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Will Independent Contractors Become Extinct?

Article Highlights:

  • New California Legislation
  • Employee or Independent Contractor
  • Dynamex
  • ABC Test
  • Impact on Employers
  • Impact on Workers
  • Safe Harbor

The California legislature recently passed landmark labor legislation that essentially makes it very difficult, if not impossible, to legally classify an employee as an independent contractor (self-employed). Governor Newsom was quick to sign it into law, and it generally became effective on January 1, 2020. Many believe this legislation will suppress entrepreneurship and innovation.

Although this issue currently pertains to California, other smaller states are sure to follow, and this will ultimately become an issue for employers nationwide.

Background

The distinction between employee and independent contractor is governed by both federal law and state law. It has always been a complicated issue at both the federal and state levels, and the state and federal guidelines often differ. However, because of the significant payroll tax revenues involved, the states are generally the most aggressive in classifying workers as employees.

In the California case, the legislation was prompted by a labor case that was ultimately settled by the California Supreme Court. In that case, Dynamex Operations West, a trucking company, was treating its drivers as employees. It started classifying them as independent contractors to reduce costs, which caught the eye of the California Employment Development Department and ultimately reached the California Supreme Court. The court determined the drivers were employees and not independent contractors. However, in making that decision, the California Supreme Court adopted the “ABC test” used by some other states to make their determination.

As a result of this decision, the California Legislature passed legislation (AB-5) codifying, with some exceptions, the ABC test for determining whether a worker is an independent contractor.

The ABC Test

Several states, including Massachusetts and New Jersey, have also adopted the “ABC” test. The test is a broad means of determining a worker’s status as either an employee or a contractor by considering three factors. If a worker passes all three, then he or she is an independent contractor:

(A) That the worker is free from the hirer’s control and direction, in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) That the worker performs work outside the usual course of the hiring entity’s business; and

(C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The objective of the ABC test is to create a more straightforward, clearer test for determining whether a worker is an employee or an independent contractor. It presumes that a worker hired by an entity is an employee and places the burden on the employer to establish that the worker meets the definition of an independent contractor. But California’s AB-5 legislation did not just adopt the ABC test; it also added numerous and complicated exceptions to using the ABC test, which will surely enrich California labor attorneys.

Impacts on Employers

Employers who have been treating a worker as an independent contractor but must treat him or her as an employee must pay at least minimum wage and provide sick time, meal and rest periods, and health insurance. The employer will also have to pay worker’s compensation benefits and health insurance. On top of that, California has severe monetary penalties for misclassifying workers. Impacts on Workers: The impacts on workers vary by occupation. Some workers incur significant amounts of expenses, and under the tax reform, they can no longer deduct employee business expenses on their tax returns. Thus, for example, an Uber driver who must provide the vehicle and pay for the gas, insurance, and upkeep would be unable to deduct these substantial costs of providing the service and would have to pay taxes on his or her gross income.

Large Employers Are Fighting Back

Some larger employers are fighting back and challenging AB-5. Uber and DoorDash have joined forces with some contract drivers to file a suit in the U.S. District Court for Central California, alleging that AB-5 violates individuals’ constitutional rights and unfairly discriminates against technology platforms. The California Trucking Association (CTA) successfully obtained a temporary injunction against AB-5 for CTA drivers by contending that AB-5 is in direct conflict with several federal laws related to motor carriers. Regardless of the outcomes of these cases, they will be appealed, and the ultimate outcome could be months, if not years, away.

This leaves few choices for smaller employers other than to carefully assess the provisions of AB-5 when treating a worker as an independent contractor. For those who are unsure, it might be wise to consult a labor attorney. The safe-harbor option is to treat all workers as employees until all of the legal challenges to AB-5 have run their course.

Please contact us if you have further questions.

Repairing Your Business’s Bad Credit Score

The creditworthiness of your business is measured by its credit score. This number is issued by Dun & Bradstreet, Experian, Equifax, and FICO SBSS, and is an essential reflection of your company’s payment reliability and timeliness.

Why is Your Business Credit Score Important?

Your company’s overall financial health is of key importance to any lenders, creditors, and trade partners with whom you wish to do business. Those partners need to be able to trust in your ability to provide the goods or services that you are promising: to pay back any loans you may apply for. Your financial health can also be a determination of the terms that you are able to negotiate with lenders.

Ultimately, your business credit score is the main way third parties can measure your company’s financial health. It’s typically used by lenders, creditors, and trade partners during various business transactions, such as applying for business loans, leasing, winning contracts, doing business with vendors or suppliers, obtaining net terms with trade partners, and even getting better interest and payment rates for instruments such as business contracts and mortgages.

Businesses in possession of strong credit scores have a much better chance of obtaining the capital that they need to grow compared to those with weak credit scores. Many lenders have minimum credit score requirements in place, and businesses that cannot meet that threshold will be unable to secure the loan that they seek. Even if your business has a credit score that exceeds that threshold, the stronger your credit score, the more advantageous the interest rate or repayment terms you are likely to have extended to you.

Business credit scores are also used as a gauge by suppliers and others who will need to rely on you to pay them in a timely manner. Vendors, landlords, and other stakeholders with whom you will have a financial relationship will look to your past performance with others as an indication of how you are likely to treat them. Have a weak credit score? Even if these trade partners agree to do business with you, they are likely to include terms that will protect their own interests and be less advantageous to you.

