Employee vs. Independent Contractor — Tips for Business Owners

If you are a small business owner, whether you hire people as independent contractors or employees will impact the amount of taxes you withhold from their paychecks as well as how much and what types of taxes you pay. Furthermore, it will affect how much additional cost your business must bear, what documents and information must be provided to you, and what tax documents must be given to the individuals you are hiring.

Worker misclassification is a perennial issue for the Internal Revenue Service and state taxing authorities due to the perception that many employers are not properly classifying their workers.

The obvious advantage for a business to treat an individual as an independent contractor is to avoid paying minimum wages, overtime, payroll taxes, worker’s compensation insurance, unemployment tax, Social Security contributions, health benefits, paid leave, 401(k) benefits, and unpaid leave under the Federal Family and Medical Leave Act. Workers also have some tax-related benefits to being considered independent contractors, such as the ability to deduct certain business expenses that are not available to employees, the eligibility to set up their own retirement plans, and the fact that they are not subject to withholding. Of course, many workers want to be considered employees so they can get the benefits due to employees, such as vacation pay, overtime pay, and health insurance.

Here are some things every business owner should know about hiring people as independent contractors versus hiring them as employees.

Three characteristics are used by the IRS to determine the relationship between businesses and workers:

  1. Behavioral Control – Behavioral control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.
  2. Financial Control – Financial control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
  3. Type of Relationship – This type of relationship factor relates to how the workers and the business owner perceive their relationship.

If you have the right to not only control or direct what is to be done but also how it is to be done, then your workers are most likely employees.

If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and not filing the required tax forms. Employers can request the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS. A worker may also file Form SS-8 requesting an IRS determination. The IRS does not issue determinations for proposed or hypothetical situations.

If you need more information about the critical determination of a worker’s status as an independent contractor or employee, please give us a call.

The Ultimate Cheat Sheet on Growing Your Business

Every business must have a constant eye on growth. If your company is not growing, it is losing key opportunities and longevity. Yet, growth does not always come from increased sales. In many cases, it’s important to take an inside look at how you are operating, what costs you have, and how you can better manage day-to-day operations. To stimulate growth in your business – no matter the sector – focus in on these key areas specifically. It could mean improving your company’s ability to compete at a higher level.

Using KPIs to Guide Growth and Budgeting
Key Performance Indicators (KPIs) help you know how your company is performing. They should be used as a compass and guiding point for every decision you make within the company. KPIs such as profit, cost, sales by region, customer lifetime value, and product defects are just some of the areas to focus on. To achieve clarity here, you need an efficient way of managing all of this data. Cloud computing makes it possible along with implemented automation. These metrics can provide you with key opportunities for:

  • Growth
  • Cost-cutting
  • Better employee management
  • Better customer management
  • Scaling limitations and much more

Use KPIs to help guide every one of your company’s decisions about growth from this point out. Invest the time in learning what these figures are to get started.

Real-Time Cloud Accounting and Improving the Books
A good place to focus attention is on your accounting. Here’s what to look for:

  • Are you in the cloud yet? This provides the most effective and efficient way to manage your business’s books.
  • Real-time access means you can pull up reports and profit margins to get a clear understanding of opportunities.
  • Put more attention into accuracy and bottom lines. If you are not working with a professional service to improve your accounting clarity, what every dollar means, it is time to do so.

Use Reviews and Social Proof to Convert More Clients
Social proof and reviews are insights into what your customers are thinking, expecting, and desiring. They provide an opportunity for you to get more info on what your customers want. Social proof indicates that someone “says” your product or service is good. That means other people are going to flock toward this. Learn what reviews are out there. Amplify your marketing to focus on them. Build strong customer relationships through this process.

Shoring Up Cash Flow by Reducing Costs and Boosting Efficiency
Next, take a look at your efficiency. Using your KPIs, you can provide more insight into key areas of cost. For example, spend the time examining the various costs your company has and work to reduce them. Then, find more efficient methods to improve production, employee productivity, and customer service.

Extend Market Reach by Honing in on Your Target Market or Expand Your Reach
Establish who is your target market. Instead of marketing to the masses, reach people where they are. For example, if you are targeting Millennials as your ideal client, marketing on social media and connecting digitally is essential. For seniors, television and local ads still reign as ideal.

At the same time, consider the value and potential possible if you expand into other markets. Carefully consider other markets that fit your product perhaps in a different way. For example, if you are marketing just to Millennials right now, consider how your product or service could impact the up and coming younger generation. Do you need to make modifications? Should you use different marketing to capture the early lead in this generation?

