Notes on Affordable Care Act (Obamacare)

It's that time of year again that we all love--time go wrap up Continuing Education requirements! One topic I recently delved into is the Affordable Care Act, aka "Obamacare".  This is a topic that has gotten a lot of press and hype and created a lot of confusion, and I'm just as confused as anybody, so this is a good opportunity to sort out fact from fiction, and reality from hype.

I'd like to summarize some of the key points from my learning experience in today's post. This is a summary and there is a lot more to this than the information presented here, so if something catches your eye, do some more research before taking it as gospel!

Under the Affordable Care Act, in 2014:

• All individuals must have minimum essential health coverage for each month, qualify for an exemption, or make a payment (penalty) when filing his or her federal income tax return.
• In 2014, the penalty is calculated in one of 2 ways--whichever is higher is the amount to pay:
• 1% of your yearly household income, with the maximum penalty being the national average premium for a "bronze" plan  or
• $95 per person for the year ($47.50 for each child under 18). Maximum penalty per family is $285.
• The Marketplace, or "exchange", was set up for individuals and employers to find health coverage under ACA. Completing an application allows users to view and compare available options. See www.healthcare.gov.
• Individuals may qualify for free or low-cost coverage through the Marketplace through a premium tax credit (only available when insurance is purchased through the Marketplace). The application process will include this information including the amount of the credit you may qualify for. There are several considerations to determine eligibility and not all are included in this blog post.
• The credit can be taken immediately ("Get It Now")  by having some or all of the estimated credit paid in advance directly to your insurance company to lower what you pay out-of-pocket, or taken as a credit when you file your tax return ("Get It Later").
• Another provision of the ACA is for additional Medicare tax if an individual's wages or other compensation exceed a certain level. The rate of the additional Medicare tax is 0.9%
• The threshold amount for each filing status is:
• Married filing jointly  $250,000
• Married filing separately:  $125,000
• Single: $200,000
• Head of Household (with qualifying person) $200,000
• Qualifying widow(er) with dependent child: $200,000
• Lots of possible scenarios with this provision, so check out the details if you think it will affect you.
• ACA provisions for employers:
• Employers can be Small Employers or Large Employers:
• Small Employers have fewer than 50 full-time employees or equivalents
• Large Employer have 50 or more full-time employees or equivalents
• "Equivalents" mean how many 40-hour work weeks. If you have 2 employees who each work 20 hours per week, they count as one full-time equivalent. So you can have 50 people on your payroll but if some are part-time, you can still end up with less than 50 full-time equivalents and be considered a Small Employer
• Small Employers may be eligible for credits and other benefits.
• Employers with fewer than 25 full-time equivalent employees may be eligible for a Small Business Health Care Tax Credit to help cover the cost of providing coverage.
• Employers with 50 or fewer full-time-equivalent employees may be eligible to buy coverage through the Small Business Health Options Program (SHOP). See www.HealthCare.gov.
• Small Business Health Care Tax Credit
• Eligible employer has fewer than 25 full-time equivalent employees, with an average wage of less than $50,000 per year
• For tax years 2010 through 2013, maximum credit is 35% of premiums paid (25% if employer is a tax-exempt employer, such as a charity)
• Starting in 2014, the maximum credit will increase to 50% of premiums paid (35% if employer is a tax-exempt employer)
• To be eligible for the credit, the small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace.
• The credit is available for two consecutive taxable years.
• Lots more details on this credit, do your research to make sure you qualify!

Those are the high points, current as of October 2013.

Time Tracking for Service Businesses—Don’t Give Away Your Time!

If you have a service-based business, you most likely bill clients for your time. Even if you charge a fixed price, it is probably based on how much time it takes to do the job. So it's crucial to your success that you capture that information for effective billing!

Time is the one completely inflexible resource we all have. There are 24 hours in a day, and you can’t bargain with that fact or rationalize it away. So it’s important that you keep track of your time so you  capture all the billable hours. If you don’t bill by the hour, it’s still important to know where that time is going so you know what activities are most profitable, and if your prices need to be adjusted if an activity takes more time than you anticipated.

I charge for my time, and I wish I could say that I had the perfect system in place for capturing all my hours. Truth is, I don’t, but after giving away big chunks of time over the year, I have learned to be more disciplined in tracking my time, (especially the billable hours!). 

