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!

 

Updates to Per Diem Rates

Back in August, the General Services Administration (a.k.a GSA) issued its annual update on federal maximum per diem rates. These new rates pertain to locations within the continental United States – otherwise known as CONUS. This includes the lower 48.

Before we go into detail on the new rates, let’s do a little refresher.

Per Diem: A Latin word that translates to per day, or for each day. In the case of this post, per diem is being discussed as the daily allowance employees are paid and reimbursed for when they travel for work. Common expenses covered under per diem rates include:

  • Lodging
  • Meals
  • Tips
  • Ground Transportation
  • Wi-Fi Charges
  • Other incidental expenses, such as dry cleaning

Another simple way to put it: it is the amount of money an employee is able to spend, per day, on a business trip, attending conferences and events related to work and traveling to work away from the home office. Think of it as an allowance. However, it is important to note the per diem rate doesn’t include the cost of transportation to the site, such as flights or driving. Those costs are usually paid separately by the employers.

So, let’s get back to the main point: these rates are changing, and if you or your employees travel for work, it’s important to know them and stay in compliance!

The new FY18 rates apply to work travel on or after October 1, 2017. If the per diem allowance given to an employee is equal to or less than the federal rates, the allowance is excludable from income tax; those over the federal rates are subject to employment taxes.

Let’s take a look at what FY18 per diem rates have to offer.

The first takeaway to note is the CONUS meal and incidental expense (M&IE) rate hasn’t changed – it is staying at $51. The M&IE rates for non-standard areas – areas still within CONUS which have different rates for travel – will also stay the same. However, all locations in CONUS that don’t appear on the non-standard area list will have an increase in the lodging per diem rate. This has gone up from $91 to $93.

There are also some changes to the non-standard areas list. While no new locations were added, there were 14 locations removed for FY18. They include:

  • Redding, CA
  • Cedar Rapids, IA
  • Bonner’s Ferry/Sandpoint, ID
  • Dickinson/Beulah, ND
  • Watertown, NY
  • Youngstown, OH
  • Enid, OK
  • Mechanicsberg, PA
  • Scranton, PA
  • Laredo, TX
  • McAllen, TX
  • Pearsall, TX
  • San Angelo, TX
  • Gillette, WY

These removed locations are now considered part of the regular CONUS, and follow CONUS standard rates.

You might also be wondering about rates in places that aren’t part of the CONUS, such as Alaska, Hawaii or even Puerto Rico. If your employees are lucky enough to travel to Hawaii for work, it’s important to note these rates are not updated annually, but rather on an irregular basis.

The Department of State steps in and updates per diem rates for foreign travel, but also on an irregular schedule.

To find these rates, as well as the CONUS rates, be sure to check out the GSA website.

In the meantime, if you’re struggling to understand how much to reimburse your employees for their travels, reach out to us. We would be happy to help!

1099 Basics – In July

That’s right, it’s never too early to start the process of preparing your 1099s (you will thank us come January). Here are a few tips to start preparing those 1099s.

Who do I prepare 1099s for?

The simplest answer for the most common type of 1099, the 1099-MISC, is they need to be prepared for anyone that provided services to you. However, they are not given to someone who is an employee (here’s your refresh), and you need to have paid them $600 or more for the year (we’re talking accounting, legal, janitorial services, repairs, snow removal or lawn maintenance, etc. unless the company is incorporated). If the company is incorporated, then a 1099-MISC is not required, except with lawyers … then you still get to fill out the form.

Other items reported on a 1099-MISC include rent paid to an individual or a business that is not incorporated, royalties of $10 or more, other income payments including prizes and awards, employee wages paid after death in the year following death, director fees, etc.

Another common 1099 form is the 1099-INT. This form is required for interest paid of $10 or more, any foreign tax on interest withheld and paid, or backup federal withholdings regardless of the amount of the interest payment.

Please note, this is a very simplified list of items that 1099s need to be issued for. IRS.gov has several booklets that go into more detail on what is required and instructions for each form is available. On their website, type 1099 instructions in the search box and a list of forms and instructions will pop up.