Provide More Services to Existing Customers
Expand through your existing customers. Perhaps one of the best ways for today’s company to increase sales without having to expand on services or customer acquisition costs is to focus on increasing sales to existing customers. What else can you offer? There are several solutions here:

  • Offer more products and services you already provide to existing customers. For example, introduce them to a secondary service you provide that they have yet to purchase.
  • Build relationships with complementary service providers and market those services to your existing customers.
  • Build on your existing products and services to provide more comprehensive options. Grow the company by expanding what you offer.

In these situations, the goal is clearly to get more money from existing customers. Provide them with quality, value, and opportunity to achieve these key opportunities.

Understand Which Products Are “Losers” and Should Go
Do you have “loser” products? These are products that never really capture enough sales to make them a profit point for you. It’s important to target these products with careful insight. To grow your business’s bottom line, you need to know how effective every product is. Are you putting a lot of money into marketing a product that only has a very limited customer base? Does it yield a very small profit margin? Determine if you have these products in your lineup and then work to eliminate them, improve them, make them less expensive, or pull at least some of your marketing and labor hours away from them.

Get Better Control Over Employee Costs and Reduce Turnover
How much do you spend on managing your employees? From payroll to taxes to human resources, there are many costs that go into managing your employees. Reducing those costs is always a good thing. Automation and software can help you to reduce your human resource department to create massive savings that you could put toward scaling. The key here is to ensure you are using the most up-to-date resources and tools available.

Alongside this is the goal to reduce employee turnover. Don’t create a bad experience for your employees. Provide them with support. Be sure they have constant guidance and the ability to achieve your company’s goals. Retaining employees is essential. It costs much more to have to find, hire, train, and manage new employees than it does to keep well-performing, talented, or employees with potential on staff. Find that balance within your HR department for the best results.

Improve Customer Retention to Reduce Costs
It’s hard (and expensive) work to get new customers. Every dollar you spend on marketing and bringing in new customers and clients needs to be money well spent. While you cannot stop marketing, you should do what you can to improve customer retention. To do this, consider:

  • Speak to customers one-on-one to ensure they are satisfied.
  • Ask for feedback and respond to it routinely.
  • Meet with customers to gather more insight. Conduct market research routinely.

Most importantly, listen to the negative. These are areas where you’ll be able to improve and grow specifically. Fixing a customer’s problem is also a surefire way to keep them as a lifelong customer. Are you doing what you can to improve customer retention?

Get a Clear Picture of Profit Margins of All Products and Services
How much does each product cost to make, buy, produce, market, and sell? Every service needs a clear understanding of the costs to acquire and provide that service to your customer base. These costs will change over time, especially as many companies see significant changes in production and logistics costs. You’ll need a method for monitoring these costs on an ongoing basis. That’s not always easy. With proper software and accounting tools, you should be able to gain insight into costs in real time or at least over the course of several months. This gives you the ability to know where to move prices, where to place your marketing dollars, and where to focus your efforts to scale your business.

What Steps Can You Take Now?
Business growth is always necessary, but there are many ways for your company to expand. Don’t always focus on just increasing sales and growing locations. Also look at ways to monitor the financials within your company. This will give you more leverage and power to achieve more of what you want long term.

If you have questions, please call us.

A Beginner’s Guide to Bookkeeping

If you’re a new business owner, you might not remember the last night you slept more than four or five hours. Your days may be filled with developing marketing strategies, screening potential employees and trying to figure out how to set up a bookkeeping system. If working with numbers isn’t your favorite pastime, the latter activity may be posing quite a challenge. If you can relate to this common scenario that new entrepreneurs face, the following beginner’s guide to bookkeeping might calm your frayed nerves and set you on the right course.

Cash Versus Accrual Basis of Accounting
A pivotal first step when setting up a bookkeeping system is deciding whether to use the cash or accrual basis of accounting. Cash accounting requires you to record transactions at the time cash changes hands. Both actual money and electronic funds transfers constitute cash. If you’re a sole proprietor working from home or at a one-person office, opting for cash accounting can make sense. However, if you’re going to extend credit to your customers or request credit from your suppliers, you must utilize accrual accounting. Accrual accounting dictates that you record sales or purchases immediately, even if you receive cash from a customer or pay cash to a creditor at a later date.

Single- Versus Double-Entry Accounting System
Single-entry bookkeeping is similar to maintaining a check register. You record transactions when you make deposits into your business account or pay bills. This method only works if you own a small company with a low volume of transactions. If you own a mid-size or large business that is complex, a double-entry bookkeeping system is needed. With this type of system, at least two entries are made for every transaction. One account is debited, while another one is credited. A simultaneous debit and credit system is the key to a double-entry bookkeeping system.

