Don’t be afraid of the 1099…

Every January business owners and individuals start to think about their taxes – do they owe money or will they get a refund? It’s a question we all ask. The answers start by calculating not only income, but also expenses. Have you considered that maybe you should think about those 1099’s BEFORE January? They really matter ALL year long. Here’s why:

For Business Owners

If you are a business owner, it is your legal responsibility to report payments made to employees or contractors. Wages paid to employees, which are subject to federal tax withholding, are reported to the IRS on the W-2 form and employees receive a copy. If you make payments to a contractor (typically someone who controls their own hours and productivity), they’ll need to receive a 1099 form that lists the total amount of payments made. It is important, before a contractor starts working for you, to obtain the information that will be necessary to prepare their 1099. Ask them to complete IRS form W-9 (https://www.irs.gov/pub/irs-pdf/fw9.pdf). It may seem like basic information, but it’s vital information to have at the end of the year. You can be fined for every 1099 you are required to issue that you do not.

For Subcontractors

If you find yourself receiving a 1099, it’s important to keep in mind that no taxes have been withheld from those payments. It is very possible that the full amount of money you received could be subject to both self-employment and income taxes. How will you report the income? Are there ways to offset it? Knowing what business expenses you can legitimately deduct to help reduce your taxable income is key. From mileage while driving to see a client to your cell phone use, ordinary and necessary business expenses can be deducted from your income to reduce your tax liability. Items that are “ordinary and necessary” are different for every business.

If you properly track your business expenses, whether as the person paying a subcontractor or as someone who receives subcontractor payments, there should be no reason to fear the 1099.

Whether you receive a 1099 or you think you may need to send someone a 1099, we can help!

close up of businessman holding contract document

Subcontractor Agreements (and why you need one)

Hiring subcontractors can provide many advantages to the small business owner, but with those advantages comes an additional level of risk.

Why Do I Need A Subcontractor Agreement?

A subcontractor can provide your company with valuable specialized skills needed to complete a project. Subcontracting work can also provide your company with staffing flexibility, cost savings, and increased efficiency and scalability. However, with the potential to add value to your company comes an additional risk. As a general rule, a company is liable for its subcontractor’s work even if the company did not directly perform the services for the client. In order to mitigate this liability, a business must protect itself by having a written contract with the subcontractor to allocate risk of loss to the responsible party.

What Needs To Be In My Agreement?

  1. Project Length And Scope
  2. Your contract should detail the exact deliverables of your project from both parties, a schedule of fees, and a clear timeline of completion. If these items are outlined in writing and agreed to by both parties, a business can reduce or eliminate its liability related to the non-delivery of products or services, and also the completion time of the subcontractors.

  3. Warranty and Insurance Clauses
  4. Warranty clauses seek to protect your business against any defects in materials or services for a defined period of time after the work has been completed. Insurance clauses requires the subcontractor to provide sufficient general liability insurance (and the subcontractor should provide written evidence that such an insurance policy exists). These key provisions will allow for the business to legally allocate any losses caused by the “at fault” subcontractor, and seek protection from the subcontractor’s insurance company.

  5. Industry Specifics
  6. As with any contract, you should consult your legal representative to discuss any specific issues relevant to your particular business, industry, or project

In Conclusion:

Without a subcontractor agreement, a business can be exposed to unlimited liability related to the performance of its subcontractor. Any mistake made by the subcontractor can be perceived as a mistake by the contractor without a written agreement in place identifying responsibilities of the parties involved. The best way to mitigate this risk is to contact your legal representative to create a written subcontractor agreement that transfers the risk of loss to the “at fault” party.

Employee vs Subcontractor: How To Decide Who To Hire

So you’ve set up your business, compared your product to the market, found your breakeven point and your business is doing well. You even have enough work that you need to hire some help. How do you go about that? In today’s business climate there are typically two routes to take. You can either go with the standard employee or with a subcontractor.   Even though the actual work for hire may be the same, there are some significant factors that need to be considered in order to avoid potential aggravations and financial costs.

Hiring an Employee

You may want to bring them on as an employee if:

  • You, as the employer, are setting their hours
  • They work solely for you
  • They present themselves as a representative of your business (perhaps carry your business card)

In this case, as an employer you will be responsible for payroll taxes and perhaps workers comp insurance, health insurance or other benefits.

