Barbara’s Blog

Luddites were 19th century English textile workers who smashed the newly invented machines they feared would replace them. We now know that machines and other technology are enhancements used to increase productivity and don’t necessarily replace workers. Still, the post-recession economy may prove the Luddites right.

Technology replacing workers
New machines, software, cloud applications, and other technologies continue to debut. They help to make companies run more efficiently and, in many cases, using fewer workers. Earlier this year, AP reported “Some occupations are beneficiaries of the march of technology, such as software engineers and app designers for smartphones and tablet computers. Overall, though, technology is eliminating far more jobs than it is creating.”

Other findings by AP:

• Technology is enabling startups to launch with one-third fewer employees than in the 1990s
• Companies in the S&P 500 Index grew profits post-recession by one-third while cutting their payrolls in half

Low-paid workers
Those who have jobs may not have enough spending money to oil the economy. Kiplinger reported that 28% of workers are in jobs that earned them less than the poverty level (this is 5% more than in 2002). The Kiplinger Letter had it right: “An economy can’t grow if too many workers don’t have money to spend.”

The answer from some economists and politicians has been to raise the minimum wage. However, many small business owners have said that a higher minimum wage will force them to use fewer workers. What’s the right answer? I don’t know.

Conclusion
Early in the last century, the story goes that Henry Ford paid his workers $5 an hour, an unprecedented sum for the times, so that they could afford to buy the cars he sold. The real story (the reason for the high pay and how it was figured) may be somewhat different, but the lesson seems sound. In the short run, replacing workers with technology and paying low wages are helpful to the bottom line. I’m no economist, but it seems to me that in the long run, there may be few left to buy what we have to sell. The Luddites in the 19th century were concerned with their jobs; now it seems that they had a point when it comes to the economy.

It seems to be the norm these days. The Bureau of Labor Statistics reported recently that the average number of hours worked by all types of full-time employees in the U.S. (other than on farms) in February was 34.5 hours (up 0.1 hour from January). Hours for those in manufacturing: 40.9 hours (up 0.2 hours). For owners, who knows? Many owners I know work 60 hours a week or more.

Impact on health

Do long work hours adversely impact health? An article in a scientific journal suggests they can kill you! Working longer than eight hours increases the chances of coronary disease by 40% to 80%. You certainly don’t want this for yourself or your staff.

Reasons for overwork

There’s no single answer for why you and your staff are putting in long hours. Examine which of these possible reasons apply in your situation so you can address them properly.

Technology

The ability to work after regular work hours is all too easy these days, with smartphones, tablets, and WiFi just about everywhere you go. The result: the boundary of the workday has virtually disappeared.

What to do: Limit business time during off hours. Mute devices and wait until business hours to respond to business communications.

Smaller workforce

The recession (which continues for many small businesses despite economic indicators) forces many companies to make do with the staff they have, even if it’s smaller than would be optimum. Employees who are still with the company must handle more work than when the company was fully staffed.

Even more problematic are the companies that are now flourishing and could use more help. Even if they could afford the substantial added cost of new workers (wages, employment taxes, workers’ compensation, and employee benefits your current staff enjoys), there’s a sticking point that isn’t easily overcome. If a company becomes a “large” employer (more than 50 full-time employees), it’ll be subject to the employer mandate for providing affordable health coverage (or paying a penalty) starting in 2014. The determination of whether an employer is “large” is based on 2013 payroll.

What to do: Some companies are alleviating overwork for existing staff by taking on part-timers (less than 30 hours a week). They can carry some of the extra work load without triggering the employer mandate in 2014. Determine whether part-timers may be a solution for your business.

Competitiveness

Maybe it’s compulsion that drives some people to work longer hours that may be required by an employer or the scope of the job. Certainly, with the lack of job security these days, many feel compelled to show their commitment to the company in the hopes of increasing their worth to the business (which is meant to create some job security).

What to do: Be clear to workers what is and is not required of them. Simply sitting longer at a desk and looking busy doesn’t help your business. For some types of businesses, it makes more sense to set tasks or projects that need to be completed; when they are done, the workday can end. Sometimes this may require extended hours, but good planning and scheduling can help to limit employees’ hours.

Final thought

As the saying goes: Stop and smell the roses.

I recently participated in a webinar hosted by Brother Online, and wanted to pull together a set of tips to help SMBs with filing their taxes for 2012.

If you have not yet filed your business’ income tax return for 2012, there are still some pointers that can help you legally minimize your taxes and avoid IRS scrutiny of your return.

Take advantage of extended tax rules and know what actions can trigger IRS audits so you can steer clear of them.

Use extended tax breaks

As part of the deal to avert the “fiscal cliff,” many tax breaks that had expired at the end of 2011 were extended for 2012 (and in many cases 2013 as well). Check to see if any of these favorable deductions, tax credits, or other tax rules apply to you:

Hiring incentives. If you hired certain employees in 2012, you may be eligible for a tax credit based on a portion of their wages. Such credits include:

• Work opportunity credit for hiring workers from certain targeted groups (e.g., certain veterans; ex-felons). To claim the credit, you must submit Form 8850 to your state workforce agency. Usually this must be done within 28 days of the workers’ start of employment. However, for workers hired in 2012, you have until April 29, 2013, to act.
• Empowerment zone credit for hiring workers for businesses within certain government-designated areas.
• Indian employment credit for hiring workers on Indian reservations.