Balance Sheet Basics
Before you can successfully develop a bookkeeping system, you must understand the basic balance sheets accounts: assets, liabilities and equity. If you don’t carefully track these items and ensure the transactions that deal with them are recorded in the right place, your books won’t balance. The accounting equation is a simple formula you can use to ensure your books always balance. This handy equation is: assets = liabilities + equity.

Assets
Assets are things your business owns, such as accounts receivables and inventory. On the balance sheet, assets are typically listed in order of their liquidity. For instance, the assets section of a balance sheet might begin with cash followed by marketable securities, inventory and accounts receivables. These accounts are referred to as current assets. Fixed assets, or tangible assets, round out the first portion of the balance sheet. They include things you can touch such as land, buildings and equipment.

Liabilities
Liabilities are things a company owes to third parties such as suppliers and banks. The liabilities section of the balance sheet comprises both current and long-term accounts. Current liabilities, those expected to be paid within a year, typically include accounts payable and accruals. Accounts payable contains amounts owed to suppliers. This account may also encompass credit card and bank debt. Accruals consist of taxes owed, including:

  • Sales taxes
  • Social security taxes
  • Medicare taxes

Long-term liabilities, such as bonds and mortgages, aren’t expected to be paid off during the next year.

Equity
Equity represents the ownership a business owner and other investors have in a company. If you’re the only person who has put money into your business, the equity section of the balance sheet will only have one account in it.

Income Statement Basics
In addition to being familiar with balance sheet accounts, understanding income statement basics is critical to setting up a superb bookkeeping system. The income statement consists of revenue and expense accounts.

Revenues
Revenue represents all the income received when selling goods or services. On the income statement, revenues are classified as either “operating” or “non-operating.” Operating revenues stem from your business’s main operations. Sales is an example of this type of revenue. Non-operating revenues are earned from some other activity such as rent or interest revenue.

Expenses
Expenses are the costs incurred to run your business. On the income statement, expenses are classified as either cost of goods sold, operating or non-operating. Cost of goods sold represents the cash a company spends to manufacture or buy the products or services it sells to customers. Operating expenses are the costs a company incurs as part of its regular business activities excluding cost of goods sold.

Examples of operating expenses include:

  • Supplies expense
  • Wages expense
  • Rent expense
  • Utilities expense

Non-operating expenses are incurred for reasons outside the scope of normal business activities such as interest expense.

Benefits of Working With a Bookkeeping Professional
Besides familiarizing yourself with the aforementioned beginner’s guide to bookkeeping, working with a professional accounting expert is a smart idea. Numerous details go into managing your enterprise’s bookkeeping. Even a trivial mistake such as putting a decimal point in the wrong place can wreak havoc on your books. In addition to assisting you in setting up and managing a bookkeeping system, our professionals can help you raise financing, develop a pricing structure for your goods or services, and discover ways to save money on operations, which may decrease your stress levels and increase your odds of long-term business success.

Enhance Your Cash Flow, Enhance Your Business: The Top Tips You Need to Know

We’ve discussed at length in the past about how cash flow is ultimately one of the most important factors of a business that far too many people just aren’t paying enough attention to. Cash flow maintenance is about more than just knowing how much money is coming in versus how much money is going out. Even if your business is very close to true profitability, this ultimately won’t mean a thing if you’re dealing with clients who are slow to pay. This can seriously impact your momentum, and worse — your chances at long-term success.

To put it simply, enhancing your cash flow isn’t just about enhancing your accounting — it’s also about enhancing the very organization you’ve already worked so hard to build. With that in mind, there are a few key tips you’ll absolutely need to know about moving forward.

Technology Is Your Friend. It’s Time to Start Acting Like It
Perhaps the most important tip that you should start using to enhance your cash flow (and thus, your entire business) is to start leveraging the power of modern technology to your advantage. There are a wide range of different financial solutions that allow you to not only submit invoices to clients electronically, but that then allow those clients to pay you in exactly the same way.

Not only will this make it far, far easier for you to track money that is still “in play” so to speak, but it will also significantly help shorten the time it takes to get you paid for your products and services in the first place. This means that money will be coming in at a much faster rate, helping to make sure that you have the cash on hand necessary to take advantage of certain opportunities as they develop.

