Mar 31

Statutory Employees and Wages

February 5, 2015 Tax Blog by Calli McWilliams, MSA, MSM

Information for employers of salespersons

Did you know that you can treat some of your independent contractors as statutory employees for employment taxes purposes? This is a relatively uncommon used approach, compared to the standard determination of an employee or independent contractor. This is both a benefit to the employee and the business owner. This holds true for many different areas, but especially for salespersons. They must fall within the following three conditions described under Social Security and Medicare taxes, below:

  • A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity.

Additionally there are eight elements that must be met under the statutory employee test, in order to withhold and claim social security, Medicare, and FUTA tax expenses.

  1. Works full time for one person or company except, possibly, for sideline sales activities on behalf of some other person,
  2. Sells on behalf of, and turns his or her orders over to, the person or company for which he or she works,
  3. Sells to wholesalers, retailers, contractors, or operators of hotels, restaurants, or similar establishments,
  4. Sells merchandise for resale, or supplies for use in the customer’s business,
  5. Agrees to do substantially all of this work personally,
  6. Has no substantial investment in the facilities for transportation,
  7. Maintains a continuing relationship with the person or company for which he or she works, and
  8. Is not an employee under common-law rules.

What does this mean for the statutory employee?

The statutory employee uses Schedule C to report wages and expenses. The employee benefits from the withholding of taxes, but can also take their unreimbursed business expenses against their wage income. They do not have to take them on Schedule A, subjecting them to the 2% of their adjusted gross income limits. In many cases, the employee never gets a benefit from this on their personal tax return, but can if they are treated as a statutory employee.

For additional information you may refer to the following publications, and certainly consult your tax preparer.

Refer to the Salesperson section located in Publication 15-A, Employer’s Supplemental Tax Guide (PDF) for additional information.

Refer to Instructions to Form 1040, Schedule C, (2013), p. C-1.
Refer to Rev Rul 90-93, 1990-2 CB 33

Feb 10

Tax Prep 101

Get Your Business Tax Records in Order.

With the tax deadline quickly approaching, we’ve decided to provide you with some helpful tips on how to better prepare your business records for tax season. Ensuring your records are organized and complete ahead of time ensures that your taxes will be done more accurately and efficiently, resulting in your tax return being filed in a timely manner.

The IRS requires businesses to keep adequate records for tax deductions. The best advice we can provide you with is to follow the KISS principle for record keeping; that is, Keep It Simple and Safe.

Here are a few ways to help you keep your records in order!

Stay Organized.

Use a large container and inexpensive file folders to help stay organized throughout the year so you know where everything is.

Limiting Your Categories.

Start with the five major categories for a business — Assets, Liabilities, Income, Expenses and Owner’s Equity/Retained Earnings. Creating individual folders for income, expenses, bank statements and credit card receipts, travel, asset purchases, and outside services (independent contractors) allows you to keep track of your records in a more organized and accurate manner.

Income and Receipts.

Keep all deposit slips and be sure to note what customer the checks were from. Keep register tapes and credit card charge slips from customers. Keep invoices you have sent out.

Purchases and Recurring Expenses.

Keep all bank and credit card statements, canceled checks, and credit card slips or receipts from in-person purchases. Keep all invoices and other receipts and don’t forget to use petty cash slips so you can capture small cash expenditures. Also, for payments to vendors providing services, be sure to get a completed W-9 before you pay them. The IRS is becoming more strict on MISC-1099 filings and this ensures you’re not on the hook for potential penalties.

Make Notes on Statements.

We highly suggest that you make notes on your bank statements and credit card receipts.  If there is no detail available on deposits or receipts make a note of who the income came from and who the check was written to.

Asset Paperwork.

Any paperwork that shows proof of assets purchased during the year should be kept on file. All information about business assets, starting with the purchase price and including setup, delivery, and training should be recorded. Keep track of maintenance and other expenses for use of the asset and don’t forget to record accumulated depreciation.

Travel Expenses.

