DIY Payroll…Go Buy Some Stamps

Did you get into business to write letters and beg for forgiveness? No, not unless you’re working the customer service desk at Comcast. You got into business to provide a valuable service/product, become profitable, and provide for your employees and your family.

Payroll is one of the most important aspects of your business. Even if you’re the only person getting paid, it’s crucial that the work be done accurately and that you make those pesky tax deposits in exactly the right manner, for the right amount, at the right time. If those tax deposits aren’t handled properly, IRS puts you on their Christmas card list and off we go!

We work with many clients who began processing their own payroll, submitting their own payroll tax deposits, and things started out fine. Then one day, they forgot to make that federal tax deposit. The notices started rolling in, and one day the certified letter came with the threat to freeze the business bank accounts and seize the amount that was due. That day, the business decided they needed help. The thing is, at that point, it’s almost too late to get help. IRS is ready to come take your children and your pets. Stuff got real.

Entrepreneurs are "do-everything" people, and consequently they seek out a payroll solution so they can continue to, you know, do everything. Just like those terrible ads that attempt to sell DIY accounting services, there are equally terrible DIY payroll ads. Payroll is promised to be "easy" and "quick." It's a hollow promise, people. Payroll, in my opinion, isn't a DIY activity. I liken payroll to dentistry and electrical repair...don't try those things at home.

I have two quick examples of why you should never do your own payroll:

Several years ago, I asked one of our long-time clients if he wanted to turn over his payroll to us. He begged off, mostly to save some money. After about three months, he sent me an IRS notice. I responded at an additional charge to him, and sent him some suggestions to keep this from happening again. Three months later, we got another notice...and six months after that, we got two more. Guess what we were asked to do? You got it...he begged us to take over the payroll, and there hasn't been a notice since then.

I had to call IRS the other day for a client. I was on hold off and on for 2.5 hours and I spoke to 9 different agents. I know how irritated I was, but imagine as a business owner if you had gone through that. Would it have ruined your entire day and caused you to be completely unproductive and miss a deadline? Could you have been doing something to make your clients happy instead of talking to Doris in Philadelphia who was ready for her lunch break and really didn’t care about your tax problems? Probably.

We never say that clients aren’t smart enough to handle their payroll. If that was all they had to do, they’d do fine. But, it’s not. It’s one very important, time-intensive, deadline-driven, mess-this-up-once-and-you’re-doomed-to-a-life-of-writing-letters-to-Doris aspect of the business. Things spiral out of control when it takes you an entire day of holding on the line with IRS to argue about a tax notice and come away with no resolution. Consider allowing a major leaguer to take on this task for you, because the minor leagues won’t cut it when it comes to payroll.

Why Do I Need You?

My first response to this question is “You may not.”  We are really big on making sure you are a good fit for our firm, because a mistake in judgment here costs you and it costs me.

If that one doesn't work, then I have a series of questions/rebuttals/comments that will hopefully answer your question. The last thing I want is for you to pay me and not gain any value from it; conversely, I am not fond of wasting my time with work that isn't valuable to you, my prospective client. See how we have the same concerns in mind?

Here are examples of replies when I begin to talk about my services and prices:

But I don’t bring in very much money. 
I get that, but I assume it is your goal to change that situation as quickly as possible. If it is, then I encourage you to consider our fees an investment in your company and use our expertise to help you make more money. We are generally the first ones to say “This isn't a good fit for our firm.” Assuming we haven’t yet told you that, we know we can help you. It’s up to you now to make that decision of spending the money to have unlimited access to our knowledge and expertise, or move on to someone else. The most important thing to consider:  If we aren't delivering value to you, then we aren't the right firm for you.

But my business isn't very big.
Here’s the thing….the size of your business has nothing to do with profitability. Of course you’re not GM. Hardly anyone actually is that large. Some of my most profitable clients are family-owned businesses, operating out of a home office. But, even if it’s just you, there are complexities and strategies with which we can help you. One of the proudest moments I had with a prospect involved my offering him to serve as his Pricing Committee for the first year of his business. I would sit down with him, review all of his contracts for new customers, and make recommendations on how he could be more profitable. He couldn't afford the monthly cost of that service in the beginning, but his eyes lit up and he said “I never would have thought of even asking you to do that with me. That’s an amazing service.”  See how creative we can be!  The most important thing to consider:  No, you aren't that big yet, but you want to be, and we can help you get there.

