Barbara’s Blog

Here’s one lottery you don’t want to win. Anita Bartels, Senior Program Analyst in the Office of Employment Tax of the IRS, told the audience at the American Payroll Association’s 27th Annual Congress this past May that the IRS will conduct about 5,000 random payroll tax audits over the next several years.

This means that an employer can be selected even if the employer did nothing wrong. The reason for these random audits: The IRS needs more statistics for its National Research Program to help it better select returns for examination in the future.

The IRS will probably focus on some key areas, such as worker classification (making sure that a company’s independent contractors are really independent and not just employees given an IC label to avoid employment taxes), fringe benefits, and compensation to owner-employees.

While there is no way to prevent being selected for a random audit, you can protect yourself by maintaining good records that may be useful in case of an audit. 

These records should include:

1. Your employer identification number (EIN).
2. Amounts and dates of all wage, annuity, and pension payments.
3. Amounts of tips reported.
4. The fair market value of in-kind wages paid.
5. Names, addresses, Social Security numbers, and occupations of employees and recipients.
6. Any employee copies of Form W-2 that were returned to you as undeliverable.
7. Dates of employment.
8. Periods for which employees and recipients were paid while absent due to sickness or injury and the amount  and weekly rate of payments you or third-party payers made to them.
9. Copies of employees’ and recipients’ income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V).
10. Dates and amounts of tax deposits you made.
11. Copies of returns filed.
12. Records of allocated tips.
13. Records of fringe benefits provided, including substantiation. 

Even if you escape selection, get into a habit of good recordkeeping. The IRS suggests that you keep all records of employment taxes for at least four years after filing the return for the 4th quarter for the year.

Storms and other unexpected events can severely damage your business property and hurt your business profits if you’re not prepared. Even the IRS warns you to backup accounting and tax records. Also store paper receipts and other supporting information in a safe place (e.g., a fireproof office safe or another secure location off the premises). Besides financial data, be sure to back up vital information on your customers and employees; this information can be difficult or impossible to recreate in the event of loss.

Review your insurance coverage with your insurance agent to make sure you have adequate coverage for property losses. Also, consider coverage that will provide cash to continue paying business expenses (e.g., rent, payroll) during a period in which the business is closed down due to a storm, fire, or other unexpected event. 

If you have a service business that can be run from another location, now may be a good time to check out alternate business locations and/or determine whether it’s feasible for staff to work from home. Talk to your staff about their ability to telework if it becomes necessary and work out details to facilitate this arrangement.

Most important is emergency contact information—retaining key numbers that would be needed when a storm hits your business location, such as the number of your insurance agent. Keep this information, along with other directions for staff action, in a written emergency plan that you can access immediately if you experience a hurricane or other devastating event.

More people are becoming self-employed today, many spurred on because of job layoffs. Those who have long been W-2 workers and are new to self-employment may not be aware of the higher tax cost for self-employment. With federal and state income taxes, plus self-employment tax, the tax bill can reach nearly 50% of profits.

Here’s important information you’ll need: 

• You pay Social Security and Medicare taxes (collectively called self-employment tax) on your net earnings from self-employment (your profits). The Social Security tax rate is 12.4% on net earnings up to a base amount ($106,800 in 2009); the Medicare tax rate is 2.9% on all net earnings. Thus, the total tax rate is 15.3%, one half of which is deductible. The self-employment tax applies without regard to what you do with your profits…reinvest in your business, pocket the money, or keep it in a bank (in contrast to an employee and his or her employer who only pay FICA taxes on compensation).
• Health insurance premiums for the self-employed and family are not deductible as a business expense to reduce profits subject to income and self-employment tax. They are deductible as an adjustment to gross income, so income taxwise, the result is the same; for self-employment tax, the result is more tax. For example, say a self-employed person pays $12,106 in health insurance premiums for the year (the average according to a Kaiser Family Foundation study for 2007. The person effectively pays $1,852 in self-employment tax that would not have been owed if the premiums had been deductible as a business expense. There have been Congressional proposals  to change this tax treatment so that it equates with the treatment for corporations, but it is too early in this session to predict the likelihood of passage.
• Retirement plan contributions for the self-employed person are not deductible as a business expense, with the same tax results as for health insurance premiums.

Alternative. Self-employed individuals might want to incorporate and use S corporations for their business activity. In this way, only their compensation is subject to FICA taxes; profits are not. Of course, there are additional costs for operating as an S corporation: tax filing costs and, in some cases, state franchise fees. And compensation is a red flag item for S corporations; the IRS wants to be sure that owner-employees are receiving reasonable compensation for work performed and are not taking little or no compensation as a way to avoid FICA taxes.

How does your optimism today compare with that of small business owners across the nation? The National Federation of Independent Business Index of Small Business Optimism rose 2.1 points in May. The Index appears to have bottomed out in March when it nearly reached the all-time low attained in the second quarter of 1980.

