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New Overtime Rules for Employees – What you need to Know

11/30/2016 – DELAYED!
As of right now, the new overtime rules do NOT go into effect tomorrow.   On November 22nd, a US District Court Judge in Eastern Texas granted an Emergency Motion for a Preliminary Injunction which stayed the implementation of the updated Overtime rule.

In my opinion (take it for what it’s worth) this is a double edged sword.   Would the new rule have hurt business?  Yes some, but mostly those businesses who were abusing the employee’s stated position (ie Manager, Director) to get around paying overtime to individuals who were earning a mere $10/hour while those same employees did not meet the Criteria to be considered Exempt from Overtime.   This new rule attempted to rectify that classification so that workers could not be exploited.

On the other edge of the sword are the workers themselves.   The new rule was an attempt to ensure that employees who did not meet certain managerial job duties were not miss-classified as managers denying these employees overtime pay for work over 40hrs.   This new rule didn’t say you needed to necessarily give your employees a raise if they were Exempt salaried, it merely helped to define a living wage for those who were working over 40 hrs and not compensated for that work.   An employer has 2 choices under the new rule – Either Pay overtime to employees that clearly are not Management (either by pay scale or duties) or Hire additional Labor to fill in the hours that were not being compensated under the old rule.   Assume this person was working 50 hrs a week and only compensated for 40 at $10/hr – 2 things happen under this scenario (1) the person’s hourly wage is effectively reduced to $8 when not compensated for the other 10 hrs (2) their time away from their family is effected and (3) something most probably don’t think about, resentment and employee dissatisfaction become an issue.   The later may be something that actually costs an employer more than if the employee were happy and enjoyed their job.

Stay posted to this page.   I will update this information when more is available.  But as of now, no changes are in effect regarding overtime pay.

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Effective December 1st, 2016, new Exempt Overtime rules go into effect.   As an employer you will need to start paying Overtime to your SALARIED employees whose salaries are under $47,476 per year and even if they meet the other regulation criteria to be considered exempt.

What the new legislation does is merely lift the pay threshold from $23,660 ($455/week) to the new higher threshold for anyone earning under $913/week.    You won’t necessarily have to change your Salaried employees over to hourly, but you will need to find some method of tracking those hours so that overtime can be accurately calculated and paid.

A bit of History on who could be classified as Exempt

You could classify an employee as exempt from overtime if they met certain job/pay related tests.   The main tests are the employment classification:  Executive, Administrative, Professional, Computer or Outside Sales.   On top of these general classifications, the employee would need to have a position of responsibility – managing employees, exercising discretion/judgement, have advanced knowledge among other related qualification type tests.   However, under each of the tests, the minimum weekly pay for each of the classifications was $455/week.   This had the tendency to lead to employees being misclassified as exempt from overtime even though, the employee may not meet the other Employment Classifications.

Keep in mind, you can and could still pay employees based a Base Salary even if they didn’t meet the exempt standards, but you were and are required to pay overtime (time WORKED over 40 hours in a given work week) to salaried employees even if they did not qualify for exempt status. The term “Salary” was not and should not be confused with being exempted from earning overtime pay.

How to implement the New Rules

Effective on Dec 1st, employers will be required to pay overtime to every employee who does not meet the Exempt Work regulations – those rules have not and are not changing.  What has changed is the weekly earnings in ADDITION to the exempt criteria.    The weekly minimum pay is being increased from $455/week to $913/week.

Attached (via this link)  https://www.dol.gov/whd/overtime/fs17a_overview.pdf  is the U.S. Dept of Labor fact sheet on WHO is exempted from overtime.  For any employees that you are not paying overtime to, you should review that employees job responsibilities to see it they meet the exemption standards for overtime.   If they do not, you need to begin paying overtime to the employees covered under this new change.   You may want to review these rules now to see if you are in compliance as you could potentially owe your employees hundreds (potentially thousands) if you have had them misclassified incorrectly all alone.   For those employees who do meet the job duty classifications but are under the new pay threshold, you have a couple options – (1) Raise that employees salary to an amount that exceeds $913/week, (2) Leave their salary as is but convert their Salary to hourly so their overtime hours can be easily determined or (3) Leave the Salary as is and weekly recalculate their hourly rate and pay overtime according to you state’s overtime rules.