How to Interpret Business Credit Scores

Unlike personal FICO credit scores which can reach as high as 850, business credit scores generally only go as high as 100 and can fall as low as 0. As is true in so many other types of grading systems, the higher the score, the better the credit rating is considered to be, though different credit rating agencies have different levels at which they bestow the value judgment of being “good.” For Equifax, a credit score of 90 or above is considered good while Experian considers 7 or above good. Dun & Broadstreet bestows the term “good” on scores of 80 or above, while FICO SBSS (whose highest scoring ranges well above 100) considers a score of 140 or more a good rating.

The higher a business’s credit score, the better their chance of obtaining loans or positive trade terms with vendors and suppliers. This is because the high score reflects a history of making payments on a timely basis rather than being late or delinquent.

Can You Fix A Bad/Thin Business Credit Score?

Having a low business credit score can be a reflection of several possible factors, including having filed for bankruptcy, having liens against your business, having a poor repayment history filled with delinquent payments or non-payments. In addition to having a bad score, businesses that don’t have a significant history of payments have credit scores that are termed “thin.”

When you’re applying for a loan, having either a bad business credit score or a thin credit score can work against you. Lenders are unlikely to provide advantageous terms to businesses with a poor history of repayment. Even if your business is new and doesn’t have much of a record of timely payments or delinquencies, many lenders will be reluctant to lend money to your business. Whichever situation you find yourself in, it will be well worth your time to either build a credit history or repair your poor credit. There are ways to do both. Here are several steps you can take that can have a significant impact.

  1. Keep your Business and Personal Finances Separate

You are not your business and your business is not you. Therefore, you should keep separate accounts for your company and for your personal use. Doing so will not only help you keep track of transactions and obligations for each, but will also help prevent any mistakes that you make (i.e. delinquent payments) from affecting either your business credit score or your personal credit score.

  1. Don’t Fall Behind On Your Bills

When your business makes a purchase or agrees to pay for a service, holding up your end of the bargain and paying in full (and on time) reflects on your business in a number of ways. Early payments will boost your credit score and be welcomed by trade partners, while delinquent payments will negatively impact your business’s credit score and have a negative impact on your reputation in general.

  1. Develop A Strong Relationship With Your Vendors

Keep in mind that your vendors and suppliers are the ones who report on-time or early payments to the credit bureaus as well as late payments. The better your business relationship with those partners, the more likely that they will report your positive actions and the less likely that they will report delinquencies.

  1. Maintain a Low Credit Utilization Ratio

Building credit as a business is done in much the same way as building personal credit: by establishing a history. One of the fastest ways to build a positive business credit report and score is to obtain a business credit card; however, use it sparingly and stay below 33% of your available credit.

  1. Keep Your Eye on Your Numbers

Credit reports change constantly, and it is essential that you keep your eye on it to make sure that it is an accurate reflection of your payment history. If you find a mistake you should act quickly to dispute the error within the framework provided by the bureau that is publishing the mistake.

  1. Add More Credit Options

Businesses that have either thin or bad credit can build their reputation by establishing additional lines of credit through a secured business credit card. These vehicles are backed by a deposit, making them easy to get and an excellent way to improve your business’s history (as long as you make your payments promptly).

Positive Credit Scores for Future Success

Having a solid, positive credit score for your business is more than just a report card. It is what can make a difference in your company’s future opportunities for growth. A business’s credit report should be nurtured, and this can be done by remaining organized and dedicated to making on-time or early payments, but for those who have made mistakes, it is not too late to repair and rebuild. Please contact us if you have any questions.

Understanding Your Annual Social Security Letter

Article Highlights:

  • Medicare B Premiums
  • Medicare D Premiums
  • Modified AGI
  • 2020 Premiums Table
  • Effect of Recreational Gambling
  • Appealing the Social Security Administration’s Decision

If you are receiving Social Security, then you have just recently received your annual letter from the Social Security Administration letting you know that your Social Security benefits for 2020 have increased by 1.6 percent as a result of a rise in the cost of living. The letter also lets you know how much will be withheld from your monthly retirement benefit for Medicare Parts B (medical insurance) and D (Prescription Drug Plan).

Not everyone realizes their Part B and Part D benefits are based upon their modified adjusted gross income (MAGI) from two years prior. This means the premiums for 2020 are actually based on your MAGI for 2018. The MAGI for making the adjustment is the federal AGI plus the following:

  • Tax-exempt interest income
  • United States savings bonds interest used to pay higher-education tuition and fees, if the interest was excluded from income
  • Excluded foreign earned income and housing costs
  • Income derived from sources within Guam, American Samoa, or the Northern Mariana Islands
  • Income from sources within Puerto Rico

 

2020 MEDICARE PREMIUMS
TAXPAYER FILING STATUS Medicare Part B Monthly Premiums Medicare Part D**
Individual* Married Filing Joint MAGI Increase Total Surcharge
2018 MAGI less than or equal to $87,000 2018 MAGI less than or equal to $174,000 $0.00 $144.60 $0.00
2018 MAGI greater than $87,000 and up to $109,000 2018 MAGI greater than $174,000 and up to $218,000 $57.80 $202.40 $12.20
2018 MAGI greater than $109,000 and up to $136,000 2018 MAGI greater than $218,000 and up to $272,000 $144.60 $289.20 $31.50
2018 MAGI greater than $136,000 and up to $163,000 2018 MAGI greater than $272,000 and up to $326,000 $231.40 $376.00 $50.70
2018 MAGI greater than $163,000 and less than $500,000 2018 MAGI greater than $326,000 and less than $750,000 $318.10 $462.70 $70.00
2018 MAGI greater than or equal to $500,000 2018 MAGI greater than or equal to $7500,000 $347.00 $491.60 $76.40

 

*The increases for a married taxpayer who lived with his or her spouse at any time during the year and files a separate return are:

  • If 2018 MAGI was $87,000 or less: no surcharge for either Part B or Part D
  • If 2018 MAGI was $87,001 to $412,999: Part B $462.70 and Part D $70.00
  • If 2018 MAGI was $413,000 or above: Part B $491.60 and Part D $76.40

**The monthly Part D surcharge is in addition to the drug plan’s premium.

You might discover that even though your monthly Social Security benefits increased because of inflation, the net amount you receive may actually be less per month because of increases in Medicare Part B and D premiums. Such increases are attributable to increased MAGI in 2018, but one might encounter a hidden source of income. This applies to recreational gamblers whose winnings are included in their MAGI, but whose losses are an itemized deduction. Thus, even though the overall result may be a loss, the MAGI is increased by the full amount of the gambling winnings, therefore possibly causing increases in the Medicare Part B and D premiums.