Whenever going on a business trip, make sure to capture all your travel paperwork for each trip. Keep a log of all travel by car; log every trip – when and where you went, who you saw and why. Keep receipts for all expenditures for air travel, lodging and meals.


Any emails that are received relating to your finances, receipts, etc. should be kept in a separate folder for your records.

Employment Taxes.

Keep all employment tax records for at least four years.

Hopefully these tips will point you in the right direction toward getting more organized and relieving stress when tax time rolls around both for you and your accountant.

Nov 26

A Breakdown of the Healthcare Penalty for Individual & Employers

By Ryan Webber

On March 23, 2010 the Affordable Care Act was signed into law by the President and transformed the way small businesses and individuals will be able to shop for, compare and purchase health insurance. The Act, which was upheld by the U.S. Supreme Court in June 2012, preserved the law’s “individual mandate” requiring most Americans to have health insurance by January 1, 2014 or pay a penalty.

The Affordable Care Act promotes employers with 2 – 50 employees to provide health insurance to its employees. However, employers with less than 50 employees are exempt from requirements to offer coverage. Nevertheless, most employees of exempt employers must still find insurance privately or use their State or Federal exchanges to find affordable health insurance for themselves. To avoid the penalty, employers with more than 50 full time employees must offer them a health insurance package privately that meets certain requirement standards (Essential Health Benefits) or pick a plan in their State or Federal exchanges.

While individuals are not required to have health insurance today, beginning on January 1, 2014 most individuals must have it or pay a penalty on their individual income tax return. The penalty would start at $95 a year ($47.50 per child under 18), or up to 1 percent of household income, whichever is greater, and rise to $695, or 2.5 percent of household income, by 2016. Household income is defined by the Internal Revenue Service (IRS) as a taxpayers modified adjusted gross income less exemptions. The amount the taxpayer is assessed cannot exceed the cost of a specified level of annual premiums offered by the exchanges.

This penalty will also be assessed on employers with more than 50 full time employees that do not offer health insurance. The penalty will be $3,000 per employee, but it is not to exceed $2,000 x (full time employees minus 30). For example, if an employer had 51 full time employees and did not offer coverage that met the requirements, the employer would have to pay a penalty of $2,000 X 21 = $42,000. However, the penalty will not be greater than the penalty that would apply if the employer offered no coverage at all. Only full-time employees (not full-time equivalents) are counted for purposes of calculating the penalty. After 2014, the penalty amount may be indexed.

As written, the law prohibits the IRS from seeking to put anybody in jail or seizing their property for simple refusal to pay this penalty. The law says specifically that taxpayers “shall not be subject to any criminal prosecution or penalty” for failure to pay. It also states that the IRS cannot file a tax lien (a legal claim against such things as homes, cars, wages and bank accounts) or a “levy” (seizure of property or bank accounts). Currently, the only means the IRS has of collecting the penalty is to essentially garnish tax refunds for people or entities that overpaid their taxes.

Please note that small business owners with fewer than 25 full-time equivalent employees, who pay an average wage of less than $50,000 a year, and who pay at least half of employee health insurance premiums are eligible for a tax credit. The tax credit will help these small businesses offset the cost of covering their employees. Currently, the tax credit is 35 percent of the cost of premiums. The credit increases to 50 percent in 2014. The credit phases out as firm size and average wage increases. The credit is capped based on the average health insurance premium in the area where the small business is located.

Aug 29

5 things startups should know before starting

There have been startups as long as there has been business. But only recently has the idea of the “startup” taken on the meaning it has in today’s tech-saturated economy.

Today, when we think of startups, we think of cash-flush twentysomethings developing the next mobile app or social media platform with millions of dollars of other people’s money. This new startup world brings with it immense opportunities, and large pitfalls, for today’s entrepreneurs. Here are five ways to make sure your startup turns into a successful company and does not fold after the last of the VC cash dries up.

