Archive for the "Business Consulting" Category

Sharing Economy Basics

The rise of easy to use apps have allowed more and more people to take advantage of the sharing economy.  Countless people supplement their current income and a few even leave their steady paychecks behind and work for themselves, on their own schedule, by driving for Uber or renting their home through Airbnb.  This is referred to as the sharing economy, or gig economy.  While this can be liberating for some, there are important tax consequences that are often overlooked or misunderstood.

When you start participating in the sharing economy, you have started your own business and are an independent contractor of the app developer (Uber/Airbnb).  With that comes additional filing requirements and often additional taxes.  The most important, or largest new tax obligation, will likely be self-employment taxes.  Self-employment tax is currently 15.3% of your net self-employment income up to $127,500.  For a more in depth look at self-employment taxes please see our article “Self-Employment Taxes Explained.”  Keep in mind that this 15.3% tax is in addition to the regular income tax.

The income that you receive from the shared economy is taxable.  This is the case even if you do not receive a 1099-MISC, or 1099-K for electronic payments, or only accept cash.  You are also able to deduct from your taxable income, ordinary and necessary business expenses to arrive at net income.  This is the amount that you pay taxes on.

Ordinary and necessary business expenses will be different for the type of work you are doing.  Each segment of the sharing economy has its own attributes.  For example, depreciation, or the reduction in the value of an asset, will be very important to someone utilizing Airbnb.  Not so much for somebody driving for Uber.  The exact opposite will be true of the mileage deduction.  It is important to be aware of which tax deductions you can, and should, take advantage of.  It is equally important to understand the record keeping requirements to document those expenses.

If you are profitable in your gig economy venture, you may be required to make estimated tax payments throughout the year.  When you receive a paycheck, federal and state taxes are withheld from each check.  When participating in the gig economy you do not receive a paycheck, and therefore must send in your estimated tax payments separately.  These payments are due quarterly.

It may seem like you are responsible for all for all of the same things as an ordinary business.  That's because you are!  The IRS does not see your gig economy business any different than a property management company or taxi service provider.  It is important to be aware of each businesses characteristics and requirements to make sure there are no surprises when it is time to file your taxes.  For more information please contact your trusted tax advisor.

If you are thinking of joining Airbnb, please see our article on short term rentals.

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Short Term Rentals

The Twin Cities has been and continues to be a popular site for National events, mostly in the sports genre.  The next event that the Twin Cities is buzzing about hosting is the 2018 Super Bowl.  With this kind of national exposure, Minnesota residents are searching for opportunities to take advantage of the increase in tourism.

With the current media exposure for sites like Airbnb, short term rentals are gaining in popularity for their simplicity and tax benefits.

However, these short term rentals may not be quite as easy as they may seem.  Depending on the location and type of home you hope to rent out, you may have issues with zoning codes, specific license compliance, and association rules.  The fines for violating any one of these could outweigh any income you may hope to earn. Additionally, should any of your guests get injured, you could have a whole host of issues that you did not plan for.  And don't forget the cost of sales tax compliance.

Even with the risks, there are tax benefits to these short term rentals.  Income earned from renting out your main home for two weeks or less is not taxable and does not need to be reported on your income tax return.  The downside is that any expenses you incur to rent out your home are also nondeductible for tax purposes.  Therefore, if the expenses you incur such as license fees, additional insurance, cleaning and any repairs exceed the income received in the activity, there is no tax benefit.

In the end, short term rentals can be a great money making strategy as long as the risks don't outweigh the reward. Make sure that you do the research to stay in compliance and contact your insurance and tax advisors with any questions.

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Employee vs. Independent Contractor

Do you have employees or independent contractors?  This is an important question with potentially large tax implications. Employees are paid through payroll and wages are subject to FICA and unemployment taxes.  Independent Contractors are not subject to payroll taxes, however there are additional reporting requirements for payments of services. This is also an area in which governments are beginning to crack down.  The IRS offers Form SS-8, which can be submitted by either the business or the worker to help determine the correct treatment in uncertain cases.  To help determine into which category your workers fall the IRS has some common law control rules that fall into three categories; behavioral, financial, and type of relationship.

