Voluntary Classification Settlement Program (VCSP) Update!
Think you may have made an error classifying your workers as an independent contractor
when they should have been an employee? Be sure to understand the rules when classifying your workers as the penalties for misclassifying them can be large. One penalty plus interest can wipe out two to three years the small business thinks they are saving by misclassifying its workers.
Earlier this year, the IRS launched the VCSP which allows employers to reclassify their workers who were previously labeled “independent contractors” in error as employees for future tax periods.
IRS Update:
1) The VCSP application (or rejection of) will not automatically trigger initiation of a Federal audit.
2) The VCSP concerns future years only. A taxpayer that signs a VCSP closing agreement is not admitting liability or wrongdoing for past periods.
3) The VCSP filing of Forms 1099 Requirement states “a taxpayer will be eligible for the VCSP if it files the required Forms 1099 within 6 months of their due date (including extensions).”
4) The VCSP permits taxpayers to reclassify some or all of their workers; However, once a taxpayer chooses to reclassify its workers as employees, all workers in the same class must be treated as employees for tax purposes.
5) The IRS will not share information about VCSP applicants with the Department of Labor or with States.
For a free review of your employee classification contact us today!
1. The organization must qualify: Charitable contributions must be made to “qualified organizations” as provided by IRS Publication 526. Remember, you can’t deduct donations to specific individuals or political organizations.
2. You must itemize: Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.
3. What you can deduct: You can deduct cash contributions and the fair market value of most property you donate. Clothing and household items must be in “good used condition or better” to be deductible.
4. Receive something in return?: If your contribution entitles you to receive merchandise, goods, or services, you can deduct the amount that exceeds the fair market value of the benefit received.
5. Pledges and payments: Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in May but paid the charity only $200 by year end, you can only deduct $200.
6. Recordkeeping: You must keep records of the contribution. Save a cancelled check, bank or credit card statement, or a dated/ written receipt from the charity with the amount of the contribution. For text message donations, keep your phone bill showing the receiving organization, the date, and the amount.
7. Donations made near year end: Include credit card charges and payments by check in the year you donate to the charity, even if you don’t pay the credit card bill or draft from your bank account until the next year.
8. Large donations: For contributions of $250 or more, you need more than a bank record. You need a dated/written receipt from the charity. Stating the dollar amount donated and whether the organization provided goods or services in exchange for the gift. If you donated large items, the receipt must include a description of the items and a good faith estimate of value. For items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attach the form to your return. To claim deductions for a contributions of noncash property worth more than $5,000. You must obtain an appraisal and complete Section B of Form 8283 with your return.
Call today to learn more about how we help small business owners avoid tax surprises!
Photo Credit: renjith krishnan
#1 Hiring an Orlando accountant based solely on cost
Price is no indication of quality. Expensive can be just as good as inexpensive. And cheap
advice is cheaper, but not necessarily better. If you hire an accountant just to save a few dollars in fees and hire someone incompetent whose decisions cost you hundreds of dollars, then you did not get a bargain. In the long run bad advice or poor service will cost you far more than you may know. Hire someone that is expensive who provides poor service you will be unhappy no matter how sound the advice. Compare the services and determine a balance between service and cost. Good business advice can solve problems and save money and time.
#2 Expecting credentials and designations to make a “Good” Business Adviser
There are a lot of professional credentials and designations. Some credentials are good while other are terrible. Within every credential there outsourced accountants that are good while other are just down right bad.
The primary question to ask a business adviser or Orlando outsourced accountant is do they have the expertise I need?
Credentials may or may not help to answer that on their own. Credentials say nothing about the individual's personality, skills, talents, disposition, or ability to provide you quality service. You want someone that will take the time to learn about you and your business.
Finding a business adviser or outsourced accountant is about "the right person," not "the person with the right credential," and there is a big difference. When you have question or experience a challenge in your business, it's going to be the human being and not the letters after their name that you need to rely on.
#3 Making decision on expectations and results
Business owners hire advisers because they need help to solve a problem, they need a skill set they do not have, or they want someone to provide sound advice as needed.