Choose your team wisely. When we think of startup successes, we think of individuals — Mark Zuckerberg, Jack Dorsey and Larry Page. But startup success is truly a team effort. Choose your team wisely. Pick team members that fill the gaps in your own resume. And pull together a team that can cover all aspects of business — finance, creative, marketing. If you become known as the next Mark Zuckerberg, it will be because of your talent in team-building as much as your programming ability.

Don’t overspend. The current tech startup culture glorifies the big-spending, VC-backed tech entrepreneur. But spending heavily during a startup period where you have no revenue coming through the door is a recipe for failure. Keeping control over your expenses will make your startup capital stretch further, allowing you to focus your money on the core of your business — product development.

Don’t be a one-hit wonder. You may have a world-changing product idea that you know is going to be successful. But once you get your first product off the ground, you have to continue thinking about product development. Apple didn’t stop with the Macintosh or the iPod or the iPhone. Google didn’t stop with a search engine. Focus on your first product; but know that if you are going to be successful in the long-term, you have to build a company that embraces a culture of innovation and never stops thinking about the next product or service.

Build a business plan, but be flexible. A business plan is integral to your success. You need to know your target consumer and study your competitors. But especially in the fast-changing world of technology, you need to be flexible and aware of the changes in the marketplace. Build a business plan but continue to refine it and adapt it to changes in the marketplace. Add to it as you learn more about your industry, your consumer and your technology.

Don’t bank on an acquisition. There seem to be a large number of startups whose business plans could be stated in one sentence: “Get acquired by (insert name of large technology company here).” While acquisition is clearly one exit strategy for tech startups, putting all of your eggs in that basket limits your options. Startups should build their companies with the end goal of making it a viable company on its own. Have the discipline to build a company that can be monetized. Do that and you will be even more attractive as an acquisition, and will also have the option of standing on your own two feet as well.

Jul 31

Cash contributions and distributions & loans to and from entities

By Matt Lipkowitz

When asking an owner of a small business what is the difference between cash contributions and distributions and loans to and from entities the most common answer would be “Aren’t they the same thing? It just depends on how my accountant classifies the transaction.”

This common misconception with majority of individuals who own and operate their own businesses can cause quite a headache when it comes to taxes and the Internal Revenue Service.  It is smart tax planning to be informed about all possibilities and tax consequence that may occur as a result of providing capital to your small business. There are both benefits and detriments to the classification and treatment of member/shareholder loans to and from an entity and by understanding these issues it may prove to be a win/win situation for both the owner and the entity.

When creating loans between owners and their entities there are a list of items you want to be sure to include, this will limit the ability for the IRS to question the reasonableness of the loan.

  1. A loan agreement.
  2. A fixed payment date and provide adequate stated interest.
  3. The Interest rate should be at or above the applicable federal rates, which can be found on the IRS website.
  4. Rights to property as secured collateral.
  5. Terms that reflect commercial reasonableness – such as waiver of demand, presentation and notice, rights to attorney’s fees.

The items above will help support the facts of a bona fide loan between an entity and its owner. Making it much more difficult for the IRS to reclassify the loan as contributed capital, a cash distribution, or a cash dividend.

These reclassifications can greatly impact the taxable income of the owner of the entity. By reclassify a loan as a cash dividend in a C Corp or S Corp this creates additional dividend income for the shareholder, and is not a deductible expense of a the C Corp or S Corp.

If a loan is reclassified as a cash distribution, this may reduce the owners’ basis below zero, which may disallow and suspend any losses previously taken. This may greatly increase the taxable income on the return of the member creating a much larger tax burden than expected.

Loans reclassified as contributions don’t create as many problems since cash classified as a loan or contributed capital both increase the basis of owner’s interest in their entity. However, it may postpone or limit the repayment of the contributed funds due to cash flow and operating activity of the entity.

So be sure to examine the loans between you and your entities to be confident that they are reasonable and have the items list above to help support the purpose of the loan. As always consult your tax advisor if questions and concerns arise about loans between you and your entity, being overly cautious is always a good way to go.

Jun 28

Life insurance: an integral tool for business planning

Life insurance often is viewed as financial protection for your family in the case of untimely death. But these policies also often play a very important role in the business world.

