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.

Holidays and Taxes – Part 1

Greetings readers.  The next three blog posts will discuss some things that will help you during – and right after- the holiday season.  This week, I’ll discuss employee holiday parties and gifts to employees.  Next week, I’ll discuss year end planning tips. The end of the month will be about making some new goals for the new year.  Perhaps there will be time for one more summarizing tax law changes that should have been passed by Congress by that time.

Gift Cards
According to some statistics software attached to this blog, my post a couple years ago on employee gift cards and taxability is consistently the most visited page on this site.  It seems there is a lot of confusion regarding employer responsibility and payments to employees for holiday bonuses and gifts.  Somehow, the notion has entered the minds of the taxpaying public that if you give money or gift cards to employees below $25 or $50 that the amount is not taxable.  That is absolutely false.  The key to withholding on an employee gift is whether or not the value can be tracked easily.  If you give turkeys to all your employees, they cannot exchange that for cash, and determining the value of each turkey as it is given to an employee is nearly impossible.  If you give $25 gift cards to all your employees, it is very easy to determine the value: $25.  This amount should be taxed appropriately.  Likely, you will need to “gross up” the value.  A $25 gift card using supplemental rates could cost the company nearly $50 once payroll, withholding and unemployment taxes are added into it.  There is a simple gross up calculator available at PaycheckCity.com.  It is free to use after  registration.  This tool will tell you the cost from the paycheck perspective.

Holiday Parties
According to the IRS, the cost of  holding an employee holiday party can be deducted 100% as business expense.  As an employer, this can give your employees a chance to relax and talk about non-work topics.  It also causes team building.  Holiday parties should not be overly extravagant.  Think of the old Tyco/Koslowski debacle.  Having a reasonable party that shows your appreciation for their hard work during the year is a great way to give back and avoid the cost of giving out trinkets or gift cards.  You can find many articles that can help you provide guidelines for your employees during one of these parties.  You want it to be the social event of the year, but not because you ended up with a sexual harassment or discrimination lawsuit on your hands.

What if you invited clients to attend the party as well?  This actually takes away part of the deductible nature of the party.  Now it is for advertising purposes which means only 50% of the cost of the party can be deducted.  So you say, “I’ll just send my customers a nice gift like a goodie box from Fairytale Brownies or Rocky Mountain Chocolate Factory.”  Keep in mind that there is a limit on these as well for tax purposes.  For marketing purposes, spend as much as you want on a customer.  For tax purposes, you can only deduct up to $25 of the cost of gifts to your clients/customers.

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.

Congressional indecision

Working in the payroll software industry during the day has certainly opened my eyes to problems created by our federal elected officials.  Under normal circumstances, Congress decides on a budget for the next year with significant lead time for the president to sign the legislation and the Treasury department (IRS) to issue tax tables based upon that law.  Tax tables, if issued in early November, can be coded, tested and released by software companies well in advance of the next tax year.  Once software companies release these tables, payroll and accounting software providers must update their customers with the new calculations after performing tests of their own.  This entire process can take up to a month.

Now, mix in this year’s congressional indecision.  The federal government’s budget has still not been finalized as of the writing of this post.  Many analysts and representatives are saying nothing will happen until the “lame duck” session following the election in November.  With no tax law available for writing next year’s tax tables, there can be no software coding and testing at the tax table software level or the payroll software provider level.  To add even more complexity to the situation, how is anyone supposed to plan for their tax liability with no rules in place to determine how much liability will exist?

The Treasury Department has three choices:

1. Issue new tables assuming all Bush-era tax cuts will be continued
2. Issue tables assuming all Bush-era tax cuts expire
3. Issue tables similar to this year with small adjustments for inflation

If Treasury and Congress do not follow the same path, any mix of two of these scenarios would cause tax confusion like we have never experienced before.  Think about the Treasury Department assuming tax cuts will continue while Congress lets them all expire.  Not only would there be two releases of withholding rules (expensive!) within a short amount of time, everyone would experience underwithholding.  This would require that everyone re-evaluate their tax position to ensure withholding or estimated payments would be enough to cover liability.

While I normally don’t get political in this blog, this time I’ll make an exception.  Please write or contact your Congressman and make a good case for the urgency of a new budget.  Delaying will cause withholding problems with all taxpayers and prohibit those who wish to plan from making those plans.  Should we withhold on an unpatched AMT, reduced child tax credits, Making Work Pay credit?  Please Congress, let’s get this resolved.

Why Doesn’t the IRS Think Payroll Needs Affordable Tax Workshops?

Every year the IRS offers a series of Tax Forums across the country, usually in seven or eight cities from east to west coast. The Forums offer all kinds of workshops on all kinds of tax issues. It is geared primarily to CPAs and Enrolled Agents. But the cost is only $209 so even if there are only two or three workshops for payroll it is still a great deal. This is especially true if you are a CPP like me who needs to have these types of classes to renew.

