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4 New Small Business Tax Surprises

Here are two words small business owners seldom like to see together: “taxes” and “surprise!”  Trying to cope with overwhelming complex tax laws is hard enough without the occasional grenade the IRS tosses across the moat.  But BizBest figures you’d rather know now, before getting a notice in the mail.  Here, then, are tips on four recent or impending tax changes that you’ll want to know about (and one of them is actually good news!):

1)      If your employees earn tips, the IRS has you in its sights (again). The tax agency has launched a new effort to bill employers for Social Security (FICA) and Medicare taxes on tip income reported by employees to the IRS, but not to you.  The genesis of this is an IRS form you probably never heard of:  Form 4137: Social Security and Medicare Tax on Unreported Tip Income.  This is how tip-earning employees tell the IRS about tips they earned but did not report to an employer – including any “unallocated” tips shown on their W-2. And the threshold is low:  Any employee who received cash and charge tips of $20 or more in calendar month and didn’t report that income to you (the employer) must file a 4137. In past years, the IRS didn’t have an easy way to match that income to an employer.  But the form was changed and now requires the employee to include your tax ID number. This, of course, creates a new tax event for you (never mind you didn’t know about it), since you are responsible for paying the employer portion of FICA and Medicare taxes on this income.   IRS is collecting the information from the new 4137 forms it receives, and is sending tax bills or letters to employers telling them how much they owe.  Employers who pay up quickly – usually with the next scheduled payroll tax deposit – are not charged any penalty or interest.

2)      S-Corp business owners who pay themselves extremely low salaries in order to take more profits as lower-taxed dividends are also in the IRS crosshairs these days.  Be aware the IRS might argue that your pay is unreasonably low if it doesn’t come close to standards in your business or profession, and will seek back taxes on the income that it says should have been classified as salary.

3)      And here’s a reason to question the health insurance tax credit for small business that’s received such great fanfare since passage of health insurance form:  If you receive such a credit, it will also count against you by reducing the amount your small business can deduct for health insurance premiums.  Be sure to factor this in when calculating the value of the credit toward purchasing health insurance for your employees.

4)      And finally the good news:  Thanks to 2011 100% bonus depreciation, if your business buys a new heavy (gross vehicle weight over 6,000 pounds) SUV this year, you’ll qualify for a much larger tax break than before.  As long as the SUV is used 100 percent for business purposes, your company can write off the entire cost immediately under the bonus depreciation rule now in place.  Forget the old $25,000 maximum you may have seen as a lid on the amount of an SUV purchase that can be expensed. That doesn’t apply under 2011 bonus depreciation rules.  Both new and used heavy pickup trucks also qualify for full write-off.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

Bonus Depreciation Tax Breaks Make 2011 a Year to Buy

If you are thinking of buying new vehicles, equipment, machinery, phones, computers or other technology for your business, 2011 could be the year to do it.  That’s because not one, but two laws passed late last year have greatly increased the amount of your immediate tax write-off for making such purchases.

The so-called Section 179 deduction limit, slated to revert to $25,000, was increased to $500,000, and the total amount of equipment that can be purchased was increased to $2 million (up from $200,000). This includes most new and used capital equipment, and also includes software.  In addition, bonus depreciation was increased to 100 percent on qualified assets (new equipment only). When applying these provisions, Section 179 is generally taken first, followed by bonus depreciation. 

Bonus depreciation, a special depreciation allowance, is a limited-time tax benefit for business purchases of qualified items during 2011, or in some cases 2012 as well.  Basically, bonus depreciation offers a giant tax incentive for businesses to buy new property and other assets now by allowing you to write off (or “expense” in accounting lingo) the entire purchase (100 percent) immediately rather than having to take those write-offs in little pieces over many years (called depreciation). Normally, businesses recover these types of capital investments through annual deductions spread over as many as 20 years. 

Now 100%:  This provision of the Tax Relief Act passed late last year doubles the amount of bonus depreciation allowed – from half of the purchase cost, to the full amount (100 percent) for this year. That’s up from 30 percent a few years ago. In other words, if you buy some PCs, servers, phone equipment, machinery, or all kinds of other qualifying items, you can take the entire amount as a deduction on your 2011 tax return.   

