Are These People Employees or Independent Contractors?

by Jeff Roberts

One of the most common questions we get from businesses regards the status of individuals performing services for them. This is an important issue, since employees must be included in benefit programs like retirement, while independents do not. On the other hand, independents might get unhappy when it’s time to end the services and file a complaint with the state department of labor, kicking up an audit in which you are presumed guilty and protests of innocence usually ring hollow. And independents cost less, no SS to match, unemployment taxes to pay, or worker’s comp, though in some instances, independents will be required to be covered. Who pays is up to you, the business owner.

The issue, on the Federal rule level, boils down to control. There is a Form SS-8 which can be used to allow the IRS to make the determination, and which serves to give us some of the brightlines on which to base our own decision. Basically, if you, the company, can control the way in which services are provided, whether you do so or not, then the individual is an employee. If you, on the other hand, merely make an agreement on the end result of the work to be done and in no way can control the details of how services are performed, or by whom, then it begins to look like an independent relationship.

For example, in my world, if you hire a bookkeeper to do certain tasks, and can tell her when to start, where to sit, what to do, how to do it, etc., then she looks like an employee. If you hire me, just try it! If you hire me, we’ll agree on what’s to be done and when and for how much. How I do the work, or if I have someone else doing it for me, and what I wear while I’m doing it, is entirely up to me. I am independent. We know what a vendor/customer relationship looks like, and most of us have been employees, so we know what that relationship looks like as well. Ensure that the relationship is on one end of that scale or the other. Don’t pretend to create an independent when you really have an employee. The biteback can be very bad.

Now, all that being said, the states nearly universally use a different set of definitions, known as the ABC rule. Suffice it to say that they consider nearly anyone you pay to be an employee! I wish I was exaggerating, but that’s very close to the truth. So you can have a mismatch between what the Fed would say and what the state would say. This can be a problem due to matching programs between them. We fight those battles as they come, and follow the Federal rules.

How Long Do I Have to Keep All this !*^@#+$% Paperwork??!!

by Jeff Roberts

For those who like to keep their houses and offices clean and in order, and avoid renting warehouses to store papers, the length of time you need to keep things is much shorter than most people imagine. Generally you need to keep only the current year and the three previous years which are open for audit, if you filed on time. This includes invoices, receipts, credit card statements, cash register tapes, utility bills, and the like. Technically, you can also toss bank statements, but I prefer to hang onto them a bit longer since banks change hands so often, and tracking down a cancelled check can be difficult these days. And you have to pay for them.

Exceptions: tax returns, hang onto for much longer, since there are often issues currently that can relate back to an early year. House papers, since you won’t know until you sell whether or not you’d have a taxable gain, so knowing the amount of that porch addition or the landscaping will be important later on. Investments of all kinds are usually semi-permanent records, especially for retirement plans and investments. But other investments are crucial as well. You inherit 50 shares of IBM from grandpa. What was it worth when he died? Worse, suppose he gave them to you as a wedding gift? You need his records now. And anything related to legal issues, contracts, payments under contracts, payoff notices and the like are considered permanent records.

The rest? Pitch and ditch.

How Should I Keep Books?

by Jeff Roberts

Many accountants have very specific requirements for how the company books are kept. I’m like that algebra teacher you always wished you had—I’m looking for the answers and don’t have much concern for how we get there. The main issues are how much talent you have, how much time you have, and how much money you have. And the complexity. Obviously, larger companies require more sophisticated systems than one person businesses. And reporting requirements for corporations are more complex than sole proprietors.

The simplest is the Domebook or some similar variant. You can get them for about $20 at your office supply store of choice, it’s simple, a column to record money in and a column for money out, and a place to summarize it in a self-made profit and loss statement. It’ll take some time and a calculator, but gives you feedback as to how you’re doing and where your money’s going, and I can use it just fine at tax time.

Next up is using Excel on a computer device. I can help you create an easy spreadsheet to record all transactions, ins and outs, on one page, that totals out the way we want it to. Simple. Don’t need a calculator for this one…I use Excel for much of my own accounting work since it’s easily customizable, the files are tiny (I even carry Excel files on my Palm!), and quick to transfer between computers. Oh, and easy to fix when you mess something up.

