Let’s get the last two out of the way: A statutory employee is a certain type of independent contractor that have special situations that require them to be treated as employees for certain employment tax purposes, like types of delivery drivers, salesmen, those assembling items at home or a life insurance agent. The three categories of statutory nonemployee are fairly simple: licensed real estate agents, direct sellers and certain companion sitters. Click on the links if you’d like to read the full description on the IRS website.

And as for categorizing independent contractors and employee—well, it’s not an exact science. There is no single factor that is decisive in determining a worker’s status, as the individual circumstances of each case will determine how the IRS’ axe will fall. The basic rule is this: Independent contractors generally control the manner and means by which their contracted work (i.e. services, products or results) is achieved. For instance, an employee may have a deadline for a project, but their employer deems that they have to work on it from 8 a.m. to 5 p.m. during normal office hours and at the employer’s office. An independent contractor, for instance, may have the same deadline for a project, yet they can do it working 36 straight hours at home in their pajamas, or for one hour a day for two weeks, as long as they provide the results they were hired to do.

There are 20 factors that the IRS will consider when determining employee vs. independent contractor relationship.  The first five are as follows:

1. Level of Instruction: If the company dictates to the worker when, where and how the work must be done, that level of control leans towards an “employee” status.
2. Amount of Training: If you need to direct the worker in the methods of how the work should be done, i.e. sending them to company-provided training, this suggests an employee status.
3. Degree of Business Integration: If the worker’s services are integrated into day-to-day business operations or they significantly affect business success, that worker is likely to be considered an employee.
4. Extent of Personal Services: Independent contractors are usually free to assign the work in the project’s scope to whomever they choose, whereas a company will insist on a particular person performing the work (for instance, covered under an employee’s job description), which indicates an employee relationship.
5. Control of Assistants: Have you hired, supervised and paid that worker’s assistant? Then most likely this worker has an employee status, as an independent contractor maintains control over hiring, supervising and paying helpers.

Again, these are only the first five of 20 possible factors that can assess if your workers are employees or independent contractors. If you would like to read the remaining 15 factors, please leave a comment below and we would be happy to email them to you.

Also, don’t forget to ask us whether or not you should file an SS-8 form with the IRS to allow them to determine the worker’s classification. There are pros and cons to submitting the “Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding” form, so please don’t submit one until you’ve talked to us first.

Don’t let a misclassification of a worker cause you to be fined unnecessarily! We cut through the complex language of the IRS and translate it into words you can understand. Call now for your free consultation before it’s too late—1099s are due to your independent contractors by February 29^th! Click here to fill out our online form, or call us directly on (714) 637-4552.

Here’s one that we think you should all know about: California Senate Bill 459. Do you have any independent contractors working for your company? How many? Did you send them all a 1099 form? And, most importantly, do they all legally qualify as independent contractors?

If you are surprised by any of the questions above, it’s a good thing you’re reading this.

In Senate Bill 459, penalties for misclassified independent contractors will increase. That means that if you know that you have classified someone working for you as an independent contractor when you know full well that they should be treated as an employee, the penalty that can be assessed against you has just increased.

How much? Violation of SB 459 can bring a civil penalty of between $5,000 and $15,000. Not just for violating it, but for each violation. SB 459 has authorized the Labor and Workforce Development Agency to enforce its statutes, and to assess the specific civil penalties to be levied against employers (or persons) violating the law. In addition, the bill requires the LWDA to take other “specified disciplinary actions” against these individuals.

What kind of disciplinary actions? There’s one that they have outlined that reminds us of the way people have been “named and shamed” in public, either in the newspaper or being forced to wear a sandwich board in front of a busy store. This disciplinary action requires the employers who have been found guilty of this misclassification to create a notice “to display prominently” on their website for one year. The notice, to employees and the general public, must announce that they have committed a serious violation of law by this misclassification, and it must be signed by a corporate officer.

Is there more bad news? Yes. If an employer has been found engaging in the past or present in “a pattern or practice of violations”, that penalty we mentioned earlier moves up to a range of $10,000 to $25,000—again, that’s per violation. And, of course, the law does not define what they mean by “a pattern or practice”, but we assume it means that an employer’s records make it clear that they’ve misclassified on numerous occasions, and it was clear it wasn’t an accident.

