Accounting and Tax Tips and Information

written by Lauren Bakken, owner of Bakken CPA PC and co-author of the book, One-Income Household

Bakken CPA PC is dedicated to providing timely, professional, personalized service to businesses and individuals.

Tag Archives: employee deductions

Why You Should Outsource Your Company’s Payroll

A common question accountants get is “am I handling my payroll correctly?” How can you be sure you are withholding the required amount? Are you paying your unemployment taxes? Are you filing payroll returns on time?

If you cannot answer these questions confidently, you may not be doing it right! Not paying the correct amounts at the right time can have some serious consequences, including fines and penalties.

An easy solution to these challenging questions is to outsource your payroll.

Some things the third party service providers do:

  • Prepare the paychecks for your employees
  • Prepare and File Forms 940 and 941 for your business
  • Make federal tax deposits and federal tax payments, and submit this information for the taxes reported on the Forms 940 and 941
  • Prepare Forms W-2 for your employees

There are many payroll companies out there, and you must be diligent in finding a reliable one. Simply hiring another company to do this work for you, does not make you exempt from being held responsible for any problems that may arise.

  • You, as the employer, are the one held liable for all taxes, penalties and interest due, even if it is due to the payroll provider filing something late on your behalf.
  • You should confirm the payroll service provider is using EFTPS (Electronic Federal Tax Payment System) so you can verify that payments are being made on your behalf, by logging into your account periodically.
  • Any notices regarding issues with your account from the IRS will be sent to you, the employer. The IRS suggests not changing your address of record to the payroll service provider because it will limit your ability to be informed of tax matters involving your business.

By choosing a reliable payroll service provider, you can streamline your business operations, save yourself time and be confident your payroll is properly managed. Contact your accountant to get a referral to a great payroll service provider today!

Tax Break on Employee Health Insurance Contributions

If you own a small business and offer your employees health insurance, you may be able to claim a credit on your tax return for it. The credit is based on a percentage of the amount of premiums that your business pays for employees to have health care coverage. And, of course, you must meet certain requirements to take advantage of this credit:

 

  • You must cover at least 50% of the cost of health care for some of your workers based on the single rate,
  • Your firm must have less than the equivalent of 25 full time employees to qualify as being a small business, and
  • You must pay your employees (individually) less than $50,000 a year.

 

This credit applies to both for profit and tax exempt employers, but the rates vary between the two types.

 

The amount of the credit can be up to 35 percent of the business’ health insurance premium costs in 2011 for taxable businesses and is up to 25 percent for tax exempt businesses.

 

This credit is set at these rates until January of 2014, at which time they will increase to 50% for taxable employers and 35% for tax exempt employers.

 

The credit amount is calculated on your Form 8941, Small Employer Health Insurance Premiums. If the credit ends up being more than your tax liability, you can chose to apply it to a previous tax return or a future tax return, and in certain circumstances you can even receive it as a refund!

 

To take advantage of this and many other credits offered to small businesses, it is best to consult a tax professional!

Can You Take a Tax Deduction for Your Car?

If you use your car for business purposes, you may be able to claim a deduction for the expenses you incur during the year. But, there are certain rules and requirements to have them qualify as deductible car or truck expenses.

 

All or a portion of the cost of owning and using a vehicle may be claimed as a business expense.

 

You may claim these, as long as you maintain records that can substantiate your business use and expenses.

  • You must record the vehicle make and model;
  • If the weight is greater or less than 6,000 pounds;
  • Date of purchase and evidence of amount paid;
  • The date the vehicle was placed in service for business, and
  • The odometer reading on the first and last day of the tax year.

 

Along with these records, you must also maintain an accurate log of actual business travel. This must include the mileage, date and purpose of the travel.

 

There are two methods you can use to determine your eligible deduction: standard mileage rate or the actual expense method.

 

If your vehicle is used for both personal and business purposes, the costs related to the vehicle must be divided based on the mileage driven for each purpose. If you lease a car, you must use the standard mileage rate for the entire lease period, including renewals.

 

To use the standard mileage rate, you must track your miles with a log because the rate varies for use throughout the year 2011. For all of the miles driven for business use from January 1, 2011 to June 30, 2011 the rate is 51 cents per mile. For all of the miles driven for business use from July 1, 2011 to December 31, 2011 the rate is 55.5 cents per mile.

 

To apply the actual expense method, you must determine what it costs to operate the car for the business portion of the overall use of the vehicle. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation attributable to the portion of the total miles driven that are business miles. Car expenses for personal property tax, parking fees and tolls attributable to business use are deductible, whether you use the standard mileage rate or actual expenses.

 

To determine which method is more beneficial for you and if the IRS will allow you to use it, it is best to consult a CPA. This is a broad overview of a very complex topic with more regulations than listed above. But, hopefully you gained an understanding of this tricky tax topic!

Home Office Deduction

Do you have space in your home that you use strictly for business? That area  may qualify as a home office space that will allow you to take deductions on your tax return for expenses related to the business use of your home, Form 8829. There are specific conditions that the area must meet in order to qualify:

  • The area is used regularly and exclusively for trade or business purposes as opposed to other profit-making activity.
    • Exception: If the home is used as a day care facility for children, adults 65 and over, or individuals who are mentally or physically incapacitated.
    • Exception: If the area is used for inventory or storage of produce (must be regular but not exclusive).
  • The area is used for convenience of the employer.
  • The area represents the primary place of business, or the area is the place of contact with clients or customers in the normal course of the trade or business or the area is a separate structure used in connection with the trade or business.

Once you have determined if your business space in your home qualifies, you are able to take deductions for expenses such as:

  • Operating expenses
  • Depreciation
  • Mortgage interest
  • Real estate taxes
  • Rent (with the exception of rent paid by the employer for the area in question)
  • Casualty and theft losses
  • Utility costs
  • Cleaning and other services
  • Homeowner’s insurance
  • Security system costs
  • Repair costs (labor and supplies)

The expenses listed above are categorized as either direct or indirect. Direct expenses are those that affect only the part of the home used for the trade or business, such as the cost of painting or furnishing an office. Direct costs are deductible in full. Indirect expenses involve the costs of maintaining the entire home of which the office is only a part. But, only the business use percentage of an indirect expense is deductible.