Did You Tell Your Payroll Department?

This week’s post was inspired by my attendance at the American Payroll Association‘s 29th Annual Congress.  This is the biggest gathering of payroll professionals and vendors anywhere in the world.  The common theme I observed during workshops and networking opportunities was that employees just don’t communicate changes to their payroll system well enough.  Many presenters and attendees experienced the problem of  a significant payroll event that was never given to them for processing.  The demand was that the payroll department “just fix it.”

This post is to motivate anyone who is an employee to stay on top of changes to their payroll situation.  The following examples can provide a taste of items that you can help with.

1. Getting married. This requires a change to the filing status on the federal and maybe state W-4 forms.  Those with the married filing status often see significantly lower withholding.  If you don’t make this change, you may receive a much larger than is necessary tax refund.
2. Changing state.  Generally, withholding is required in the state where you work.  If you change states, you need to make sure and complete a new federal and state W-4 to notify your payroll department of the change.  Without this change, you may end up with no withholding where payments were required.  This would force you to file a return in the state with incorrect withholding in order to get a refund of this money so you can forward it to the correct location.  This is such a hassle!
3. Garnishments/Levies/Child Support. If you have paid off the amount that was being withheld from your check and you do not follow up with that entity quickly enough, your payroll department will have no idea they are supposed to discontinue withholding.  This means you will end up paying money for something that you don’t owe.  It’s often really difficult to get this money back in a timely fashion.
4. Terminations. This one really is the job of the manager or supervisor of employees.  If you do not complete the necessary paperwork with the payroll department, you could allow an employee to continue to be paid for no work.  That means you as a boss are directly hurting the profitability of your company.  Unless in the case of a mass layoff or headcount reduction policy, employees are normally terminated for cause.  Why pay them extra?  They may already be receiving termination payments at the same time.  It is very difficult for a company to recover these funds.  It’s so much easier just to communicate the event to payroll

These events are more common that most people realize.  By staying on top of these issues before they create a problem you are helping improve company profitability, reduce stress of employees, and reduce confusion with employees.

Holidays and Taxes – Part 2

It’s time for year end planning!  Most blogs at this time of year talk about financial moves you can make to minimize your taxes.  I don’t think that bears repeating.  If you are interested in that, here are a few other sites that can help.

http://www.accountingtoday.com/news/Tax-Saving-Year-End-Tax-Planning-Tips-56551-1.html
http://www.smartmoney.com/personal-finance/taxes/year-end-tax-planning-massive-uncertainty-edition/
http://taxes.about.com/b/2010/11/08/year-end-tax-planning-tips-if-you-think-tax-rates-might-go-up-in-2011.htm
http://businesswest.com/2010/11/year-end-tax-planning

I’m more interested in getting everyone organized for the upcoming tax season.  The better prepared you are for tax season, the happier your accountant/tax preparer will be.  After the holiday lull begins in late December or early January (depending on your love of football) take some time to look for your 2010 documentation.

1) Medical receipts.  In order to deduct medical expenses on Schedule A, you must first be able to itemize and second have expenses that are more than 7.5% of your Adjusted Gross Income (AGI).  The most important part though is that you have good documentation. Do you have receipts for any payments to physicians or hospitals or pharmacies?  Did you pay with check or credit card? Having a copy of the statement showing your payment whether from your checking account or credit card is essential. If you cannot find all of your receipts or statements, now is the time to begin calling those who treated you in 2010.  Most doctors can provide you with a printout of your account activity for the year.  Keep an eye on the different codes from that system though.  Any insurance payments on your behalf should not be considered your own payments.

2) Mileage logs. If you drive your vehicle for business, medical or charitable purposes, did you keep good logs of your mileage?  It’s more than just noting starting and ending mileage and date.  A good record of what you did and where you went is essential as well.  Because there are three categories of mileage reimbursement, it is best if you can provide documentation for your tax preparer by category.   By assembling and keeping good notes now, you will save yourself many headaches in case of a future audit.