On the other hand, if 2017 had been a high-income year and your income in 2018 was substantially less, your 2020 Medicare Part B and D premiums may be less than they were in 2019, resulting in a larger net monthly check.

The letter you received from the Social Security Administration does include an appeal process if you disagree with the Social Security Administration’s decision to increase your premiums. However, this appeal must generally be made within 60 days after receipt of the letter. Unfortunately, an increase in your 2018 MAGI that put you into the surcharge range for 2020 and was a result of capital gains due to a one-time sale of real property or stock, isn’t a valid reason for an appeal.

If you have questions related to your Social Security benefits and their taxation, please contact us. There are often planning strategies that may lessen the tax bite and premium costs.

Did You Just Get an IRS Notice of Deficiency? Here’s What to Do Next

Nobody likes getting mail from the IRS, especially when it’s something you weren’t expecting. 

One minute, you’re minding your own business and aren’t even thinking about that return you filed months ago. The next minute you open your mailbox and see something called a “Notice of Deficiency” — and your anxiety immediately goes through the roof. 

At this point, the most important thing you can do is relax. Getting a Notice of Deficiency from the IRS in the mail doesn’t automatically mean you’re about to be audited, and in fact, it may not mean anything bad at all. It does, however, require you to keep a few key things in mind to make sure that you respond in the right way. 

What Is an IRS Notice of Deficiency? 

Formally known as the CP3219A notice, a Notice of Deficiency is exactly what it sounds like, an indication that the IRS has recently received information that is different from what you originally reported when you filed your tax return for the year in question. 

To put it another way, something that you put on your return doesn’t match with a piece of information that a third party provided to the IRS. The discrepancy could be as simple as a difference between your self-reported income and income reported on a Form 1099. 

Now, despite how intimidating it may sound, this isn’t necessarily a bad thing. Depending on the situation, it could just as easily result in a decrease in the amount of tax that you owe as it could result in an increase. 

The note itself will explain exactly how the amount was calculated, so the first thing you’re going to want to do is read it to make sure that you understand.

Moving Beyond the Notice of Deficiency 

If you agree with the changes as outlined by the Notice of Deficiency, then this process is almost over. All you have to do is sign the enclosed form (which should be Form 5564) and mail it to the address that is printed on the notice itself. This is called the Notice of Deficiency Waiver, and it just means that you agree to either pay the new amount that you owe or, in a perfect world, agree that you would like the IRS to send you some money that you didn’t know you had coming. 

If you don’t agree with the changes, however, note that you do have the right to challenge them by filing a petition with the United States Tax Court, but you have to do so by absolutely no later than the date shown on the notice itself. The court will not consider your petition if you file beyond this deadline. 

If you don’t agree with the changes and you have additional information that can help clear up any confusion, mail all of the supplementary documentation along with the aforementioned Form 5564 to the address on the notice. But keep in mind that doing this does not extend the amount of time you have to file your petition. 

You should also be aware that if the mistake is something that happened because of identity theft that you suffered, there are additional options available to you. The most immediate involves filling out Form 14039, otherwise known as the Identity Theft Affidavit. You should then call the IRS, speak to a representative, explain your situation and get advice about what they want you to do next. 

You could also contact the third party that gave the IRS the information that triggered the discrepancy in the first place. If the mistake is theirs, you can ask them to correct it or provide you with more information to help you make your case. 

If the mistake was a legitimate one on your end, you’ll also probably want to go over any other returns that you filed to make sure they don’t have the same issue, thus causing even more tax problems down the road. At the very least, you’ll want to file an amended tax return to include any additional information that you received (like more 1099s) after you filed your original one earlier in the year. 

If you owe additional taxes and can’t afford to pay right now, don’t worry. You could always set up a payment plan or make other arrangements with the IRS. Depending on the situation, you could also make an Offer in Compromise and settle your bill for far less than you originally owed. 

Resolving a Notice of Deficiency can be very overwhelming, and if not handled properly, you could end up with an even larger problem than you started with. For more assistance and to get help with your CP3219A notice, contact us today. 

Cofounder Conflict Could Be One of the Biggest Threats to Your New Business

If you asked brand-new entrepreneurs to make a list of everything they think might one day pose a threat to their startup, you’d probably hear a variety of answers with similar themes. 

Some might be (rightfully) worried about ultimately developing a product in search of a marketplace. Others may be worried about how they’re going to overcome the cash flow issues they’ll likely face. Others still might be worried about getting “taken for a ride” by the venture capital people they’re putting so much of their faith in. 

While all of these are understandable concerns, none of them should be at the top of that list. The fact of the matter is, the number-one threat to your business isn’t an external factor at all. 

It’s the people you’ve cofounded that business with. 

While it’s absolutely true that founding a business with at least one other person increases your chances of becoming a success, it’s equally true that about 50% of cofounder relationships fail, and most of those failures are ugly. 