The temporary rule change also makes 50 percent bonus depreciation available for qualified property placed in service during 2012. Some long-lived property and transportation property is eligible for 100 percent expensing if placed in service by the end of 2012. What’s more, there is no cap on the amount you can spend and deduct, and the benefit applies to businesses of any size.

Where Section 179 Fits:  Other benefits available only to small businesses fall under different provisions known as the Section 179 rules.   The maximum amount of property that small businesses could deduct immediately under Section 179 was scheduled to revert to its old limit of $25,000, but that’s now been raised to $500,000. This includes vehicles, machinery, furniture and other equipment.  A detailed list of qualifying types of property is available at IRS.gov.

To qualify for the Section 179 deduction, your property must have been acquired for use in your trade or business. Property you acquire only to produce income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify.

When you use property for both business and non-business purposes, you can take the Section 179 deduction if you use the property more than 50 percent for business.  If you use it more than 50 percent for business, multiply the cost of the property by the percentage of business use. Use the resulting business cost to figure your Section 179 deduction.

When to Forego the Bonus: The IRS also ruled recently that you can forego bonus depreciation if you want to.  That’s something you might want to consider if your business has an expiring net operating loss, an expiring capital loss carryover, or you believe that much higher tax rates in the future will make deductions more valuable in later years.

The website Section179.org is a helpful resource for figuring out Section 179 deductions, and covers the details in plain language, including what property qualifies and the many ways that the deduction can impact your bottom line. The site also has IRS tax forms, and tools for you to use, including a free Section 179 deduction calculator.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

What 1099 Reporting Rule Repeal Means to Small Business

Okay, small business owners just dodged a bullet. Chalk one up for common sense. The insane expansion of 1099 reporting hidden in 2010’s massive health care reform bill is now toast. President Obama put a stake in its heart on April 14.

Expansion of mandatory IRS 1099 form filing would have required every small business to file such a form for business-to-business transactions totaling $600 or more over the course of a year.  While businesses already must file 1099s for payments to individuals and independent contractors, this provision represented a giant escalation of the IRS campaign to close the so-called “tax gap” by putting a further squeeze on small business owners. [Also see New SBA Study says IRS Small Biz Audit Crackdown is Bogus.]

The expanded rule would, for the first time, have included payments currently exempted from the provision, such as those to vendors for merchandise and similar items. What’s more, under the now-defunct rule, individuals owning as few as one rental property would have been considered a “business” and required to file 1099s.

Needless to say, the filing burden would have gone through the roof, as business owners would also have been forced to collect tax IDs from every person or business they paid money to. And if they couldn’t get it, they would have been required to withhold federal income taxes and send the money to Washington.  In general, it was nuts.

But a public outcry, and some deft lobbying by the National Federation of Independent Business (NFIB), brought lawmakers back (briefly, at least) to planet Earth long enough to repeal the 1099 reporting provision. “The 1099 provision was so illogical, and so burdensome, that it was quickly identified as a must-repeal not long after the health-care law was signed into law last spring,” says Dan Danner, president and CEO of the NFIB. “But it took Congress more than six months to get this simple job done. They lingered over it, savoring the repeal effort in a way that only a politician can.  The process was deliberately prolonged by casting multiple votes for symbolic bills before voting on a piece of legislation that actually guaranteed repeal.”

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

New SBA Study says IRS Small Biz Audit Crackdown is Bogus

Ten years ago, a landmark IRS report claimed that small business owners under-report income by $80-100 billion yearly and account for over half of the U.S. “tax gap” of owed by uncollected taxes.   As a result, small business owners have been subjected to increased audits and reporting requirements, including the controversial new 1099 rule.

But now for the truth:  A new study just released by the U.S. Small Business Administration (SBA) Office of Advocacy says the IRS crackdown on the backs of small biz has been bogus all along.  And that comes from independent research commissioned by the Feds themselves – not some anti-tax business group.

