You’ve seen it on the Shark Tank: Entrepreneurs pitch their ideas, and every now and then one pops up that doesn’t know their business’s numbers. If you were to go on Shark Tank, how much would you really know about your own company’s numbers? Budgeting and forecasting are two of the most important financial exercises performed by businesses, regardless of their size. Unfortunately, they are also two exercises that many businesses fail to perform accurately or efficiently.
The biggest common problem is that most budgets and forecasts are created without any room for flexibility. Managers are told at the end of the year to make projections for revenue and spending for the next year, but these often end up being optimistic best guesses that are manipulated for the financial benefit of their department.
Here are 3 steps to help you improve your company’s budgeting and forecasting processes:
- Build flexibility into your budgeting and forecasting. This is the most important step to better budgeting and forecasting. Static and inflexible budgets and forecasts can lead to many different financial problems.
Traditional annual forecasts and projections made by managers are often inaccurate and obsolete by the end of the first quarter. However, managers are still expected to meet them and important business decisions are made based upon them. This leads to frustrated employees who are held accountable for hitting unrealistic numbers — and worse, faulty decisions and plans that can end up being very expensive.
Instead, your processes should include a review of your budget and forecasts at the end of each quarter, if not each month. Doing so will allow you to make necessary adjustments that will improve overall accuracy and lead to better business decision-making.
- Create rolling forecasts and budgets. This is a flexible alternative to the traditional static annual budgeting and forecasting process that most companies follow. It enables you to regularly update your forecasts and budgets based on actual current business results, not what managers guessed might be happening many months ago.
The rolling process involves using actual quarterly financial data to update your forecasts, which typically extend out for five or six quarters. Each quarter, you will update your forecasts for the next quarter based on the most recent quarter’s results. You will then adjust your budget so that it reflects these new, updated forecasts.
With this process, detailed monthly forecasting at the category level is only done for the next quarter, not the entire year. Subsequent quarters’ forecasts are broader, since they will likely be updated in the future. Rolling forecasting and budgeting will enable you to better align your budget with your strategic plan while also improving the accuracy of your forecasts and budgets.
- Budget to your plan, instead of planning to your budget. This is a fairly simple but often overlooked concept because it requires discipline on the part of ownership and management. It requires that spending decisions be made based on actual revenue, rather than on opportunities that such spending might (or might not) lead to. Budgeting to plan considers the true impact that spending decisions will have on the company’s finances.
For example, a business might have an opportunity to grow by acquiring a competitor or taking on a large new client. However, doing so will require assuming significant debt in order to finance the acquisition or buy new equipment or additional inventory. Budgeting to your plan will consider how these costs will impact the budget in both the short and long term and then plan accordingly. Conversely, planning to your budget will just move forward with the debt and figure out later what the impact on the budget will be.
Budgeting and forecasting are too important to leave open to inaccuracies and inefficiency. By following these 3 steps, you will go a long way toward improving your budgeting and forecasting processes. If your small business needs help in setting and managing your budget, feel free to give us a call at Dagley & Co.
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Every year, Americans tip workers billions of dollars – and it doesn’t end there. Those tips should be taxed! If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes:
- Tips are taxable — Tips are subject to federal income, social security, and Medicare taxes. The value of non-cash tips, such as tickets, passes, or other items of value, is also income and subject to taxation.
- Include tips on your tax return — You must include in gross income all cash tips received directly from customers, tips added to credit cards, and your share of any tips received under a tip-splitting arrangement with fellow employees.
- Report tips to your employer — If you receive $20 or more in tips in that month, you should report all of your tips to your employer. Your employer is required to withhold federal income, social security, and Medicare taxes. If the tips received are less than $20 in any month, they need not be reported to the employer. However, these tips are still taxable and must be reported on your tax return, as they are subject to income and social security taxes.
- Tip-splitting and cover charges — Tips you give to others under a tip-splitting arrangement are not subject to the reporting requirement, so you should report to your employer only the net tips you receive. Service (cover) charges, which are arbitrarily added by the business establishment, are excluded from the tip reporting requirements. The employer should add each employee’s share of service charges to each employee’s wages.
- Employer allocation of tips — Tip allocation is applicable to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport.” Underreporting occurs if an employee reports tips that are less than 8% of the employee’s applicable share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8%. If you are in this situation, your allocation amount will be noted on your W-2 form. These allocated tips will not have been included in the total wages box on your W-2, so they must be accounted for as additional wage income on your return, unless you have adequate records to show that the amount is incorrect. Because social security, Medicare, and Additional Medicare taxes were not withheld from the allocated tips, to the extent these tips are included in your income, you must report those taxes as additional tax on your return. The IRS frequently issues inquiries when the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return.