This is because cofounder conflict is very real and far more common than many people prefer to assume. But by taking the time to learn as much about it as you can, you put yourself (and your colleagues) in the best position to mitigate risk from these issues as much as possible — before it’s too late. 

Why Cofounder Conflict Happens 

Cofounder conflict can ultimately happen for a myriad of reasons, and not all of them are going to be immediately obvious. 

Sometimes when you start a business with someone else, you don’t realize just how incompatible your managerial styles are because you’ve never had the chance to put them on display. But once your startup is up on its feet and real decisions are being made on a daily basis, you might discover that you and your cofounder have two very different working styles. 

Other times it comes down to the fact that roles and responsibilities among cofounders are not clearly defined. Who is actually supposed to be doing what? What is your specific job description and how does it overlap with that of your cofounders? What boundaries are in place that give each of you your necessary space, but that also allow you to truly collaborate with one another in the way you need in order to run a successful business? 

Another issue could be the absence of stipulations on how “significant future changes will affect the management and control of the business.” Without a buy-sell agreement and succession plan in place, your business is at risk if any major event — like your partner’s death, divorce, or bankruptcy — may occur. 

Finally, one of the biggest causes of cofounder conflict is that entrepreneurs make the mistake of taking any conflict as a warning sign that something sinister is afoot. 

The truth is that running a business is hard and there are times where you will have arguments and disagreements with the people around you. This is true regardless of how similar your backgrounds are or how closely your visions align. 

If you go through life assuming that conflict is something you can totally avoid, you’re in for a number of surprises and almost none of them are good. The key to a successful, long-term relationship with your cofounders involves not running from that conflict but embracing it. Have the argument, talk through your differences, hash things out and come to a solution together.  Every moment may not be as fun as you’d hoped, but you will absolutely come out better for it. 

Mitigating Cofounder Conflict: Breaking Things Down 

Here’s the good news: once you’ve taken steps to learn about what cofounder conflict actually is and why it happens, you put yourself in the best position to avoid it in your own efforts — at least as much as possible. 

By far, the key to at least relieving some of this conflict involves first identifying why it is happening with your particular startup. Are you having frequent arguments with your cofounders because of significant personality changes? Is it because your work ethics differ a great deal? Do you come from different backgrounds? Do you have totally contrasting management styles? 

When left unchecked, these differences can form a major chasm that can be difficult to overcome. But, if you identify them in your early days as an entrepreneur, you may be able to find a way to meet your cofounders “in the middle,” so to speak, to avoid bigger issues later on. 

Remember that being an entrepreneur and founding a business with someone else ultimately requires a fair amount of give and take. Your startup does not belong exclusively to you and it would be unfair of you to act that way. Therefore, once you start to see conflict develop, don’t be afraid to address it head-on… but also understand that you must be willing to make compromises, too. Don’t just spend time identifying problems with someone else — offer up solutions of your own. 

In terms of mitigating some of these potential risks, a buy-sell agreement can be very effective (and should be viewed as a necessity). This legally-binding document “anticipates the intent and needs of the owners, as well as the potential conflicts that may arise among them if one or more wishes to sell his/her interest in the business, or is forced to dispose of such interest.” 

If you acknowledge your startup for what it really is — a collaboration between two or more people — you stand the best possible chance at ending the lion’s share of these cofounder conflicts before they’ve ever had a chance to start. At that point, the proverbial runway will be clear and there really is no limit to what you can accomplish together.

Consulting with a tax and accounting professional during the process of negotiating a buy-sell agreement can be very beneficial for all parties involved. Contact us for more information. 

How to Create Projects in QuickBooks Online

You already know how to determine whether your business is making or losing money overall: you run a Profit and Loss report. But what if you want to break this data down further? How can you tell whether the specific jobs you do for customers, with all their related income and costs, are profitable?

This kind of insight can have an enormous impact on future business decisions about product and service pricing, worker costs, and expenses. It can even signal whether or not you should take on specific jobs.

If you’re using QuickBooks Online Plus or Advanced, you can use their Project tools to calculate profitability. The theory is simple. You assign all relevant sales, time, and expenses to the project. QuickBooks Online will do the rest.

Getting Started

First, you’ll need to make sure that QuickBooks Online is ready to track projects. Click the gear icon in the upper right and select Account and Settings. Click on the Advanced tab and go down to the Projects section. If this feature is turned Off, click the pencil icon over to the right, click in the box to turn it On, and Save this option.

To create a project, click on Projects on the home page and then on the New Project button over to the right. This panel will slide out from the right:

Before you begin tracking a Project in QuickBooks Online, you’ll have to create a master record for it.

Enter a Project name in that field and select a Customer from the drop-down list (or ). Notes are optional but recommended. Click Save and your new project will appear in a list on the Projects page. QuickBooks Online stores that information along with the customer in your company file and makes it available when you create, for example, invoices, checks, expenses records, and time activities.
Linking Projects in Forms

Your project will appear in different places in different forms. On an invoice, it appears in the Customer drop-down list as a sub-item under the linked customer. You’ll select the project name rather than the customer to make sure the invoice was “tagged” to the project and wasn’t just a one-off bill. If you’re recording an expense, you’ll see a column for Customer/Project with other line item details.

There’s also another way to connect transactions to their related projects. On the Projects home page, click on a project name in the list. Click the Add to Project button in the upper right and select the correct transaction from the list that drops down. In some cases, like invoices, the project will already have been selected and will appear in the Customer field.

If you enter a transaction and realize later that you forgot to connect it to a project, you can correct this in most cases (like expenses and bills) by going back to the original transaction and adding (or changing) the Customer/Project name. Invoices are tricky, though, depending on their status. We’d recommend you consult with us about this.

