Business

What the self-employed need to know about employment taxes

In addition to income tax, you must pay Social Security and Medicare taxes on earned income, such as salary and self-employment income. The 12.4% Social Security tax applies only up to the Social Security wage base of $118,500 for 2016. All earned income is subject to the 2.9% Medicare tax.

The taxes are split equally between the employee and the employer. But if you’re self-employed, you pay both the employee and employer portions of these taxes on your self-employment income.

Additional 0.9% Medicare tax

Another employment tax that higher-income taxpayers must be aware of is the additional 0.9% Medicare tax. It applies to FICA wages and net self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately).

If your wages or self-employment income varies significantly from year to year or you’re close to the threshold for triggering the additional Medicare tax, income timing strategies may help you avoid or minimize it. For example, as a self-employed taxpayer, you may have flexibility on when you purchase new equipment or invoice customers. If your self-employment income is from a part-time activity and you’re also an employee elsewhere, perhaps you can time with your employer when you receive a bonus.

Something else to consider in this situation is the withholding rules. Employers must withhold the additional Medicare tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So your employer might not withhold the tax even though you are liable for it due to your self-employment income.

If you do owe the tax but your employer isn’t withholding it, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or you can make estimated tax payments.

Deductions for the self-employed

For the self-employed, the employer portion of employment taxes (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. (No portion of the additional Medicare tax is deductible, because there’s no employer portion of that tax.)

As a self-employed taxpayer, you may benefit from other above-the-line deductions as well. You can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You also can deduct contributions to a retirement plan and, if you’re eligible, an HSA for yourself. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income (AGI) and modified AGI (MAGI), which are the triggers for certain additional taxes and the phaseouts of many tax breaks.

For more information on the ins and outs of employment taxes and tax breaks for the self-employed, please contact us.

© 2016

3 ways to get started on next year’s budget

As the year winds down, business owners have a lot to think about. One item that you should keep top of mind is next year’s budget. A well-conceived budget can go a long way toward keeping expenses in line and cash flow strong. The question is: Where to begin? Well, to answer this question, we don’t have just one suggestion — we have three:

1. Investigate your income statement. A good place to start on next year’s budget is with the numbers you put on paper for last year, as well as your year-to-date results. In your income statement, you’ll see information on sales, margins, operating expenses, and profits or losses.

One specific factor to consider is volume. If sales have slipped noticeably in the preceding year, your profits may be markedly down and regaining that volume should likely play a starring role in your 2017 budget.

2. Check your cash flow statement. Look at where cash is coming from in terms of daily operations, as well as external financing and investment sources. The statement will also tell you where cash is going, as you finance business activities and investments.

Even profitable companies can struggle if their cash flow is weak. Where do they go wrong? Under- or unbudgeted asset purchases can have a major negative budget impact. Another culprit is one or two departments regularly going over budget.

3. Peruse your balance sheet. Here you’ll find your company’s assets, liabilities and owner’s equity within the given period. Your balance sheet should give you a good general impression of where your company stands financially.

Take a close look at how your liabilities compare with assets. If your debts are mounting, a good objective for 2017 might be cutting discretionary expenses (such as bonuses or travel costs) or developing a sound refinancing plan.

That’s right — to get started on next year’s budget, simply pull out your most recent set of financial statements, roll up your sleeves and get to work. But you don’t have to do it alone. Our firm can help you. Call Mark Patten at (214) 696-1922 to understand where your business stands as of today and what next year’s budget should look like.

© 2016

Is your executive compensation reasonable?

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The IRS can reclassify S corporation distributions as wages

If you run your business as an S corporation, you’re probably both a shareholder and an employee. As such, the corporation pays you a salary that reflects the work you do for the business — and you (and your company) must remit payroll tax on some or all of your wages.

By distributing profits in the form of dividends rather than salary, an S corporation and its owners can avoid payroll taxes on these amounts. Because of the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately), the potential tax savings from classifying payments as dividends rather than salary may be even greater than it once would have been.