So the moral of the story is that it is always better and safer to add a person as a full employee, rather than an independent contractor, if you have any questions at all about their eligibility.

Next week we will talk about how to determine the business relationship between an employer and an individual, and how to classify them as an independent contractor, an employee, a statutory employee or statutory nonemployee.

Sound complicated? Then let us explain it for you. At Simons Accountancy, we are happy to sit down with you for a free, one-on-one consultation to understand your tax questions and problems, and see if we can help. Our award-winning firm has the experience and know-how to deal with almost every tax problem. We cut through the complex language of the IRS and translate it into words you can understand. Call now for your free consultation before it’s too late—1099s are due to your employees by February 29^th! Click here to fill out our online form, or call us directly on (714) 637-4552.

The answer is pretty simple. If you have a general understanding of the US tax law and if you have enough common sense to comprehend your tax returns when completed, then it is okay to use tax-preparation software to do your own returns. However, if you have absolutely no idea what you are doing, then please hire a professional!

Most people foolishly believe that a computer program will be able to accurately file their tax returns. The truth is that most people don’t know what they are doing when it comes to taxes, and consequently would not be able to discern if information provided by tax-preparation software was right or wrong, which could spell big trouble later down the road.

Take this cautionary tale for example: I had a referral client several years ago come to me for tax returns. While in the process of filing them, I looked at her previous years’ documents, and was shocked at what I saw. My client, who had used her own tax preparation software, had declared an income of $28,000 while also declaring $32,000 of miscellaneous employee business expenses.  Because of this mistake, my client received earned income credit AND received a tax refund as a result of allegedly not making any money.

Now this may sound like a dream come true, but let me warn you that the IRS will catch these discrepancies on your tax returns and hunt you down to audit you! Sure enough, six months later, my client received an audit notice. My client had erroneously believed that her tax preparer software was accurate, when in reality she had been answering all the wrong questions and digging herself a deeper and deeper hole throughout the years. She merely pushed buttons and received her supposed “refund”. In the end, because she did not make enough money to justify the audit nor did she have the correct deductions that she had claimed, she had to repay her taxes plus penalty fees.

Tax-preparation programs are designed for processing generic tax returns. However, if you are self-employed, a tax-preparation program will not be sufficient; it will not be able to ask you whether or not you’ve accounted for all your business expenses, tell you what constitutes a business expense or be there for you to talk to during the middle of the year when you have an urgent question.

If you use tax-preparation software without any knowledge of how taxes work, you will be taking a huge gamble! Tax-preparation software won’t be able to tell you what mistakes you made or whether or not you are at risk for an audit. Like your schoolteachers, the “I didn’t know how to use it!” excuse won’t work for the government either. At the end of the day, you are accountable for your own taxes if you use a tax-preparation software program.

If you feel unsure about your taxes, let us help. Contact Simons Accountancy for a free consultation at 714.637.4552 or via our online contact form here http://simonscorp.com/contact-us/.

1. Who can do your taxes? If the first question you have for a tax preparer is, “How much is it going to cost me?”, chances are you aren’t looking for a CPA. Of course, it’s possible that you can fork over a $20 to the college kid down your street to do your 1040 EZs (if you dare), but for more complex tax returns, you can enlist the help of Enrolled Agents (who, according to Wikipedia, are “tax professionals recognized by the US Federal Government through tax payers dealing with the IRS”, CPAs (like us here at Simons Accountancy Corp) or tax attorneys.
2. How much will your tax returns cost you? Everybody always wants a definite answer as to how much filing their tax return is going to cost them, and I always say that it depends. For example, a tax return for someone who owns one home and has a W-2 form will be much simpler than someone who is self-employed and owns five rentals. Tax filing fees depends on the complexity of your tax return. Always avoid tax preparers who base their fees on a percentage of your refund; this is an ethical violation for CPAs!
3. How do I know my tax preparer will be a good fit? You never know at the beginning, so always schedule an initial meeting at your preparer’s office.  Doing this enables you the opportunity to see what kind of environment your preparer works in.  If his or her office is professional and organized, then you can assume that your taxes will be handled just as accordingly. If the office is messy and disorganized, then you might have to worry about your taxes getting lost in the piles of paperwork. At Simons Accountancy Corp, we always give free consultations; nothing is worse than figuring out you don’t want to work with a certain CPA, and then having to pay them for this revelation.
4. How do I know if my tax preparer is reputable? Admittedly, it’s hard to find a tax preparer’s history online. Check their Yelp listings for recommendations, but also don’t be afraid to ask them for their personal references. Good accountants will always have references and will not be afraid to hand them over to you.