Finally, Quickbooks. No, just because you own Quickbooks doesn’t make you an accountant, or even give you a shot at getting it right. Like having a socket set in the garage, it can get you in trouble when you take out the wrong bolt. And what do you do when you need a screwdriver? So QB is for the right client, who has some ability and time, and able to handle the added complexity. Make no mistake, it’s an excellent accounting system. And it IS an accounting system. So having and follow procedures consistently is mandatory, and my involvement is necessary as well to ensure that things are as they should be for year end. It’ll cost more to buy, install, and get trained on, and maintain…but can be very effective for the clients who are up for it.

Realize that keeping books isn’t just about filing tax returns. If that’s your belief, then we need to talk. We need information in order to run our businesses profitably, to make good decisions along the way, how to price our sales and services, control costs, and assess tax moves that we need to make along the way. Filing the return is the final step of a lot of work. So whatever we use, it must give both you and me the information that we need.

Advantages of Conversion

By Kaye A. Thomas
Current as of November 15, 2013

Here are the main advantages of converting a traditional IRA to a Roth IRA.

What’s the payoff for converting a traditional IRA to a Roth IRA? How is it that you can end up wealthier by paying tax sooner?

The answer varies depending on your situation. Some people will receive one type of benefit, others will receive a different kind. Some people won’t benefit at all. Here’s a summary of the benefits of convert

[Read More]

OK, Partner, We Better Sign a Prenup

Updated May 11, 2008

In 1997, first cousins Mark and Michael Ferdman founded a New York Web-design business with dreams of making it big in the dot-com boom.

Close confidants since they were young, they assumed they’d be natural business partners. But soon after the launch, resentment and frustration began to seep in. Mark, now 38, felt he did a disproportionate share of the work, while his cousin gave orders. Michael, 40, says he felt Mark was never comfortable having work delegated to him and “it was almost like I was doing the things he wanted to do.”


Social Security — When Should I Start Drawing Benefits?

by Jeff Roberts

Figuring out when to start drawing your social security benefits is one of the more complex issues that you’ll face, and there’s a lot of conflicting information out there. I’ll boil it down to the three issues that are primary drivers for the decision so that you’ll understand the pros and cons. Note that there are two different things people need to understand about SS benefits: repayment and taxability. They are different and separate…


This is the most important driver of all. If your health is relatively poor and/or your family life expectancy isn’t long, you should go ahead and file for SS. (Unless you’re working and under your normal retirement age, earning more than the allowed amount.) If your health is good, and your longevity genes are good, the other issues will be more important.


This is the biggest mistake that I see folks make — ‘retiring’ and not yet retiring! Most people need to earn an income in addition to SS benefits and investment and/or other retirement income. So they keep working, just not as much. Before your normal retirement age, the allowed limits of earnings are fairly small. If you do much more than greet at WalMart parttime, you’re likely to exceed the limits.

What happens then is that you GIVE BACK the very benefits that you filed for! And if there are any benefits left after that, you’ll likely pay tax on them to boot. So if you’re still working, never ever file for SS until your normal retirement age. At that point, you do not have to give back benefits, though you may still face tax on them. Which leads me to this: if your income will be high enough that the SS benefits are taxed at a fairly high rate, it makes sense to delay taking benefits due to the tax loss.


The obvious one. Most of you know that the earlier you file for benefits, the smaller they are. It’s a monthly computation that SSA uses to determine your benefit. What many people do not realize is that every month that they wait beyond their normal retirement age the benefit increases as well. So there really is no magic age for SS, and never has been. There is the ‘normal retirement age’ which based on your year of birth (see the site for that) where the benefits are 100%. Prior to that, they can range from around 70-80%, and after that, to as much as 120%. And this is where the disagreements come with various analysts.

