“The great thing about working with ADP is our firm’s ability to capitalize on one of the best payroll systems available while having the control needed to give our client the unparalleled services they have always enjoyed from our firm”. – Fred Daus

Lower Payroll Costs
Since Fredrick James has such a large client base in and around Clearwater, the firm was able to negotiate price and service levels from ADP that would not normally be available to individual business owners. In keeping with the Fredrick James philosophy of “saving you money”, these savings are passed through to clients.

More Payroll Service Options
Fredrick James clients will now be able to choose the Payroll Service Package that fits their business model. ADP has systems that will allow clients to add on their payroll packages as their businesses grow and expand. Services such as Secure Web Control Access, Health Care, Retirement Benefits, Human Resource Management and Pay As You Go Workers Comp can be added as-needed. In addition, clients who choose to use the ADP system will receive the same great service they are accustomed to in the Fredrick James family of Accounting, Tax, Payroll and Consulting services.

Human Resource Options
The Human Resource Feature offers another dimension for our clients that would not be available to small businesses. The Human Resource Feature includes background checks for prospective employees, State and Federal Compliance Database (summary of employment laws), and unlimited access to a team of HR professionals.

Fredrick James is excited to be able to offer clients this opportunity. Visit us at FredrickJames.com. We serve clients throughout the world through our virtual office. Read more about our virtual office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

How will this affect Small Business? The report indicates what you should already know: the IRS knows that corporations with a sole owner or a small group of shareholders provide opportunities for abuse of the system to understate tax liabilities. It also indicates that they’re going to be looking harder for these violations using every tool at their disposal. Of course, this means that if you’re a small business owner, you really want to do everything you can to ensure that you don’t get audited! And if you do get audited, you want to be sure you’re following all of the rules and regulations to the best of your ability to minimize your risk.

Several changes to audit procedures are scheduled for implementation in March 2012, just in time for the 2011 tax season. The most significant of these changes have to do with how returns are selected for audit and how that audit is initially researched and processed.

How will returns be selected for an IRS audit? The IRS has a variety of criteria for audit selection. A major source is the Discriminate Index Function (DIF). The DIF is an automated system that assigns scoring to returns. Once the DIF score of a return hits a certain threshold the return will be selected for audit. The higher the score, the more potential for a material tax change. The current version of DIF program dates back to 1988. Using results from a recent National Research Program study, DIF formulas are being updated for 2012. The IRS expects the revised DIF program to identify 2,500 Tax Year 2010 returns with assets of less than $250,000 for examination.

What will the IRS look for in an audit? Once a return is selected for audit the IRS examiner makes sure all prior and subsequent tax returns have been filed, as well as employment tax returns, information returns, international forms, and related tax documentation. Some of the areas that were identified as requiring increased scrutiny by auditors are:

• Significant differences between the amount of labor costs deducted in the corporate return and the amounts reported on employment tax returns
• Verification of proper filing of Form 1099 series forms
• Thorough investigation of Large, Unusual, or Questionable (LUQ) items
• Use of basic Integrated Data Retrieval procedures for online access to business returns, information reports and nationwide tax return data

Additionally, an IRS audit will always look for the following:

1. Large, Unusual, or Questionable items
2. Compliance with all Federal Tax filing requirements
3. Verification of reporting requirements for commissions, labor costs (cost of goods sold), subcontract, royalties, management fee, and consultant fees
4. Determine if the income from the related business entity was included on the shareholder/ partner’s individual return
5. Ensure that any loans to or from shareholders were not distributions of earnings, dividend income, or another form of taxable income
6. Potential for unreported revenue
7. International features and associated reporting requirements
8. Decrease in assets during the year
9. Correct classification of inventory

In closing, the IRS aims raise additional revenue through these procedural changes implemented in March 2012. The small corporate returns that will be selected for audit will undergo stickier guidelines and procedures for compliance. As a small business owner or shareholder, you should make sure that you are paying yourself a reasonable salary for your profession. Also, ensure that proper taxes are being withheld and remitted to the IRS on a timely basis. If you have any concerns at all about the risk of your Small Business being audited, Contact Fredrick James accounting immediately. We can help!

You can visit us at FredrickJames.com. We serve clients throughout the world through our virtual office. Read more about our virtual office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

A little history. In August 2009 the Florida UC Trust Fund became insolvent due to the recession and the unexpected high volume of claims. The State of Florida had no choice but to borrow the necessary funds from the Federal Government to pay unemployment compensation benefits. The State of Florida has not yet been able to pay back its loan from the Federal Government. The loan amount is an astounding $1.7 billion!

