In Volume 4 of our 2013 newsletter, we highlight:
- Update Your Internal Controls
- SEP And SIMPLE Pension Plans
- Fringe Benefits
- Simplified Home Office Deduction
- Workers’ Compensation Insurance Costs
Update Your Internal Controls
In general, small businesses have few internal controls because the owner oversees the employees and all of the company’s activities. Of course, as the business grows the direct supervision diminishes and controls must be established to prevent increased risk of theft, fraud, or embezzlement. Here are some practices that will help protect your business:
- Separate operating and recording functions
- Establish responsibility for assets and recordkeeping to specific individuals
- Require authorization and approval procedures for all transactions
- Divide responsibilities so that collusion would be required by two or more individuals to cover up a theft by falsifying the books
- Have employees develop procedure manuals for every job in your organization
- Rotate employees on a regular basis and require them to take vacations
- Establish written procedures for purchasing, expense reimbursement, and payroll functions and transactions since these provide the greatest risk
If you are unable to carry out the above controls, at a minimum, you, as the owner or director of a small or mid-size business or organization, should personally sign and mail all of the checks. There are a variety of reasons for this advice, including:
- Enabling you to have an overview of where the money is going
- Allowing you to observe frivolous spending anywhere in your organization
- Deterring possible fraud, since employees know that management sees all of the checks
Personal review, signing, and mailing of checks by the owner are considered by some to be the most effective internal control for any small organization. If you cannot do the above, we suggest that at a minimum, you receive all bank statements (unopened) to monitor them, or monitor them online regularly, while making sure that all employees are aware of this activity.
With the broad use of computers, attention should be given to the development of suitable passwords and immediate removal of passwords when an employee leaves or is dismissed. Use appropriate software and other techniques to create firewalls making it difficult for a hacker to enter your system to perpetrate a theft or bring the system down. Internal control is an important issue for a small growing business and should be discussed with us regularly.
SEP And SIMPLE Pension Plans
Businesses may be hesitant to start up a retirement plan for themselves and their employees due to the financial commitment and administrative burden. An alternative may be to setup a simplified employee pension (SEP) or a savings incentive match plan for employees (SIMPLE) plan.
SEPs are available for any size business. When you setup a SEP you must establish an individual SEP IRA account for each eligible employee. Eligible employees include anyone who is at least 21 years old, has worked for the company at least three of the last five years, and has received at least $550 of compensation for the year. The employer can decide each year whether and how much of a nondiscriminatory contribution to make to the plan. The maximum contribution is the lesser of 25% of wages or $51,000 for 2013. SEPs allow for employer contributions only.
Employers with fewer than 100 employees can setup a SIMPLE plan. Once again an individual IRA account is established for each eligible employee. Eligible employees include anyone who has earned at least $5,000 from the employer in any two prior years. Both employees and employers can make contributions to the plan. The employee can make an elective deferral of up to $12,000 for 2013. The employer can either match the employee deferral dollar for dollar up to 3% of wages or they can contribute up to 2% of wages for all employees, including nonparticipants. The contributions by the employer are mandatory each year.
Any employer who does not maintain another qualified plan to which contributions are made or benefits are accrued may establish a SEP or SIMPLE plan. The Internal Revenue Service (IRS) has model SEP and SIMPLE plans which makes them easy to setup and maintain. There are no annual reporting requirements such as the annual participant disclosure statements or the Form 5500 filing. Participants are always 100% vested in the plan. SEP and SIMPLE plans are also available for self-employed individuals.
With the increased rules and regulations on traditional retirement accounts, many employers are establishing SEPs and SIMPLEs to provide some savings for their employees.
Payments To Terminated Employees
Can terminated employees who are receiving severance pay over several months continue to participate in the company’s cafeteria or 401(k) plans? In general, ex-employees may continue participating in a cafeteria plan on a salary reduction basis if the underlying plan document permits this and the payments are reportable on the W-2 Form. Conversely, when it comes to 401(k) plans, only current employees are permitted to make elective compensation deferrals into these plans, thus excluding former employees who are receiving severance payments from participating. However, elective deferral to a 401(k) plan may be made from the last paycheck, provided the plan’s definition of “compensation” permits this.
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One of the secrets of life is to make stepping stones out of stumbling blocks.
What fringe benefits are taxable? Cash and cash equivalents such as gift certificates are always taxable no matter why they are paid. The following are some of the more common employee fringe benefits and whether or not they are taxable:
- Length of service and achievement awards are tax exempt if they are part of a written qualified plan and are under $1,600 per year.
- Holiday gifts are tax exempt if they have a de minimus value such as a turkey or ham.
- Group term life insurance on coverage of up to $50,000 is tax exempt.
- Occasional parties or picnics for employees and their guests are tax exempt.
- Moving expenses are tax exempt only if the employee would have been able to deduct the expenses on their personal return had they paid for the expenses personally.
If you choose to pay your employee’s share of Social Security and Medicare taxes on taxable fringe benefits instead of deducting it from their pay, you must gross up their pay for these taxes.
Simplified Home Office Deduction
The IRS announced a new simplified option (also known as a safe harbor method) to calculate the home office deduction. The simplified option, at this time, is capped at $1,500 per year based on $5 a square foot up to 300 square feet. It is important to weigh the benefits of using the new simplified option against computing the home office deduction under the regular Tax Code rules.
The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation, and carryovers of unused deductions. Taxpayers claiming the optional deduction will attach a significantly simplified form to their individual tax return.
Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business; they can claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees are still fully deductible.
Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.
The new simplified option is available starting with the 2013 return most taxpayers file early in 2014. If you would like additional information on the simplified option and how it may apply to you, please call our office.
Thanks For Your Referrals!
We appreciate the confidence you have shown as clients and friends by referring new business to us. You are the key to our growth. As we grow, our ability to retain competent personnel is enhanced. We are able to commit more resources into widening our industry knowledge and training our staff, which allows us to serve you more efficiently. Please continue to refer friends or business associates who may benefit from our services.
Workers’ Compensation Insurance Costs
Here are two possible ways to minimize the escalating cost of workers’ compensation insurance:
Review your worker classifications. Classifications are based on the likelihood that workers will collect premiums from the insurer for work related injuries and accidents. Frequently, workers can be reclassified and premiums reduced because they are actually engaged in low-risk activities.
Pay premiums monthly rather than annually based on projected estimates determined by the insurer. Frequently, companies that pay annually pay in too much. Although the excess premiums are eventually reimbursed, in the interim the insurer is provided with an interest-free loan, and there is also a negative impact on cash flow.
Please let us know if you need our assistance with workers’ compensation audits, worker classifications, and other related matters.
For more information, please contact us.