There are many who claim that you’ll rarely outlive the money that you didn’t draw earlier, by waiting. The math just doesn’t work. Let’s take an example. Suppose that at age 64, your benefit would be 1200. At 66, it would be 1400. And at age 68, it would be 1600. If you wait until age 68 to file, you’re now up 400/ month over what you would have had at age 64. BUT…

By waiting 4 years, you’ve given up 48 months of $1200, or $57,600! It’ll take 12 years to recover that money. And financial advisors would tell you that even if you didn’t need the money, and subject to the working paragraph above, you could take that added money and invest it and beat the added benefits of waiting until age 68 anyway. So even with good genes and health, it probably pays off to draw ealier rather than later.


If you’re continuing to work, under normal retirement age, and earning more than the permitted amounts, DO NOT FILE! (Do file for Medicare, of course. You have a limited time to do that, but it has NO effect on drawing SS benefits. They are separate issues.) If you’re done working, or over the normal retirement age, then it makes sense to file as early as you can. If you’re in a high bracket and can see that lower brackets are coming, delay drawing benefits as long as you can since the tax cost will be high.

Finally, I’ve discovered that some of the best tax planning comes in retirement. By balancing the amounts of where you draw various funds from, whether retirement funds or non-retirement investments, we can often work to keep the SS benefits from being taxed at all, or in the low brackets, saving thousands of tax dollars. Whatever you do, try not to decide until we’ve had an opportunity to review all this. Overcoming years of “When I am x age, I’m filing!” is the most difficult hurdle of all.

Entity Choice

By Jeff Roberts

Choosing the right entity when you’re in business is one of the most important things you can do, other than picking the right spouse! Getting it right isn’t terribly exciting, but getting it wrong can be catastrophic. Let me break down some of the key issues and options so that you can follow along.

Real Estate should never, ever go into a corporation. They go in easy, and come out horribly. Double taxes are only one of the problems. Business or rental real estate generally should go into an LLC that is organized for that express purpose: to hold it, and collect rent and pay the expenses. It’s cheap liability separation from your business or personal assets. The neat thing is that if this is husband/wife owned, or owned by an individual, there is no separate tax reporting. It’s reported as if you didn’t have an LLC, so it’s easy and inexpensive on the accounting front.

So what is an LLC anyway? Limited Liability Companies popped up about 20 years ago, first in Wyoming. Their express purpose is to treat your ownership as a limited liability interest, as in a limited partnership or corporation, without some of the difficulties of those tax rules. An LLC allows for a lot of flexibility in how profits and losses are split, and even how the company is split up on sale. And yet, the owner is not open to personal liability unless he or she signs for something personally.

An LLC can be taxed in a number of ways, which is unfortunate, since many web sites now tout the LLC as the solution for everything, leading many people into trouble and high costs unnecessarily. IRS has refused to create a new set of forms for the LLC, which has led to the options to have it taxed any number of ways. Generally, we consider an LLC to file as a partnership and come under the partnership rules. And just like a real estate LLC, a single member or husband/wife LLC is disregarded for tax filings, so no separate filing is required. The LLC is very useful for smaller businesses, since it can shield you from personal liability at low cost. Nothing replaces insurance, of course, but it’s another layer of protection. When two or more partners are going into business, and where either they’re not investing the same amount of money, or they want to split up profits other than by pure ownership, the LLC is the easy pick. Owners pay taxes personally, unless there’s a state tax assessed. And the owners are not employees, do not file payroll returns for themselves, etc. They usually will make estimated quarterly payments personally.

So when should you incorporate, and why is that an option now? The corporate form has been around the longest. In some states, the LLC and corp forms are identical by law in terms of shielding owners from liability. But that’s not true in all states. And where there isn’t clarity on that issue, the corporation still rules. Even where the LLC/Inc. is the same, there are many advantages to a corporation, and because it’s been around so long, it’s simpler to understand and operate in many respects. Partnership tax law is goofy! Corp. tax law usually isn’t. But, profits must be allocated according to ownership without exception.

So if one owner has the cash, and the other is going to work the biz, there’s a problem since the money guy owns all the stock! Bonuses can be used to balance out a fair split, but whatever profit remains after bonus belongs to stockholders by ownership. In the small business world, I’m thinking only of the S Corp (used to be called subchapter S), where again, all taxes will generally be paid by owners personally, except for any state taxes. However, in contrast to the LLC, an S corp owner will usually be on payroll and draw a salary unless they’re a silent owner.