Florida law requires an annual adjustment to the unemployment tax rates to maintain a balance in the UC Trust Fund. This adjustment was suspended in 2010, because the legislators did not want to burden employers further with an additional tax. Unemployment tax rates were kept at a lower rate than would have normally occurred. In essence, the legislators wanted to buy employers enough time for the economy to recover.

Additionally, Federal law requires automatic increases in FUTA tax, as well as annual interest payments related to the loan.

Tax Increase #1 – Unemployement Tax Rate. For 2012 the trigger has been re-engaged in calculating the unemployment tax rates.

2012 UC Tax Rates (effective January 1, 2012)

• Minimum Rate: .0202 or $171.70 per employee
• Maximum Rate: .0540 or $459.00 per employee
• based on annual salary up to $8,500 per employee

2011 UC tax rates were:

• Minimum Rate: .0103 or $72.10 per employee
• Maximum Rate: .0540 or $378.00 per employee.
• based on annual salary up to $7,000 per employee

Generally unemployment tax rates are first increased for employers that have benefit charges. The more claims paid the higher the tax rates.

Tax Increase #2 – Interest on the UC Loan. On June 30, 2012 Employers will also be responsible for paying interest on the Federal government’s $1.7 billion loan to the UC Trust Fund. The assessment of interest will be sent to employers from the Department of Revenue in February. The form is called UCT-27FI. This assessment will be calculated as follows $7,000 taxable wages X .0092 additional rate=$6.44 per employee.

Tax Increase #3 – FUTA Tax Rate. Lastly, Florida employers will pay an additional $21.00 per employee for FUTA (Federal Unemployment Tax Act). Every year that the loan is not repaid FUTA will go up by $21.00 per employee. See our previous blog about the FUTA Tax Rate Increase.

The Bottom Line. As a result of all of this, 2012 will cost businesses owners an additional $127.04 per employee at a minimum. Even if you’re not a business owner, you should expect that these additional costs will no doubt be passed along to consumers. Economic recovery comes at a price.

You can visit us at FredrickJames.com. We serve clients throughout the world through our virtual office. Read more about our virtual office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

Part of the law that gives us this tax cut is a “recapture” provision to help the government get some of that money back from those who earn more than $110,100 per year. Since this only applies to the first two months of the year, that is prorated to $18,350. If you earn more than $18,350 during the first two months of 2012, you’ll have to repay that 2% in the form of an income tax increase on income earned during that period when you pay your 2012 federal income tax.

If that didn’t click, read it again. What it means is that if you pay yourself $9,000 per month during the months of January and February, you’ll save about $360 in Social Security tax and avoid the recapture that would require you to pay it back. So, if you normally pay yourself more than that, it would benefit you to be sure to pay yourself less for that period. And if you normally pay yourself less than that, you’d get the benefit by paying yourself more for that period. How much you pay yourself for the remainder of the year will not have an affect on this.

Aside from this small quirk, employers need to implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31. For any Social Security tax over-withheld during January, employers should make an adjustment in workers’ pay as soon as possible but not later than March 31.

If you have any questions or need help with your personal or business taxes Contact us Today. We serve clients throughout the world through our virtual office. Read more about our Virtual Office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

What is a 1099-K and why am I receiving it?

The 1099-K is a new form for 2011 for reporting payments to the IRS that are received by a person or a business from a Merchant (Visa, Mastercard, American Express, Discover) and/or a Third Party Network, (PayPal, Google Checkout, etc.) when the total gross payments are greater than $20,000 and there have been greater than 200 transactions.

For those who exceed those criteria, the IRS now requires Merchants and Third Party Networks to report all gross amounts paid, defined as “the total dollar amount of aggregate reportable payment transactions for each participating payee without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts”. What does this mean you ask? This means all sales are reported on accounts which exceed $20,000 and 200 transactions.

This can get a little fuzzy in some cases. Like, if you charge a customer credit card for $500.00 for merchandise and the customer comes back and returns $100.00 of merchandise 3 days later, then “the total dollar amount of aggregate reportable payment transactions” is $500.00. The IRS is going to leave it up to you to keep good enough records to prove “adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts”. So, if this new requirement is likely to affect you, you need to be sure that you have an adequate record-keeping system.

So what do I do now that I have this Form 1099-K?

There won’t be a specific line on 2011 tax forms for recording 1099-K amounts, however, the IRS requires that the person or business report any income reported to you on Form 1099-K along with any other income on Line 1b (Form Sch C, Form 1120S, Form 1120, Form 1065 ). Reporting the “adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts” should be done on line 1d (Form Sch C, Form 1120S, Form 1120, Form 1065 ).

If you have any questions or need help with your personal or business taxes Contact us Today. We serve clients throughout the world through our virtual office. Read more about our Virtual Office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

How are they collecting, and how does it affect Florida business owners?