If you have any further questions, feel free to give Simons Accountancy Corp a call at 714-637-4552, or fill out our online contact form here. Remember, we do free consultations, so don’t be afraid to come in!

Not necessarily! You only have to be making $50,000 a year to make it worth it from a tax perspective—for the most part. If you have any dealings in construction or in the trades where you work on residences and businesses, you should be incorporated for liability issues, even if you are earning less than $50,000 a year. This way your personal assets are protected, but it doesn’t mean that you’re protected from all malpractice.

Here’s a good example: You meet your buddies for a few beers after work, and you happen to be driving the company truck. You have a few too many beers, but still decide to drive home. On your way home, you collide with another car and put a family of four in the hospital. The corporation will not protect your personal assets in that situation, as you weren’t using the company truck for company work.

Now, if you were driving down the freeway (perfectly sober) on your way to a job site, and a piece of wood falls off the back of the truck, causing an accident where a family of four ends up in the hospital, your corporation will protect you.

True story: We have a roofing company as a client, and one day on a job site, a worker was unrolling tarpaper on the roof. He was kicking it to get the tarpaper to unroll. Unfortunately, he kicked a little too hard, and the roll of tarpaper went right through a skylight. Under that skylight was a bathroom where the owners’ teenage daughter was brushing her teeth. That roll of tarpaper hit the sink and crushed it, missing the girl by literally inches—and if it had hit her, it would have killed her. That’s a real-life example of how a corporation can protect your personal assets, as the incident was caused by an employee, and was a complete accident.

And nobody wants to lose their assets, like their house or their savings, because of an accident.

There are also some possible tax benefits that can go along with incorporation—and you should ask your CPA or tax attorney about how it can help your particular situation. If your CPA doesn’t provide you with the information you need, please call us or call our colleague Robert Lamm, an estate-planning attorney. Between the two, we can answer all of your questions in depth.

But—be warned. There are some costs associated with incorporation. For example:

• Setting up the separate legal entity
• Paying corporation tax every year, which is a minimum of $800
• Paying a CPA to file a separate corporate tax return
• Overall, it can cost you $2,500 per year, at minimum, to be incorporated

And that’s why we recommend that you should be making a minimum of $50,000 to make the associated costs worthwhile, and where we can have the potential to actually save you that $2,500.

If incorporation is not the right option for you, for financial or other reasons, but you still need to be protected on liability issues, we recommend that you call a good insurance agent who can offer you an umbrella Business Owners’ Policy. We recommend BMR Insurance Agency, a local agency in Tustin who has insured many businesses, from roofing contractors through to flooring installers, in the Orange County, Inland Empire and San Diego counties.

When should you incorporate? Ideally, on January 1. This way you don’t need to file two separate tax returns at the end of the year—one for the time you were unincorporated, and another for the part of the year you were incorporated, as you will get a new federal tax ID number for the corporation, for example. Of course, your accountant will be happy to file two tax returns for you, but it will add to those overall costs of incorporation we mentioned earlier.

If you have questions about the legal process of incorporation, we encourage you to call Robert Lamm, who will be able to help you every step of the way. If you have specific questions about how incorporation can help your company, please call us to arrange a free consultation at our offices in Anaheim Hills. Each situation is unique, and although you think that incorporation is right for you, it may not be the right solution for you at this time.

At Simons Accountancy, our emphasis is on making tax preparation and tax season easy on our clients. We’re happy to answer any questions you have, so call us to arrange that free consultation today—April 15^th is not that far away! (714) 637-4552.