I just don’t think it’s that complicated/I don’t think it’s that involved.
This is where I get confused. You called me and asked for this meeting, so I assumed you thought the work was more complicated than you could handle. I have yet to meet anyone who came in, admitting that their work was extremely complicated and they absolutely had no way of knowing what to do. Most often, it’s the opposite, and they think that the QuickBooks Pro file they just handed me is Hop On Pop. You may think it’s not that complicated, but trust me, it is. The most important thing to consider: You want things done right. You may not be able to pull that off. You aren't an accountant, because if you were, you wouldn't be in my office. You owe it to yourself and your family to invest in expertise to make sure the information you rely on to make business decisions is accurate, and that you are doing everything in your power to be successful.

I just don’t know why everything has to cost so much.
It’s at this point that I realize we are not a good fit, if nothing else has thrown off the red-flag alerts before now. If you’re a start-up, I know that every single person you've talked with before me (and let’s face it, I’m usually the last person you meet with, even though everyone from your father-in-law to your banker has told you to call someone like me before now) has asked you for a retainer or your credit card number. You’re tired of spending money. Maybe you have a home office, little to no overhead, and the thought of plopping down 2-5% of your revenue to a CPA firm makes you hive up. The most important thing to consider: Here’s the deal, my friend.  You’ll realize more benefit than you’ll ever pay me.  Period. 

And this is the real world. Everything costs something. And around here, we either do it ourselves or we pay someone else to do it.  Isn't that what you want your customers to do?

Is the 1099 Life Working for You?

Meghan recently sent me an article where Elizabeth Warren was quoted as saying that the “1099 economy” is a huge problem in the US workforce. I agree that when businesses hide behind paying someone as a subcontractor when that person is really an employee, they should be made to change the classification. It’s bad for the worker, as well as fraudulent for workman’s compensation insurance issues and payroll taxes.

But what about the new “on-demand” labor force, with people who are classified as independent contractors with Uber and Airbnb? These business owners are now creating income by sharing things they already own, and becoming self-employed in the process. Does that muddy up the definition of who is an independent contractor and who isn’t?

Think of the independent contractor relationship in the simplest way possible:  Think of the home-building process. You engage a builder to build your house, and that builder calls up his favorite carpenter. He tells the carpenter that he needs the house framed by a date in the future. He doesn’t care when the carpenter works; he doesn’t supply the hammers and nails to the carpenter; and if the carpenter needs a new ladder, he has to buy it. The builder doesn’t buy it for him. The builder pays a lump sum for the project as opposed to paying the carpenter by the hour. That’s the textbook independent contractor relationship. There is no control over the hours worked, no expectation of being in an office from 9-5, and the carpenter buys a new drill if his old one breaks. If your relationship with a questionable worker doesn’t fit this description, then you could have a problem.

Going back to our example above, using the IRS definition of an independent contractor, those new business owners in the “on-demand” labor force fit the bill. They’re not employees, paying taxes as they work. That’s where independent contractors get into trouble, from our perspective. They only know that they’ve embarked on a venture for profit, and they have no idea how their taxes are calculated or what comprises “taxable income.” This information isn’t intuitive, nor is there an instruction manual. That’s why most self-employed individuals learn lessons the hard way.

We advise our clients on these questions quite often. The taxes are very important, as are the matters of complying with both federal and state law about how you compensate someone who works for you and how that compensation is reported. Clients say, “I just wanted to start a business and make a little money. This compliance sucks.”

Amen, I say. Pull up a chair.

http://www.buzzfeed.com/mathonan/elizabeth-warren-on-rise-of-the-1099-economy-a-real-problem

Are You Being Clear?

I don't like the term "full-service." I have used it to describe my firm in the past, but I don't use it anymore.  Why?

I think describing your business as "full-service" is a cop-out these days. The age in which we live now allows for specialization like never before. Being all things to all people is exhausting and not nearly as profitable as being focused on the ideal client and serving them like the expert you are.  
Being full-service used to mean "I'll pump your gas, change your oil, check your tire pressure, and clean your windshield." What happened to those guys?  
Digital, self-serve pumps happened. That little knob you push in your car that cleans your windshield happened. Quick Lube happened. Those businesses specialized and made more money being "special" to their ideal customer.