For the past several years I have attended the Tax Forum here in Las Vegas with my CPA friend. I even wrote several articles touting how great they were for payroll professionals. Workshops I have attended included taxing nonresident aliens and filing W-2s electronically. After the first Forum I attended they asked for a survey of attendees as to what workshops they would like to see in the future. I, of course, jotted down some quick suggestions on adding Form 941, third party sick pay, and taxing fringe benefits in general. I submitted the survey and went merrily on my way, knowing I would see at least one or two of these courses next time around.

The next year came around but they did not have any new workshops for payroll people. In fact they had dropped a few from the time before. But still they had enough to get my money’s worth so I attended. And again they asked for ideas for workshops. Well this time I got a large cup of Starbuck’s coffee, a muffin and a pen and off I went. War and Peace it wasn’t but it was nearly that large. I explained how they could attract payroll professionals thereby increasing attendance, and ensure better compliance by offering these workshops. And it’s not like CPAs don’t need the information, they do. I submitted my tome of a survey and headed off into the future secure in the knowledge that I would see these workshops this year. I mean the IRS would surely jump at the chance to educate those professionals who are responsible for collecting at
least half of the taxes in this country. Isn’t compliance in payroll one of the most important things to them? They have all these publications to tell us how to handle fringe benefits surely a workshop or two wouldn’t be out of line?

So as soon as I got the e-mail for the Tax Forum this year I opened it with great anticipation. Wondering how I was going to fit in all the payroll related workshops this year. You know where this is going of course. Not only did they ignore my suggestions for workshops related to payroll but actually dropped any workshops that would even matter to payroll professionals. They only ones they kept were the tired old ones they always offer. Those are the ones on how to submit W-2s electronically and matching names and numbers on the W-2 to the SSA’s data base. Those both are actually offered by the Social Security Administration so I can’t fault them for not adding any new ones.

So the question arises, why doesn’t the IRS want to offer affordable tax compliance workshops to payroll professionals at their Tax Forums? Are they worried that so many payroll professionals will show up there will not be enough room for the CPAs? I don’t think so! Do they not care about compliance when it comes to payroll? I doubt that. So why not use this opportunity to offer sessions for payroll professionals? It’s a question the IRS needs to address.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Self-Employed on Unemployment?

Q. I am a OTR driver and am the only person working for this company. Now he’s shutting down the company. He classified me as self employed. Can I draw unemployment? I do not have a home, but license is North Carolina. Employer was in Nebraska.

A. The arrangement between you and the company providing your work is very important to get right.  The key here is, how much financial and behavioral control over your work did the hiring entity have?  If he provided your truck and directed all of the shipments you hauled, you may have been an employee.  If you have your own truck and were allowed to contract with other companies, you may actually be independent.  How have you filed your tax return since working with this individual?  Did you use Schedule C, which is typical for self-employed individuals?  Were you provided a 1099 or W-2 at the end of previous years?

The biggest problem with mis-classification is when termination, layoff or work stoppage occurs.  Employers typically attempt to avoid the employee classification simply to save money on the Social Security/Medicare match, unemployment taxes and workmen’s compensation insurance.  If you were actually an employee, then you are due unemployment compensation.  If you were not, then you are not eligible to collect unemployment benefits.  It makes sense that as a self-employed individual, it is my responsibility to keep myself busy.  If I am not finding enough work and lose clients, it is my own responsibility to find more business. No unemployment benefits should be received.  In an employee/employer situation, it is the employer’s responsibility to pay into the unemployment system and thus provide benefits for those employees who are terminated.

The state where you were based is likely the state where you will need to attempt to collect unemployment.  That state will make the determination if you were truly an employee or not.  If it is determined that you were not, you are out of luck.  This may take some time to sort out unfortunately.  In the meantime, the best thing you can do is find another source or income instead of waiting around for an answer. You can read a more in depth article a few years back regarding this topic as well.

The IRS also has a very good publication regarding worker classification.  You can read it here.

—–
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.

Taxes Cause Fireworks Too?

Q. We recently ran a fireworks stand for a business in another state.  They have stands over about 4 different states and they hire people to manage them for them.  This was our first year running the stand.  We sold off of commission.  We were to receive 20-25% of net sales that we took in.  I just received the check from the company.  The check made out to me in the amount of just over $6,000.  It is my understanding that when tax time comes, I will be receiving a 1099 for that amount.

Here is my problem, I do not want to have to pay taxes on the full amount when I’m planning on giving about $4,500 in wages to 9 workers.  I also have about $500 in expenses.  The way it looks to me right now, is that in April, I will be paying income tax on the whole amount.  Can I write them checks as contract labor?  If so, what is the max on it?  How do I show those expenses after I get the 1099 so it doesn’t look like I received the whole $6,000?

A. Taxes, Taxes, Taxes.  Everyone seems to want to avoid paying taxes on their income for some reason.  Actually, it is your legal right to only pay the taxes you actually owe.  You should be taking advantage of all possible legal deduction opportunities that are available in the tax code.  In your case, yes, you will receive a 1099 for the amount you earned running the stand.  The arrangement described almost sounds like a franchising opportunity. I wonder whether you are actually “self-employed” as you are being classified or if you are indeed an employee.  I wrote an article about that one awhile back that you can read here.

