Do Your Employees Receive Tips? You May Be Eligible for a Tax Credit
February 03, 2020 | BY admin
Are you an employer who owns a business where tipping is customary for providing food and beverages? You may qualify for a tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.
How the credit works
The FICA credit applies with respect to tips that your employees receive from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises. Although these tips are paid by customers, they’re treated for FICA tax purposes as if you paid them to your employees. Your employees are required to report their tips to you. You must withhold and remit the employee’s share of FICA taxes, and you must also pay the employer’s share of those taxes.
You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15 per hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.
Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.
How it works
Example: A waiter works at your restaurant. He’s paid $2 an hour plus tips. During the month, he works 160 hours for $320 and receives $2,000 in cash tips which he reports to you.
The waiter’s $2 an hour rate is below the $5.15 rate by $3.15 an hour. Thus, for the 160 hours worked, he or she is below the $5.15 rate by $504 (160 times $3.15). For the waiter, therefore, the first $504 of tip income just brings him up to the minimum rate. The rest of the tip income is $1,496 ($2,000 minus $504). The waiter’s employer pays FICA taxes at the rate of 7.65% for him. Therefore, the employer’s credit is $114.44 for the month: $1,496 times 7.65%.
While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.
Get the credit you’re due
If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. Contact us if you have any questions.
5 Ways to Strengthen Your Business for the New Year
December 26, 2019 | BY admin
The end of one year and the beginning of the next is a great opportunity for reflection and planning. You have 12 months to look back on and another 12 ahead to look forward to. Here are five ways to strengthen your business for the new year by doing a little of both:
1. Compare 2019 financial performance to budget. Did you meet the financial goals you set at the beginning of the year? If not, why? Analyze variances between budget and actual results. Then, evaluate what changes you could make to get closer to achieving your objectives in 2020. And if you did meet your goals, identify precisely what you did right and build on those strategies.
2. Create a multiyear capital budget. Look around your offices or facilities at your equipment, software and people. What investments will you need to make to grow your business? Such investments can be both tangible (new equipment and technology) and intangible (employees’ technical and soft skills).
Equipment, software, furniture, vehicles and other types of assets inevitably wear out or become obsolete. You’ll need to regularly maintain, update and replace them. Lay out a long-term plan for doing so; this way, you won’t be caught off guard by a big expense.
3. Assess the competition. Identify your biggest rivals over the past year. Discuss with your partners, managers and advisors what those competitors did to make your life so “interesting.” Also, honestly appraise the quality of what your business sells versus what competitors offer. Are you doing everything you can to meet — or, better yet, exceed — customer expectations? Devise some responsive competitive strategies for the next 12 months.
4. Review insurance coverage. It’s important to stay on top of your property, casualty and liability coverage. Property values or risks may change — or you may add new assets or retire old ones — requiring you to increase or decrease your level of coverage. A fire, natural disaster, accident or out-of-the-blue lawsuit that you’re not fully protected against could devastate your business. Look at the policies you have in place and determine whether you’re adequately protected.
5. Analyze market trends. Recognize the major events and trends in your industry over the past year. Consider areas such as economic drivers or detractors, technology, the regulatory environment and customer demographics. In what direction is your industry heading over the next five or ten years? Anticipating and quickly reacting to trends are the keys to a company’s long-term success.
These are just a few ideas for looking back and ahead to set a successful course forward. We can help you review the past year’s tax, accounting and financial strategies, and implement savvy moves toward a secure and profitable 2020 for your business.
Management letters: Have you implemented any changes?
September 23, 2019 | BY admin
Audited financial statements come with a special bonus: a “management letter” that recommends ways to improve your business. That’s free advice from financial pros who’ve seen hundreds of businesses at their best (and worst) and who know which strategies work (and which don’t). If you haven’t already implemented changes based on last year’s management letter, there’s no time like the present to improve your business operations.
Auditing standards require auditors to communicate in writing about “material weaknesses or significant deficiencies” that are discovered during audit fieldwork.
The AICPA defines material weakness as “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.” Likewise, a significant deficiency is defined as “a deficiency, or a combination of deficiencies, in internal control that is … important enough to merit attention by those charged with governance.”
Auditors may unearth less-severe weaknesses and operating inefficiencies during the course of an audit. Reporting these items is optional, but they’re often included in the management letter.
Looking beyond internal controls
Auditors may observe a wide range of issues during audit fieldwork. An obvious example is internal control shortfalls. But other issues covered in a management letter may relate to:
- Cash management,
- Operating workflow,
- Control of production schedules,
- Defects and waste,
- Employee benefits,
- Website management,
- Technology improvements, and
- Energy consumption.
Management letters are usually organized by functional area: production, warehouse, sales and marketing, accounting, human resources, shipping/receiving and so forth. The write-up for each deficiency includes an observation (including a cause, if observed), financial and qualitative impacts, and a recommended course of action.