The point is this....as an entrepreneur of a successful company that's been around the block a few times, you have the ability to make a product/provide a service that is specific to your ideal client/customer and CHANGE THEIR LIVES. Do you take advantage of that power? Most don't, because saying no to someone is scary.  
And let's face it....to specialize, you have to say no to others in order to say yes to the right type of work. 

When you're starting out, you can't afford to be niche-focused because you need to eat and pay the bills. But what happens when you've been around and you've experienced success? Do you even realize when you became "successful"?  (Sometimes the creep of success manifests itself in the problems you are having, not the money you are making... but this is another conversation.)  

Full-service implies you'll work for anyone with a pulse and a checkbook. Full-service doesn't make you stand out. You now should know who your ideal clients are, and you should be able to focus on providing profitable, life-changing work for them.  

Explore the freedom of specializing, and re-learn why you started your business in the first place.



Jason Fried talks about his decision to do less in order to do more.  We really enjoyed this video.  If you have 3 1/2 minutes, you probably will to!  Check it out:

http://www.inc.com/jason-fried/inc-live-why-you-should-power-pivot-your-mission.html

No One Understands AMT

Have you ever been asked to explain any of these things?

•  The Holy Trinity
•  The Tooth Fairy
•  Why you only ever see one shoe on the side of the road, and never two?
•  How your Aunt Dottie is always drunk, no matter what time of day it is, and you never see her drink anything?

If you've ever been asked to explain the Alternative Minimum Tax (AMT) to someone, you see what I’m getting at. I would have an easier time explaining the benefits of waxing to a bear.

When a client is all of a sudden subject to the AMT for the first time, their eyebrows go up and their mouth begins to form the words “What the hell…”. I can see it coming…that incredulous tone bordering on defensive that signals I have some explaining to do and quick. As though I handed them a tax return prepared in Latin and have asked them to recite it an audience.  And I don’t blame them. AMT is difficult to understand, and difficult to explain.

So, what is the AMT?

The present AMT was enacted in 1982 (thanks, President Reagan).  Like all magical alternate universes, it wasn’t necessarily created for evil.  But, in order to understand AMT, you must visit the alternate universe much like an alien.  This universe requires you to suspend what you know about regular income taxes and calculate a different tax, an alternative tax, one where some deductions are allowed and some aren't; where you make money and pay taxes, but like the portkey in Harry Potter, a seeming ordinary and innocuous event transports you to a magical and alternate universe, where you could owe more tax. In the regular universe, there are deductions that one can take.  In the AMT universe, where Voldemort and IRS live, some of those deductions vanish.  POOF!

The two common disallowed deductions that impact our clients when assessing taxes in the land of AMT are:

•  state income taxes paid

•  miscellaneous itemized deductions.  

For regular universe income taxes, these are great deductions. In the land of AMT, they don’t exist. So, when you add those deductions back to your taxable income, along with other required calculations (remember that portkey), turn your head to the left and spit in the air, then assess the flat tax rate of 26% or 28%, if your tax under AMT is higher you must pay it. If not, then you pay your regular income tax. 

But, how did I get to the land of AMT?
Most people are under the assumption that if they make a lot of money, they will be subject to AMT. Not true. It’s funny that AMT was created to level the playing field between the higher income earners and average income earners, but it only succeeded (in my opinion) in subjecting more average income earners to a higher level of tax. As with every road that Congress paves, hell was involved, as were good intentions. So, income is only a small part of how you end up in the land of AMT. 
You don't find AMT. You don't plan a vacation to AMT. You end up there, like that bar you end up visiting at 1am. A series of situations occurred that lead to AMT. 

The AMT form instructions are 14 pages long. FOURTEEN PAGES OF IRS-SPEAK. Harry Potter is 7 books, and it is far easier to explain. This blog post wasn't intended to tell you how to avoid AMT. It's tricky, it is everywhere and nowhere at the same time. It wasn't even a good attempt at explaining AMT.
This blog post was written to increase your awareness of AMT, and also let you know that we can meet to discuss if and how AMT impacts you.

So, bring your abacus, your Latin-to-English dictionary, and a shot glass and we’ll discuss it further. Try to avoid portkeys on your way.