After reviewing 10-years’ worth of IRS small business audits related to the innocuously-named “National Research Program” (NRP), outside researchers found that a mere 1% of all issues examined resulted from intentional failures to report income properly. Yes you read that right – one percent. In other words, 99% of income underreporting is unintentional, and undoubtedly the result of a vast and utterly confusing array of tax rules and regulations.

And here’s the real gut punch for biz owners:  While small business was tagged as the tax cheating culprit, the new study says that large corporation tax gaps are scarcely being measured at all, and that the IRS has been using estimates dating back to the 1970s and 80s to calculate corporate noncompliance.  What’s more, says the new report released by SBA:  “The IRS focused its tax-gap study on individual tax returns, and on returns not subject to withholding or third party reporting, which skewed the study unfairly toward small business.”

Over the last five years, audits of returns typically filed by biz owners have soared, while those for corporations with $10 million or more in assets have actually dropped 13%.  These are figures reported by the SBA itself.

But which type of audit pays off the most for taxpayers – small biz or big corporation?  No contest.  According to the new whistle blowing report, the IRS collects an average of $9,350 per auditor hour spend examining big biz returns, but only $1,034 per auditor hour spend auditing small business.

The new study concludes with this:  Unlike large corporations, small businesses lack the resources and expertise to negotiate with the IRS.  Indeed, 71% represent themselves in audits. They are overwhelmed by the complexity of the tax code.  Only aggressive outreach and education designed to help small businesses understand their tax filing obligations will significantly reduce the tax gap attributed to them.

BizBest will email the full 54-page report in PDF, free of charge, to anyone interested. Email your request to editor@bizbest.com, and be sure to include the email address you’d like the report sent to.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

Claim Your Small Business Health Care Tax Credit

If you’re a small employer with a health insurance plan and pay at least half of employee premiums, you probably qualify for a new health care tax credit worth thousands or even tens of thousands of dollars.  Contrary to rumors and media reports, most small businesses do in fact qualify for substantial tax credits, and SBA Administrator Karen Mills issued a letter today saying just that.

Generally, tax credits are available for small business owners who:

  • Started or continued health insurance coverage for employees in 2010
  • Contribute at least 50% of employee premiums at the single coverage rate
  • Have fewer than 25 full-time employees (part-time employees are counted proportionately)
  • Pay their employees an average of less than $50,000

The IRS has a simple three-step worksheet (at www.irs.gov/pub/irs-utl/3_simple_steps.pdf) to help determine your eligibility.

Here’s an example.  An auto repair shop with 10 employees whose earnings average $25,000 can get what amounts to a 35% “rebate” on its health insurance premiums. Based on typical costs, that would be a credit of $24,500, according to IRS estimates. Not bad. And that’s a credit – which directly lowers your tax dollar-for-dollar – not merely a deduction.

Here’s what you need to know…

Because the eligibility formula is based in part on the number of FTEs, not the number of employees, employers that have more than 25 individual workers may also qualify if some workers are part-time. For eligible businesses the credit could provide a welcome boost.  Here are the four key health care credit eligibility standards:

1)    Your business provides and pays for health coverage. To clear the first hurdle, you must cover at least half of the cost of health care coverage for your employees.

2)    Your business is small. You cannot have more than the equivalent of 25 full-time workers. Eight half-time employees count as four “full-time equivalent” (FTE) workers. Thus, an employer with fewer than 50 half-time workers can still qualify.

3)    Your wages aren’t too generous. A qualifying employer must pay average annual wages below $50,000 to get even a partial credit.  For the full credit, the average must be under $25,000.

4)    Both taxable (for-profit) and tax-exempt (non-profit) firms qualify.

The credit is worth up to 35 percent of your premium costs in 2010 (25 percent for non-profits). In 2014 that jumps to 50 percent (35 percent for non-profits).  A ruling just issued by the IRS also confirms that the credit applies to premiums you pay for dental and vision coverage.  And your business can still qualify for the federal credit even if you receive a separate state credit.