IRS audit target

But paying little or no salary is risky. The IRS targets S corporations with owners’ salaries that it considers unreasonably low and assesses unpaid payroll taxes, penalties and interest.

To avoid such a result, S corporations should establish and document reasonable salaries for each position using compensation surveys, comparable industry studies, company financial data and other evidence. Spell out the reasons for compensation amounts in your corporate minutes. Have the minutes reviewed by a tax professional before being finalized.

Prove a salary is reasonable

There are no specific guidelines for reasonable compensation in the tax code or regulations. Various courts, which have ruled on this issue, have based their determinations on the facts and circumstances of each case. Factors considered in determining reasonable compensation include:
• Training and experience,
• Duties and responsibilities,
• Time and effort devoted to the business,
• Dividend history,
• Payments to non-owner employees,
• Timing and manner of paying bonuses to key people, and
• Compensation agreements.

Ascertain the right mix

Do you have questions about compensation? Contact us. We can help you determine the mix of salary and dividends that can keep your tax liability as low as possible while standing up to IRS scrutiny.

© 2016

Lower gas costs = lower business driving tax deductions

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business went down. The reason? Compared with last year, the cost of driving is less because gas prices are lower.

Two options

If you use a vehicle for business, you can generally deduct the actual expenses attributable to your business use. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle, based on the percentage of business use. However, depreciation write-offs are subject to “luxury car” limits.

But some taxpayers don’t want to keep track of actual vehicle-related expenses. Another option: You may be able to use the IRS’s standard mileage rate. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.

This year’s rate

Beginning on January 1, 2016, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 54 cents per mile. For 2015, the rate was 57.5 cents per mile.

The cents-per-mile rate is adjusted annually by the IRS. It is based on an annual study commissioned by the IRS about the costs of operating a vehicle.

Current gas costs

On June 15, 2016, the national average price of a gallon of regular unleaded gas was $2.36 and it fell below $2 a gallon earlier this year. This is down from the average price of $2.80 per gallon a year earlier. (There are variations in fuel prices from one state to another so the per-gallon price in your state could be higher or lower.)

Going forward

Not all taxpayers can use the cents-per-mile rate. It depends on how they’ve claimed deductions for the same vehicle in the past.

If you have questions about deducting mileage expenses in your situation, contact us.

© 2016

Will your business have a net operating loss? Make the most of it

When the deductible expenses of a business exceed its income, a net operating loss (NOL) generally occurs. If you’re planning ahead or filing your income tax return after an extension request and you find that your business has a qualifying NOL, there’s some good news: The loss may generate some tax benefits.

Carrying back or forward

The specific rules and exact computations to figure an NOL can be complex. But when a business incurs a qualifying NOL, the loss can be carried back up to two years, and any remaining amount can be carried forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow during a time when you need it.

However, there’s an alternative: The business can elect instead to carry the entire loss forward. If cash flow is fairly strong, carrying the loss forward may be more beneficial, such as if the business’s income increases substantially, pushing it into a higher tax bracket — or if tax rates increase. In both scenarios, the carryforward can save more taxes than the carryback because deductions are more powerful when higher tax rates apply.

Your situation is unique

Your business may want to opt for a carryforward if its alternative minimum tax liability in previous years makes the carryback less beneficial. In the case of flow-through entities, owners might be able to reap individual tax benefits from the NOL. Also note that there are different NOL rules for farming businesses.

Please contact us if you’d like more information on the NOL rules and how you can maximize the tax benefits of an NOL.

© 2016

How many employees does your business have for ACA purposes?

It seems like a simple question: How many full-time workers does your business employ? But, when it comes to the Affordable Care Act (ACA), the answer can be complicated.

The number of workers you employ determines whether your organization is an applicable large employer (ALE). Just because your business isn’t an ALE one year doesn’t mean it won’t be the next year.