This opens up the payroll tax filings, withholdings, and the need to determine a reasonable salary, which is assessed for social security tax. Profits remaining after the salary are NOT subject to SS taxes. This is a contentious area with IRS, and good documentation of the salary level decision is a must. The other huge advantage of a corporation is when there’s a change in ownership. In a corp, shareholders can buy each other out, or the corp can buy out a shareholder. The corp continues doing business. That is NOT true of LLC rules.

Here’s how I view this from a flow chart way of thinking: Are you owning real estate? If yes, LLC. If no, go on. Do you have a partner (other than a spouse)? If no, go on. If yes, will the partners invest equally and share profits equally? If yes, S corp. If no, LLC. Are you just starting up? Is this a part-time venture? If so, maybe do nothing right now, save your cash. If not, opt for the LLC, perhaps since you’ll have the shield of protection at low cost and no added tax filings. Or wait until incorporating makes sense. So when DO you incorporate in that case? Generally, the last moment is when your profits hit your reasonable salary level, for then, social security savings will pay off. Prior to that, it’s a matter of how much aggravation you’re willing to bear in paperwork and costs, versus how much liability protection you require. All these decisions should be made in conjunction with a good business attorney since state laws can affect the choices significantly.

Kids and Taxes

by Jeff Roberts

Have you wondered how much kids can earn tax free and when they have to file returns?

Here’s a summary.

For memory purposes, two numbers: 5000 and 1000.

Those aren’t exact, but close enough. If your child earns from working over $5000, they’ll owe taxes. (That’s the Fed rule, states are another matter.)

If they earn over $1000 in investment income, interest, dividends, etc., they’ll owe tax.

Now, there are situations where they can or must file. If they have withheld taxes, they can file to get those refunded. If they (you) sold mutual funds, they need to file since IRS only sees the sale amount and not the net gain/loss. If they’re self employed in something other than babysitting or lawn mowing and net over $500, they must file and pay some self employment tax, even though there’d be no income tax until they got to $5000.

And there’s an opportunity: IRA’s or Roth’s. As long as the student has earned income from working, they can contribute to an IRA or Roth (the Roth makes the most sense, usually, at that age). The 2007 limits are $5000 for a contribution. So if they earned $5000, they could put that amount in a Roth. Imagine what happens with all those extra years to compound! If you can only get the cash before they buy more video games or itunes…

Should I Buy or Lease This Car?

by Jeff Roberts

Buying or leasing vehicles is a decision we face every time we fall in love with our next one. Aided by muddy marketing and sales tactics by dealerships, salespeople, and car finance companies, buyers wrestle with trying to find the right answer. No wonder—we face a massive enemy! Let me help you along the road before those who put your money into their pockets can speak.

Buying is still generally, the best choice. Leases have built in interest costs that are sky high. Remember, they figure that if you’re leasing instead of buying, it’s because you can’t buy…so they get you. And leases are more complicated, especially at the end of the lease term. But buying really works best for those who keep their cars beyond 4-5 years, can pay cash or get cheap financing which is often available, and are NOT trying to write it off as an employee of someone else. And who drive a lot of miles.

Leasing can be the only way to acquire a vehicle, especially if you’re in outside sales or construction as an employee, and want to write off the vehicle. Employees may not use depreciation, and so are stuck with either mileage or only the out of pocket costs. Naturally, the win win is to have the employer reimburse for all expenses, and take less salary to make up. Less income for you to pay tax on, no limit on deductions, same money to your employer. But if that can’t happen, then leasing gets you the deduction. Another interesting and not-mentioned part: leased vehicles don’t get the restrictions for luxury autos that bought vehicles do.

They’re supposed to, but it doesn’t work out that way. So if your eye is on an expensive vehicle to be used for business, then by all means, lease if you can negotiate a good deal. And, if you’re one who trades vehicles regularly enough that you always have a car payment, leasing shifts most of the burdens away from you and keeps you in nice, clean cars.