What hours Qualify for Overtime

Overtime hours are those hours an employee WORKS in excess of 40 hours per week.  If your employee works 40 hrs but has 8 hours of vacation, the 8 hours of vacation is not Worked time and therefore no overtime is payable.   However, if your employee is continually working 45 hours per week, they will be due 5.0 hrs of overtime each Week – do not confuse this with pay periods.  If you pay on a bi-weekly period or some other pay period, you will need to determine if the employee worked over 40 hours in a given WEEK.

Example:  You pay your employees every other week (your pay cycle is Bi-Weekly).  Your employee who makes $15/hr and does not meet any of the exempt criteria turns in their time sheet for 80 hrs.  However, that 80 hrs consists of them working 45 hrs on week 1 and 35 hours on Wk 2 – The employee is entitled to 5 hours of Overtime pay for week 1 even though their total hours equal what would normally be 2 weeks at 40 hrs per week.

Each state has it’s own laws on what the overtime rate is.  Wisconsin is 1.5x the regular hourly rate.  Under these laws, in the example above, this employee would be paid 5.0 hrs at $22.50/hr for the overtime hours.   Some states may have laws which may 2.0x the employees hourly rate when/if hours exceed a given amount of overtime or if overtime occurs on a holiday.  Be Sure you know what your states Overtime pay laws are.

It’s important to understand that the employees who are entitled to overtime pay is NOT changing!  It’s only the amount that the already exempted employees earn that is being adjusted.   In other words, your employee meets the work related criteria to be considered exempt from overtime but they don’t meet the new pay threshold beginning on Dec 1st – this employee would now no longer be exempt simply because the pay threshold has changed.

LKM Accounting is here to help!  Feel free to give a jingle or shoot us an email.  We are happy to help small businesses understand the tax and pay laws.

 

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Where is my refund??

Tax Refunds Not in your bank yet?

So you are panicking! Your tax accountant said it should about 10-14 days (give or take) and most individuals are getting their refunds back – but it’s day 10 and you haven’t seen yours yet.  Well, hang in there! Unless you filed your return in early February, your return filing is in the height of the return season so it may be a couple more days of processing than it was a month ago. Additionally, if you have anything special happening on your return, Earned Income Credit, increased Medical Expenses, or maybe lots of stock sales… it could take a few days longer.

You can always go out to the IRS (or maybe even your State Revenue Department Website) and check on the “Where’s my Refund” option.  Have your tax return in front of you so you can verify who you are and click submit. These sites will give you a current status of your tax refund situation. Note that most refunds right now from the U.S. Treasury are out about 21 days. Long gone are the days of paper checks which took 6-8 weeks for the refund to get to you…. Remember that?  Aren’t we glad we are not back in those days!

Here is the IRS website to check on your refund.   https://www.irs.gov/Refunds

Remember, Tax Preparers are extremely busy right now so unless it’s been a month or more, try researching on the IRS or State Website first.  Your Tax Preparer will be very grateful you did.

 

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Filling out your Federal W-4 Form

If your employer hasn’t already, they should have given you a new W-4 form to update your Withholding exemptions. These should really be updated each year and adjusted according to what your tax liability was for the prior year. Now, being it’s only January, you most likely won’t have your W-2 or Tax Returns completed yet for last year but if your filing status has changed … ie you got married, had a child or other dependent, or possibly bought a house… you should go through the step by step calculation to see if you have your exemptions correct.

What is an exemption? A Withholding Exemption is a deduction from your gross income that reduces your period income by a given dollar amount when calculating your Federal and State income tax on that payroll amount. Example: If you are paid weekly, 1 exemption is equal to $43.30 (rate for 2016) so if you claimed 3 exemptions and were paid $500 per week, your TAXABLE income for Income tax purposes would be $370.10 ($500 less 3x$43.30 or $129.90). The exemption amount changes depending the frequency you are paid. The annual value of each exemption is $2,250 so if you are paid monthly, your exemption amount would be equal to $187.50 PER EXEMPTION (or $2,250 divided by 12).

