your greatest tax fear is solvable

Tax planning is sitting down, maybe with your accountant, maybe alone, and figuring out how much taxes you are going to owe at the end of the year, and whether you need to do anything to mitigate that tax debt. For my personal taxes, I sat myself down with myself, since I’m an accountant and looked and was like, “Ew, I made more money than I thought I would this year (great problem, you know), and that means I’m going to owe more taxes. Now what am I going to do to make (some of) that not happen?”

First we look at some tax advantages. I will show that in personal finance, and the process is similar though the tax advantages are different for businesses. First, I haven’t dumped a whole lot into my 401(k) yet this year, or into my IRA, so, the first thing is, that 401(k) dollars, even for self-employed people (they get something called a 401(k) solo) are deductible off income, dollar for dollar. Make $100,000, but put $20,000 into your 401(k)? you now have made only $80,000. (you can only contribute 20% of your pre-tax income, and contribution limits are different for employees—max of $19,500) This is where some planning can come in. You can also contribute up to $6,000 to an IRA—and it is deducted from your AGI on your 1040. Now, if you are Married filing Jointly, which I am, and your AGI is less than $65,000, you can take advantage of something called the Retirement Savings Contribution Credit. You can qualify for up to a $2,000 credit if: Total AGI was less than $39,000 and Retirement account contributions exceeded $4,000. There are lesser amounts up to the $65,000 AGI and smaller credits if you didn’t max out this retirement contribution.

If you want to increase the amounts you are contributing, and, like me, your spouse doesn’t work, you can set up a spousal IRA, and dump an additional $6,000 in there. Our person who made $100,000 before taxes is now down to a total AGI of $68,000, just shy of being able to take this credit. Bummer. Is this the end of the tax planning? No, because it’s PLANNING! meaning that we are doing this while we can still do something about it. Maybe, it’s time to look into a larger investment that the customer was wanting to do but hadn’t been ready to commit to. Need to buy that $10,000 piece of equipment and haven’t had the reason to do it? Let’s look at our tax bill if we do.

$100,000 income VS $90,000 income

$20,000 401(k) VS $18,000 401(k)

$12,000 IRA VS $12,000 IRA

$68,000 Net Inc VS $60,000 Net Inc

$4,844 FIT VS $3,484 FIT ($3884 tax minus $400 Retirement credit)

$63,116 Aft Tax VS $56,516 Aft Tax

So, that $10,000 piece of equipment, now that we throw some tax planning in there (and this is just one credit, there are many more that we can work up like this) costs $6,600. Now, yes, I know it costs a bit more because it takes $2,000 out of the 401(k) as well, but it’s still about a 14% savings over the baseline cost. Tax planning may push this one over the edge for this customer. And other tax planning may do more for this customer as well. But this is tax planning and one of the things it does for you.

How to select your accountant

Does your business need someone special with lots of experience in your field? Or will any old accountant do? Do you have a specialized accountant, or do you have a generalist currently? Do they work with you on your terms or do you work with them on their terms? Do you just want to shove all the accounting stuff at them and let them sort it out, or do you want to be an active participant in the process? Or at least understand the process?

For many businesses, specialized accountants will help with finding the proper tools for your business because they work with many people in that industry. They know the tools that work for that industry and the ones that don’t. To some extent there’s always going to be a give and take with any (business) relationship, and that’s perfectly normal, but also, there need to be expectations set down in the beginning for how things work. And yes, most accountants can do all of the work, but it helps if business owners can take some ownership of the paperwork and organize what needs to be done. And we can provide plenty of ways to make that organization happen. And the best accountants take time to sit down with you and go over what’s happening, and make sure to present it to you in a way that you will understand.

Is your accountant on board with your five year plan?

Do you have a five year plan? is it just a vague thing, or do you actually have it written out somewhere? And if you have written it out, have you gotten buy-in from one of the most important people in your financial life—your accountant?

Well, have you? I’m not talking have you showed it to him. Have you sat down and talked with your accountant about where you envision your company in 5 years? or, better yet, has your accountant sat down and talked with you about this? Once you guys are on the same boat, and the boat is sailing, where you are steering that is a really important conversation to have with your accountant, your financial advisor.

