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!

Tax Changes: What’s New?

Surprise – we’re back! We disappeared for a while, but we’re back to share some important updates on, you guessed it, taxes!

It should come as no surprise there are constant changes in the tax world, and staying up to date on all these changes and regulations can be taxing (don’t worry, we haven’t lost our sense of humor).

So, what’s been changing? We’re glad you asked.

Physical Nexus

A while back we brought you info on nexus (you can check it out here if you need a refresher). States are now looking to overturn the physical nexus requirement for sales tax and replace the current presence test with a new test which would be based on sales or transaction volumes. These changes are important to pay attention to, as they just might have an effect on your nexus and filing duties.

Sales Tax Reporting

Changes are happening to sales tax reporting in Colorado, which is important if you do business in the state. Back in July, reporting requirements began for sellers who don’t currently collect Colorado sales tax and have annual sales greater than $100,000. If the seller doesn’t let the buyer know on the invoice they need to pay use tax, the seller will be penalized.

Penalties are also being imposed on those who fail to provide their buyers with a year-end transaction summary – if the customer makes more than $500 in purchases. Customer information also must be provided to the state.

Other states such as Kentucky, Louisiana, Vermont and Washington have put similar requirements in place, and it’s likely others will follow. It’s important to pay attention to these changes – your state could be next!

Economic Standard

As if changing the sales tax reporting requirements wasn’t enough, states are also imposing an economic standard for any business conducted in a state that leads to an income tax requirement. The standard for “doing business” generally looks like:

  • $50,000 in property or payroll in a state
  • $500,000 of sales into a state
  • An amount of activity in the above categories that is more than 25% of the company’s total

Of course, these minimum amounts of sales, payroll and property can vary by state. The following states currently have similar definitions for doing business:

  • Alabama
  • California
  • Colorado
  • Connecticut
  • Michigan
  • New York
  • Ohio
  • Tennessee
  • Virginia
  • Washington

The Market-Based Method

Businesses who don’t sell tangible property have been using the “cost of performance” method of revenue sourcing for quite some time. However, states are now starting to source this kind of revenue using a market-based method.

Unsure of what a market-based method is? This method means the sale is attributed to the actual location of the customer, rather than where the work was performed. This change has been adopted by many states, with a lot more likely to play copycat. Stay aware of these changes – filing requirements and taxes may be due in states where taxpayers haven’t previously filed.

This is great info, but why should I care?

Understanding these issues and changes can help you prevent costly surprises. Simply filing in a state where a company has a physical location is no longer valid, and is even considered an invalid excuse for failing to handle sales and income taxes.

Taxes are important. To learn more, or ask some questions, reach out. We’re here to help you!

A version of this blog first appeared on eidebailly.com

Benchmarking: Part 1

Do you ever wonder how your business does compared to others similar to you in size and industry? Maybe knowing this information would give you a more competitive drive, or would lead you to make some improvements to better your company. Or, maybe you’re just curious.

Whatever your reason for wanting to know, benchmarking can be a powerful tool to compare you to your peers and check your performance. Benchmarking can even lead to an overall greater level of success as a company.

Here are a few (of many) reasons why we think benchmarking is pretty awesome.

It never goes out of style| Benchmarking isn’t just a one and done concept. It can, and should, be used throughout the entire lifecycle of the business. As your numbers and statistics change, the same happens for the competition. Benchmarking can provide a real-time look into how your business is stacking up against the competition and industry trends, and can help you find solutions at any stage in your business.

Knowledge is power| When you see and understand how your business is ranking relative to similar businesses, you can empower management to evaluate company performance and make informed decisions. This information can also be used to identify new and future opportunities that can lead to greater growth and success. To accomplish this, it’s best to compare on an industry or peer group level, rather than just a one-company comparison.

Data doesn’t lie| Without good data, you’re wasting your time. Make sure to look for data from benchmarking that is:

  • Relevant – Data won’t mean much to you if it isn’t relevant to your business. Make sure you consider your geography, size and industry when getting your data. Each has their own trends and characteristics that are incorporated into the data – which makes for a meaningful comparison.
  • Timely – You want to be sure the benchmarks being used are the most recent available, which helps account for seasonality, economic cycles and other fluctuating factors.
  • Accurate – If you’re making sure your data is relevant, it will likely be accurate too. However, it’s always a good idea to verify the data before applying to make important decisions.