How many exemptions should I claim? Don’t get carried away on claiming exemptions! The more exemptions you claim, the less is withheld in Federal and State income taxes on each paycheck. Although this may sound like a great idea, it could end up leaving you with a very large tax bill at the end of the year when you finally do your tax returns. Try to match your exemptions to what your liability actually is so that you come out with a Zero net tax, in other words No Tax Due but No Tax Refund either. This may be something you want to consult with your tax accountant on. I know a lot of people think that if they have more withheld that means a nice large check at the end of the year but I don’t agree with this savings plan. Set up a Savings account and put those funds in an account that you have access to in the event you have an emergency and need access to your money! Remember if you give it to the Government, you’ll need to wait to get it back. Wouldn’t you rather collect interest on that money and have it available if you need it?

The basic rule on exemptions is you get 1 exemption for each person who appears or will appear on your Income Tax Return. However, this basic amount is a TOTAL number of exemptions you can claim. So is you are married with a child, the total basic exemption you can claim on your W-4 is 3. You can split these in any way you’d like between you and your spouse.  If your spouse works too, you and your spouse need to split up the exemptions – if you take all 3, your spouse would need to claim 0. So long as you add up to 3 between the 2 of you, you and your spouse can claim any combination. In addition to the exemption for each person on the return, there are also exemptions you can claim for Child Care, Head of Household, and other Dependent Care expenses.

Should I be claiming Exempt from Withholding Taxes? Unless you are a FULL TIME STUDENT AND/OR your income is LESS than your Standard Deduction and Personal Exemption(s) on your Tax return, you can not claim exempt from withholding – period! This status is meant for tax payers who will have NO Tax Liability in the given tax year. If you claim this and your employer suspects that you do not fall into the category that allows you to claim exempt, they can consider your Form W-4 as invalid and request you complete a new form. However, if you refuse, they can send in your W-4 to the IRS for review. If the IRS reviews your W-4 and determines that you have falsely completed your form, the IRS will send you and your Employer an “INITIAL LOCK IN LETTER”. This letter will indicate that you have 10 days to correct your W-4. However, the IRS can also send you and you Employer a “LOCK IN LETTER” that permanently sets the amount of withholding exemptions you are allowed to claim. And normally, they will set your new withholding Exemptions at Single with 0 Exemptions – insuring the maximum amount of withholding. Under these letters, you can appeal but your employer can not change your withholding without a release from the IRS. Basically, the IRS is punishing you for not withholding federal income taxes based on information they have from your prior years Tax Return and your filed W-2. If you are not sure if you can claim exempt, ask your tax accountant or your Payroll Administrator at you place of work.

Breaking News

Breaking News!

Congress has reached a Budget deal which incorporates and reauthorizes some tax breaks and incentives for individuals and small business.   Below is a list of items that are PERMANENTLY extended!!

The credits being permanently extended include:

  • An expanded Earned Income Tax Credit for low-income earners;
  • The Child Tax Credit for low and moderate income workers;
  • The American Opportunity Tax Credit to help students under age 40 pay college tuition and expenses;
  • Low income housing credits;
  • An expanded research and experimentation credit;
  • Section 179 business expensing, which allows businesses to fully deduct the price of equipment and software investments;
  • State and local sales tax deduction;
  • Tax deductions for food inventory donated to food banks;
  • A deduction for land donated for conservation; and
  • A tax break for individuals to donate to charity from qualified retirement accounts.

