Why are IRS contracted workers allowed to owe $5.4 million, while you and I receive menacing letters from the IRS if we accidentally forget a 1099 or W2 on our return and end-up underpaying?
The just released report by the Treasure Inspector General for Tax Administration (TIGTA) exposes how 5% of workers contracted by the IRS owe $5.4 million in Federal taxes. This amount is for Federal taxes only. It does not include state or local taxes. Who knows what they may owe additional in state or local taxes.
The IRS requires its own employees to file taxes on time and pay any Federal tax debt. Why is this rule not extended to contractors that work for the IRS is a question raised in the TIGTA audit released on August 30. TIGTA identified hundreds of contracted IRS workers currently in non-compliance.
IRS policy requires all employees with staff-access or contracted employees with staff-like access are in compliance with tax filings. If taxes are owed, they are required to be on a scheduled payment plan.
While initially in compliance when hired, these non-compliant contracted employees chose to not file taxes and remain current with Federal law (and most likely state laws and local tax filing laws) as required by IRS policy.
The objective of the audit conducted by TIGTA's was "...to determine the effectiveness of the IRS's background investigation process to identify contractor employees who do not file required Federal tax returns or who owe Federal taxes but are not currently on a payment plan."
TIGTA recommendations include:
- The IRS continuously monitoring contractor employees for tax compliance similar to the way IRS employees' Federal tax compliance is required.
- If there has been a break in service for more than two years the IRS should complete a tax compliance check to revalidate the employee's staff-like access.
- The IRS further evaluates the contracted employees who were identified by TIGTA as potentially non-complaint or remove them from IRS contracts.
The IRS agreed with TIGTA's recommendation and moving forward will establish and implement policies to ensure contracted employees remain in tax compliance. The plan encompasses a continuous monitoring plan and background clearance revalidations. Future checks and actions include: "to establish and implement policies that contractor employee tax compliance is continuously monitored and background clearance revalidations include a tax compliance component. In addition, the IRS plans to further research and carefully evaluate the contractor employees identified in this report as potentially non-compliant and refer them for additional action as appropriate."
This may not have the political fall out or receive the publicity of other events, but is still more egg on the face of the IRS. In May, 2013 The IRS was exposed for targeting political groups when the groups applied for a non-profit status during an election year. Up until last, Timothy Geithner, the Secretary of Treasury, over saw the IRS. The confirmation hearings for the former Secretary brought to light this own tax related issue. Many believe he received a free pass and benefited from his connections, position and political influence.
Is it any wonder we as tax payers are critical when it comes to the IRS? They presume guilt for the rest of us but do not police their own workers. Others with influence are allowed to skate and they have a track record of targeting groups because of their affiliations or beliefs.
The IRS while it plays an important role in tax compliance should not be free from scrutiny. As the enforcement arm of the government for tax law, all employees or contracted workers must be required to follow the law or be dismissed and/or prosecuted as appropriate. The IRS has 100 years of experience. By now, they should have procedures and policies already in place to preclude and prevent this behavior.
Despite the government shut down this week, Healthcare exchanges have begun to open up across the country. Because of this, there has been a large volume of news about Healthcare. I though it would be a good time to review some of the new requirements that will be implemented in 2014 and 2015. There have been some big changes over the last few months and some very big changes that individual tax payers and business should be aware of.
Reprieve for Businesses with more than 50 full-time or full-time equivalent employees.
In early July amidst everyone preparing for 4'Th of July celebrations, vacations and cookouts, the White House quietly announced a delay of one year for implementation of a key component of the Patient Protection and Affordable Care Act (PPACA).
In 2014, businesses with 50 or more full time or full time equivalent employees would've been required to provide healthcare coverage to full time employees. This provision has been delayed by one year, until 2015.
Businesses beginning in 2015 will need to track employee's time for the purpose of determining number of full-time employees that they will be required to provide healthcare coverage to or if they choose to pay the fine, to understand how much that fine will be.
In 2014 and beyond, everyone will be required to have healthcare coverage or pay a fine.
