Monthly Archives: October 2015

Do you have misclassified employees?

Misclassified employees. That’s what the IRS calls independent contractors who may actually be employees. Do you know the difference between the two classifications? As Affordable Care Act provisions continue to take effect, getting the answer right becomes essential.

The problem is that getting the answer right isn’t always easy. The IRS provides twenty factors and three questions to use as an analytical tool in making the decision. In addition, in July of this year, the U.S. Department of Labor issued guidance in the form of an interpretation based on “economic reality factors.” But the final determination depends on the facts and circumstances specific to your business.

Where should you start? Under IRS rules, control is one useful way of resolving the issue. Evaluate your right to control both the end result expected of the person performing the service for your business, and the means of achieving that result. More control — such as providing an office, materials, or equipment — can indicate employee status.

If your workers have been misclassified, you’ll need to begin treating them as employees. When you voluntarily change the classification of your workers, you may also be able to participate in the Voluntary Classification Settlement Program. This IRS program provides partial relief from employment taxes that would have been due in prior years, as well as the related penalties.

Please call Carl Heinemann, your Chattanooga CPA,  if you have questions about how to classify your workers.

Check your payroll compliance

October is the month for preparing third quarter 2015 payroll reports. As you begin gathering the information you’ll send to federal, state, and local governments, check your compliance in these four key areas.

  • Wages. Federal and state laws spell out your responsibilities for meeting minimum wage and overtime pay, as well as what records you need to keep, such as hours worked, pay periods, and pay dates.

    Tip. Know the difference between employees and independent contractors and make sure your workers are classified correctly.

  • Income tax withholding. As an employer, you’re responsible for withholding the correct amount of income tax from your employees’ wages and remitting the withholding on time as part of your payroll tax deposits.

    Tip. Maintain current Forms W-4 on file for each employee to be sure you’re withholding the correct amount of tax.

  • FICA taxes. “FICA” is the acronym for Federal Insurance Contributions Act and includes social security and Medicare taxes. FICA tax is a set percentage of gross wages. The base rate is 7.65% for 2015 for both employees and employers. When you pay an employee more than $200,000 in a calendar year, you’ll also withhold an additional Medicare tax of 0.9% from your employee’s wages.

    Tip. There is no employer match for the additional Medicare tax.

  • Unemployment tax. Federal and state unemployment taxes are not withheld from employee wages. Instead, these taxes are paid solely by you, as the employer.

    Tip. Be sure you’re calculating your liability using the correct rate. A “credit reduction” applies to some states. What does that mean? When a state takes a loan from the federal government to fund unemployment compensation, and hasn’t repaid the full amount within a specified time, employers in that state pay more federal unemployment tax.

Give Carl Heinemann, your Chattanooga CPA, a call for payroll tax tips. We’re here to help you stay up to date.

Withdraw excess IRA contributions, or face penalties

Contributing to your retirement accounts is a good thing. But like many good things, too much can get you in trouble. That’s the case when you make excess contributions to your IRA — because those excess contributions may be subject to a 6% excise tax penalty, even if the overage is due to a mistake.

As you know, for 2015 you can contribute up to $5,500 in total to all of your traditional and Roth IRAs (or your taxable compensation for the year, if your compensation was less than the dollar limit). When you contribute more than the limit, the 6% penalty rules kick in.

Here’s how the rules work.

  • Before tax filing deadline. If you withdraw the over-contribution and any related earnings before your tax return is due (including extensions), you won’t have to pay the penalty. The withdrawal may be taxable to you if you took a deduction on your return. Earnings on the contribution while it was in your IRA are included as income on your tax return.

    You also have the option to recharacterize your excess contribution. This can be useful when, for example, you contribute to a Roth and later discover your income was over the limit for making the contribution.

    Note: You have until October 15, 2015, to correct an excess contribution made in 2014.

  • After tax filing deadline. The tax applies each year while the excess contribution remains in your account. You can withdraw the excess to stop the penalty, or you can carry it forward to future years. Just be sure to reduce your regular contributions in those future years.

Please call Carl Heinemann, your Chattanooga CPA,  for a full explanation of these and other IRA rules.

Keep your retirement plan SIMPLE

Are you thinking about starting a retirement plan for your business? Take a look at a Savings Incentive Match Plan for Employees (SIMPLE). A SIMPLE is a straightforward tax-favored retirement plan for businesses with 100 or fewer employees. Here’s how SIMPLEs work.

  • Set up. You select a bank, mutual fund, or other approved financial institution to maintain your plan. Establishing your SIMPLE means completing a “model plan document” — generally an IRS form that spells out the terms of your plan, such as the definition of eligible employees and how contributions can be made. You keep the form with your other business legal papers.
  • Reporting requirements. Your reporting requirements to the IRS are minimal. There are no annual forms for the SIMPLE. You only have to report information such as an employee’s contributions on each contributing employee’s Form W-2.

