tax Office, Inc. are here to answer any questions you may have.

Changing Systems May Help to Grow Your Business

Author: Keith Huggett 

 In past articles we have talked about outsourcing your accounting services. We still recommend that. You need to focus your activities on your core business, which does not include doing your own accounting, however, we do need to talk about which type of accounting system you are using.

When you are first starting up your business or have been in business for a while, you may have started keeping your books using a cash based accounting system.  This system is fairly easy to use and records financial transactions when cash changes hands.  It keeps track of what cash you have on hand very well, but does not do well keeping track of future sales or long term payments. Depending upon how much business you are doing, you may need, or want to shift your system to an accrual accounting system.

An accrual accounting system is a "real time" accounting system. Financial transactions are recorded as they happen. As you might guess, a lot more time is required to manage this type of accounting system.  We most emphatically suggest that you outsource this activity.  Using this type of system provides infomation that can be used to indicate sales forcasts, key performance indicators, and financial reports.

The general set of accounting principles, standards and procedures that companies use to compile their financial statements, commonly called GAAP, require businesses that have $5 million in annual sales or $1 million in inventory sales to use an accrual method for their accounting system.  The accrual method is also the preferred method for businesses that wish to significantly grow.

If you have any questions regarding cash or accrual accounting systems, please contact the Tax Office, Inc. Our specialists would be happy to answer any questions you may have.  If you have any questions regarding outsourcing your accounting, bookkeeping or payroll services we would be happy to help you.

8 Simple Ways To Protect Yourself 

Author: Keith Huggett 

During the height of tax season we always hear about identity theft and the hundreds of ways people are being scammed out of their hard earned money. Well, tax season is over now but identity theft is still a problem that needs to be discussed. Your tax preparer can either be part of the problem; someone who is helping the theives, or a part of the solution. Here are some simple ways that you and your tax preparer can help protect your identity.

1. Never sign a blank tax return.
2. Place your tax documents in a secure location, such as a safe, or locking file cabinet.
3. Use a password on your cell-phone, tablet, & laptop computer.
4. Remember that when you receive communications from the IRS, they only use the U.S. postal service. If you receive an email from someone claiming to be the IRS, report it to phishing@irs.gov.
5. Ask your tax preparer about their security. Is it up-to-date? Do they have back up systems?
6. Monitor your credit reports regularly. It's a handy practice to keep up to date on your credit report. With a watchful eye, you will notice any changes much faster than your credit card company will.
7. Change your passwords on your computers regularly. Make them complex, with numbers, capital letters, and symbols, in order to make it more difficult for hackers to figure them out. Using birthdays, anniversaries, or pet names are very common and easy to figure out.
8. If you upgrade your computer system, and decide to recycle your old one, be certain to wipe the hard drive first. PCWorld provides a helpful article on How to Securely Erase Your Hard Drive. 

One last thing to remember in order to protect your identity. When you are on social media sites, be careful not to answer those harmless looking (and sounding) quizes about your first pet, or your mother's name, where you grew up and games about how well you know your best friend. You could accidently give out information about yourself & your best friend.

If you have any questions about identity theft, personal information, or tax information, the specialists at The Tax Office, Inc. are ready to help. If you suspect that you have become a victim of identity theft, you should act immediately to correct your records. Make copies of all email and letters, and keep detailed notes of phone calls.  Your tax returns are only a portion of what will need to be corrected. Contact us today for your tax return needs.

The Supreme Court Brings Tax Equality to Same Sex Families

Author: Keith Huggett 

With a vote of of 5-4 the Supreme Court leveled the tax field for same sex couples. No longer are same sex married couples forced to file separate tax returns. They now have the option to file jointly as a married couple just as heterosexual married couples do. They can file taxes, claim inheritances, and handle other tax and benefit issues in the same way as other married couples. Insurance benefits will no longer be considered taxable income.

Due to being unable to file jointly as a married couple there are a couple of tax issues that same sex couples will have to deal with.  Filing separately will have caused an overpayment in taxes, for which, they will now be able to file an amended joint return in an attempt to get a refund for the last three years. For years beyond that, legal aid will be necessary.

In order to file any tax return at all as a "legally married couple" will depend on where a couple lives. The Internal Revenue Service and the Social Security Administration  both define a marriage as "legal" depending on where you live. If the state you live in does not recognize your marriage as being legal, you cannot benefit from federal spousal benefits. In order for a same sex couple to benefit from the federal spousal benefits they must live in 1 of the 13 states that recognize same sex marriage.  These states are:

• California
• Connecticut
• Delaware
• District of Columbia
• Iowa
• Massachusetts
• Maine
• Maryland
• New Hampshire
• New York
• Rhode Island
• Vermont
• Washington

Because of the changes to DOMA, it's effects are going to ripple through the tax code and cause many changes to the lives and family members of same sex couples.  People have been working hard to effect this change for so long, now that it is here, there are still many difficult challenges and complications to work out.

With California coming on board as the 13th state to legalize same sex marriage, couples living here are going to be facing many tax ramifications.  At the Tax Office, Inc. Our tax specializations suggest that speaking with a tax professional might be in your best insterest before making any changes to your tax plan.  If you have any questions regarding how the defeat of DOMA and the legalization of same sex marriage may or may not affect your tax situation, please feel free to contact us for no cost, no obligation conversation. Our tax professionals are here to answer any questions you may have.