Although businesses received a reprieve of compliance of one year for the Patient Protection and Affordable Care Act (PPACA), individuals did not. Beginning in 2014, all individuals will be required to carry healthcare coverage and if not, will have to pay a fine or penalty.
Individuals and families that cannot obtain healthcare coverage through an employer will be able to enroll in insurance through healthcare exchanges. There is a sliding scale subsidy for an individual or family that is available. A family of 4 whose income is less than $87K may start to qualify for a subsidy, if an employer does not provide health care coverage. The Henry J Kaiser Family Foundation has a healthcare calculator that you can use to determine if you qualify for a subsidy.
Individuals or families that choose not to carry healthcare coverage will be assessed a "tax." Judge Roberts, when he upheld the PPACA's individual mandate, had to categorize the penalty as tax for him to uphold its constitutionality. At any rate, here is the schedule of "tax" increases if you do not carry healthcare coverage:
- 2014 - $95 penalty or 1% of income whatever is higher. So if you are single and have an income of $70,000, the penalty is $700 for not carrying health insurance.
- 2015 - $325 or 2% of income whatever is higher. The single taxpayer that makes $70K will have to pay $1,400 more in "taxes"
- 2016 - $695 or 2.5% of income whatever is higher. Using same income as above, the single taxpayer will have to pay $1,750 in "taxes."
Healthcare tax credit available for small businesses.
While large businesses have a 1 year reprieve of implementing coverage for their employees, small businesses conversely, that provide healthcare coverage, may qualify for a healthcare tax credit.
To qualify the business must have fewer than 25 full time or full time equivalent employees and the average annual wage compensation for full time employees must be less than $50,000.
The tax credit for-profit employees can be as high as 35% of contributions to healthcare coverage for employees and for non-profit companies up to 25% of contributions to employees' healthcare coverage. The tax credit for-profit companies increases to 50% in 2014.
If you believe that you may be eligible for a tax credit, consult a CPA to assist you with your return.
It seems there is still much confusion out there about the new healthcare law and the individual mandate. Many taxpayers are unaware of the requirement in PPACA for them to carry insurance or be required to pay a penalty (added tax). It seems hard to believe, given all the coverage on the Supreme Court ruling in July.
We encourage you to share this with everyone, so there are no surprises.
From: The HR Pros at Richard A. Beauchemin, CPA/Carolina Accounting & Tax Service, PLLC
Many business owners and managers believe that tracking employee hours should only be applied to non-exempt employees. In this post we highlight the reasons and benefits of tracking hours, using an automated timekeeping system, for exempt employees.
The exempt verses non-exempt classification issue continues as a common area of confusion among employers. Often, many employers who are unfamiliar with the nuances of the issue also face practical challenges, including when and how to track time for exempt employees.
To be classified as exempt, the employee's job generally must satisfy both a salary basis test and duties basis test. Exempt employees generally must be paid on a salary basis, meaning they must be paid a fixed salary each week. The U.S. Department of Labor (DOL) enforces regulations that define the salary basis requirement to satisfy the exempt status tests. Exempt, Administrative, Executive, and Professional employees must be paid a predetermined amount each pay period that is at least the minimum weekly salary required by regulations. The current federal minimum is $455 per week; however some states require a higher minimum weekly salary to satisfy this test. The amount paid may not be reduced because of a variation in the quality or quantity of work performed.
Non-exempt employees are typically paid on an hourly basis and entitled to overtime compensation. According to the federal Fair labor Standards Act (FLSA) employees are required to track the hours worked and meal periods for non-exempt employees. This requirement ensures that such employees earn at least minimum wage plus overtime compensation for any hours worked above 40 in a work week (and in some states, for any hours worked above eight in a workday).
However, nothing in the law prohibits an employer from keeping track of an exempt employee's hours. Some valid reasons for tracking exempt employee hours can still be compelling. For example, an employer may opt to track an exempt employee's hours for purpose of client billing, Family Medical Leave Act (FMLA), 401(k), hours-based benefits calculations, attendance, paid time off (PTO) benefits, etc. Some employers opt to track employees' time simply to ensure the equitable treatment of all employees regardless of classification in the company.