- Keep a running daily log of tip income — Tips are a frequently audited item and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee’s Daily Record of Tips and a Report to Employer for recording your tip income.
If you are receiving tips and have any questions about their taxation, please get in touch with us at Dagley & Co.
Do you often send your employees abroad – or even a state or two over? Sending employees on business trips is essential for many companies – even though travel can result in tax headaches for both the employer and the employee if the tax regulations are not adhered to. If the rules are followed, the cost of the employee’s travel will be fully deductible to the employer, with the exception of meals, which are only 50% deductible, and tax-free reimbursement to the employee. In addition, the reimbursement is not subject to FICA or payroll withholding.
With that said, if the rules aren’t followed, the expenses are still deductible by the employer, but the reimbursement must be added to the employee’s taxable wages, subject to both FICA and payroll withholding.
An employer is able to deduct ordinary and necessary business expenses, including an employee’s job-related travel and lodging expenses that are not lavish or extravagant, and under the rules of working condition fringe benefits, any such item that is deductible by the employer is not includible in the employee’s salary. In addition, an advance or reimbursement made to an employee under an “accountable plan,” which requires the employee to adequately account for the expenses and return any excess advances, is deductible by the employer and not subject to FICA or income tax withholding.
Reimbursements not made under an accountable plan are fully taxable to the employee, and the only way for the employee to deduct the expenses is as a miscellaneous itemized deduction on his or her 1040. To do that, the employee must itemize his or her deductions on Schedule A, as opposed to taking the standard deduction. The employee business expense category on Schedule A is subject to a 2% of AGI nondeductible threshold, and this frequently results in the employee not being able to deduct any or only a portion of the expenses.
With the exception noted below, to deduct the cost of lodging and meals, the taxpayer must be away from home overnight. Any trip that is of such a length as to require sleep or rest to enable the taxpayer to continue working is considered “overnight.”
Under an exception to the away-from-home rule, the cost of local lodging is deductible if the lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function and the duration does not exceed five calendar days and does not recur more frequently than once per calendar quarter. For an employee, the employer must require the employee to remain at the activity or function overnight, the lodging must not be lavish or extravagant, and there can be no significant element of personal pleasure, recreation, or benefit.
A taxpayer’s home, for purposes of determining if he or she is away from home and can deduct lodging and meals, is generally where the taxpayer normally lives and works, although that fact is sometimes difficult to determine, in which case the IRS has numerous special rules that apply.
Where an away-from-home assignment, at a single location, lasts for one year or less, it is “temporary,” and the travel expenses are deductible. If the assignment is longer, there is a good chance the expenses will not be deductible based upon some complex rules.
The rules for the tax treatment of travel expenses and temporary away-from-home assignments can be complex. Please give us at Dagley & Co. a call or drop us an email for further details or assistance. You’ll find our information at the bottom of this webpage.
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Times are changing for business owners: Beginning 2015, large employers (with 100 or more full-time equivalent employees) must begin offering health insurance coverage to their employees. Then, in 2016, employers with 50 or more equivalent full-time employees must do the same or face penalties, called the “large employer health coverage excise tax.”
Employers with fewer than 50 full-time equivalent employees are never required to offer their employees an insurance plan, but qualified small employers who do provide coverage may qualify for the small business health insurance credit.
In the past, many smaller employers have simply reimbursed their employees for the cost of insurance. They found it less expensive and had fewer administrative costs than having a group insurance plan. However, under the Affordable Care Act (ACA, or Obamacare for short), a group health plan that reimburses employees for the employees’ substantiated individual insurance policy premiums must satisfy the market reforms for group health plans. However, most commentators believe an employer payment plan will fail to comply with the ACA annual dollar limit prohibition because an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement, and an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement. Thus, reimbursement plans may be subject to a very draconian penalty.
In February, the IRS issued Notice 2015-17, which provides small employers limited relief from the stiff $100 per day, per participant, penalties under IRC §4980D for health insurance reimbursement plans that had been addressed in Notice 2013-54. In particular, that notice provided:
- Transitional relief for employers that do not meet the definition of large employers (i.e., employers with 50 or more employees). This relief is granted for all of 2014 and for January 1 through June 30, 2015; and
- Relief for S corporations that pay for or reimburse premiums for individual health insurance coverage for 2% shareholders, as previously addressed in Notice 2008-1. The relief period is indefinite, and the IRS states that taxpayers may continue to rely on Notice 2008-1 “unless and until additional guidance” is provided.
