Category Archives: Prescott Accounting

IRS/DOL Crackdown on Independent Contractor vs. Employee

IRS/DOL Crackdown

If you classify any workers as “independent contractors”—or have plans to do so—2013 is the year to make sure you get that classification correct.

Below is Topic 762 – Independent Contractor vs. Employee provided by irs.gov to help in identifying which classification a worker falls:

To determine whether a worker is an independent contractor or an employee under common law, you must examine the relationship between the worker and the business. All evidence of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and the Type of Relationship.

Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done, through instructions, training, or other means.

Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

  • The extent to which the worker has unreimbursed business expenses
  • The extent of the worker’s investment in the facilities used in performing services
  • The extent to which the worker makes his or her services available to the relevant market
  • How the business pays the worker, and
  • The extent to which the worker can realize a profit or incur a loss

Type of Relationship covers facts that show how the parties perceive their relationship. This includes:

  • Written contracts describing the relationship the parties intended to create
  • The extent to which the worker is available to perform services for other, similar businesses
  • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
  • The permanency of the relationship, and
  • The extent to which services performed by the worker are a key aspect of the regular business of the company

For more information, refer to Publication 15-A (PDF), Employer’s Supplemental Tax Guide, or Publication 1779 (PDF), Independent Contractor or Employee. If you want the IRS to determine whether a specific individual is an independent contractor or an employee, file Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Contact Schutte & Hilgendorf with your questions related to independent contractor vs. employee.  Schutte & Hilgendorf, CPAs, is a full service public accounting firm providing tax planning, preparation, audit, accounting, and QuickBooks consulting to individuals and small business in the Prescott and greater Yavapai County area.  Call us at 928-778-0079 or visit www.prescottaccountants.com


Things to Remember about Charitable Giving

All giving is valuable to those in need, but from a tax perspective, not all giving is rewarded with a tax write-off.   Here is what you need to keep in mind:

1. YOU MUST ITEMIZE FOR FEDERAL FILING TO DEDUCT CHARITABLE GIVING. You can be as generous as you want, but a tax deduction is limited to those who itemize personal deductions and forego the standard deduction amount.

2. DEDUCTIONS ARE ALLOWED ONLY FOR IRS-APPROVED CHARITIES. You cannot claim a deduction for money you give directly to individuals. Check to see that a charity is IRS-approved at www.irs.gov/Charities-&-Non-Profits/Search-for-Charities.

3. ANNUAL DEDUCTIONS ARE LIMITED WITH RESPECT TO ADJUSTED GROSS INCOME. You cannot deduct cash donations in excesss of 50% of your adjusted gross income.  Unused deductions can be carried forward for up to 5 years.

4. DEDUCTIONS REQUIRE SUBSTANTIATION. Your word or even a canceled check isn’t good enough.  If you donate $250 or more, you must obtain a written acknowledgment from the organization, specifying your gift and stating that no goods or services were received in exchange. Special rules apply for donations of vehicles.

5. SOME GIFTS REQUIRE APPRAISALS.  If you donate property valued at more than $5,000, you need a qualified appraisal.  This must be done by someone who has the credentials to be a qualified appraiser.

6. DEDUCTIONS OF APPRECIATED PROPERTY PROVIDE A DOUBLE TAX BENEFIT.  If you donate appreciated property that you have owned for more than a year, such as stock, you can deduct the value of the property on the date of the gift.  What’s more, you don’t have to report any capital gain on the appreciation; it effectively becomes tax free to you.

7. CASH DONATIONS MADE BY YEAR-END ARE DEDUCTIBLE NOW EVEN IF RECEIVED IN THE NEW YEAR. If you mail a check to the charity on December 31, it is deductible on your 2012 return, even though the charity does not receive the gift until 2013. Also, you can charge a donation to a credit card; you can take the  deduction in 2012 even if you pay the credit card bill in 2013.

8. OUT OF POCKET EXPENSES ARE DEDUCTIBLE. If you spend any money helping a charity, you can deduct those if you have substantiation. The value of your time volunteered to a charity, however, is NOT deductible. The mileage on your vehicle for driving to volunteer IS deductible at the rate of $0.14 a mile.  Be sure to keep a record of the mileage, including the date and purpose of each charitable trip.

These tips are brought to you by Schutte & Hilgendorf, PLLC, CPA’s, a Prescott firm serving the greater Yavapai County, providing audit, accounting, bookkeeping, tax preparaton and planning, Quickbooks accounting and setup, to individuals and small businesses. Contact us for a free consultation at (928) 778-0079.