With a few exceptions, exempt employees must receive their full salary for any week in which they perform without regard to the number of days or hours worked. Accordingly, if exempt employees clock in late or leave work early at the end of the day, the employer may not dock their pay as they may for non-exempt employees. If an employer does dock an exempt employee's wages, such a deduction may jeopardize the individual exempt status.
Should an employer opt to track the hours of exempt employees, the company will need to be very careful with respect to how it uses this information. As explained above, the exempt employee's salary should not fluctuate based on the number of hours worked within the workweek. Prorating an exempt employee's salary based on hours worked may result in the loss of the exemption, which may be very costly for the business. The company may only take a deduction from an exempt employee's salary under limited circumstances without jeopardizing the exempt status. These circumstances are listed below:
- When an employee is absent from work for one or more full days for personal reasons other than sickness or disability;
- For absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness;
- To offset amounts employees receive as jury or witness fees, or for temporary military duty pay;
- For penalties imposed in good faith for infractions of safety rules for major significance;
- For unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions;
- In the employee's initial or terminal week of employment if the employee does not work the full week, or
- For unpaid leave taken by the employee under the federal FMLA.
While the company may opt to track the hours of exempt employees, the company must ensure that such information is not used to take deductions from their employees' regular salaries, unless such deductions comply with relevant guidelines.
The Wage & Hour (W&H) division of the U.S. Department of Labor has increased its enforcement and audit efforts with employers. The Wage and Hour division wants to ensure workers are fairly paid and employers uphold the law. Unfortunately, businesses that have violated wage and hour laws can face heavy fines and penalties. Many employers often assume a low likelihood of being audited for payroll, but they can be targeted, and the likelihood of an audit has been increasing.
An audit can be announced or unannounced. Usually, it occurs when an employee formally complains to the Department of Labor (DOL) about wages and/or hours concerns. The Wage and Hour division sometime randomly "targets" specific industries for investigation. In the last few years, the Department of Labor visited a wide array of employers in industries such as hospitality and restaurants, healthcare, day care, retail, temporary staffing, among others.
Non-Complaint Business. Certain employers may be high on the DOL watch list especially for repeat violations including:
- Failure to maintain accurate timekeeping and payroll records and overtime payments to non-exempt employees.
- Salaried employees classified as exempt from overtime without assessment of the performed job duties.
- Unlawful wage deductions for items (e.g., cash register shortages, uniforms, etc.) against employees.
- Inaccurate payment to immigrant workers and minors who receive less than minimum wage requirement.
- Insufficient tips that do not adequately make up the difference between minimum wage and employer's wage obligations.
Penalties and Recourse
During the audit if the investigators uncovers violations they will attempt to resolve any issues of compliance, or payment of back wages, but be aware the FLSA provides for the following recourses as noted right from US Department of Labor Wage and Hour Division Fact Sheet #44:
While many of the above provisions are found in laws administered by the W&H, there are also many state and local labor laws, that have to be complied with as well that can also result in enforcement penalties or law suits.
- An employee may file suit to recover back-wage, and an equal amount in liquidated damages, plus attorney's fees and court costs.
- The Secretary of Labor may file suit on behalf of employees for back wages and an equal amount in liquidated damages.
- The Secretary may obtain a court injunction to restrain any person from violating the law, including unlawfully withholding proper minimum wage and overtime pay.
- Civil money penalties may be assessed for child labor violations and for repeat and/or willful violations of FLSA's minimum wage and overtime requirements.
- Employers who have willfully violated the law may face criminal penalties, including fines and imprisonment.
- Employees who have filed complaints or provided information during an investigation are protected under the law. They may not be discriminated against or discharged for having done so. If they are, they may file a suit or Secretary of labor may file a suit on their behalf for relief, including reinstatement to their jobs and payment of wages lost plus monetary damages.
Be ready if ever a DOL representative visits your business to conduct an audit. Consider the following actions:
- Have an interview room mad privately available only between you and the DOL representative.
- Ensure that all required labor law posters are up-to-date, highly visible, and posted in common areas.
- Revisit time-tracking devices or methods to determine accuracy of actual time worked.