There are a lot of tools for time tracking out there, and I use a combination of those tools. One trusty tool is my daily planner. If I’m working at a client’s site, I’ll just make a note of the time I arrived and the time I left on my paper calendar. It’s portable and it’s easy.

I also have a free app (I useToggl) that is both on my smart phone and on my PC. It’s handy in that you can start and stop the clock, and even pause it when you get that phone call. Then it will spit out a report upon request. There is a paid version that I believe gives more complex reporting, but the free version works for me—when I use it. Truth is, I’m more of a paper-and-pencil kind of gal, and when I’m working at home, I tend to use a paper time log to track time by client and make notes about what I was doing that I can include on the bill (you can do this in Toggl, too).

There are also billing and accounting apps (FreshBooks, QuickBooks) that will capture your hours and automatically create a bill for them. I use QuickBooks a lot, and I do enter my time in the Timer in my own QuickBooks file to create invoices.  The QuickBooks timer can be used stand-alone, without my needing to be in my own company file, and then I could import the data using an IIF file, but for me it’s just as easy to enter it manually (although now that I’m writing this, I may try the import feature).

I recommend tracking your non-billable time as well. This can be revealing! You might want to set up a goal of having a certain percentage of your time be billable, and could even budget your time as you do your money (you do budget your money, don’t you?), with a certain percent being billable, another percent for business development, some for administrative tasks, etc. My personal goal is 80% billable.

As I noted, I use a wide variety of tools to capture my time while I’m working, but then I consolidate it all into the QuickBooks timer so I can run a consolidated report on all my time. There are lots of tools out there that will capture all of the activites I listed above in one place, create reports, generate bills, and even import into QuickBooks. I just personally don’t have the patience to set one of those tools up and then use it at all the places where I work.  I don’t always have internet access for some of the online tools, and I also find it awkward to use some of those tools while I’m at a client’s site. So you just have to explore the options and come up with the system that works for you. 

The important thing is to have a system that captures all your time, so you don’t miss billable hours, you get some history on how long it takes you to do the activities you charge for so you can set your prices effectively, and you know how much time you spend on non-billable activities.

Why You Need an Employee Handbook

Even if you only have one employee, you should consider preparing an employee handbook. Not only will this clarify your expectations of your employees, it will force you to anticipate and consider all the options available when putting someone on the payroll and make decisions about those options before the first paycheck is issued.

I administer payroll for several clients, and find that situations often arise that can delay payroll processing, and those situations can be anticipated and prepared for while writing the manual. Simple items such as what documentation should be obtained from the employee before start of work (W4, I-9, direct deposit information), when spelled out in the manual and put in a checklist, make onboarding employees systematic and painless.

Rate of pay, overtime policies (be sure they comply with state law!), vacation and sick policies, employee benefits are all considerations that should be documented.

Payroll administration is one reason for a manual, but in addition it will help to ensure fair treatment of all employees,compliance with state and federal laws and clarify expectations, all of which can contribute to a pleasant work environment, as well as potentially keep you out of court.

The Small Business Administration has good information on what should be contained in an employee manual (http://www.sba.gov/content/employee-handbooks), and the National Federation of Independent Businesses offers a model handbook (http://www.nfib.com/business-resources/business-resources-item?cmsid=28642) that can be used as a starting point.

Its' surprising how many things there are to consider when hiring employees. Planning ahead and establishing documented policies will help smooth the road.

Are You On The Payroll?

So you've started your own business.You're making some money, and now you're starting to pay yourself. You're calling it your payroll. But is it really?

Here's the deal: If you are a sole proprietor (you have not formed a corporation or LLC, or a partnership, and will file a Schedule C or F with your form 1040), then you are not an employee of your own company. The earnings of your company will be reported as self-employment income on your individual tax return, and you will pay Social Security and Medicare taxes on the earnings as well. Any money you "pay" yourself out of the company should be shown on your financial statements as a "draw" on the balance sheet, and not "Payroll Expense" on the profit and loss.

If you have formed a regular partnership, the same rules pretty much apply. The partnership will file its own return, splitting the earnings among the partners, and that will be reported on your 1040 and the applicable taxes will be applied.