Use Your Credit Cards in the Right Ways
Another key tip that you can use to enhance your cash flow actually involves using your company credit card for purchases that you may otherwise pay for by check. Using your company credit card gives you an extra grace period to pay off the card in full each month. This essentially allows you to “push” that cash payment down the road, giving you a bit more breathing room than you’d have rather than the net 15 or net 30 that you’d be dealing with for check-based payments.

Get Organized and Stay That Way
Perhaps the most important step that entrepreneurs can take to enhance their cash flow involves not just getting organized, but doing anything that they have to in order to stay that way as long as possible. Consider creating different types of tier groups in your records, clearly separating people based on when they absolutely need to be paid.

Order everyone by who must be paid first — meaning that you’re definitely going to want to prioritize the government, payroll and certain vendors that may shut off your access to resources before anyone else. Certain others, on the other hand, can easily be paid later without too much undo fuss. Sure, you’d love to be able to pay everyone at the same time — but in the event that you can’t, this information will be invaluable to have when making strategic decisions regarding where your available funds should go.

This itself can also help identify certain trends and patterns that make the next six, 12 and 24 months of essential decisions far easier to predict.

Never Be Afraid to Consult a Professional
At the end of the day, the most important tip that you need to not just understand but truly believe in with regards to cash flow is that you should never be afraid to enlist the help of a trained professional. You’re a business leader and you’re good at what you do. You wouldn’t have gotten this far if you weren’t.

However, that doesn’t make you a financial expert and it certainly doesn’t mean that you’ll have the time necessary in a day to devote to something as mission-critical as proper bookkeeping and other financial tasks. In certain cases you might, sure — but if you start to feel like this is getting overwhelming, it is in your own best interest to pick up the phone and find someone who can lend you a much-needed helping hand. Find an accounting expert who doesn’t just have experience in terms of cash flow, but who understands your niche and knows exactly how a business just like yours needs to perform.

Not only will this help put you in a better position to make positive cash flow gains moving forward, but it’ll also give you the essential peace of mind that only comes with knowing your financial needs are being properly (and actively) taken care of.

How to Identify When the Time Is Right to Bring an Accounting Pro Into the Fold

Running your own business is a complicated affair with a wide range of different “moving parts” to concern yourself with, but many people don’t realize how many of them ultimately lead back to your finances until it’s far too late.

A large part of your ability to be successful in the long-term will ultimately come down to the rate at which you expand. Grow your business too quickly and you might spread yourself too thin. Grow too slowly and you’ll be passing up opportunities that are rightfully yours, leaving a lot of money on the table at the same time. Your control over your finances will dictate whether you’re able to strike that perfect balance the way you need to.

Marketing, paying vendors, paying employees, managing client relationships – all of it depends on the quality of your bookkeeping (or lack thereof). To that end, a large part of your success will ultimately come down to your ability to identify when the time is right to stop doing things yourself and bring a professional accounting provider into the fold. To do this, you’ll need to keep a few key things in mind.

The Warning Signs You Need to Know
As it does every year, Intuit recently released a survey outlining the state of small business accounting in the United States. The results are very telling in terms of when people should bring a financial professional into the fold – and what the consequences are of inaction.

Asset tracking, for example, is something that you may not immediately think impacts your bookkeeping, but it does in a fairly significant way. Ghost assets are fixed assets that have either been rendered unusable or are physically missing. However, “out of sight, out of mind” does not apply in this case – they still count toward a business’s tax and insurance liability, thus making it difficult to properly reconcile their books every year.

Of the people who responded to Intuit’s survey, 74% indicated that they didn’t understand this, and 49% said that they didn’t even know what ghost assets were in the first place. If you are among those numbers, congratulations on arriving at one of the biggest indicators that you need to bring a financial professional into your business (and also that you’ll likely want to conduct inventory on a regular schedule moving forward).

Other signs that the time is right to bring a accounting professional into the fold ultimately come down to the most pressing financial issues that most businesses face. 51% of people who responded to Intuit’s survey said that accounts receivable and collections were their most significant business challenge. 44% said that cash flow was always something they were concerned about, and getting a better handle on “money in vs. money out” was always a top priority.

Cash flow troubles, it is important to note, is the number one reason why most small businesses fail within the first four years of existence.

Other pressing issues included properly managing paperwork on a regular basis, accurately closing the books each month, and managing payroll. The major thing to understand is that a financial professional will be able to help with ALL of these things, taking the stress off your plate so that you can focus simply on running your business like you should be. If ANY of these things are ones that keep you awake every night, or you feel these issues are significantly affecting your ability to grow and evolve, guess what? It’s time to contact a professional to do as much of the heavy lifting as possible.