Understanding Profitability


You can see what your profit margin is on any project at any time.

After you’ve been entering project-related income and expenses for a while, you’ll probably be curious about whether or not you’re making money – even if the project is still in progress. To do this, open the Projects home page and click on the project name. The screen that opens (like in the image above) will be devoted to that one project. You can click on tabs to see:

  • An Overview that lists your income and costs, as well as your profit.
  • A list of related Transactions.
  • Time Activity records.
  • Project Reports (Project profitability, Time cost by employee or vendor, and Unbilled time and expenses).

We encourage you to use QuickBooks Online’s Project tools but would caution you about making changes to some existing transactions, especially invoices. To ensure that you are on the right track with this feature, please contact us to set-up a consultation.

Employer-Offered Benefits That Can Save You Money and Taxes

Article Highlights:

  • Health Insurance
  • Retirement Plans
  • Qualified Transportation Fringe Benefits
  • Flexible Spending Accounts (FSAs)
  • Group Term Life Insurance
  • Qualified Employee Discounts
  • Employer-Provided Education Assistance
  • Adoption Expenses
  • Child and Dependent Care Benefits
  • Health Savings Accounts

Tax law includes several tax- and financially favored benefits that employers can offer or provide to their employees. This article is intended to make you aware of these perks, with the caveat that all employers, especially small businesses, may not provide all, or perhaps any, of these covered perks. But whichever of these benefits your employer offers, you should seriously consider taking advantage of them, if you haven’t already.

Health Insurance – The Affordable Care Act (also known as Obamacare) requires businesses with over 50 employees to offer at least 95% of its full-time employees, and their dependents, with affordable minimum essential health care coverage. Companies that do not meet this requirement are subject to penalties. If you work for one of these larger employers and the company picks up the entire health insurance premium cost, consider yourself lucky, as the prices of health insurance coverage have risen dramatically over the last few years. More likely, you may have to pay part of the premium costs, and the plan may have a high deductible or co-pays. Even so, the tax-free benefit of what the employer covers is valuable. While not required to, businesses with fewer than 50 employees may offer health care coverage, often for competitive purposes in retaining employees. The health insurance premiums paid on your behalf by your employer are tax-free to you. If you aren’t aware of the value of this nontaxable employee benefit, you can look at your Form W-2, box 12a, code DD, which shows your share of the cost of employer-sponsored health coverage. You can claim the part of the coverage that you pay for with post-tax dollars as a medical expense if you itemize your deductions.

Retirement Plans – Although some larger employers may provide a company-funded retirement plan that will pay you a monthly benefit when you retire, most generally offer 401(k) plans with which an employee can save for retirement by making pre-tax contributions up to $19,000 for 2019. If the employee is age 50 or over, they can qualify to make a catch-up contribution of up to $6,000, bringing the total to $25,000. Some employers also match their employees’ contributions up to a certain amount, which means an employee should endeavor to contribute at least the amount that the employer will match.

Qualified Transportation Fringe Benefits – Certain transportation-related fringe benefits that an employer may provide to employees are tax-free to the employee. Before the passage of the tax reform in late 2017, employers were able to provide employees with tax-free reimbursement for parking, transit passes, commuter transportation, and bicycle commuting, subject to certain limits, and the employer could deduct the cost. The tax reform had a significant impact on these benefits. It eliminated the $20-per-month bicycle benefit and no longer allowed the employer to deduct reimbursements made to employees for other transportation benefits, making some employers less likely to offer any transportation fringe benefits. However, they remain tax-free to the employee; for 2019, the limit on tax-free employer reimbursements is $265 per month each for qualified parking, transit passes, and commuter transportation.

Flexible Spending Account (FSA) – This is a unique account established by an employer that allows employees to contribute to the account through salary-reduction contributions. The benefit is that the contributions are pre-tax, meaning the employee doesn’t pay taxes on the money contributed to the account. This allows employees to pay for individual out-of-pocket health care costs with pre-tax dollars. The health care expenses can be used for health plan deductibles, co-payments, and even some over-the-counter-medications. The annual limit on contributions is inflation-adjusted and is $2,700 for 2019. However, if you don’t use the money in your FSA, you will lose it.

Group Term Life Insurance – The cost for the first $50,000 of group term life insurance (GTLI) coverage provided by an employer is excluded from the employee’s taxable income. However, the employer-paid cost of group-term coverage in excess of $50,000 is taxable income to the employee, even if he or she never receives it (i.e., it is “phantom income”). So, while the tax-free coverage of the first $50,000 is a good perk, an employee shouldn’t automatically sign up for more than $50,000 of GTLI coverage without considering whether they genuinely need the coverage and what the extra cost will be. In some cases, an employee who wants more than $50,000 in coverage may be able to privately acquire a policy that will cost less than the tax on the imputed income for the extra coverage through the employer’s plan.

Qualified Employee Discounts – A certain amount of an employee discount on purchases from an employer or on services provided by an employer is excludable from the employee’s income. The exclusion is limited to the employer’s gross profit percentage for property or 20% of the price at which the employer sells services to non-employee customers for services.

Employer-Provided Education Assistance – An employee doesn’t have to include, in his or her income, amounts paid by the employer for educational assistance under a qualified education-assistance program. The maximum amount of educational support that an employee can exclude is $5,250 for any calendar year. Excludable assistance under a qualified plan includes, among others, tuition, fees, books, supplies, and equipment. The education is any training that improves an individual’s capabilities, whether or not it is job-related or part of a degree program.

