Hiring independent contractors? Make sure they’re properly classified
As a result of the coronavirus (COVID-19) crisis, your business
may be using independent contractors to keep costs low. But you should be
careful that these workers are properly classified for federal tax purposes. If
the IRS reclassifies them as employees, it can be an expensive mistake.
The question of whether a worker is an independent contractor or
an employee for federal income and employment tax purposes is a complex one. If
a worker is an employee, your company must withhold federal income and payroll
taxes, pay the employer’s share of FICA taxes on the wages, plus FUTA tax.
Often, a business must also provide the worker with the fringe benefits that it
makes available to other employees. And there may be state tax obligations as
well.
These obligations don’t apply if a worker is an independent contractor.
In that case, the business simply sends the contractor a Form 1099-MISC for the
year showing the amount paid (if the amount is $600 or more).
No uniform definition
Who is an “employee?” Unfortunately, there’s no uniform
definition of the term.
The IRS and courts have generally ruled that individuals are
employees if the organization they work for has the right to control and direct
them in the jobs they’re performing. Otherwise, the individuals are generally
independent contractors. But other factors are also taken into account.
Some employers that have misclassified workers as independent
contractors may get some relief from employment tax liabilities under Section
530. In general, this protection applies only if an employer:
- Filed all federal returns consistent with its treatment
of a worker as a contractor, - Treated all similarly situated workers as contractors,
and - Had a “reasonable basis” for not treating the worker as
an employee. For example, a “reasonable basis” exists if a significant
segment of the employer’s industry traditionally treats similar workers as
contractors.
Note: Section 530 doesn’t apply to certain types of technical
services workers. And some categories of individuals are subject to special
rules because of their occupations or identities.
Asking for a determination
Under certain circumstances, you may want to ask the IRS (on
Form SS-8) to rule on whether a worker is an independent contractor or
employee. However, be aware that the IRS has a history of classifying workers
as employees rather than independent contractors.
Businesses should consult with us before filing Form SS-8
because it may alert the IRS that your business has worker classification
issues — and inadvertently trigger an employment tax audit.
It may be better to properly treat a worker as an independent
contractor so that the relationship complies with the tax rules.
Be aware that workers who want an official determination of
their status can also file Form SS-8. Disgruntled independent contractors may
do so because they feel entitled to employee benefits and want to eliminate
self-employment tax liabilities.
If a worker files Form SS-8, the IRS will send a letter to the
business. It identifies the worker and includes a blank Form SS-8. The business
is asked to complete and return the form to the IRS, which will render a
classification decision.
Contact us if you receive such a
letter or if you’d like to discuss how these complex rules apply to your
business. We can help ensure that none of your workers are misclassified.
© 2020
IRS extends some (but not all) employee benefit plan deadlines
The IRS recently issued Notice 2020-23, expanding on previously
issued guidance extending certain tax filing and payment deadlines in response
to the novel coronavirus (COVID-19) crisis. This guidance applies to specified
filing obligations and other “specified actions” that would otherwise be due on
or after April 1, 2020, and before July 15, 2020. It extends the due date for
specified actions to July 15, 2020.
Specified actions include any “specified time-sensitive action”
listed in Revenue Procedure 2018-58, including many relating to employee
benefit plans. The relief applies to any person required to perform specified
actions within the relief window, and it’s automatic — your business doesn’t
need to file any form, letter or other request with the IRS.
Filing extensions beyond July 15, 2020, may be sought using the
appropriate extension form, but the extension won’t go beyond the original
statutory or regulatory extension date. Here are some highlights of Notice
2020-23 specifically related to employee benefit plans:
Form 5500. The
relief window covers Form 5500 filings for plan years that ended in September,
October or November 2019, as well as Form 5500 deadlines within the window as a
result of a previously filed extension request. These filings are now due by
July 15, 2020. Notably, the relief window does
not include the July 31, 2020 due date for 2019 Form 5500 filings
for calendar-year plans. Those plans may seek a regular extension using Form
5558.
Retirement plans. The
extended deadlines apply to correcting excess contributions and excess
aggregate contributions (based on nondiscrimination testing) and excess
deferrals. They also apply to:
- Plan loan repayments,
- The 60-day timeframe for rollover completion, and
- The deadline for filing Form 8955-SSA to report
information on separated plan participants with undistributed vested
benefits.