- Review and organize payroll records since DOL may check up to the last three years of the wage-and-hour records and any documented practices and procedures.
In all, it's best to prepare now instead of gambling and worrying about whether or not random audits and compliance investigations by the DOL may occur. Plan as if an audit will occur, unless you as the employer can easily afford paying thousands of dollars in fines and penalties. Find ways to determine good faith efforts of understanding and effectively resolving any employee's complaint about your company's compliance to wage and hour laws.
By: The HR Pros at Richard A. Beauchemin, CPA/Carolina Accounting & Tax Service, PLLC
Every employer, regardless of size, must comply with basic employment laws that regulate wage and hour factors. At a time when litigation and agency investigations are ramping up, getting a good grasp of fundamental wage and hour information and tools is especially important.
We have assembled seventeen useful tips to help you with employment laws and Fair labor Standards Act (FLSA) compliance.
- Familiarize yourself with the overtime exemption criteria and remember that simply because an employer is paid on a salaried basis does not automatically disqualify the employee from entitlement to overtime compensation.
- Secure and maintain signed timesheets from all nonexempt employees verifying their hours worked. Retain such timesheets for at least three (3) years.
- Avoid prorating/reducing an exempt employee's salary based on the quantity or quality of work performed, unless such a deduction is specifically permitted under federal law.
- Familiarize yourself with the break laws that pertain to the states in which you employ personnel.
- Ensure that employees are properly classified as either W-2 employees or 1099 independent contractors in accordance with the IRS guidelines. Remember, just classifying them as W-2 employee does not make it so. The IRS has strict guidelines on when a worker should be classified as an employee. We put together an extensive 1099 checklist that the IRS uses to determine the correct classification. Incorrectly classifying a worker as 1099 contracting when they should be on your payroll will get you fined and cause you to owe back payroll taxes. You can obtain a copy of our guide: Employee or Independent Contractor - 20 Factors Used by the IRS amd Why This Matters, here.
- Assure that all employees are earning at least minimum wage at either the state or federal level, whichever is higher.
- Specify the seven day 'work-week" that will be used for overtime calculations.
- Verify that the frequency of pay days conforms to your state's requirements.
- Make sure that any requirement of "direct deposit" of wages is permitted in your state.
- Determine each position's non-exempt or exempt status under the Fair Labor Standards Act (FLSA) or any relevant state equivalent.
- Ensure that overtime is being calculated and paid correctly based on the state and federal requirement for the payment of overtime on a daily and or/weekly basis.
- Ensure that the overtime rate is being calculated correctly based on the "regular" rate of pay.
- Verify whether there are ant state requirements for mandatory meal and rest breaks. If so, verify that non-exempt staff is adhering to the requirements.
- Train non-exempt staff and supervisory personnel on the requirements to accurately complete time reporting records such as time sheets.
- Assure that final payment of wages to terminating employees is in accordance with your state's final paycheck requirements, including any payment of unused vacation time.
- Make sure that any non-standard deductions to paychecks such as uniform expenses, expenses for tools, etc. are authorized in writing by employees and are in conformance with your state's wage and hour regulations.
- Double check if federal and state labor law posting requirements have been satisfied.
Every employer is challenged with complying with multiple federal, state and local employment laws. Failure to comply can result in fines, law suits and general employee dissatisfaction. In addition to all of the employment laws an employer must comply with they must also be in compliance with payroll tax deposit requirements and payroll tax reporting at the federal, state and in some cases the local level.
The complexity and compliance requirements are more challenging than ever for businesses. We would love to hear your biggest challenge managing your business while trying to keep up to date and comply with all of the employee labor laws, tax compliance, licensing requirements and other specific business compliance requirements. Leave your comments below.
What Should I Pay for a Bookkeeping Service - The Determining Factors
Last week we covered some of your in-house bookkeeping solutions and in todays post we will cover wha tto consider when outsourcing your bookkeeping requirements and some determining factors for what your outsourced bookeeping costs will be.
1. The volume of work required i.e., the amount of time required to complete all of the bookkeeping and administrative tasks you require.