If you have formed a corporation (either S or C), then you MIGHT be an employee. Just paying yourself from the company funds does not make you an employee. To be an employee, you must calculate and withhold taxes from your paycheck, deposit those taxes (plus the company's portion) on a regular basis, and file quarterly and annual payroll tax returns. If you are just taking money out of the company without doing those activities, then you have either a "distribution" (or "dividend"), or possibly a loan.

If your company is an LLC, then things get even more complicated. An LLC is a business organization recognized by states, but not by the IRS for tax purposes. The company will elect to be treated as a corporaton or as a partnership when it files its first tax return (a single-member LLC can be either a corporation or a "Disregarded Entity", meaning the owner will file a Schedule C as a sole proprietor). If the company is taxed as a corporation, then the corporate rules mentioned above apply. If it's taxed as a partnership or sole proprietor, then the owner(s) is not an employee.

Now, if your business is set up as a corporation, which means you are eligible to be an employee, should you do this? It does add paper work and complexity. BUT, generally speaking, it is a good idea. If you are pulling a draw or distribution from your corporation but are NOT on the payroll, the IRS is likely to take a look at that and tell you that it is actually payroll, and will retroactively charge you for the payroll taxes, plus penalties and interest, that you did not sent them. You should pay yourself "reasonable compensation" and comply with the payroll reporting requirements to avoid this. "Reasonable compensation" is a fairly squishy term and it depends on what your role is in the business and how much time you spend working in that business. But you will want to pay yourself an amount that you might pay somebody else to do the same job.

There are also some potential tax advantages to treating yourself as an employee of your corporation, and you will want to consult with your tax pro to see if your situation can benefit from some of those.

So as usual when it comes to tax issues, this question does not have a simple answer. And to tell the truth, the information presented above is a simplified overview. My usual disclaimer applies--this should be taken as general advice and NOT tax advice. As always, consult with your tax professional to determine the best course of action for your particular situation.

Is Barter Better? Maybe Not...

At some point in most business owners' career, the idea of swapping goods or services comes up. It seems to have a beautiful simplicity about it. If you have someone do some computer work for you in exchange for designing their business cards, you're not out any cash and he doesn't have to report any income. Right?

Not so fast. The IRS is on to that one. It's known as "barter", defined by the IRS as "an exchange of one taxpayer's property or services for another taxpayer's property or services". And, reading further on the IRS website, "The fair market value of property or services received through barter is taxable income."

Yes, in our example, both you and your computer guy will need to report on your tax returns the fair market value of the services each receives. The same would apply if goods changed hands. Furthermore, each of you would have to issue a 1099-MISC to the other if the value over the course of the year was $600 or more. You can also each write off the amount as a business expense. So it seems like a wash and who cares in that case? But if one of you is not providing something for business use, then only one side of the transaction has a tax impact. If I do my friend Ann's taxes in exchange for a year's supply of her excellent tea, I don't get to write off the tea (unless it is going in my office's break room for the use of the employees--but it isn't). She and I still both have to report the fair market value of the tea and the tax prep as income. I do not have to issue Ann a 1099-MISC because I was not using the tea for business purposes. That does not, however, meant that Ann is not required to report the value of that tea as income. The IRS isn't too concerned if you write it off as an expense but they definitely care that you report the income!

If you join an actual bartering exchange, it gets even more fun as you will get your transactions reported by the exchange on a 1099-B. In this case the 1099-B replaces the need to issue a 1099-MISC for all transactions that go through the exchange.

The barter rules apply to your employees, too. If your employee works a little extra in exchange for free football tickets, that's a taxable event. You need to increase his wages on his paycheck even though he didn't receive any cash, and withhold taxes on that amount (and pay your share of the employment taxes too). In addition, overtime rules could apply.

Any exchange that would normally be taxable, whether business-related or not, is subject to the barter rules. Check out the IRS Bartering Tax Center for all the details.

You may ask, how is the IRS going to know about your bartering activity? Without a 1099, they probably won't. But you didn't hear that here. I'm just telling you what's required.

Sales Tax and the Internet

This morning I sat in on a webinar hosted by a company that provides sales tax services to businesses. Of course, it was essentially a sales pitch, but there was a lot of good information presented--enough to make me consider never selling anything again! While that's not going to happen, it was an eye-opener for me, and I thought I was reasonably familiar with sales tax rules. 

