Now more than ever, carefully track payroll records

The subject of payroll has been top-of-mind for business owners
this year. The COVID-19 pandemic triggered economic changes that caused
considerable fluctuations in the size of many companies’ workforces. Employees
have been laid off, furloughed and, in some cases, rehired. There has also been
crisis relief for eligible businesses in the form of the Paycheck Protection
Program and the payroll tax credit.

Payroll recordkeeping was important in the “old normal,” but
it’s even more important now as businesses continue to navigate their way
through a slowly recovering economy and ongoing public health crisis.


Most employers must withhold federal income, Social Security and
Medicare taxes from their employees’ paychecks. As such, you must keep records
relating to these taxes for at least four years after the due date of an
employee’s personal income tax return (generally, April 15) for the year in
which the payment was made. This is often referred to as the
“records-in-general rule.”

These records include your Employer Identification Number, as
well as your employees’ names, addresses, occupations and Social Security
numbers. You should also keep for four years the total amounts and dates of
payments of compensation and amounts withheld for taxes or otherwise —
including reported tips and the fair market value of noncash payments.

In addition, track and retain the compensation amounts subject
to withholding for federal income, Social Security and Medicare taxes, as well
as the corresponding amounts withheld for each tax (and the date withheld if
withholding occurred on a day different from the payment date). Where
applicable, note the reason(s) why total compensation and taxable amount for
each tax rate are different.

So much

A variety of other data and documents fall under the
records-in-general rule. Examples include:

  • The pay period covered by each payment of compensation,
  • Forms W-4, “Employee’s Withholding Allowance
    Certificate,” and
  • Each employee’s beginning and ending dates of

If your business involves customer tipping, you should retain
statements provided by employees reporting tips received. Also carefully track
fringe benefits provided to employees, including any required substantiation.
Retain evidence of adjustments or settlements of taxes and amounts and dates of
tax deposits.

Follow the records-in-general rule, too, for records relating to
wage continuation payments made to employees by the employer or third party
under an accident or health plan. Documentation should include the beginning
and ending dates of the period of absence, and the amount and weekly rate of
each payment (including payments made by third parties).

Last, keep copies of each employee’s Form W-4S, “Request for
Federal Income Tax Withholding From Sick Pay,” and, where applicable, copies of
Form 8922, “Third-Party Sick Pay Recap.”


Proper and comprehensive payroll recordkeeping has become even
more critical — and potentially more complex — this year. Our firm can help
review your processes in this area and identify improvements that will enable
you to avoid compliance problems and make better use of this valuable

© 2020

Divorcing couples should understand these 4 tax issues

When a couple is going through a divorce, taxes are probably not
foremost in their minds. But without proper planning and advice, some people
find divorce to be an even more taxing experience. Several tax concerns need to
be addressed to ensure that taxes are kept to a minimum and that important
tax-related decisions are properly made. Here are four issues to understand if
you’re in the midst of a divorce.

Issue 1:
Alimony or support payment
s. For alimony under divorce or
separation agreements that are executed after
2018, there’s no deduction for alimony and separation support payments for the
spouse making them. And the alimony payments aren’t included in the gross
income of the spouse receiving them. (The rules are different for divorce or
separation agreements executed before 2019.)

Issue 2:
Child support.
No matter when a divorce or separation instrument is executed,
child support payments aren’t deductible by the paying spouse (or taxable to
the recipient).

Issue 3:
Your residence. 
Generally, if a married couple sells their
home in connection with a divorce or legal separation, they should be able to
avoid tax on up to $500,000 of gain (as long as they’ve owned and used the
residence as their principal residence for two of the previous five years). If
one spouse continues to live in the home and the other moves out (but they both
remain owners of the home), they may still be able to avoid gain on the future
sale of the home (up to $250,000 each), but special language may have to be
included in the divorce decree or separation agreement to protect the exclusion
for the spouse who moves out.

