Every business owner goes through the process of deciding how to hire someone when they get to the point where they’ve outgrown their current situation or just need a bit of extra help.  You’ve found the right candidate and now you need to decide whether or not to hire a contractor or employee…this is where you need to be very careful!

Watch out for the pitfalls

While your first inclination is to hire contractors to save paying FICA and Workers Comp, you should be aware of the rules that the IRS and state can nail you on.  Yes, there may be two sets of rules that you have to abide by!  We’ll explain each one, and since we live in California, the rules here as well.

What the IRS Looks For

The IRS is mainly looking at two factors; Control & Relationship.  Control is what it sounds like, do you have control over how your worker does their work and when they do it?  Do you determine how much you pay the worker?  If the answer is yes, then you most likely have an employee, not a contractor.

Under the Relationship test, does your relationship with your worker resemble an employee or contractor?  Are there written agreements, do you pay for benefits, do you reimburse your worker for expenses?  If it walks like a duck, quacks like a duck, then you most likely have an employee.

Under the Control test, you give up when and how the worker perfoms the work. For example, you take your car to the mechanic for some work.  You walk in and the mechanic tells you how much it’s going to cost and how long it’s going to take to do it.  Now you’re hoping it’s fast because you need to pick up the kids, but you can see what I’m getting at here.  You really don’t have any control over the mechanic in how and when they do their work.  In this case, we’re describing a contractor relationship.  

California

In California, we take it to another level! Oh, how we love the Golden State! New legislation for 2019 enacted more rules for determining contractor status.  (Even if you’re not in California you might as well take heed as I’m sure states will soon follow California’s lead)

California gives you the “ABC” test to help you determine whether or not you have a contractor or employee relationship:

A – Control

This refers to whether or not the worker is free from the control of your business in connection with their performance of the work. Thus, if you are telling the worker when and how to do their job then you are probably going to fail this test.

B – Business

Additionally, the worker should be performing work that is outside the normal course of your business.

C – Customarily Engaged

In connection with A & B, the workers must be engaged in an established trade or business of the same nature as the work performed.

Summing up California

Photo by Vital Sinkevich on Unsplash

As you’re now most likely thinking about what this means for your business, these new rules rule out a lot of what has gone unchecked for many years–hiring just anyone to get around payroll taxes and workers comp insurance. To illustrate, here are a few examples:

Example 1: You run a personal training studio and hire other personal trainers to come in and run training sessions. That’s an employee.

Example 2: You’re a physician in private practice and you hire office staff. This is an employee because they will most likely fall under the “Control” test.

Example 3: You’re a church and you hire a consultant to help you with leadership and other efficiencies. That’s a contractor.

Example 4: You’re a real estate agent and hire a transaction coordinator to help you move all your listing and sales through the administrative pipeline. But they work from home and you don’t dictate their schedule. You can most likely get away with hiring them as a contractor.

These rules can be tricky…no matter what state you live in

The worst thing for you to do is to guess at these rules. Feel free to reach out or comment if you find yourself stuck and caught in the web of employee vs. contractor rules!

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We love the holidays and the season of gifts, getting together with family and friends and frankly just kicking back.  But as you un-plug for a few weeks this is a great time to think about the new year and making positive changes for your business.  Here’s our top tips for changes you can make to start the new year off on the right foot.

Utilize Technology To Automate

Find your self doing the same tasks over and over again?  Look into automating those with tools like Zapier and others.  I’m not saying to take the human out of where it counts, but updating email lists etc. doens’t require a human touch.  When you’re able to reassign tedious tasks you can spend more time on meaninful activities.  For example, if you send out a MailChimp email to your client based on an action by them, why not use Zapier to automate that, plus update your MailChimp list at the same time.  Really, the possibilities are endless.

Setup A Budget

Creating a budget is the first step in planning to make sure you meet goals.  Setting up thresholds and goals will help you measure your progress throughout the year.  It can even be easily done in your accounting softwar like Xero or QuickBooks Online.

Beyond tracking the income and expenses, it forces you to think about what you plan to do and set goals.  That act is alone is a lot more than what a lot of business owners do!  easily take, forgranted–it has a throughout positive effect on how you treat your business.

Implement Some Tax Planning

Now, you have probably heard lots about taxes this past year and rightfully so, 2018 has seen some of the most extensive tax reform laws in decades!  Knowing why they mean and translate for you in your business is no small feat but that doesn’t mean you should keep your head in the sand.  Planning now can save you tons of tax if you play your cards right.   For example, IRS section 199 outlines hefty tax savings for small business owners under a certain income threshold.  This translates into huge tax savings for a lot of businesses.  