The current Federal Unemployment Tax Act (FUTA) tax rate is 6.0%** for the first $7,000 of wages earned by each employee. This rate is modified by a 5.4% credit for those employers who pay their FUTA tax on time. What is changing is the amount of that credit, reducing it by a 0.3% “reduction rate” from 5.4% to 5.1%, so it will directly affect (increase) the amount of FUTA that businesses must pay per employee.

Simply Stated:

Currently, the 6.0% FUTA rate less the 5.4% credit results in an actual 0.8% FUTA rate. Calculating 0.8% of $7,000, that’s $56 per employee. The decrease in credit results in an actual 1.1% FUTA rate, which raises the tax paid to $77, an additional $21 per employee!

New tax form to be aware of! To help you correctly calculate the amount of your FUTA “credit reduction”, the IRS has added Form 940 Schedule A. If you are using QuickBooks, you can find this form in Federal Forms under Payroll Forms. Contact us if you need help.

QuickBooks users BEWARE!

QuickBooks has a major flaw in its calculation of FUTA tax in the payroll module! The makers of QuickBooks (Intuit) did not update the program to calculate the additional tax credit reduction of .3%. We contacted Intuit and reported the issue on 1/13/2012 and were told that there is no fix for the problem in the works. What this means is that you may have paid your FUTA tax in the payroll module but when you print the 940 report it will show an amount due! Don’t ignore this amount due, you MUST pay it or suffer the IRS consequences of penalties and interest. Here is what you do in QuickBooks and EFTPS:

1. Preview your 940 in QuickBooks and make a note of the tax due on line 14
2. Make a Payroll Liability Adjustment in QuickBooks
3. Make the additional 940 payment through the EFTPS government website
4. Make the payment in QuickBooks

Looking ahead

This 0.3% FUTA tax credit “reduction rate” (a convoluted way of saying “tax increase”) will increase by another 0.3% each year until the debt is paid. So, Florida businesses will likely see a similar increase in actual FUTA tax paid at the end of 2012. (another $21 per employee)

You can visit us at FredrickJames.com. We serve clients throughout the world through our virtual office. Read more about our virtual office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

* States affected are AR, CA, CT, FL, GA, IL, IN, KY, MI, MN, MO, NC, NV, NJ, NY, OH, PA, RI, VA, WI & VI.
** In addition to this changing credit amount, the FUTA rate itself changed from 6.2% to 6.0% mid-year in 2011, this change appears on the 2011 Form 940.

Fred Daus, CEO of Fredrick James Accounting, Tax and Consulting stated: “In essence, this law would have required that a business or landlord send a 1099  to Best Buy for the purchase of a $649 laptop used for their business”.  “Imagine Best Buy’s response to a small business owners request for a W-9 so it can mail a 1099 to them for their purchases in 2011!”.  “Most business’s, big and small, had no idea how to deal with the new 1099 filing requirements”. “This is a big win for all of the Small Business’s and Mom and Pop Landlord’s who would have had to pay the tremendous costs of preparing the 1099’s”.  “We made our opinion heard, fought hard and our lawmakers listened to us!

Last week we went over the individual tax payer’s record keeping requirements, this week I want to discuss what business owners should be holding onto and for how long.

Obviously businesses have a more extensive list of record keeping requirements than individual do but it’s an important detail not to be overlooked as it will help you to avoid unpleasant surprises in an audit.

Businesses are all different, but in this case documentary evidence for business deductions, those that are reasonable and ordinary in the course of business, is generally the same for all types of business entities.

One big mistake a lot of smaller businesses make is not having a separate business checking account. This is a big “no-no”. Get your business checking account set up if you don’t have one and use it for all transaction to prove gross income and business expenses.  If faced with an audit, you can bet the auditor will probably reconcile this account and if any personal deposits or disbursements appear, you’d better have the paperwork to back that up.

What to keep for business deductions:

• Receipts
• Canceled checks
• Bills
• Petty cash slips
• Bank statements (bank statements are very important for electronic receipts)

Receipts should list the name and location of vendor, dates, itemized charges, number of people, and written explanation of the expense to prove its business purpose.  For entertainment expenses, you must document the business relationship of those attending.

Canceled checks are very important for proving amounts, but do not necessarily prove business purpose.

Business expenses should be recorded as close as possible to the actual time of the expense.

There are a few exceptions for Travel, Meals and Entertainment where documentation is relaxed:

1. Under an accountable employee reimbursement plan that adopts the per diem method, which is a fixed daily reimbursement amount
2. A travel expense (except for lodging) less than $75
3. A receipt for transportation is not available (e.g. taxi fare)

I would highly recommend NOT making estimates, they are rarely allowed (except in extraordinary situations where records are destroyed). This is especially true for Travel, Meals and Entertainment, and deductions related to listed property (items commonly used for personal use), all of which have very strict deductibility requirements.