The first category is behavioral control.  This refers to the degree of the right the company has to control the workers job.  An example of this is the type and degree of instructions given.  Generally, an employee is instructed about when, where, and how to work.  An independent contractor (IC) is hired to complete a job and given minimal instruction.  How the worker is evaluated is also a factor.  A contractor is usually only evaluated on the end result, rather than the parts of the process.  Training also factors in.  Training the worker on how to do the job it is strong evidence that the worker is an employee.  It is important to note that actually controlling these aspects of the worker are not important.  What's important is having the right to this control.

The second category of control is financial.  ICs often have significant investment in their equipment, whereas employees typically use the company's equipment.  ICs are usually not reimbursed for their expenses and will have ongoing expenses even if no work is being performed.  Whether the worker is offering their services to the market and not just to the company is strong factor for independent contractors.

The last category is the type of relationship.  This includes contracts, benefits, and length of the relationship.  Independent contractor agreements are always a good idea.  However, the existence of a contract is not sufficient to classify a worker as an IC.  Benefits such as insurance, paid time off, and retirement plans are indicators of an employee relationship, as these are generally not offered to ICs.  A company typically hires an IC with the expectation that the work will be for a specific job, or period.  If there is an expectation that the relationship will continue forever, it is evident of an employer-employee relationship.

It is important to look at the entire relationship between a company and the worker.  It is possible that some factors point to IC status while others point to employee.  You must consider all the factors and document the ones used to make the determination.  For help in making the determination or guidance on how to document it, please contact your trusted tax advisor.

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Self-Employment Taxes Explained

If you have recently started your own small business you may have heard the term "Self-Employment Tax" crop up in conversations with your advisors.  Self-employment tax is not a new additional tax that you are required to pay because you started a business, but rather the government's way to collect Social Security and Medicare taxes for self-employed individuals.

Social Security and Medicare taxes are due on wages, tips, and net earnings from certain businesses. Self-employed individuals who report earnings on Schedule C of their individual tax return or Partners in partnerships with self-employment earnings are subject to self-employment tax.  Self-employment tax is made up of the following:

  1. Social Security tax 12.4% up to $127,200 of wages, tips, or net earnings in 2017.
  2. Medicare tax 2.9%
  3. Additional Medicare tax .9% this tax is only calculated for taxpayers whose wages, tips, and net earnings (including spouses) exceed certain thresholds depending on filing status. Currently the threshold is $200,000 for Single filers and $250,000 for Married Filing Joint filers.

Net earnings under $400 are not subject to self-employment tax.

As an employee who receives a Form W-2 wage reporting statement you may have noticed that Social Security and Medicare are withheld from your wages to get to your net check and are reported on your W-2.  The amount that is deducted from your pay is only half of the total tax due, your employer pays the other half.  When you are self-employed, the entire burden resides with you.  However, there is a deduction from the total income on your individual tax return that is equal to the employer equivalent or about half of the total self-employment tax. This deduction only affects your income tax and does not affect either your net earnings from self-employment or self-employment tax.

Most self-employed individuals are required to pay estimates throughout the year to pay the self-employment and income tax due on their earnings.  For a full discussion on estimates see our article. It is important to remember self-employment tax when saving for your overall tax liability as the numbers can change dramatically if not considered.  There are different ways of limiting your self-employment tax liability based on entity structure, retirement options, and expense planning.  For guidance on how to reduce your liability based on your individual situation please contact your tax advisor.

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2017 Update

Welcome to 2017. The rates and phase-out ranges for tax deductions are subject to change and cost-of-living adjustments on an annual basis.  Some of the new changes to 2017 include:

Mileage Rates

Business – 53.5 cents per mile

Medical or moving – 17 cents per mile

Charitable – 14 cents per mile

 

HSA Contribution

Self-Only – $3,400 (plus an additional $1,000 if 55 or older)

Family – $6,750 (plus an additional $1,000 if 55 or older)

 

Retirement Plan Contribution Limits

Traditional IRA –  The contribution limit remains the same, $5,500 or $6,500 if 50 or older, but the phase out limits have changed.