3) Update your mailing address. If you moved this year, there are a lot of tax documents that are going to take the long road to your home.  This of course slows down their delivery through our illustrious mail system.  Make sure you notify current and former employers (W-2), banks (1099-int and 1098), student loan providers and investment providers of your new mailing address.  Depending on the situation, this could drastically affect your withholding as well if you live in one of the states with local taxes.

4) Make a plan. What is your financial goal for 2011?  Do you want to continue extinguishing your debt?   Will you be saving up for a big purchase to avoid interest?  Will you be moving or changing your family structure (marriage, divorce, kids etc)?  Start thinking about your plan for next year now.  If you don’t make any plans to reach that goal you always talk about, you will never reach it.

Any of these can be done at any time during the year.  However, a little extra planning at year end before the tax documents start arriving can make tax season so much easier for you.

Should the United States Celebrate Thanksgiving?

This month’s post from guest blogger, Vicki Lambert:

Should the United States Celebrate Thanksgiving?

Or any holidays for that matter? That sounds like I am advocating not celebrating Thanksgiving or Labor Day, or Memorial Day or even the Fourth of July. And that is not the case. What am saying is that if we, as a nation, celebrate a day of Thanksgiving across this great nation, why is it not a national holiday under wage and hour law? Why is it left up to each individual employer whether to allow employees time off to be with their families? And if they are given time off but its unpaid why should the employee be penalized a day pay because the CEO wants time off to be with his (or her) family and gets paid for it anyway?

In other words, if the holiday is so important that we have parades and special concerts, then why don’t non-government workers get the day off with pay to celebrate?

The United States is practically the only industrialized nation that does not have mandated holidays. I can understand not having nationalized holidays that subscribe to one particular religion, (i.e. Christmas) or are based on a calendar change such as New Years.  But on days in which we celebrate our national heritage and history workers should be able have the day off to join in the celebration and to do so without loss of pay.

Just a thought, what do you think?

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Beyond Yourself, Charitable Giving

So you’ve obliterated all your debt, paid off your credit cards diligently, established an emergency savings fund with 3 to 6 months of expenses in it, purchased the necessary insurance products, what’s next?  The normal attitude of a Western Society would be “let’s save up to buy something big.”  While it’s admirable to be actually saving up for a large purchase, perhaps there’s another option.  Everyone has seen the commercials late at night that show the starving kids of multiple ethnicities with the kindly old grandfather figure asking you to sacrifice a little bit.  Charitable giving is a great way to go beyond yourself and make a difference in the world.  There are as many charitable possibilities as there are causes in the world.  Some cater to animal lovers, feeding the hungry, promoting eduction or children issues, others to environmental causes, others still are religious in nature.  How do you know where to put your dollars to get the biggest bang for your buck?

First, some background.  Taxpayers can often deduct the value of charitable contributions on their tax returns in Schedule A.  This is subject to limits based on income and also assumes that the taxpayer already itemizes.  If you  take the standard deduction on your tax return, you will not see extra tax benefit from charitable contributions.

Contributions can be in the form of cash or property.  Donating used clothing and household items that are in good shape to your local Goodwill store is one way of making a non-cash contribution.  The IRS has guidance available to determine the value of the non-cash deductions.  Many people go even further by working charities into their estate plan to minimize taxes and provide a positive legacy at the end of their life.  Check with your CPA or tax preparer for specific guidance in your situation.

Suppose you want to donate cash directly to a charity.  Charitable organizations, like businesses need cash to operate.  A certain amount of the fund raising they do must cover operational expenses like salaries, marketing, supplies, rent and administration.  The key is to find charities that minimize these expenses as much as possible.  Larger charities are required to submit to the IRS a document with the number 990.  This document contains information on the structure of the charity.  It is also available for public review.

There are other ways to check up on the expense ratio of a charity.  Websites like Charity Navigator, Charity Guide,  The Better Business Bureau and GuideStar (requires registration) give many different ratings on program expense ratio as well as growth percentages and descriptions of the type of work the charity performs.  There are countless other websites and tools available to help you decide.  I found these through a simple search engine query.

