Redfern & Company

In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program.  It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation beforethe IRS or Department of Labor initiates an examination.

The distinction between independent contractors and employees is significant for employers, especially when they file their federal tax returns. While employers owe only the payment to independent contractors, employers owe employees a series of federal payroll taxes, including Social Security, Medicare, Unemployment, and federal tax withholding. Thus, it is often tempting for employers to avoid these taxes by classifying their workers as independent contractors rather than employees.

If, however, the IRS discovers this misclassification, the consequences might include not only the requirement that the employer pay all owed payroll taxes, but also hefty penalties. It is important that employers be aware of the risk they take by classifying a worker who should or could be an employee as an independent contractor.

“All the facts and circumstances”

The IRS considers all the facts and circumstances of the parties in determining whether a worker is an employee or an independent contractor. These are numerous and sometimes confusing, but in short summary, the IRS traditionally considers 20 factors, which can be categorized according to three aspects: (1) behavioral control; (2) financial control; (3) and the relationship of the parties.

Examples of behavioral and financial factors that tend to indicate a worker is an employee include:

• The worker is required to comply with instructions about when, where, and how to work;
• The worker is trained by an experienced employee, indicating the employer wants services performed in a particular manner;
• The worker’s hours are set by the employer;
• The worker must submit regular oral or written reports to the employer;
• The worker is paid by the hour, week, or month;
• The worker receives payment or reimbursement from the employer for his or her business and traveling expenses; and
• The worker has the right to end the employment relationship at any time without incurring liability.

In other words, any existing facts or circumstances that point to an employer’s having more behavioral and/or financial control over the worker tip the balance towards classifying that worker as an employee rather than a contractor. The IRS’s factors do not always apply, however; and if one or several factors indicate independent contractor status, but more indicate the worker is an employee, the IRS may still determine the worker is an employee.

Finally, in examining the relationship of the parties, benefits, permanency of the employment term, and issuance of a Form W-2 rather than a Form 1099 are some indicators that the relationship is that of an employer–employee.

Conclusion

Worker classification is fact-sensitive, and the IRS may see a worker you may label an independent contractor in a very different light. One key point to remember is that the IRS generally frowns on independent contractors and actively looks for factors that indicate employee status.

Please do not hesitate to call our offices if you would like a reassessment of how you are currently classifying workers in your business, as well as an evaluation of whether IRS’s new Voluntary Classification Program may be worth investigating.

As 2012 gets underway, Congress has extended the employee-side payroll tax cut but a laundry list of tax incentives have expired and their renewal is in doubt.  The fate of these incentives, along with the Bush-era tax cuts, will dominate debate in Washington D.C. in 2012.  At the same time, tax planning in a time of uncertainty appears to have become the new normal.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011, approved by Congress on December 23 and signed by President Obama the same day, extends the 2011 payroll tax holiday through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the period January 1, 2012 through February 29, 2012 (10.4 percent for self-employment income). The new law also includes a recapture provision for certain individuals.  However, the House Ways and Means Committee reported that the recapture provision will only apply if the payroll tax reduction is not extended for the remainder of 2012.  Lawmakers are expected to extend the employee-side payroll tax cut through the end of 2012, although not before difficult negotiations.

One speed bump to extending the payroll tax cut through the end of 2012 is its cost. The two-month extension is paid for by increasing certain fees charged to mortgage lenders.  A full-year extension will require additional offsets (unless Congress decides not to offset an extension). Lawmakers are reportedly discussing additional revenue raisers, such as unspecified changes to the S corporation rules and the closing of a loophole for corporate jets.  Other revenue raisers reportedly under consideration are repeal of certain oil and gas preferences and repeal of the last-in, first-out (LIFO) method of accounting.  A variety of spending cuts are also on the table.

Extenders

After December 31, 2011, many popular but temporary tax breaks expire.  The incentives, which are known as “extenders,” impact individuals and businesses.  Some of the more popular individual extenders are the state and local sales tax deduction, the higher education tuition deduction, and the teachers’ classroom expense deduction.  For businesses, the research tax credit is one of the most important extenders.