Never Underestimate the Power of Trust
Consider it from another perspective. Recently, small business owners responded to a survey outlining all of their most pressing accounting issues. The survey, conducted by Wasp Barcode Technologies, spoke to 393 small business leaders of nearly every organization size and industry that you can think of.

When asked to rank the professionals that they worked with on a regular basis in the order of importance, these business leaders overwhelmingly agreed that accounting experts were one of the single most valuable assets they had. They outranked attorneys, insurance agents, technology firms and even staffing services.

This is how important tax professionals are: Business leaders know that much of what they’re trying to do each day, along with what they hope to be able to accomplish in the future, would be impossible without the stable foundation that only an accounting professional can provide.

When It Comes to Accounting, Knowledge Is Power
At the end of the day, it’s important to remember what may be the single most important piece of advice for small business owners when it comes to accounting: It is far, far cheaper to hire an accounting professional today before things get out of hand tomorrow.

Think about it this way: A large part of the reason why you got where you are today is because you took the initiative and started to do things for yourself. You have a “can do” attitude that just won’t quit, and you’ve built something incredibly successful from the ground up as a result. But there are certain situations where you cannot let pride get in the way of making the right decision, and accounting is absolutely one of them.

You already have a full-time job: running your business. You don’t have the time to take on another one, let alone the expertise to guarantee that you’re making the best decisions at all times. Yet this is exactly what business accounting is – a heavily specialized, full-time job that requires a careful hand and attention to detail that is second to none.

Bringing in a professional sooner rather than later will not only help make sure that you have cleaner books and other records, it will also significantly reduce the chance that you’ll get hit with penalties for things like late taxes and allow you to be much, much more successful in the long term. These types of benefits, to say nothing of the peace of mind that only comes with knowing your accounting is taken care of, are things that you literally cannot put a price on.

Startups: Research Credit Can Offset Payroll Taxes

A little-known tax benefit for new, qualified small businesses is the ability to apply a portion of their research credit – no more than $250,000 – to pay the employer’s share of their employees’ FICA withholding requirement (the 6.2% payroll tax). This can be quite a benefit, as in their early years, start-up companies generally do not have any taxable profits for the research credit to offset; quite often, it is in these early years when companies make expenditures that qualify for the research credit. This can substantially help these young companies’ cash flow.

Research Credit – The research credit is equal to 20% of qualified research expenditures in excess of the established base amount. If using the simplified method, the research credit is equal to 14% of qualified research expenditures in excess of 50% of the company’s average research expenditures in the prior three years.

Qualified Research – Research expenditures that qualify for the credit generally include spending on research that is undertaken for the purpose of discovering technological information. This information is intended to be useful in the development of a new or improved business component for the taxpayer relating to new or improved functionality, performance, reliability or quality.

Qualified Small Business (QSB) – To apply the research credit to payroll taxes, a company must be a QSB and must not be a tax-exempt organization. A QSB is a corporation or partnership with these criteria:

  1. The entity does not have gross receipts in any year before the fourth preceding year. Thus, the payroll credit can only be taken in the first 5 years of the entity’s existence. However, this rule does not require a business to have been in existence for at least 5 years.
  2. The entity’s gross receipts for the year when the credit is elected must be less than $5 million.

Any person (other than a corporation or partnership) is a QSB if that person meets the two requirements above after taking into account the person’s aggregate gross receipts received for all the person’s trades or businesses.

Example – The taxpayer is a calendar-year individual with one business that operates as a sole proprietorship. The taxpayer had gross receipts of $4 million in 2016. For the years 2012, 2013, 2014 and 2015, the taxpayer had gross receipts of $1 million, $7 million, $4 million, and $3 million, respectively; the taxpayer did not have gross receipts for any taxable year prior to 2012. The taxpayer is a qualified small business for 2016 because he had less than $5 million in gross receipts for 2016 and did not have gross receipts before 2012 (the beginning of the 5-taxable-year period that ends in 2016). The taxpayer’s gross receipts in the years 2012-2015 are not relevant in determining whether he is a qualified small business in taxable year 2016. Because the taxpayer had gross receipts in 2012, the taxpayer will not be a qualified small business for 2017, regardless of his gross receipts in that year.

The research credit must first be accrued back to the preceding year, where it must be used to offset any tax liability for that year. Then, the excess (up to $250,000 maximum) can be used to offset the 6.2% employer payroll tax. Any amount not used is carried forward to the next year.If you have questions related to the research credit or if your business could benefit from using the credit to offset payroll taxes, please give us a call.