Hiring someone solely on claims they can reduce or eliminate your tax bill is a recipe for disaster. A good tax adviser will provide you comfort they have found every tax deduction or credit you are entitled too. This comfort comes from meeting with the tax adviser on a regular basis. There is not much tax planning that can be done in January for the prior year.
Look for a business partner who will help you develop business strategies that enable you to reach your long-term goals or someone who has a service that allows them to learn about you and your business.
#4 Letting the adviser control everything
Business advisers are partners in your financial success, but you have the most at stake and, therefore, you run the show. With that in mind, you are entitled from the very beginning of the relationship to ask about anything you want, from why a recommendation was made to why something cost more than you expected.
You need to be treated like "the boss,". Some advisers treat customers poorly when the client doesn't take their advice or make a suggested move. That reaction is an instant warning sign that the adviser respects his position more than yours and may have put his interests first.
#5 Hiring friends and relatives
Doing business with a friend or family member spells trouble for one big reason: You let your guard down.
Working with friends has emotions on all sides. Ask your friend or relative to provide a written history of his business experience and credentials and they may be offended. Fail to ask a full set of questions about their qualifications you will not know whether or not you found the right expert.
There is more than money at stake when you do business with friends and family. Factor the extra value of your friendship into your decision making; you'll lose a lot more than just money if a financial relationship with a friend or relative goes bad.
To learn more about outsourced accounting from an Orlando Accountant call today!
Bookkeeping is the recording of a company’s day-to-day financial records into a journal. 
These day-to-day records are a result of the normal course of business and may include recording sales, invoicing customers, entering purchases, paying bills to vendors, logging inventory into the software, recording payments received to accounts receivable, deposits to the bank account, and checks written. The journal entry includes the date, name of the accounts to be debited and credited, the amount of the entry, and a reference to the source document. These journal entries are written or posted to the company’s general ledger (GL).
Once the journal entries are posted a trial balance is created to be sure there are no errors meaning total debits equal credits.
The accounting process is usually performed by an accountant who will create financial statements for managing the business, provide a payroll service, and complete and file forms with government agencies.
Bookkeeping should not be confused with accounting. Accountants prepare income statements (profit and loss statement), balance sheets, and cash flows statements from the trail balance and general ledgers prepared by the bookkeeper. Sometimes the accountant will need to make adjustments to the trial balance for depreciation or prepaid accounts. These adjusted result in an adjusted trial balance.
Once the financial statements are complete the accountant will review the results with the owner and provide feedback on financial performance and tax advice. If the business owner prefers more in depth financial analysis, consulting, and business planning this may require an outsourced CFO.
Organized financial information and financial statements are the key to business success. Without this organization a business typically struggles.
To learn more about our outsourced accounting services call today!
Even though you own your S corporation for tax purposes you are an employee. When an employer or S corporation provides an employee with a business cell phone primarily for 
non-compensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. The IRS will not require record keeping of business use in order to receive this tax-free treatment. The IRS announced a similar administrative approach that applies to small businesses that provide cash allowances and reimbursements for work-related use of personally-owned cell phones. Under this approach, employers that require employees, primarily for non-compensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees' expenses for reasonable cell phone coverage as nontaxable. However this treatment does not apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee's regular wage.
Minimizing your taxes requires careful tax planning each month or quarter. To learn more about business cell phone use in your s corporation and tax planning strategies to minimize your federal tax burden call for a free consultation today or "click here" to request a call back from one of our tax professionals.
Due to the flexibility of distributions and the lack of double taxation, S corporations enjoy more
tax planning opportunities through the manipulation of shareholder wages. The manipulation of shareholder compensation to accomplish tax-savings objectives can be risky. The better the documentation (e.g., in the corporate minutes) and the greater the business purpose for such transactions, the more likely the transactions will withstand IRS attack. In any case, the compensation to the shareholder-employee must be reasonable for the services rendered.
Since substantial s corp tax advantages can be gained by using compensation to achieve certain objectives, a significant portion of IRS activity in the S corporation area is directly or indirectly related to the reasonableness issue. Those areas, discussed in the following paragraphs, are:
- Reallocation of S corporation income among family member
- Minimizing salaries to reduce payroll taxes
- Using compensation to minimize built-in gains and passive investment taxation
- Reducing salaries to change character of shareholder’s income
Reallocation of S Corp Income among Family Members
One method of shifting S corporation income is to reduce the salary paid to the owner. This increases the corporation’s net income and shifts pass-through income to the other shareholders, who are often children in a lower tax bracket.