Most owners expect sales to improve in the coming months. The same cannot be said of other business indices. The Index shows that demand for capital is down, hiring plans have not increased, and plans for capital expenditures were up by only one percentage point.

Many small business owners I talk to say they are tired of feeling down and prefer to go with their natural tendency of optimism. With some positive signs in the economy (initial unemployment claims are down and consumer confidence is up), this optimism may be justified!

This month marks the 35th anniversary of the Universal Product Code (UPC), an innovation that has changed retailing forever. The first live use of a scan took place in a Marsh Supermarkets store in Troy, Ohio, on June 26, 1974, of a package of Wrigley’s gum.

Created by GS1, a non-profit organization, the UPC is a row of 59 machine-readable black and white bars and 12 human-readable digits. The bars and the digits show the identity of a specific product and its manufacturer. Today, there are increasingly sophisticated bar code scan options, including the GS1 Data Matrix resembling a checkerboard; it is capable of holding large amounts of data useful for a wide range of applications.

A UPC is scanned more than a billion times a day by industries including the grocery industry for which it was created, as well as consumer packaged goods, apparel, hardware, food services, healthcare, logistics, government, and high-tech. Use of UPCs saves the grocery industry alone $17 billion annually.

Recent surveys show that small business owners are working harder than ever during this recession to keep their businesses afloat. Discover Small Business Watch reports that owners are working longer hours and longer work weeks and taking little or no vacation, in part due to the economy.

In fact, 39% say they work more than 10 hours a day, compared with just 30% last year (and only 20% of average workers). When it comes to working six or seven days a week, 61% admit to doing so now, up from 45% last year (and only 22% of average workers).

Summer vacation? According to the American Express OPEN Small Business Monitor, while the number of owners planning to take at least a week off this summer is about the same as last year (56% compared to 59% in 2008), 28% link their vacation to business to save time and money.

In a down economy, it may be time for owners to reassess priorities and mind their health. Slow down and take time off to recharge yourself and be poised to leap when the recovery occurs.

If you’re in a cash crunch because of debt servicing, there may be relief available. The SBA has announced a new American Capital Recovery (ARC) program under which small businesses can borrow up to $35,000 interest free. Loan proceeds can be received over a six-month period; repayment of principal is deferred for 12 months after the last disbursement of the proceeds and can be extended up to five years.

This temporary lending program is designed to help ease the commercial credit crunch (made worse by Advanta’s elimination of small business credit cards starting June 10).  ARC loans are limited to small businesses with outstanding loans (credit cards, notes payable to vendors, capital leases, and certain other types of borrowing) and that are experiencing immediate financial hardship (declining sales, difficulty in paying expenses, etc.).

The program is not for start-ups (you must be in business for a minimum of two years) and loans will not be given to small businesses that are already seriously delinquent in outstanding loan payments.

The ARC program is set to start on June 15. Loans are made by commercial lenders (not directly by the SBA); they are 100% guaranteed by the SBA. The program will continue until September 30, 2010, or when funds run out, whichever is first.

A tough economy notwithstanding, you can grow your business now, and The Stimulus Package: What it Means for Growing Businesses, will help.   Sponsored by SCORE, SAP and MyVenturePad, this free downloadable eBook explains how the American Recovery and Reinvestment Act of 2009 can directly help you.

Written by Steve King, partner in Emergent Research, Erik Pages, president of EntreWorks Consulting, and me, you can find out which industries are likely to benefit from the stimulus package and what incentives in the package you can use to grow your business.

On May 11, the cost of first-class mail rises by 2¢ (to 44¢ for a 1-ounce, first-class mail stamp); other mail services have similar increases.   You can review the price hikes at USPS.com.

What do the increased prices of mailings through the Post Office mean for your business?  You’ll want to build the increases into your budget and find ways to reduce postal costs. 

Here are some suggestions:

1. Shift more mailings to electronic transmissions (e.g., send invoices by email). Added savings: The cost of paper as well as transmittal time.
2. Use forever stamps. These first-class stamps purchased prior to the price hike for 42¢ can continue to be used for mailing on and after May 11; no additional postage is required.
3. Explore bulk mailing where appropriate. If you do direct mail marketing, this can save you plenty.

If swine flu becomes widespread, what does it mean for your business?

Experts say a pandemic can result in a 40% absenteeism rate. Even if this flu does not become a pandemic, absenteeism could still be higher than normal.

It may be a good idea to make contingency plans in the event that staff members become ill. For example, you might want to advise anyone who is ill to stay home so as not to infect others in the workplace. Maybe you also want to rethink some business travel plans to avoid areas with a high incidence of flu cases.

You can follow swine flu news at PandemicFlu.gov  and find links to employer guidance on workplace planning.