Hiring a Subcontractor

You may want to just subcontract the work out to an individual if:

  • You are okay with loss of control of how and when the work is done.
  • You only want them for one job or on a per-piece-of-work basis (this may involve fluctuating payments, unlike a steady salary)
  • They have other clients they do similar work for

Here’s the tricky part. The Department of Labor has been known to have a little beef with some subcontractor arrangements. They may contest the validity of the relationship. In other words, if you are bringing on a sub-contractor to get out of the payroll tax and insurance costs, you better be sure that the subcontractor can’t be considered in “essence” acting as an employee. For example, if the “sub” has been doing the same work solely for you over a period of time or has no other clients, then they could be deemed to be an employee. In that case, you could find yourself owing significant money in back taxes and penalties.

Making a Decision

Sometimes people make the choice between a subcontractor and an employee based on perceived liability if faulty work should be performed. While that is a consideration, it’s worth nothing that often there’s little difference when the work is performed on behalf of your company. It’s most important to evaluate WHAT work they will do, WHO will decide how and when that work is done and HOW their pay is determined.  Employee vs Sub: Consider WHAT work they do, WHO decides how it's done and HOW they get paid. Click To Tweet

These are just a few of the things to consider when trying to decide between a traditional employee or subcontractor.It may seem like an easy decision but it is important to take the time to weigh your options carefully.

Late Notices

Annual Filling- What happens if I’m late or entity is dissolved?

We get it – you just finished filing your tax return. You thought you were done with all of the necessary business paperwork for the year. Then about half way through May you decide to clean out your inbox and you see a renewal reminder for your Annual Report. You’ve missed the deadline!

What can you expect?

The Annual Report is your yearly opportunity to update your business information. This includes the names or addresses of the registered agent, directors, officers, members, managers, or partners, and to change the address or update the EIN of the entity itself. Most states also requires a filling fee in order to keep your entity active and in good standing.

If you do not complete the Annual Report by the due date set by the state your entity is registered in, you will be charged a penalty for late filing. Some states also charge interest. Florida’s late filing fee is $400 in addition to the Annual Report filling fee. Unfortunately, no matter how good your excuse is, there is no provision for waiving the late fee.

In addition to the headache of a late penalty, if you are really late then your entity may be automatically dissolved which will cost you additional fees for reinstatement. In the state of Florida, this automatic dissolution is initiated if you have not filed your Annual Report by the 3rd Friday in September. It’s important to note that if your entity is automatically dissolved and that was your intent, then you are not subject to the late fee. The late fee only applies if you are late to file the Annual Report in order to keep your entity active.

What should you do now?

As soon as you discover you are late to file your Annual Report, you should file as soon possible. Make sure you are providing accurate, updated information and pay the necessary filing fee and the late fee. Also be sure to make a plan for next year of how to avoid filling late.

If your entity has been automatically dissolved and you wish to reinstate it, contact your state Division of Corporations and request the necessary reinstatement paperwork.

How can you prevent this from happening in the future?

Depending on the state your entity is registered in, your Annual Report may be due on a standard date (May 1st for the state of Florida), your entity’s anniversary date, fiscal year end, or state jurisdiction ID specified date. Because of the cost of failing to file your annual report, it is very important to set a recurring reminder for yourself to remember to submit by the due date. Many states send an automatic reminder email or renewal letter, but not all do, so stay vigilant!

Business Lunch With Coaching Clients

Business Deductions for Meals and Entertainment

The IRS tells us that a business can deduct expenses that are “ordinary and necessary” and directly relate to active conduct associated with the taxpayer’s trade or business. In layman’s terms that means there must be a valid business purpose for a purchase to qualify as a deductible expense. While meals and entertainment may meet the IRS’s definition of a business expense, the caveat is that this expense is also related to personal consumption. It’s a fundamental income tax principle that items used for personal consumption are not deductible – i.e., everyone has to eat no matter what their trade is – but what if a personal expenditure also passes the IRS’s “ordinary and necessary” test for your business activity? How can you know what is and isn’t a tax deduction?

In the case of meals and entertainment (M&E), the IRS has decided to meet businesses halfway – literally. More specifically, the IRS has allowed for a 50% deduction for meals and entertainment that meet the business deduction test. But before you pick up that tab for lunch with that 50% deduction in mind, there are a few rules to consider:

Before you pick up that tab for lunch with a deduction in mind, there are a few rules to consider. Click To Tweet

How should you substantiate your deduction?