Single and Head of Household: phase-out begins at $62,000

Married Filing Joint (both spouses covered by employer plans): phase-out begins at $99,000

Married Filing Joint (only one spouse covered by employer plan): phase-out begins at $186,000

Roth IRA – The contribution limit remains the same, $5,500 or $6,500 if 50 or older, but the phase out limits have changed.

Single and Head of Household: phase-out begins at $118,000

Married Filing Joint: phase-out begins at $186,000

 401K and 403b Plans – the contribution limit for employees that participate in these plans remains the same at $18,000 or $24,000 if 50 or older.

Defined Benefit Plans – limited to $54,000 in 2017

 

If you have questions about your individual tax situation, contact your tax advisor.

2017

New Small Employer Health Reimbursement Arrangement

In December of 2016 President Obama signed the 21st Century Cures Act into law.  Included in this law was a provision to allow small employers to establish health reimbursement arrangements (HRAs) for their employees.  Previously, with the passage of the Affordable Care Act, these arrangements were subject to very high penalties as they did not satisfy the minimum essential coverage requirements.  There was relief from these penalties that expired in June of 2015.  The Cures Act now makes that relief effective for all plan years beginning before the end of 2016. Moving forward, a new type of reimbursement arrangement can be implemented.

A qualified small employer health reimbursement arrangement (QSEHRA) can be established.  A few guidelines regarding QSEHRAs:

  1. The definition of a "small employer" is the same as defined in the Affordable Care Act – less than 50 full time equivalent employees
  2. The company does not offer a group health plan
  3. The plan must cover all employees with very limited exceptions
  4. There is a cap to how much each employee can be paid – $4,950 per year for single employees and $10,000 per year for family coverage. Benefits generally must be offered at the same level to all employees
  5. The reimbursement arrangement can pay for medical expenses including health insurance premiums
  6. The amounts paid are deductible by the company but not income to the employee if the employee provides annual proof of minimum essential coverage for them and their family members
  7. Companies must provide an annual notice to eligible employees. The notice states the benefit amount and informs the employee to disclose the benefit to the health insurance exchange if they are receiving advance premium tax credits.

It has been a struggle recently for small employers to offer any assistance with employee health insurance.  The passage of the 21st Century Cures Act provides a valuable option that many small businesses can use to their advantage.  It is likely that in the coming months further guidance will emerge to help with the implementation and administration of QSEHRAs.  For additional information, or to discuss how this could benefit you, please contact your trusted tax advisor.

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2016 Tax Season Resources

Welcome to another tax season!  To make this busy time a little easier, you can download all the necessary documents right here.

We ask all of our clients to fill out and return a signed Engagement Letter, and Questionnaire. We also have an Organizer that you can fill out to help gather your tax information.

Individual Engagement Letter

Fiduciary Engagement Letter – Available upon request.

Individual Questionnaire  This is a “fill in” PDF form, but will need to be either printed to .pdf or paper to record your answers.

Fiduciary Questionnaire Print and record your answers on paper.

Individual Organizer (Not available for Fiduciary)

If we did your return in 2015, you will receive an Organizer with your prior year information.  If you need a new Organizer, please contact Carrie to have one sent to you.

If you are a new client, please download and complete the blank Organizer that pertains to your situation.

  1. Basic- For taxpayers without Schedule C business income, or rental property.
  2. Business Income- For taxpayers with self-employment income. Please make sure to fill out this Organizer AND the Basic Organizer.
  3. Rental Income – For taxpayers with rental properties. Please make sure to fill out this Organizer AND the Basic Organizer.
  4. Complete- This is the complete version for taxpayers with multiple activities such as business, rental, farm, or foreign income.

If you have Adobe Acrobat see our instructions for filling out your organizer in Adobe.

1099 and W2 Deadline Changes

Tax season and its many deadlines are right around the corner.  The first deadline is the information-reporting forms, and beginning in 2017, there are important deadline changes.  In prior years, both forms W2 and 1099 were due to the recipient on January 31, but not due to the IRS until March 31.  Congress has enacted new legislation closing this gap; both Forms 1099 and W2 will be due to the recipient and the IRS on January 31, 2017.