Get your return filed quickly and efficiently and don’t be a procrastinator, like many people out there who have not filed a tax return in three or four years! We don’t mind the extra revenue that we earn from that type of client, but it does not make their life easy with the taxman.

So don’t sit around just waiting for the mailman! Here is a list of things to do right now while you’re waiting for your 1098, 1099 and W-2 forms:

• Review your charitable contributions in your checkbook register—they won’t usually give out a receipt unless you give them more than $500*
• Search for DMV fees from the previous year
• Collate your medical expenses you had out-of-pocket over the previous year—you might have enough to take as an itemized deduction on your return
• Look for your child-care payments over the last year, even if you have pre-tax child care through your employer
• Look for other deductions you don’t get receipts for
• Find dividend, interest and other bank payments from your account records
• If you are offered a flexible-spending account from your employer, and you used it to pay for child care, gather those records
• Make a list of the banks or other financial institutions you might be getting 1098 or 1099 forms from
• Check to see if your financial institution actually will create your 1098 or 1099 for you in a form you can download directly from their website. Big banks like Bank of America and others offer this service.
• If your company uses a large payroll service like ADP or Paychex, you should be able to download your W-2 from their website, instead of waiting for your employer to send it in the mail
• If you have unreimbursed expense receipts, collect these to claim in your Schedule A tax return**

*Charitable deductions—don’t make this number up, or ask your accountant to write down the “maximum you can take without getting audited.” And don’t ask them “How much did I deduct last year?” so you can claim the same amount this year. And cash technically doesn’t count. The maximum you can claim in charitable deductions is 50 percent of your income (which is not feasible for most people!), so please take the time to compile your actual contributions. We know that people in Orange County are very generous

**If possible, always get your expenses reimbursed by your company. We stress this because if you just try to write them off at the end of the year, you are actually losing money. With company reimbursement, you are getting dollar for dollar. When you claim on your taxes, you’re only getting 35% of that money back.

And please don’t forget the little ones! If the stork brought a new dependent in 2011, please let your accountant know so they can update your tax return accordingly.

Worried you’re forgetting something? Don’t fret—the Simons Accountancy team in Anaheim Hills has your back. We’ll make sure to find every deduction that you can claim against your taxes, and make sure that your taxes get filed accurately and on time. If you have any questions, or need to plan that appointment for tax preparation, please call us now on (714) 637-4552.

The definition of use tax from the Franchise Tax Board website is as follows: Use tax is a separate tax that is generally due on the purchase of tangible property from outside of California. If you purchase an item from out of state that will be used, consumed or stored in California, you owe use tax. If the merchant charges you the appropriate tax on the sale, then your use tax requirement is fulfilled. According to the Franchise Tax Board, “out-of-state companies that are “engaged in business” in California must register with the Board of Equalization and collect sales or use tax on their retail sales of personal property to California customers. However, if no sales or use tax was collected on your purchase, then you are required to compute and pay the amount of use tax due.”

Use tax has actually been around since 1935, but only came to the forefront recently because of internet purchases and budget issues. Up until the advent of the internet, it was unlikely for a consumer to go out of state for purchases, unless they were mementos from a trip or business expenses. And people have been using the internet to make purchases, assuming that they were saving money on sales tax by avoiding purchasing the product in a brick-and-mortar store. They clearly hadn’t heard of use tax.

You don’t need to be a bookkeeper or accountant to figure out what you owe. It’s easy to keep track of this, especially since internet transactions need to be done by credit card, debit card or something like PayPal, which will keep track of the transaction and tell you what state the merchant is from. That will be your clue that it’s an item you’ll need to pay use tax on, and since most people don’t buy everything online, it should be fairly easy to keep track.

Now, a company like Staples will charge you sales tax on your order because they have brick-and-mortar retail facilities all over California. A purely online company like Amazon.com or iTunes will not charge you sales tax. So think about those purchases you made on Cyber Monday, Black Friday or over the last two months paying for holiday gifts online in order to avoid all the crowds—will you need to pay some use tax?

