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Employees vs. Independent Contractors: How To Make The Right Decision For You

Back when you started your own small business,you most likely started out by hiring a few independent contractors. You were hesitant to hire anyone outright, and simply needed a little help along the way.

However, suddenly you became large enough and successful enough that the need to hire employees became evident. Perhaps you needed workers completely dedicated to your business alone. Maybe your small business tax accountant started advising you to add what had once been considered independent contractors to the payroll in order to avoid auditing. Or, with all the blurred lines within this gig economy we live in now, maybe you are simply confused about which is which. 

How do you know when it’s the right time to hire an employee as opposed to an independent contractor? What does each look like in your small business? What is the true benefit of each?

What An Employee Brings To The Table

The most significant benefit bringing an employee into your small business is the complete control that decision gives you as the owner. That person is trained by you, scheduled by you, and delegated specific tasks by you in exactly the way you prefer them to be done. Additionally, once that training and delegating is complete, you can feel confident to give out one of the many hats you’ve been wearing up until this point.

Employees also bring with them a sense of pride in the company. Because their financial security depends on your employment, the worker is often more dedicated and loyal. This results in less turnover and more consistency overall.

How Hiring Employees Affects Business Tax Preparation

Why do so many small business owners hesitate, then, to hire employees? Hiring an employee brings in a host of regulations along with it. On top of adhering to payment stipulations and overtime rules, your company must now withhold payroll taxes, social security, and Medicare, as well as file a W-2 for each one. Small business tax accountants are able to assist business owners with how to do this while abiding by IRS regulations.

In addition, most full-time employees will expect to receive benefits, as well as any training or licensing required. Whereas independent contractors have to seek all of that out for themselves, with an employee, it is now the company’s responsibility.

How Independent Contractors Can Help Your Business

When a business simply wants a job done well, does not feel the need to control the process, and wants to avoid all of the payroll responsibilities that come with an employee, hiring an independent contractor tends to be the way to go. Independent contractors are especially attractive to complete short-term projects, or perform services not linked to the core of the business. For instance, a cleaning service for the office or an IT service hired to update a computer system could both be paid as an independent contractor, or an IT service hired to update a computer system. 

Independent contractors add greater flexibility, as hiring and firing becomes a quicker and easier process. If you weren’t impressed by their work, you don’t need to mentor or train them. You simply avoid hiring them again.

Potential Drawbacks of Hiring Independent Contractors

Though employees are the more costly and time-consuming option, they have a razor sharp focus on your business. Conversely, independent contractors set their own hours and can work for a number of businesses at a time. They are also able to decide when and how the job is done, which, for a small business owner, may be a riskier option.

When you hire workers for your small business, make sure you’ve reviewed the benefits of each, and that you classify your workers correctly. Misclassifying a worker, and thus paying incorrect amounts, could end up with an IRS audit. If you are in doubt about the classification of a worker, our small business CPA firm in Charlotte can help you out.

Resources:

https://www.sba.gov/business-guide/manage-your-business/hire-manage-employees

https://smallbusiness.yahoo.com/advisor/resource-center/the-pros-and-cons-of-hiring-employee-vs-independent-contractor-203736904/

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COVID-19 Update 3.25.2020

The Treasury Department and Internal Revenue Service announced the federal income tax filing due date is automatically extended from April 15, 2020, to July 15, 2020.  We are continuing to work and complete as many tax returns as we can by the original filing date.  For any client that does not file by April 15, 2020, your returns will be automatically extended until July 15.  If you are unable to file by July 15, 2020, we can file an extension at that time to delay your filing until October 15, 2020. 

Taxpayers can defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax.  If we have completed your tax return and you owe money, you do not need to make the payment until July 15, 2020. This also applies to the first quarter 2020 estimated tax payments.  The deadline to contribute to an IRA or Roth IRA contribution for 2019, has also been extended until July 15, 2020. You will still have until the extended due date of your tax return to make SEP IRA and profit-sharing contributions.

South Carolina has adopted the federal changes.  North Carolina has also adopted the federal changes, with the exception of one item that requires a law change. The NCDOR does not have authority to waive interest charges on unpaid balances. We expect updates in the coming days.   If you file in a state other than NC or SC, we are monitoring the adoption of the federal changes.  Do not hesitate to email or call if you have any concerns. 

Our staff members are now working remotely.  Although accountants are considered an “essential service” under the Mecklenburg County Stay-at-Home proclamation, our office will only be open on a limited basis.  Please remember to make use of our portal for electronic transmission of documents.  If you are unable to use the portal, we will do our best to make arrangements to have your tax returns mailed to you or schedule an appointment for pick-up.    