Yes, accountants can do a stellar job of just keeping the business trucking along at its same pace, even with some year over year improvements, just fine, hunky dory. But without a bigger-picture goal in mind, we get lost in those little details. Keeping that in focus, and checking back in that the big picture is on track is important to the business.

Let’s say you are in manufacturing. You put together a five year plan to be ready to build a new factory. You want shiny new factory robots to make shiny new widgets and whatsits and it will be more efficient than your old plant, make twice the widgets and whatsits with the same number of employees. If you get buy-in from your accountant, if they are part of the team drawing up the plans for that, they can tell you, well, you will probably need about this much money to make it all happen. Let’s say you need a million dollars to show the bank you’re serious and you can borrow some to finish out your financing. To make it easier, the accountant says you need to save $200,ooo a year, a fifth of the cost. You need to set that aside rather than to hand it out as bonuses or stock options. You can put it in bonds or you can loan it out to other companies but you put the money aside and don’t spend it on operations. Easy peasey, because you talked with your accountant, and they told you they were on board and you all made a plan.

Why is there so much accounting software out there?

So, you have yourself a business, and you (obviously) need to track money in and money out and cost of things and a whole bunch of things that seem to get lumped under the header, “accounting.” So, first thing you do is get a piece of whizbang software that claims it will do all of the things you need done and like 50 things you didn’t think you would need but they sound cool.

Look, for a while, that will probably work for you, but at some point you are going to come across a problem that your accounting software isn’t going to be able to fix. So you go find a particular little widget to do that thing. And maybe you encounter something else, and need another new piece of tech, and another new piece of tech, and they don’t integrate, and they don’t play nicely and after a year or two, you are spending twice the amount of time on accounting as you would have if you’d hired an accountant. I mean, I get it. I can’t find personal budgeting software that doesn’t give me a giant headache. So I have gone old school with it, because it WORKS. I had a lovely old couple bring in an old school ledger the other day—they were so adorable, and she used it to keep track of their deductible expenses, and sometimes, you know, the best way is just to do it the way it’s always been done. We still do leather work the way Neanderthals did. 50,000 years, and we haven’t found a better way.

Now, I’m all for new stuff. QBO? Great. You need a mileage tracker? It’ll do it. You need Inventory tracking? Well, QBO is kind of bollix at that if you want to do more than track it by hand, but there are a dozen apps that integrate with QBO and make your life easier instead of harder. Same with Xero. You want to hop on a Zoom meeting to talk about a snag you’ve encountered and need to figure out how to tackle it? Done. If I can automate something for you, or help you automate something to make your business run smoother, more efficiently, or just better? Absolutely. But piling on software for the sake of software isn’t going to help anyone, and with as much as there is out there to wade through, once you’ve graduated from “I can do this myself” to “I can’t do this myself anymore,” it’s probably time to call in an expert.

Why you should listen to your accountant (Employee classification)

So, you have an accountant and you have a business, right? The business requires an accountant or multiple accountants and they talk about ROI or whether or not you should be counting your people as employees or independent contractors and a whole host of things that you don’t even care about. Or you don’t know that you should care about them because your accountant hasn’t explained sufficiently WHY these things should be important to you.

Let’s take the employee vs independent contractor debate. You can check it out here. The IRS has very specific rules about who is an employee and who isn’t.

The first rule is, “Who’s rules?” At the end of the day, as a small business person I know, you just want the thing done. If you just throw some money at a person, and say, “Hey, do this thing for me for this price,” and they say, “okay,” go away and bring you back the finished product, that’s more likely to be an independent contractor. If you start laying down rules as to how they make the thing, it slides into employee territory. For example, I had a young lady come in for tax time, and she’d been given a 1099, independent contractor payment. She showed up to work at her cleaning job, at the time given by her employer, used supplies provided by employer and worked the hours requested by the employer. She was, in fact, an employee, by the Behavioral Control Rule the IRS sets down.

The second rule is, “Who pays?” If the employer pays hourly, the person in question is more likely an employee. If they pay by contract, that is more likely independent contractor. Sometimes this will come down to something as simple as, ‘Who owns the tools that did the job?’ If Behavioral control is murky, Financial Control may be able to straighten this out.

The third rule is “How close are you working?” Relationship may be your ultimate determining factor. Independent contractors don’t get health insurance, 401(k)s, and are generally hired to do a specific thing or series of things. The way that you work with your employees tells you if they are true employees.