Adoption Expenses – An employee may exclude amounts paid or expenses incurred by the employer for qualified adoption expenses connected to the employee’s adoption of a child, if the amounts are furnished under an adoption-assistance program in existence before the costs are incurred. If the adopted child is a special needs child, the exclusion applies regardless of whether the employee has adoption expenses. The maximum exclusion amount is inflation adjusted annually and is $14,080 for 2019 per child, for both non-special needs and special needs adoptions. The exclusion phases out when the employee’s modified adjusted gross income is between $211,160 and $251,160 for 2019. Taxpayers can claim a tax credit for qualified adoption expenses, subject to the same phaseout range as for the exclusion. Still, any employer-paid excludable expenditures can’t be used for the credit.

Child and Dependent Care Benefits – Qualified payments made or reimbursed by an employer on behalf of an employee for child and dependent care assistance are excluded from the employee’s gross income. The amount of the exclusion is limited to the lesser of $5,000 ($2,500 for married individuals filing separately), the employee’s earned income, or the income of the employee’s spouse. A child and dependent care tax credit is available to taxpayers. Still, no credit is allowed to an employee for any amount excluded from income under his or her employer’s dependent care assistance program.

Health Savings Accounts – Employees who have a high-deductible health plan through their employer can open a health savings account (HSA) and make annually inflation-adjusted pre-tax contributions, which, for 2019, can be up to $7,000 for families and $3,500 for a single individual. When you make distributions for medical expenses, the money comes out tax-free. However, distributions not used to pay qualified medical expenses are taxable, and if the plan’s owner is under the age of 65, nonqualified distributions are subject to a 20% penalty. Some individuals let the account grow and treat it as a supplemental retirement plan, waiting until after age 65 to begin taking taxable but penalty-free distributions.

If you have questions on how job-related benefits might apply to you or if you are an employer interested in providing any of these benefits to your employees, please contact us.

Should You Have an Identity Protection PIN?

Article Highlights:

  • Taxpayer First Act
  • Taxpayer Notification when a SSN is Fraudulently Used
  • Purpose of an IP PIN
  • Obtaining an IP PIN
  • Is an IP PIN Right for You?

With the passage of the Taxpayer First Act in mid-2019, the Treasury Department (i.e., the IRS) is required to establish a program to issue an identity protection pin (IP PIN) to any U.S. resident who requests one. For each calendar year beginning after the date of enactment, the IRS must also expand the issuance of IP PINs to individuals residing in such states as the IRS deems appropriate, provided that the total number of states served by the program continues to increase.

Victims of identity theft and refund fraud are often unaware that their identity had ever been used fraudulently. If they become aware of the situation, they’re not always aware of the outcome of their case. 

The Taxpayer First Act addresses this situation by requiring that the IRS notify a taxpayer if it determines any of the following: 

  • there has been suspected unauthorized use of a taxpayer’s identity or of that of the taxpayer’s dependents; 
  • an investigation initiates; 
  • whether the investigation substantiated any unauthorized use of the taxpayer’s identity; 
  • and whether any action has been taken on an open investigation (such as a referral for prosecution). 

Furthermore, when an individual is charged with a crime, the IRS must notify the victim as soon as possible, giving the victim the ability to pursue civil action against the perpetrators.

An IP PIN is a six-digit number assigned by the IRS to eligible taxpayers. This pin helps prevent the misuse of taxpayers’ SSNs on fraudulent federal income tax returns.

The IP PIN was initially established several years ago to aid taxpayers whose SSNs were compromised, and there was a concern their SSNs could be used to file a fraudulent return. Recently, as a result of the Taxpayer First Act, the IRS has opened the IP PIN system to a variety of taxpayers.

In addition to taxpayers whose SSNs the IRS has determined are compromised for tax-filing purposes, IP PINs now are available to those who

  • filed their federal tax return last year as a resident of Florida, Georgia, the District of Columbia, Michigan, California, Maryland, Nevada, Delaware, Illinois, or Rhode Island, or
  • received an IRS letter inviting them to “opt-in” to get an IP PIN.

Requesting an IP PIN is strictly voluntary. If you choose not to participate in the program, you can file your return as you normally would. If you are assigned or if you request an IP PIN, you must use it along with your SSN, to confirm your identity on any tax returns filed electronically during the calendar year. A new IP PIN is generated for each filing season and can be retrieved starting in mid-January of each year by logging into the account you create with the IRS. At this time, if you choose to receive an IP PIN, you must use your IP PIN on all 1040 (current year and delinquent) returns filed during the calendar year.

To obtain an IP PIN, you must pass the IRS’s identity verification secure access process. To do that, you must register with the IRS and set up an online account that is only accessible with a username and password established during the registration process. This can require a substantial amount of verification information so the IRS can make sure you are not trying to obtain an IP PIN for someone with a stolen identity. Next, you have to log into the IRS IP PIN Section, which requires double authentication: a password plus a 6-digit code that the IRS sends to your cell phone. Once you complete this process, you can retrieve your IP PIN.

Is an IP PIN right for you? That depends; the process is quite complicated, and you get a new number every year. When deciding, it can help to weigh the inconvenience it creates when your SSN has not been compromised with knowing you can always obtain an IP PIN if your SSN is compromised in the future. The decision is up to you.

Of course, if the IRS has already sent you a CP01A Notice, the annual communication from the IRS containing your unique 6-digit IP PIN and instructions on how to use it, you are already in the system.

If you have questions about IP PINs, please contact us

Who Owes You? 5 QuickBooks Online Reports That Can Tell You Fast

How many of your invoices are unpaid? Have any of your customers gone over 30 days past due? Did you bill all of the time and expenses for that project you just completed for a customer?

If you’re doing your accounting manually, there’s simply no way to get that information quickly. Depending on your bookkeeping system, you may not be able to get it at all.