You must be able to demonstrate that the M&E expense is “ordinary and necessary” and be able to prove that the expense was related to your trade’s active conduct or business activity. To do this, you must retain the receipt for your M&E expense along with a record stating who the meal was with and the business purpose of that meal. In the event of an audit, the IRS may ask for these records to validate your M&E deductions, so good record keeping is essential for any business owner.

What types of expenses are included in the 50% M&E deduction?

The most common type of M&E expenses are client business meeting and meetings with co-workers. This can include events such as lunch with co-workers or clients, golf outings to develop client relationships, and meals with vendors. Some other expenses that meet the 50% M&E deduction can include out-of-office meals while traveling and reimbursement for meal expenses for an employee on a business trip which is not included in the employee’s compensation.

What type of expenses are excluded from the 50% M&E deduction?

Any time that you eat out alone and you are not traveling you are ineligible for the 50% deduction. Just because you decided to eat out instead of bring your lunch to work doesn’t mean you can claim your meal; that’s a non-deductible personal expense. However, if you are out of town on a business trip eating out alone or with others qualifies you for the 50% M&E deduction.

Are there any types of M&E expenses that are fully (100%) deductible?

There are some opportunities for taxpayers to claim a 100% deduction. While it is not possible to provide a complete list of every exception, some of the more common examples of fully deductible M&E expenses include meals for the occasional in-office meeting, meal expenses incurred while attending promotional seminars or trade shows, and M&E expenses incurred for social or recreational purposes, such as holiday parties or company picnics. The IRS also allows business to fully deduct the cost of snacks and beverages provided to employees on the business premises, which can include coffee, snacks, bottled water, and similar items.

Conclusion

It’s important for any business owner or manager to develop a method to manage the day-to-day M&E expenditures. From establishing a meal allowance or a per diem plan, to keeping records and establishing a system for tracking expenses, Kuberneo can help you conduct an M&E review of your business to provide best practices for your company’s M&E expenditures.

Signs- Break Even, Loss, and Profit

Do You Know Your Company’s Breakeven Point?

The breakeven point is a critical threshold that any established business or startup should be aware of to achieve profitability.

No business owner starts their company or launches their product hoping to pour money down the drain. While making money may not be your only goal in running a business, it’s probably pretty high on your objectives. To actually start making money it’s imperative to know the threshold when you move from loss into profit – the breakeven point.

The goal of a breakeven analysis is to find the point where your revenues equal your costs. In a world of online tools and Excel spreadsheets, many small businesses take the breakeven calculation for granted. Too many entrepreneurs make the mistake of introducing their product or service to a market without fully researching the total costs involved in starting and sustaining a profitable business.

How can a breakeven analysis benefit your business?

  1. In setting your product’s price point
  2. Examining the impact of certain costs
  3. Assessing how sales will need to grow to justify additional investments into the company
  4. Identifying areas that are unprofitable and can be trimmed or improved
  5. Continuing to remain competitive when markets change

How do I conduct a breakeven analysis?

Conducting a breakeven analysis requires careful and diligent examination of costs and prices related to running your business. The key components of the breakeven analysis are:

  • Overhead costs
  • Variable costs
  • The selling price of your product or service
  • And, if you are a startup company, you may want to include initial startup costs in the breakeven analysis

The breakeven point can then be measured in by dividing your total fixed costs by your product’s contribution margin (the product price minus its variable costs). While this may be seem like a simple calculation, it can become very complex when a business has a wide breadth of products with multiple revenue streams.

Do you need more help?

Kuberneo CPA has the expertise to help your company fine tune its profit model by routinely conducting this kind of breakeven analysis. Is it time to hire an additional employee and increase overhead costs? Should you sell your product at a higher price? How will finding a less expensive source of supplies affect your bottom line? If you want refine your approach to price and costs management, please come in and talk with the Kuberneo CPA team.

Man with Hands on Head and word TAX all around him

What to do when you miss the tax deadline?

Filing taxes under normal circumstances can be stressful, but waking up the day after the tax deadline and knowing you still haven’t filed can be downright terrifying. If you woke up this morning with a sinking feeling in the pit of your stomach we have two words for you: don’t panic. Yes, that’s right. Don’t panic. There are still steps you can take for handling this year’s taxes.

If you’ve requested an extension:

An extension extends the time to file your return, NOT the time to send in your payment (if one is due). Even if you filed an extension, if you owe taxes and have not paid them, time is of the essence.

If you haven’t done anything:

If you haven’t yet filed anything, it is imperative that you take action. Don’t be an ostrich – burying your head in the sand will not make the problem go away.