The relief for excess deferrals is a change from previous
guidance indicating that 2019 excess deferrals still needed to be corrected by
April 15, 2020. In addition, while loan relief is already available to certain
individuals for specified reasons related to COVID-19, this relief appears to
apply more broadly — albeit for a shorter period. The Form 8955-SSA due date is
the same as for the plan’s Form 5500, so the extension applies in the same
manner.
Health Savings Accounts (HSAs). The
notice extends the 60-day timeframe for completing HSA or Archer Medical
Savings Account (MSA) rollovers. It also extends the deadline to report HSA or
Archer MSA contribution information by filing Form 5498-SA and furnishing the
information to account holders. The regular deadline for the 2019 Form 5498-SA
would be June 1, 2020, placing it squarely within this relief period.
Business owners and their plan administrators should carefully
review Notice 2020-23 in conjunction with Revenue Procedure 2018-58 to
determine exactly what relief may be available. For example, the revenue
procedure covers various cafeteria plan items, but many deadlines may fall
outside the notice’s window. We can provide you with further information about
this or other forms of federal relief.
The IRS recently issued Notice 2020-23, expanding on previously
issued guidance extending certain tax filing and payment deadlines in response
to the novel coronavirus (COVID-19) crisis. This guidance applies to specified
filing obligations and other “specified actions” that would otherwise be due on
or after April 1, 2020, and before July 15, 2020. It extends the due date for
specified actions to July 15, 2020.
Specified actions include any “specified time-sensitive action”
listed in Revenue Procedure 2018-58, including many relating to employee
benefit plans. The relief applies to any person required to perform specified
actions within the relief window, and it’s automatic — your business doesn’t
need to file any form, letter or other request with the IRS.
Filing extensions beyond July 15, 2020, may be sought using the
appropriate extension form, but the extension won’t go beyond the original
statutory or regulatory extension date. Here are some highlights of Notice
2020-23 specifically related to employee benefit plans:
Form 5500. The
relief window covers Form 5500 filings for plan years that ended in September,
October or November 2019, as well as Form 5500 deadlines within the window as a
result of a previously filed extension request. These filings are now due by
July 15, 2020. Notably, the relief window does
not include the July 31, 2020 due date for 2019 Form 5500 filings
for calendar-year plans. Those plans may seek a regular extension using Form
5558.
Retirement plans. The
extended deadlines apply to correcting excess contributions and excess
aggregate contributions (based on nondiscrimination testing) and excess
deferrals. They also apply to:
- Plan loan repayments,
- The 60-day timeframe for rollover completion, and
- The deadline for filing Form 8955-SSA to report
information on separated plan participants with undistributed vested
benefits.
The relief for excess deferrals is a change from previous
guidance indicating that 2019 excess deferrals still needed to be corrected by
April 15, 2020. In addition, while loan relief is already available to certain
individuals for specified reasons related to COVID-19, this relief appears to
apply more broadly — albeit for a shorter period. The Form 8955-SSA due date is
the same as for the plan’s Form 5500, so the extension applies in the same
manner.
Health Savings Accounts (HSAs). The
notice extends the 60-day timeframe for completing HSA or Archer Medical
Savings Account (MSA) rollovers. It also extends the deadline to report HSA or
Archer MSA contribution information by filing Form 5498-SA and furnishing the
information to account holders. The regular deadline for the 2019 Form 5498-SA
would be June 1, 2020, placing it squarely within this relief period.
Business owners and their plan administrators should carefully
review Notice 2020-23 in conjunction with Revenue Procedure 2018-58 to
determine exactly what relief may be available. For example, the revenue
procedure covers various cafeteria plan items, but many deadlines may fall
outside the notice’s window. We can provide you with further information about
this or other forms of federal relief.
© 2020
What are the key distinctions between layoffs and furloughs?
As businesses across the country grapple with the economic
fallout from the novel coronavirus (COVID-19) pandemic, many must decide
whether to downsize their workforces to lower payroll costs and stabilize cash
flow. If your company is contemplating such a move, you’ll likely want to
consider the choice within the choice: that is, should you lay off workers or
furlough them?
Basic difference
The basic difference between the two is simple. Layoffs are the
ostensibly permanent termination of employees from their positions, though you
can rehire some of these individuals when business improves. Meanwhile, a
furlough is a mandatory or voluntary suspension from work without pay for a
specified period.
