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May 2021 Client Profile

The Roberts family hired a live-in au pair to help care for their children while the parents work. One of their co-workers mentioned something about a “Nanny Tax,” and the Roberts aren’t sure if it applies to their situation.

In the IRS’s eyes, au pairs and nannies fall into the category of household employees. With a few exceptions, if your au pair is considered an employee because you control when and how they work, you’ll need to withhold and pay Social Security and Medicare taxes if they earn at least $2,300 in 2021. You may also need to pay federal unemployment tax if they earn more than $1,000 in a calendar quarter. This is on top of any state employment taxes you may be required to withhold or pay.

And while you’re not required to withhold federal income tax, your employee may ask you to. You would need to get a Form W-4 from them. If you withhold any taxes from your employees, you’ll need to provide a W-2 each January. Incorrectly classifying your au pair as an independent contractor to avoid paying payroll taxes can have harsh consequences.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.

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Understanding Your Business Insurance Binder

Insurance paper on businessman desk in Office Business

Whether you’re insuring your business against liability or protecting your employees with a workers’ compensation policy, your insurance agent will provide a binder that can serve as your temporary proof of insurance before an insurance policy is issued.

ASK FOR IT BY NAME

When you apply for an insurance policy, you should always ask your agent to provide you with the binder. Sometimes your agent might call this a certificate of insurance or refer to the process as binding coverage. Having this written document gives you the chance to review your coverage and confirm it is correct.

WHAT’S INCLUDED

Your insurance binder won’t be in a physical 3-ring binder. Instead, it is usually two or three pages of legal paperwork that spells out your policy’s details. Your business insurance binder should include the following key elements:

  • The type of risk insured.
  • The liability coverage amounts.
  • The deductible amount.
  • The named insured(s).
  • The start and end date of the policy.
  • The name of the insurance company and insurance agent.

While the binder acts as a temporary policy with an expiration date, it will not cover you once it lapses. Also, it does not guarantee that a policy will be issued. You’ll still have to go through the company’s underwriting process. So it’s always good to follow up with your insurance agent to ensure that the formal policy is issued. As with all critical business documents, be sure to get a complete copy of the policy for your files.

NOT A DECLARATION

Typically the declaration page is provided with the policy after is has made its way through underwriting and been approved. A declaration page provides a summary of your insurance policy. While it will contain a lot of the same information as the binder, they aren’t the same thing.

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Professional Financial Designations

When it comes to managing your personal finances, you need the right financial professional on your team. Knowing the differences between the various professional designations will help.

CPA (Certified Public Accountant):

One of the more widely recognized certifications. These professionals are tax and accounting specialists who can help with reducing taxes, preparing tax returns, and organizing investments.

CFP (Certified Financial Planner):

These experts can help with investment, estate and retirement planning. And they have a fiduciary duty to make decisions with their client’s best interest in mind.

IA (Investment Advisers):

They are regulated by either the Securities and Exchange Commission or a state regulator and are able to give advice or recommendations about specific investments. An investment adviser may also be a CFP.

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Valuing Your Business

Knowing how much your business is worth can do more than figure out how much money you can get when you sell it. Creating an accurate valuation is part of an ongoing business strategy.

COMPARING AND PROJECTING

Think of a business valuation as an appraisal, which is generally created by analyzing a company’s tangible and intangible assets relative to its liabilities and debts. Some valuation methods will also consider how profitable the company is on an annual basis, and others will compare your business’s financial statements with similar companies. There are numerous valuation methodologies and which one is best for you will depend on your business.

KNOW WHEN

Business valuations are most often completed when a company is being sold. But valuations can also be useful when there are tax disputes with the IRS or when additional owners are brought in, or old partners are cashing out and leaving. And if a business wants to secure a sizable loan or investor funding, a valuation can offer credibility to justify the risk.

Valuations also help owners measure progress, identify hiccups or gaps in company infrastructure, and provide a benchmark as to how your company performs against your peers or industry best practices.

Maybe you weren’t planning to sell. But if the value of your business has increased significantly, selling now might make sense.

MAKE A CHOICE

You can run your own informal valuation at any time. But if you need a third-party valuation, you’ll need an experienced independent appraiser trained to use unbiased methods. And if your company operates in a heavily regulated industry, hiring someone with in-depth regulatory knowledge is a must.

BEYOND VALUATION

Make sure all aspects of your operation are up-to-date. A few examples include: record-keeping, outstanding legal matters, insurance coverage and intellectual property documentation.

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May 2021 Client Line

Valuing Your Business – creating an accurate valuation is part of an ongoing business strategy.

Professional Financial Designations – knowing the differences between the various professional designations will help.

Understanding Your Business Insurance Binder – your insurance agent will provide a binder that can serve as your temporary proof of insurance before an insurance policy is issued.

May 2021 Client Profile

Big Changes to Child Tax Credit – the American Rescue Plan Act, March 2021, made significant changes to the child tax credit for 2021 only.

Defining Company Culture – worker satisfaction is highest when employees’ personal view are in sync with a clearly defined company culture.

May 2021 Questions and Answers

May 2021 Short Bits

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April 2021 Short Bits

PRESIDENTIAL SALARIES

U.S. Presidents earn $400,000 per year as the commander in chief. On top of that, they receive a $50,000 expense account annually for things like dry cleaning and food. After leaving office, former Presidents receive an annual pension for life along with permanent Secret Service protection.