The end will come, though, so be careful. When you buy a vehicle and want to cut it loose, you trade it or sell it. Or give it to your kids. With a lease, it’s not that simple. You have an agreement to cover a residual value that is pre-determined in the lease. If you’ve beat it up and it’s not worth that, you have to cover. If it’s worth more, they’re not likely to tell you! And there are charges for excess mileage that are astronomical, so if you drive a lot of miles, DO NOT lease.

Charitable Giving-What Are the Rules Now?

by Jeff Roberts

We’ve had some crackdowns on charitable giving handed to us from the IRS and Congress. Apparently, someone was overstating their deductions … so our hands are now slapped. There are four categories to address here, along with a couple notes, so cut to the one that applies to you and skip the rest.


Donations of vehicles get special scrutiny. If the charity sells the vehicle, it reports back to you the amount of the sales price, and that is your deduction. If the charity retains your vehicle for its own use, or uses it as part of its purposes, for example, giving cars to single moms, then you may deduct the fair market value. Go to the Kelley Blue Book site, search for the place to get a private party retail value, and enter the equipment, options, mileage, and condition. Print this and keep in your tax records.

Stuff except cars

Donations of other items require more reporting if they accumulate more than $500 for the year. The dates, value, and some detail of what’s donated, and the name and address of the organization is required and reported. All items must be in good condition. IRS has yet to rule what that means. Does it mean good for a 1965 black and white TV set? Or good in relation to now? No one knows. If anything is valued at over $5000, there must be a professional appraisal.


Do give stocks or funds that have capital gains associated with them, since you’ll avoid the tax and can deduct the full value of the shares given. The shares do require appraisal, so have your broker provide that to you. If your stocks or shares have declined in value, sell them first so that we can take the tax loss, and then give the cash.


ALL cash/check/credit card contributions now require documentation. There must be a receipt, bank account entry, or letter that accompanies the donation, no matter how small! Any donations of $250 or more MUST have a letter from the charity documenting the donation.

Note to business owners: Often, an owner wonders if they can donate inventory or equipment. The answer is yes, but you don’t get much of anything for it except a wam feeling. Equipment donations are limited to your cost basis. So if the equipment is depreciated, the basis is now zero, and zero is your max deduction. For inventory, it’s your cost. And usually, it’s inventory that’s already been removed from the books as obsolete or unsalable, so it also has no value.


Trick entry. You cannot donate your time and claim a deduction. Your time is free, unless you’re recording income for it. Example, if I do a tax return for a pastor, it costs me nothing. I have no deduction. Unless I’m willing to record as income the $400 I would have charged him, and can then record the donation. But that’s not accomplishing anything. You can claim your mileage, however, in doing charitable work, and any out of pocket expenses that are ordinary and necessary in performing charitable duties.

I’m a Minister–How Should I Get Paid?

by Jeff Roberts

Clergy pay is one of the more complex areas of the law, and for many accountants who don’t handle a lot of pastors and pastoral employees, it can be frustrating to understand. There are a few key issues to address: Who is a minister? The SS system. Reimbursements. Housing. Reporting. Retirement. As succinctly as I can:

Who is a minister? A minister is determined to be someone who is licensed, commissioned, or ordained, and meets any two of the following: leads worship, administers sacraments, is considered a spiritual leader, or is administering or managing affairs of the church or organization. Many churches and orgs have a checklist or policy to help determine who, within their body, qualifies as a minister.

The Social Security system. One of the most important decisions you’ll make as a minister is whether you want to be covered in the SS system or not. You have two years after taking a new position in a church to make that determination and file with the IRS for exemption if you choose. The financial benefit is obvious-you control your retirement money instead of the government, and will return 6-10 times what you’d have through the government system. Ministers are the only people other than teachers and government workers who have the opportunity to dodge SS. But this is not an inherently financial decision. It’s a moral decision.