In most states, furloughed workers are still considered employees
and, therefore, don’t receive a “final” paycheck. Check with an employment or
labor attorney, however, to make sure your state’s furlough laws don’t trigger
final pay requirements.
Employee benefits are another issue to explore. Reach out to
your health insurance provider to see whether a furlough is a triggering event
for COBRA health care coverage purposes. In addition, employees can sometimes
be dropped from a group health plan if they don’t work enough hours. Ask about
potential problems this might cause under the Affordable Care Act.
Applicable laws
If you’re a midsize business, and layoffs or furloughs begin to
look unavoidable, it’s particularly important to coordinate the move with legal
counsel. Under the Worker Adjustment and Retraining Notification (WARN) Act,
employers with 100 or more employees must provide written notice at least 60
days before a plant closing or mass layoff.
To have a mass layoff, at least 50 workers at a single site must
be laid off for more than six months (or have their hours reduced by at least
50% in any six-month period). Because furloughs generally last for less than
six months, a WARN notice wouldn’t likely be required. But you should still
check with your employment attorney regarding applicable state laws and any other
potential legal ramifications.
Unemployment benefits
To soften the blow, you can inform furloughed employees that
they’re generally eligible for unemployment benefits — assuming their previous
year’s wages are enough to qualify. Although a waiting period often applies
before an employee can start receiving unemployment benefits, many states have
waived these waiting periods because of the COVID-19 outbreak. Again,
double-check with your attorney to fully understand the unemployment insurance
rules before communicating with employees.
Formulate a strategy
Unprecedented unemployment numbers show that many businesses
have had to downsize. It’s worth noting that, if you can hang on to your
employees, recently passed tax relief created a refundable credit against
payroll tax. (Rules and limits apply.) Our firm can help you assess your
employment costs and formulate a strategy for optimally sizing your workforce.
© 2020
Relief from not making employment tax deposits due to COVID-19 tax credits
The IRS has issued guidance providing relief from failure to
make employment tax deposits for employers that are entitled to the refundable
tax credits provided under two laws passed in response to the coronavirus
(COVID-19) pandemic. The two laws are the Families First Coronavirus Response
Act, which was signed on March 18, 2020, and the Coronavirus Aid, Relief, and
Economic Security Act (CARES) Act, which was signed on March 27, 2020.
Employment tax penalty basics
The tax code imposes a penalty for any failure to deposit
amounts as required on the date prescribed, unless such failure is due to
reasonable cause rather than willful neglect.
An employer’s failure to deposit certain federal employment
taxes, including deposits of withheld income taxes and taxes under the Federal
Insurance Contributions Act (FICA) is generally subject to a penalty.
COVID-19 relief credits
Employers paying qualified sick leave wages and qualified family
leave wages required by the Families First Act, as well as qualified health
plan expenses allocable to qualified leave wages, are eligible for refundable
tax credits under the Families First Act.
Specifically, provisions of the Families First Act provide a
refundable tax credit against an employer’s share of the Social Security
portion of FICA tax for each calendar quarter, in an amount equal to 100% of
qualified leave wages paid by the employer (plus qualified health plan expenses
with respect to that calendar quarter).
Additionally, under the CARES Act, certain employers are also
allowed a refundable tax credit under the CARES Act of up to 50% of the
qualified wages, including allocable qualified health expenses if they are
experiencing:
- A full or partial business suspension due to orders
from governmental authorities due to COVID-19, or - A specified decline in business.
This credit is limited to $10,000 per employee over all calendar
quarters combined.
An employer paying qualified leave wages or qualified retention
wages can seek an advance payment of the related tax credits by filing Form
7200, Advance Payment of Employer Credits Due to COVID-19.
Available relief
The Families First Act and the CARES Act waive the penalty for
failure to deposit the employer share of Social Security tax in anticipation of
the allowance of the refundable tax credits allowed under the two laws.
IRS Notice 2020-22 provides that an employer won’t be subject to
a penalty for failing to deposit employment taxes related to qualified leave
wages or qualified retention wages in a calendar quarter if certain
requirements are met. Contact us for more information about whether you can
take advantage of this relief.
More breaking news
Be aware the IRS also just
extended more federal tax deadlines. The extension, detailed in Notice 2020-23,
involves a variety of tax form filings and payment obligations due between
April 1 and July 15. It includes estimated tax payments due June 15 and the
deadline to claim refunds from 2016. The extended deadlines cover individuals,
estates, corporations and others. In addition, the guidance suspends associated
interest, additions to tax, and penalties for late filing or late payments
until July 15, 2020. Previously, the IRS postponed the due dates for certain
federal income tax payments. The new guidance expands on the filing and payment
relief. Contact us if you have questions.