Businesses with 10 or fewer workers and average annual wages less than $25,000 will qualify for the full credit. The credit starts to phase out as you move above those limits.  Businesses with average payrolls over $50,000 will not qualify for the credit at all.

Also be aware that if your business pays only a portion of health insurance premiums, with employees paying the rest, you can only count the premiums you pay when calculating the credit.

Another example: Downtown Diner, a restaurant with 40 part-time employees (the equivalent of 20 full-time workers), pays total wages of $500,000, or an average of $25,000 per full-time equivalent worker. Health insurance premiums paid by the business this year total $240,000, and the business would qualify for a 2010 credit $28,000, after applying “phase-out” provisions.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011.

Small Business Tax Credit Calculator is a new web-based tool that computes precise (not estimates) small business health care reform tax credit calculations for filing actual small business tax returns based upon each state’s allowances and up-to-the-minute legal requirements.  As the regulations regarding the small business health care reform tax credit continue to evolve it is critical to have a calculator that updates with the changes as they occur.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved. 

Business Owner Guide to Top Legal and Tax Trends

Starting and operating a small business is never easy, and all of the tax and rule-making authorities that get in your way don’t help. Legal and regulatory issues, trends and requirements are always changing, forcing business owners to run a new gauntlet each year.  To keep you on top of things, here are 11 trends and changes you need to know:

1. Rising unemployment insurance (UI) rates: UI funds in many states are at critically low levels. As a result, biz owners in many areas can expect to see UI contribution rates higher in 2011 to replenish depleted UI trust funds and repay federal loans taken to allow states to continue to pay benefits.

2. Changing tax laws: In 2011, business owners even greater complexity (if that’s possible), including a partial payroll tax holiday, the ability for businesses to expense 100 percent of their capital investments, and the retroactive extension of some temporary incentives that expired in 2010.

3. Health care reform: A new rule provides business tax credits for small companies that offer health insurance to employees. Grandfathering will remain an important component of health care reform. Health plans that existed on March 23, 2010 are grandfathered, meaning that they do not need to add many of the new protections under the health care reform law. To remain grandfathered, health plans cannot make any significant changes to the plan.

4. Flexible spending account (FSA) changes: Effective this year, over-the-counter medicines and drugs other than insulin (i.e., aspirin) are longer eligible for reimbursement from a health FSA unless the item is prescribed by a medical practitioner.

5. Employment law trend: The U.S. Department of Labor and many states have enacted or are considering measures to provide greater transparency to workers on the wages they are owed, especially in key areas such as minimum wage and overtime requirements, and to increase penalties on those who fail to pay their workers the compensation they are entitled.  Expect to see new rules enacted.

6. 401(k) disclosures: If your business offers a 401(k) plan, new regulations will require disclosures of fees being charged by the plan. In addition, plans offering “target date” funds will likely see further disclosure requirements around those investments.

7. States go revenue hunting: Many states are facing critical budget shortfalls, and are contemplating new tax and fee increases or filing changes to raise money. Also be aware that many state agencies are reducing staff, which could result in processing delays for businesses requiring licensing or other state services. Be sure to renew or apply for business licenses early.

8. Federal Trade Commission (FTC) requirements:  With the dramatic increase in the use of social media such as Facebook and Twitter, as well as blogs, the FTC has issued regulatory guidance around the use of advertising in social media, especially endorsements and misleading or dishonest product reviews. The agency has also recently proposed the creation of a “Do Not Track” tool for the Internet (similar to the telemarketing “Do Not Call” registry).

9. IRS enforcement: To help collect more tax revenue, the IRS is ramping up its enforcement efforts in several areas affecting small business. In 2010, the IRS kicked off an employment-tax audit program that will carry into this year and beyond. These audits are focusing on employee misclassification, executive compensation, fringe benefits, and adherence to general employment tax filing requirements.  The IRS is also accelerating efforts to increase tax compliance among employees who collect tips.

10. Privacy protection: Most states now require businesses to notify customers (and sometimes government authorities) when sensitive data is breached. Some have new laws requiring that businesses protect sensitive client data. Businesses handling protected health information are subject to additional requirements.

