Correct Classification: Making Part-Time Employment Work For You

With the holidays around the corner, many small businesses are in the process of hiring seasonal help. In this economy, part-timers are an excellent choice for businesses who will benefit from their flexibility and lower cost. All year round, part-time employees or self-employed contractors are attractive in many ways compared to full-time employees, but managing these types of employees is not as simple as it may seem.

One common misconception about part-time employees is that they don’t qualify for overtime or benefits. Worker status is not determined by the length of employment or number of hours—employment taxes apply to all employees. Many states have daily overtime rules (in addition to weekly ones) even for those employees who only work one day out of seven. Generally, it is up to the employer to decide which voluntary benefits a part-time employee is eligible for, such as vacation, sick leave, health insurance and retirement, but there are legal limits. For example, the Employee Retirement Income Security Act (ERISA) states that employees who have worked 1,000 hours in the period of 12 consecutive months are eligible to take part in any company pensions or profit-sharing plans. In all cases, it is advisable to have a written policy that clearly and consistently states who is eligible for what.

Hiring part-time employees versus commissioning a contractor are two very different things. Contractors are responsible for declaring their own taxes and are not entitled to benefits, whereas with any employee, the employer is responsible for the tax payments, paperwork and filing. It may be tempting to choose a contractor over a bona fide employee, but if that person is treated like a employee, penalties will apply. If a worker does not use office space or equipment, sets his or her own hours, and works for other clients as well, he or she can safely be classified as an independent contractor.

The Department of Labor’s website provides helpful information regarding the Fair Labor Standards Act, but for additional assistance, contact your tax professional.

Election Season Blues (and Reds)

It’s no secret that small business owners have felt the pinch of the weak economy in the past few years. This election season has highlighted major issues and both presidential candidates have promised to render the plight of the many who are struggling. In their stump speeches on the campaign, both presidential candidates have repeatedly professed their love for small businesses and the jobs they create—small businesses have created 65% of net new jobs over the past 17 years and employ half of the private sector workforce. In a new survey released this month by Manta, the largest online community dedicated entirely to small business, polls found that 67% of small business owners are optimistic about the future—up 10% since August and up 14% since January.

Even given the optimism felt by some, the road is not yet clear. There is a general negativity that comes along with election season given the constant rehashing of the problems in our country, and the economy is still not where it was four years ago. The upcoming vote is important, but casting a ballot for either candidate and their respective tax policies doesn’t change the largest contributor to the success of a small business—demand for products and services.

The entrepreneurial spirit of small business owners supersedes most attitudes about governmental involvement. In another recent survey, released by the Hartford insurance group, 85% of small business owners reported that they just wanted to make enough money to live comfortably, and 81% want to do something they are passionate about.

For more information and the full survey results, visit: http://www.manta.com/media/political_survey_10092012 and http://www.thehartford.com/successstudy/.

Avoid these 10 common payroll mistakes

Running a small business requires wearing many different hats, and sometimes processing payroll can end up on the back-burner. However, payroll mistakes can result in thousands of dollars in penalties and hours of correction time. Nearly 40% of small businesses pay an average of $845 a year in IRS penalties. Transparency regarding policies and the minimization of errors will result in strengthened trust of employees and a smoother running business.

Here is an overview of ten common payroll mistakes small businesses make:

1.    Misclassifying employees.

For independent contractors, employers are not required to pay matching FICA, Medicare, or unemployment contributions. These requirements can add up to 30% in labor costs. However, if a worker is misclassified, fines and penalties can add up.

2.    Not having a written pay policy.

Being able to point out your firm’s policy on a particular issue will sidestep disagreements about awarding bonuses, raises, promotions and paid time off.

3.    Incorrectly reporting reimbursements.

On a paycheck, reimbursements must be itemized and separated. It is also important to know what types of reimbursements are taxable and which are not.

4.    Not obtaining W-9s from independent contractors and vendors.

If W-9s are not collected on time, up to 28% backup withholding may apply, in addition to failure-to-deposit penalties.

5.    Not including taxable fringe benefits in income.

Taxable fringe benefits include spousal travel, company-provided cars (when not being driven for business purposes), and housing that is not for business use.