Let's start with the volume of work required. It's simple math, the more responsibility and work required from a bookkeeping firm requires more time it will be, hence a higher fee.
It is not uncommon for someone to call and request a quote over the phone without providing any details about the scope of work (are we paying invoices, setting up and tracking receivables, doing the bank reconciliations at the end of the month, maintaining the G/L accounts for them, creating the monthly financial reports, running payroll, etc.) or volume of work.
Imagine the type and quality of the work you would expect from a contractor where you requested a quote over the phone for a remodeling job and provided minimal details. Your primary factor for who you go with is price.
I don't know of any contractors that would bid that way since they want to understand what they are getting themselves into and whether they can make a profit but if one was out there that was willing to give you a low price owner the phone would you seriously consider that?
Then, why would you hire a company to take care of your books and/or give you financial advice and guidance to someone you have not met with and interviewed? Why would you trust the price they give to you, if they do not know the scope and details of your requirements? What is the quality of work you can expect from that company?
These are all details that need to be incorporated into pricing for bookkeeping services. for some clients we charge as little as $150 per month and others the bookkeeping fee is several thousand dollars per month. It depends on how much time is required and the level of expertise needed to support the client.
2. The experience of the bookkeeping firm you hire.
There are many bookkeeping services that compete only on price. For some of these a small start-up company can have one of these companies do monthly bookkeeping for as little as $75 per month.
Quality of work, continuing education, customer service is secondary. Think of all the low cost providers you have tried in the past. How many of the low cost providers have also excelled at excellent customer service and adding value to your knowledgebase. When you go into Wal-Mart and are looking for a television is that clerk going to have as much knowledge as a store that only sells electronic equipment?
Finally, there has been an aggressive campaign by overseas companies, to provide outsourcing support services for business including bookkeeping. Many will set themselves up as a US based company or market to a US bookkeeping and accounting company for outsourcing the bookkeeping work to an overseas office. Yes, the price may be inexpensive, but is that what you are looking for, a company that processes work overseas.
3. Professional Accreditation; Knowledge and experience.
Anybody can open a bookkeeping service. No experience or standardized testing is required. The hiring company, has to rely on his or her impression of the bookkeeping service, referrals or word of mouth reputation.
Alternatively, businesses can hire a company, such as a CPA firm that has individual's that have professional accreditations and have met and shown competency in the area of accounting, business and taxes. The bookkeeping work is over seen by a CPA. Bookkeeping prices can be as competitive or higher depending on the CPA firm and how they provide pricing for their engagement.
When considering a bookkeeping service, do not dismiss the idea of using a CPA firm, because you believe they will be priced much more expensively. In many instances, a CPA firm may actually be less expensive that your current bookkeeping provider and provide greater value to your business.
4. Value Added Services
When considering your bookkeeping requirements, consider all aspects of your financial accounting administrative tasks. While a bookkeeping firm, may provide you only with bookkeeping services, other providers can you give you greatly enhance added value services.
For example, if you use a CPA firm see if they will include a minimum number of sit down consultation and guidance meetings with a CPA. If it is firm that offers payroll services, see what the bundled package is for both bookkeeping services and payroll. for our clients we provide a comprehensive plan that not only includes, bookkeeping, payroll, payroll and sales tax reporting, but also access to HR resources and access to a time and attendance system that save them money on employee labor cost
Here are some of the key takeaways from the two posts:
- Bookkeeping costs will vary greatly.
- When considering whether to hire a bookkeeper, bookkeeping service or CPA firm consider the overall value proposition for your company. While a CPA firm may be more than a low cost bookkeeping service, they can save you more money in taxes, offer advice to help you manage and grow your business, assist you when dealing with the IRS and be a valued resource to you.
- Make sure you have in place systems to prevent fraud Some of the worst cases of fraud have occurred because an owner trusted their bookkeeping to a family member. Even if you hire a full time bookkeeper, use a CPA firm to go behind the bookkeeper to minimize your risk to monies being embezzled from your company.
- Consider the value of your time, skill level, knowledge and frustration tolerance level if you chosse to try and tackle bookkeeping on your own.
