The Business of Keeping Records

As a business owner, your financial information is incredibly important and necessary to help you run your business. But how do you know what to track?

It all starts with a system. You need to have an accounting system that will clearly track the financial state of your business. There are lots of different types of accounting systems (we have a few recommendations) but ultimately, you need something that will summarize your business transactions, gross income, deductions and expenses.

Supporting documentation. In order to get the information you need for your accounting system, you need to have the records or supporting documentation. These types of records include:

Gross receipts = income you receive from your business

  • Cash register tape
  • Deposit information
  • Receipt books
  • Invoices
  • Forms 1099-MISC

 Purchases = what you resell to customers, as well as what you buy

  • Canceled checks
  • Credit card receipts and statements
  • Invoices

 Expenses = costs you incur (other than purchases)

These need to show the amount you paid as well as a description of what it was.

  • Account statements
  • Credit card receipts or statements
  • Invoices
  • Petty cash slips

As a note, if you deduct travel, entertainment, gift or transportation expenses, you have to prove certain elements of the expenses. For more information on how and what to do, go here.

Assets = property you own and use for your business

  • When and how you obtained the assets
  • Purchase price for each
  • Cost of improvements
  • Documentation of deductions taken, including: 179D, depreciation, casualty losses
  • Selling price
  • How the asset was used
  • Expense of sale

So where do you find all of this information? Often you can find it on purchase or sales invoices, real estate closing statements and even canceled checks that identify the payee, amount and proof of funds transferred.

Employment taxes

There are lots of different tax records you need to keep. At a minimum, you need to keep record of employment for four years.

Why you need to worry about it.

For starters, accurate books help you make financial decisions about your business. But there’s even more benefits to ensuring you have good records.

  • Tax time isn’t fun when you don’t have good records. Your books allow you to report accurate revenue, keep track of deductible expenses, calculate gain or loss on sold property and various other items you’ll need for your tax return.
  • Without solid financial information, your bank won’t be able to make lending decisions for your business.

For more tips and tricks on why you need to keep good records, check out this blog.

 The moral of the story

Documentation is important when it comes to running your business. It’s necessary to ensure you’re in compliance, as well as gives you the information you need to ensure you have the right financial information.

Preparing for the New Year: Expense Reimbursements

As we enter the new year, it’s important to take a look and ensure you’re entering 2018 on the right foot. There are several things you need to remember to keep your business in compliance. One of these things is your expense reimbursement policies.

The IRS defines business expenses as ordinary and necessary costs for carrying out your trade or business. So when we talk expense reimbursement, we’re referring to paying your employees back for what they spent (of their own money) on business-related expenses.

Not only should your business have an expense reimbursement policy, but that policy has to be compliant with the IRS and Department of Labor.

An Accountable Plan

The IRS states the following conditions must be met for your expense reimbursement to be in compliance:

  • A business reason. There has to be a business reason for the expense. In other words, you can’t just go out for drinks and submit it for reimbursement. It has to have a connection with the services your employee is performing.
  • It has to be validated. You have to have receipts or invoices that document the amount and nature of the expense being submitted for reimbursement.
  • No excess. Your employees need to return any amounts that were paid in excess of the validated expenses.

When these three conditions are met, it’s referred to as an accountable plan. This is important to know because if you’re deemed to have a non-accountable plan, the amounts reimbursed to your employees could be considered income and need to be included on the Form W-2. An accountable plan, on the other hand, allows reimbursements to not be considered taxable.

The Five “Ws” and a few other items

Meal Reimbursements
One of the key expenses often paid through reimbursement are meals. Yes, the IRS has specific rules about this.

If you’re not using a per diem allowance (go here to learn more), the IRS has specific requirements to substantiate your actual meal receipts. It’s known as the five “Ws”:

  • Who was there?
  • Why is the meal considered official business?
  • Where did the meal occur?
  • What was the cost of the meal?
  • When did the meal occur?

Automobile Expenses

The IRS also has rules when it comes to automobile expense reimbursements. Again we go back to the rule of substantiation. The policy related to automobile expense reimbursements must describe how your employees use a vehicle for business expenses. This applies to both an automobile owned/leased by your company as well as mileage reimbursement and personal use.

As a note, personal use of a company vehicle have to be included in taxable income.