From business partnerships and buy-sell arrangements to business succession plans, life insurance can ensure a stable revenue stream and continuity in the event of the death of a partner, owner or integral employee.

The death of a partner or company owner is a crisis for any organization. Not only does the company lose an important member of its key leadership, but a partner’s death means the company often must pay out the amount of the ownership stake to the owner’s heirs.

For a midsized company that is not fully mature, buying out an owner while simultaneously weathering the loss of a key company leader can be a deeply challenging proposition.

A properly structured life insurance policy can ensure that the company has the money on hand to buy out an owner and continue operation of the company without having to take on more debt.

This is important since a company dealing with the death of an owner or partner is most likely already struggling to replace the revenue that the partner generated.

In buy-sell arrangements among business partners, life insurance policies ensure that even a growing company with limited liquidity can transfer ownership in an orderly manner with the insurance policy payout financing the ownership buyout.

There are many different types of life insurance, and policies can be tailored to a business’ specific needs and desired level of coverage. Businesses should evaluate their maturity, liquidity, ownership structure and business succession plans in determining what type of life insurance policy best fits them.

Finally, some companies take out life insurance policies on key staff members whose identity, vision and skill are an integral part of the company’s success.

“Key person” life insurance protects a company from the financial risk of the loss of a CEO, founder or company visionary. A life insurance policy that pays when a key person passes away can help a company weather that storm and have the needed capital on hand to restructure or reorganize.

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Jun 28

Living in interesting times; the Affordable Care Act for Small Businesses

By Bill Saylor

A Chinese blessing (or is it a curse?!) says, in part, “May you live in interesting times.”  Apparently, we’re all blessed these days as the Affordable Care Act continues to take effect.

If you own a small business, chances are you still have questions about the Affordable Care Act.  While it is true that most businesses with fewer than 50 employees are exempt from the penalty and tax requirements of the ‘Act, be careful if you have multiple businesses as you may have to aggregate all your employees in the related businesses to determine the total number you employ and your responsibilities under the ‘Act.

If you are a small business, you do not have to provide coverage to employees and their dependents.  However, if you do choose to offer coverage, be aware that you may be able to purchase coverage on your state exchange starting October 1, 2013. Talk to your exchange and/or your insurance broker to determine whether the exchange coverage is competitive with your existing group plan.

Also, you may be eligible for a federal tax credit of up to 35% (this increases to 50% effective January 1, 2014) of health insurance premiums you pay for employees. This credit is available if you have fewer than 25 full-time employees and if you pay average wages of less than $50,000 annually.  The more than 10 employees and/or pay average wages of more than $25,000, the amount of your credit is reduced.  Be sure to discuss with your tax advisor if you’re not already taking this credit.

Finally, although you may not have to provide coverage, you need to be aware that all your employees will have to buy coverage starting January 1, 2014 or pay a tax.  The amount of the tax varies depending on the employee’s income and subsidies may be available to individuals earning between 100% and 400% of the federal poverty level who are not covered by an employer plan.  Again, you may want to discuss possibilities with your insurance broker or attend one of the many training seminars currently being presented around country.

Good luck and blessings, my friends, it’s going to be an interesting time!

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May 30

Think globally, invest locally

Over the past several years, the state of Nevada found itself in a position no investor, public or private, wants to be in — locked in a stagnant investment fund that was losing money to inflation.

But the underperformance of the Nevada Permanent School Fund has since triggered a round of public investment innovation in the Silver State that is solving three of the state’s most vexing problems at once — increasing revenue from public investments, expanding funding for K-12 education and injecting much-needed private capital into Nevada companies.

The new investment strategy, championed by Nevada Treasurer Kate Marshall, is an example of how states across the nation are thinking outside of the box by not only increasing investment in high-return private equity funds, but also voting to keep their investment close to home, where it will finance the growth of their own state’s economy.