At least I feel reasonably comfortable with the California sales tax regulations as they apply to my clients' businesses. I didn't think I needed to worry too much about sales tax in other states for any of my clients because none of them have a "physical presence" in any other states. The "physical presence" provision, in case you are interested, came about in 1992 as a result of a petition by a mail-order retailer named Quill. But in the 20 years since this ruling, interstate sales have exploded, thanks to the Internet, and revenue-starved states are turning a hungry eye toward those interstate sales.

Some creative states have developed some, um, interesting definitions of "physical presence". For example, if you advertise on cable television in Alabama, whether or not you are actually in Alabama, you are considered to have a physical presence and must collect Alabama sales tax.

If you live in California (and probably elsewhere--it's hard enough to keep up with California laws), and you buy something from an out-of-state vendor who does not need to collect sales tax, you still owe the California Board of Equalization sales tax on the purchase. As a convenience, you can report and pay it when you file your California income tax return. How many people actually do this? I don't have any statistics but I bet it's not as many people as actually made those purchases.

Non-compliance, whether intentional or not, costs the states a staggering amount of revenue each year. So they aren't very forgiving about non-compliance, and plenty of people have been put out of business by demands for uncollected sales taxes, plus the penalties and interest. Any developments on the sales tax front deserve the business owner's attention. And internet sales are in the crosshairs, as the tax that is currently not being collected on internet sales is estimated to run in the billions.

In 2000, the Streamlined Sales and Use Tax Agreement (SSUTA) was crafted by the Streamlined Sales Tax Governing Board "to simplify and modernize sales and use tax administration...in order to substantially reduct the burden of tax compliance." The goal was to find solutions to the complexity in state sales tax systems resulting from current laws governing online sales tax and remote sellers (SSUTA Website).

There are currently three online sales tax bills that Congress is considering, two of which rely on the SSUTA to help establish online sales tax regulations. The bills are the Main Street Fairness Act, the Marketplace Fairness Act and the Marketplace Equity Act (the first two rely on the SSUTA). I'm not going to go into the details here (I got my information here) but heads up that if you sell to buyers in other states, you will probably be entering a whole new world of sales tax collecting and reporting. As for me, I'm going to check out the services provided by the company that hosted the webinar (it was Avalara) to ensure compliance for me and my clients.

Under-the-Table Employees are Skating on Thin Ice!

Employees are expensive. Employer payroll taxes and worker's compensation insurance add significantly to the cost, over and above the wage rate paid to the employee. Complying with labor laws and filing the required payroll tax returns take time and resources. Many business owners get around this by classifying people as "independent contractors" or even by paying them cash and not reporting the cost, known as paying "under the table".

The people they hire often go along with this because they don't get payroll taxes withheld and often get paid a premium if the employer doesn't have to report the wages and pay the additional costs. So what's the downside?

The downside for the "under-the-table" worker is that they are not covered by unemployment insurance, disability insurance or worker's compensation. In addition, their wages don't go into their Social Security base. Plus it's illegal to not report income. Those are risks many are willing to take, or they just don't realize that this is the case, until they come face-to-face with the consequences.

A friend's daughter just ran up against this the hard way. Working under the table in a high-risk recreational industry, she was severely injured and is currently in the hospital undergoing treatment. Thankfully, she has medical insurance, and is doing well, but she is not going to be able to work for quite a while, and has no coverage for disability or worker's compensation. And her injuries are likely to cause her ongoing problems for years to come. The costs of this accident to the worker are going to be too high to dismiss as a risk of working under the table, and a claim will most likely be made to worker's comp.

The owner of the business will probably be getting some heat from the employment agencies and worker's comp authorities. Because of the high injury rate in this industry, the worker's comp rates are among the highest in the state, so it's a common practice to not report workers. Businesses who comply with the employment laws are often forced out of business by the costs, so it's understandable. But an incident like this can put the owner out of business anyway, by the time taxes, penalties and costs are paid. In addition, the businesses who don't pay the costs associated with complying with the law are unfair competition for those companies who do comply.

A sound business model needs to incorporate ALL the costs of doing business. Paying someone extra to dodge the employment costs may seem fair, but the incident described above make it clear that this is not fair to the employee, and can ultimately be the undoing of the business.