Section 179 is the huge one for Businesses!!  Very happy with congress today for seeing the light on this one.  (For further information on Section 179, please see our Blog on 09/09/2015)

Additional items included in this legislation:

  • A compromise over cybersecurity legislation that would encourage businesses to share information with the government about potential cyber threats
  • Permanently reauthorize federal health benefits for emergency personnel who responded to the Sept. 11 terrorist attacks;
  • Put in place new security requirements for a visa waiver program, which the House passed as a standalone bill earlier this month. that has come under scrutiny following the Paris terror attacks. The legislation does not include new restrictions that would prevent Syrian and Iraqi refugees from entering the country, a provision House Republicans had pushed to get in the bill;
  • Freeze funding for the Internal Revenue Service and the Environmental Protection Agency; and
  • Repeal country-of-origin food labeling requirements.
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New Penalties for Failure to File 1099’s

The IRS has strengthened its penalty phase of the reporting requirements.  These penalties are effective beginning January 1st for the 2015 tax year filing period.  The penalties are as follows:

1-30 days late:  $30.00 each penalty per return not filed with a maximum of $500,000.00 per year ($175,000.00 for small business maximum)

30 days – 8/1/2016:  $100.00 each penalty per return not filed timely with a maximum of $1,500,000.00 per year ($500,000.00 for small business maximum)

After 8/1/2016:  $250.00 each penalty per return not filed timely with a maximum of $3,000,000.00 per year ($1,000,000.00 for small business maximum)

Intentionally Disregarded:  $500.00 each penalty per return not filed timely with no maximum limit per year (No maximum limit for small business)

As you can see from the information above, the penalties can be severe.  However, should your supplier not provide you with necessary paperwork, you will not be penalized – SO LONG AS, your attempts to collect the information can be provided and are sufficient to prove that you made attempts to obtain the information.

More than ever, it is important that you are complying with these regulations.

 

 

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Online / Cloud Accounting Software

All the rage now-a-days is to move your accounting/bookkeeping to a Cloud based/Online software provider. But is that really such a good idea? Is it really right for YOUR business?

I’m old school. I was taught and learned on old mainframes that required large cooled rooms with a large IT staff to support the system. The internet was still relatively new and we didn’t have smart phones – we had bag phones! In addition, my first job was for a company that was traded on NASDAQ so we had pretty intense internal controls on everything and I’m not sure we would have ever moved to an online accounting system. Cloud/Online software does have a couple advantages: (1) you have the convenience that you can access your books from virtually anywhere. You can log on to your provider from anywhere you have a computer with internet access or even smart phone and (2) your software is never out of date and never needs to be updated. But are they safe?

In an article by Forbes Magazine (link below), they discuss that Online Software is probably better secured than in-house server based systems. Online software providers use the some of the same security as banks do for online banking. With this you get the benefits of the economies of scale – large number of users sharing the costs of security, updates and IT personnel. But you should keep in mind that NO system will ever be 100% secure. I only need to point to the hundreds of data breaches over the last couple years, over a billion personal records were illegally accessed in 2014 alone. Target, Michaels and the IRS just to name a couple of the better known breaches. Digital First (link below) has a very good article on the comparisons of security for Online/Cloud software vs Desktop/Server based systems.

My issue with these online providers is beyond the security issue. My biggest concern is internet connectivity and cost is my second. Being in Madison, WI you would think that the internet is relatively accessible – but you would be incorrect. I have a client, literally less than 2 miles from my door that just got high speed cable last month – did I say this was almost 2016! Until then, it was traditional phone lines and if you have ever experienced slow internet from traditional phone lines, you know exactly what I’m talking about. My brother-in-law even lives less than 10 miles outside of Madison, his internet is via his cell phone so the convenience of a Cloud based system would not be a good fit for his business. Consider the following before jumping onto the cloud.