QuickBooks Online has more than one solution to this problem. Each time you log in, the Dashboard contains a graphic in the upper left corner that tells you how many invoices are overdue and unpaid. Click on the colored bar labeled OVERDUE, and you’ll see a list of invoices with the unpaid ones right at the top.


You can tell at a glance how much of your money is tied up in unpaid invoices.

While this is important information for you to have as you start your workday, it doesn’t tell the whole story. To get that, you’ll need to access some of QuickBooks Online’s reports, five of them in particular. Click Reports in the left vertical pane, and then scroll down to the heading labeled Who owes you.

These reports are listed in two columns. Each has the outline of a star next to it. Click on the star, and the report will be added to the Favorites list at the top of the page. Click on the three vertical dots next to it, and you’ll be able to Customize the report. And as you hover over the title, you’ll see a small, circled question mark. Click on this to get a brief description of the report.

There are several reports on this list that can provide insight into where your outstanding revenue is. We recommend you run five of them at least once a week, and more frequently if your business sells large quantities of products or services. The suggested reports are:

Accounts receivable aging detail

This report provides a list of overdue invoices, along with aging information. There are several columns in the report, but you’ll want to pay special attention to the last one: OPEN BALANCE.

Tip: If you have many customers or simply a high volume of unpaid invoices, you might consider running the Accounts receivable aging summary instead.

Changing the Content

Before you run the report, you should explore the customization tools provided for it. They won’t be the same for every report, but you can start to get an idea of what can be done. Hover over the report title and click Customize. A panel like the one pictured below will slide out of the right side of the screen.


QuickBooks Online provides deep customization tools for reports.

You can see some of your customization options in the image above. Beyond these, you can also work with filters and headers/footers. When you’re satisfied with your changes, click Run report.

If you want to run a report with its default settings, click on the report title in the list to display it. You’ll have access to limited customization from there.

Four other reports you should be generating regularly are:

  • Customer Balance Summary: Shows you how much each customer owes your business
  • Open Invoices: Lists invoices for which there has been no payment
  • Unbilled Charges: Just what it sounds like: tells you who hasn’t been invoiced yet for billable charges
  • Unbilled Time: Lists all billable time not yet invoiced

We don’t expect you’ll have any trouble understanding reports like these; they’re fairly self-explanatory. QuickBooks Online offers many other reports, including the standard financial reports that need to be generated monthly or quarterly, like Balance SheetProfit and Loss, and Statement of Cash Flows. You’ll need these if you apply for a loan or need to supply in-depth financials for any other reason. If you have any questions about how to run QuickBooks reports, please contact us. We can help you analyze them to get a comprehensive, detailed picture of your company’s fiscal health.

Life-Changing Events Can Impact Your Taxes

Article Highlights:

  • Marriage
  • Buying a Home
  • Having or Adopting Children
  • Getting Divorced
  • Death of Spouse

Throughout your life, there will be significant occasions that will impact not only your day-to-day living but also your taxes. Here are a few of those events:

Getting Married – If you are getting married, it is essential to understand that once you are married, you no longer file returns using the single status. Instead, you will file as married taxpayers filing jointly (MFJ). When you file MFJ, both spouses combine their income on one return. When both spouses have substantial income, your combined incomes could put you in a higher tax bracket. However, when filing MFJ, you benefit by being able to claim a standard deduction equal to twice that of the standard deduction for a single taxpayer. It may be appropriate for newly married couples to estimate the differences of filing as unmarried and filing as married before tax-filing time. Depending on your situation, you may decide to adjust withholding to compensate for the MFJ status.

Keep in mind that filing status is determined on the last day of the tax year. Regardless of when you get married during the year, you will be considered married for the entire year for tax purposes. In addition, when a spouse is changing names, the Social Security Administration should be notified, and the IRS should be informed of any address change by either or both spouses.

Buying a Home – Buying a home, especially your first home, can be a trying experience. Without a landlord to take care of repairs and upkeep of the property, those tasks will become your responsibility as a homeowner. When you rent, you are responsible for making a rental payment, which is not tax deductible. On the other hand, when you own a home, in addition to being accountable for its maintenance, you have to make homeowner’s insurance, mortgage, and property tax payments. While the routine upkeep costs aren’t tax deductible, the interest on the mortgage and the property taxes you pay may be tax deductible, providing you with a significant saving in income tax. However, if the standard deduction amount for your filing status exceeds the total of all itemized deductions the law allows you to claim, you won’t get a tax benefit from the home mortgage interest and property tax payments. So, when determining if you can afford a home, it’s important to consider whether you’ll benefit from those home-related tax savings. Also, consider the long-term benefits of homeownership. Homes have generally appreciated in the past, so you can look forward to your home gaining value. When you sell it, the gain up to $250,000 ($500,000 for a married couple) can be excluded from income if the property has been owned and used as your primary residence for any two of the five years just before the sale.

Having or Adopting Children – Besides the loss of sleep, changing diapers, middle of the night feedings, and constant attention, a newborn also brings some tax benefits, including a maximum $2,000 child tax credit, which can go a long way in reducing your tax liability. If both spouses work, you will no doubt incur childcare expenses, which can result in a maximum (can be less) credit of between $600 and $1,050 for one child or twice those amounts for two or more children. The credit amounts are based on a maximum childcare expense of $3,000 for one child and $6,000 for two or more multiplied by 20 to 35 percent of the expense based upon a taxpayer’s income.

Of course, the medical expenses are deductible if you itemize your deductions, but only to the extent that the medical expenses exceed 10% of your adjusted gross income. Although rarely encountered, the expense of a surrogate mother is not deductible.