50 is the magic number

Your business is an ALE if you had an average of 50 or more full time employees — including full-time equivalent employees — during the prior calendar year. Therefore, you’ll count the number of full time employees you have during 2016 to determine if you’re an ALE for 2017.
Under the law, an ALE:

Is subject to the employer shared responsibility provisions with their potential penalties, and
Must comply with certain information reporting requirements.

Calculating full-timers

A full-timer is generally an employee who works on average at least 30 hours per week, or at least 130 hours in a calendar month.

A full-time equivalent involves more than one employee, each of whom individually isn’t a full-timer, but who, in combination, are equivalent to a full-time employee.

Seasonal workers

If you’re hiring employees for summer positions, you may wonder how to count them. There’s an exception for workers who perform labor or services on a seasonal basis. An employer isn’t considered an ALE if its workforce exceeds 50 or more full-time employees in a calendar year because it employed seasonal workers for 120 days or less.

However, while the IRS states that retail workers employed exclusively for the holiday season are considered seasonal workers, the situation isn’t so clear cut when it comes to summer help. It depends on a number of factors.

We can help

Contact us for help calculating your full-time employees, including how to handle summer hires. We can help ensure your business complies with the ACA.

Keep Family Businesses Going for Generations

fathersonAccording to Forbes.com, 80-90% of all firms across the globe and the top 500 largest family-owned firms generate a combined annual revenue of $6.5 trillion which totals an economy only smaller than the U.S. and China. These firms have effectively been able to pass down control of the company to the next generation.

Based on a survey done by EY’s Global Family Business Center of Excellence and Kennesaw State University’s Cox Enterprise Center, two-thirds of the world’s billionaires are self-made and plan to hand over their company to a family member. The most daunting task was said to be designating the person responsible for succession planning and implementation. Succession planning should be done sooner rather than later to ensure that all those involved presently and in the future have a clear understanding of the business and its values from a young age.

Carl Pohlad, a billionaire financier, Minnesota Twins owner and Forbes 400 member, cultivated good business judgement and discipline early on. He spent three decades including his three sons in business practices, mentoring them and including them in business decisions.

According to the survey, communication amongst the family is strongly emphasized to ensure smooth transition. Although family arguments and disagreements can surface amongst high-stakes business decisions, successful communication and proper grooming allow for families to work out disagreements and focus on the succession of the business.

If you are looking for family office assistance for your business, call 214-696-1922 and ask for Mark Patten.

McKinnon Patten is a Local Dallas CPA with expertise in succession planning. We can help ease the transition of passing down the business to the next generation.

PUT SOCIAL MEDIA NETWORKING SITES TO WORK FOR YOUR FAMILY BUSINESS

If you think that social media is just for teenagers, think again. More than half of those logging on to social media sites are in their mid-thirties or older.Benefits Social Media

Traditional media outlets such as newspapers, radio and television have long served the purpose of delivering one-way messages, like your company’s advertising. Social media, by contrast, uses Web-based platforms to not only deliver your message, but to allow the recipient to participate.

You’ll find a number of technologies under the umbrella of social media, including email, instant messaging, blogs and social networking websites. In fact, sites like Facebook and Twitter have now surpassed traditional search engines when it comes to reaching some segments of the buying public.Traditional media outlets such as newspapers, radio and television have long served the purpose of delivering one-way messages, like your company’s advertising. Social media, by contrast, uses Web-based platforms to not only deliver your message, but to allow the recipient to participate.

The end result? Social media is not only changing the way your customers access news and information, but how they do business. If your company has not yet embraced the power of social media, it might be time to take another look.

Social Networking Websites

Separate from our professional lives, many of us have a profile on at least one social networking website. That’s why many businesses, large and small, are employing this innovative new marketing tool.

Adopting these technologies, however, involves more than creating a profile or fan page for your family business. To really be effective, it requires a shift to a culture of transparency. And, it is this window into your business that makes it more important than ever for your message to be consistent at every point of contact with current and prospective customers.