The Department of Labor

The Department of Labor also has rules when it comes to expense reimbursements. These rules include:

  • The Five “ws”. The DOL also adheres to the 5 Ws when documenting all expenses to be reimbursed. Further, they also require your employees provide the original receipt and written description. If the receipt is lost, your policy has to state that you require a signed statement from the employee regarding the lost receipt.
  • Substantiation for all. The IRS has an exception that allows you to not have to keep records for any expense (excluding lodging) that is less than $75. This is not true with the DOL. The DOL states that all reimbursed expenses have to have the proper records.
  • For meal expenses, the DOL requires itemized receipts. In other words, the credit card slip won’t work. You need the actual ticket that details what each person ordered, as well as the credit card slip that indicates how much tip was left.
  • Automobile rules. When it comes to organization owned leases/vehicles, employees must furnish date of travel, number of miles driven, whether it was for personal or business and the odometer reading. If your policy also includes reimbursement for personal vehicles, the DOL states you have to have at least one record that includes date of travel, locations traveled to and from, number of miles and business purpose.

The moral of the story

Make sure your policy for expense reimbursements is in compliance as we kick off the new year. By setting these rules in place, you’ll ensure your employees not only have the information they need as they travel for work, but that your business is in compliance with the IRS and the DOL.

 

 

The Gift of Per Diem Rates

Business travel expenses are enough to make anyone’s head spin. There are so many things to remember, both for the employee traveling, as well as the business owner. There are the receipts and the records and the purpose of the travel … you can see how this begins to add up.

There is another option for business travel, known as per diem rates. Per diem rates are the daily fixed allowances employees are paid or reimbursed for work travel. These could include:

  • Lodging
  • Meals
  • Tips
  • Ground transportation
  • Other incidental charges (dry cleaning, wi-fi, etc.)

One thing per diem rates don’t cover is the cost of transportation to the work function or site. So if your employees are flying or driving, that’s paid separately by you.

Per diem rates are based on IRS-approved rates for your location. The General Services Administration issues these rates within the continental United States. They’re updated each year (check out the most recent update here).

So why use per diems? Well receipts usually aren’t required for per diem, meaning less paperwork. Another benefit of per diems is that qualified per diem reimbursements usually aren’t subject to income or payroll tax and therefore aren’t reported on an employee’s W-2.

But before you get all excited, here are some tips for implementing a per diem program that actually qualifies for tax-free reimbursements.

  • Is there a business purpose? Per diem rates are deductible when they have a purpose. In other words, the expenses your employees incur while traveling for work must be ordinary and necessary business expenses associated with travel away from home in connection with the performance of duties for a job, profession or business.
  • Are you away from “home”? Per diem rates only work when the employee is actually away from their tax home. The basic rule of thumb here is that per diem rates apply when the employee is away from home longer than an ordinary day’s work and reasonably could not be expected to make the trip home without obtaining sleep or rest. This is also known as the “sleep or rest rule.”

The establishment of a tax home is important. Temporary employees who hop around to different work assignments in various locations are not eligible for per diem rates. When in doubt, think about if the employee incurs substantial continuing living expenses related to their tax home location.

  • Is the assignment long term? Per diem allowances do not work for employee assignments that last over a year. In order for per diems to apply, the assignment has to have a definite period (beginning and end) and be documented.
  • Have you been keeping track? Yes, one of the benefits of a per diem allowance is the less stringent recordkeeping. However, documentation is still required. Typical documentation for per diems includes: days worked, location and business purpose.
  • Do you know the IRS-approved rates? The rates for per diem allowances differ based on location. If you pay over the location based amount, the excess will be classified as taxable income for your employee.
  • Are you giving breaks? Sometimes you put an employee at a job for multiple assignments. But what if that assignment lasts longer than a year? Make sure the breaks between assignments in the same location are legitimate. Typically, the IRS has said breaks of three weeks or less might not be considered a break at all. So pay attention to the length of contracts and the breaks between assignments.

 

 

 

 

 

 

Tips for Form W-2

As tax season rolls around, it’s important to have all your information ready. Not only will you feel more organized, but you’ll be able to provide your employees with all the information they need to file their own personal taxes.

One of the key pieces you’ll need to have for each of your employees is Form W-2.

What is it?

It’s an information form used to report federal and state taxable wages, taxes withheld, and other fringe benefit information to your employees. Information on this form is used by both the taxpayer (that’s your employees) in preparing to file taxes and the IRS to match records to the taxpayer’s tax return.

Do all my employees get one of these?