In addition to shifting income to a lower tax bracket, the pass-through income increases the stock basis of all shareholders, in accordance with their stock ownership, which in turn allows a corresponding nontaxable distribution from the S corporation.
If the IRS feels that compensation for services rendered or for capital furnished is unreasonable (i.e., too high or too low), the IRS will reallocate income among family members to properly reflect the value of such services or capital. Included among family members are spouses, ancestors, lineal descendants, and trusts created for such persons.
Minimizing Salaries to Reduce Payroll Taxes
Since draws are not subject to payroll taxes or self-employment tax, shareholders and the corporation can reduce or eliminate social security and unemployment taxes if the shareholder receives draws instead of salary. However, if the payment to the shareholder actually represents compensation for services rendered to the corporation, the payments are not distributions but instead are wages subject to withholding. The IRS is well aware of this strategy for reducing or eliminating employment taxes. Reportedly, some IRS Service Centers have their computers programmed to detect those S corporations who report relatively small salaries in relation to distributions.
Using Compensation to Minimize Built-in Gains and Passive Investment Taxation
Certain S corporations are subject to tax at the corporate level under the built-in gains tax and the passive investment income tax rules. These taxes are deferred or eliminated if the corporation has no taxable income, determined as if the corporation were a C corporation. Therefore, a common tax planning strategy is to increase owners’ salaries or make year-end bonus payments to eliminate the taxable income and thereby eliminate these taxes. For this strategy to work, the total compensation paid, whether as salary, bonus, or some other form, must be reasonable.
Reducing Salaries to Change Character of Shareholder’s Income
Distributions from an S corporation may be:
(1) Taxable as ordinary income [if considered to be distributions of C corporation accumulated earnings and profits (AE&P)];
(2) Nontaxable (to the extent of the shareholder’s basis if the corporation does not have AE&P); or
(3) Capital gain income (if the distributions exceed the shareholder’s stock basis and the corporation does not have AE&P).
Since wages are always ordinary income, the character of the shareholder’s income can change if the corporation reduces the shareholder’s salary and makes distributions to him or her instead. If this is done, the corporation should be able to substantiate good business reasons for the salary reduction.
Need help determing reasonable compensation? Call today for a Free Consultation.
The factors to be considered in establishing that compensation paid to a shareholder-employee of an S corporation is reasonable are the same as those that apply to a C 
corporation. These factors include:
- The prevailing compensation rates and packages of similarly situated employees in the corporation’s industry.
- The shareholder-employee’s qualifications and abilities. These qualifications and abilities should be documented in the personnel file.
- The degree to which the shareholder-employee contributes to the success of the business. This should be documented in the personnel file.
- The relationship between the shareholder’s stock ownership and the amount of compensation paid to each shareholder. The corporation should avoid compensating shareholder-employees in proportion to their stock ownership.
- Whether the shareholder-employee was adequately compensated in prior years. Inadequate compensation is common in initial years when funds are typically reinvested to promote growth. Thus, the shareholder-employee can make up for the prior inadequate compensation in future years. Compensation paid currently for past services should be documented in a corporate resolution that also states why the employee’s past compensation was inadequate.
- The overall size and complexity of its business operations.
- The timing of the compensation (i.e., is it paid only after profits for the years can be determined, or are wages set early in the year before the amount of actual profits is known).
- The ratio of compensation paid to other factors such as the net profits of the company.
Need help determing reasonable compensation? Call today for a Free Consultation.
C Corp considerations for reasonable compensation:
Wages paid to a shareholder as an employee of a corporation are deductible by the 
corporation and taxable to the shareholder. Wages are not double-taxed, as is the case with dividend distributions (dividends are not deductible by a C corporation and are taxable to the shareholder). This creates an incentive for a shareholder in a C corporation to take as high a wage as possible in order to minimize taxes on corporate earnings. If compensation is determined to be excessive, the excess over the amount considered reasonable may be treated as “constructive” dividends instead of deductible wages.