6.    Mishandling exemptions, contributions and taxes.

Knowing whether to make deductions before or after taxes is important to keep payroll running smoothly. This includes deductions, such as health insurance, retirement contributions, and court-ordered child support.

7.    Not allotting enough time for payroll.

If payroll is not completed on time, late deposit of withheld taxes will incur a penalty of 2%-15% plus interest.

8.    Ignorance of the law is not an excuse.

Not hanging notices concerning OSHA and minimum wage can become a liability. Also, small businesses without an HR department need to be cautious about breaching employee confidence and knowing what information can be revealed to other companies.

9.    Not maintaining impeccable records.

With limited space, some small businesses elect to throw away (or not collect at all) employee files or W-4s. Additionally, maintaining accurate Social Security numbers will avoid penalties.

10.    Not implementing pay changes in a timely manner.

If there is a time lag between awarding a pay increase and executing the changes in payroll, employees may become disgruntled and question the firm’s reliability.

Contracting out payroll is an option, but for many that isn’t a viable choice. Many small businesses have made one or more of these mistakes before, but one of the benefits of being in charge of the payroll process is the ability to amend it. Taking the time to properly set up payroll and learning and understanding tax laws will save time, money and peace of mind in the long run.

And Now, a Word on Your Sponsors

Not-for-profit organizations are called “tax-exempt,” but, as our 501(c)(3) clients know well, they may be—and are—taxed on income that’s unrelated to their mission, called “unrelated business income.”  What’s more, the line between unrelated business income and income having to do with an organization’s mission is often blurry—that’s one of the reasons nonprofit organizations need a good accountant.

One good example of this is sponsorships. On its face, a business’ sponsorship of, say, a nonprofit organization’s fundraiser seems like a win-win situation: The organization gets money (or in-kind services) and the company gets good publicity (not to mention a tax deduction). But, if nonprofits aren’t   careful, sponsorships can easily cross a not-all-that-clear line and be deemed “advertising” by the IRS—making the sponsorship payments taxable unrelated business income.

For a sponsorship to qualify as tax-free, according to the IRS, the sponsor must “receive no substantial benefit other than the use or acknowledgement of the business name, logo or product lines in connection with the organization’s activities.” Where nonprofits get into trouble and risk the tax-exempt status of sponsorship payments is in “advertising” the sponsor or its products with certain kinds of statements. The IRS considers the following types of statements (among others) to be advertising:

• Messages containing qualitative or comparative language, price information, or other indications of savings or value
• Endorsements
• Inducements to purchase, sell, or use the products or services

The bottom line is, nonprofit organizations should only publicize, never promote, the sponsor and its products; they should give them publicity, but not actively promote them or their products over their competitors.

Still unclear on what would render a sponsorship payment taxable unrelated business income? Contact your accounting professional.

Just the Facts, Ma’am: New Data on Nonprofit CEO Pay

The issue of compensation is fraught enough in the private sector, but in the nonprofit world, where organizations are answerable to donors, grantmakers and the IRS regarding their finances, it’s even more so. The question of how much to pay executives bedevils nonprofit boards: Too much, and they’re criticized for using limited resources on administrative, rather than programming costs; too little, and they risk not being able to attract and retain competent executives. This problem is exacerbated by the dearth of data on nonprofit executive compensation.

A new analysis from the Economic Research Institute (recently summarized by researcher Linda Lampkin on the nonprofit e-magazine Blue Avocado) provides some welcome relief. Lampkin and co-researcher Christopher Chasteen used a database of Form 990 information in the Nonprofit Comparables Assessor, an ERI-developed software program, to review 100,000 nonprofit CEO salaries. They offer the following key findings:

• The median salary for nonprofits with annual revenues of $100,000 to $500,000; $500,000 to $1 million; $1 million to $5 million; $5 million to $10 million; and more than $10 million were, respectively, $42,600; $61,694; $86,277; $122,042; and $189,943.
• “The vast majority” of nonprofit CEOs earn less than $100,000.
• Only approximately 1 percent of nonprofit CEOs make a significantly greater amount than the average (i.e., two or more standard deviations above the mean).