So what am I supposed to do in July?

Identifying the vendors that need 1099s now will save you a lot of headache come year end. You can do this by having each of your vendors complete and return to you a Form W-9 (also found on IRS.gov). This form will give you their business name, address, tax identification number and type of entity. Best practice is to have all of your vendors complete this form, even if you know they will not be providing services to you. If circumstances change and you are required to provide a 1099 to them in another year, then you are already prepared!

Once the W-9s are returned, you can begin updating your records so when it comes time to complete your 1099s you will have the correct name, address, and TIN on file. You should also flag your vendors so it accumulates the amounts for you. Many accounting programs, such as QuickBooks, allow you to indicate the vendor will need a 1099 at the end of the year. Most also allow you to indicate the type of form and which box the amounts should be reported in. Having your system set up to accurately do the work for you will save tons of time at year end.

If all of these suggestions are followed, you should have time in January to put your feet up on your desk and relax because you won’t be spending hours trying to find vendor information and trying to figure out the amounts to report.

If you have questions, we’re always here to help.

Ringing in the New Year with New Mileage Rates

Mileage changesAs you get read to embark on 2017, one of the things to keep in mind is the IRS. Why you may ask? Well the IRS likes to ring in the New Year with all sorts of changes (don’t believe us? Check out this blog).

One of their newest additions is the change in rate for mileage. Beginning on January 1, 2017, the standard mileage rates for business, medical and moving will change. Happy New Year.

The new rates will be:

  • 53.5 cents for business mileage (that’s a whopping half cent change from 54 cents in 2016)
  • 17 cents for medical or moving purposes (it was 19 cents in 2016)

Why the change? As a reminder, the mileage rates for business are based on a fancy study on the fixed and variable costs of operating an automobile. So the IRS is just keeping up with the times.

These are important calculations to watch if you’re reimbursing your employees for driving on or for the job. While half a cent might not seem like much, it can add up if you’re not paying attention to these types of changes. Anything paid to an employee above the federal mileage rate becomes taxable wages to the employee.

Don’t feel like calculating the mileage rates? You can always calculate the actual cost of using a vehicle instead.

 

Updates to Form I-9

We want to keep you up to date on all changes that effect your business. Today, we bring you a compliance update from the American Payroll Association regarding the new Form I-9.

What is it? 

According to the US Citizenship and Immigration services, Form I-9 is used to verify the identity and employment authorization of individuals who are hired for employment in the U.S. Employers are required to complete a From I-9 for each person they hire to work in the U.S., including citizens and non-citizens.

What’s the story?

Form I-9 got a facelift. The U.S. Citizenship and Immigration Services released a new Form I-9, along with updated instructions. Along with these changes comes a new date. Employers have to start using this new version by January 22, 2017. Until that date, employers have the flexibility to use either the new form, or the old version.

So what changed?

Electronic seems to be the way to go in today’s day and age, and tax forms are no exception. Revisions have been made to Form I-9 so it’s easier to complete on a computer. Some new features include a start over button, on screen instructions for each section and drop down lists, to name just a few.

The electronic changes also bring options. Employers can now use either the computer form, the paper copy or both. However, the form available on the U.S. Citizenship and Immigration Services website can’t be signed electronically. The form must be printed, signed and dated by hand, where required. An exception to this rule is if the employer has their own I-9 system that meets certain requirements, in which case they may choose to use e-signatures.

Other changes made to the From I-9 include:

  • Wording Changes
  • Prompts to ensure correct information
  • A separate area to add additional information
  • Ability to add multiple preparers/translators and a supplemental page for them

But that’s not all …

Another change to the Form I-9 is the separation of the instructions. The instructions now include specific directions for completing each portion of the form. The new and improved instructions also include a list of documents used during the verification process, as well as commonly used abbreviations. If an employer is planning to rehire an employee, they will find guidance on when and how a previous Form I-9 may be used if the rehire is within three years of the previous date on the I-9.