Charitable giving lets you go beyond the normal selfish pursuits of society.  In this holiday season, perhaps it’s time to add a charity to your list of gift recipients.  You’ll be surprised to see how much good your donation can do.

What’s Your Motive?

Each day, we are assaulted with news stories about the level of debt Americans hold both in government and personally.  Still others trumpet the fact that Americans are actually reducing their debt levels.  Others are more cynical stating that debt levels are declining because of higher defaults.  No one really knows of course what is going on.  However, these are all macroeconomic statistics.  Today, let’s take a look at you specifically.  Are YOU trying to reduce your debt load and what is your motive?

In pure economic terms, debt is more acceptable in certain cases when inflation is present or the economy is growing.  During times of inflation, the real value of the debt you hold is being paid back in dollars that continue to decrease in value making the overall economic cost lower to the purchaser.  That is good for the debtor but really bad for the debt holder.  During times of economic growth, businesses can use debt as leverage to prop up their earnings.  As everyone knows, we are now in a much different time.  The economy is not growing as quickly as before.  Businesses and individuals who took on all that debt now have the distinct pleasure of paying it all back or defaulting.

Which brings me to my question.  Why are you paying off debt?  Is it simply to put yourself in a better position to borrow again when times improve?  This reasoning got us into the current housing mess.  We’ll buy a house now and it will increase in value and we’ll sell it and make more money and buy a bigger house…. and repeat multiple times.  A better way of thinking is that your debt reduction plan can give you flexibility in the future regardless of what happens. This could lead to a more stress-free life. If you look at the fixed payments required to service your credit card debt, auto loans and lines of credit, you’ll see that you are essentially locked into long-term slavery.  Think of the stress if anything abnormal happens to upset your servicing of all this debt.

It takes so long to clear the debt mess, that it would be a shame to simply dive back into it in the next economic boom cycle.  What about this scenario?

• Your only payment is towards your mortgage.
• You have normal utility bills each month.
• You pay cash for everything.
• You have a savings account that contains 6 months of living expenses.
• You have life, short-term disability and long-term care insurance.
• You live within your means.

Can you see the difference in the amount of stress? Incidentally, the latter scenario is recommended by most financial consultants.  There are no short cuts to this plan.  You simply make sacrifices and pay back all the debt accumulated from years of overspending.  There is a very pleasant side effect of cutting back on the “fluff” that we all think we need to make it in every day life.  Suddenly, meals at home with the family, game nights with friends, and quiet time with your spouse become a bigger part of your life.  If materialistic (selfish) thinking invaded your life to get you into debt, changing that thinking to spending time with others (giving) is a benefit of getting back out of it.

Non-profit donations before non-profit status

Q. Can a nonprofit corporation issue tax-deductible receipts while waiting for approval of 501(c)3 status from the IRS? Would the deduction be only for the state in which the nonprofit is located and not for a federal return?

A. Non-profits fulfill a great need in our society. Thankfully, the IRS still considers donations to qualified non-profits to be tax deductible within certain limits. There are certain types of non-profits that do not need to go through the official recognition process with IRS Form 1023.

• Churches, including synagogues temples, and mosques.
• Integrated auxiliaries of churches and conventions or associations of churches.
• Any organization that has gross receipts in each taxable year of normally not more than $5,000.

Regardless, it’s still recommended to get the official blessing of the IRS on your organization.

If your organization does not fall into one of those categories, it is not an official non-profit in the eyes of the IRS or your state (most likely) until Form 1023 is filed and you receive your official acceptance letter.  Donations made to the organization prior to the official designation are likely not deductible.  Even if you are accepted at the federal level, it’s a good idea to look into the requirements of registering your non-profit organization at the state level.  If there are extra steps required to provide non-profit status at y0ur state level, it would be a shame to ignore them and cause confusion amongst your donors.  They want to help fulfill your mission, so make sure you have completed all necessary steps to provide the tax benefit available from the IRS.

