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.

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.

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.

Multiple Rates of Pay—Finally a Use for High School Math

A post from guest author, Vickie Lambert:

Under the FLSA it is required that employers pay employees overtime based upon the regular rate of pay. For this blog entry I want to look at one facet of calculating overtime and the regular rate of pay. What to do when an employee works at two or more different rates within the same workweek. In this type of situation, the regular rate of pay for the week is the weighted average of all the rates. Remember weighted average is not the same as average.

Let’s do an example: At Secrest Corp this week Paul worked to cover for other employees on vacation. His time card reads as follows:

Paul does not work in a state which requires daily overtime. So under the FLSA we would calculate his gross pay as follows:

Step 1… Calculate the Earnings for Each Day
Monday       8 x $8.00 = $64.00
Tuesday       8 x $8.00 = $64.00
Wednesday 8 x $9.00 = $72.00
Thursday     9 x $8.75 = $78.75
Friday         10 x $7.50 = $75.00
$353.75

Many times I have seen payroll professionals confuse weighted average with average. They add up the rates then divide by the number of rates. For example $41.25 (total of all the rates) divided by 5 (number of rates) = $8.25 and try to use that as the regular rate of pay. In this case it would be close enough. But unfortunately it doesn’t always work out so close and can end up underpaying the employee.

Step 2: Divide the total earnings by the total hours worked to determine the regular rate of pay
$353.75 divided by 43 = $8.23 (regular rate of pay)

Step 3: Determine the premium pay for overtime by multiplying the regular rate of pay by .5 (or divide by 2) then multiplying that amount by the number of overtime hours
$8.23 x .5 x 3 = $12.35

Step 4: Determine the total weekly compensation by adding the total earnings (step 1) and the premium pay (step 3)
$353.75 + $12.35 = $366.10 (total weekly compensation)

These 1938 rules under the FLSA require this method to properly pay employees working at more than one rate in a workweek. So you see, you should have paid closer attention to your teacher in high school math class.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

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.

Enjoyable Financial Statements

I get to serve as a director on the boards of several local non-profit organizations.  Part of the meeting process for board members is to review financial statements.  The directors are responsible for keeping watch on the finances of the organization to ensure that they are being spent in the best interest of the organization’s mission, not the pockets of management.  Unfortunately, most board members, and for that matter, most people really don’t know how to properly view a financial statement issued by a company or organization. This post is explain to the masses some simple things you can look for during those moments.  Hopefully, it will lead to less awkward silence at board meetings.

Financial statements are considered to be about as much fun as a root canal.  So, while the accountants on various boards are carefully performing accounting calculations in their heads during the review time, others:

• look at the statements out of fear that they may look ignorant if they simply stare off into space
• look for nit picky items in categories that seem to be more or less expensive than previous statements
• simply stare off into space
• ask questions using the few accounting terms they know to impress others ie materiality, depreciation, assets, did we debit that properly?
• look at the accountant and wonder what they actually do all day at work?

First and foremost, numbers on a financial statements are essentially meaningless by themselves.  Ratios of the numbers on the page to the whole, trends of the numbers over time and comparison to similar organizations will lead the reader to a much greater understanding of what is actually happening.

The first thing I look for is the percentages of the total revenue (income) numbers.  By that I mean, what percentage of total revenue were product sales, or government grants or memberships?  Has that number changed over time? Is most of the revenue in the organization coming from one or two sources?  How stable are the income sources? In the case of the non-profit charter school I work with, how stable is the revenue stream from the state?  When states go through recessions with declining tax revenues, they often look to educational institutions to “cut the fat.”  While unfortunate, it is important to keep in mind when planning for income during upcoming years.

Expenses are even more fun to analyze.  The typical person will say something like, “we spent $300 more on (fill in the blank) this year.” Looking at the increasing expense does provide clues to what is happening in the organization if properly analyzed.  If it is copy costs, perhaps an initiative to be more “green” is in order.  Perhaps an organization with increasing employee count is doomed to increased office supply costs simply because of the extra bodies using them.  More important in examining expenses is to look at the percentage of total expenses contained in that number.  For a service organization like a software company or school, perhaps employee/benefit costs of 65-70% of total expenses are completely appropriate since the majority of the operation exists by people doing the work.  If a retail organization had 65% employee costs, I would be concerned.  In that environment, inventory should be the main cost driver, not compensation of employees.

Sometimes expenses expose a hidden story that management is trying to hide. If you tell me that the organization spent $650 on liability insurance this year, unless I am in the insurance business, that will mean nothing. However, if I can see that last year, we spent $300 and this year the number is over 2 times as large, I know there is something going on.  Did we have excess claims this year?  Did something change significantly with regards to the organization’s practices?  Is the insurance company trying to get rid of us?

Next, it is important to examine expense percentages compared to others in the industry.  If my charter school is paying around 8% of expenses toward copying costs and other charter schools of similar size are paying only 3 or 4%, that would indicate that there are some missing cost controls surrounding this area.  More important in this comparison are larger line items like salaries, debt payments, maintenance and curriculum costs for charter schools.  In retail it could be rent, advertising, inventory and compensation.  Whatever the case, you don’t want to be locked into fixed payments for an area that is significantly higher than your competitors.

Last of all, the most important item to remember as you make financial statements enjoyable is materiality. Don’t worry about all the items smaller than a gnat’s nose. Materiality means the item must be big enough to make a significant impact on the financials. In well-run organizations, management will take care of minimizing expenses they have direct control over. The board needs to focus on strategic expense issues relating to the mission of the organization while it oversees management’s implementation of those plans.

There is a lot more to this issue than what I presented.  Hopefully, this at least gets you started on the path to a better understanding of the financial world.

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.