401(k) CONTRIBUTIONS

According to a recent study, for the 12-month period ending in September 2020, the average 401(k) participant saved $7,270 while earning another $4,010 in employer contributions. Based on participants’ average income, this amounts to a 13.5% combined contribution, which is slightly less than the financial expert’s recommended savings rate of 15%.

DECLINE AND RECOVERY

Recovering from the economic impacts from the COVID-19 pandemic will take some time. According to the Brookings Institute, it will take until 2023 for the average American to spend the same amount as they did in 2019. While the off-premise food and beverage (i.e. grocery stores) sector saw an increase of $84 billion in consumer spending in 2020, health care spending dropped by $148 billion as many Americans delayed or skipped visits to health care professionals.

IRS BACKLOG

Some taxpayers have waited six months or longer to have their 2019 federal tax returns processed. As of December 31, 2020, the IRS website indicated there were still 7.1 million unprocessed 2019 individual returns. Office closings due to COVID-19 and 20% fewer employees since 2010 levels are to blame. With approximately 26% of its employees eligible to retire in 2021, the IRS is asking for more funding to hire customer service representatives.

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April 2021 Questions and Answers

Question:

I bought a fundraising ticket to support a non-profit and I won the main prize, a new car. Will I be taxed on winning the car?

Answer:

Raffles are considered a form of lottery. Although cash winnings of more than $5,000 are subject to a 25% withholding tax, non-cash prizes are treated differently.

With no cash to withhold, the winner of a non-cash non-profit raffle must pay the organization 25% of the prize’s fair market value, minus the amount of the wager. However, in some instances, the organization may pay the tax for the winner.

If the value of the car is at least 300 times the value of your wager, you’ll receive a Form W2-G from the non-profit showing the car’s value and the tax withheld. Since the IRS considers this prize to be income, you’ll need to report the vehicle on Form 1040. Keep in mind you may also owe state taxes.

Question:

My business was approached by a professional employer organization (PEO). What does a PEO do for businesses?

Answer:

A PEO offers outsourced solutions for things like human resources, payroll, and benefits. Often it can decrease benefit costs due to its purchasing power and keep your company up-to-date with employment regulations. Using a PEO means that employees technically work for the PEO under a co-employment model. This means the PEO assumes some of the risks associated with being an employer.

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Disregarded Entities

There are three types of disregarded entities, but the single-member limited liability company (SMLLC) is the most common.

TAXES

The IRS defines a disregarded entity as a business that is not taxed separately from the owner. All the company’s income and expenses pass through to the owner and are reported on the individual’s federal tax return—so no need for an additional company tax filing. This also avoids double taxation, unlike corporations. Owners of SMLLCs still have to pay self-employment taxes.

It’s important to understand that disregarded entity status applies at the federal level only. State taxation of disregarded entities vary. While some may not impose an income tax on the business, they may charge other taxes like franchise or excise taxes.

LEGAL PROTECTION

A major benefit of a SMLLC is to provide legal protection to the owner. The company, not the individual, becomes the party to contracts and the borrower on loans. At the state level, the company retains all the liability benefits of an LLC so its assets are protected from creditor’s claims.

Consult your tax advisor before taking on new partners/owners as this would change how your business is taxed.

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Kids, Money and Taxes

Unfortunately, personal finance is rarely taught in schools, so unless kids learn about money at home, they often learn hard lessons as adults. That’s why it is so important for parents to put this task on the list of things to teach their children, starting at a very young age.

SHARE EXPERIENCES

As you deal with finances on a daily basis, involve your children, keeping in mind the child’s age. For example, grocery shopping can become a lesson about budgets and decision making. Simply allow a younger child to choose only one item. Older children can learn about budgeting and sales tax while shopping for school clothes. A wellness check at the doctor’s office presents the perfect opportunity to explain a bit about health insurance.

TEACH BY EXAMPLE

Let your kids see you working on planning finances. Tell them how you are saving up to buy something special for the family or putting money away for college and retirement. An older child could also learn the concept of time and money. At tax time, explain to them why you are paying income or property taxes.

LEARN BY DOING

Chores are a great way to teach kids to earn money. You can further help them learn about saving by putting their earnings into two clear jars. For every dollar earned put a quarter into one jar for savings and 75 cents into another, for spending. Encourage them to watch their money accumulate and add any birthday money they may receive. You could open a savings account for older children.

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April 2021 Client Profile

Barbara operates a floral shop and her CPA recently suggested she switch from the cash method of accounting to the accrual method and she doesn’t understand the difference between the two methods.

The cash method of accounting is the most common way to maintain financial records for small businesses. Under this method, all transactions are recorded based upon when cash changes hand. Revenue is recorded when you get paid and expenses are recorded when you pay them.

As businesses get larger, switching to the accrual method provides a better long-term view of the company’s financial situation. It shows how much money is earned and spent, regardless of when cash changes hands. If you complete work for a client in February but aren’t paid until July, you’ll record the revenue in February.

Although either method is generally acceptable, many banks will require financial statements using the accrual method when considering a loan application, as will most potential investors. And the IRS requires using the accrual method for certain businesses with inventory and most companies with revenue greater than $25 million per year.