As a CPA firm offering, bookkeeping services in Charlotte, NC this is one of the most frequently asked questions we hear from business owners. If you are a business owner or manager and want to manage your expenses it is a good question. You want to know a fair price to pay a bookkeeping company so you can compare it to the cost to that of hiring a bookkeeper.
I break this subject down into two parts: This first article reviews in-house bookkeeping solutions and in the second part, that will be published next week, I cover outsourced bookkeeping solutions.
Bookkeeping costs will vary from company to company and will depend on the work required. The management team, charged with making this decision, will have to consider total cost of hiring a bookkeeper verses hiring a bookkeeping services and the additional valued added services a bookkeeping service can deliver.
Cost of a Bookkeeper
Below is the average annual salary for a bookkeeper in Charlotte. As you can see hiring a
bookkeeper will cost a company in the Charlotte region an average annual salary in the high $30's. This salary does not include any benefits, or additional costs to the employer such as the employer's payroll taxes or workers compensation. If you factor in the direct cost of salary, benefits, taxes and workers compensation, the total cost for hiring an in-house bookkeeper will be on average north of $45,000.
The value a bookkeeper provides an in-house presence to the company to help maintain daily records. Often times companies that have an in-house bookkeeper will use them for administrative tasks as well. In addition to the direct costs a company has to consider they should all consider the following:
- What are the additional costs incurred such as purchasing bookkeeping software, setting up the company in the software, training requirements, support of the bookkeeping software, etc?
- What happens when the bookkeeper is not available such as out sick or on vacation?
- What does the business have in place for oversight of the bookkeeper to prevent fraud?
After taking these factors into consideration and comparing it to outsourcing the bookkeeping functions, many companies find they can save money by outsourcing part or all of their bookkeeping requirements.
Cost of a Business Owner Maintaining the Bookkeeping Records
When starting out, many business owners will want to maintain their own bookkeeping records. They assume it is just a few hours a week and will not take too much time away from their business and will save them the bookkeeping expense. While other will try and have a spouse that also works full time try and do the bookkeeping between all the other family responsibilities.
Most business owners, (unless it is an accounting and bookkeeping business) do not go into business to do bookkeeping. In fact, almost all would rather be poked in the eye than have to endure the task of keeping up with the books. Most procrastinate or totally ignore them altogether. Often times the ones that attempt to keep up with the books are terrible at it. Is it any surprise, since most owners have no experience or background in bookkeeping?
Other will rely on a spouse that works full time and is busy raising children to complete the bookkeeping. Needless to say It becomes the lowest task on his or her priority list and is usually months and in some cases years behind.
In these cases the owner has to determine the value of his or her time, the value placed on receiving meaningful accurate financial records and the stress alleviated by hiring a bookkeeping service. For example if a lawyer charges $200 per hour and is spending 5 hours per month on bookkeeping, isn't it less expensive to outsource bookkeeping at $500 per month.
If you choose to maintain control over your bookkeeping, you have to determine the total cost of hiring a bookkeeper and make sure you have systems in place to provide a check on the bookkeeper to prevent fraud. Too often, we have seen companies and owners place all their trust in a bookkeeper, only to find the employee was embezzling money. Unfortunately even family members are susceptible to theft.
If you are considering managing this task yourself, you will have to consider the value of your time and whether you have the skills and knowledge to complete the task correctly. Otherwise your should consider your outsourcing bookkeeping options.
By Patricia Garner
Americans initially lacked adequate savings and their bad spending habits often paved the path for debt. Therefore, few saving schemes are designed like Individual Retirement Accounts to promote saving. You can secure your financial future even after retirement by contributing to a retirement savings account. The Internal revenue Service (IRS) offer tax advantages to these accounts. The Individual Retirement Account (IRA) can help lower your tax debt. However, you can lower other unsecured obligation by enrolling in a debt consolidation program.
What happens when you contribute in an IRA?