If you adopt a child under age 18 or a person physically or mentally incapable of taking care of himself or herself, you may be eligible for a tax credit for the qualified adoption expenses you paid. The credit, which is a maximum of $14,080 for 2019, is not refundable, but if the credit is more than your income tax, you can carry over the excess and have five years to use up the credit. If the child is a special needs child, the full credit limit will be allowed for the tax year in which the adoption becomes final, regardless of whether you had qualified adoption expenses. The credit phases out for higher-income taxpayers.

It is also time to begin planning for the child’s future education. The tax code offers two tax-favored education savings accounts. The Coverdell account allows a maximum contribution of $2,000 per year, and the Qualified State Tuition plan, more commonly known as a Sec 529 plan, allows large sums of money to be put aside for a child’s education. There is no tax deduction for contributing to either of these programs. However, the earnings from the plans are tax-free if used for qualified education expenses, so the sooner the funds are contributed, the more significant the benefit from tax-free earnings.

Getting Divorced – If you are recently divorced or are contemplating divorce, you will have to plan for significant tax issues such as asset division, alimony, and tax-return filing status. If you have children, additional issues include child support; claiming of the children as dependents; the child, childcare, and education tax credits; and perhaps even the earned-income tax credit. Here are some details:

  • Filing Status – As mentioned earlier, your filing status is based on your marital status at the end of the year. If on December 31, you are in the process of divorcing but are not yet divorced, your options are to file jointly or to each submit a return as married filing separately. There is an exception to this rule if a couple has been separated for all of the last six months of the year, and if one taxpayer has paid more than half the cost of maintaining a household for a qualified child. In that situation, the spouse can use the more favorable head-of-household filing status. If each spouse meets the criteria for that exception, they can both file as heads of household; otherwise, the spouse who doesn’t qualify must have the status of married filing separately. If your divorce has been finalized and if you haven’t remarried, your filing status will be single or, if you meet the requirements, head of household.
  • Child Support – This is support for the taxpayer’s children provided by the non-custodial parent to the custodial parent. It is not deductible by the parent making the payments and is not income to the recipient parent.
  • Children’s Dependency – When a court awards physical custody of a child to one parent, the tax law is particular in awarding that child’s dependency to the parent who has physical custody, regardless of the amount of child support that the other parent provides. However, the custodial parent may release this dependency to the non-custodial parent by completing the appropriate IRS form.
  • Child Tax Credit – A federal credit of $2,000 is allowed for each child under the age of 17. This credit goes to the parent who claims the child as a dependent. Up to $1,400 of the credit is refundable if the credit exceeds the tax liability. However, this credit phases out for high-income parents, beginning at $200,000 for single parents.
  • Alimony – The recent tax reform also impacts the tax treatment of alimony. For divorce agreements that were finalized before the end of 2018, the recipient (payee) of the alimony must include their income for tax purposes. The payer, in such cases, is allowed to deduct the payments above the line without itemizing deductions. This is technically referred to as an adjustment to gross income. The recipient, who includes this alimony income, can treat it as earned income to qualify for an IRA contribution, thus allowing the recipient to contribute to an IRA even if he or she has no income from working. For divorce agreements that are finalized after 2018, alimony is not deductible by the payer and is not taxable income for the recipient. Because the recipient isn’t reporting alimony income, he or she cannot treat it as earned income to make an IRA contribution.
  • Tuition Credit – If a child qualifies for either of two higher-education tax credits, (the American Opportunity Tax Credit [AOTC] or the Lifetime Learning Credit), the credit goes to whoever claims the child as a dependent even if the other spouse or someone else is paying the tuition and other qualifying expenses.

Death of Spouse – Losing a spouse is painful emotionally. Unfortunately, it can be accompanied by several tax issues that may or not apply to the surviving spouse. Here is an overview of some of the most frequent problems:

  • Filing Status – If a spouse passes away during the year, the surviving spouse can still file a joint return for that year if the surviving spouse has not remarried. However, after the year of death, the surviving spouse will no longer be able to file with the deceased spouse jointly and will have to use a less favorable filing status.
  • Notification – If the deceased spouse is receiving Social Security benefits the Social Security Administration must be immediately notified. This would also be true of pensions and retirement plans of the deceased spouse.
  • Estate Tax – Where the deceased spouse’s assets and prior reportable gifts exceed the current lifetime inheritance exclusion ($11.4 million for 2019), an estate tax return may be required. However, the lifetime inheritance exclusion can be changed at the whim of Congress. Even when an estate tax return isn’t needed because the value of the deceased spouse’s estate is less than the exclusion amount, it may be appropriate to file the estate tax return. There could be an impact on the estate tax of the surviving spouse when he or she passes.
  • Inherited Basis – Under normal circumstances, the beneficiary of a decedent’s assets will have a tax basis in those assets equal to the fair market value of the assets on the date of death. Thus, generally, a qualified appraisal of the assets is required. However, for a surviving spouse, this can be more complicated depending upon whether the state of residence is a community property state and how title to the property was held.
  • Changing Titles – The title to all jointly held assets needs be changed into the survivor’s name alone to avoid complications in the future.
  • Trust Income Tax Returns – Many couples have created living trusts that, while they are both alive, don’t require a separate tax return to be filed for the trust and can be revoked. But upon the death of one of the spouses, this trust may split into two trusts, one of which remains revocable and the other becomes irrevocable. A separate income tax return for the latter trust will usually have to be prepared and filed annually.

These are just a few of the issues that must be addressed upon the death of a spouse, and it may be appropriate to seek professional help from your Tarlow tax advisor.

If you have questions about the tax impacts of life-changing events or situations, please contact us.