The requirement in filing for exemption is your signing off that you conscientiously object to the government providing welfare/retirement benefits, and that the church should do this job. If you don’t believe that, you can’t realistically file the exemption and sleep well at night. It is important to note a couple other key things. Many who were in the SS system in ‘real jobs’ will still receive SS benefits upon retirement, even after filing for exemption as a minister. This is confirmed in the SS code section 1131.4 “The exemption applies only to net earnings from the exercise of the ministry. Once having filed a valid application for exemption, a minister cannot later acquire Social Security credit for earnings from these services. However, Social Security taxes will continue to be paid by any minister on any other self-employment income or covered wages.” Finally, and perhaps this should NOT be mentioned, while the exemption is irrevocable, meaning that you cannot change your mind once that two year period is up, you may have other opportunities to alter your position with SS. First, if you change churches, you have a new two year window open for a new decision. Second, historically, about every 15-20 years, SS opens the window to allow previously exempt ministers to come back into the system.

This has been used for abuse, as someone chooses to dodge the system for many years, and then, near retirement age, comes back in, pays SS taxes for a few years and qualifies for decent benefits. My job is to give you all the facts, though, so that you can make the right decision.

Reimbursements. The general rule is that you want to get reimbursed for expenses first. Then housing, then, taxable salary. Reimbursed expenses don’t show up on any tax form, ever. So maximizing these helps keep taxable income down, while the same amount of money changes hands between the church and the minister. Let’s say that the church can afford to pay $40,000 total to the minister per year. If he/she turns in cellphone, mileage, dues, library, travel, meals, and the like, or the church pays these directly, $5,000-10,000 per year can change hands legitimately without any tax to anyone. Of the $30-35,000 that remains, in many metro areas, that will handle the housing allowance nicely. We’ll discuss that in the next section. But housing isn’t subject to income taxes, so you can see that this $40,000 compensation program can be kept from income taxes entirely. It’s a nice benefit. But we start with those reimbursements. Maximize those, and then…

Housing. Apart from opting out of SS, housing is the best deal going for ministers. To put into perspective, think of the old parsonage that was near the church that was provided to the pastor and his family. Those don’t exist much anymore, and the housing allowance is the replacement for it. The pastor could live in the parsonage tax free. And in the same way, the housing allowance which replaces the parsonage, is tax free. What is housing? Well, it’s whatever it costs in your area to live in that parsonage. Costs to pay for it (the entire mortgage payment, not just interest), furnish it, maintain it, light and heat it, clean it…just about anything except for food and clothing! Limited to a fair rental value for a furnished home, so you can’t live in a mansion and take it. But from my experience, $20-40,000 perhaps is pretty usual.

Now, you have to keep records and prove that you spent that much, or it gets added back to income. And that housing allowance must be declared, usually at year end, board approved, prior to receiving any housing allowance the next year. So you need to know at all times what you’ve spent so that you can set the amount for the following year. There is one other thing to know about housing. While it avoids income tax, if you’ve chosen to remain in the SS system, it is subject to SS taxes. So while you may owe no income tax, we compute SS taxes on the housing amount.

Reporting. Generally, the rule is that a minister is a dual status worker-an employee of the church, yet considered self employed for tax filing. This makes it very confusing, and many churches and orgs get this wrong. A minister should be issued a W2, nearly always. BUT, there should be no withholding of any kind, or social security/medicare wages. So it’s a W2 with one figure in the wage box, and the housing amount shown in box 14 as info only. That’s it. On the pastor’s return, we pick up the wages in the usual place on the 1040, but use a Sch. C for any unreimbursed business expenses, and the SE form to compute all the SS tax on salary and housing.

Retirement. Finally, the main thing to know here is that housing and reimbursments cannot be used to determine retirement contributions or benefits. So if you manage to dodge taxable income entirely, you’ve also dodged the ability to deduct a retirement contribution. And we should note as strongly as possible that if you do choose to opt out of the SS system, you owe it to yourself and your family to take that same money and put it into retirement, disability and life insurance. One other thing of note, upon retirement, distributions can still qualify for housing exclusion, making the money tax free. Again, it’s entirely possible to make tax deductible contributions to retirement over the years, and then not have to include the benefits in income when drawn for housing. It really gets no better than that, except for the retirement benefits after death…!

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