A way to measure success| Each business and industry (even businesses in the same industry) has a different way of measuring what success means to them. While you can only decide what success looks like for your business, there are a few metrics that can provide a quick, high level view of your business’s well-being:

  • Net Profit Margin = Net profit before taxes, divided by sales
  • Liquidity Ratio – Current Ratio = Total current assets divided by total current liabilities
  • Turnover ratios, which include inventory days, accounts receivable days and accounts payable days.

As you can see above, benchmarking is a great way to get a picture of how your business is really doing compared to those around it. Using this information, you can feel comfortable making changes to better grow and improve your business.

Have Questions? We have Answers

In our line of work, we get a lot of questions on anything and everything related to owning and operating a business (and we’re happy to answer them, too)! While a lot of these questions are usually pretty easy to answer, sometimes we get a few that really make us think. Even then, we enjoy researching and finding the answers to help business owners be successful.

So, what questions do you have about your business? We would love to help you reach your dreams and goals.

In case you think your question might be too far out there, we promise it’s not. Check out some of these questions (and our answers) to get you started on finding the information you need to watch your business succeed.

“I have invoices coming out of my ears! What do I do with all of them?”

When you have a large amount of invoices to deal with, it’s easy to get overwhelmed and lose track of what needs to get done. When invoices aren’t being properly managed, your business can see some serious negative side effects, such as fraud. Following this list of tasks can help you make sure you’re keeping everything in check. Looking to an automated system, such as QuickBooks, is also a great way to keep your invoices at a manageable level.

“Where in the world did all of my cash go?”

This question is more common than you may think. While your business may be profitable, you can still be running out of cash, which might be a concern. Financial struggles can be hard, but our professionals are available to help. Check out this blog – and then, let’s talk!

“Why don’t I have enough time to do everything that needs to get done?”

We get it: owning and operating a business means you have a lot on your plate. From accounting and finance, to human resources to the day-to-day operations, you probably don’t have enough time to do it all yourself. The good news is you don’t have to! Consider your team of employees. What can you delegate to take some of the burden off your shoulders and free up some time? Another option is outsourcing. When you outsource some of your business activities, such as your accounting processes, you free up time to focus on why you got into business in the first place.

“What is this accrual accounting thing I hear so much about? Am I doing it?”

Knowing the specific ins and outs of accounting can be a confusing, daunting task. What it comes to what method of accounting you are using, the water may get even muddier. Maybe you’ve heard of cash based accounting and accrual accounting, but you really have no idea where to begin. We’ve written multiple blogs on how to tell the difference and how to select what fits your business and set up your books. Check them out!

“Taxes terrify me. Where do I even begin?”

Taxes are a complex issue, and questions regarding this topic are common. Whether you want to know more about R&D tax credits, employer vehicles and mileage, how to track your taxes or even all those pesky (yet necessary) forms, we’ve got you covered. Check out our tax archive for answers to all your most pressing questions. If you can’t find the answer, let us know.

Remember, although we numbers nerds really like our financial lingo, we promise to answer your questions in a way you will understand, not just a bunch of accountant talk. After all, we want to see your business succeed!

The Sales Tax Cap

It’s time for a facelift. Last summer, we posted a blog about the North Dakota sales tax cap, and to this date, we still get tons of views on it. What does this mean? It’s a hot topic that’s important to business owners! So, we decided to bring it front and center again so you can get all the info you need without having to dig too far (we’re nice like that).

If you’re doing business in the state of North Dakota, there’s some important tax issues you need to know about: local sales tax cap and minimum tax.

There are multiple cities and counties in North Dakota, which means there are multiple local sales tax jurisdictions that have a max amount of sales tax you are responsible to pay – or, in other words, the refund cap. However, it’s not the vendor’s responsibility to cap the sales tax on your purchase.

The good news? You can submit a claim for a refund with the State!

So, how does all this cap stuff even work? Let’s look at an example:

Gary is working on a project, and bought $10,000 worth of lumber. He had the lumber delivered right to the job site – which is located in Fargo. He received a bill from the vendor, with the total being $10,750. This included sales tax at a rate of 7.5%, which was properly imposed.

Material Cost    $10,000.00

            Sales Tax                 750.00     

            Total                 $10,750.00

Gary went ahead and paid the bill for $10,750. However, in this case, the sales tax on the purchase is in excess of the maximum tax. This means Gary should apply for a refund. But how is the sales tax more?