If you are actually considered a small business, then you need to track your expenses incurred while running the stand like a regular business would.  As a self-employed individual, the income and expenses from your business will be reported to the IRS on Schedule C of the tax return.  Schedule C allows many types of deductions.  You can read instructions for that form here.  Valid expenses could be everything from vehicle mileage or depreciation, office supplies, employee and benefit expenses, licenses you were required to purchase, business meals, commissions, insurance, etc.  If you paid people to run the stand with you, those people were likely employees and should have been paid and reported properly through a payroll system.  Basically a valid expense is something that a an auditor would allow during the course of an examination.  If you take a conservative approach and have receipts and documentation for expenses, you are much more likely to keep your claimed expenses from being denied if you are audited.

Of course, the best way to make sure you are doing this correctly is to retain the services of a knowledgeable accountant.  Both the IRS and the state government will have unique tax laws relating to your situation.  Your accountant will become your trusted advisor while guiding you through the labyrinth of tax laws that exist today and helping you make better business decisions.  Good luck!

—–
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.

HHS Wants Us Fit—IRS Wants the Tax

It’s been in the news a lot lately—how unfit Americans have become. The First Lady is advocating programs to fight childhood obesity while AARP started an online movement to get its members fit over this summer. Everyone is being asked to join in and help. But for employers and especially for payroll helping fight obesity is a two-edged sword. If the employer takes office space and puts in a gym on site for employees to use under IRS regulations it is tax free. According to Publication 15-B:

Athletic Facilities
You can exclude the value of an employee’s use of an on-premises gym or other athletic facility you operate from an employee’s wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee’s dependent child is a child or stepchild who is the employee’s dependent or who, if both parents are deceased, has not attained the age of 25.
On-premises facility. The athletic facility must be located on premises you own or lease. It does not have to be located on your business premises. However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort.

The added bonus of offering an on-site gym is the employee good will it creates. But for the employer to use valuable and sometimes nonexistent “extra” office space to put in a gym can cause a lot of “bad will” among workers who are crammed into cubicles. And let’s face it not too many companies have an extra 500 square feet just laying empty. Plus I really have to ask how many of us overweight and out of shape payroll professionals want to huff, puff, and sweat in front of our staff and fellow co-workers. I know I never did. Plus with no shower facilities it could make the small and cramped payroll office somewhat—shall we say, unpleasant. And if the employer does put in a shower, I really don’t want to strip and shower in front of my staff!

But the employer really wants to offer a healthier lifestyle to its employees. And they also want to help other local businesses by buying services. So they buy a gym membership for all their employees. It might be a one-off benefit or even part of a larger and more complex wellness program that includes quitting smoking and diet tips. Either way it doesn’t matter. If the employer buys the gym membership everyone is paying taxes on it. FIT, FICA, FUTA, SIT, SDI (where required), SUI, Local Taxes–all of them. In essence the employer is made to pay more simply because they don’t want a gym next to their conference room.

My point is if the government wants Americans to get fit why make it harder and more expensive to buy a gym membership rather than gym equipment. Why should employers and their employees have to pay more for basically the same thing? Putting in a gym or buying a membership should be the same thing if it is for the employee’s health and for the health of America.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Social Security Started Over

Q. I have a unique variation of your “Social Security Tax on Everything” post… My wife’s small company decided to change their paycheck provider in July. The provider “reset” all employees yearly total earnings to zero and are therefore collecting the Social security tax from scratch. The provider claims they have to do this by IRS law. My wife had already paid the maximum of $6621.60. Will we be able to get the overpayment for the rest of the year back on our taxes? The instructions for line 69 of 1040, and form 843, seem to indicate that if your employer overwitholds then you are ineligible for a refund. She has not changed employers, just paycheck providers.

A.  This is a very good question.  Unfortunately, there is not enough information to answer your question.  It sounds like this employer may have switched to a PEO also known as a Professional Employer Organization.  Sometimes these are referred to as Employee Leasing Companies.  When an employer joins a PEO, the employer of record changes from the employee perspective and all Social Security and unemployment taxes start over for each employee.  PEOs can be a big cost savings for an employer by allowing a bunch of smaller employers to pool together for health insurance purposes to become one big client.  In your case, it would restart SS withholding however because technically, there is a different employer.  If this is not the case, I have no idea why SS would have started over.  Simply switching payroll providers would not cause this problem because the employer would be the same.  The employer would also feed in all Year-To-Date information from the old payroll provider to keep this kind of problem from surfacing.

Your second comment however is incorrect.  You can still obtain a refund of excess Social Security withholding from a single employer.  However, you must first ask the employer to refund the tax.  This quote is taken directly from the instructions from IRS Form 843 which is needed to request this kind of repayment, “A refund of excess social security or railroad retirement (RRTA) tax withheld by any one employer, but only if the employer will not adjust the overcollection.”  Refunds are available if your employer simply will not work with you.

—–
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.

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.