  • If you owe money, the IRS will continue to accrue penalties and interest.
  • If you are due a refund, there IS a time limit on how long you have to get your money back.

Missed filing your taxes? Don’t be an ostrich–burying your head in the sand won't make it go away. Click To Tweet

Let us help:

There’s nothing to take care of that sick-to-your-stomach feeling like having an advocate in your corner. Contact us today and let us help you regain control of your taxes AND your peace of mind.

mailbox with letter marked urgent

I got a scary looking “official” letter. Do I really need to pay that?

For most people starting a business is a giant mix of euphoria and fear. After filing the paperwork to start your LLC or corporation you may be riding high on a wave of elation, only to have it come crashing down when you get your first official looking piece of mail. Urgent. Action required. Did you forget to do something important?

Not necessarily.

Once your paperwork is filed with the state, you are now part of publicly accessible records that fraudsters often tap into. Very often people will find new businesses and send off notices of phony requirements (or even of real but optional items) to try to make off with part of your hard-earned money. Business owners are frequently misled by these pieces of mail suggesting there is still more they need to do to keep their business in good legal standing with the government. Knowing up front what you really need will help give you piece of mind when these lousy letters find their way to you.

Annual Board of Directors Meeting

Wherever you live you’ll want to make sure you are in compliance with your state’s Department of Revenue. Generally speaking once you’ve filed your paperwork there isn’t much else you need to file (or pay) outside of renewing it yearly. However for corporations, you must also have at a minimum an annual Board of Director meeting and minutes (or notes documenting items discussed and agreed upon) on file.

Corporate Certificate of Status

A corporate Certificate of Status is optional for most businesses, usually only needed if required by your bank or another vendor. If you do need to get one, you should only get this directly from your state. Other services offering to do it for you charge big add on fees and then submit the same simple paperwork you would.

Let us help

While there is a lot of fraud and fake notices out there, there is no one blog that can answer for the demands of each individual business in every single state. However we want you to have peace of mind knowing exactly which letters you can send through the shredder and never give another thought to. Contact us today, sometimes all it takes is just a short 5-minute conversation!

Laptop with Graphs

“If someone can do it better, faster, or cheaper, let him… do it!”

Quote credit: Thomas G. Miller author of “It’s Your Business: So What Are You Going to Do About It?

Have you ever considered outsourcing your accounting and financial tasks? You are not alone. According to Forbes, finance and accounting was one of the first business processes that companies outsourced. Furthermore, outsourcing is NOT limited to large corporations. Small to medium-sized businesses are outsourcing their financial and accounting processes and reaping great benefits.

Why outsource?

  1. Outsourcing your accounting processes will give you more time to focus on your core business.
  2. Outsourcing your accounting and financial projects will give you peace of mind. When you work with a trusted accounting firm, you can rest easy knowing that experts are handling your accounting and finance related processes. [It goes without saying you’ll want to choose that “trusted accounting firm” wisely. Selecting a partner solely based on price could create more problems than it solves, but that’s an entirely different blog!]
  3. Outsourcing your accounting can help reduce your overhead costs. Instead of hiring an employee or in-house accounting staff to work full time, you can pay for only what you need. Today, you might need a bookkeeper’s services, but tomorrow a CPA. The right accounting and finance partner will have a well-versed team ready to serve your needs at different levels.
    Outsourcing your accounting can help reduce your overhead costs. Click To Tweet

But it’s MY business, I don’t want to lose control!

You may fear losing control when hiring an outside firm, but this isn’t the case. A qualified accounting team will use advanced accounting software to provide detailed and clear metrics that you wouldn’t get in-house. They will help you answer questions like, “Was that advertising campaign profitable? Can we afford a second location?” as well as providing insights you never even knew you were missing.

What’s the bottom line?

Outsourcing your accounting and financial tasks can allow your business to be more efficient and to save money overall – all while you enjoy your own clients and family more.

Question marks on paper piled up

We Want To Hear From You!

If you could ask a team of CPAs anything, what would you want to know? While we’ve been working hard behind the scenes to come up with interesting content we want to tailor it to what our readers want to know.

Ask us about:

  • Starting a business
  • Bookkeeping
  • How to get the most out of your CPA firm
  • Taxes
  • Legal & HR requirements
  • Whatever else!

Please ask us in the comments below and follow us on Facebook & Twitter to see when we post answers!