Record Retention

We at Schutte & Hilgendorf field a lot of questions regarding record retention. “How long should I keep my receipts?  ” How long should I keep my prior year tax returns?” The answer is not as clear cut as you would hope.  We found the following helpful article in a web search provided by www.lifeorganizers.com.  It thoroghly addresses these questions for most individuals.

Click here :  Record Retention

Should you have additional questions or need tax or accounting advice, give us a call.   Schutte & Hilgendorf is a full service CPA firm, providing auditing, accounting and tax services for individuals, small businesses, non-profits and homeowners associations throughout Yavapai County and Northern Arizona. Call us at 928-778-0079 or email info@prescottaccountants.com


Exempt Organizations Annual Reporting Requirements – Annual Electronic Notice (Form 990-N) for Small Organizations: Information Reported

From www.irs.gov

Exempt Organizations Annual Reporting Requirements – Annual Electronic Notice (Form 990-N) for Small Organizations: Information Reported

 
What information do I need to provide on the e-Postcard?

The e-Postcard is easy to complete. All you need is the following information:

  • Organization’s legal name –
    • An organization’s legal name is the organization’s name as it appears in the certificate of incorporation or the organization’s application for Federal tax-exempt status, unless a request was previously submitted to the IRS to have the name officially changed.
  • Any other names your organization uses – If the organization is known by or uses other names to refer to the organization as a whole (and not to its programs and activities), commonly referred to as Doing-Business-As (DBA) names, they should be listed.
  • Organization’s mailing address – The mailing address is the current mailing address used by the organization.
  • Organization’s website address (if you have one).
  • Organization’s employer identification number (EIN) –
    • Every tax-exempt organization must have an EIN, sometimes referred to as a Taxpayer Identification Number (TIN), even if it does not have employees. The EIN is a unique number that identifies the organization to the Internal Revenue Service. Your organization would have acquired an EIN by filing a Form SS-4 prior to requesting tax-exemption.  The EIN is a 9-digit number and the format of the number is NN-NNNNNNN (for example:  00-1234567). 
    • If you do not know your EIN, you may be able to find it on the organization’s bank statement, application for Federal tax-exempt status, or prior year return.
    • Please note that the EIN is not your tax-exempt number.  That term generally refers to a number assigned by a state agency that identifies organizations as exempt from state sales and use taxes.
    • If you do not have an EIN, see the Instructions for Form SS-4 for different ways to apply for an EIN.  DO NOT use the EIN of a parent or other organization.
  • Name and address of a principal officer of your organization –
    • Usually president, vice president, secretary, or treasurer – often specified in the organization’s by-laws.
  • Organization’s annual tax year –
    • Like any taxpayer, exempt organizations must keep books and reports and file returns based on an annual accounting period called a tax year.  A tax year is usually 12 consecutive months that can be either calendar year or fiscal year and is often specified in the organization’s by-laws.
  • Answers to the following questions:

Page Last Reviewed or Updated: September 21, 2011

 

Schutte & Hilgendorf, CPAs, a Prescott accounting firm, specializes in auditing, accounting and tax preparation and planning for non-profit Organizations throughout Yavapai County and Northern Ariziona.  Should you need assistance with filing a non-profit information return (990) or notecard, please call us at 928-778-0079.  We can e-file 990-e postcards (990-N) for you from our office for a nominal fee.  Call us today!


Knowing when to make your Arizona Withholding Payment

How does an employer know whether to make Arizona withholding payments on a quarterly basis or more frequently?

QUARTERLY BASIS PAYMENTS: An employer must make its Arizona withholding payments on a quarterly basis if the average amount of Arizona income taxes withheld during the preceding four calendar quarters does not exceed $1,500.

MORE FREQUENT PAYMENTS: An employer must make its Arizona withholding tax payments at the same time as its federal withholding deposits if the average amount of Arizona income taxes withheld during the preceding four calendar quarters exceeds $1,500.

WHY DOES THE EMPLOYER MAKE THIS COMPUTATION? Arizona law requires an employer, at the beginning of each new quarter, to compute its average Arizona withholding tax liability for the preceding four calendar quarters. This calculation is performed to determine the correct Arizona withholding payment schedule.