Is Tax Avoidance Really a Strategy?

I know…I know. Some of you are already raising your eyebrows. Let me be clear about something. I didn’t reference “tax evasion.” I referenced tax avoidance. There is a difference, and it’s not 10-25 years.

Every business owner wants to avoid taxes, but maximize profit at the same time. Sounds easy enough, right? Sure. And we will meet on my private yacht to discuss how to do this.

I recently worked with a client who was interested in selling an expensive business vehicle to a family member who was NOT involved in the business. When we met to discuss the decision, I casually mentioned that the sale was going to result in income to him. 

“But why should I have any income on the sale?  I am planning to pretty much give this truck to him.” (Client, annoyed)

“I think that’s honorable, but you can’t do that.  You can’t just sell this truck that would appraise for $25k to your family member for $10 and avoid the gain.  You’ll record the sale at FMV.  And remember when we fully depreciated the truck a few years ago to avoid taxes?  Yeah, all of that depreciation comes back and guess what?  It’s not capital gain.  It’s ordinary income.”

“But I still owe $20k on the loan.  I won’t have any money after I pay those taxes and the loan balance.” (Client, more annoyed)

“That is absolutely correct.” (Me, hesitant)

“I want my money back.”

He didn’t actually say that last line, but I know he was thinking it.  

The fact is that most clients looked at the accelerated depreciation rules we had in place over the last 13 years as license to buy assets, finance them to the hilt, avoid taxes, and disregard the tax implications of selling them. It’s a pretty good gig, until you realize the idea only works until you sell the assets.

It’s hard to advise a client to pay some tax to avoid more pain later, but I think we are not doing our job if we don’t at least raise the issue. The fact is that while you can certainly avoid taxes in a perfectly legal manner by rapidly depreciating qualifying asset purchases, that decision comes home to roost when you consider selling them. We take for granted that clients can see the future as well as we can, and while we work for some of the smartest clients around, it’s our job to analyze the transaction as it stands now and as it may stand later. As an IRS agent told me the other day, these difficult conversations are why we get paid the big bucks.

Raise your hands if you think your tax rates will be less in 5 years than they are right now. Exactly as I thought…there’s only one of you.  So, those generous depreciation rules we had in place from 2000-2014 were just that. They were generous, for a time. Yes, we used the rules to reduce taxes in the short-term, only to potentially expose the client to a gain they didn't expect on the back-end. Legal tax-avoidance at its best, but swallowing the tax on the gain when those assets are sold is a difficult task.

Don’t let depreciation cause you heartburn. The most powerful antacid can’t cut that pain.

Who Doesn’t Like a Refund?

Imagine that you’re walking down the street, and you see a hat on the ground.  You are curious and you pick up the hat, to find a stack of cash underneath it.  There’s no penalty for keeping it, it’s just free money.  You keep it, and you’re happy.

Imagine instead that you went to that hat every day for a year and placed a dollar underneath it.  No one but you knew the location of the hat, so there was no danger of someone stealing the money.  But every day, you stopped and placed $1 underneath the hat as opposed to taking the money home with you, or buying groceries.  On April 15, you stop at the hat each year and take your $365. 

Are you still happy? Or do you feel as though the money was yours all along, but you just let the hat guard it for a year at 0% interest and 100% opportunity cost?

Yeah, that’s how tax refunds work for most people.

I know that there are circumstances that create refunds for taxpayers, and those little added bonuses are nice and unexpected. Your child is in college, and you are due a refund because of the American Opportunity Tax Credit, for instance.  Or you make about $75k as a family and you receive the tax credit for participating in a pension plan at your work.  You didn’t expect them, but they happened.  Those are refunds granted to you by the IRS not because you paid those taxes up front, but because you made other decisions.

If you’re the kind of person who gets those “hat refunds” and you want to begin holding onto your own money, this is your invitation to do something different.  Our clients who work with us throughout the year often ask us to help them forecast their tax liabilities so they can make changes to their exemptions and take more of their paycheck home each pay period.  I love doing that.  I worked with a client last year who always received about $18k each year in refunds.  This year, he owed about $1k in taxes, but guess what?  He was able to utilize the $18k throughout the year rather than waiting for a large chunk in April.  I was proud of him.

If this appeals to you, what are you waiting for?  Get in here.