Equipment purchases. Instead of depreciating the cost of equipment and machinery over three, five, or seven years, you can opt to claim first-year expensing (“Section 179 deduction”). The deduction limit for 2012 is $500,000. This limit phases out when total purchases for the year exceed $2 million. You must be profitable to benefit from this deduction. You can also use 50% bonus depreciation, provided the items are new (not pre-owned). You need not have been profitable for this write-off.

Certain building improvements. If you made leasehold, restaurant, or retail improvements (e.g., a new wiring system), you may not be limited to simply depreciating them over 39 years, the usual period for depreciating commercial realty. Instead, you can use first-year expensing up to $250,000. You can also depreciate costs over 15 years.

Of course, the full the cost of repairs are immediately deductible. Regulations defining repairs versus capital improvements were supposed to be effective for 2012, but have been postponed until 2014. However, you are permitted to use them for 2012 and 2013 returns. Check whether the safe harbors and de minimis rules in the regulations are helpful to you.

Avoid audit red flags

While there is no way to guarantee you won’t be audited, there are actions to follow that minimize your exposure.

• Classify your workers correctly. Don’t label an employee as an independent contractor merely to avoid the cost of being the worker’s employee. This IRS audit target can cost you dearly in penalties if you misclassify workers and the IRS finds out.
• Report income correctly. Merchants receiving Form 1099-K, reporting payment transactions through financial institutions, PayPal, and other payment processors, must report their gross receipts on their returns. They do not have to reconcile the income reported with amounts on this information return, but should report all income.

Work with your tax advisor

Your advisor can help you timely file your return. He or she can also help assess which tax breaks you qualify for.

Filing extensions. Your unincorporated business (e.g., partnership; sole proprietorship) has until April 15th to file the 2012 return. If, for any reason, you can’t file by this date, ask for a filing extension:

• Sole proprietors file Form 4868 to have a filing extension to October 15th.
• Partnerships (and limited liability companies filing partnership returns) file Form 7004 to have a filing extension to September 15th.

Returns for calendar-year corporations were due on March 15th.  Corporations that failed to file and did not request extensions should file as soon possible to minimize late filing penalties.

Conclusion

Taxes are a cost of doing business successfully. However, you do not have to pay more than the law requires. Staying current on tax developments and working with your advisor can go a long way toward obtaining favorable tax results. Good luck!

It’s up to a company to decide whether to treat its workers as employees or independent contractors. The decision has wide-ranging tax consequences for the company.  For workers who are independent contractors, the company saves on payroll taxes (the employer share of FICA and unemployment tax), benefits (such as payments for health insurance and retirement plan contributions), and insurance (including workers’ compensation).

Expanded voluntary settlement program

You may recall that in September 2011, the IRS introduced a new program, called the Voluntary Classification Settlement Program (VCSP), to enable employees to reclassify their independent contractors as employees with reduced penalties and interest (only 10% of the employment tax liability otherwise due on compensation for the most recent tax year if workers had been classified as employees). The idea for the program was to encourage employers to reclassify workers by easing tax penalties.

Interested companies that had filed all required Forms 1099-MISC for their independent contractors could apply for participation in the VCSP. They had to agree to extend the statute of limitations (the period in which the IRS can start an audit) for three years after starting participation. Companies currently under any type of audit were barred from the program. (Q-and-As on the VCSP can be found here.)

Now the IRS has temporarily (until June 30, 2013) revised and liberalized the VCSP. Participation is allowed even if the company is under an income tax audit; it is only barred if under an employment tax audit. The company is not required to extend the statute of limitations.

Companies that failed to file required Form 1099-MISCs for their independent contractors can now apply to the program. However, they will be required to pay 25% (rather than 10%) of the employment tax liability that would have been due on compensation for the most recent tax year if workers had been classified as employees. They also owe a penalty, although reduced, for unfiled 1099s for the three previous tax years and will have to file such forms electronically for the previous three years for workers being reclassified.

Legislation proposed

Currently, the VCSP is not necessarily the best option for a company. As long as the employer has issued required Form 1099-MISC to its independent contractors and had a reasonable basis for this classification, it could rely on Section 530 of the Revenue Act of 1978 to minimize or even avoid back employment taxes. This relief provision could be raised if and when the IRS challenged worker classification.

A bill in Congress, entitled the Independent Contractor Tax Fairness and Simplification Act of 2012 (H.R. 6653) would repeal Section 530 relief. Of course, the likelihood of passage before Congress adjourns is slim to none. But the idea could be renewed in the new Congress, so stay tuned.

Bottom line

If your company has been treating workers as independent contractors, talk your tax advisor to make sure you are properly classifying these workers. You can’t arbitrarily pin an independent contractor label on a worker who is really an employee because of the level of control exerted by the company over the worker.