One immediate change that many taxpayers will notice is a drop in transit benefits.  In 2011, commuters benefitted from more generous transit benefits.  The 2011 monthly limit on the tax benefit for transit and vanpools of $230 per month reverts to $125 per month in 2012. However, the monthly limit for qualified parking provided by an employer to its employees for 2012 will increase to $240, up $10 from the limit in 2011.

Several bills have been introduced in Congress to extend the expiring incentives. However, the bills have languished in committee. One reason for the lack of movement is that Congress can extend the incentives in 2012 and make them retroactive to January 1, 2012.  The extenders are also separate from the temporary Bush-era tax cuts, which are scheduled to expire after December 31, 2012.  Many lawmakers do not want to link the extenders to the more-controversial Bush-era tax cuts.

IRS budget

One bill that did pass Congress at year-end 2011 was a fiscal year 2012 budget for the IRS.  Congress voted to cut $305 million from the IRS’s FY 2012 budget.  How this cut will impact IRS operations is unknown. In November 2011, the IRS offered buyouts and early outs to back-office employees to reduce its greatest expense: employee payroll.  The IRS could also delay some business systems modernizations to save money.  The IRS will likely keep customer service as close as possible to full funding, especially during the busy 2012 filing season.

Tax planning

One of the most significant challenges to long-term tax planning is the on-again, off-again nature of many tax incentives.  Temporary incentives, such as the research tax credit and the state and local sales tax deduction, have become de facto permanent incentives because they are regularly extended.   Nonetheless, they are temporary. Because of their temporary nature, taxpayers must have two tax plans: one that takes into account an extension of the incentives, and a second plan that does not.

If you have any questions about tax planning and tax legislation in 2012, please contact our office.

The new year brings a new tax filing season. Mid-April may seem like a long time away in January but it is important to start preparing now for filing your 2011 federal income tax return.  The IRS expects to receive and process more than 140 million returns during the 2012 filing season.  Early planning can help avoid any delays in the filing and processing of your return.

Through the end of 2007 and beginning of 2008, we encouraged our clients to “horde cash”. While businesses were still performing fairly well, real estate and associated businesses were being hit. We were encouraging clients to build up cash reserves not due to some “doom and gloom” predictions, but because with cash comes flexibility, and frequently with flexibility comes success.

Here we are five years later and are happy to report businesses are coming back. We are seeing our existing clients perform better than they did last year and are speaking with new entrepreneurs. With this new business hope our advice is start building (or rebuilding) your cash reserve now.

Here are the 3 steps to start building a cash reserve in your business:

Step 1, examine your expenses and get cheap. One of the few positives we saw coming out of the last few years was that being cheap, while not necessary cool, was acceptable. Do not fall in the trap of “keeping up the Joneses”. Now is the time to continue to operate “lean” in both your business and home spending. One practical way to execute this is to respond to our offer to examine your personal spending habits versus the norm in this area. This will give you an idea of how your expenses stack up against others in the area. Step 1, continue to spend as if it were 2009, not 2006.

Step 2, examine how you make your money. Most of us have either multiple product/service offerings or at least multiple clients. Not all products/services or clients created equal. Some will be more profitable than others. It is up to you to know, which products, services, clients help your bottom line the most, then you should make a plan to get more of those clients. If you don’t know how to extract this information from your accounting records, we can help you setup your books in a way that it will provide this information.

Step 3, get a success plan. Notice, our recommendation is not to “create” a budget, don’t reinvent the wheel. Borrow, Buy or Steal a plan that already exists. Articulate what your plan will be and then see how that works out numerically. We all know we need a plan, so why don’t we create one? For business owners that have a large amount of work, they tend to feel they are “too busy”, meaning it will take a lot of time they don’t have. For business owners that are not busy, they simply don’t want to know what their projects look like. Neither are good reasons to continue as status quo. One practical way to get started is to look at your most recent tax return; it breaks down how money was made and spent. How would you like that to change for the remainder of 2010?

We are happy to see business turning around in 2010 thus far. Don’t forget the lessons of 2008 and 2009; build your business’s cash reserve and position yourself for success.