They have also provided a “use tax” line on the personal income tax return Form 540. How do you calculate this amount? Here’s the Franchise Tax Board’s guidelines:

1. Add the amount of all purchases made from out-of-state or Internet sellers made without payment of California Sales/Use tax. Include only items on which you would have paid sales tax if you had purchased them in California. See the Board of Equalization Website for more information on taxable items.
2. Look up the use tax rate for the location where you used, gave away, stored, or consumed the items you purchased.
3. Multiply the amount by the use tax rate.
4. Subtract any sales or use tax you paid to another state for the items you purchased.
5. Enter this amount.

Confused about use tax, why you should pay it or how much you owe? How about if you’re confused about all three of those questions? Give us a call—we love the tax code and can answer all of your questions and even analyze your past returns to make sure they’re up to scratch. You can use our online form or you can just call us direct: (714) 637-4552.

If you are a W2 employee, there is not much time left for you to augment your 401(k) savings. IRAs allow you to contribute until April 15, but 401(k)s that are covered in an employment plan only allow the employee to contribute until December 31^st. Therefore, if you’ve only put in $2,000 for the year, and you make $10,000 a month, you probably won’t have time to max out your 401(k) allocation of $16,500 before the end of December. But now would be a good time to look at maxing out what you can in order to maximize the amount your employer will match.

Some employers require employee contributions of 6% in order to match 3% of the contribution. I would really recommend trying to take advantage of this free money that your employer is offering you (but probably secretly hopes you won’t take advantage of!).

Another end-of-year practice that will be good to take advantage of is charitable donations. You can give up to 50% of your income in donations, but most people (obviously!) can’t afford to do so. But there’s one way to use donations that not enough people take advantage of—when you’re 70 and a half, you’re required to take a minimum distribution, or a Required Minimum Distribution (RMD) from your IRA. A lot of people at this age don’t need that money; usually they’ve done well, invested wisely and yet they’re still required to take out that money.

Let’s say the RMD is $10,000—they have to take out that $10,000 and pay taxes on it, hence the requirement. The government wants to tax that money. Through 2012, there is exclusion in place that lets you take out that money but not pay taxes on it by donating it instead. By donating the RMD directly to a charity, you don’t get taxed on it and you’re helping people. You won’t get a charitable deduction for it, but not having to pay taxes on the cash as income more than makes up for that.

Gifts are a good thing to do too, as they are not taxable to the recipient and not deductible by the person that gives them. Now, we’re not talking about giving your son a new computer, or buying your wife that diamond necklace she’s always wanted, these are gifts from an estate-planning standpoint. So if your parents give you a monetary gift, it will not be counted as income to be taxed on your return, nor will your parents be able to count it as a charitable deduction—as long as it’s less than $13,000.

But if you wanted to minimize your estate taxes, that’s when giving more than the $13,000 limit is beneficial. Here’s a good example: an elderly lady has $8 million and has more than enough to live on for the rest of her life. Because she has four children, she may want to start making gifts to the children in order to get the money out of the estate. She can file the gift tax return, as there’s no tax on a certain amount in the first transfer. This way she can reduce the amount of estate taxes she pays on her assets when she passes away. For more information on this and how to maximize your estate plan, please contact our trusted colleague, Robert Lamm of Cummins & White, LLP, who is an expert in advanced estate planning techniques.

Not sure what to do before the end of the year to save as much as possible on your tax bill? Are you scared that you’ll make a mistake on your tax return? Please give Simons Accountancy a call. We are honest (and award-winning!) accountants who can provide accurate tax returns and bookkeeping at a price that fits your budget. You can use our online form or you can just call us direct: (714) 637-4552.

Do keep in mind that what you’re doing is buying a tax deduction—and spending money just to save money on taxes is never a good idea, because you’re only saving a portion of what you spend when it comes to your taxes.

Let’s say you’re in a 30% combined tax bracket, and you buy a new computer for $1,000. You’ll only save $300, and still be out of pocket for $700.

But if you are going to buy it anyway, it’s better to do it now before the end of the year. Buy the equipment and supplies now that you’re going to use in January, and possibly even February.

Please note that this advice does not apply to businesses that keep inventory—we are not talking about companies that buy items, supplies or raw materials and manufacture them into a saleable product or create inventory.

