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HOMEBLOGSmall Business Tax Briefs: September 2018

Sep
19
2018

Small Business Tax Briefs: September 2018

Robert Smith

2018 Q4 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
 
October 15
  • If a calendar-year C corporation that filed an automatic six-month extension:
    • File a 2017 income tax return (Form 1120) and pay any tax, interest and penalties due.
    • Make contributions for 2017 to certain employer-sponsored retirement plans.
October 31
  • Report income tax withholding and FICA taxes for third quarter 2018 (Form 941) and pay any tax due. (See exception below under "November 13.")
November 13
  • Report income tax withholding and FICA taxes for third quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.
December 17
  • If a calendar-year C corporation, pay the fourth installment of 2018 estimated income taxes.

We also suggest reviewing the years' payments that may require furnishing a Form 1099 and beginning to gather any information you may be missing.  Review the requirements on our Reference Page and read on to learn more about the differences between an employee and an independent contractor as well as the risks of having an independent contractor reclassified by the IRS.

How to reduce the tax risk of using independent contractors

Classifying a worker as an independent contractor frees a business from payroll tax liability and allows it to forgo providing overtime pay, unemployment compensation and other employee benefits. It also frees the business from responsibility for withholding income taxes and the worker’s share of payroll taxes.
 
For these reasons, the federal government views misclassifying a bona fide employee as an independent contractor unfavorably. If the IRS reclassifies a worker as an employee, your business could be hit with back taxes, interest and penalties.
 
Key factors.  When assessing worker classification, the IRS typically looks at the:
  • Level of behavioral control. This means the extent to which the company instructs a worker on when and where to do the work, what tools or equipment to use, whom to hire, where to purchase supplies and so on. Also, control typically involves providing training and evaluating the worker’s performance. The more control the company exercises, the more likely the worker is an employee.
  • Level of financial control. Independent contractors are more likely to invest in their own equipment or facilities, incur unreimbursed business expenses, and market their services to other customers. Employees are more likely to be paid by the hour or week or some other time period; independent contractors are more likely to receive a flat fee.
  • Relationship of the parties. Independent contractors are often engaged for a discrete project, while employees are typically hired permanently (or at least for an indefinite period). Also, workers who serve a key business function are more likely to be classified as employees.
The IRS examines a variety of factors within each category. You need to consider all of the facts and circumstances surrounding each worker relationship.
 
Protective measures.  Once you’ve completed your review, there are several strategies you can use to minimize your exposure. When in doubt, reclassify questionable independent contractors as employees. This may increase your tax and benefit costs, but it will eliminate reclassification risk.
 
From there, modify your relationships with independent contractors to better ensure compliance. For example, you might exercise less behavioral control by reducing your level of supervision or allowing workers to set their own hours or work from home.
 
Also, consider using an employee-leasing company. Workers leased from these firms are employees of the leasing company, which is responsible for taxes, benefits and other employer obligations.
 
Handle with care.  Keep in mind that taxes, interest and penalties aren’t the only possible negative consequences of a worker being reclassified as an employee. In addition, your business could be liable for employee benefits that should have been provided but weren’t. Fortunately, careful handling of contractors can help ensure that independent contractor status will pass IRS scrutiny. Contact us if you have questions about worker classification.
 

State and Local Tax Briefs

Home Heating Credit deadline.  The Michigan Agency for Energy is reminding qualified homeowners or renters that they must apply by 9/30/18 to receive the state’s home heating credit. The home heating credit helps certain Michigan residents to pay their energy bills. Those eligible are low-income, deaf, disabled, blind, senior citizens and disabled veterans. Applicants don’t need to file a Michigan income tax return to get the home heating credit. Get more details by visiting this site from Michigan.gov.

October Prepaid Sales Tax on Gasoline.  The Michigan Dept. of Treasury has announced that, effective for the period 10/1/18 through 10/31/18, the prepaid sales tax rate for the purchase or receipt of gasoline will decrease to 15.1¢ per gallon, from the Sept. 2018 rate of 15.3¢ per gallon. Additionally, for the period 10/1/18 through 10/31/18, the prepaid sales tax rate for the purchase or receipt of diesel fuel will be 16.8¢ per gallon, unchanged from the rate for Sept. 2018. The prepayment rates for both gasoline and diesel fuel must be determined each month by the Department.