Fortunately for you, if you’re reading this blog you’re in the right place to get help if you don’t understand or know how to apply it to you.  There are also tons more opportunities to save tax so it may be worth your while to schedule some time with your tax planning expert.  Or, give us a call if you don’t have one.

Get Your Books In Order

I call ‘net income’ the magic tax number because it’s what drives most of the tax liability when you operate a business.  But you’re never going to know what that is unless you keep good records of your income and expenses.  Let’s face the hard truth, the days of paper and spreadsheets for tracking this should be over.  Online accounting software like Xero is so easy to use and so cheap that it’s a no-brainer.  Plus, using something like Xero is a great way to get ALL of your business on one place for invoicing, bills, document storage, etc.

Level Your Business Up

During this time when you’re taking some time off or away from the desk think about waysin you can make small changes to improve the quality of life.  Think in terms of plenty  and ditch the scarcity mindset.  When you do you’ll see big changes at how you handle stress and how you visualize success.  For example take implementing a CRM like Active Campaign or Hubspot costs a monthly fee, but did you think about how much time you can save with automation and how you can better serve your customers by having a system in place to put them in?

When you’re able to spend a little you make big gains in your mentality for growth.  Remember, unless you invest and work on your business there is huge rewards.

In closing I hope you’re able to use some or all of these points to have successful new year going into 2019!  Don’t forget, growing your business is like steering a large ship, you do it with small course corrections and in time you will get where you want to go!

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It’s that time again and the holidays are fast approaching.  It’s a time of excitement, family, get togethers, and…finances!  For most, year-end is the time when we start thinking about taxes and our financial situation for the year.  December 31st is too late, but if you’re reading this now, you have a good chance to get things in order to make tax time and other year-end tasks less stressful.  Keep reading to see how to get ready!

Catch Up Your Bookkeeping

If you have some a back log of bookkeeping to do, now is the time to get caught up and ready for January.  Bookkeeping can be as simple as a spreadsheet if you’re a sole proprietor, or if you have LLC or Corporation, then you really should use software like Xero.  Don’t spend hours and hours on this.  Technology is come along away in the past 5 years so chances are “there’s an app for that”!

Having your books caught up will tell you how much income and expenses you have for the year.  Once you know that, then you’ll have a good idea of what your tax bill is going to look like.

Taxes

If you’re self-employed chanced are that you should be paying estimated tax payments–which are basically tax prepayments.  Reviewing how much you’ve paid in, and making any necessary catch up payments will help ensure you don’t have a large tax bill and will help you avoid any pre-payment penalties.

Additionally, you should review your net income to ensure you aren’t getting caught with a large unexpected tax bill.  Reviewing this will help you know what to expect when it’s time to file taxes.  And if you have extra cash, you can even pay some or all of your tax liability before you file your return.

 

Retirement Accounts

Saving for retirement has almost become a cliché term.  But did you know most business owners aren’t taking advantage of having their company pay themselves for retirement?  It’s one of the great tax planning tools that a business owner can use!  The company (which you own) pays into a retirement account for you.  So it’s like getting a double benefit!  Every business owner should be doing this.

There are many different options for retirement accounts.  Whether it’s a 401K, SEP, or SIMPLE IRA, find the one that works for you and get it started.

Re-evaluate Your Pricing & Costs

End of year is a great time to look at your pricing and costs.  It’s also a great time to review your Gross Profit % and make sure you’re charging enough for your products/services, or adjust your Cost of Goods Sold (COGS).  Keep in mind that generally speaking, your COGS should be no more than 30% of your revenue.  If it is, you could be bleeding cash and you may soon run out.  If you run out of cash, guess what?  The jig is up and you may be out of business.  In order to do this you’ll need to of course have your bookkeeping caught up so do that first, and then review these numbers.

 

…your COGS should be no more than 30% of your revenue

Review Your Systems and Processes

Finally, review your internal systems and processes.  Or, maybe this is the time where you commit to write them down.  Mapping out your systems and processes does a few things for you:

  1. You can discover inefficiencies that you may have never seen.  Writing something down  has the amazing effect of providing objectivity!  You can use paper or online tools like Google Docs or Evernote to do this.  That way, if you ever have staff taking over certain jobs, they’ll know what to do.
  2. It also prepares you to be able to hire staff and delegate tasks or jobs.  Doing this allows you to take on more of a managerial/strategy role and be less of a technician.  As business owners, we should all be moving away from the technical side of the business so we can work on the vision and growing the company.