If the couple doesn’t meet the two-year ownership and use tests,
any gain from the sale may qualify for a reduced exclusion due to unforeseen

Issue 4:
Pension benefits. 
A spouse’s pension benefits are
often part of a divorce property settlement. In these cases, the commonly
preferred method to handle the benefits is to get a “qualified domestic
relations order” (QDRO). This gives one spouse the right to share in the
pension benefits of the other and taxes the spouse who receives the benefits.
Without a QDRO the spouse who earned the benefits will still be taxed on them
even though they’re paid out to the other spouse.

More to

These are just some of the issues you may have to deal with if
you’re getting a divorce. In addition, you must decide how to file your tax
return (single, married filing jointly, married filing separately or head of
household). You may need to adjust your income tax withholding and you should
notify the IRS of any new address or name change. If you own a business, you may
have to pay your spouse a share. There are also estate planning considerations.
Contact us to help you work through the financial issues involved in divorce.

© 2020

New business? It’s a good time to start a retirement plan

If you recently launched a business, you may want to set up a
tax-favored retirement plan for yourself and your employees. There are several
types of qualified plans that are eligible for these tax advantages:

  • A current deduction from income to the employer for
    contributions to the plan,
  • Tax-free buildup of the value of plan investments, and
  • The deferral of income (augmented by investment
    earnings) to employees until funds are distributed.

There are two basic types of plans.

benefit pension plans

A defined
benefit plan
provides for a fixed benefit in retirement, based
generally upon years of service and compensation. While defined benefit plans
generally pay benefits in the form of an annuity (for example, over the life of
the participant, or joint lives of the participant and his or her spouse), some
defined benefit plans provide for a lump sum payment of benefits. In certain
“cash balance plans,” the benefit is typically paid and expressed as a cash
lump sum.

Adoption of a defined benefit plan requires a commitment to fund
it. These plans often provide the greatest current deduction from income and
the greatest retirement benefit, if the business owners are nearing retirement.
However, the administrative expenses associated with defined benefit plans (for
example, actuarial costs) can make them less attractive than the second type of

contribution plans

A defined
contribution plan
provides for an individual account for each
participant. Benefits are based solely on the amount contributed to the
participant’s account and any investment income, expenses, gains, losses and
forfeitures (usually from departing employees) that may be allocated to a
participant’s account. Profit-sharing plans and 401(k)s are defined
contribution plans.

A 401(k) plan provides for employer contributions made at the
direction of an employee under a salary reduction agreement. Specifically, the
employee elects to have a certain amount of pay deferred and contributed by the
employer on his or her behalf to the plan. Employee contributions can be made

  1. On a pre-tax basis, saving employees current income tax
    on the amount contributed, or
  2. On an after-tax basis. This includes Roth 401(k)
    contributions (if permitted), which will allow distributions (including
    earnings) to be made to the employee tax-free in retirement, if conditions
    are satisfied.

Automatic-deferral provisions, if adopted, require employees to
opt out of participation.

An employer may, or may not, provide matching contributions on
behalf of employees who make elective deferrals to the plan. Matching
contributions may be subject to a vesting schedule. While 401(k) plans are
subject to testing requirements, so that “highly compensated” employees don’t
contribute too much more than non-highly-compensated employees, these tests can
be avoided if you adopt a “safe harbor” 401(k) plan. A highly compensated
employee in 2020 is defined as one who earned more than $130,000 in the preceding

There are other types of tax-favored retirement plans within
these general categories, including employee stock ownership plans (ESOPs).


Small businesses can also adopt a Simplified Employee Pension
(SEP), and receive similar tax advantages to “qualified” plans by making
contributions on behalf of employees. And a business with 100 or fewer
employees can establish a Savings Incentive Match Plan for Employees (SIMPLE).
Under a SIMPLE, generally an IRA is established for each employee and the
employer makes matching contributions based on contributions elected by

There may be other options. Contact us to discuss the types of
retirement plans available to you.

© 2020

Inventory management is especially important this year

As year-end draws near, many businesses will be not only be
generating their fourth quarter financial statements, but also looking back on
the entire year’s financials. And what a year it’s been. The COVID-19 pandemic
and resulting economic fallout have likely affected your sales and expenses,
and you’ve probably noticed the impact on both. However, don’t overlook the
importance of inventory management and its impact on your financial statements.