When you contribute to a traditional IRA then you can reap the benefit of takig an above-the-line deduction equal to the contribution you made. You need to track the fund and calculate it properly to get the benefit. An above-the-line deduction can be included in addition to the standard deduction. You are no required to pay taxes on the amount in the year when you make the contribution. For example: A taxpayer, filing as a single person makes a $5,000 contribution to his IRA. He or she has an income of 105,000 that puts him at the 28% tax bracket. The tax savings for that tax filer is 28% multiplied by his IRA contribution of $5,000 for a tax savings of $1,400.
Roth IRAs Verses a Traditional IRA
Roth IRAs are treated differently. With a traditional IRA you receive an immediate tax deductions on your intital contribution but must pay taxes on all interest and earnings when you wihdraw money from your IRA. While the money resides in your traditional IRA account, you do not have to pay any taxes on the accrued interest or capital gains. if you have $10,000 in your account and it can earn 10% for the year, that $1,000 interest is not taxed while in the account. The interest will compound annually.
At age 59 1/2 years a taxpayer can withdraw money from thier IRA without an early withdrawal penalty of 10%. However, when tethe taxpayer withdraws money from his or her traditional IRA account he or she will have to pay taxes on the monies withdrawn.
A Roth IRA is treated differently. Taxpayers do not receive the front-end tax deduction on the intial contribution. So they do not have an immediate tax deduction in the year they contribute to their Roth.
However, they receive a much greater benefit on the back-end. When money is withdrawn from the Roth, none of the money withdrawn is treated as taxable income. For example: A taxpayer contributes $30,000 to their IRA and have accrued interest and capital gains totaling $100,000 over 20 years. The taxpayer will have paid taxes on the iitial contributions of $30,000, but does not pay taxes on the $100,000 in accrued interest and capital gains.
Withdrawal of Monies from IRAs
As mentioned at age 59 1/2 you can with draw money from either a traditional IRA or Roth IRA withour fear of an early withdrawal penalty. For a traditional IRA you will have to pay income tax on income withdrawn while money withdarwan from a ROTH IRA is not subject to income taxes.
if you do decide to withdraw money from an IRA account early, you may be subeject to an early withdrawal penlaty of 10% plus owe taxes on money withdrawn from an IRA. Although there are some hardship exceptions that allow for this penalty to be waived.
In all cases, when considering an early withdrawal, you should consult a CPA for professional advice on your income tax liability and under the tax consequences for an early withdrawal.
By The HR Pros at Richard A. Beauchemin, CPA/Carolina Accounting & Tax Service, PLLC
Independent Contractors have been a common addition to many organizations for years, but have increased in use over the past several years as companies have shed their head count. Independent Contractors are secured either directly and work in a 1099 capacity or they are brought into an organization via the route of a third party staffing or placement agency.
The use of Independent Contractors is cost effective for organizations as the employer is not burdened with withholding payroll taxes, making matching payroll tax contributions, or covering the cost of the employee's health and retirement benefit plans. Additionally, this is a great opportunity to see if an Independent Contractor will fit in with the organization's culture as well as whether the individual will be successful in the role for which he or she was contracted. Independent Contractors who find success in their roles and fit well with a company's culture hold an advantage should they be hired to become regular employees and placed on the employer's payroll. The leaning curb for these workers is substantially shorter that that of an individual who is hired into the company from the outside. The Independent Contractor has already had an opportunity to become acquainted with the organization's industry as well with the dynamics of the employees.
Additionally, opting to allow an Independent Contractor's contract to expire if he or she is not a good fit for the organization is a simpler task than terminating a regular employee of the company.
Some disadvantages, though, are that the employer has substantially less control over an independent Contractor. In addition, an Independent Contractor will not have loyalty to the organization as would a regular employee. This can be problematic when an employers need to strategize for succession planning and cross-training. With an independent Contractor, employers do not have the same incentive to retain and train these workers as they would a regular employer of the organization.
If you are a business owner or contractor who provides services to other businesses, then you are generally considered to be self-employed. If you are a business owner hiring or contracting with other individuals top provide services, you must determine whether the individuals providing services are employees or Independent Contractors and ensure that workers are categorized in line with their status.