June 30, 2015 has come and gone – and so has the small employer relief. This means employers who still reimburse employees for their medical expenses are in danger of being subject to the $100 per day ($36,500 a year) per employee penalty. Compared to the annual $2,000 penalty that large employers face for not providing insurance to their full-time employees, the penalties on small employers are substantial enough to bankrupt them. So, the large employer who fails to provide any insurance pays a penalty of only $2,000 per year per employee while the employer who helps employees by reimbursing them for the cost of insurance gets hit with an up to $36,500-per-employee penalty.
This is true even if the employer is a small employer (50 or fewer equivalent full-time employees) who is under no legal obligation to provide health insurance plans for its employees, but makes reimbursements simply to help the employees. Does this seem fair? We will let you form your own opinion.
Will Congress step in to alleviate the problem? Maybe yes and maybe no, and employers must decide if it is worth the risk to depend on Congress to act. One firm, Zane Benefits, claims to have solved the problem with a reimbursement plan that complies with the code, while others argue that it does not.
We hope this illustrates the importance of you understanding your risks if your business has a medical reimbursement plan and perhaps consider other options. Please get in touch with Dagley & Co. if you have questions.
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As our business grows, you may find yourself needing additional help – someone you can put on payroll. When you hire your first employee, you create an entire new task of complying with employment and labor laws. Payroll taxes create more administrative burden for small businesses than any other tax, according to the 2015 Small Business Taxation Survey from the National Business Association.
Plus, compliance with payroll laws is a challenge for many businesses. The IRS levied more than $6.9 million in penalties related to employment taxes for the fiscal year ended September 30, 2014, according to the 2014 Internal Revenue Service Data Book.
The Stress of Payroll
Why is it so complicated? Well, your payroll responsibilities include making tax payments to appropriate government agencies and filing all the associated paperwork on time. It’s not just for the IRS; you have to follow all state rules and laws. If you have employees in more than one state, you have to follow the rules for each state, which vary widely in regards to filing frequencies, deadlines, how you must file, and how you determine taxes.
Payroll stress stems not only from taxes but also from the accounting involved in calculating hours and accrued vacation and sick day pay and tracking other employee benefits.
You can reduce payroll stress by setting up a system. Here are four steps to take.
- Get the Initial Paperwork Filled Out.
All new employees must complete a Form W-4, Employee’s Withholding Allowance Certificate, which you must submit to the IRS. The exemptions claimed on the form determine the amount of tax you withhold from an employee’s pay. Check whether your state requires the completion of any forms.
- Document How You Process Payroll.
Ask yourself a few questions: How often do you plan to pay employees? Some states have specific requirements about pay periods. Are you paying hourly or on salary?
How do you track employee hours? What about overtime: Does your state define overtime as working more than eight hours a day or more than 40 hours a week? How do you handle paid time off (vacation and sick leave)?
How do you manage items such as health plan premiums and retirement contributions that you deduct from employee paychecks and pay to the appropriate organizations?
- Set Up a Tracking System.
Set up a system to track everything. It could be a manual system using pen and paper or a spreadsheet. You could use accounting and/or payroll software. You or an employee could do the tracking, or you could hire an accountant.
- Pay Taxes and File Paperwork On Time.
You must pay payroll taxes to the IRS within a specific number of days after you pay employees, though you have eight different payroll periods and two deposit schedules to select from. IRS forms you must file include:
- Employer’s quarterly payroll tax return (Form 941)
- Annual Return of Withheld Federal Income Tax (Form 945)
- Annual Federal Unemployment Tax (FUTA) Return (Form 940 or 940EZ)
- Wage and Tax Statements (Form W-2)
For more information, see the IRS Employer’s Tax Guide. You also need to learn your state’s requirements for paying and filing paperwork.
You can take much of the stress out of payroll by working with Dagley & Co.; we will work with you to understand your business and handle all the details. A knowledgeable professional from our small team will save you a lot of time and greatly reduce the risk of errors that can lead to penalties. Better yet, our help will let you to focus on running your business. Get started by contacting us; you’ll find our information at the bottom of this page.
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Love Wins! On June 26, 2015, the US Supreme Court ruled that the 14th Amendment to the Constitution requires all states to license marriages between two people of the same sex and to recognize same-sex marriages performed in other states. This comes approximately two years after the Supreme Court overturned the Defense of Marriage Act (DOMA) enacted by Congress and signed by then President Bill Clinton. DOMA defined marriage as “legal union between one man and one woman as husband and wife.”