11. Employment verification:  U.S. Immigration and Customs Enforcement (ICE) continues to crack down on companies knowingly hiring undocumented aliens. Several different Congressional immigration reform proposals, which may present further employment verification obligations, are being considered.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

What You Must Know about Hiring Independent Contractors

If your business uses independent contractors, the best tax advice is simple: Watch your back! Why?  Because state governments are lining up to help the IRS nab businesses they believe have misclassified workers as independent contractors instead of employees.

In tax terms, the difference is huge. If the IRS says you did it wrong, the taxes and penalties will do some serious damage.  And states now want their pound of flesh as well.  Pennsylvania, for example, just enacted a law that can impose civil and even criminal penalties on businesses that misclassify workers. Other states with similar laws include CO, CT, DE, IL, MD, MA, NE, NJ, NM, NY and WI.  Others won’t be far behind.

And be aware that the IRS uses leads and other information it gets from all states to identify and audit small businesses it feels are misclassifying workers.  In short, small business is a big target, and thousands of audits are underway already, with thousands more to come.

Using independent contractors or “contract workers” properly has long been one of the stickiest issues that small business owners face.  Are the people you bring in to provide specific services “independent contractors” (non-employees)? Or are they actually employees?

Because independent contractors are responsible for paying their own taxes, using them can save your business a bundle in payroll taxes, insurance, benefit costs, training and other areas. Independent contractors work for themselves. They operate their own business and have you as a client. You are not their employer and don’t set their hours or control how they perform their work.

But the IRS sees it this way: A worker is an employee of your business unless you can prove otherwise.  “Determining whether a new worker is an employee or an independent contractor can be tough,” says Keith Hall, National Tax Advisor for the National Association for the Self-Employed (NASE).  “Keep in mind that you can’t just choose which one is easiest.  It really depends on who calls the shots day to day.”

If you’re unsure how to classify a worker, here’s quick advice from NASE:

  • If you control the Who, Where, When and How the work is done, they are probably an employee. This means that you, as the business owner, must file a Form W-2 and withhold income and payroll tax, among other things.
  • If the worker controls their own work product and even has other customers besides you, then they are most likely independent contractors.  Payments to independent contractors are reported on IRS Form 1099, and the independent contractors are responsible for their taxes and their own tax forms, including Schedule C, Profit or Loss from Business and Schedule SE, Self Employment Tax.

And also know that workers who believe they’ve been improperly classified as independent contractors can file an Uncollected Social Security and Medicare Tax on Wages form asking the IRS to calculate and collect the employer portion of those two items that would have been due from you.

Here are 12 other things you should do and know:

  1. Using an independent contractor agreement can help (a little): A simple agreement that specifies the independent contractor relationship can help validate your position, but it won’t be enough by itself. Sample independent contractor agreements that you can use or adapt for your own business are available online at Business Owner’s Toolkit and DocStoc.com.
  2. Know the rules for your specific business or industry: Some industries or types of businesses have established a tradition of using independent contractors rather than employees and have cleared this with taxing authorities. But at the same time, firms in certain lines of business are at high risk for aggressive worker “reclassification” audits – especially construction and landscaping.  IRS Publication 15-A, The Employer’s Supplemental Tax Guide (PDF) has detailed guidance including information for specific industries.
  3. The Independent Contractor Report, which has been tracking legal issues in this area since 1986, has detailed information on industries most at risk.   
  4. Know what the IRS says: This is an area where’s it’s important for business to look at what the IRS is saying about the business relationship between you and the person performing the services. The links below have what you need.
  5. Contractors control when and where they work. While they might receive job specifications from a client, they are not given specific instruction on how to accomplish a task.
  6. Avoid setting a pattern of daily or weekly work hours dictated by your business.
  7. Contractors do not usually have a permanent or continuing relationship with your business and have time to pursue other clients. Compensate contractors on a per-job basis, rather than weekly or monthly.
  8. Contractors are paid to complete a set task and may bring in others to complete it, at their discretion and on their payroll.
  9. Contractors use their own tools and technology and are responsible for their incremental expenses. They have an investment in their own “business” and should be able to perform their duties without your facilities.
  10. Contractors can’t be fired as long as they produce results that meet their contract specifications.
  11. Contractors are not covered under health insurance or other benefits you have for employees.  They should have their own.
  12. Legal self-help publisher Nolo has a great guidebook that shows you how to: create a valid contract, assess who qualifies as an independent contractor, hire ICs without risking an audit, retain ownership of intellectual property when using ICs and take advantage of the IRS “Safe Harbor” law.  Details at Nolo.