In 2007, we gave our tax clients copies of The Richest Man In Babylon, a classic book on wealth written by George S. Clason during the Great Depression. Like many books of this nature, Mr. Clason espouses saving and investing money rather than spending and borrowing it. Much like the original audience of this book, current readers find themselves in difficult financial times and must navigate solutions to keep their businesses open.

One solution I have read a great deal about over the last few weeks is President Obama’s proposed Small Business Administration (SBA) $30 Billion loans program. Much like the TARP bail out banks, the government wants to now lend through the banks for small businesses. SBA Administrator Karen Mills, in a recent Associated Press interview, stated small business growth is key for our economic recovery and these loans will help small businesses. One key point Administrator Mills made repeatedly though was that these loans are to be for growing small businesses looking to expand. Further, even though this is a government program, the loans must still be approved by a bank.

As nearly anyone dealing with banks in the last few years has found, many banks are loath to lend. To combat this, this proposed program incentivizes banks to lend to small businesses by lowering the interest rate they pay the government for these loans based on the volume of loans they make. If approved, what this is likely to foster is the situation that already exists, some banks will specialize in SBA Loans and others will not make any.

This solution will likely not work for the business simply looking to make it through a difficult period until sales volume returns to 2007 levels. This solution will probably not work for a brand new business. Make no mistake, this is not a “bailout” program for small businesses like what the banks received, this is a “growth” program for businesses with proven track records.

Regardless if you believe this solution is right for your business or not, any solution you seek will likely require you to have the following:

1.)    A vetted business plan that shows your business will produce month-by-month excess cash.

2.)    Financial statements, both the business’s and the business owner’s.

3.)    Business expertise proven in the current business or a related business.

A point of caution, nearly any loan, but especially an SBA loan, will be secured with collateral. If the business owner personally secures the loan, if the business fails and the business owner declares bankruptcy, this debt may not be eliminated.

The foundational elements of any viable solution for business success are planning, execution and monitoring. When planning, determine what is the minimum amount necessary to realize success and execute appropriately. Regardless of whether or not your business is eligible for SBA or any other type of debt, I would strongly recommend giving non-debt options long consideration before signing up for a loan. If possible, follow Mr. Clason’s advice for building wealth: save money and reinvest it in yourself, let your own money work for you.

We are nearing the finish line of another tax season! Getting your paperwork together to file a tax return can be painful. If once the returns are prepared there is a liability due, it is especially painful. If, on the other hand, you get money back, it’s nice, but both cases are probably a sign there are opportunities to budget your money. But, as we tell our business clients, tax planning should only be 1 part of financial planning.

For this reason, we will be sending our individual tax clients a questionnaire shortly. As a part of our general service, we will analyze each respondent’s personal or household financial situation, to include:

• Savings and investing advice
• Budgeting ideas
• Tax savings tips
• Debt analysis
• Housing calculators

As a bonus, if this is the year you want to get serious about a household budget/cash flow, we can help you get started.

Finally, through financial planning, you will be able to get a better idea of what your 2010 tax return should look like and what measure can be taken now to help ensure you don’t have a liability due while keeping more money in your pocket throughout the year.

Keep your for an email from our office for your personal questionnaire.

As you’ve known since having your first job, in January you’ll likely receive a W-2 and other tax documents. What you’ve come to realize since starting your business is that businesses mail out those tax documents. The question is then, as a business owner, what must you mail to people and companies you’ve done business with in 2009.

W-2s

If you have employees, you will need to issue them W-2s. You are also responsible for mailing copies of the W-2s with a summary form titled W-3 to the US government. You likely have a payroll company though and most payroll companies provide this service on your company’s behalf. What you must do:

• Please confirm with your payroll company that they are in fact taking care of this on your behalf.
• Please make sure that if they mailed you all of the W-2s that you mail them to your employees.
• If you do not have a payroll company, or if you are unhappy with the services you’ve received from your payroll company, please contact us as we may have recommendations on a company that can help!
• If you are doing your own payroll, you must give your W-2s to your employees by February 1, 2010 and you must remit copies of the W-2s with the W-3 to the Federal government by March 1, 2010.