© 2020
Just launched: The SBA’s Paycheck Protection Program
To stem the tide of joblessness caused by the coronavirus
(COVID-19) outbreak, the Small Business Administration (SBA) has officially
launched the Paycheck Protection Program (PPP). The program’s stated objective
is “to provide a direct incentive for small businesses to keep their workers on
the payroll.”
What does the program offer?
The PPP was authorized under a provision of the Coronavirus Aid,
Relief, and Economic Security (CARES) Act. It provides up to eight weeks of
cash-flow assistance through 100% federally guaranteed loans to eligible
recipients to maintain payroll during the COVID-19 crisis and cover certain
other expenses.
Under the program, eligible recipients may qualify for loans of
up to $10 million determined by eight weeks of previously established
average payroll. The first loan payment is deferred for six months. All loans
will have an interest rate of 0.5%, a maturity of two years, and no borrower or
lender fees.
If the recipient maintains its workforce, up to 100% of the loan
is forgivable if the loan proceeds are used to cover the first eight weeks of
payroll, rent, mortgage interest or utilities. (The U.S. Treasury Department
anticipates that no more than 25% of the forgiven amount can be for non-payroll
costs.)
How is payroll defined?
Under the PPP, payroll includes:
- Employee salaries (up to an annual salary of $100,000),
- Hourly wages,
- Cash tips,
- Paid sick or medical leave,
- Group health insurance premiums,
- Retirement benefit payments,
- State or local tax on employee wages, and
- Compensation to a sole proprietor or independent
contractor of up to $100,000 per year.
If the PPP recipient doesn’t retain its entire workforce, the
level of forgiveness is reduced by the percentage of decrease. However, if the
laid-off workers are rehired by June 30, the full amount of the loan may still
be forgiven.
Who’s eligible?
Eligible recipients are small businesses with fewer than 500
employees (including sole proprietorships, independent contractors and
self-employed persons). Private nonprofits and 501(c)(19) veterans
organizations affected by COVID-19 may also qualify. In addition, businesses in
certain industries with more than 500 employees may be eligible if they meet
the SBA’s size standards for those industries.
The PPP begins retroactively on Feb. 15, 2020, and ends June 20,
2020. (The retroactive start allows eligible recipients to bring back workers
who were laid off because of the crisis.) Qualifying companies may apply for a
loan at lending institutions approved to participate in the program through the
SBA’s 7(a) lending program. Applications may also be available through
participating federally insured depository institutions, federally insured
credit unions and Farm Credit System institutions.
When should you apply?
The Treasury Department released the PPP Application Form on
March 31, and lenders could begin processing applications on April 3. If you
believe your small business may be eligible to participate, it’s a good idea to
apply as soon as possible because funds are limited under the program. We can
help you confirm your eligibility, complete the application and optimally
manage any loan funds you receive.
Answers to questions about the CARES Act employee retention tax credit
The recently enacted Coronavirus Aid, Relief, and Economic
Security (CARES) Act provides a refundable payroll tax credit for 50% of wages
paid by eligible employers to certain employees during the COVID-19 pandemic.
The employee retention credit is available to employers, including nonprofit
organizations, with operations that have been fully or partially suspended as a
result of a government order limiting commerce, travel or group meetings.
The credit is also provided to employers who have experienced a
greater than 50% reduction in quarterly receipts, measured on a year-over-year
basis.
IRS issues FAQs
The IRS has now released FAQs about the credit. Here are some
highlights.
How is the credit calculated? The
credit is 50% of qualifying wages paid up to $10,000 in total. So the maximum
credit for an eligible employer for qualified wages paid to any employee is
$5,000.
Wages paid after March 12, 2020, and before Jan. 1, 2021, are
eligible for the credit. Therefore, an employer may be able to claim it for
qualified wages paid as early as March 13, 2020. Wages aren’t limited to cash
payments, but also include part of the cost of employer-provided health care.
When is the operation of a business
“partially suspended” for the purposes of the credit?The
operation of a business is partially suspended if a government authority
imposes restrictions by limiting commerce, travel or group meetings due to
COVID-19 so that the business still continues but operates below its normal
capacity.