These IRS resources will also help:

10 Tips to Avoid a Tax Audit for Small Business

As Washington digs for every dollar to stem the federal deficit, IRS audits of small business tax returns are up – way up, and headed even higher.  And know this too:  Sole proprietors – the dominant type of small biz ownership – are 10 times more likely to be audited than other business entities such as LLCs, S-corps and partnerships. But here are ten tips that can help you lower your IRS audit odds:

1.       Be “DIF” score savvy. DIF is hush-hush Fed-speak for “Discriminate Information Function,” the secret IRS formula that decides if you’ll be audited. While DIF details are, well, secret, the steps below can help you avoid the audit hook. Each choice you make – including how to file (e-file or paper), when to file (early? last minute? extend?) and what deductions to claim (home office? entertainment?) – impacts your DIF score and your audit odds.

2.       Be accurate, thorough, neat and on-time (but not early). Sloppy returns, math errors and rounded numbers raise red flags at the Internal Revenue Service.  Having an accountant prepare your taxes, or using a tax prep service or tax prep software makes your return look professional and lowers chances of obvious errors.  But don’t be in a hurry. Filing early only gives the IRS extra time.

3.       Do not file electronically. The IRS hires temps to enter data from millions of paper returns. But they capture only about 40 percent of the info. Electronic filing gives the IRS quick and easy access to 100% of your return.  That’s why they like it so much.

4.       Explain yourself.  Avoid vague expense categories.  For example, “Miscellaneous” is a definite no-no.  If your biz is claiming unusual deductions, provide explanation or specific documentation with your return. Whatever it is, there’s probably a form for it.

5.       Make quarterly tax payments and issue 1099s, W2s and other mandatory filings on time.  Do these electronically. Late quarterly and estimated payments, non-payments and underestimated amounts draw serious IRS ire. Know the deadlines and meet them. File 1099s and W-2s using easy online tax services such as FileTaxes.com. The BizBest Guide to 2011 Tax Forms and Answers has the info and links you need.

6.       Beware of your income-to-deduction ratio. Your audit odds rise if the difference between expenses and income exceeds 52 percent. But total deductions are only part of it. One large deduction can also raise flags.

7.       Inc. yourself. Sole proprietors who file a Schedule C for each business get audited most. To avoid the higher risk of sole proprietor audits, consider making your biz a corporation or limited liability company (LLC).

8.       Hire a tax pro.  If your return is complex or you are uncertain about treatment of deductions, income or other areas, don’t hesitate to bring in a CPA or other business tax pro.

9.       Take a home office deduction carefully. It’s a prime IRS target, so if you plan to take a home office tax deduction, make sure you know the rules.

10.   Get real. Every year, the IRS gets better at using high-tech means to track your business income with cooperation from companies you do business with as well as state and local agencies. And some things are just obvious. If you claim lots of expenses, but show little revenue to pay for them, the tax folks get curious.

BizTaxes.com, a BizBest site, has more helpful tax-saving advice.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved.

Surviving the IRS Employer Tax Crackdown

As budget deficits go stratospheric, the federal “tax gap” is once again a hot topic in Washington. The tax gap is money the government believes should be paid in taxes, but isn’t.  So bureaucrats are beefing up enforcement of existing rules or implementing new ones created by Congress, forming a new gauntlet of compliance requirements for small employers – especially those who use freelance or contract help.