Hobby or Business? It Makes a Difference for Taxes

Taxpayers are often confused by the differences in tax treatment between businesses that are entered into for profit and those that are not, commonly referred to as hobbies. The differences are:

Businesses Entered Into for Profit – For businesses entered into for profit, the profits are taxable, and losses are generally deductible against other income. The income and expenses are commonly reported on a Schedule C, and the profit or loss—after subtracting expenses from the business income—is carried over to the taxpayer’s 1040. (An exception to deducting the business loss may apply if the activity is considered a “passive” activity, but most Schedule C proprietors actively participate in their business, so the details of the passive loss rules aren’t included in this article.)

Hobbies – Hobbies, on the other hand, are not entered into for profit, and the government does not permit a taxpayer to deduct their hobby expenses, in excess of any hobby income, on their tax return. Thus, hobby income is reported directly on their 1040, and any expenses not exceeding the income are deductible as miscellaneous itemized deductions on their Schedule A, assuming the taxpayer is not claiming the standard deduction, in which case they would be reporting income but not deducting the expenses.

So, what distinguishes a business from a hobby? The IRS provides nine factors to consider when making the judgment. No single factor is decisive, but all must be considered together in determining whether an activity is for profit. The nine factors are:

  1. Is the activity carried out in a businesslike manner? Maintenance of complete and accurate records for the activity is a definite plus for a taxpayer, as is a business plan that formally lays out the taxpayer’s goals and describes how the taxpayer realistically expects to meet those expectations.
  2. How much time and effort does the taxpayer spend on the activity? The IRS looks favorably at substantial amounts of time spent on the activity, especially if the activity has no great recreational aspects. Full-time work in another activity is not always a detriment if a taxpayer can show that the activity is regular; time spent by a qualified person hired by the taxpayer can also count in the taxpayer’s favor.
  3. Does the taxpayer depend on the activity as a source of income? This test is easiest to meet when a taxpayer has little income or capital from other sources (i.e., the taxpayer could not afford to have this operation fail).
  4. Are losses from the activity the result of sources beyond the taxpayer’s control? Losses from unforeseen circumstances like drought, disease, and fire are legitimate reasons for not making a profit. The extent of the losses during the start-up phase of a business also needs to be looked at in the context of the kind of activity involved.
  5. Has the taxpayer changed business methods in an attempt to improve profitability? The taxpayer’s efforts to turn the activity into a profit-making venture should be documented.
  6.  What is the taxpayer’s expertise in the field? Extensive study of this field’s accepted business, economic, and scientific practices by the taxpayer before entering into the activity is a good sign that profit intent exists.
  7. What success has the taxpayer had in similar operations? Documentation on how the taxpayer turned a similar operation into a profit-making venture in the past is helpful.
  8. What is the possibility of profit? Even though losses might be shown for several years, the taxpayer should try to show that there is realistic hope of a good profit.
  9. Will there be a possibility of profit from asset appreciation? Although profit may not be derived from an activity’s current operations, asset appreciation could mean that the activity will realize a large profit when the assets are disposed of in the future. However, the appreciation argument may mean nothing without the taxpayer’s positive action to make the activity profitable in the present.
There is a presumption that a taxpayer has a profit motive if an activity shows a profit for any three or more years within a period of five consecutive years. However, the period is two out of seven consecutive years if the activity involves breeding, training, showing, or racing horses.

All of this may seem pretty complicated, so please call this office if you have any questions or need additional details for your particular circumstances.

How An Accountant Can Help Your Small Business Boom

One of the most positive qualities that many small business owners share is a burning desire – an insatiable willingness – to “do it all.” It’s what separates entrepreneurs from employees in the first place. An employee is more than willing to set out on the path that someone else has carved for them. An entrepreneur has a need to carve a path for themselves.

Unfortunately, this mentality can also get even the most passionate small business owners into a bit of trouble – particularly when it comes to their finances. Being able to balance your own checkbook and running the finances of a small business are NOT the same thing, nor should they ever be treated as such. To that end, the importance of finding the right accounting professional to help support your small business as it continues to grow and evolve cannot be overstated enough.

There are a number of essential ways, in particular, that an accounting expert can help your small business.

When You’re Just Starting Out
Perhaps the most important role that an accounting professional will play in terms of your small business takes place when you’re just starting out. One of the most common mistakes that many business owners make involves selecting the wrong business entity – a small problem that can have major ramifications when tax season rolls around. A accounting pro who is intimately involved with the makeup of your business from a basic level can help make sure this doesn’t happen to you.