Cut back
as necessary

Carrying too much inventory can reflect poorly on a business as
the value of surplus items drops throughout the year. In turn, your financial
statements won’t look as good as they could if they report a substantial amount
of unsold goods.

Taking stock and perhaps cutting back on excess inventory
reduces interest and storage costs. Doing so also improves your ability to
detect fraud and theft. Yet another benefit is that, if you conduct inventory
checks regularly, your processes should evolve over time — increasing your
capacity to track what’s in stock, what’s selling and what’s not.

One improvement to perhaps budget for here: upgraded inventory
tracking and ordering software. Newer applications can help you better forecast
demand, minimize overstocking, and share data with suppliers to improve
accuracy and efficiency.

tough decisions

If yours is a more service-oriented business, you can apply a
similar approach. Check into whether you’re “overstocking” on services that
just aren’t adding enough revenue to the bottom line anymore. Keeping
infrastructure and, yes, even employees in place that aren’t contributing to
profitability is much like leaving items on the shelves that aren’t selling.

Making improvements may require some tough calls. Sadly, this
probably wouldn’t be the first time you’ve had to make difficult decisions in
recent months. Many business owners have had to lay off or furlough employees
and substantively alter how they deliver their products or services during the
COVID-19 crisis.

You might have long-time customers to whom you provide certain
services that just aren’t profitable anymore. If your company might start
losing money on these customers, you may have to discontinue the services and
sacrifice their business.

You can ease difficult transitions like this by referring
customers to another, reputable service provider. Meanwhile, your business
should be looking to either find new service areas to generate revenue or
expand existing services to more robust market segments.

Take a
hard look

As of this writing, the economy appears to be slowly recovering
for most (though not all) industries. An environment like this means every
dollar is precious and any type of waste or redundancy is even more dangerous.

Take a hard look at your approach to inventory management, or
how you’re managing the services you provide, to ensure you’re in step with the
times. We can help your business implement cost-effective inventory tracking
processes, as well as assist you in gaining key insights from your financial

© 2020

Reviewing your disaster plan in a tumultuous year

It’s been a year like no other. The sudden impact of the
COVID-19 pandemic in March forced every business owner — ready or not — to
execute his or her disaster response plan.

So, how did yours do? Although it may still be a little early to
do a complete assessment of what went right and wrong during the crisis, you
can take a quick look back right now while the experience is still fresh in
your mind.


When devising a disaster response plan, brainstorm as many
scenarios as possible that could affect your company. What weather-related,
environmental and socio-political threats do you face? Obviously, you can now
add “pandemic” to the list.

The operative word, however, is “your.” Every company faces
distinctive threats related to its industry, size, location(s), and products or
services. Identify these as specifically as possible, based on what you’ve

There are some constants for nearly every plan. Seek out
alternative suppliers who could fill in for your current ones if necessary.
Fortify your IT assets and functionality with enhanced recovery and security


Another critical factor during and after a crisis is
communication, both internal and external. Review whether and how your business
was able to communicate in the initial months of the pandemic.

You and most of your management team probably needed to
concentrate on maintaining or restoring operations. Who communicated with
employees and other stakeholders to keep them abreast of your response and
recovery progress? Typically, these parties include:

  • Staff members and their families,
  • Customers,
  • Suppliers,
  • Banks and other financial stakeholders, and
  • Local authorities, first responders and community
    leaders (as appropriate).

Look into the communication channels that were used — such as
voicemail, text messaging, email, website postings and social media. Which were
most and least effective? Would some type of new technology enable your
business to communicate better?

and update

If the events of this past spring illustrate anything, it’s that
companies can’t create a disaster response plan and toss it on a shelf. Revisit
the plan at least annually, looking for adjustments and new risk factors.

You’ll also want to keep the plan clear in the minds of your
employees. Be sure that everyone — including new hires — knows exactly what to
do by spelling out the communication channels, contacts and procedures you’ll
use in the event of a disaster. Everyone should sign a written confirmation
that they’ve read the plan’s details, either when hired or when the plan is
substantially updated.

