Posts Tagged ‘compliance’

Hiring Your First Employee

October 7th, 2012

Is your business ready to make its first hire? Finding and hiring the right employee is a critical step in the process. However, there are a few other steps you’ll need to take to ensure you meet the legal, regulatory and tax obligations of being a new employer.

In California many employment related tasks, including some of those listed below can be done from the Employment Development Department’s e-Services for Business page.

For California businesses about to become employers, here’s a checklist of the things you’ll need to do either before, or soon after you make that first hire:

1. Apply for an Employee Identification Number
Many businesses operate without an Employer Identification Number (or EIN), but if you hire employees, you’re going to need one. Think of it as the social security number equivalent for employers. An EIN is used to report the taxes you withhold on behalf of employees. You can apply for an EIN online from the IRS during their hours of operation Monday through Saturday. Apply for an EIN online.

2. Set-Up Withholding Taxes
Either on or before the date of employment, you’ll need to give your employee a copy of IRS Form W-4, to fill out and hand back to you so that you can withhold the correct federal income tax from their pay. To help you figure out what you should be withholding, refer to the IRS’ Employer’s Tax Guide(for use in 2012). Most California employees use the same number of Federal withholding allowances for their state income tax withholding. But under certain circumstances, especially if a person has income from multiple sources, they will want to use Employment Development Department Form DE-4 to determine if they should use a different number for their state withholding.

3. Verify That Your Employee is Eligible to Work in the U.S.
Employers are required to ensure their workforce is legal, and must verify each employee’s legal right to work in the United States within three days of the hire date. Go the U.S. Citizenship and Immigration Services website if you need to learn more about this process. Mainly, you will need to examine acceptable forms of ID presented by the employee and complete the Employment Eligibility Verification Form (I-9), and then verify the data on the form with the U.S. Citizenship and Immigration Services’ E-Verify online tool. You don’t need to file the form; just keep it on file for three years after the hire date, and one year after a termination date.

4. Register with the New Hire Reporting Program
Within 20 days of the hire date, you must report all new hires to the Employment Development Department’s New Employee Registry. The easiest way to satisfy this requirement is to fill out and submit a Report of New Employee(s) Form DE-34. Actually you can submit the necessary information in any format you like, as long as it’s all there. Some employers just add the employee’s start date and their California employer account number and the Federal employer ID number to the W-4 and send that.

5. Obtain Workers’ Compensation Insurance
In California, once you have employees you are required to carry worker’s compensation insurance. The insurance is available through commercial insurance carriers, on a self-insured basis, or through your state’s program and is considered a cost of doing business. If you need a referral to a commercial insurance agent who will help you minimize this cost, email me at

6. Unemployment Insurance Tax (UI), Employment Training Tax (ETT), and State Disability Insurance (SDI) for 2012
The UI program is part of a national program administered by the U.S. Department of Labor under the Social Security Act. The UI program provides temporary payments to individuals who are unemployed through no fault of their own.

UI is paid by the employer. Tax-rated employers pay a percentage on the first $7,000 in wages paid to each employee in a calendar year. The UI rate schedule and amount of taxable wages are determined annually. New employers pay 3.4 percent (.034) for a period of two to three years. EDD notifies employers of their new rate each December. The maximum tax is $434 per employee per year. (Calculated at the highest UI tax rate of 6.2 percent x $7,000.)

New employers are assigned a 3.4 percent UI tax rate for a period of two to three years. This will depend on when you meet the criteria under Section 982(b) of the California Unemployment Insurance Code (CUIC). If you purchased an established business, you have the option of acquiring the previous owner’s UI tax rate (see purchasing a Business with Employees).

The Employment Training Tax (ETT) rate for 2012 is 0.1 percent. The UI and ETT taxable wage limit remains at $7,000 per employee per calendar year.

The State Disability Insurance (SDI) withholding rate for 2012 is 1.0 percent. The taxable wage limit is $95,585 for each employee per calendar year. The maximum to withhold for each employee is $955.85.

The UI, ETT, and SDI tax rates are combined on a single rate notice, Notice of Contribution Rates and Statement of UI Reserve Account (DE 2088). The DE 2088 will be mailed to you in December, with a mailing date of December 30. Employers will have 60 days from the December 30 mailing date to protest any item on the DE 2088 except SDI and ETT, which are specifically set by law.