This will work for small businesses that don’t have inventory and are on a cash basis. It helps the business because in essence you can deduct the items when you pay for them. If you pay for things in December—even six cases of paper—because you know you’re going to use them in January, you’re accelerating that deduction into 2011.

You shouldn’t be buying things that you’re not going to use, or inessential items, like calculators, or things you’re going to buy just to have a new one. Some good examples of items to buy now are:

• Computers and new technology
• Printers
• Consumables (paper, printer cartridges, stationery, etc.)
• Promotional items
• Office furniture
• Equipment repairs (including computers)
• Telephone systems
• Certain vehicles

With new technology purchases, we recommend using an IT company such as Green Room Consulting to help advise you on what to buy and get it installed without the hassle of doing it yourself. David Pauls, owner of Green Room Consulting, can have your new system up and running with absolutely no interruption to your staff or production levels.

It is important to note that with equipment purchases, you need to make sure that they are installed by the end of the year. If you are a printer, and you buy a new Heidelberg press, you must have it installed, up and running by December 31, 2011.

Remember: Credit card expenses are deductible when charged, not paid. Get 30 days (or more!) of floated cash by purchasing business items on your credit card to have them deducted for 2011, but you won’t actually pay for them until your bill arrives in January…or even February, depending on the cut-off date. Now that can help with holiday budgeting!

If you have further questions about purchases you were tempted to make before the end of the year, but aren’t sure if they will be deductible, please call Simons Accountancy at (714) 637-4552. We’ll help answer any questions you have—and maybe a few you didn’t know to ask!

Let’s start with an example. Say you’re working late on a project, and it looks like you won’t make it home for dinner. You order some food to be delivered so you can keep working. Is that a business expense? No.

No, you might ask? But you wouldn’t have had to buy that food if you weren’t working on that report for your client, XYZ Corp! True, but you were going to eat anyway, as humans need food to survive. So whether you had brought in dinner or bought it, it’s not something that was specific to the job.

For something to be a deductible expense, it needs to meet two criteria from the IRS code:

1. Ordinary for the production of income
2. Necessary for the production of income

I usually get a lot of confused looks when I mention this to clients. They tell me it’s vague and open to interpretation. Maybe to you, I reply, but not to the IRS. To them, it’s simple: it has to relate to your business and the production of income for your business. Always remember that you won’t be audited now, it will be a few years down the line, and the IRS auditor will have the benefit of hindsight. What will this deduction or expense look like to that auditor? It’s something to keep in mind.

Here are more examples of things my clients want to claim:

• Haircuts: These are almost never deductible. Even if you’re a model or an actor and the client requests a specific haircut for a photo shoot or role, they almost always have staff on set to do so. That’s not to say that we recommend going to work looking like you’ve spent a month camping, just don’t try to deduct your salon bills in your tax return.
• Dry cleaning: Yes, you bought that suit for a job interview. But have you also worn it to dinner on your anniversary? To church? To your friend’s wedding? Even if you didn’t, you potentially could have, and therefore it’s not exclusively for work. There is one exception to this rule: If you have to wear a uniform, then dry cleaning it could be deductible. In many cases, though, the employer has cleaning facilities for their staff, and therefore not a deduction.
• Lunch: We mentioned the dinner example above, but what about lunch? You’re out on meetings and only have time to grab a quick bite at a sandwich shop. Deductible? No. Again, you need to eat whether you’re out on meetings, sitting at a desk, out on the tractor or chasing your children around the home, and therefore it is not “ordinary” or “necessary” for the production of income. Again, there’s an exception here and there are meals for the benefit of the employer. This is easiest to explain by example: A company needs staff to work on a Saturday, usually a day off. To sweeten the deal, the boss decides to treat the staffers by bringing in lunch from the local deli. Because this is keeping his employees at their desk working, this is termed a meal for the benefit of the employer, and it’s 100 percent deductible for the company.

Still confused about what you can claim and what you can’t? Are you afraid the taxman will see right through your return to the mistakes you didn’t know you made? Help is at hand— please contact Simons Accountancy now for a consultation how we can help with your tax preparation and bookkeeping. Call on (714) 637-4552 or use our online form.