In addition, go over disaster response measures during company
meetings once or twice a year. You might even want to hold live drills to give
staff members a chance to practice their roles and responsibilities.

Heed the

For years, advisors urged business owners to prepare for
disasters or else. This year we got the “or else.” Despite the hardships and
continuing challenges, however, the lessons being learned are invaluable.
Please contact us to discuss ways to manage costs and maintain profitability
during these difficult times.

© 2020

What tax records can you throw away?

October 15 was the deadline for individual taxpayers who extended their 2019 tax returns. (The original April 15 filing deadline was extended this year to July 15 due to the COVID-19 pandemic.) If you’re finally done filing last year’s return, you might wonder: Which tax records can you toss once you’re done? Now is a good time to go through old tax records and see what you can discard.

general rules

At minimum, you should keep tax records for as long as the IRS
has the ability to audit your tax return or assess additional taxes, which
generally is three years after you file your return. This means you potentially
can get rid of most records related to tax returns for 2016 and earlier years.

However, the statute of limitations extends to six years for taxpayers
who understate their adjusted gross income (AGI) by more than 25%. What
constitutes an understatement may go beyond simply not reporting items of
income. So a general rule of thumb is to save tax records for six years from
filing, just to be safe.

Keep some
records longer

You need to hang on to some tax-related records beyond the
statute of limitations. For example:

  • Keep the tax returns themselves indefinitely, so you
    can prove to the IRS that you actually filed a legitimate return. (There’s
    no statute of limitations for an audit if you didn’t file a return or if
    you filed a fraudulent one.)
  • Retain W-2 forms until you begin receiving Social
    Security benefits. Questions might arise regarding your work record or
    earnings for a particular year, and your W-2 helps provide the
    documentation needed.
  • Keep records related to real estate or investments for
    as long as you own the assets, plus at least three years after you sell
    them and report the sales on your tax return (or six years if you want
    extra protection).
  • Keep records associated with retirement accounts until
    you’ve depleted the accounts and reported the last withdrawal on your tax
    return, plus three (or six) years.

reasons to retain records

Keep in mind that these are the federal tax record retention
guidelines. Your state and local tax record requirements may differ. In
addition, lenders, co-op boards and other private parties may require you to
produce copies of your tax returns as a condition to lending money, approving a
purchase or otherwise doing business with you.

Contact us if you have questions or concerns about

Understanding the passive activity loss rules

Are you wondering if the passive activity loss rules affect
business ventures you’re engaged in — or might engage in?

If the ventures are passive activities, the passive activity
loss rules prevent you from deducting expenses that are generated by them in excess
of their income. You can’t deduct the excess expenses (losses) against earned
income or against other nonpassive income. Nonpassive income for this purpose
includes interest, dividends, annuities, royalties, gains and losses from most
property dispositions, and income from certain oil and gas property interests.
So you can’t deduct passive losses against those income items either.

Any losses that you can’t use aren’t lost. Instead, they’re
carried forward, indefinitely, to tax years in which your passive activities
generate enough income to absorb the losses. To the extent your passive losses
from an activity aren’t used up in this way, you’ll be allowed to use them in
the tax year in which you dispose of your interest in the activity in a fully
taxable transaction, or in the tax year you die.

vs. material

Passive activities are trades, businesses or income-producing
activities in which you don’t “materially participate.” The passive activity
loss rules also apply to any items passed through to you by partnerships in
which you’re a partner, or by S corporations in which you’re a shareholder.
This means that any losses passed through to you by partnerships or S
corporations will be treated as passive, unless the activities aren’t passive
for you.

For example, let’s say that in addition to your regular
professional job, you’re a limited partner in a partnership that cleans
offices. Or perhaps you’re a shareholder in an S corp that operates a
manufacturing business (but you don’t participate in the operations).

If you don’t materially participate in the partnership or S
corporation, those activities are passive. On the other hand, if you
“materially participate,” the activities aren’t passive (except for rental
activities, discussed below), and the passive activity rules won’t apply to the
losses. To materially participate, you must be involved in the operations on a
regular, continuous and substantial basis.