    Once a year, you’ll need to provide your employees with information statements that include a description of how the SIMPLE works, whether your employees are eligible to contribute, and how they can start or change their contributions.

  • Fixing mistakes. If you make a mistake in the administration of your SIMPLE, such as accidentally forgetting to include an eligible employee, the fix could be as easy as taking corrective action to bring the employee into the plan.
  • Terminating your plan. To end your SIMPLE, you need to notify your employees and your financial institution. You’ll have to leave the plan open for the entire calendar year and fund the contributions as you stated you would in the annual reporting requirement that you gave your employees. No notification to the IRS is necessary.

Give Carl Heinemann, your Chattanooga CPA, a call if you’re ready to establish a retirement plan for your business. We’ll help you examine your options and choose the plan that works best for you.

Should you tap home equity for retirement?

If you’re approaching retirement, you may be taking a closer look at your savings and investment accounts. Perhaps you’re pondering the idea of tapping into your home equity — taking out a home equity loan or opening a home equity line of credit (HELOC) — to bolster your retirement accounts while you’re still working. But is that a good idea?

Here are some of the risks and rewards of this leveraging strategy.

  • Advantages. Borrowing against the equity in your home means you’ll be paying mortgage interest, an expense that’s deductible if you itemize on your income tax return.

    Another potential tax advantage: If you contribute the proceeds from your home equity loan to a traditional 401(k) plan or IRA, you have the opportunity to reduce your taxable income. In addition, pumping up your retirement fund offers the potential for greater growth over time.

    For 2015, individual tax-deferred contributions to a 401(k) plan are limited to $18,000 per year, with an additional $6,000 allowed if you’re over age 50. Small business owners who contribute to a SEP IRA enjoy even higher contribution limits.

  • Disadvantages. If you or your spouse is laid off or lose other sources of income, payments on your home equity loan won’t go away. Depending on the terms of your company’s retirement plan, getting money out of your account may not be easy. If you’re under age 59½, you’ll likely incur penalties for early withdrawal.

    What if the value of your home drops below the outstanding balance on your loan? You may find the house difficult to sell, and if you can’t sell, paying off your home equity loan can become problematic.

    Finally, by using this strategy, you’re hoping to generate a greater return on the borrowed money than the cost of borrowing that money. But there’s no guarantee your retirement account will generate a healthy return. As recent events have shown, the stock market is volatile, especially over the short term.

You do have other options. For example, you could tighten your household budget and use the money you save to increase retirement account contributions. Benefits include no interest, no penalties, and no long-term obligations.

Pay attention to money management basics

Launching a small company can be exhilarating, like entering an extreme sports competition with huge risks and prodigious rewards. But keeping a business profitable year after year may not always generate such exuberance, especially if you’re the one responsible for balancing priorities and covering day-to-day expenses.

Like it or not, monitoring such mundane matters as cash flow, inventory, collections, and taxes often distinguishes winners from losers in the business arena. Conscientious owners who keep a close eye on their financial resources may still be in the fight five years after opening their doors. Entrepreneurs who neglect their accounts may find themselves posting “going out of business” placards after a year or two of frustration and dashed dreams. Unfortunately, some owners never discover what went wrong.

Even if you’ve hired a top-notch accountant or bookkeeper, it’s wise to acquire at least a basic understanding of the following business fundamentals:

  • Cash flow. Liquidity is the lifeblood of your business. Like a doctor assessing the health of a patient, gaining insight into cash — how much money is in the bank, how much is coming in, how much is going out, where the cash is being spent — can help you reach a proper diagnosis. Even if the firm seems healthy, knowing where your cash is flowing can inform crucial decisions, prompting adjustments that may stave off disaster before it strikes.
  • Assets and liabilities. The listing of balance sheet accounts lets you know how much is tied up in inventory, how much you owe and how much is owed to you, how much equity you’ve contributed to the business, and other factors that may affect your company’s health. For example, a balance sheet that’s heavy in accounts receivable may indicate a problem with too-lenient credit policies. A large cash balance may signal missed investment opportunities or sluggish payment of outstanding loans.
  • Business versus personal accounts. Of course, if the line between the company’s books and your personal finances becomes blurred, your diagnosis may become distorted. Keeping personal and business budgets separate makes it easier to manage taxes and track financial transactions. Setting up discrete bank accounts — including a separate payroll account for employee social security, income taxes, and Medicare — is also crucial.

If you’d like additional suggestions about managing your company’s resources, give Carl Heinemann, your Chattanooga CPA, a call.