Example: A state governor issues
an executive order closing all restaurants and similar establishments to reduce
the spread of COVID-19. However, the order allows establishments to provide
food or beverages through carry-out, drive-through or delivery. This results in
a partial suspension of businesses that provided sit-down service or other
on-site eating facilities for customers prior to the executive order.
Is an employer required to pay qualified
wages to its employees? No. The CARES Act doesn’t require
employers to pay qualified wages.
Is a government employer or self-employed
person eligible?No.Government employers aren’t eligible for the employee
retention credit. Self-employed individuals also aren’t eligible for the credit
for self-employment services or earnings.
Can an employer receive both the tax credits
for the qualified leave wages under the Families First Coronavirus Response Act
(FFCRA) and the employee retention credit under the CARES Act? Yes,
but not for the same wages. The amount of qualified wages for which an employer
can claim the employee retention credit doesn’t include the amount of qualified
sick and family leave wages for which the employer received tax credits under
the FFCRA.
Can an eligible employer receive both the
employee retention credit and a loan under the Paycheck Protection
Program? No. An employer can’t receive the employee retention credit if
it receives a Small Business Interruption Loan under the Paycheck Protection
Program, which is authorized under the CARES Act. So an employer that receives
a Paycheck Protection loan shouldn’t claim the employee retention credit.
For more information
Here’s a link to more questions: https://bit.ly/2R8syZx . Contact us if you
need assistance with tax or financial issues due to COVID-19.
Using your financial statements during an economic crisis
The economic fallout from the coronavirus (COVID-19) pandemic
has forced business owners to reevaluate their operations and make difficult
decisions. One place to look for the information you need to make rational,
reasonable moves is your financial statements. Under U.S. Generally Accepted
Accounting Principles, these typically comprise a statement of cash flows, a
balance sheet and an income statement.
Cash flow
A statement of cash flows should be organized into three
sections: cash flows from operating, financing and investing activities.
Ideally, a company generates enough cash from operations to cover its expenses.
For many businesses, the COVID-19 pandemic has caused revenue to
drop precipitously without a proportionate decrease in certain (fixed) operating
expenses. Keep a close eye on whether you’re reaching a danger point. To
generate additional cash flow, you may need to borrow money — consider a Small
Business Administration loan, if you’re eligible.
Assets and liabilities
Your balance sheet tallies your company’s assets, liabilities
and net worth — creating a snapshot of its financial health on the statement
date. Assets are typically listed in order of liquidity. Current assets (such
as accounts receivable) are expected to be converted into cash within a year,
while long-term assets (such as your plant and equipment) will be used to
generate revenue beyond the next 12 months.
Similarly, liabilities are listed in order of maturity. Current
liabilities (such as accounts payable) come due within a year, while long-term
liabilities are payment obligations that extend beyond the current year.
As its name indicates, the balance sheet must balance — that is, assets
must equal liabilities plus net worth. Net worth is the extent to which the
book value of assets exceeds liabilities. In times of distress, certain assets
(such as receivables, financial assets, pension funds and inventory) may need
to be written off, and intangibles (such as brands and goodwill) may become
impaired. These changes may cause the book value of a company’s net worth to be
negative, suggesting that the business is insolvent. Other red flags include
current assets growing faster than sales, and a deteriorating ratio of current
assets to current liabilities.
Income and overhead
An income statement shows revenue and expenses over the
accounting period. Revenue has fallen for many businesses as the result of
social distancing during the COVID-19 outbreak. Fortunately, certain variable
expenses — such as materials and direct labor costs — have also fallen.
Unfortunately, most fixed expenses — such as rent, equipment
leasing fees, advertising, insurance premiums and manager salaries — are
ongoing. Review costs that are categorized on the income statements as overhead
and sales, general and administrative expenses. Consider whether you can scale
back these items, renegotiate them or convert them into variable costs over the
long run.
For example, you might return a leased copier that isn’t being
used, decrease your insurance coverage or rely more on independent contractors,
rather than employees, for certain tasks.
Sudden changes
Your existing financial statements may not account for the
sudden changes inflicted upon businesses worldwide by COVID-19. We can assist
you in evaluating them, gleaning insightful data using updated numbers, and
generating new ones going forward.
© 2020
The new COVID-19 law provides businesses with more relief
On March 27, President Trump signed into law another coronavirus
(COVID-19) law, which provides extensive relief for businesses and employers.