The IRS may challenge the deductibility of year-end bonuses, especially when such bonuses appear to be distributions of corporate profits rather than merited rewards for performance during the year.
S Corp considerations for reasonable compensation:
The primary concern with S Corporations is not excessive compensation, but inadequate compensation. If an S corporation is not paying a “reasonable” salary to a shareholder who provides services to the corporation, distributions to that shareholder may be recharacterized as wages subject to payroll taxes.
Having distributions reclassified as wages can be expensive. The corporation must pay the FICA and FUTA on the wages, and may be required to pay income tax withholding of 28% of the wages. The corporation will be subject to the failure to file penalty, the failure to deposit penalty (if payroll tax returns were not filed), and conceivably, the negligence penalty.
Substantial tax advantages can be gained by S corporations using compensation to achieve certain objectives. As a result, a significant portion of IRS activity in the S corporation area is directly or indirectly related to the reasonableness issue. Those areas are:
- Reallocation of S corporation income among family members
- Minimizing salaries to reduce payroll taxes
- Using compensation to minimize built-in gains and passive investment taxation
- Reducing salaries to change character of shareholder’s income
Need help determing reasonable compensation? Call today for a Free Consultation.
Photo Credit: Boaz Yiftach
Have you ever wonder what an adequate wage is for an owner of a small business? The
answer is not as easy as looking it up in a book or in the classified section of the newspaper. The determination as to whether an individual’s compensation is reasonable is based on the specific facts and circumstances surrounding the payments. It involves looking at all aspects of the business and the owner’s role – much like what is considered in business valuations. Tax problems can surface if the compensation is too high, too low, or not payment purely for services.
A corporation is allowed a deduction for compensation only if the amount paid is reasonable. “Reasonable” compensation becomes more questionable when it involves a shareholder/employee who is personally performing the very services from which the compensation is earned.
What Factors Constitute Reasonableness?
There is no rigid set of rules for measuring the reasonableness of compensation and no definition of “reasonableness” exists. The regs provide only that reasonable compensation is an amount paid for like services by a like enterprise under like circumstances. Court cases have shown, however, that an individual’s compensation is reasonable based on the specific facts and circumstances surrounding the payments.
The determination of reasonableness involves more than just an analysis of the amount of cash paid to each employee. Although the IRS usually places more emphasis on cash payments, in certain cases, the amount of noncash compensation also receives IRS scrutiny, especially when the noncash compensation represents a substantial benefit to the employee. The use of noncash compensation (also known as “fringe benefits”) requires careful tax planning. In a C corporation, the cost of a fringe benefit generally is deductible at the corporate level, and the employee who receives the benefit excludes the value from income. In an S corporation, however, fringe benefits paid on behalf of a greater-than-2% shareholder are subject to special rules and are usually treated as additional wages to the shareholder, subject to payroll taxes.
Need help determing reasonable compensation? Call today for a Free Consultation.
Photo Credit: worradmu
On September 21, 2011 the IRS announced a new voluntary worker classification settlement program called Voluntary Classification Settlement Program (VCSP). VCSP is part of a larger "Fresh Start" initiative to help taxpayers and business address their tax responsibilities.
This new program will provide relief to employers who misclassified their workers as independent contractors by allowing employers the opportunity to get into compliance rather than waiting for an IRS audit. Under this program, eligible employers can obtain substantial relief from past federal payroll taxes they may have owed in the past, if they misclassified employees.
To be eligible the business must:
-
Consistently have treated the workers in the past as nonemployees,
-
Have filed all required Forms 1099 for the workers for the previous three years
-
Not currently be under audit by the IRS
-
Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers
Interested employers need to apply for the Voluntary Classification Settlement Program at least 60 days before they want to begin treating the workers as employees. Employers accepted into the program will pay just over one percent of the wages paid to reclassified worker for the past year. No interest or penalties will be due and the employer will not be audited on payroll taxes related to these workers for prior years.
Many employers that misclassify employees do not even realize the workers are misclassified. Payroll tax penalties and interest can be very expensive for a business. For a FREE consultation and help determining if your workers are misclassified call today or click here.