HOW DOES THE EMPLOYER MAKE THIS COMPUTATION? An employer that has four full consecutive calendar quarters of Arizona withholding liability historical data must use the regular withholding payment schedule computation. An employer that does not have four full consecutive calendar quarters of Arizona withholding liability historical data must use the alternate withholding payment schedule computation. Refer to the “Arizona Withholding Liability/Payment Schedule” section of the Form A1QRT instructions for further information

Per the State of Arizona – Department of Revenue – Arizona Withholding FAQ’s

Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.


Audits Add Shine to Firms – WSJ.com

By ANGUS LOTEN, WSJ.com

Small businesses whose books are audited—by a hired certified public accountant, not the Internal Revenue Service—improve their chances of getting a loan, and at far better terms, than businesses with less scrutinized financial statements, a new study shows.

Yet even as owners continue to struggle with tight credit, few can afford the time, effort or cost of preparing complex financial statements, let alone having them audited, small-business owners, lenders and accountants say.

“Banks love when you have audited financials because they view it as a form of insurance,” says Buzz Rose, a certified public accountant in Pittsburgh. “But audits have become very expensive and to have one done ‘just in case’ would seem to be a waste of time and money.”

But the benefits might outweigh the costs.

Based on data from more than 10,000 closely held companies—about half of which have less than 500 employees—a study by the University of Chicago Booth School of Business found audited businesses save an average of $6,900 for every $1 million in outstanding debt every year as a result of lower interest rates, which were more than half a percentage point below rates paid by nonaudited businesses. For a loan of $3.3 million, the average size of loans analyzed in the study, the savings was about $23,000.

A small-business audit costs anywhere from $5,000 to $75,000, depending on the size of the company, the complexity of its data and other factors—typically double the cost of a financial statement review, the next highest level of CPA-verified assurance after an audit.

An audit provides third-party assurance that a company’s financial statements are correctly prepared and based on verified business data, while a review shows the statements are at least internally consistent with data provided by management.

“There appears to be a very real cost benefit to getting an audit, beyond the obvious value of having your financial statements in order,” says Michael Minnis, a Booth School assistant professor of accounting who led the study. The Booth School study is expected to be published in the Journal of Accounting Research in May.

Similarly, a joint study last year by Michigan State University and Indiana University found small businesses with audited financial statements were “significantly less likely” to be denied credit from banks.

David Leuthold, chief executive of Century Negotiations Inc., a North Huntingdon, Pa., consumer-debt settlement firm, says he started having his books audited annually in 2005 to double-check his own bookkeeping, paying about $8,000 an audit. The move paid off when he applied for a $100,000 line of credit the following year.

“The bank required audited financial statements,” says Mr. Leuthold, whose company made $8 million in revenue last year. Even without audited books, he believes the bank might have approved the loan, though at less favorable terms. “We had what they wanted, so it was definitely worth it,” he says.

Still, for many small businesses seeking a loan, lenders say an audit is costly and unnecessary.

“Audits provide good information. The more concrete information a lender can get, the better,” says Tom Burke, the director of Wells Fargo’s Small Business Administration lending division. But he questioned the necessity of audits for every business.

Mr. Burke says a business with less than $1 million in annual revenue can ask a CPA to prepare a compilation, which is a cheaper, unaudited financial statement based on recorded sales, inventory and other data. Since owners often use these statements to manage daily operations—and they’re prepared by CPAs—lenders have some assurance of the statements’ accuracy in making loan decisions.

“I’d hate to see people taking steps that aren’t necessary, or that they can’t afford,” Mr. Burke says.

Small-business accountant David Wilke, of Carnegie, Pa., says he helps borrowers and lenders negotiate loan terms based on mutually acceptable levels of assurance, ranging from compilations to audits. He says a CPA “adds value by determining what a bank wants and what a business can provide at an early stage,” rather than trying to convince every client to get audited.

Mr. Rose, the accountant in Pittsburgh, says it’s only worth going through an audit—which can require days and even weeks of a manager’s time—when a business owner has a loan in hand that’s contingent on providing audited financial statements.

Audited or not, less than a quarter of businesses with fewer than 500 employees keep financial statements of any kind, according to the Federal Reserve Board’s National Survey of Small Business Finances.

“There’s a lot of criticism that it’s expensive and difficult to prepare and audit your financial statements,” says Teri Yohn, an Indiana University associate professor of accounting who sits on the Financial Accounting Foundation’s blue-ribbon panel on private-company accounting standards. “But there are clearly benefits.”