It is extremely important to note the IRS does not allow all workers to be classified as Independent Contractors. The IRS has strict guidelines regarding classification of W-2 Employees verses 1099 Contractors. The basic premise behind determining correct classification is the amount of control that the company has over the worker and how work is performed. An additional contributing factor is how central the work is to the company's core business.
The IRS uses a 20-step statuary test to determine whether an individual should be classified as an employee or contractor. The IRS has increased and is expected to substantially ramp up its enforcement of businesses incorrectly classifying workers as Independent Contractors.
As more businesses continue to adopt this business model of leveraging the use of Independent Contractors expect more scrutiny. It is critically important to ensure your workers are not misclassified as a 1099 Independent Contractor when they should be on your payroll as a W-2 Employee.
If the IRS determines that you misclassified workers as independent Contractors they will go after you for back payroll taxes owed and, fines and interest on the back payroll taxes.
To assist businesses we have put together a Free Guide for businesses thinking about or using Independent Contractor so they can understand what 20 factors the IRS will evaluate when looking at businesses using Independent Contractors. The guide is free; just follow the Request a Copy button below.
If so, you will want to reconsider and read the information below.
- Do you own or operate a restaurant, catering business, banquet hall?
- Do you collect an automatic 18% gratuity charge for large parties?
- Do you take the tax tip credit for these gratuities?
IRS and Clarification on Automatic Gratuities
The IRS, last year issued rev. ruling 2012-18 clarifying the difference between a service charge and a tip. The clarification is significant because it draws a clear distinction between a tip and a service charge. For owners and operators of restaurants, caterers or banquet halls, this means if you charge an automatic gratuity on a customer's bill it will be considered a service charge.
Starting in January, 2014 IRS reviewers will be looking for automatic gratuities and how you classify them i.e., as wages or as tips. If you classify them as tips and are taking the tax tip credit for automatic gratuities, the IRS will disallow it and reclassify them as wages.
The resulting action will have you owing FICA taxes, penalties and interest on the automatic service charges.
Four Areas That Help Clarify Tip Verses Service Charge
The IRS highlights four areas that help determine whether the income can be classified as a tip verses a service charge:
1. The payment must be made free from compulsion
2. The customer must have the unrestricted right to determine the amount
3. The payment should not be the subject of negotiation or dictated by employer policy; and,
4. The customer has the right to determine who receives the payment
Essentially, the IRS is saying: If you, the employer, set the amount of gratuity, automatically add the gratuity to the bill or the customer is not allowed to direct who the tip goes to, it is a service charge. As a service charge it is considered wages and cannot be claimed against the tax tip credit.
State and Local Implications
As is often the case, there are state and local law compliance requirements as well. Some states, such as New York, Connecticut and New Jersey have various pieces of legislations that essentially defines an automatic service charge as part of the total bill. This causes the business to collect and pay sales tax on not only the food and beverage sales but also on the service charge. For businesses it means charging more to the customers and additional bookkeeping and tax compliance requirements. Finally, since it is considered income, it means reporting the additional income on the tax returns.
FLSA (Fair Labor Standards Act)
One other twist to all of this is compliance to FLSA. The FLSA requires employers pay overtime to employees in excess of 40 hours in a work week. The overtime is paid at 1.5 times the regular rate of pay and the regular rate of pay cannot be less than minimum wage. If you have an employee that is performing two different jobs or has different two pay rates then you have to pay that employee the weighted average pay rate.
This simply means that when you have an automatic service charge, it is considered part of the employees' wages and must be included in the calculation for the overtime rate for the employee. Thus, an automatic service charge will increase an employee's average wage rate resulting in a higher overtime rate.
Consider These Options
- Reprogram your print out with suggested tip amounts on the bottom of the sales receipt below the total amount due line i.e., leave the Tip Amount and Total Due lines blank for the customer to fill in.
- Provide a second print out showing recommended tip amounts.
- Do not provide the customer any information and allow them to do all calculations for an appropriate tip.
- If you do plan on continuing a policy of an automatic service charge you will need to make sure you segregate tipped wages from service charges and do not include automatic service charges in your tip tax credit. You will also have to make sure you are in compliance with state and local laws for sales tax reporting and all labor laws and overtime requirements.