Fred’s Fast Tax Tip: Records for business assets should be retained through the statute of limitations for the tax year in which the assets are disposed of. This is important for audits that investigate depreciation expense.

Employment records must be retained for 4 years after the tax is due or paid, whichever is later.

As important as proper record keeping is for successfully responding to tax audits, record keeping is just as important for effectively managing a business (small or large) in terms of cash flow, short-term working capital needs, and profitability over the long-run.

Record keeping and analysis of accounting reports ultimately reveal where a business needs improvement and where growth opportunities exist. So, you’ve got even more good reasons to keep on top of your business record-keeping! If it all gets to be too much, and you’re losing the battle then I would recommend you find a qualified bookkeeper to help you whip your books in shape. Then kick back, put your feet up on the desk and give yourself some much deserved praise for being such a savvy business owner!

As a trusted tax advisor I am in the position of researching new proposed tax laws and passing that information on to my clients. Sometimes a new bill comes along that I feel is important for my clients and readers to get a heads up on due to the major tax implications. This latest bill has quietly moved through the House and is on its way up the ladder.

A bill titled “The American Jobs and Closing Tax Loopholes Act of 2010″ was passed by the house on 5/28/2010. The US House and Senate plans to raise the taxes of Small Business Owner S-Corporation’s starting in 2011 through H.R. 4213. This bill targets small personal and professional service businesses with 3 or fewer professionally skilled individuals (performing artists, athletes, accountants, lawyers, actuaries, architects, consultants, engineers, health professionals, veterinarians, lobbyists, brokers, and investment advisors) with the goal of raising over $11 billion in SECA Tax over the next 10 years!

So what does this mean to me?

The SECA tax is an additional 15.3% of taxable income earned by S-Corporations.  This is only the beginning of this far reaching SECA Tax.  If our elected officials pass this bill for small personal and professional service businesses, it is only a matter of time until a SECA tax is placed on all S-Corporations. The tax implications are huge! For example:  an S-Corporations owner who has a taxable income of $50,000 from his or her S-Corporation business could be taxed an additional $7,650 on top of the Federal Taxes.

What can I do?

It’s important to let your representative’s know how you feel about this bill, and quickly. Click the link below to contact your Senator now!  Let your Senator know if you don’t agree with H.R. 4213, “The American Jobs and Closing Tax Loopholes Act of 2010″, Section 413: the 15.3% SECA tax on S-Corporations could hurt small business in the United States.

To contact your senator:

http://www.senate.gov/general/contact_information/senators_cfm.cfm

Click here to read the white paper on this bill.

In the last part of this series, we covered the consumer side of bad debt charge-offs and how the IRS handles that from a tax perspective. Today I want to delve into the business side of bad debt charge-offs. This side of things is usually quite complex and hard to generalize but I will attempt to keep my “tax guru” side in check and you on board.

Business Not What It Used To Be?

Let’s assume that we’re talking about a business (Corporation or LLC that is treated as an S-Corp for tax purposes) that has been hit hard by the recession and has run out of money to pay its creditors. Typically in cases like this the business will notify creditors who will then turn around and liquidate the business assets in order to attempt to recoup at least part of the debt owed. Once that happens the business is faced with a balance plus late fees and interest to cover.

Many times business owners will be able to negotiate a settlement far under the remaining balance owed and once that agreed upon price has been paid, the business owner will generally feel they have taken care of everything and their ordeal is over. Hooray!

But Wait! There’s More!

It’s not exactly time to celebrate yet. Come tax season the, now former, business owner receives a 1099-C for the canceled debt and interest. Now what to do? At this point the business owner would be wise to contact their accounting professional who will review the situation and offer advice on how much of that total will actually be taxable.

Their accounting professional will be able to determine this number by assessing the net worth of the business (a negative number at this point), the fair market value of any remaining business assets, and the amount of the canceled debt among other factors. Whatever the balance is, if any, is the amount of taxable income the business owner would be liable for paying taxes on.

The business owner may also be entitled to an ordinary business loss equal to the difference between the fair market value of business assets that were auctioned off (or the canceled debt, if less) and the cost of the assets to the owner.

Call Now And Save

As always there are a hundred different variables that will affect the outcome of a scenario like this; this example is a highly simplified version used to provide a general understanding of the concept and should not be taken as de facto for all situations.

My goal is to provide fair warning to business owners with a loss that they WILL have to deal with charged off debts when it comes time to handle their taxes. I also want to point out that it isn’t nearly as awful as it might first seem and, with the help of a professional, your tax liability may be significantly reduced or even eliminated. So don’t ignore those 1099-Cs, if you do it will create an even bigger and more expensive mess to straighten out.