7. Display Workplace Posters
Check with the Department of Labor’s “Poster Advisor” online tool to see which posters you need to display that explain employee rights, etc. To determine what posters are requited of you in California check the Department of Industrial Relations Workplace Postings site.

8. Filing Taxes as an Employer
It’s a good idea to talk to your accountant or tax advisor about your new tax obligations. Typically, you’ll need to report income tax withholding, social security, and Medicare taxes each quarter on the IRS Form 941. If you paid wages of $1,500 or more in any quarter or had an employee on the payroll for any 20 weeks of the year, you’ll also need to file an Employer’s Annual Federal Unemployment (FUTA) return.

To see what applies to you, read the IRS Employer’s Tax Guide.

9. Keep Good Records and Stay Informed on Employment Laws
Once your employee is on board, make sure you maintain good employee records, pay close attention to workplace health and safety laws, and understand what benefits you must establish by law. Each of the following links will provide useful guides and tools that can help you stay compliant.

Labor Recordkeeping Requirements

Occupational Safety and Health Act (OSHA)

Fair Labor Standards Act (FLSA)

Family and Medical Leave Act (FMLA)

Equal Employment Opportunity Commission

Employee Handbook information

If you will be providing benefits to your employees, you should become familiar with the uniform minimum standards required by federal law to ensure that employee benefit plans are established and maintained in a fair and financially sound manner. See the chapter on Employee Benefit Plans in the U.S. Department of Labor’s Employment Law Guide for more information.

Paying Your Use Tax… the Party’s Over

May 11th, 2011

If you own a California business that has made in excess of $100,000 in gross receipts in the last calendar year, you are required to pay use tax. This makes you what is called a qualified purchaser, and you are required by Section 6225 of the Revenue and Taxation Code to register with the Board of Equalization (BOE) to whom you must pay the use tax.

Actually, the state government has automatically registered every business in California that grosses $100,000 or more and given them an account number and password. The use tax, which has been around since 1935, is the tax that applies when you purchase some tangible merchandise like supplies or equipment for your business from another state where California sales tax is not charged. Most such merchandise purchased, ranging from books to millions of dollars worth of equipment, are not reported and thus not taxed. Sales tax is the tax that is paid on purchases made within California. Both of these taxes are calculated based at the same rates. For California, Publication 71 lists the various rates applied to each county and city.

But the process of collecting the use tax has not been without problems. For one thing, when this went into effect in 2010, all qualified purchasers were required to file their BOC-401-DS Use Tax returns  for the previous three years even if they had no purchases to report. There were complaints that the approximately 180,000 qualified purchasers were not given enough time to compile their records from three years back since the letters from the BOE informing them of their automatic registration only started going out as of March 1st of that year. What’s more, it was, and still is, virtually impossible for most business owners to track whether every website from which they purchased merchandise as far back as 2007 paid California taxes. But since you’ve been tracking those items ever since, you now know exactly what your use tax obligation is for each item, right?

But there are still plenty of headaches left. The use tax must be filed each year by April 15 and no extensions are allowed, even if the qualified purchaser files an income tax extension. Additionally, the use tax filing can only be done online. What can further inconvenience and complicate the matter is that some of the information required in filing the use tax is the same as that for filing income tax.

Failure to comply with paying the use tax results in a 10% penalty plus interest consistent with the law. The BOE has the authority to waive the penalty, and has typically done so for the retroactive years, but does not have the authority to change the deadline. That can only be accomplished by a change in legislation. Even your tax preparer is not spared. They are fined $50 for each client they fail to ask about purchases made outside California, unless they check every invoice, because credit card statements do not give this information.

It gets better. Let’s assume that instead of purchasing a book you bought a computer monitor and were not charged sales tax. You register for use tax, duly pay the use tax, but the Board of Equalization asks you, “Have you registered to pay the eWaste fees?”

A couple of years ago California added a fee; some would call it a tax, on sales of LCD and cathode ray tube devices (generally, computer monitors, flat screens and laptops). This program, administered by the BOE, is separate from sales and use tax.

So what would your response be to the BOE? Perhaps you’d say, “OK, how can I pay the fee on my use tax return?” Well, you can’t. The program is separate and has separate registration and reporting. So if you are impacted by this, you must register separately, and make your payment separately from the use tax payments.

Adding to the joy is the thought that once you register for the eWaste program, you must file a form every year even if you never again have to pay an eWaste fee. It’s yet another registration number to keep track of, and more paperwork to handle.

