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Is your business susceptible to payroll fraud?

Unless a small business owner handles all aspects of computing and paying payroll, there is room for fraud. Even if your company has only a few employees — it does not guarantee your funds will be safe.

How payroll fraud happens

Perhaps one of the easiest payroll fraud techniques is the overpayment of withholding or payroll taxes. Your bookkeeper simply overpays the government. When the refund check arrives, the employee deposits it to his or her personal account.

In some cases, the employee will have an account at a different bank but in the company name. Such an account could be used for the fraudulent deposit of other company receipts as well.

The greater the number of employees, the easier it is for someone to pull off a scam. Perhaps the payroll clerk has invented a fictitious employee or falsifies hours or commissions for a cooperating employee who shares the stolen funds. Or perhaps the employee holds the payroll deposit funds in his or her own interest-bearing account until it is time to make the payroll deposit to the government.

How to prevent payroll fraud

Small businesses can be exceptionally susceptible to payroll fraud because they often lack anti-fraud controls that larger organizations have in place. Here’s a few ways you can work toward preventing this type of fraud:

  • Get outside help. A payroll review by an independent accountant may help prevent employee schemes.
  • Divvy up duties. Even in small companies, it is possible to divide office tasks to make employee theft more difficult.
  • Limit payroll access. Figure out who needs to have access to payroll data. That list will likely be very small. Make sure it stays that way.
  • Offer direct deposit. No paper checks means less opportunities for employees to handle funds, meaning greater security all around.


Do you have a household employee? Don’t ignore the nanny tax

As you review your filing requirements for 2018, make sure you don’t overlook the nanny tax related to household employees. If you have a housekeeper or any other household employee, you could be liable to pay state and federal payroll taxes.

 

How to know if you must pay the nanny tax

First, you’ll need to determine whether you have a household employee. Generally, this is someone you hire to work in or around your house. It could be a babysitter, nurse, gardener, etc. It doesn’t matter whether they work part-time or full-time, or whether you pay them hourly, weekly, or by the job.

But not everyone who works around your house is an employee. For example, if a lawn service sends someone to cut your grass each week, that person is not your employee.

As a general rule, workers who bring their own tools, do work for multiple customers and/or control when and how they do the work are not your household employees.

 

Your responsibilities

If you have a household employee, you’ll generally be responsible for 2017 payroll taxes if you paid that individual more than $2,000 last year. However, federal unemployment tax kicks in if you pay more than $1,000 to all domestic employees in any quarter.

It’s not always easy to tell whether you have a household employee, or whether exceptions apply. If in doubt, don’t hesitate to call our office.



Avoid high RMD penalties

Required minimum distribution (RMD) rules are pretty strict. If you don’t want to face a hefty fine, you must withdraw a certain amount of money every year from tax-deferred retirement plans like 401(k)s  and traditional IRAs after you reach age 70½.  The withdrawals you make are then taxed as ordinary income. Not following these rules can lead to a penalty equal to 50% of the amount that should have been withdrawn, plus regular tax.



Changes to the kiddie tax

The Tax Cuts and Jobs Act has changed the way unearned income is taxed for your children. In the past, interest, dividends and other unearned income used to be taxed in phases. The first $1,050 was tax-free, the next $1,050 was taxed at the child’s rate and any additional was taxed at the parent’s tax rate.

The act now calls for all of a child’s unearned income to be taxed using the estate and trust tax table. Call us if you have questions about how the changes will affect your situation.



New 1095-B and 1095-C due date: March 2

The IRS said it will allow large health insurance companies to delay sending out health insurance confirmation forms. The Jan. 31 due date has been delayed until March 2. Keep in mind that you can still fill your tax return without this form as long as you can prove you have health insurance. This change does not impact people who purchase insurance from the ACA marketplace (Form 1095-A).



Considering converting your IRA?

You won’t be able to make contributions to a Roth IRA if your income goes above a certain level. However, you do have the option to convert a traditional IRA to a Roth IRA no matter how high your income. People often like Roth IRAs because qualifying distributions are tax-free and annual distributions are not required after age 70½. Make sure to consider that a conversion to a Roth is a taxable event as you do your 2018 planning. Let us know if you have questions.