All of us at Dagley & Co. are overjoyed at the ruling, and of course, we immediately want to dive into what this means for our taxes! This has wide-ranging implications for married individuals who reside in states that until now have not recognized same-sex marriage and for those who can now marry in their state, including employer-provided employee and spousal benefits, retirement issues, Social Security benefits, and of course tax issues.
Since DOMA was overturned, legally married same-sex couples have been required to file their federal returns as “married,” but they have had to file their state returns as single or head of household status if their state did not recognize their marriage as legal. That will now change, and they will be filing using the married status for their state returns as well.
Being married for tax purposes is not always beneficial, depending on a number of circumstances. The following are some of the tax breaks available to legally married same-sex couples:
- The right to file a joint return, which can produce a lower combined tax than the total tax paid by same-sex spouses filing as single persons (but this can also produce a higher tax, especially if both spouses are relatively high earners or one or both previously qualified to file as head of household);
- The opportunity to get tax-free employer-paid health coverage for the same-sex spouse;
- The opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax;
- The opportunity for the estate of the spouse who dies first to receive a marital deduction for amounts transferred to the surviving spouse;
- The opportunity for the estate of the spouse who dies first to transfer the deceased spouse’s unused exclusion amount to the surviving spouse;
- The opportunity to consent to make “split” gifts (i.e., gifts to others treated as if made one-half by each); and
- The opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for nonspousal beneficiaries.
There is a negative side as well. Many same-sex married couples, especially higher-income ones, may find that filing as married has unpleasant income tax ramifications. Divorcing before the end of the year can rectify that. However, before employing that strategy, a couple needs to consider the other financial benefits of being married. The following issues are commonly encountered by same-sex married couples.
- A taxpayer who is married and living with his or her spouse cannot file using head of household filing So a same-sex spouse (or both) who previously qualified for and filed a federal return using the head of household status will no longer file as head of household. Instead, the same-sex couple will file as married using the joint or separate status, which will generally result in higher taxes.
- When filing as unmarried, one individual can take the standard deduction and the other can itemize. As married individuals, they must choose between the two, which could substantially reduce their overall deductions. If a same-sex couple files married separate returns and one spouse claims itemized deductions, the other spouse cannot use the standard deduction.
- As unmarried individuals, same-sex partners were able to adopt each other’s children and claim the adoption credit. As married individuals they can no longer do that.
For those who are registered domestic partners (RDPs) in California, the Supreme Court’s recent ruling does not address the IRS’s position that these individuals are not legally married and therefore not eligible to file as married. Unless IRS changes its interpretation, RDPs will still not be able to file as married for federal purposes.
If you are contemplating a same-sex union or live in a state that previously did not recognize same-sex marriages and wish to explore the tax consequences of now filing as married individuals, please get in touch with us at Dagley & Co. – we can’t wait to help!
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Working for tips? You’ll need to report those soon. Image via public domain.
As we head into July, it’s important to keep some of these tax due dates for individuals in mind. Go here to read our list of July tax deadlines for business owners.
July 1 – Time for a Mid-Year Tax Check Up
Time to review your 2015 year-to-date income and expenses to ensure estimated tax payments and withholding are adequate to avoid underpayment penalties.
July 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during June, you are required to report them to your employer on IRS Form 4070 no later than July 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
July 15 – Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in June.
July is here, which means there is a new list of deadlines for business owners. Don’t get so into the Independence Day festivities that you forget these important deadlines! Contact us at Dagley & Co. if you need assistance making these dates, or if you would like for us to elaborate further. You’ll find our contact information at the bottom of this page.
July 1 – Self-Employed Individuals with Pension Plans
If you have a pension or profit-sharing plan, you may need to file a Form 5500 or 5500-EZ for calendar year 2014. Even though the forms do not need to be filed until July 31, you should contact this office now to see if you have a filing requirement, and if you do, allow time to prepare the return.
July 15 – Non-Payroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in June.
July 31 – Self-Employed Individuals with Pension Plans
If you have a pension or profit-sharing plan, this is the final due date for filing Form 5500 or 5500-EZ for calendar year 2014.
July 31 – Social Security, Medicare and Withheld Income Tax
File Form 941 for the second quarter of 2015. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.
July 31 – Certain Small Employers
Deposit any undeposited tax if your tax liability is $2,500 or more for 2015 but less than $2,500 for the second quarter.
July 31 – Federal Unemployment Tax
Deposit the tax owed through June if more than $500.
July 31 – All Employers
If you maintain an employee benefit plan, such as a pension, profit-sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar year 2014. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends.
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