December 2009

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Tuesday Tax Time: Officer Compensation

December 31, 2009 by thriveal | 1 comment

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Officer Compensation is now up for discussion as we continue in our four part series on the IRS’s National Research Project to audit employment tax returns over the next 3 years. They will be statistically sampling tons of returns to catch some of the estimated $60 billion lost to underreporting and underpayment from the US workforce.

And they have the law on their side in this subject. An officer of a corporation is an employee by default. We can’t get into the first week’s discussion on Worker Classification when it comes to officers – the Internal Revenue Codes says “an officer is an employee” (code section 3121(d)(1), to be precise). So there.

Often times paying an officer income other than wages out of the corporation saves the corporation employment taxes – and that is exactly what the IRS is looking for. Here are some examples of things the IRS may want to check into should it seem to be excessive on your corporate tax return (and, yes, even though they are auditing employment tax returns, they can open up your corporate return too if needed):

1. Dividends from a C corporation/Distributions from an S corporation – paying small salaries to the officer while paying large dividends or distributions to that same officer could mean reclassification of some of these payouts as wages. “Reasonable compensation” must be paid to an officer for services rendered. Ask yourself, “what would I hire another person to do my exact job?”

2. Loans to shareholders – it’s not a “real” loan to the officer unless the corporation can enforce the collection of that loan from the officer. You have to show intent to pay, with interest, to even pass the legit test.

3. Expense reimbursements – repeat after me, “personal expenses are not a legitimate reimbursement” from a corporation, even if you do own the company. Stop it. This one is not even hard to bust. They’ll just ask you for the receipts for that round dollar $10,000 reimbursement you just made – BAM! Busted.

4. Rent payments – this is an often used technique to disguise wages as rent payments to the same corporate officer. This is a great way to manage the officer’s personal taxes but the rent must be paid at fair value (do a study of the area you work in and charge what everyone else is charging for the same type building and square footage – even better, pay a real estate expert to do it and keep the report as backup).

5. Management fees – this one is real tricky. I don’t think the IRS is going to like this one. These are fees paid by the corporation to an individual (usually the owner) or a management company (usually owned by the owner) to “run” the company. That sounds like compensation to me, and you have to pay payroll taxes on compensation.

Remember, the IRS’s goal in these audits is to reclassify other payments as wages. Then they get to request employment taxes on these new “wages” and probably penalty and interest because you didn’t pay the taxes on time. OUCH. Be careful out there!

Thanks, Jason M. Blumer, CPA

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Merry Christmas.

December 24, 2009 by thriveal | 2 comments

Christmas-Manger

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Tuesday Tax Time: Fringe Benefits

December 22, 2009 by thriveal | 3 comments

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We’re doing a four part series on the IRS’s National Research Program, where they are going to be digging a little deeper into your employment tax returns. goody, goody.

This week we’re on Fringe Benefits, or those little bitty benefits your employer gives you (like a cell phone) and tries to write off on their books and NOT count in your income.

The tax code basically says that any benefits paid to employees are taxable unless the tax code specifically excludes it. For all my clients that like to call us and ask if your extra little benefit is taxable, that should answer your question. The IRS even has a publication to explain the tax treatment of various employee fringe benefits: Pub 15-B, Employer’s Tax Guide to Fringe Benefits. Good toilet reading.

And some benefits that are normally NOT taxable, like retirement plans or cafeteria pre-tax health plans could be taxable if they are offered to non-employees. Be careful on this one – if you want to call your new hire an independent contractor, make sure you don’t put him/her on the Sect. 125 cafeteria plan, or BAM!, it’s all taxable to every employees. These plans are for employees only!

So, if you are doling out sweet nuggets of goodness to your employees in the form of cell phones, meals, etc. make sure that the use is documented or the IRS will bust you while looking over your employment tax returns during their lovely little National Research Program. Dougie pooh will get ya.

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Monday Morning Message

December 21, 2009 by thriveal | No comments

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“The important thing is not to stop questioning. Curiosity has its own reason for existing.”

Albert Einstein

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GoSee: Thriveal’s Three on Thursday (the “Google Book Search” Edition)

December 17, 2009 by thriveal | No comments

1. Google has had trouble (involving lawsuits) gaining traction on their Google Book Search project, where they intend to scan millions and millions of books into their online searchable system (they’ve already scanned about 10 million). Why is this so important? – GoSee

“It’s a link from Google’s current Internet-based view of humanity’s collective knowledge to the broad and deep information contained in the world’s books. If the company succeeds in its ambition, the world’s books will emerge from dusty library stacks to be reborn on the Web, and Google already has a 7-million book start.”

2. Add your own books to the Google Book Search library. Here’s how… – GoSee

3. Here is the start of the book scanning. Check out Google’s initial load of books and magazines to search online – GoSee

Thanks, Jason M. Blumer

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Numbers Tell Stories…

December 16, 2009 by thriveal | 9 comments

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I love the title to this blog post: Numbers Tell Stories. We dweebs too often forget that real people doing hard things under various circumstances create financial statements every month. As usual, we focus on a product and outcome (boring financial statements) as opposed to a relationship and human interactions.