Lampkin, who has spent her career working as an economist for nonprofits and labor unions, advises nonprofits to take advantage of cold, hard facts in making executive-compensation decisions that are “defensible” to stakeholders (e.g., grantmakers), “reflect the organization’s compensation philosophy,” and strike a balance between administrative and programming spending. The statistics she and her organization have provided should help.

The Affordable Care Act and Your Small Business

Unless you’ve been living under a rock, you’ve heard that the Supreme Court upheld the Affordable Care Act (ACA) in June. The President’s healthcare-reform law having cleared this major hurdle, small business owners have to assume that the ACA is here to stay, and be aware of what that will mean for them as the law is gradually implemented. The federal government’s ACA website offers all the information on the law you could ever want; below are a few points relevant to small businesses:

Beginning in 2013:

• A 0.9 percent Medicare tax will be imposed on wages and self-employment income over $200,000 for individuals, $250,000 for joint filers and $125,000 for married people filing separately. Employers are required to withhold the tax amount from wages above these thresholds. The tax doesn’t qualify for a deduction. It must be accounted for in estimated taxes.

• Employers will no longer be able to write off the full amount of their retirees’ prescription-drug costs, but will instead be permitted to deduct only the portion of the expenses not covered by tax-exempt government subsidies.

Starting in 2014:

• A monthly health-coverage excise tax will be imposed on employers with 50 or more full-time employees if they don’t offer healthcare coverage meeting basic requirements for all employees and one or more of their employees is enrolled in a state health-insurance exchange. For the purposes of this provision, “full time” means an employee who works on average at least 30 hours per week. (Non-full-time employees’ hours count toward “full-time-equivalency.”) The tax equals 8.3 percent of $2,000 times the number of full-time employees in excess of 30. If the employer does offer minimum healthcare coverage, the tax equals 8.3% of $2,000 times only the number of full-time employees enrolled in an exchange.

Contact your tax professional for more information about how the Affordable Care Act will affect your small business.

Appreciating Depreciation: (Gradually) Deducting Commercial-Property Improvement Costs

Rome, they say, wasn’t built in a day. Improvements to a commercial property, as anybody who has ever undertaken them knows, can’t even be made in a week. And the cost of such improvements can’t be deducted in an entire year.

In fact, commercial-property improvement costs may only be written off over 39 years. The way it works is, you’re allowed to “depreciate” the costs over that 39-year period by claiming an allowance each year meant to account for wear and tear on the property. Don’t assume, as business owners sometimes do, that you’ll be able to deduct the full cost of a construction project the year you do it! This rule applies not only to construction on commercial buildings you own, but also to those on buildings you rent (these are called “leasehold improvements”) and improvements to land (e.g., landscaping).

Some fine print:

•  You may not write off the costs of building improvements at all if you start and stop using the property in the same year.

• The IRS considers depreciation to have begun when you start using the property to make profit, and to have ended when you have either recovered the full cost of the property or stopped using it, whichever happens first.

Questions about deducting the costs of improvements to commercial properties? Ask your tax professional!

Prospective Proprietors May Claim Start-up Write-Offs

Every business owner knows that they can deduct expenses related to their business on their tax return. Soon-to-be business owners, however, might well not know that they may write-off business-related costs before their business is even up and running.

That’s right: Expenses associated with starting a business may be deducted from one’s taxes. Examples of such costs include:

• market research
• business consulting and legal advice
• employee wages and training
• advertising
• locating property
• traveling for research
• supplies

The IRS limits the amount of start-up costs that prospective proprietors are allowed to deduct to $5,000. Any amount beyond that, though, may be amortized evenly over 180 months. If you’re spending big bucks on start-up costs, this write-off won’t do you much good: The deduction is reduced by the amount of start-up costs over $50,000.

“Organizational expenses,” expenses having to do with the initial organization of a business, may be written off separately. Instances of these costs include:

• state incorporation
• having incorporation documents drafted
• initial accounting

The IRS caps the organizational-expenses deduction at $5,000, too, and, again, each dollar you spend over $50,000 reduces the deduction by a dollar.

Still, being permitted to write off $10,000 in business costs before a business is even operational is not a bad deal.