Here are some of the tax-related provisions in the Coronavirus Aid, Relief, and
Economic Security Act (CARES Act).
Employee retention credit
The new law provides a refundable payroll tax credit for 50% of
wages paid by eligible employers to certain employees during the COVID-19
crisis.
Employer eligibility. The
credit is available to employers with operations that have been fully or
partially suspended as a result of a government order limiting commerce, travel
or group meetings. The credit is also provided to employers that have
experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year
basis.
The credit isn’t available to employers receiving Small Business
Interruption Loans under the new law.
Wage eligibility. For
employers with an average of 100 or fewer full-time employees in 2019, all
employee wages are eligible, regardless of whether an employee is furloughed.
For employers with more than 100 full-time employees last year, only the wages
of furloughed employees or those with reduced hours as a result of closure or
reduced gross receipts are eligible for the credit.
No credit is available with respect to an employee for whom the
employer claims a Work Opportunity Tax Credit.
The term “wages” includes health benefits and is capped at the
first $10,000 paid by an employer to an eligible employee. The credit applies
to wages paid after March 12, 2020 and before January 1, 2021.
The IRS has authority to advance payments to eligible employers
and to waive penalties for employers who don’t deposit applicable payroll taxes
in anticipation of receiving the credit.
Payroll and self-employment tax payment delay
Employers must withhold Social Security taxes from wages paid to
employees. Self-employed individuals are subject to self-employment tax.
The CARES Act allows eligible taxpayers to defer paying the
employer portion of Social Security taxes through December 31, 2020. Instead,
employers can pay 50% of the amounts by December 31, 2021 and the remaining 50%
by December 31, 2022.
Self-employed people receive similar relief under the law.
Temporary repeal of taxable income limit for
NOLs
Currently, the net operating loss (NOL) deduction is equal to
the lesser of 1) the aggregate of the NOL carryovers and NOL carrybacks, or 2)
80% of taxable income computed without regard to the deduction allowed. In
other words, NOLs are generally subject to a taxable-income limit and can’t
fully offset income.
The CARES Act temporarily removes the taxable income limit to
allow an NOL to fully offset income. The new law also modifies the rules
related to NOL carrybacks.
Interest expense deduction temporarily
increased
The Tax Cuts and Jobs Act (TCJA) generally limited the amount of
business interest allowed as a deduction to 30% of adjusted taxable income.
The CARES Act temporarily and retroactively increases the limit
on the deductibility of interest expense from 30% to 50% for tax years
beginning in 2019 and 2020. There are special rules for partnerships.
Bonus depreciation for qualified improvement
property
The TCJA amended the tax code to allow 100% additional
first-year bonus depreciation deductions for certain qualified property. The
TCJA eliminated definitions for 1) qualified leasehold improvement property, 2)
qualified restaurant property, and 3) qualified retail improvement property. It
replaced them with one category called qualified improvement property (QIP). A
general 15-year recovery period was intended to have been provided for QIP.
However, that period failed to be reflected in the language of the TCJA.
Therefore, under the TCJA, QIP falls into the 39-year recovery period for
nonresidential rental property, making it ineligible for 100% bonus
depreciation.
The CARES Act provides a technical correction to the TCJA, and
specifically designates QIP as 15-year property for depreciation purposes. This
makes QIP eligible for 100% bonus depreciation. The provision is effective for
property placed in service after December 31, 2017.
Careful planning required
This article only explains some of the relief available to
businesses. Additional relief is provided to individuals. Be aware that other
rules and limits may apply to the tax breaks described here. Contact us if you
have questions about your situation.
The difference between a mission statement and a vision statement
Many business owners put off writing a mission statement. Who
has time to write down why you’re in business when you’re busy trying to run
one! And perhaps even fewer owners have created a vision statement — possibly
because they’re not sure what the term even means.
There are good reasons for creating both. Lenders, investors and
job candidates appreciate strong, clear mission statements. And vision
statements can give interested parties a clear idea of where a business is
heading. In addition, you and your staff may benefit from the focus and
direction that comes from articulating your mission and vision.
Describe your purpose
Let’s start with a mission statement. Its purpose is to express
to the world why you’re in business, what you’re offering and whom you’re
looking to serve. For example, the U.S. Department of Labor has this as its
mission statement:
To foster, promote, and develop the welfare of the wage earners,
job seekers, and retirees of the United States; improve working conditions;
advance opportunities for profitable employment; and assure work-related
benefits and rights.