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Treasury Secretary Announces 90-Day Payment Extension for Most Taxpayers

Following President Trump’s declaration of a national emergency, Treasury Secretary Steven Mnuchin stated at a press conference on March 17, 2020 that individuals can defer tax payments up to $1 million for 90 days. Corporations can defer up to $10 million of tax payments for 90 days.

The $1 million limit for individuals was established to cover small businesses and passthrough entities, he said.

“We encourage those Americans who can file their taxes to continue to file their taxes [by] April 15,” Mnuchin said, especially encouraging people who will be getting tax refunds to do so. “Just file your taxes,” he said, and “you will automatically not get charged interest and penalties” on payments made within the 90-day deferral period.

Observation: Mnuchin’s statement did not extend the tax filing due date. For individuals the filing date, generally, is April 15. But they can get an automatic extension to file till October 15 by, for example, filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.

Observation: Many details remain unclear with respect to this relief, and no official written guidance has been released as of the time we went to press.

We’re aiming to keep you as up to date as possible. If you have any questions, please call us at (704) 372-1167.

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COVID 19 Letter 3.16.20

Dear Clients and Friends,

As the current situation surrounding the outbreak of the coronavirus (COVID-19) continues to evolve, please know that the health and well-being of our clients and staff is a top priority at Scharf Pera & Co., PLLC.  While our office will remain open, we encourage telephone conferences and e-mail communications over in-person meetings.  In addition to regular mail and overnight delivery options, we have a secure portal for electronic acceptance of documents and delivery of tax returns and financial statements.  Many of you are already making use of the portal, but if you do not have an account and would like one, please contact our office as soon as possible.  We hope all of these options will help protect the health of our clients and employees.

As always, we are committed to providing you with quality, timely and efficient service.  At this time, we have no updates on any changes to the April 15th tax deadline, but we will continue to monitor and update you. In the meantime, we will complete as many tax returns as we can accommodate.  As we have communicated in previous years, if you have not already submitted your documents by March 15th, we may have to file an extension for your tax returns.  We will update our website and Facebook page with future communications.

With these unusual circumstances, you may have questions about the tax extension process or other financial or accounting concerns.  We are available to assist you and respond to your questions as they arise. 

We wish you, your families and employees continued good health.

Scharf Pera & Co., PLLC

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2018 – 10/08 – Tax-free fringe benefits help small businesses and their employees

In today’s tightening job market, to attract and retain the best employees, small businesses need to offer not only competitive pay, but also appealing fringe benefits. Those that are tax-free are especially attractive to employees. Examples include many types of insurance (health, disability, long-term care, life) and assistance plans (dependent care, adoption and educational), subject to certain limits. The tax treatment of some benefits, such as moving expense reimbursements and transportation benefits, has changed under the TCJA. Contact us to learn more.

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2018 – 10/09 – 529 plans offer two tax-advantaged education funding options

Section 529 plans are a popular education-funding tool because of tax and other benefits. Two types are available: 1) prepaid tuition plans, and 2) savings plans. A prepaid tuition plan guarantees tuition regardless of its cost when the child attends the school. A savings plan can fund expenses beyond college tuition on a tax-free basis. The TCJA expands the definition of qualified expenses to generally include elementary and secondary school tuition. However, tax-free distributions used for such tuition are limited to $10,000 per year. Contact us with questions.

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2019 – 04/22 – How entrepreneurs must treat expenses on their tax returns

Have you recently started a new business or are you contemplating starting one? Keep in mind that not all start-up expenses can be deducted on your federal tax return right away. Some expenses probably must be amortized over time. You might be able to make an election to deduct up to $5,000 currently, but the deduction is reduced by the amount by which your total start-up costs exceed $50,000. You can also deduct $5,000 of the organizational costs of creating a corporation or partnership. Contact us. We can help you maximize deductions for a start-up business.

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2019 – 04/23 – Casualty loss deductions: You can claim one only for a federally declared disaster

The rules for writing off personal casualty losses on a tax return have changed for 2018 to 2025. Specifically, taxpayers generally can’t deduct losses unless the casualty event qualifies as a federally declared disaster. (The rules for business or income-producing property are different.) Another factor that now makes it harder to claim a casualty loss is that you must itemize deductions to claim one. For 2018 to 2025, fewer people will itemize, because the standard deduction amounts have been significantly increased. We can help you navigate the complex rules.

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2019 – 04/12 – Now or later? When to report subsequent events

Financial statements present a company’s financial position as of a specific date. But some events happen after the cutoff date that have financial implications for the prior period or the future. Subsequent events that provide further evidence of conditions that existed on the financial statement date must be recorded. Other unforeseeable events may be disclosed in the footnotes to keep the financial statements from being misleading. Contact us to help determine the appropriate accounting treatment for these types of events.

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