[BizBest Update:  Also see our followup to this story on a new SBA-sponsored report that says the IRS crackdown on small business has been bogus from the beginning!]

The bulls-eye is “worker misclassification.” Basically, that’s when you pay somebody as an independent contractor – thus avoiding the need to withhold payroll taxes – rather than as an employee.  Or perhaps you are paying someone a salary when they really should be hourly and subject to overtime pay.  Either way, if you get it wrong, it could cost you dearly.

The new federal budget hands the U.S. Department of Labor (DOL) an extra $25 million to pursue misclassification miscreants.  But according to MBO partners, a leading human resources consulting firm, the extra dough for DOL is nothing compared to an estimated $8 billion boost the feds are giving IRS to modernize and expand enforcement programs.

Implications for small business are immense. “Minimum wage and overtime laws can be confusing, and not paying the proper wage to an employee can quickly turn into an expensive headache,” says Karen Harned, executive director of the NFIB Small Business Legal Center.  “DOL is hiring more agents to investigate and charge businesses with overtime and other wage violations,” says Harned.  To avoid penalties or claims from disgruntled employees, make sure your business hasn’t fallen into these common traps.

1. Letting hourly employees waive their right to overtime pay. Overtime pay is mandatory. Employees can’t opt out.  Even if an employee is instructed to only work 40 hours per week, any hours actually worked over 40 hours in a seven-day workweek are subject to overtime pay.

2. Averaging hours worked over two weeks. Even if you use a two-week pay period, the Fair Labor Standards Act (FLSA) treats each work week as a single unit.  An employee who works 42 hours in one week must be paid two hours of overtime, even if the same employee only works 20 hours the next week.

3. Giving time off instead of cash. The law is highly biased in favor of cash compensation rather than “comp time.” Neither the employer nor employee can agree to or insist on comp time in lieu of overtime pay.

4. Treating all salaried employees as exempt from overtime rules. Just because someone is salaried or carries a fancy job title doesn’t make them exempt from FLSA overtime requirements. Employers must be careful to ensure that employees are properly classified. Exempt employees must meet a certain minimum salary and fall under a certain exemption category specified by the FLSA.  You can find details of the law at the DOL website (www.dol.gov/elaws).

5. Docking the pay of an exempt employee. An exempt employee must be paid on a salary basis. This means the employee receives a predetermined amount of pay which is not subject to reduction.  Here’s the danger:  If you make improper deductions from an exempt employee’s salary, the salaried basis of payment is destroyed and the exemption is lost. Don’t jeopardize the exemption. Make sure exempt employees are paid the same each pay period, regardless of hours worked.  In other words, if an exempt employee shows up for part of a workday, you must pay him or her for the whole day.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved. 

How a Bigger Business Bash can save Money

As a cost cutting move, many companies have downsized their office celebrations.  But in some cases, putting on a bigger business bash might actually be a way to save the company money. Here’s why:

If you host a small get-together just for select employees, customers or other invited guests, the IRS will consider your event to be “entertainment” and not “advertising,” says Phillip Ash, a Washington, DC-area CPA and publisher of Small Business Tax Strategies. And the difference between those two words is huge in tax terms.

Your business is only allowed to deduct 50 percent of entertainment costs.  But advertising costs are 100 percent tax deductible.  Thus, if you plan to host a get-together with only a few invited guests, by expanding your guest list to include the entire workforce — and then some — your business will be able to deduct the full cost, rather than just half.

And while you’re at it, beware of other tax-related pitfalls.  For example, giving employees cash or gifts (in lieu of a party) can have negative tax consequences to your business and well as your employees since those items are reportable as income to the employee, says Kelly Phillips Erb, a business tax attorney who heads the The Erb Law Firm in Philadelphia.

IRS Publication 463, available at IRS.gov, has all the gory details.

And if you’re looking for ideas and resources to pull together your big business-related bash, check out BizBash, a great event and meeting planner’s source for venues, caterers, rentals, entertainment, decor, banquet halls, AV production, and lots more.

Copyright © 2000-2011 BizBest Media Corp.  All Rights Reserved.