Striving for continuous improvement
Too often, management letters are filed away with the financial statements — and the same issues are reported in the management letter year after year. But proactive business owners and management recognize the valuable insight contained in these letters and take corrective action soon after they’re received. Contact us to help get the ball rolling before the start of next year’s audit.
How to research a business customer’s creditworthiness
September 18, 2019 | BY admin
Extending credit to business customers can be an effective way to build goodwill and nurture long-term buyers. But if you extend customer credit, it also brings sizable financial risk to your business, as cash flow could grind to a halt if these customers don’t make their payments. Even worse, they could declare bankruptcy and bow out of their obligations entirely.
For this reason, it’s critical to thoroughly research a customer’s creditworthiness before you offer any arrangement. Here are some ways to do so:
Follow up on references. When dealing with vendors and other businesses, trade references are key. As you’re likely aware, these are sources that can describe past payment experiences between a business and a vendor (or other credit user).
Contact the potential customer’s trade references to check the length of time the parties have been working together, the approximate size of the potential customer’s account and its payment record. Of course, a history of late payments is a red flag.
Check banking info. Similarly, you’ll want to follow up on the company’s bank references to determine the balances in its checking and savings accounts, as well as the amount available on its line of credit. Equally important, determine whether the business has violated any of its loan covenants. If so, the bank could withdraw its credit, making it difficult for the company to pay its bills.
Order a credit report. You may want to order a credit report on the business from one of the credit rating agencies, such as Dun & Bradstreet or Experian. Among other information, the reports describe the business’s payment history and tell whether it has filed for bankruptcy or had a lien or judgment against it.
Most credit reports can be had for a nominal amount these days. The more expensive reports, not surprisingly, contain more information. The higher price tag also may allow access to updated information on a company over an extended period.
Explore traditional and social media. After you’ve completed your financial analysis, find out what others are saying — especially if the potential customer could make up a significant portion of your sales. Search for articles in traditional media outlets such as newspapers, magazines and trade publications. Look for anything that may raise concerns, such as stories about lawsuits or plans to shut down a division.
You can also turn to social media and look at the business’s various accounts to see its public “face.” And you might read reviews of the business to see what customers are saying and how the company reacts to inevitable criticisms. Obviously, social media shouldn’t be used as a definitive source for information, but you might find some useful insights.
Although assessing a potential customer’s ability to pay its bills requires some work up front, making informed credit decisions is one key to running a successful company. Our firm can help you with this or other financially critical business practices.
When it comes to asset protection, a hybrid DAPT offers the best of both worlds
September 16, 2019 | BY admin
A primary estate planning goal for most people is to hold on to as much of their wealth as possible to pass on to their children and other loved ones. To achieve this, you must limit estate tax liability and protect assets from creditors’ claims and lawsuits.
The Tax Cuts and Jobs Act reduces or eliminates federal gift and estate taxes for most people (at least until 2026). The gift and estate tax exemption is $11.4 million for 2019. One benefit of this change is that it allows you to focus your estate planning efforts on asset protection and other wealth-preservation strategies, rather than tax minimization. One estate planning vehicle to consider is a “hybrid” domestic asset protection trust (DAPT).
What does “hybrid” mean?
The benefit of a standard DAPT is that it offers creditor protection even if you’re a beneficiary of the trust. But there’s also some risk: Although many experts believe they’ll hold up in court, DAPTs are relatively untested, so there’s some uncertainty over their ability to repel creditors’ claims. A “hybrid” DAPT offers the best of both worlds. Initially, you’re not named as a beneficiary of the trust, which virtually eliminates the risk described above. But if you need access to the funds down the road, the trustee or trust protector can add you as a beneficiary, converting the trust into a DAPT.
Do you need this trust type?
Before you consider a hybrid DAPT, determine whether you need such a trust at all. The most effective asset protection strategy is to place assets beyond the grasp of creditors by transferring them to your spouse, children or other family members, either outright or in a trust, without retaining any control. If the transfer isn’t designed to defraud known creditors, your creditors won’t be able to reach the assets. And even though you’ve given up control, you’ll have indirect access to the assets through your spouse or children (provided your relationship with them remains strong).
If, however, you want to retain access to the assets in the future, without relying on your spouse or children, a DAPT may be the answer.
How does a hybrid DAPT work?
A hybrid DAPT is initially set up as a third-party trust — that is, it benefits your spouse and children or other family members, but not you. Because you’re not named as a beneficiary, the trust isn’t a self-settled trust, so it avoids the uncertainty associated with regular DAPTs.
There’s little doubt that a properly structured third-party trust avoids creditors’ claims. If, however, you need access to the trust assets in the future, the trustee or trust protector has the authority to add additional beneficiaries, including you. If that happens, the hybrid account is converted into a regular DAPT subject to the previously discussed risks.
A flexible tool
The hybrid DAPT can add flexibility while offering maximum asset protection. It also minimizes the risks associated with DAPTs, while retaining the ability to convert to a DAPT should the need arise. Contact us with any questions.