Unfortunately, the process of completing the form is onerous. There is a 38-page instruction booklet to mull over for requirements. The application form itself is 30 pages!  There is also a new fee structure.  Just to apply, get ready to hand over at least $400.  According to the application,

The entire process can even take up to a year.  For those with more complicated organizations, an attorney may be necessary to insure that the purpose and structure are properly communicated to the IRS.

—–
Samuel Kerch, CPA

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

House Hunting

Q. My husband and I are looking to buy our first home.  We are currently renting and that lease is up at the end of May.  Our credit scores are not terrible but they are not really good either.  We have been looking at buying a HUD home and really have no money to put down on a house purchase.  What can we do?

A. These are very good questions.  The biggest red flag I see from your question is your lack of funds for a down payment.  If you can’t afford a simple 3% down, how will you manage the added expenses that come with maintaining a home?  Think about what is NOT included when you own the home:

1. Taxes
2. Homeowner’s insurance
3. Mortgage insurance
4. Maintenance
5. Appliances and furnishings

The last two items are normally the most expensive.  If you are not a “handy” person and can perform a lot of normal maintenance yourself (I am included in this category), then you will need to pay contractors to bring the home up to a livable condition first.  Keep in mind that HUD homes are foreclosed homes that were insured by FHA loans.  FHA loans are normally for first time home buyers.  During the last2 or 3 years, many home owners in this program suddenly found themselves unable to keep up with payments on their homes, let alone keep up the homes themselves.  For that reason, many of these houses are not well maintained. More about HUD homes here.

Before anyone launches into the home buying process, it is important to understand what you can afford.  This will involve two  steps.  First, you need a personal budget.  What are you spending your money on now?  How much of your cash is spent on home-related purchases while you are renting?  Are there any “leaks”, which is my term for money that could be more efficiently spent?  Once you have followed this path for a couple months, you will be ready to determine the amount that you can comfortably spend in housing.  Your situation is complicated by the quick lease termination.  In this housing market, there are plenty of homes available that are sitting empty with great rates waiting for you.

The second step in the home buying process is pre-qualifying.  You can’t buy a home if you don’t know how much you can borrow.  Your circumstances affect this pre-qualification number. Do you have good credit? Do you have new outstanding loans?  Does your outstanding credit limit your ability to repay a mortgage loan?  As you can see, it is better if you can get your house in order (no pun intended) before looking to buy a house.  There was a very good article recently on CNNMoney.com about steps to take before going after a home.  The better financial position you can get before applying for that loan, the better interest rate you will qualify for.  This directly affects your payment.

Get started on that budget.  I wrote an article about the process a couple years ago.  It should help you get started.

Education and Finances

Today is a special edition targeted to those who are still in the education system.  The consensus this time of year is “spring fever” and “I can’t wait until summer is here.”  Before you start the 2-month brain checkout however, let’s keep some things in mind.

One of my favorite bloggers, Jeff Thredgold, publishes a regular weekly economic new update.  While I don’t always agree with his thoughts, it is fascinating to read the updates of statistics published by the government relating to all facets of our economy.  In the most recent edition, he discusses the job market and the associated unemployment rate.  One of the facts published is:

“It comes as no surprise that one’s educational attainment typically has a direct impact on employment. The jobless rate for those workers with less than a high school diploma was 14.5% in March. For those with a high school diploma, but no college, the rate was 10.8%.

For those workers with some college or an Associate’s degree, the jobless rate was 8.2%. For those with a Bachelor’s degree and higher, the average unemployment rate was 4.9%.”

My blog topics focus mainly on personal finance, tax and accounting.  In this case though, economic statistics point out a very important concept.  The best way to gain control over your finances is through education.  Many other studies promote the fact that educated employees tend to earn higher incomes over their lifetime as well.