 

As business owners we should all be moving away from the technical side of the business so we can work on the vision and growing the company

 

This isn’t meant to be an exhaustive list by any means, but it should get you started.  If you need help, just ask!  We’ve helped countless businesses do these things and we can offer down-to-earth advice that will make doing this, easy!

 

 

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receipts
If you’ve been in business for any amount of time, you’ve probably heard something about keeping your receipts.  And we’ve heard some good myths about when and when you don’t have to keep them.  We’re here to set the record straight and tell you exactly when you need to keep receipts.

First, let me explain that there are different suggested records for different types of transactions.  For example, what you keep to prove the purchase of inventory is different than gas for your car.  We’re going to explore two categories today: General, and Travel/Entertainment expenses. But there are many more that we’re not discussing today.

General Expenses

What are they?

General expenses are things like paper, utilities, cell phone, etc.  Those types of expenses must be be proved with a bank/credit card statement, receipt, or invoice that shows the date, amount, and busienss purpose.

How long should I keep records for?

Generally speaking, you’ll want to keep records for at least 3 years from when you claimed them on your tax return.  The good news is that you can keep them in paper form, or electronically.  We’re a big fan of using the mobile app for Xero to take a snapshot of the receipt, and recording the transaction right on the spot when it happens.  You can also use other systems like Evernote, Google Drive, Dropbox and Box to store your records.  If you choose to keep paper, then have a good file system organized by year and type of expense, at the very least.

 

Travel & Entertainment Expenses

What are they?

41131785-business-team-on-the-way-to-meetingsJust as it sounds, expenses you incur to travel, take clients out to lunch.  It also covers lodging, rental cars, transportation, and a host of other things.  See IRS Publication 463 that is referenced below for more things that qualify as travel and entertainment expenses.

 

 

How should I keep records and for how long?

The trick here is to have “adequate” records.  There are 4 main points that you must prove in order to have a deemed adequate expense in this category:

  1. Amount
  2. Time (for travel)
  3. Place or Description
  4. Business Purpose

What that basically means is that you must have a receipt, log book, or some kind of record that proves those 4 main points for each expenses you deduct.  Estimates don’t count.  The long and short of this is: that you keep all receipts/invoices for each expense in this category.  There are only a few exceptions, one of them being that if your expense in under $75 (except lodging), you can simply provide bank statements to prove you expense.  Of course there are more exceptions, but we don’t have time to go into them in this post.

And like above, you should keep these records for 3 years after you file the tax return for the year you’re taking the deduction in.

 

The IRS has some pretty elaborate articles and publications on this topic.  We referenced IRS Publication 463.  Feel free to check it out if you need to dive in a bit deeper.  Or, leave a comment and reach out to us and we can help you navigate the murky waters of business deductions.

 

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“My bank says I have $5000, but my Profit and Loss says I made $10,000… huh?!”

Ever asked this question?

With this post, let’s dive into one of the most mis-understood and under-used reports that you have in your accounting software arsenal: Statement of Cash Flows (aka Cash Flow Statement).  This statement will answer the very question may have plagued you for some time now.

In short, this report follows one of the most important things in your business: CASH.  It tracks where the cash came from, and where it went.  The report breaks up your income and spending into three different categories: Operating, Investing, and Financing activities.

Here’s a brief explanation of each:

  1. Operating Activities: this is income and expenses from regular revenue and expenses in your business.  For example, sale of services/products that you provide, and money spent on supplies.
  2. Investing Activities: this is money spent on selling and purchasing assets.  For example, you buy a new computer and sell an old vehicle that the business owns.
  3. Financing Activities: this is money that you or an investor infuses into the business, or money taken out by owners.  For example, you contribute money into the business to cover expenses, or you take money out of the business to pay your self as an owner/shareholder.

Now, let’s show you what a statement looks like.  For this post, we’re using a statement from Xero.  QuickBooks will give you one that looks a little bit different, the differences are minor, and it tells you the same thing.

Xero Cash Summary Demo Company US

Or, here’s a downloadable version of the same report:

Demo Company (US) – Cash Summary

This report answers the question “where did my cash go?”, and will show you where the cash went.  At the very least, this report should help you understand your business activities so that you can make better decisions.  If you need further help making sense of this, or maybe your business has a unique situation, please don’t hesitate to reach out and contact us.