Nevada’s Permanent School Fund, which was invested almost primarily in government bonds, is now becoming a diversified and balanced portfolio that increases returns by adding in a mix of private equity investment and co-investment. That change was spearheaded by Marshall and her knowledgeable staff (including investment experts such as Deputy Chief Treasurer Mark Mathers) who supported state Senate Bill 75 that passed in the 2011 Legislature.

This new public investment model for Nevada seeks to create a cycle of economic growth that lifts the economy, the education system and the state’s tax base into an upward spiral of compounding investment returns.

Nevada’s modernization of its school fund investment strategy paves the way for more investment in education, the foundation of future economic growth, while also investing in the state’s current economic engines — Nevada-based companies that need capital to grow.

The investment also is attracting welcome attention to Northern Nevada’s business climate. Nevada’s partnership with world-class financial institutions such as Hamilton Lane and Providence Equity Partners is exposing Northern Nevada’s business community to world-class funding institutions.

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May 01

Employee ownership offers options to owners, workers

Many business owners reaching retirement age look long and hard for a buyer who understands their business model, is knowledgeable about their industry and will continue to operate their business successfully.

Today, more and more business owners are finding those buyers within their own companies.

Employee ownership, often referred to as an Employee Stock Ownership Plan, is an increasingly popular ownership model that, if structured correctly, can benefit both owners and employees.

In a properly constructed ESOP, business owners have ready and willing buyers who will be invested in the long-term growth and health of the company. Business owners also might receive significant tax benefits from converting their business to employee ownership.

Employees, in turn, receive a part ownership of the company, in most cases without having to purchase that ownership stake. Stock typically is given to employees as an incentive, bonus or benefit.

Employee ownership does not make sense in all cases. But mature and successful companies that are valued correctly and well-managed are good candidates for employee ownership.

Employee ownership can foster a superior corporate culture. Employee-owned businesses have the capacity to be more nimble and flexible, and employee-owned businesses often have longer-tenured staff and highly committed employees.

According to a recent Wall Street Journal article, “Businesses with shared ownership plans fared better during the recession than more traditionally structured firms, including fewer layoffs, higher productivity and stronger employee loyalty.”

This corporate culture can differ starkly from a company that is absorbed by a large corporate industry giant. In that buyout scenario, duplicative departments such as marketing and human resources are often consolidated or cut, and often large-scale layoffs occur.

For a business owner who wishes to retire but wants to see the company he or she founded live on as an independent organization, the employee ownership model can be a desirable solution.

Despite these upsides, employees should not take employee ownership as a substitute for diversified retirement planning. Employees should invest in diversified retirement funds separate from their employee ownership.

The baby boomer generation represents a significant segment of business owners.

The Wall Street Journal estimated that 30 percent of U.S. business owners are 55 or older. As those business owners look to retire and pass their businesses on to another owner, a significant portion of them now will be considering their employees as potential owners.

John Solari is the managing partner of J.A. Solari & Partners. He has 25 years of accounting experience and also is a member of the American Institute of Certified Public Accountants and the Nevada Society of Certified Public Accountants.

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May 01

Estimated Tax Payments

As the economy slowly gets back on its feet there are a few things to think about when you start making more money. Believe it or not making an estimated tax payment may be necessary if you want to avoid paying penalties.

Who must generally pay estimated tax?

  • If you are filing as a sole proprietor, partner, S Corp. shareholder, and/or self-employed individual if you expect to owe tax of $1,000 or more.
  • If filing as a corporation and you expect to pay tax of $500 or more when you file.

If an underpayment of estimated tax is calculated you could be subject to penalties and ultimately footing more cash when you file your taxes. Generally, most taxpayers can avoid this penalty if you owe less than $1,000 in tax after subtracting withholdings and credits, or if you pay at least 90% of the tax for the current year, or 100% of the tax shown on the return from the prior year, whichever is smaller.

If estimated taxes are paid it will also make the tax burden much easier at the time you file your taxes.  To avoid these penalties and have a more enjoyable time filing your taxes consult with a tax professional and consider making some estimated tax payments.

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