How Social Media Puts You Out Front

Establishing a presence on social networking sites can give your business a competitive edge in several ways, including:

  1. Brand Enhancement. Profiles, fan pages and participation in groups all serve to build awareness about your company’s brand. They also provide an opportunity to interact with current customers as well as begin the relationship-building process with prospects.
  2. Open Communication. Social media, including social networking, is based on the principle of two-way communication. Your company can benefit from both the positive experiences and negative feedback that customers voluntarily share. Not only can you address these customer concerns publicly, but you then have the chance to make any necessary improvements. You have the unique opportunity to make lemonade out of lemons.
  3. Target Marketing. Establishing a presence on social networking sites can help you identify, and subsequently target, potential customers. While the need for advertising through traditional media outlets may not be eliminated, the ability to target marketing communications reduces overall costs and provides a greater return on your marketing investment.

Tapping into social networking analysis tools may also assist with targeted marketing efforts. What if, for example, you knew that online discussions about one of your key products waned during the prior 12-month period, while conversations about a similar product that you have not promoted as strongly, showed an increase? Now there is some market intelligence to take under advisement when developing your marketing message. It is important, however, to remember that overt advertising on social networking sites can be received negatively, so your message should be developed with that in mind.

Social Networking Best Practices

Whether you are new to social networking, or a seasoned veteran, it’s important to:

Make a Commitment. Social networking, like most marketing tools, requires a commitment to time and possibly finances — perhaps even cultural change within your business — in exchange for successful results.

Be Visible. Make sure that your brand remains consistent between the various social networking sites. Develop a communications plan that keeps your business visible, but does not overwhelm your online following.

Listen First, Respond Second. Once your program is established, monitor the social buzz daily to keep a pulse on both current and potential customers. Much like a dinner party, you must listen before you respond. Then, once you have a clear picture of what is being said online, you can determine a course of action.

Keep it Local. Customers and prospective customers alike want to do business with companies that are within driving distance. Keep this in mind as you develop and refine your social networking plan.

Make it Easy. Remember to make it simple for people to find you. Add social networking information to business cards as well as your company’s website.

If your family business hasn’t yet gotten its feet wet in the world of social networking, it may be time to rethink your marketing strategy. Establishing a presence on social networking sites can be particularly effective when it comes to heightened brand awareness for your company and for identification and targeting of potential customers. In addition, finding ways to tie social networking initiatives into community efforts can create a win-win situation for everyone involved.

 

If you are looking for family office assistance for your business, call 214-696-1922 and ask for Mark Patten.

McKinnon Patten is a Dallas, Texas CPA firm with expertise in business consulting. We can help you identify opportunities to increase business efficiency and profitability.

Court: No Pay for Employees Monitoring Electronic Devices during Lunch

A federal district court recently sided with an employer in a dispute regarding whether employees had to be compensated for on-call time, activities before and after their shifts, and work during lunch breaks.

Facts of the Case

In Brand v. Comcast Corp., a cable, entertainment and communications company in the state of Illinois employed line technicians to maintain its cable network infrastructure. A line technician is responsible for maintaining node health, repairing outages, signal testing and addressing other system issues for the network plant.

The Portal-to-Portal Act was passed by Congress in 1947. It eliminates from working time certain travel, walking time and other similar preliminary and postliminary activities performed prior or subsequent to the “workday” that aren’t made compensable by contract, custom, or practice. It should be noted that “preliminary” activities do not include “principal” activities.

—The U.S. Department of Labor

A group of employee line technicians alleged that the company violated federal and state wage laws by not compensating them for on-call time, pre-shift and post-shift activities, and for work they performed during lunch breaks.

On-Call Time

The employees were required to check for outage notices sent to their personal devices during lunch breaks. The employer provided line technicians with company vehicles that had to be used exclusively for business purposes.

The line technicians argued that they should be compensated for lunch breaks because:

  • They had to respond to pages quickly (within about five to 10 minutes).
  • They had a 30-minute time limit to report to work after responding pages.
  • They were required to stay with their company vehicles during on-call shifts, seriously restricting their ability to engage in personal activities.