1099s

If you’ve paid an individual more than $600 during 2009, you are probably required to issue them a 1099. You are also responsible for mailing copies along with a summary form titled Form 1096 to the Federal government. In some cases, if you’ve reported these payments through a payroll company, the payroll company will take care of this. Most of the time this is not the case. What you must do:

• If you have not received W-9s from individuals you paid more than $600 during 2009, do that immediately.
• Armed with the W-9s, create 1099s for individuals you paid more than $600 during 2009 and mail them no later than January 31, 2010 to the recipients.
• Mail copies of the 1099s and a summary 1096 to the Federal Government by February 28, 2010.
• Most account software tracks this type of information and appropriate 1099 and 1096s forms are sold at most office supply stores.
• We are happy to help prepare these forms.

OTHER KEY ITEMS

• The 4th quarter estimated tax payment (corporate and individual) is due January 15, 2010.
• If you are required to remit sales tax returns, quarterly filers file Q4 by January 31, 2010.
• If you are a corporation or LLC, you likely have recently received a Statement of Information filing request from the Secretary of State of California. There are differing due dates for different organizations, but that is a form required to be filed annually, so make sure you complete it and remit it to the Secretary of State.

REMINDERS

• If you are a calendar year corporation, your tax return is due by March 15, 2010.
• If you are a partnership or LLC being taxed as a partnership, your tax return is due by April 15, 2010.
• Calendar year not for profit tax returns are due May 15, 2010.

Depending on your business, there may be other key items that are due not listed above. This is not intended to be an exhaustive list, but rather the most common items we see businesses dealing with. To view the IRS’s small business tax calendar, see http://www.tax.gov/calendar/. For specific questions, please contact us.

Do you remember what it was like going to the ice cream shop as a youngster? Let’s take a walk through memory lane. As you step into the parlor, the cold air meets you with a subtle sense of euphoria and excitement. Once you become acclimated to the new environment, your focus shifts back to the important question at hand. Investigating the situation further, you walk back and forth intently looking into the glass at the beloved tastes of heaven just moments away. You get in line, perhaps chattering a bit with the family or friends that you went with and before too long it is decision time. What flavor would you like?

For the small to medium-sized business owner, choosing ice cream is a lot like choosing a retirement plan. There are many flavors that might do the trick for you, but which one will be the most satisfying! Before looking at a particular type of retirement plan, let’s look at some of the business benefits to employers who establish retirement plans.

*Employer contributions are tax deductible

*Assets in the plan grow tax-free

*Assets grow with compounding interest

*Businesses may receive tax credits and other incentives for starting a plan

*A retirement plan can attract and retain better employees

Now that you know there are several retirement plans (flavors) you can choose from and some of the benefits, let’s keep things “simple” and look at one of the options available as a retirement plan platform.

1). SIMPLE IRA (Plain Vanilla)

The SIMPLE IRA Plan is ideally suited as a start-up retirement savings plan for small employers who do not currently sponsor a retirement plan. Some of the qualifications include:

*Have a business with 100 or fewer employees

*Need to complete just a form or two

*Cannot have any other retirement plan

Here are some of the advantages:

*Easy to set up and run

*Administrative costs are low

*Employees can contribute, on a tax-deferred basis, through convenient payroll deductions.

*You can choose either to match the employee contributions of those who decide to participate or to contribute a fixed percentage of all eligible employees’ pay.

Under a SIMPLE IRA plan, you, the employer, make contributions to traditional IRAs (SIMPLE IRAs) set up for each of your eligible employees. In addition, this type of plan allows your employees to defer a part of their salaries into the plan for retirement. A SIMPLE IRA Plan is funded both by employer and employee contributions.

Maximum elective deferral amount: $11,500

As an employer, when you establish a retirement plan there is evidence of the many tax and employee retention benefits that you immediately receive. One of the benefits that is often overlooked is the future value of your hard-earned contributions! Let’s have a look at the following scenario.

Within a SIMPLE IRA, your maximum elective deferral amount is $11,500. Let’s assume the following.

If one were to put $11,500 into a plan annually and earn 7% compounding interest over the next 30 years, the accumulated tax-free growth would be:

$1,177,254.98!!

So there you have it. Choosing a retirement plan for employers is a lot like going to the ice cream shop. Once you select your flavor, enjoy!