Along the same lines, an accounting professional can also help make sure that your accounting system is properly set up in the first place. They can make sure that you’re picking the right accounting system that actually supports your long-term goals for your business and can create a chart of accounts to offer superior visibility into money coming into and out of your organization.

The Day-to-Day Grind
Another one of the hugely invaluable ways that an accounting expert can help your small business comes by the small, yet critical, decisions they make on a daily basis. A financial expert can help give you greater visibility into cash flow (including accounts payable and accounts receivable), for example. Cash flow and other instability issues are one of the major reasons why most small businesses fail in the first place, and having the right person at your side can help you avoid them altogether.

An accounting professional can also help make sure your security controls are properly set up and executed, particularly in terms of factors like compliance. Remember that we’re living in an era where the average cost of a data breach has ballooned to almost $4 million. If the security aspect of your finances is not properly accounted for, it could be putting your entire business at risk. Even one small data breach could expose the personal records of multiple clients, something that opens the door to things like lawsuits, and that could eventually close the door on everything you’ve worked so hard to build.

Other Benefits
A financial professional will also play an important role when it comes to growing your small business. Remember that both an inability to scale up as fast as you need AND growing your business faster than you can sustain are additional reasons why many small businesses fail. Because such a large part of your growth and expansion pace has to do with personal finances, it stands to reason that bringing someone into the fold who can leverage their years of experience to your advantage is a very good idea.

A financial expert can help you raise money – particularly helpful if you’re getting ready to bring a new product or service to market. If you ever decide that this chapter of your life is closed and that it’s time to look for new opportunities, these professionals can also help sell your small business as well. Selling a business is a process filled with potential mistakes just waiting to happen, and the expert hand of someone who has been in this position before is something that you literally cannot put a price on. It isn’t just an investment in your organizational ability – it’s an investment in the future of your business as a whole.

In the End
The fact of the matter is that there really is no “one size fits all” approach to small business accounting. Every business is a little bit different, which will require a certain level of care and finesse when it comes to finances in particular. Only by consulting the help of a professional as early on in the process as possible will you be able to avoid the normal pitfalls of running a small business and create a financially stable foundation from which to work.

If you are considering starting a new business, it may be appropriate to consult with this office before you get too far through the process. Please call for assistance.

Does Your Employer Misclassify You as an Independent Contractor Instead of as an Employee?

It is not uncommon for employers to misclassify employees as independent contractors, either to intentionally avoid their withholding and tax responsibilities or because they are not aware of the laws regarding the issue. If your employer reports your income on a Form 1099 (as opposed to a W-2), you are being treated as an independent contractor, not as an employee. This can have significant ramifications in terms of how much you have to pay in income, Social Security, and Medicare taxes.

The general distinction, of course, is that an employee is an individual who works under the direction and control of an employer, and an independent contractor is a business owner or contractor who provides services to other businesses.

To determine whether a worker is an independent contractor or an employee, the IRS examines the relationship between the worker and the business and considers all evidence regarding control and independence. This evidence falls into the following three categories:

(1) Behavioral control covers whether the business has the right to direct or control how the work is done through instructions, training, or other means. Employees are generally given instructions on when and where to work, what tools to use, where to purchase supplies, what order to follow, and so on.

(2) Financial control covers whether the business has the right to control the financial and business aspects of the worker’s job. This includes the extent to which the worker has unreimbursed business expenses; the extent of his or her investment in the facilities being used; the extent to which his or her services are made available to the relevant market; how he or she is paid; and the extent to which he or she can realize a profit or incur a loss.

(3) Type of relationship includes any written contracts that describe the relationship the parties intended to create; the extent to which the worker is available to perform services for other, similar businesses; whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay; the permanency of the relationship; and the extent to which the worker’s services are a key aspect of the company’s regular business.

When a worker’s status is in doubt, Form SS-8 (Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding) can be used. This form may be completed by an employer or a worker; it asks the IRS to determine whether the worker is an employee or an independent contractor for federal tax purposes. Form SS-8 is filed separately from the requestor’s tax return. The IRS does not issue determinations for proposed employment arrangements or hypothetical situations, and it will only issue a determination if the statute of limitations for the year at issue hasn’t expired.

If an employee wants to avoid paying self-employed tax on 1099-MISC income after he or she has already been determined to be an employee – or when he or she has filed an SS-8 but has not received a response – that individual can file Form 8919, which only requires payment of what would have been withheld if the worker had been treated as an employee. Form 8919 requires the employee to choose one of these codes:

Code A. I filed Form SS-8 and received a determination letter stating that I am an employee of this firm.
Code C. I received other correspondence from the IRS that states I am an employee.
Code G. I filed Form SS-8 with the IRS but have not received a reply.
Code H. I received a Form W-2 and a Form 1099-MISC from this firm for the same tax year. The amount on Form 1099-MISC should have been included as wages on the Form W-2.