An employer legally must send out W-2 forms to each of its employees to whom they pay a salary, wage or other form of compensation.

If you need a refresher on who is an employee, go here.

Form W-2 must be filled out if you did any of the following:

  • Withheld any income, Social Security or Medicare tax from wages. This is regardless of the amount of wages.
  • Paid $600 or more in wages, even if you did not withhold any income, Social Security or Medicare tax.
    • Before you get too excited, this only applies to certain classes of employees, such as election workers or foreign ag workers.
  • Would have had to withhold income tax if the employee had claimed no more than one withholding allowance or had not claimed exemptions from withholding on Form W-4.

What do I need to do on the forms?

Form W-2 is made up of multiple parts, all of which is necessary for the taxpayer and the IRS.

Box 1 – Wages, tips and other compensation

This box is for the total taxable wages, tips and other compensation you paid your employee during the course of the calendar year. It includes the following:

  • Total wages
  • Bonuses (including sign-on bonuses) and awards
  • Total noncash payments, including certain fringe benefits
  • Tips reported by the employee to the employer
  • Certain employee business expense reimbursements
  • The cost of accident and health insurance premiums paid on the behalf of a S corp 2% shareholder
  • Taxable benefits from a section 125 plan if the employee chooses cash
  • Employee contributions to an Archer MSA
  • Employer contributions to an Archer MSA (if includible in the income of the employee)
  • Employer contributions for qualified long-term care services (if the coverage is provided through a flexible spending or something similar)
  • Taxable cost of group-term life insurance above $50,000 (above $2,000 for dependents)
  • Payments for non-job related education expenses
  • Employee’s share of Social Security and Medicare taxes if you paid them on their behalf
  • Designated Roth contributions made under a section 401(k) plan, a section 403(b) salary reduction agreement, or a governmental section 457(b) plan.
  • Distributions to an employee or former employee from an NQDC plan (or a nongovernmental section 457(b) plan.
  • Amounts includible in income under section 457(f) because the amounts are no longer subject to a substantial risk of forfeiture.
  • Payments to statutory employees who are subject to social security and Medicare taxes but not subject to federal income tax withholding.
  • Cost of current insurance protection under a compensatory split-dollar life insurance arrangement.
  • Employee contributions to a health savings account (HSA).
  • Employer contributions to an HSA if includible in the income of the employee.
  • Amounts includible in income under an NQDC plan because of section 409A.
  • Payments made to former employees while they are on active duty in the Armed Forces or other uniformed services.
  • All other compensation, including certain scholarship and fellowship grants.

 

Box 2 – Federal income tax withheld

This one’s pretty self-explanatory. Here we’re talking all federal income tax withheld from an employee’s wages for the calendar year.

 

Box 3 – Social Security Wages

This is the total wages paid (before payroll deductions) that are subject to employee social security tax. This, however, does not include social security tips and allocated tips (you get to save that for Box 7).

Items subject to employee social security tax, and therefore should be included in Box 3 are:

  • Signing bonuses
  • Employee business expense reimbursements
  • Taxable cost of group-term life insurance over $50,000
  • Employee and non-excludable employer contributions to an MSA or HSA except those made through a cafeteria plan.
  • Employee contributions to a SIMPLE retirement account
  • Adoption benefits

As a note, the total of boxes 3 and 7 (Social Security Tips) can’t exceed $127,200, as this is the maximum social security wage base for 2017.

 

Box 4 – Social Security Tax Withheld

Here we’re looking for the total employee social security tax withheld, including social security tax on tips. As a reminder, only includes taxes withheld for 2017.

 

Box 5 – Medicare wages and tips

Similar to box 3, this is where you record the wages and tips that were subject to Medicare tax. Wages that are subject to this are the same as those listed in box 3. The only difference? There’s no wage base limit to Medicare tax.

 

Box 6 – Medicare tax withheld

Here’s where you put the total of the Medicare tax withheld for 2017, including any additional Medicare tax withheld (there is an additional Medicare tax of 0.9% on taxable wages that exceed $200,000 for an employee in a calendar year).

 

Box 7 – Social security tips

Separate from box 3, this is where you show the tips your employee reported to you. All tips need to be recorded here, even if you did not have enough employee funds to collect social security tax for the tips.

And remember, the maximum amount for boxes 3 and 7 (combined) cannot exceed $127,200.