The moral of the story…

One thing is certain: employee forms are complex. If you don’t stay up to date on changes, Uncle Sam might be shaking his finger at you and your business. If you ever find yourself struggling to keep up with these changes, let us know – we’re ready to help!

The Need for Good Books

It’s time to talk records … and no, we’re not talking about filing cabinets full of paper. We’re talking about records in terms of financial records, also known as your books. Before you hit the snooze button, let’s first talk about a few reasons why keeping accurate financial records (also known as good books) is so important.

Accurate bookkeeping allows you to make sound business decisions.

Your books keep you in touch with your business’ operations and obligations. They will also help you see problems before they occur.

Here’s just a few things good books will help you answer:

  • How is my cash flow? Are vendors being paid on time? Are customers paying me on time?
  • Do I have too much money tied up in inventory? Or do I have adequate inventory to fulfill sales orders?
  • Do I need to purchase new equipment? Do I have the ability to purchase new equipment given the current state of my finances?
  • Do I need to hire additional help? Will I be able to pay said help?
  • Which areas of my business are successful? Which areas need improvement?
  • Can I cut my costs in any areas?
  • Am I following my budget?
  • How does my profitability compare to others in my industry? (Don’t forget, profitability isn’t the same thing as cash flow)

Accurate books are critical when it comes to tax time.

Tax time isn’t so fun when you haven’t had accurate bookkeeping. After all, good books allow you to report accurate revenue, keep track of deductible expenses, calculate gain or loss on sold property and support items reported on your tax return (read, in case you get audited). All of these things are good to know and have at tax time.

Accurate financial records help others, like your bank.

Without good books, your bank won’t be able to make lending decisions for your organization. Don’t believe us? Read up on what this bank has to say.

So now that you know why it’s important, here’s a few things to consider on your record journey:

Implementing a bookkeeping system.

  • Keep it simple!
  • Maintain books that have the right level of detail depending on the complexity of your business.
  • Make sure you have the essential information you need on a timely basis. If you don’t have access to timely information, even the most accurate records won’t help you a whole lot.
  • Compare current data with historical data to check your progress. (cough benchmarking cough)

Need some more help with setting up your books?? We’ve written two blogs on this for you: Part 1 and Part 2.

Find the right tool/partner.

As a reminder, before you make a decision regarding accounting software, make sure you understand your needs.

There several different types of software that can help you track your records. Many are cloud based accounting programs (QuickBooks, Zero, Wave, FreshBooks, Bill.com … to name a few) that allow you to access your information from almost anywhere for a small monthly fee.

If you’re not sure of how to set up your books, or you need just a little more help understanding and updating, talk to a reputable CPA firm. They can be a trusted ally on your business journey, especially if you visit them more than once a year.

Mileage Rate Changes in 2016

Mileage changesThe IRS would like to welcome you to 2016 with some exciting news. Business standard mileage rates are dropping to 54¢ in 2016. Happy New Year.

The mileage rate decrease to 54¢ is down 3.5 cents from the 57.5 cents-per-mile rate, which was in effect during 2015. Effective January 1, employers can use the new mileage rate to figure out the amount to reimburse employees who are using their own cars for business purposes. It can also be used for the “cents-per-mile” valuation method, which helps you determine the amount to add to your employee’s income for personal use of certain company vehicles.

So why the change of rate? The mileage rate calculation is based on an annual study of the fixed and variable costs of operating a vehicle. So the IRS is changing with the times … and the statistics.

It’s important to be aware of this change and make adjustments on or after January 1, 2016. Otherwise, you’ll end up reimbursing an extra 3.5 cents in each employees’ income, in addition to having to deal with withholding and reporting responsibilities.

But wait, there’s more. The IRS shared the love and said the 2016 standard mileage rate for medical or moving purposes will decrease to 19 cents per mile. This a four cent drop from the 23 cents per-mile rate for 2015.

With all of this, it’s important to note that you have to be mindful of your years. If an employee files an expense report in 2016 for miles driven in 2015, the 2015 rules apply.