So now that you know more about your cash, what are you going to do with it?
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16261450-three-road-signs-pointing-to-spending-saving-and-budget-to-symbolize-budgeting-and-savings-in-your-p

Whether you’re budgeting for your business, organization, or a department you’re in charge of, it can be a daunting task!  But believe it or not, the nuts of bolts of how to create, manage, and execute a budget is the easy part.  Most often, the challenge is to train ourselves how to treat the funds we have stewardship over.

Traditional Budgeting, Right or Wrong?

If you’ve ever worked for large corporations, institutions, or organizations, the attitude is usually “use what’s been allotted to you, or lose it!”  That attitude is reactive in nature because you base the budget off of what happened in the past.  So, you may ask, what’s wrong with that?  The short answer maybe nothing at all.  But if you work for a cash sensitive business where funds are closely monitored, either due to cash flow, or the nature of the funds is more custodial in nature (tithes in churches), this is generally the wrong approach to budgeting.  Chances are if you’re reading this, that you fall under that categorization.

The Proactive Approach

Zero-based Budgeting (ZBB) is a term that has become popular in recent years, and is truly the proactive approach to budgeting.  Instead of basing budget amounts and expenditures on what happened in the past, it requires those who are designing the budget to ask “what do we need for this year or program?”.  So instead of using last year’s performance, you effectively wipe the slate clean and ONLY plan for what your expectations are coming up.

For example, let’s say you are budgeting for your kids extra-curricular activities for the upcoming year.  Last year your kids played soccer, with a total cost of $300 for the year.  This year, you decide your kids don’t have what it takes to be the star player, so you put them in Karate, for a total annual cost of $1200.  Now, let’s budget!

Under the traditional method, you would use history to create your new budget so we have $300 in the budget.  I bet you can already see the problem!  Now, because you used a traditional budget, before you make it half of the year, you are already over budget.

Under the ZBB method, you think ahead: “I know my kids played soccer for $300, but I know they want to try karate and that’s going to cost $1200″.  So you budget for $1200.  Viola! You just created a budget and it looks like you’re going to stick to it!

Conclusion

You can see the difference in the budgeting methods used in the example above.  It’s up to you to think about your budget from a “Zero-based” point of reference so that you can use your funds proactively.  It may be hard, and take some cognitive training, but in the end, it will be worth it when your are using hard-earned funds, to their maximum potential to achieve your goals.

If you have questions, please comment below, or “Contact Us” and we’ll be happy to help!

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In our effort to educate the small business owner in how to keep more of their hard earned money, often we get asked: So what is better ROTH or Traditional IRA’s?  So we asked a local Financial Expert to explain the differences.

 

What type of IRA (Traditional or Roth) best meets your financial goals?

Tax Benefits:

Roth:  Tax-free growth.  Tax-free qualified withdrawals.

Traditional:  Tax-deferred growth Contributions may be tax-deductible..

 

Eligibility Age:

Roth:  Any age with employment compensation.

Traditional:  Under age 70½ with employment compensation.

 

Taxation at Withdrawal:  

Roth:  Contributions are always withdrawn tax-free.  Earnings are federally tax-free after the five-year aging requirement has been satisfied and certain conditions are met.

Traditional:  Withdrawals of pre-tax contributions and any earnings are taxable when distributed.

 

Penalties at Withdrawal: 

Roth:  A non-qualified distribution is subject to taxation of earnings and a 10% additional tax unless an exception applies.  (A distribution from a Roth IRA is federally tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, qualified first time home purchase, or death.)

Traditional: Withdrawals before 59½ may be subject to a 10% early withdrawal penalty unless an exception applies.  (For Traditional IRAs, penalty-free withdrawals include but are not limited to: qualified higher education expenses; qualified first home purchase (lifetime limit of $10,000); certain major medical expenses; certain long-term unemployment expenses; disability; or substantially equal periodic payments.)

 

Required Minimum Distributions (RMD’s)

Roth:  Not subject to minimum required distributions during the lifetime of the original owner

Traditional:  RMD’s starting at 70½

 

Maximum Contribution: 

For both 2013 and 2014: $5,500 ($6,500 if you are 50 or older) or 100% of employment compensation, whichever is less

* Catch up contributions:  Individuals age 50 or older (in the calendar year of their contribution) can contribute an additional $1,000 each year

** Contribution deadline:  Tuesday, April 15, 2014, for the 2013 tax year

Note: A Rollover IRA is a Traditional IRA often used for rollovers from an old workplace plan, such as a 401(k).

Feel free to reach out to either us if you have further questions.
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