The IRS uses several tests to establish material participation.
Under the most frequently used test, you’re treated as materially participating
in an activity if you participate in it for more than 500 hours in the tax
year. While other tests require fewer hours, all the tests require you to
establish how you participated and the amount of time spent. You can establish
this by any reasonable means such as contemporaneous appointment books,
calendars, time reports or logs.


Rental activities are automatically treated as passive,
regardless of your participation. This means that, even if you materially
participate in them, you can’t deduct the losses against your earned income,
interest, dividends, etc. There are two important exceptions:

  • You can deduct up to $25,000 of losses from rental real
    estate activities (even though they’re passive) against earned income,
    interest, dividends, etc., if you “actively participate” in the activities
    (requiring less participation than “material participation”) and if your
    adjusted gross income doesn’t exceed specified levels.
  • If you qualify as a “real estate professional” (which
    requires performing substantial services in real property trades or
    businesses), your rental real estate activities aren’t automatically
    treated as passive. So losses from those activities can be deducted
    against earned income, interest, dividends, etc., if you materially

Contact us if you’d like to discuss how these rules apply to
your business.

© 2020

Buying and selling mutual fund shares: Avoid these tax pitfalls

If you invest in mutual funds, be aware of some potential
pitfalls involved in buying and selling shares.


You may already have made taxable “sales” of part of your mutual
fund investment without knowing it.

One way this can happen is if your mutual fund allows you to
write checks against your fund investment. Every time you write a check against
your mutual fund account, you’ve made a partial sale of your interest in the
fund. Thus, except for funds such as money market funds, for which share value
remains constant, you may have taxable gain (or a deductible loss) when you
write a check. And each such sale is a separate transaction that must be
reported on your tax return.

Here’s another way you may unexpectedly make a taxable sale. If
your mutual fund sponsor allows you to make changes in the way your money is
invested — for instance, lets you switch from one fund to another fund — making
that switch is treated as a taxable sale of your shares in the first fund.


Carefully save all the statements that the fund sends you — not
only official tax statements, such as Forms 1099-DIV, but the confirmations the
fund sends you when you buy or sell shares or when dividends are reinvested in
new shares. Unless you keep these records, it may be difficult to prove how
much you paid for the shares, and thus, you won’t be able to establish the
amount of gain that’s subject to tax (or the amount of loss you can deduct)
when you sell.

You also need to keep these records to prove how long you’ve
held your shares if you want to take advantage of favorable long-term capital
gain tax rates. (If you get a year-end statement that lists all your
transactions for the year, you can just keep that and discard quarterly or
other interim statements. But save anything that specifically says it contains
tax information.)

Recordkeeping is simplified by rules that require funds to
report the customer’s basis in shares sold and whether any gain or loss is
short-term or long-term. This is mandatory for mutual fund shares acquired
after 2011, and some funds will provide this to shareholders for shares they
acquired earlier, if the fund has the information.

purchases and sales

If you’re planning to invest in a mutual fund, there are some
important tax consequences to take into account in timing the investment. For
instance, an investment shortly before payment of a dividend is something you
should generally try to avoid. Your receipt of the dividend (even if reinvested
in additional shares) will be treated as income and increase your tax
liability. If you’re planning a sale of any of your mutual fund shares near
year-end, you should weigh the tax and the non-tax consequences in the current
year versus a sale in the next year.

shares you sell 

If you sell fewer than all of the shares that you hold in the
same mutual fund, there are complicated rules for identifying which shares
you’ve sold. The proper application of these rules can reduce the amount of
your taxable gain or qualify the gain for favorable long-term capital gain

Contact us if you’d like to find out more about tax planning for
buying and selling mutual fund shares.

© 2020

The 2021 “Social Security wage base” is increasing

If your small business is planning for payroll next year, be
aware that the “Social Security wage base” is increasing.

The Social Security Administration recently announced that the
maximum earnings subject to Social Security tax will increase from $137,700 in
2020 to $142,800 in 2021.