Why is this something that your accountant will be landing on you with both feet over? Well, because misclassified employees can be super expensive to you. That lady that I talked about? We wrote an appeal to the IRS that she didn’t qualify as an independent contractor because she would have been out thousands of dollars in self employment taxes that she wasn’t informed by the employer that she would be owing. (it’s possible that the IRS may resolve this in the employer’s favor, but with the COVID, it’s been taking time) She still may end up owing that money, but she will have some time to gather that as we appeal the employers misclassification of her employment status. And, with a small, newer cleaning company, that may spell the end of that company, I don’t know, I didn’t represent that company, I represented the employee to the IRS. But if I did have that company as a client, I would be on the horn with the owner, talking about who is getting those clients, who is serving those clients, who is buying product, who is setting the times for the cleaning to happen, and if the owner’s answer to most of that is, “me,” then we would be looking at what needed to happen to make the arrangement an employee-employer relationship instead of a business owner-independent contractor, because that is the more honest and the one that’s less likely to come bite you in the rear at tax time.

Trust me, you don’t want the IRS knocking on your door with a stack of SS-8s saying that they want you to pay a whole mess of back employer taxes.

Why remote CFO is the future

Small and medium companies have financial needs, and at a certain point, which may be different for different businesses, there needs to be a person in charge of those financial needs, and there can be a graduation of sorts, from a bookkeeper to an accountant, to a Chief Financial Officer and finally to an accounting department. The gains made by having a specific person or group of people dealing with money are obvious; having a person who just deals with money, who specializes in dealing with money, means that they are, at least in theory, much better at it than the average layperson.

Why should this model change? What makes this model bad?

The model isn’t bad per se, but outsourcing can be more efficient. Why is an outsource CFO better than the one I can see down the hall? You are paying for their physical presence. There is a surcharge that you pay to have that person in your physical presence every day. You also pay for their office space, office supplies, and sometimes even their company vehicle. Online CFOs replace that person in the office. They can replace the entire accounting department as your various departments get trained on how to submit things to the accounting cloud. Remote CFOs charge a flat rate, and tell you ahead of time if there is going to be a change to that or if what you are asking will have additional charges. Also, if scaling is needed, Remote CFOs take care of that. Your accounting actually needs to be taken care of by three people? We hire them, we take care of that. We model efficiency because the more efficient we are with your account, the more money we can make overall. That step of removing the accounting from the structure also insulates the company because Remote CFOs and their employees don’t have direct access to the accounts and there are a lot more steps involved in an embezzlement scheme, making them less likely to happen, more likely to get discovered early, and less impactful to companies when they do happen.

What accounting should be doing for you

There are four basic things that accounting does, and does well. First, accounting is the language that you speak to outside parties in, whether that’s people looking at buying a company, the IRS or other tax collection entity, shareholders or vendors, customers, or just other people. This is the language of business. There are a lot of Generally Accepted Accounting Procedures, GAAPs, but so far as the math goes, it’s done in the normal way of math, and there’s not much wiggle room, or at least that is what you may believe. There are actually several ways to squeeze the numbers and some of those ways work better for presenting information to different people.

For example, the management team doesn’t really care how much accumulated depreciation you have on Equipment X, but the IRS sure does. Management doesn’t care if you take a 179 deduction on the equipment, or if you are using the double-declining balance method. But the IRS lives for that stuff. So, the first thing that accounting should be doing for you, is presenting you with just the amount of information that you need, without throwing a bunch of stuff at you that you neither need nor want to know.

Second, there is a whole arm of accounting dedicated to payroll. Payroll has its own tax laws, its own tax filing requirements, and its own workspace. Even if you are using accounting software like QuickBooks Online, there is separate software for payroll because payroll is so complex.

Third, accounting is the backbone of the company, ensuring income coming in from the appropriate sources, and that bills are being paid on time, as well as the purchase of the items necessary to run the business.

Fourth, accounting should be timely. You have deadlines, both internal and external, and accounting should be cognizant of that. What good is accounting doing for you if you can’t ask for an assessment of whether or not a thing is good for your company, and get a reasonably timely answer, then why do you even have the type of accounting that you have in the first place?