Be sure your employee travel expense reimbursements will pass muster with the IRS

Does your business reimburse employees’ work-related travel expenses? If you do, you know that it can help you attract and retain employees. If you don’t, you might want to start, because changes under the Tax Cuts and Jobs Act (TCJA) make such reimbursements even more attractive to employees. Travel reimbursements also come with tax benefits, but only if you follow a method that passes muster with the IRS.
 
The TCJA’s impact.  Before the TCJA, unreimbursed work-related travel expenses generally were deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to benefit from the deduction because either they didn’t itemize deductions or they didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.
 
For 2018 through 2025, the TCJA suspends miscellaneous itemized deductions subject to the 2% of AGI floor. That means even employees who itemize deductions and have enough expenses that they would exceed the floor won’t be able to enjoy a tax deduction for business travel. Therefore, business travel expense reimbursements are now more important to employees.
 
The potential tax benefits.  Your business can deduct qualifying reimbursements, and they’re excluded from the employee’s taxable income. The deduction is subject to a 50% limit for meals. But, under the TCJA, entertainment expenses are no longer deductible.
 
To be deductible and excludable, travel expenses must be legitimate business expenses and the reimbursements must comply with IRS rules. You can use either an accountable plan or the per diem method to ensure compliance.
 
Reimbursing actual expenses.  An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as "accountable," your plan must meet the following criteria:
  • Payments must be for "ordinary and necessary" business expenses.
  • Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
  • Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.
The IRS will treat plans that fail to meet these conditions as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).
 
Keeping it simple.  With the per diem method, instead of tracking actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses, based on location. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)
 
Be sure you don’t pay employees more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely overpay per diems.
 
What’s right for your business?  To learn more about business travel expense deductions and reimbursements post-TCJA, contact us. We can help you determine whether you should reimburse such expenses and which reimbursement option is better for you.

Businesses aren’t immune to tax identity theft

Tax identity theft may seem like a problem only for individual taxpayers. But, according to the IRS, increasingly businesses are also becoming victims. And identity thieves have become more sophisticated, knowing filing practices, the tax code and the best ways to get valuable data.
 
How it works.  In tax identity theft, a taxpayer’s identifying information (such as Social Security number) is used to fraudulently obtain a refund or commit other crimes. Business tax identity theft occurs when a criminal uses the identifying information of a business to obtain tax benefits or to enable individual tax identity theft schemes.
 
For example, a thief could use an Employer Identification Number (EIN) to file a fraudulent business tax return and claim a refund. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for these "employees" to claim refunds.
 
The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation.
 
Red flags.  There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if:
  • Your business doesn’t receive expected or routine mailings from the IRS,
  • You receive an IRS notice that doesn’t relate to anything your business submitted, that’s about fictitious employees or that’s related to a defunct, closed or dormant business after all account balances have been paid,
  • The IRS rejects an e-filed return or an extension-to-file request, saying it already has a return with that identification number — or the IRS accepts it as an amended return,
  • You receive an IRS letter stating that more than one tax return has been filed in your business’s name, or
  • You receive a notice from the IRS that you have a balance due when you haven’t yet filed a return.
Keep in mind, though, that some of these could be the result of a simple error, such as an inadvertent transposition of numbers. Nevertheless, you should contact the IRS immediately if you receive any notices or letters from the agency that you believe might indicate that someone has fraudulently used your Employer Identification Number.
 
Prevention tips.  Businesses should take steps such as the following to protect their own information as well as that of their employees:
  • Provide training to accounting, human resources and other employees to educate them on the latest tax fraud schemes and how to spot phishing emails.
  • Use secure methods to send W-2 forms to employees.
  • Implement risk management strategies designed to flag suspicious communications.
Of course identity theft can go beyond tax identity theft, so be sure to have a comprehensive plan in place to protect the data of your business, your employees and your customers. If you’re concerned your business has become a victim, or you have questions about prevention, please contact us.
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