INTRIGUING EXAMPLE: I met with a new client today and they were blown away when I spelled out our firm’s view of helping you prepare your financials. Here is what I said:

“You want us to help you prepare a reviewed financial statement at year end, and make sure your financials are timely and accurate. But we can’t start with your financials. I want to leave the office and go out into your plant and see where the numbers happen. There are people out there right now doing work and building relationships with other co-workers. They don’t know it, but their daily actions have dollar values attached to them, when viewed from the owner’s perspective. We can walk through an organization, talk to the staff, count the inventory and see the effects on the financial statements literally walking around and interacting with us. When we understand that world, we will then begin to see that financial statements are simply depictions of activities that generate cost, create value, create too much expense, create just the right amount of expense, etc. Our firm starts with the relationships that create the ultimate financial statements that we analyze at the end of each month. I’m interested in your people and processes. When we nail those down, then the financials prepare themselves. So let’s leave this boring office – let’s go look at your business and let me tell you what I see. There’s dollars walking around out there.”

The client’s mouth drops open every time – “I’ve never heard it put that way before.” That’s because CPAs and accountants are the biggest dorks on the planet (besides actuaries and people with a PhD in molecular nano bio-mass technology, or whatever). We don’t know how to build relationships so we sure can’t help our clients see the relationships behind their numbers. Hello? Wake up. Add real value to your clients for once.

I’ve included a picture of dancers just to drive my point home.

Numbers do tell stories. Are you helping your clients hear the tales? Leave it in the comments.

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Tuesday Tax Time: Worker Classification

December 16, 2009 by thriveal | 2 comments

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Ah, the big question for SMEs (small to medium enterprises) – is my worker an employee (i.e. I have to pay payroll taxes on them), or are they an independent contractor (i.e. I don’t have to pay payroll taxes on them). Most business owners fall on the latter side because they don’t have to foot the bill for any payroll taxes, and the reporting burden for the employer is seriously reduced.

But as mentioned in last week’s Tuesday Tax Time post, the IRS is going after employment tax returns to see if you classified your worker properly. Ouch!

The IRS basically pulls from 20 common-law factors to determine if your worker is an employee or an independent contractor (no, you don’t get to pick which one it is to lower your tax bill). And these 20 “rules” generally fall into three categories:

1. Behavioral Control Ask yourself: “Do you, as the owner, have the right to direct and control how the worker does the work?” Consider the instruction and training you give the “employee” in answering this question. For example, the more detailed instructions you give to the individual, the more likely that this is an employee.

2. Financial Control Ask yourself: “Do you, as the owner, control the financial aspects of the worker’s job?” Do you foot the bill on tools to get the individual started working, or does the worker do that? Who outlays the cash in the relationship? If you are carrying all of the costs in the relationship, then this is probably an employee you are dealing with (or your girlfriend, either one).

3. Relationship of the Parties Consider this one last if the other two are still blowing your mind. The IRS will look at how long the individual has been working with you, does this person work exclusively for you, and do they make their services available to the market and actually maintain their own business location? If you can’t operate without them, then the IRS may want to call them an employee.

Just something to consider. Don’t mess this up, because they are checking specifically for this issue now. Hire us to do your payroll and we’ll counsel you and do our best to keep you out of the orange jump suits. ;)

Thanks, Jason M. Blumer, CPA

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Monday Morning Message

December 14, 2009 by thriveal | 2 comments

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“All you need is love. But a little chocolate now and then doesn’t hurt.”

Charles M. Schulz

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GoSee: Thriveal’s Three on Thursday

December 10, 2009 by thriveal | No comments

1. Glyde allows you to “simply buy and sell your DVDs, CDs, video games and books” Another craigslist.org? – GoSee

2. The more people you can find to buy a “groupon” the better the odds of using the “groupon.” Promise customers to the business and get a discount. Coupon innovation at it’s best – GoSee

3. Find all popular search trends on Google Insights for Search. Know what folks are searching for… – GoSee

Thanks, Jason M. Blumer

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Build Someone Else’s Business

December 9, 2009 by thriveal | 2 comments

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I’m like you… always thinking of new ways to build my business. How selfish of me! But that’s what small entrepreneurs and business owners do – they build their business.

LET’S THINK DIFFERENTLY FOR A MOMENT.

Don’t overlook the value in building someone else’s business. I know a marketing guru in town who is always looking to “hook people up.” He brings two together, and then steps out of the picture. But rest assured, he is now solidly fixed in the minds of the two people he hooked up. He is out their building other people’s businesses.

Building your business is all about relationships and lead generation (see an interesting spin on producing lead generation for others). You must take care who you refer your clients to, and whom you chose to do business with. It’s the same when building other people’s businesses. “Hook people up” that will really mutually benefit one another. Don’t do this as another way to build your business. Genuinely strive to build the business of others, and the side benefit will be that your relationships will flourish… which always lead to more business.