A combination of education, higher wages, less job loss and responsible financial moves can lead to a happier and more successful life.  Those that look forward to getting out of high school and never going back to school are setting themselves up for a much more difficult life financially.  As we move ever closer to the close of another school year, keep these facts in mind as you make plans for the future.  The financial and educational choices made early in life have dramatic effects on the later years of life.

You can sign up to receive the weekly economic news for free from essentially any page on Mr. Thredgold’s website.

S Corp Shareholder Health Benefits

Q. A 2% shareholder of an s corporation is also an emploeye.  The corporation offers health insurance under a premium only 125 cafeteria plan.  Is the shareholder/employee eligible to participate?  If so should the corporation’s contribution be reported as wages?

A. There are lots of good articles already on the web about 2% shareholders of S corporations. These would of course be secondary resources on the topic but they can provide coverage from the perspective of those who work in this field every day.

The key is that the IRS considers an S corp to be a partnership when dealing with employee fringe benefits.  If the company pays for the health insurance of a 2% shareholder, it is allowed to take a deduction for that benefit.  The full amount of that premium would be considered taxable income to the shareholder/employee.  So…yes, a shareholder can participate in the plan, but cannot get pre-tax treatment like the rest of the employees would under a section 125 or “cafeteria plan”.

Some states do not allow single person health plans to be purchased as a business.  If the 2% shareholder is the only shareholder in the S corp, then perhaps he should consider hiring his spouse to enable them to purchase a business plan.  Otherwise, health insurance must be purchased as an individual and can only be deducted once it passes 7.5% of AGI on the tax return if the individual itemizes.

The IRS published a bulletin about this topic that goes into much more detail.  It is IRB 2008-2 and can be found here.

New Credit Card Rules

After watching the stories about the new credit card rules this week, I decided to do some digging and see exactly what options are available for those wanting to open new credit accounts.  One story I heard was from a man with a long-time Macy’s credit account.  He said his account is now charged interest from the day of purchase.  Once he pays the balance, and if he pays on time, the interest charges are credited back to the account.  That means, he will never have a zero balance.  Upon visiting the Macy’s online credit application, I found another disturbing number, 24.5% interest!  I think we should all pass on that one.

Next, I visited Bank of America curious about their Major League Baseball cards, Since I am a baseball fan, it would be fun to open a card showing my fan spirit.  An interesting item here is that the fee for balance transfers is now 4% of the amount transferred.  The interest rate is variable and goes from 12.99 to 20.99%!  Apparently, the days of the old fixed rate cards are over.  New card holders get anywhere from 7 to 10 months to pay off balance transfers interest free upon opening the card.  After the initial opening period, further balance transfers begin accruing interest from the day they are transferred.  Definitely don’t transfer unless the new percentage is less than the old card!

Many financial experts recommend that people simply quit the big banks and switch to a regional banking institution or a credit union.   For an example, I went to the Desert Schools FCU website, and looked at their credit card terms.  When you click around the site, it is apparent that they do not underwrite their own cards.  This is important because the fees schedule and onerous terms found with Bank of America look nearly identical to the ones found with this credit union card.  The big difference is the rate range.  It goes from 9.99 to 17.99% which is significantly lower if you plan to carry a balance.

The next stop was to find a regional bank that offered a card.  But…I could not find one.  Many seem to contract with an other third-party issuer to underwrite credit card for their members if they offered them at all.

The new rules issued by the government attempted to reduce some of the most egregious acts committed by credit card issuers.  Unfortunately, we all know that the vast majority of the members of Congress are not financially trained.  That means that any rules they produce will stop the practices they intended to stop.  However, the minds within the big banks are financially trained and very creative.  The new terms received in the mail from anyone who has open credit accounts show just how little the Congressional action did to stop high fees as new ones were created.

The best advice is always to pay them off as quickly as possible.  There is always some way to get ahead.  When you are trying to reduce debt, simply work account by account to pay off the balances.  Any sacrifices that you can make to pay off your debt faster will be well worth it in the end when you can be debt free.