  • What happens if your internet is slow or you lose connectivity all together? If this happens, are you dead in the water? Can you provide service to your customers? Can you accept sales from your customer? You should have an alternate system in place to provide these services to your customers in the event this happens. It’s not a question of if it will happen, it’s a matter of when it will happen. In the event of natural disasters or the increasing threat of grid/virtual terrorism, you need a plan in place before you move to online. If the bad guys wanted to hurt the U.S. economy (or world economy for that matter) what better way than to shut down internet commerce…. Just saying.
  • How much is the monthly online subscription cost? If you are paying 10 or even 20 times more than the desktop version of the software would cost you in a year’s time, you should consider whether or not the cost is worth the convenience of being able to access your data online. Determine if there are other, more cost efficient ways to access data without breaking the bank. Or do you even need to access the data while you are on your vacation or home relaxing? There is something to be said about being able to get away from your work, even if only for a few hours each night. Running a small business is stressful and as any small business owner can attest to, you never actually can get away from the business, so do you really need to have 24 hour access to your accounting or sales software? If not, do you need both? Can you have one without the other? If you have a sales staff located out away from your home office, maybe access to sales online is all you need.
  • What happens if you have a bad financial month and cash flow is tough? Do you still have access to your books? Or are you being held hostage by the software company in order to access your data? Or what happens if you close your business – what happens to the data then? You should know you are required to be able to provide this data to the IRS in the event of an audit for 7 years! So if you close your online account, can you get a usable copy so that you can comply with tax needs?  Be sure you know the answer to this before you close your online cloud accounting software.
  • How many users can access your data for the base subscription fee? Do they charge you for users in groups of 5, 10 or a single add-on as needed. And are those new user seats more than the cost of the base fee? You should always have separate user IDs for each user. You want to be able to track who did what in the event you have some sort of breach. Being able to track who will help you determine how that breach happened and the breach can be better addressed and secured.
  • Can the online software meet your specific business need or is it relatively flat? Besides users, are there restrictions on the number of Customers or Vendors you can add? Years ago, QuickBooks started their online software which was lack luster at best. The basic model was free but you could only have 10 customers and you couldn’t run job costing. To get to the next level, the cost was $24.95 per month – the desktop version was only $189 for 3 years! So although your Accountant or Bookkeeper could get access to your data without having to run to your business (which saves both you time and money), the cost of having that convenience may not be enough of a benefit to make it worth while.

As a professional firm working with Startups and Micro Businesses, I tend to lean towards the desktop versions. I find that the overall cost-benefit analysis of having the online/cloud software is just not as beneficial as the reduction of expenses in the first years of being in business. Young businesses should focus on growing the business. Things such as inventory, marketing/advertising and employee costs eat up a lot of the cash flow in the first years. Even if the Cloud software is “free”, it may not really be beneficial if you have to pay someone to extract and recompile the data into useful financial statements.  I know this probably goes against everything the guy down the road could be telling you, but is he trying to make his life simplier or yours?

Come have a chat with us! We can give you options you may not even be aware of before you leap onto the cloud.

Related Articles:
Forbes: http://www.forbes.com/sites/quickerbettertech/2014/05/05/and-the-best-small-business-cloud-accounting-software-is/

Digital First: https://www.digitalfirst.com/online-accounting-guide/secure-online-accounting-software/

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1099 Requirements – What you need to know

Forms 1099 are “information returns” that businesses are required to file annually with the IRS. The forms are used to report amounts a business paid out that should be reported by the recipients as income.

Form 1099-MISC, Miscellaneous Income, is probably the most familiar to business owners. But Form 1099-MISC is just one of a group of more than fifteen different forms used to report other types of income to the IRS.

To increase compliance of Form 1099 filing, business income tax forms include questions about whether the business made payments that require issuing the form and whether the business actually did issue it. This scrutiny, coupled with steep penalties, make it important for every business to check Form 1099 filing requirements each year.

Here’s what you need to know about Form 1099.

COMMON 1099s – A variety pack

Under current tax law, every person engaged in a trade or business, including nonprofit organizations, must file Forms 1099 for certain payments made during the year in the course of the payer’s trade or business. Here are some of the most common forms and filing requirements.

Form 1099-INT
Used to report interest payments of $10 or more by financial entities; $600 or more by certain trades or businesses.
Form 1099-DIV
Used to report dividend payments of $10 or more; $600 or more for liquidations.
Form 1099-B
Used to report any proceeds from broker and barter transactions.
Form 1099-R
Used to report distributions of $10 or more from retirement or profit-sharing plans, IRAs, SEPs, annuities, or insurance contracts.
Form 1099-S
Used to report the sale or exchange of present or future ownership interests in real estate.
Form 1099-C
Used to report cancellation of debt of $600 or more.
Form 1099-MISC
Used to report miscellaneous payments generally of $600 or more; $10 or more for royalties; any amount for fishing crews.