Well…

The Fargo sales tax rate – which is the 7.5% that was applied to the purchase – is made up of three components:

State of North Dakota   5.0%

            City of Fargo                2.0%

            Cass County                  0.5%

The maximum tax for the City of Fargo is $50, while $12.50 is the maximum tax for Cass County (the State itself doesn’t have a maximum tax). In other words, the sales tax only applies to the first $2,500 of your purchase. Let’s recalculate Gary’s bill using the tax cap:

Material Cost    $10,000.00   

            Sales Tax               562.50

            Total                 $10,562.50

Confused about where the $562.50 came from? State tax = $500 ($10,000*5.0%), City tax = $50 ($2,500*2.0%), and County tax = $12.50 ($2,500*0.5%).

This means that our good friend Gary is eligible for a refund of $187.50 from the State of North Dakota – and who doesn’t love getting money back?

So how does Gary go about getting his refund?

Easy as cake (which Gary could definitely indulge in with his refund money)!

  1. Visit https://www.nd.gov/tax/salesanduse/forms/
  2. Under “Other Forms” click on “Claim for Refund Local Sales and Use Tax Paid Beyond Maximum Tax
  3. Follow the instructions to complete and send back

A few other things to keep in mind with maximum tax include:

  • The refund claim must be postmarked no later than three years from the date of the invoice. (This means if you weren’t aware of the cap, you can look back three years and see if you have any claims to submit!)
  • You need to include with the form a copy of all invoices covered by the claim.
  • The refund claim only applies on properly imposed sales tax – which means the sales tax needs to be right in order to claim a refund from the state.
  • The refund claim applies to a single transaction, not an item on a transaction or total purchases for a month.
  • Not all cities and counties impose a maximum tax. The claim for refund form has a table which outlines the cities and counties that impose this tax.

If you still have questions, let us know. We have tax people who can help make taxes a little less… taxing.

Setting up for Success: Part 1

You’ve decided to start a new business – how exciting! There are many important things to consider when getting everything set up, such as your human resources policies (your employees matter!) and software and solutions (you want everything organized and running smoothly). Another important component you need to consider is your accounting – after all, these numbers lay the foundation for your business and essentially tell your story.

Accounting is an important part of your business, and getting it right the first time is crucial. So where do you even begin?

First, it’s important to understand your business and industry. This understanding can help you answer some important questions for designing your accounting system. Some of the questions that may come up include:

  • “What basis of accounting should I be using?”
  • “What information should I be tracking in order to make informed decisions?”
  • “I know what I want to track, but how do I track it?”

Let’s start with the first question: selecting your basis of accounting. Your basis of accounting is essentially a framework used to record your transactions. There are a few different types to choose from, with the following being the most common.

  • U.S. GAAP (United States Generally Accepted Accounting Principles) – Try saying that one ten times fast. This is an accrual based framework in which revenues and expenses are recorded when they are earned and incurred, respectively. This is the most commonly recommended type.
  • Cash Basis – In this framework, revenues and expenses are recorded when cash is received or paid, respectively. Cash basis presents two different methods of accounting: pure and modified. The difference comes in that under modified cash bases, some transactions follow U.S. GAAP. Check out this blog to learn more about cash versus accrual methods.
  • Income Tax Basis – This is a framework in which revenue and expense recording depends on tax regulations. This helps eliminate the need for converting from one basis of accounting to another for tax return purposes.
  • Regulatory – In this framework, a regulatory agency prescribes the best method.

Now that we’ve looked at the different basis types available, it’s time to determine what information you should be tracking. The key here is to capture all of your business transactions in the simplest, and most efficient, way possible. This includes both cash and noncash transactions.

Depending on your specific business or industry, you might need to consider tracking your transactions in greater detail. Here are some areas to consider tracking:

  • Should you be tracking direct and indirect costs related to construction or manufacturing contracts so you can see the profitability?
  • What sales tax jurisdictions do you need to track for sales tax reporting?
  • Do you need to track certain items for tax return purposes?
  • If you do business in multiple states, should you be tracking transactions by state for tax purposes?
  • Do you have different departments or divisions that you need to track in order to view profitability?

Once you decide what information you should be tracking, you can select an accounting solution, and start designing your accounting system.

Stay tuned for the second part of this blog, where we go in depth about how you track your information. Although we’ve shared similar posts about these topics in the past, we think a refresh and reminder is important. If you need help in the meantime, just ask!