Don't Be Afraid of the 1099

Don’t be afraid of the 1099…

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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!

Employee vs Subcontractor: How To Decide Who To Hire

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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.

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

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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 Deductions for Meals and Entertainment

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Update: Some rules have changed for Meals and Expenses in 2018. Read our new blog post to learn more.

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.

Do You Know Your Company’s Breakeven Point?

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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.

What to do when you miss the tax deadline?

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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.

Should I use DIY tax software or ask a CPA for help with my taxes?

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A fairytale about tax preparation

Once upon a time there was a lovely newlywed couple who called our office looking for help with their taxes. One of the spouses was very excited not to be responsible for a stack of IRS forms. The other spouse was, we’ll say, “less than excited” to be chatting with a CPA. Spouse #2, who shall remain nameless, had always used a DIY tax prep software service and was very proud of the money they had saved by not paying a professional… until the friendly CPA reviewed last year’s tax return. The CPA discovered (and, of course, shared with the newlyweds in the most friendly, educational, non-condemning manner) that they could have saved over $1,000 on the taxes they paid to the IRS last year.

Ouch!

How to decide between DIY tax software or CPA?

Do my taxes for free?

DIY or self-prep tax software promises cost-efficient returns – even offering to do some of the simplest returns for free. Who can beat that offer? Well, if you’re a first time filer or a college student with minimal income, maybe no one. Software can absolutely help you compute and file your taxes if you have a basic return (in IRS terms, a 1040EZ or 1040A).

What if life gets more interesting?

The older and more “grown up” you become, say with a job, kids or a house, the more interesting and complicated your taxes become. Even the very best software, which is not free, can only report the historical information that you enter in each category. An experienced CPA will report your information and help you make sense of the tax forms you received for the year, but they will also ask about things you might have forgotten. The human touch means someone is going to sit down with you and talk through your income and your deductions.

Humans care and give personal advice.

Some things that go on your tax return, like the income on your W-2, are black and white. There are other expenses and life events that are not as clear. If you received a 1099, where does it go on your return and what expenses are you allowed to deduct? Will tax software give advice on if you should increase your withholding? Can it offer suggestions on the pros and cons of an early IRA withdrawal? Has software ever advised a taxpayer on what actions could be taken to defer recognition of income? Or, maybe more importantly, when that income recognition should be deferred?

What does your future look like?

Smart tax planning looks at your personal situation as well as your short and long term goals.CLICK TO TWEET

For most people, as they progress in their career, their income grows. Your expectation of that growth should include smart tax planning. Smart tax planning is an art form that looks not only at your tax return for this year, but at your personal situation as well as your short and long term goals. You deserve to talk with a live human being who has your best interest in mind. Our accountants LIKE talking to people!

What’s the bottom line?

It is lawful and important to pay all the taxes you owe. However, it’s also lawful and your right to make proper use of every tax break afforded to you by the beloved Internal Revenue Service Tax Code. While tax software can help you record a previous year’s transactions, it does not teach or offer wise counsel. A dedicated accountant will help you learn about your life, your work, and options to proactively minimize your tax liability. Software will record your past, but a diligent accountant will help plan your future.

If you think it might be time to graduate from DIY tax prep, let’s talk. We know it may sound scary to call a CPA, but no blog can answer every individual situation. We’d be happy to chat and to help guide you in the right direction with a free, new client phone consultation.

A fairytale ending

After meeting with the CPA, the newlyweds filed their taxes for this year AND an amended return for last year, received a nice refund and, as in any good fairytale, they all lived happily ever after. The End.

5 Ways to Spot an IRS Email Scam Message

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A recent article, How to Spot an IRS Email Scam Message by Anita Campbell reports that during the first quarter of the year aka tax season, IRS email scams increase– targeting taxpayers, tax preparers, and small business owners. The scams include bogus phone calls and IRS email scams alleging to be from the IRS but, in reality, they are from a spammer.

Here is how to spot a bogus IRS email scam. Be warned.

  1. An unexpected email from the IRS is a red flag

    It’s important to bear in mind the IRS has stated that it generally does not instigate contact with taxpayers via email to request financial or personal information. This includes any kind of electronic communication, such as texting and social media platforms.

    If information is required from you, the IRS will initiate contact via USPS. It will probably be an official-looking envelope.

  2. Incorrect return address

    A return email address can be forged. Inspect the email header information diligently. Find out who actually sent the message. Remember, it’s not an official IRS communication if it’s not sent from the IRS.gov domain.

  3. Unprofessional format

    It’s not an official IRS message if you can see several typos, errors odd spacing and/or multiple fonts. If the email is in anyway messy, unprofessional looking or has misspelled words it is a fake.

  4. Incorrect or vague phrases

    The IRS is generally accurate about things like IRS form numbers, tax return processes and tax code sections. For example, phrases such as “tax payout” are not standard phrases for the IRS.  “Tax refund” should be used instead. Anything that sounds unfamiliar is probably unfamiliar for a reason!

  5. Asking for confidential information

    Almost always, the point of these spam emails is to get you to reveal confidential information. They are trying to get you to click on links in the email that will take you to a page that you believe is the IRS website, but is instead a bogus page designed to collect your valuable information. Sometimes, the intent is just malicious and they are trying to get you to download and install malware or a computer virus without your knowledge or consent on your computer.

Conclusion

These emails are known as IRS phishing emails. Beware and keep informed! Don’t dare click on a link or download/ open any attachment in a suspect IRS message. Just forward the suspected spam message to [email protected].

Remember, during tax season you can avoid the stress by seeking out a CPA to help you with all your tax matters and needs.

Why Every Business Owner Should Have a Relationship with an Accounting Firm

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A Certified Public Accountant or CPA is a trained accounting professional who has received a license to manage, audit, expert opinion, and the analysis of financial records and general ledgers.

To become a CPA, an individual must pass the Uniform Certified Public Accountant Examination, managed by the American Institute of Certified Public Accountants (AICPA), along with meeting education and experience requirements.

Abacus Accounting

Did you know…? The abacus is one of the oldest accounting tools used in commerce and trading, with origins in ancient Mesopotamia in 2700 BC.

CPAs must also follow and adhere to the Generally Accepted Accounting Principles or GAAP, which provide standards for financial accounting to be followed for compliance and consistency in the accounting profession.

With this in mind, business owners working with a CPA gain access to a wealth of experience and knowledge that can help them manage their business efficiently, reducing risks and improving everyday decision-making.

Entrepreneurs often start businesses from a simple idea that creates a solution through innovation and creative genius, and while they can get by for a while on their own, there comes a time when the business can become too complex to manage on their own.

From payroll management and filing taxes to deciding on how to grow and expand, business owners should always consult a CPA to gain perspective on their decision-making, using a CPAs knowledge and objectivity to prevent costly mistakes.

Now, filing business tax forms and making the calculation of tax rates are only a small part of the filing process, since most business owners—no matter how smart or knowledgeable they are—are not tax experts and are not required to complete extenuating continuing education requirements.

In addition, business owners commonly find themselves at a crossroad when they get a certified letter from the IRS or when their business starts to thrive and keeps them away from everyday management tasks, which leads to spreading themselves too thin—and this can cause inefficiencies that pile up until it is too late to deal with them.

Consider working with a CPA who can take some of the weight off your back, managing your bookkeeping and tax filing—so you don’t have to—and start focusing on what’s really important in your business: your customers and their satisfaction.

Contact Kuberneo CPA today to learn how your business can make better decisions for growth and development—you’ll be glad you did.