The filing penalties remain largely unchanged, and can be up to $250 for each late filing both to the recipient and to the IRS.  However, the IRS's ability to assess these penalties will significantly improve in 2017.  In previous years, barring audit, a 1099 filer was unlikely to receive a penalty as long as both recipient and IRS filings were completed by March 31—regardless of when the recipient actually received the 1099.  With these deadline changes, the IRS will have the ability to assess failure to file penalties both with the recipient and with the IRS after January 31.  This penalty could be as high as $500 per 1099 whether missed, incorrect, or late.

Given the stringent requirements this year, it is important to get a head start.  Looking at your prior year filings can be a great place to start.  Additionally, let's go over the basic process for 1099s.  First, look for payments of $600 or greater made for services (not goods) throughout the tax year that were done in connection with your trade or business.  Second, determine whether the business is incorporated.  Many corporations will include the acronym ‘Inc.’ in their title if they are incorporated.  You are not typically required to send a 1099 to corporations, however, there are two major exceptions to keep in mind. Payments for attorney or medical services must be sent a 1099 regardless of corporate status.  Third, if the business is not a corporation or cannot be determined, send the business a Form W9.

For further information on the information-reporting requirements, consult your tax advisor.

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2016 Year End Tax Planning

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the planning challenge this year include turbulence in the stock market, overall economic uncertainty, and Congress's failure to act on a number of important tax breaks that will expire at the end of 2016.

Some of these expiring tax breaks will likely be extended, but perhaps not all, and as in the past, Congress may not decide the fate of these tax breaks until the very end of 2016 (or later). For individuals, these breaks include: the exclusion for discharge of indebtedness on a principal residence, the treatment of mortgage insurance premiums as deductible qualified residence interest, the 7.5% of adjusted gross income floor beneath medical expense deductions for taxpayers age 65 or older, and the deduction for qualified tuition and related expenses. There is also a host of expiring energy provisions, including: the non-business energy property credit, the residential energy property credit, the qualified fuel cell motor vehicle credit, the alternative fuel vehicle refueling property credit, the credit for 2-wheeled plug-in electric vehicles, the new energy efficient homes credit, and the hybrid solar lighting system property credit.

Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare tax.

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The 0.9% additional Medicare tax also may require year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple's combined income won't be high enough to actually cause the tax to be owed.

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.  Please review the following list that pertains to you and contact your tax advisor at your earliest convenience so that they can advise you on which tax-saving moves to make:

Year-End Individual Planning

Year-End Business Planning

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Year-End Planning: Taking Advantage of Employee Benefits

With the year-end approaching, employees can take the opportunity to revisit some of their benefits.  The following is a list explaining some of the common benefits and their potential tax ramifications.

  1. Do you have the opportunity to participate in a Health Savings Account (HSA) or a Health Flexible Spending Account (FSA)? If enrolled through your employer, you may contribute to these plans pre-tax up to certain limits annually, and spend the money on qualified healthcare expenses such as deductibles, copays, and prescriptions.  If your employer offers both an HSA and FSA, you may want to consult your tax advisor to decide which is best for you.
  2. Your employer may also offer a dependent care FSA. Similar to a Health FSA, this account permits pre-tax contributions that can be withdrawn to pay for child care.  The maximum annual contribution limit is $5,000.
  3. Have you asked about your employer's qualified transportation benefits? This permits the employer to reimburse you tax free for transportation.  This includes transit passes, parking, vanpooling, and bicycle commuting.
  4. Year end is a good time to evaluate your retirement plans, and set goals for the future. The contribution limit to a 401(k) in 2016 is $18,000.  This is tax deferred income that can grow exponentially by retirement.  If you're nearing retirement, there are options too; the IRS permitted an extra contribution of $6,000 to your 401(k) in 2016 if you are 50 or older by year-end.
  5. Finally, it may be worth taking a look at your pay stub and seeing at what rate you are withholding. If you are not withholding enough, you may be subject to interest and penalties when you file your tax return.  If you are withholding too much, you are granting the IRS an interest free loan.  These are funds you could have put towards an FSA or retirement, which could in turn generate further tax savings.  In order to change your withholding, ask your employer for a Form W-4.

If you have questions on how these benefits may impact your individual tax situation, please contact your tax advisor.

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