Schutte & Hilgendorf, PLLC, a Prescott based CPA firm provides audits and reviews to small businesses, government entities, non-profit organizations, and homeowners associations.  We also provide tax preparation and planning services, QuickBooks consulting and training and payroll and sales tax services to individuals and small businesses.  Contact us for pricing or more information about how we can help you!


How many non-profit boards hire an outside auditor?

How many non-profit boards hire an outside auditor?

Eighty-four percent of the respondents of a recent BoardSource governance survey say that they annually hire an auditor to conduct an external financial audit. Smaller organizations are less likely than large organizations to hire an auditor.

Here are five key ways to maximize the audit process:

Be sure the board is in the audit driver’s seat. The nonprofit board has the responsibility to oversee the audit process. This includes assessing the financial controls, policies, procedures, and condition of the organization and overseeing the external auditor.

Review the auditor’s independence. The board should be certain that the auditor is independent and objective in performing duties.

Choose your auditor carefully. Even with rigorous efforts by professional bodies governing the practice of Certified Public Accountants to improve the quality of audits, not all audits are created equal.

Invest your audit dollars wisely. While it is important to be certain the audit fees are reasonable in light of the quality and value of an audit, focusing too much attention on cost can be detrimental to the health of the audit and ultimately to the organization.

Properly use your audit committee. The audit committee should be the fulcrum of the financial reporting function. Start with an independent audit committee. The committee members should not be members of the nonprofit’s staff. Invite staff members to committee meetings to answer questions and to provide information.

Excerpted from the Maximizing the Audit Process by Dan Busby.

Should you have questions regarding this post or any other accounting or auditing needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.


IRS may recharacterize dividend payments to S shareholder-employee as wages

IRS may recharacterize dividend payments to S shareholder-employee as wages
Watson, P.C. v. U.S., (DC IA 12/23/10) 107 AFTR 2d ¶2011-305
A district court has concluded that an S corporation shareholder-employee’s $24,000 salary in 2002 and 2003 was unreasonably low, and allowed IRS to reclassify as salary over $67,000 in dividend payments to the officer during each of those years. The corporation will also owe employment taxes on the reclassified dividend payments.
RIA observation: This is a long standing compliance issue with IRS, which feels that many service professionals try to minimize Medicare and Social Security taxes by routing what would otherwise be self-employment income through an S corporation and then paying themselves a nominal salary. Since the amount of compensation that an S corporation pays its employee-shareholder is within the employee-shareholder’s discretion, he may have an incentive to claim less than a reasonable salary and take from the S corporation other payments (e.g., dividends) that aren’t subject to employment taxes.
RIA observation: In 2010, the House but not the Senate passed legislation that included a crackdown on service professionals who try to minimize Medicare and Social Security taxes by routing their self-employment income through an S corporation and then paying themselves a nominal salary (see Federal Taxes Weekly Alert 06/03/2010).
Facts. David E. Watson had a bachelor’s degree in business administration and a specialization in accounting. He owned a professional corporation (PC) called DEWPC that, since its inception, had elected to be taxed as an S corporation. Watson was its sole shareholder, employee, director, and officer, and was the only person to whom DEWPC distributed money during the years at issue. His $24,000 annual salary was documented in the corporate minutes. In selecting his salary, he did not look at what comparable businesses paid for similar services. For both years at issue, Watson received dividend distributions from DEWPC that totaled over $175,000 annually.
On Feb. 5, 2007, IRS assessed $48,519 in taxes, penalties, and interest against DEWPC for the eight calendar quarters of 2002 and 2003. It made these assessments after it determined that portions of the dividend distributions from DEWPC to Watson should have been characterized as wages paid to Watson that were subject to employment taxes. DEWPC later paid $4,063.93 toward these assessments and then filed a claim for refund of the payments. IRS denied the claim and DEWPC sued in district court.
Background. Employers are liable for FICA (Social Security) taxes on wages paid to their employees. (Code Sec. 3111) Fact Sheet 2008-25, August 2008 warns S corporations not to attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages. Fact Sheet 2008-25, August 2008 lists these factors that courts have considered in determining reasonable compensation:
•       training and experience;
•       duties and responsibilities;
•       time and effort devoted to the business;
•       dividend history;
•       payments to non-shareholder employees;
•       timing and manner of paying bonuses to key people;
•       what comparable businesses pay for similar services;
•       compensation agreements; and
•       use of a formula to determine compensation.
DEWPC argued that IRS did not have the authority to recharacterize any of the dividend payments as compensation. DEWPC cited three federal court cases to support its argument.
Court’s ruling. The district court found that DEWPC’s position was undermined by IRS revenue rulings and case law. For example, in Rev Rul 74-44, 1974-1 CB 287, IRS concluded that dividends received by an S corporation’s two sole shareholders were wages for which the corporation was liable for FICA, FUTA and income tax withholding. In Joseph Radtke v. U.S., (DC WI 4/11/89) 63 AFTR 2d 89-1469, aff’d, (CA 7 2/23/90) 65 AFTR 2d 90-1155, a district court determined that certain funds designated as dividends were actually compensation for which an S corporation owed employment taxes. The district court was not persuaded by the rulings that DEWPC cited because in those rulings, the taxpayer was attempting to recharacterize funds, whereas in DEPW’s case, it was the government that was attempting to recharacterize the funds.
The district court said that the proper tax treatment of funds disbursed by an S corporation to its employees or shareholders turns on an analysis of whether the payments were remuneration for services performed. After reviewing the facts, the court concluded that DEWPC structured Watson’s salary and dividend payments in an effort to avoid federal employment taxes, with full knowledge that the dividends paid to Watson were actually “remuneration for services performed.” The court believed that a reasonable person in Watson’s role as DEWPC’s sole shareholder, officer, and employee would be expected to earn far more than a $24,000 salary for his services. The court pointed out that Watson was an exceedingly qualified accountant, with both bachelor’s and advanced degrees, working as one of the primary earners in a reputable firm that had over $2 million in gross revenues in 2002 and nearly $3 million in 2003.
As a result of the ruling, DEWPC will owe employment taxes, penalties, and interest on the 2002 and 2003 dividend distributions to Watson that were reclassified as salary.
RIA Research References: For S corporation dividends as wages subject to withholding, see FTC 2d/FIN ¶ H-4329; TaxDesk ¶ 532,002.
Source:  Federal Tax Updates on Checkpoint Newsstand tab 1/13/2011

Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.


Misclassifying Workers as Independent Contractors

Misclassifying Workers as Independent Contractors Can Be A Costly Mistake

Using independent contractors in your business can save money.  Independent contractors do not receive typical company benefits such as vacation, sick pay or health insurance/retirement benefits.  Plus, employers don’t pay social security taxes (FICA), or provide unemployment benefits. However, it is easy to blur the line between a true independent contractor and employee and the IRS is cracking down.

In order to be considered an independent contractor, a worker should meet certain criteria.  Control is one of the primary determinators.  What is your level of control over the worker?  An independent contractor determines how and when work will be performed whereas an employee’s work parameters are established by the employer.  For example, if you require a worker to attend regular meetings, work set hours and use specific materials and equipment, then in most cases that worker is an employee because you are exercising significant control over his/her job performance.

Other factors include such things as:

  • Working relationship. Does the worker have other clients with whom he works or does he work exclusively for you?  An independent contractor is in business for himself so he should have other clients or at least be in the market to acquire other business opportunities.
  • Work hours. An independent contractor should, in most cases be able to set his own work schedule.  As long as the contractor meets the deadline established by the client, he can decide his own work schedule.
  • Work location.  Generally, an independent contractor provides for his own work location, materials and equipment.  In other words, his primary office is not located at your company’s facility.
  • Expenses. Employees typically submit their work-related expenses to their employer for reimbursement.  An independent contractor, however, generally absorbs expenses as part of the cost of doing business.
  • Taxes. An independent contractor pays his own taxes by filing quarterly estimated tax returns.  Your company does not withhold taxes.

If the IRS determines you have misclassified a worker as an independent contractor rather than an employee, get out your checkbook.  You may be charged for back taxes, interest and penalties.  In fact, there is even the possibility of criminal charges.  And in some cases the misclassified worker has been able to sue the employer for lost benefits during the time in which he should have been considered an employee.

The IRS has a set of guidelines an employer can use to determine the proper status of a worker.  If you are still uncertain, give us a call us.

While in the short-term, using independent contractors in your business may save you money, it could cost you significantly more in the long-term.  Make sure you make the right choice.

(From business.gov article Misclassifying Workers as Independent Contractors Can Be Costly)

Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.