If using Code H, do not file an SS-8. Here are some examples of amounts that are sometimes erroneously included (but not necessarily deliberately misclassified) on Form 1099-MISC and that should be reported as wages on Form W-2: employee bonuses, awards, travel expense reimbursements not paid under an accountable plan, scholarships, and signing bonuses.

If Code G is used, both the employee and the firm that paid the employee may be contacted for additional information. Use of this code is not a guarantee that the IRS will agree with the worker’s opinion as to his or her status. If the IRS does not agree that the worker is an employee, the worker may be billed an additional amount for the employment tax, as well as penalties and interest resulting from the change in the worker’s status.

If the IRS determination is for multiple open years, the employee can amend returns for open years to recover a portion of the self-employed tax paid.

If you have questions about being misclassified as an independent contractor, please give this office a call.

Financial KPIs: What They Are and What You Need to Know

As a small business owner, the importance of making purpose-driven decisions is something that cannot be overstated enough. Every choice that you make must be one with a particular goal in mind – whether it’s to attract new customers, increase revenue, decrease expenditures, increase liquidity, etc. But simply making the decision itself is not enough – you also have to find a way to measure the result of your action against what you were trying to accomplish in the first place.

This, in essence, is what KPIs are all about.

Also commonly referred to as “key performance indicators,” they represent the best kind of measurable value that reflect how we’ll you’re doing in a particular context – the kind that is objectionable, black and white, and provides you with a clear indication of what you need to be doing moving forward. Thanks, in particular, to the evolution of cloud computing and the advent of real-time accounting, it’s easier than ever for business owners to monitor the health of their organization through financial KPIs.

When doing so, however, you need to keep a few key things in mind.

Financial KPI Considerations
Part of the reason why KPIs are so powerful in the first place is because they’re malleable – based on exactly what you’re trying to accomplish, you can take a micro look at a particular aspect of your finances to tell you how close or how far away you are from that goal.

With that in mind, it’s important to realize that there is no “one size fits all” approach to KPI selection. If you looked at the financials of your closest competitors, they might be tracking wildly different data than you are – even though you’re both operating in the same industry.

Because of this, you need to figure out the long-term goals that are most important to you first. Then, you can reverse engineer the KPIs that you should be watching to help guide you and your business in the right direction.

KPIs to Watch Out For
Now that you’ve got a deeper understanding of what KPIs measure in relation to your goals, it’s time to learn more about the specific KPIs that you should be paying attention to monitor those goals in real-time.

  • Operating Cash Flow. Also referred to as OCF, this points to the total amount of money your company is generating on a daily basis. This can be a great way to determine whether you’re able to maintain the positive cash flow needed for growth, or if you should start looking for external funding. OCF adjusts your net income for factors like depreciation, inventory fluctuations, accounts receivable changes and more.
  • Current Ratio. This KPI is an indication of whether or not your company can pay all of its financial obligations in one year. This takes into consideration all of your current assets and compares them with your current liabilities. A Current Ratio of less than one tells you that you will NOT be able to fulfill all financial obligations, thus requiring additional cash flow. For the best results, try to keep Current Ratio between 1.5 and 3.
  • Burn Rate. This clues you in on the rate at which your company is spending money on a weekly, monthly or annual basis. This is particularly helpful for companies that don’t necessarily go through extensive financial analysis, as it’s a quick look into whether or not your current operating costs are sustainable in the long-term.
  • Income. This, simply put, looks at how much money you’re generating. Based on how much money you’d like to be generating, you can then make a determination about how much you need to increase sales and, thus, set about trying to figure out how to do that.
  • Profit/Loss. This is a quick look into whether your company’s expenditures are MORE than your income.
  • Cash Flow Forecasting. Remember that improper cash flow is literally the number one reason why most businesses close prematurely. If you want to get better at cash flow management, you need to start taking a deeper look at what your cash flow is predicted to be both in the short and long-term. Diving deeper into this topic now can help you mitigate some fairly significant risks later on.

If you have any additional questions about KPIs that you’d like to see answered, or if you have other concerns that you’d like to have addressed in a little more detail, please feel free to contact our office today – someone is ready and waiting to provide you with the personalized level of care and attention to detail that you deserve.