A regulation from the Fair Labor Standards Act (FLSA) states that an employee who is required to remain on call on the employer’s premises, or stay so close that he or she can’t use the time effectively for his or her own purposes, is considered working while “on call.” An employee who isn’t required to remain on the employer’s premises but is merely required to leave word at his or her home or with company officials where he or she may be reached isn’t considered working while on call.

The U.S. District Court for the Northern District of Illinois ruled that the employees didn’t have to be paid for their on-call time. The court answered the question of “when is on-call time compensable?” by stating it isn’t based on whether employees are inconvenienced while conducting personal activities, but whether they can conduct personal activities while on call. The district court noted that other courts have found similar conditions to the ones that the line technicians were working under insufficient to prove that employees should be compensated for on-call time.

Also, in this case, there wasn’t evidence that the on-call time was spent predominantly for the benefit of the company. The employees only had travel restrictions during their one-week on-call shifts, which they rotated through approximately every six weeks.

The employer also had a rule that allowed for random drug and alcohol tests at any time. The district court said that other courts have routinely held that such a rule isn’t sufficiently restrictive to convert on-call time to work time.

Activities Before and After Shifts

The employees sought compensation for unrecorded time that they spent before and after their shifts doing the following tasks:

  • Logging into their computers,
  • Obtaining and reviewing assignments electronically,
  • Conducting vehicle inspections, and
  • Loading, unloading or securing equipment in and from their company vehicles.

The Portal-to Portal Act narrowed the scope of employer liability under the FLSA by excepting from coverage two activities that previously had been treated as compensable, including activities which are preliminary to or postliminary to the principal activity or activities. Although the Portal-to Portal Act didn’t define “principal activity,” the U.S. Supreme Court has interpreted the term to embrace “all activities which are an integral and indispensable part of the principal activities.”

In ruling that the employees shouldn’t be compensated for their pre-shift and post-shift activities, the district court said that the employees failed to explain why the tasks they identified here are qualitatively different than the kinds of pre- and post-shift tasks that many other courts have found to be incidental (rather than integral and indispensable) to the use of a company vehicle.

The employees also argued that they were entitled to compensation for performing these activities because the company has written employment policies which state that line technicians will be compensated for the activities. The district court refuted this argument because there was no evidence that Comcast had ever paid employees for these activities. In addition, the employees failed to produce any previous court rulings in which a court had held that a general employment policy alone was sufficient to establish a legally binding obligation to compensate for time that is otherwise not compensable.

Lunch Breaks

To survive summary judgment with respect to the lunch-break claims, the employees had to offer sufficient evidence from which a reasonable jury could conclude the company had “actual or constructive knowledge” that the employees were working through lunch without pay. The employees argued they were required to monitor work devices during their lunch breaks and this policy demonstrated that the company had actual knowledge that they were working through lunch without pay.

The employees didn’t survive summary judgment on this issue because they failed to provide sufficient evidence that the company required them to continually and actively monitor their devices while on break. There was testimony that some employees sometimes received outage notices via text, email, phone or radio during lunch, but the employees testified that if they received these messages, they suspended their lunch breaks and resumed them later, if possible.

One employee testified that no manager ever told him he had to watch his computer for communications during lunch and said that he does so because he has “nothing to do.” There have also been no previous court rulings that suggest monitoring a radio or similar device is a substantial job duty as long as the employee can still spend his lunch break primarily for his or her own benefit without persistent interruptions.

(Brand v. Comcast Corp., No. 12 CV 1122, 9/28/15)

If you are looking for assistance or guidance with business consulting or corporate transactions, call us at 214-696-1922 and ask for Mark Patten.

McKinnon Patten & Associates LLC is a top Dallas, TX CPA Firm that provides businesses with proven expertise in all areas of business planningbusiness accounting,  Family Office, and business taxes .