If you have concerns about worker classification, discuss the VCSP and whether it makes sense to voluntarily reclassify some or all workers and pay the taxes before the IRS challenges your classification and embroils you in an audit.

Have you gone to a website of the federal government lately? You may be surprised to learn that they appear to be slanted almost entirely to workers.  Employers have to work very hard to find information about topics of concern to them on these sites.

Examples:

• The Department of Labor (DOL) information about unemployment insurance is subtitled “workforce security.” It tells workers how to file claims. Admittedly, the DOL is designed primarily for worker information. However, just a few years ago, the site had very helpful links and resources for employers (especially small employers) dealing with their workforce; this information is gone (or at least so buried that it’s difficult to find).

• The IRS website has been revamped recently. If you look at the homepage, you wouldn’t think there were any taxes on businesses; all of the photos and links are for individuals. Again, the site does contain information for businesses, but you really have to look hard.

• The PBGC, which is the government agency insuring private pensions, provides information to workers about how to make claims and more. It is challenging for employers who want information about their obligations to find suitable links. Information about premium amounts and paying them is there, but again you really have to look. Previously, there had been easy-to-find links for employers.

These are just some examples that I encountered when seeking information relevant to business owners. It is now challenging to find guidance and resources for businesses on many federal websites. Is this an accident, an error, or a political statement?

During the political conventions, both parties promised a new tomorrow for small businesses. Unfortunately, there is an unhappy small business community today. According to results from the recent SurePayroll survey, most indicators are down:

• Optimism of small business owners in August was at 60%, which represents a 2% decline from July.
• Hiring in August (compared with July) was down by 0.1% (and paychecks for employees was down by 0.2%)
• Only 18% of small businesses sought loans in 2012, and 32% of these had trouble obtaining them.

How does this play against the political backdrop?

Democratic Party platform
The Democratic Party platform related to small business states:

“Small businesses employ half of all working Americans, and, over the last two decades, have created two out of three net new jobs. Democrats believe that small businesses are the engine of job growth in America. President Obama signed 18 small-business tax cuts to encourage businesses to hire more workers and make job-creating investments in machinery and equipment and proposed significant additional small business tax relief. He encouraged investment and supported start-ups by allowing businesses to write off the full cost of new equipment and machinery they bought in 2011. Altogether, the President’s Small Business Jobs Act accelerated $55 billion in tax relief through 2011. Democrats made it easier for small businesses to access the loans they needed to grow and hire. The President signed into law changes to help entrepreneurs raise capital while maintaining key investor protections. Small businesses are now once again creating jobs. Democrats have helped small businesses provide health insurance to their workers with a tax credit to help pay for the cost of coverage. In 2014, the tax credit will grow and small businesses will be able to pool their purchasing power together to get affordable coverage.

We recognize the importance of small business to women, people of color, tribes, and rural America and will work to help nurture entrepreneurship.

President Obama and the Democratic Party are committed to continue cutting red tape for small businesses, helping them sell their goods around the world and access the capital they need to grow. This includes tax cuts for small businesses that make new investments, hire more workers, or increase wages.”

GOP platform
The GOP platform related to small business and entrepreneurship states:

“America’s small businesses are the backbone of the U.S. economy, employing tens of millions of workers. Small businesses create the vast majority of jobs, patents, and U.S. exporters. Under the current Administration, we have the lowest rate of business startups in thirty years. Small businesses are the leaders in the world’s advances in technology and innovation, and we pledge to strengthen that role and foster small business entrepreneurship.

While small businesses have significantly contributed to the nation’s economic growth, our government has failed to meet its small business goals year after year and failed to overcome burdensome regulatory, contracting, and capital barriers. This impedes their growth.

We will reform the tax code to allow businesses to generate enough capital to grow and create jobs for our families, friends and neighbors all across America. We will encourage investments in small businesses. We will create an environment where adequate financing and credit are available to spur manufacturing and expansion. We will serve as aggressive advocates for small businesses.”

Bottom line
It is great to see both parties acknowledging the importance of small business to the U.S. economy. This rhetoric is great, but actions following the election are the only meaningful thing for small business and our country.

It’s vital for small business owners to assess whether the last four years of a Democratic Administration have been helpful to their companies and the economy, and to decide which party going forward can better serve small business interests. Vote accordingly.

Earlier this week, the House passed the Mobile Workforce State Income Tax Simplification Act of 2011 (H.R. 1864). This bill would bar states from imposing taxes on workers until they have actually worked at least 30 days within their borders. If it passes the Senate, this measure would go a long way in helping simplify the regulatory burden of withholding taxes for mobile workers and reporting them to states outside of where a business is based.

Currently, in the 41 states in which there is an income tax on wages, the rules for withholding are not uniform. This creates confusion and complexity for small businesses that have a mobile workforce.

For a good discussion of this complexity, read an article from the Journal of Accountancy (you don’t have to be a CPA to understand it).

The measure, which just passed the House in a bi-partisan effort, would create a national standard by limiting withholding to the state or locality of the employee’s residence as well as to the state or locality in which the employee is physically present performing duties for more than 30 days.

A coalition of more than 495 businesses and organizations support the bill. And so do I! Urge your senators to do so now.