Note: All asterisks were taken from www.irs.gov

Written by:

Brandon Cass

Financial Advisor

Crowell, Weedon & Co. est. 1932

1921 Palomar Oaks Way Ste. 102

Carlsbad, CA. 92008

Toll Free (800) 345-8312

Direct (760) 448-4129

Fax (760) 438-2030

bcass@crowellweedon.com

*There are risks inherent in any investment and there is no assurance that any investment, money manager, asset class, style or index will provide positive performance over time. Any opinions or illustrations expressed herein are that of the author and not necessarily Crowell, Weedon & Co. Partners of and/or the firm of Crowell, Weedon & Co. in the normal course of business may have a position in the securities mentioned above.

Although the United States is officially out of recession¹, uncertainty still abounds for the economy. Housing prices- a consistent topic of discussion in our area and driver of consumer confidence- are flat.  While Congress considers extending (and possibly expanding) the home buyer’s credit, many news outlets are reporting a predicted decline in home prices in 2010². In uncertain times, planning is imperative.

Did you create a business plan before starting your business? Have you kept it current? Business plans are not just for businesses looking for funding from lenders or venture capital firms; they are for all businesses serious about success. While business plans are key for business start-ups, they are imperative for growing businesses and businesses going through changing economic environments. As we hope for an economic recovery, we need to plan for continued economic difficulty. One key for success in any economic climate is an up-to-date business plan.

BENEFITS OF A PLAN

1.)    Determine areas of past business success

2.)    Creating benchmarks with which to evaluate success

3.)    Count the cost of future action

DETERMINING AREAS OF PAST BUSINESS SUCCESS

Nearly all businesses have varying products or service lines, major customers or service regions. During times of economic growth, your business may survive without knowing which areas of your business are financial “all-stars” and which are pulling down the “team average.” During times of economic decline, one bad business area or major customer could make the difference between a profitable year or loss. A key step in creating your new business plan is examining where past success has come from and determining if that area may be counted on to be an area of continued success.

CREATING BENCHMARKS WITH WHICH TO EVALUATE SUCCESS

Once you determine where success has come from, it is important to create benchmarks with which to evaluate future endeavors. Past success came at a cost; be it a function of time, materials or marketing, costs should be related to return. For instance, it may have taken you 10 hours to complete a project for one client and 15 hours to complete a similar paying project for another client. You would need to determine if the benchmark is 10 hours or 15 hour, and what caused one project to be a 50 percent greater investment than the first. Once you have determined what a reasonable goal is, incorporate this into your plan. It is also highly beneficial to incorporate these benchmarks and other aspects of your business plan into your employee job descriptions.

COUNT THE COST OF FUTURE ACTION

Every decision you make in business has a cause and effect relationship. Spending 15 hours on one project, may mean you only have 5 hours for another project, or more likely, you are going to have to work 5 hours on the weekend on that other project. Having determined your areas of success in the past, you need to determine if serving the same market segment in the future will cause future success or failure. One product of this exercise we generally observe is that this helps businesses further define their niches. By focusing on a more narrow market segment, businesses are frequently more productive and more successful.

A business plan for a growing company is, in many ways, a more useful tool than one for a start-up; it benefits from business history and the business owner’s firsthand knowledge of the industry. Further, it may take less time if the business has a copy of its original business plan, which may be updated rather than creating a new one from scratch. Make revising, renewing or resuscitating your business plan a priority item for the last two months of 2009, and create a road map for your business’s future success during economic decline.

Please contact us if you would like help creating your successful business plan.

¹ Conor Dougherty, “Economy Snaps Long Slump”, Wall Street Journal, October 30, 2009

² David Streitfeld, “Fears of a New Chill, Just as Home Sales Had Begun to Thaw”, New York Times, October 28, 2009, (www.nytimes.com/2009/10/28/business/economy/)

The Department of Labor is giving a free webinar on changes to the Form 5500 on Thursday, November 5th at 11 AM.

The purpose of this webinar is to help plan sponsors and plan service providers prepare for changes to the Form 5500 and the new electronic filing requirement that begins with the 2009 plan year filings. Please click on the link below for further details.

Free Webinar