But wait, there’s more …

  • Box 8 – Allocated tips: The tips allocated to your employees
  • Box 9 – Verification code: If you’re participating in the W-2 Verification Code Initiative, the verification code goes here.
  • Box 10 – Dependent care benefits: This is the box for total dependent care benefits paid or incurred by you for your employee. This includes fair market value of daycare provided by you.
  • Box 11 – Nonqualified plans: The purpose of this box is to determine if any of the amounts in boxes 1, 3 or 5 were earned in a prior year. The Social Security Administration uses this information to ensure they have paid the correct amount of social security earnings.
  • Box 12 – Codes: The purpose of this box is to report the amounts for various fringe benefits to the employee along with the code to denote what fringe benefit it pertains to. For instance, 401k contributions made by an employee would be reported with a code of D. The IRS has a list of all of the codes along with a description for each one in the General Instructions for Forms W-2 and W-3, which can be found on the IRS website.

 The moral of the story

These forms matter, as they’re used by your employees, the IRS, Social Security Administration, and the state and local government. It’s your legal responsibility as an employer to provide each of your employees with a W-2 that accurately reflects the above items.

Yes, these forms can be confusing and time consuming. But it’s important to ensure they’re done correctly. If you need help, ask your business advisor for guidance. Or, come see us. We’re here to help.

P.S. Learn more about Form W-2, and other forms needed for year-end planning, in our W2/1099 book.

 

 

Fringe Benefits: What You Need to Know

As an employer, you want to ensure your employees are happy and thriving in your business. From time to time, you may even reward them for a job well done. But before you give a reward that’s outside the scope of their pay rate, think twice.

Welcome to the world of fringe benefits.

What are fringe benefits?

Fringe benefits are any form of payment that is considered compensation beyond your employee’s normal pay rate. This could include property, services or cash.

Why do I need to think twice?

Often, fringe benefits are taxable to the employee. And if it’s taxable, you have to report it on the employee’s W-2.

Fringe benefits that are taxable include:

  • Vacations
  • Personal use of an employer-provided vehicle
  • Gym memberships
  • Bonuses
  • Moving expenses (those in excess of your qualified expenses)
  • Group term life insurance
  • Gift cards

This is by no means an exhaustive list, but it should at least get you thinking.

What else do I need to know?

When we talk about fringe benefits, we’re often talking about value. The IRS has a little rule called de minimis fringe benefit, otherwise known as “one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.”

In other words, when you talk about value in regard to de minimis fringe benefits, if the benefit is so small it makes reporting it impractical, you don’t have to worry about it. And before you ask, there’s no specific dollar amount given.

One thing to remember is that cash or cash-equivalent gifts are NEVER non-taxable. For example, gift cards have an easily ascertainable value and can be redeemed for merchandise or a cash equivalent. So they need to be reported as part of an employee’s wages.

If you give items that are not cash, you will more than likely utilize fair market value. For instance, say you have a drawing during your company holiday party and an employee wins a 60 inch TV. This would not be considered de minimis and would need to be included in their income so taxes could be withheld. In this instance you can easily ascertain the value of the TV.

In the above example, you utilize fair market value. However, there are items that don’t have an easily discernible value. In that case, look at what a willing buyer would pay for that particular item. If you need a little more help, the IRS lays out guidelines for the valuation of certain items, like the lease of an employer-provided vehicle. You can find more information on that here.

So what would be considered de minimis?

So what would be considered de minimis? An example would be giving each of your employees a T-shirt, turkey, or something similar in value. The key here is that it HAS to be something tangible (as a reminder, this doesn’t mean cash or anything with a value attached … even a $5 gift card counts).

The moral of the story?

Fringe benefits are a great way to reward your employees and help you stand out from your competition. However, you need to be careful that you’re actually reporting these benefits as part of your employee’s wages.

1099 Reminder

Way back in July, we taught you the basics of the 1099 forms. Now that the deadlines for these forms are coming into view, we thought we would give you some tips and helpful reminders for getting them filled out.

Wait, what are these for again?

The most common type of 1099, the 1099-MISC, needs to be completed for anyone who has provided services to you amounting to $600 or more. This can be anything from accounting services to snow removal – if it was $600 or greater worth of work, it goes on the 1099-MISC. However there are a few exceptions to the rule (go figure!). A 1099-MISC isn’t required if:

  • The company providing the services is incorporated – except with lawyers.
  • The person who provided services is your employee.
  • The amount of services provided is less than $600 worth.

Do I need to report anything else on the form?