For 2021, the FICA tax rate for both employers and employees is
7.65% (6.2% for Social Security and 1.45% for Medicare).  

For 2021, the Social Security tax rate is 6.2% each for the
employer and employee (12.4% total) on the first $142,800 of employee wages.
The tax rate for Medicare is 1.45% each for the employee and employer (2.9%
total). There’s no wage base limit for Medicare tax so all covered wages are
subject to Medicare tax.

In addition to withholding Medicare tax at 1.45%, an employer
must withhold a 0.9% additional Medicare tax from wages paid to an employee in
excess of $200,000 in a calendar year.

working more than one job

You may have employees who work for your business and who also
have a second job. They may ask if you can stop withholding Social Security
taxes at a certain point in the year because they’ve already reached the Social
Security wage base amount. Unfortunately, you generally can’t stop the
withholding, but the employees will get a credit on their tax returns for any
excess withheld.


If your business has older employees, they may have to deal with
the “retirement earnings test.” It remains in effect for individuals below normal
retirement age (age 65 to 67 depending on the year of birth) who continue to
work while collecting Social Security benefits. For affected individuals, $1 in
benefits will be withheld for every $2 in earnings above $18,960 in 2021 (up
from $18,240 in 2020).

For working individuals collecting benefits who reach normal
retirement age in 2021, $1 in benefits will be withheld for every $3 in
earnings above $46,920 (up from $48,600 in 2020), until the month that the
individual reaches normal retirement age. After that month, there’s no limit on

Contact us if you have questions. We can assist you with the
details of payroll taxes and keep you in compliance with payroll laws and

© 2020

4 steps to improving your company’s sales

Most salespeople would tell you that there are few better
feelings in life than closing a deal. This is because guiding a customer
through the sales process and coming out the other side with dollars committed
isn’t a matter of blind luck. It’s a craft — based on equal parts data mining,
psychology, intuition and other skills.

Many sales staffs have been under unprecedented pressure this
year. The COVID-19 pandemic triggered changes to the economy that made many
buyers cut back on spending. Now that the economy is slowly recovering, sales
opportunities may be improving. Here are four steps your salespeople can follow
to improve the odds that those chances will come to fruition:

Qualify prospects.
Time is an asset. Successful salespeople
focus most or all their time on prospects who are most likely to buy. Viable
prospects typically have certain things in common:

  • A clear need for the products or services in question,
  • Sufficient knowledge of the products or services,
  • An identifiable decision-maker who can approve the
  • Adequate financial standing, and
  • A need to buy right away or soon.

If any of these factors is missing, and certainly if several
are, the salesperson will likely end up wasting his or her time trying to make
a sale.

2. Ask
the right questions.
A salesperson must deeply understand a
prospect’s motivation for needing your company’s products or services. To do
so, inquiries are key. Salespeople who make great presentations but don’t ask
effective questions tend to come up short.

An old rule of thumb says: The most effective salespeople spend
80% of their time listening and 20% talking. Actual percentages may vary, but
the point is that a substantial portion of a salesperson’s “talk time” should
be spent asking intelligent, insightful questions that arise from pre-call
research and specific points mentioned by the buyer.

Identify and overcome objections.
A nightmare scenario for any
salesperson is spending a huge amount of time on an opportunity, only to have
an unknown issue come out of left field at closing and kill the entire deal. To
guard against this, successful salespeople identify and address objections
during their calls with prospects, thereby minimizing or eliminating unpleasant
surprises at closing. They view objections as requests for information that, if
handled correctly, will educate the prospect and strengthen the relationship.

Present a solution.
The most eloquent sales presentation may be
entertaining, but it will probably be unsuccessful if it doesn’t satisfy a
buyer’s needs. Your product or service must fix a problem or help accomplish a
goal. Without that, what motivation does a prospect have to spend money? Your
salespeople must be not only careful researchers and charming
conversationalists, but also problem-solvers.

When you alleviate customers’ concerns and allow them to meet
strategic objectives, you’ll increase the likelihood of making today’s sales and setting yourself up for
tomorrow’s. Our firm can help you identify optimal sales strategies and measure
the results.

© 2020