Review your withholdings

The IRS recently announced new withholding guidelines for all employers and payroll companies. Employers are expected to update your paycheck on or before Feb. 15. That means you’ll need to review the amount withheld from your paycheck. Why? Because the Tax Cuts and Jobs Act lowered tax rates, increased standard deductions and eliminated personal exemptions. Many employees should see an increase in their paychecks.



Time to go through your tax records?

Chances are you’re a little confused about what to keep and what to throw when it comes to tax and financial records. No worries. It’s time to sort through what you’ve got and keep only the important stuff. Here’s what to keep in mind:

  • Keep records that directly support income and expense items on your tax return. For income, this includes W-2s, 1099s and K-1s. Also keep records of any other income you might have received from other sources. It’s also a good idea to save your bank statements and investment statements from brokers.
  • The IRS can audit you within three years after you file your return. But in cases where income is underreported, they can audit for up to six years. To be safe, keep your tax records for seven years.
  • Retain certain records even longer. These include records relating to your house purchase and any improvements you make. Also keep records of investment purchases, dividends reinvested and any major gifts you make or receive.
  • Hold on to copies. Keep copies of all your tax returns and W-2s in case you ever need to prove your earnings for Social Security purposes.

Please call our office if you have questions.



The new tax act means big changes for taxpayers

The Tax Cuts and Jobs Act was passed at the end of December 2017 with some of the most sweeping changes taxpayers have seen in 30 years. Here are a few big changes to come out of the new act — and what you can do about it.

  1. The medical expense deduction threshold was lowered to 7.5 percent.

The tax reform bill retroactively lowers the threshold to deduct medical expenses in 2017 to 7.5 percent of adjusted gross income. The previous threshold was 10 percent. This new 7.5 percent threshold remains in place for 2018, but reverts back to 10 percent in the following years.

What this means: You may want to consider using the medical expense deduction this year. If there are any qualified medical expenses you can make (drug purchases, medical equipment, etc.) to push you over the new, lower threshold, consider doing so in 2018.

  1. The healthcare individual mandate penalty stays in place until 2019.

The shared responsibility penalty (also known as the individual mandate) in the Affordable Care Act is effectively repealed by the tax reform legislation, but not right away. The penalty is set to zero in 2019, but remains in place for 2018.

What this means: You still need to retain your Forms 1095 this year in order to provide evidence of your healthcare coverage. Without proof of coverage, you may have to pay the higher of $695 or 2.5 percent of your income. Unless there are further changes coming, 2018 may be the last year you’ll need to worry about the individual mandate penalty.

More changes to consider for 2018 tax planning

We’re experiencing some of most significant tax law changes since the 1980s. There will be a lot of things to consider for tax planning this year. Here are some of the most significant:

  • Reduced income tax rates
  • Doubled standard deductions
  • Suspension of personal exemptions
  • New limits on itemized deductions, including:
    • Combined state and local income, property and sales tax deduction limited to $10,000
    • Casualty losses limited to federally declared disaster areas
    • Elimination of miscellaneous deductions subject to the 2 percent of adjusted gross income threshold
  • Boosts to:
    • The child tax credit ($2,000 in 2018)
    • A new $500 family tax credit
    • 529 education savings plan expansion for K-12 private school education
    • The estate tax exemption​ (doubled)

Stay tuned

There will surely be more details on the tax reform changes and how they are implemented by the IRS in the weeks to come. In the meantime, contact us if you have urgent questions regarding your situation.



2017 Tax Reform: last-minute year-end moves in light of Tax Cuts and Jobs Act

Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there’s still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here’s a quick rundown of last-minute moves you should think about making.

Lower tax rates coming.

The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as pass-through, such as partnerships, may see their tax bills cut.

The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:

  • If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.
  • Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization-making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won’t be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
  • If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year-or until so late in the year that no payment will likely be received this year-you will likely succeed in deferring income until next year.
  • If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.
  • The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

Disappearing or reduced deductions, larger standard deduction.

Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. Here’s what you can do about this right now:

  • Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.
  • The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
  • The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because, for post-2017 years, many itemized deductions will be eliminated and the standard deduction will be increased. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

Other year-end strategies.

Here are some other last minute moves that can save tax dollars in view of the new tax law:

  • The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
  • Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn’t held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
  • For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there’s no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.
  • The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
  • Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement-for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

Please keep in mind that these are only some of the year-end moves that should be considered in light of the new tax law. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call us.