■ 1099-MISC – The major business form

Form 1099-MISC is used to report payments for services provided to your business by unincorporated vendors when those payments total $600 or more for the year. Typical payments include rents, royalties, and compensation to independent contractors, such as consultants, web designers, accountants, lawyers, and cleaning services.

Here are five conditions for payments that must be reported using Form 1099-MISC.
1. The payment was made to a nonemployee.
2. The payment was made for services (not goods) provided to the trade or business.
3. The payment was made to an unincorporated entity (except for payments to attorneys and medical and health care payments).
4. The payment or payments generally totaled $600 or more for the year.
5. The payment was not made electronically (e.g., with a credit or debit card or with PayPal).

DEADLINES – When to file

January 31 – Give one copy of Form 1099 to the recipient of the payment by this date of the year following payment.

February 28 – Send one copy of Form 1099 (along with Form 1096) to the IRS by this date of the year following payment unless the form is filed electronically.   You will also need to check with your State Department of Revenue to see if they require filing of these forms as well.

March 31 – If Form 1099 is filed electronically, this is the deadline for providing a copy to the IRS.

NOTE: Electronic filing is required for businesses filing 250 or more information returns and optional, though encouraged, for businesses filing fewer than 250 information returns.

PENALTIES – A matter of intent

The penalties for failing to file Forms 1099 range from $50 to $250 per form, depending on how late your filing is and whether or not the failure to file was intentional. Total penalties can go as high as $1 million for businesses with gross receipts under $5 million or $3 million for those with gross receipts over $5 million.

To increase compliance of Form 1099 filing, federal income tax returns for businesses include the following questions:
1. Did your business make any payments during the year that would require it to file Form(s) 1099?
2. If “yes,” did or will the business file required Forms 1099?

MORE HELPFUL FACTS

1. If you receive a Form 1099 with an incorrect dollar amount, request a corrected copy from the payer before tax filing time.
2. Only trades and businesses are required to report payments made in the course of business on Form 1099. No reporting is required for personal payments. For example, a business owner who pays a dentist $1,500 for a child’s dental work does not need to report that payment on Form 1099.
3. Payments of $600 or more to attorneys in the course of business must be reported on Form 1099-MISC, whether the attorney is incorporated or not. Medical and health care payments made to corporations must also be reported.
4. Payments to vendors by credit or debit card, or by services like PayPal, should NOT be reported on Form 1099-MISC. The bank or third-party payment provider is required to report those transactions on Form 1099-K.
5. Nonprofit organizations are subject to Form 1099 filing requirements because they are considered to be “engaged in a trade or business.”
6. The fact that payments may not have to be reported on Form 1099 does not mean that the payments are exempt from income tax. All income must be reported on the income tax return of the recipient.
7. To properly complete Forms 1099 and avoid penalties, a business needs the recipient’s name, taxpayer identification number, and a mailing address. Obtain this information by sending the recipient Form W-9, Request for Taxpayer Identification Number and Certification. If the recipient fails to provide the necessary information, the business may have to withhold taxes from payments and remit these amounts to the IRS.

AN ACTION LIST – Staying compliant

1. Review accounts payable and cash disbursements to capture reportable payments.
2. Verify that the information on Form W-9 is current for each vendor.
3. Initiate a policy that no vendor will be paid unless Form W-9 is completed.

For additional information about the Form 1099 filing requirements that apply to your business, please contact our office at (608) 239-4907.

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Scam Emails

WARNING!

If you use QuickBooks and have your email ANYWHERE on their site, be warned that there are active scams going out to get your information!
If you get any emails from what appears to be “Intuit” – BEFORE you hit reply, review the name@xxxxx.com address. These phishing emails look just like a legitimate email using all of the Intuit Logos and usual fonts. However, if it doesn’t say “Intuit” in the email address – it’s NOT a legitimate email!

Login to your Intuit account directly – never use any hyperlinks on these emails.