Forget flowery language and industry jargon. Write in clear,
simple, honest terms. Keep the statement brief, a paragraph at most. Answer
questions that any interested party would want to know, such as:
- Why did your company go into business?
- What makes your products or services worth buying?
- Who is your target market?
Presumably, you know the answers to these questions. But putting
them down on paper may help renew your commitment to your original or actual
mission, or it may reveal some areas where you’ve gotten off track. For
example, if your target demographic is Millennials, have you maintained that
focus or wandered off course a bit?
Proclaim your ambition
So, a mission statement essentially explains why you’re here,
what you do and who you’re looking to serve. What does a vision statement do?
It tells interested parties where you’re headed and what you ultimately want to
accomplish.
A vision statement should be even briefer than your mission
statement. Think of a tag line for a movie or even an advertising slogan. You
want to deliver a memorable quote that will get the attention of readers and
reinforce that you’re not looking to make a quick buck. Rather, you’re moving
forward into the future while providing the highest quality products or
services in the here and now. For instance, the trademarked vision statement of
the Alzheimer’s Association is simple and aims high: “A world without
Alzheimer’s and all other dementia.”
Get inspired
Should you bring your operations to a screeching halt so
everyone can work on a mission and vision statement? Certainly not. But if you
haven’t created either, or haven’t updated them in a while, it’s a worthwhile
strategic planning task to put together the language and see what insights come
of it. We’d be happy to review your statements and help you tie them to sound
budgeting and financial planning.
© 2020
How business owners may be able to reduce tax by using an S corporation
Do you conduct your business as a sole proprietorship or as a
wholly owned limited liability company (LLC)? If so, you’re subject to both
income tax and self-employment tax. There may be a way to cut your tax bill by
using an S corporation.
Self-employment tax basics
The self-employment tax is imposed on 92.35% of self-employment
income at a 12.4% rate for Social Security up to a certain maximum ($137,700
for 2020) and at a 2.9% rate for Medicare. No maximum tax limit applies to the
Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding
$250,000 for married couples ($125,000 for married persons filing separately)
and $200,000 in all other cases.
Similarly, if you conduct your business as a partnership in
which you’re a general partner, in addition to income tax you are subject to
the self-employment tax on your distributive share of the partnership’s income.
On the other hand, if you conduct your business as an S corporation, you’ll be
subject to income tax, but not self-employment tax, on your share of the S
corporation’s income.
An S corporation isn’t subject to tax at the corporate level.
Instead, the corporation’s items of income, gain, loss and deduction are passed
through to the shareholders. However, the income passed through to the
shareholder isn’t treated as self-employment income. Thus, by using an S
corporation, you may be able to avoid self-employment income tax.
Salary must be reasonable
However, be aware that the IRS requires that the S corporation
pay you reasonable compensation for your services to the business. The
compensation is treated as wages subject to employment tax (split evenly
between the corporation and the employee), which is equivalent to the
self-employment tax. If the S corporation doesn’t pay you reasonable
compensation for your services, the IRS may treat a portion of the S
corporation’s distributions to you as wages and impose Social Security taxes on
the amount it considers wages.
There’s no simple formula regarding what is considered reasonable
compensation. Presumably, reasonable compensation is the amount that unrelated
employers would pay for comparable services under similar circumstances. There
are many factors that should be taken into account in making this
determination.
Converting from a C to an S corp
There can be complications if you convert a C corporation to an
S corporation. A “built-in gains tax” may apply when appreciated assets held by
the C corporation at the time of the conversion are subsequently disposed of.
However, there may be ways to minimize its impact.
As explained above, an S corporation isn’t normally subject to
tax, but when a C corporation converts to S corporation status, the tax law
imposes a tax at the highest corporate rate (21%) on the net built-in gains of
the corporation. The idea is to prevent the use of an S election to escape tax
at the corporate level on the appreciation that occurred while the corporation
was a C corporation. This tax is imposed when the built-in gains are recognized
(in other words, when the appreciated assets are sold or otherwise disposed of)
during the five-year period after the S election takes effect (referred to as
the “recognition period”).
Consider all issues
Contact us if you’d like to discuss the factors involved in conducting
your business as an S corporation, including the built-in gains tax and how
much the business should pay you as compensation.
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