The 1099-MISC requires you to report any rent paid to an individual or business that isn’t incorporated. It also requires you to report royalties of $10 or more and any other income payments such awards and prizes, and even employee wages paid after death. In other words, most miscellaneous payments are reported on the 1099-MISC.

Any other forms I should know about?

Another common 1099 is the 1099-INT. This form focuses on – you guessed it – interest reporting. Any interest paid amounting to $10 or more, any foreign tax and interest or backup federal withholdings – regardless of the interest payment amount — must be reported on this form.

So, when are they due?

Depending on the type of form you are filing, the due dates may vary. The IRS website gives a great picture of when each form is due. You can check it out here.

Anything else I should know before I get to work filling these out?

As always, these forms are more complex than meets the eye, and this list of items to include is not all-inclusive. Our pals at the IRS do a great job of explaining them, and we’ve also crafted a handy blog to help you get a picture of what these forms include.

We’re hopeful these reminders will give you the information (see what we did there?) you need to fill out the 1099. If your head is still spinning, let us know. We’re always here to help!

The Importance of Classifying Workers

Recently, the IRS released a fact sheet to help remind small businesses of the importance of correctly classifying workers. Sometimes IRS lingo can be complicated, so we broke it down for you.

Let’s start with the question that’s probably going through your head – why does this matter?

When you classify your workers, this can help determine if you need to withhold income, social security and Medicare taxes. It also helps determine if you actually have to pay these taxes on employee wages. When it comes to independent contractors, businesses usually don’t have to withhold or pay taxes. If you’re not classifying correctly, you can get stuck with some harsh fines and penalties.

So how do you determine if the individual is an independent contractor or an employee? One general rule to follow is that your worker is an independent contractor if the business has the right to control only the result of the work, not how the work will be done. However, there are three categories that can help you make your determination.

Behavioral Control

A worker is considered an employee when the business gets to be bossy. Okay, maybe bossy isn’t the right word, but the business does have the right to direct and control the work being done. Behavioral control can be broken down into a few more distinct categories:

  • Type of instructions – This can include telling the employee where to work, when to do the work and how the work should be done.
  • Instruction complexity – The higher the complexity of the instructions given, the more likely it is the individual is an employee. When the instructions have less detail, this gives the worker more control to do the job how they see fit, which points towards the worker being an independent contractor.
  • Evaluation – How a business evaluates the work can help determine if the worker is an employee or contractor. If the details of how the work was done are evaluated, then the worker is likely an employee. However, if only the end product is being evaluated, it’s more likely you have a contractor.
  • Training – This one is fairly simple. Would you like someone else telling you how to do your job? If a worker is an employee, the business has the authority to do just that. For independent contractors, they are the experts and generally don’t require training from the hiring company.

Control over Finances

This category looks at what control the business has over the financial and business pieces of the worker’s job. Factors to consider include:

  • Equipment investment – Independent contractors are much more likely than employees to make significant investments in the equipment they are using to get the job done. Employees are often provided equipment from their employer, rather than investing in it on their own.
  • Expense reimbursement – Businesses generally reimburse expenses for their employees, not for independent contractors.
  • Availability – Independent contractors generally have the freedom to seek out more business opportunities, while employees work is usually contained to the one business.
  • Payment – This one is easy to understand. When you have employees, you usually guarantee them a regular wage. With independent contractors, a flat fee is usually agreed upon and paid on the completion of the work.

Relationship Elements

What the business or worker offers in the relationship can also determine classification. Some key elements to consider are:

  • Contracts – Written contracts which describe the relationship the parties plan to create are a fairly simple way to determine which type of worker the business has. However, it’s important to note that a contract stating the worker is a contractor or an employee isn’t enough on its own to classify the worker’s status.
  • Benefits – Insurance, retirement, vacation and sick pay are benefits provided to employees. It’s rare for these benefits to be given to independent contractors.
  • Forever or just a fling – The length of time of the relationship can help determine a worker’s status. When an employee is hired, the expectation is that the relationship is long term. For contractors, the relationship isn’t permanent. Instead, both parties enter the relationship with the assumption of a certain amount of time for the work to be completed.

When businesses wrongly classify their workers, they are still liable for the related taxes and payments for those workers, and may even face other sanctions. Correctly classifying your workers helps you avoid this, making it easier for you to run your business.

We know this stuff can be kind of confusing – and even scary. But don’t fear! We are here to help.. just ask!