So the next time you see a great deal on the Internet for something you need for your business, think again about loading up your shopping cart, and consider the true cost, especially if it’s a computer. Oh, and by the way, the use tax applies to your non-business purchases as well. Sweet.


Disclaimer: All of the items above are for information only, and are not meant as tax advice. Please consult your own tax advisor to see how each item impacts your own situation.

Using Independent Contractors

February 24th, 2011

Independent contractors are workers who provide their services, usually on a short-term or part-time basis. They work with multiple clients, operate out of their own workplace, have their own tools and equipment, and may have a business license or a company name.

Generally, it makes sense to consider going with an independent contractor when you don’t have enough steady work to justify a permanent position. There are three main reasons companies hire independent contractors instead of employees.

1. The task requires specialized skills that are not available in your existing staff.
2. The task is short-term, and will only take a few weeks or months to complete.
3. The workload fluctuates, so is not consistent enough to warrant creating a permanent staff position 

Unfortunately, many companies consider using an independent contractor instead of an employee because it is less expensive. Although an independent contractor can be about 20 to 30% less expensive than an employee, if this worker is determined later to be a misclassified employee, that savings will rapidly disappear.

Business owners may not realize their decision to classify a worker as an independent contractor can get them into serious trouble with the IRS, and possibly the state. Employers pay federal and state unemployment tax and worker’s compensation insurance, plus a matching share of Social Security and Medicare. In addition, employers must collect and deposit income taxes withheld, and are required to file quarterly and annual payroll tax reports. That’s a lot of work and a lot of reporting.  It’s tempting to treat workers as independent contractors to save both time and money.  The use of independent contractors, or vendors, will spare the company all these costs with only a simple 1099 form to file at the end of the year.

What will it cost you if you get caught misclassifying employees? Back taxes can add up to 40% of the independent contractor’s payment. Consider the social security tax, federal and state income tax, and the unemployment insurance you will now have to pay. And if it is determined that your vendor is actually an employee, the Tax Man will want that money from you even if the independent contractor already paid their proper taxes on the payments you made to them.

Penalties and interest will probably also apply. The IRS has broad latitude to assess penalties depending on whether a business acted with reasonable care or purposeful disregard for tax requirements. The penalties could even cause you to lose your business.

The IRS looks at three main factors to determine the relationship between a business and a worker. Behavioral Control, Financial Control and the Type of Relationship. How the worker can be classified depends on the answers to a series of questions.

Behavioral Control
Does the business control, or have the right to control, what and how the worker does their job? Do they provide instructions or training? A general rule is that a paying business has the right to control or direct the result of the work done by an independent contractor, but not the means and methods used to accomplish that result.

Financial Control
If the payer controls the business aspects of the worker’s job, then the worker is probably an employee.

Does the worker have un-reimbursed expenses? Can the worker make business decisions that would affect their profit or loss? This “risk of loss” is a key defining component of a business and not of an employee. But if the worker were paid regardless of whether the work is completed, then that would indicate an employee. Owning tools, equipment, supplies, a computer, and such, represent business expenses that an employee doesn’t normally have, and so are consistent with independent contractor status. If the paying business provides the tools, supplies, etc. needed to perform the job, then the worker is probably an employee.

How is the worker paid? Generally, employees are paid by the hour and receive pay on a specific pay-period basis.  If the worker were paid by the job when the work is completed, that would indicate an independent contractor. However, some professions do charge clients in advance and/or an hourly rate for their services, such as lawyers, bookkeepers, or accountants, so that does not automatically determine employee or independent contractor status.

Is the worker available to provide services other clients? When a worker spends 40 hours per week at one company, the IRS views the worker as an employee. A good test of a worker’s independent contract status is if they have multiple clients. The more the better.

Type of Relationship
Is there a written contract?  Are there any employee benefits, such as a pension plan, insurance, vacation pay, etc? Will the relationship continue over the long term? Is the work performed a key aspect of the business?

When considering the use of an independent contractor, evaluate all the above factors. If any of these criteria point toward the worker being an employee, then that is the classification you should most likely use. If you decide that the worker is indeed an independent contractor, realize that should you be audited, the IRS will make their determination independent of your reasoning and may still classify them as an employee, making you liable for back taxes, interest and penalties. And then your Workers Comp carrier will start in on you. It will get expensive very fast.

Still, you can maximize your chances of prevailing by making certain that your vendor is indeed a true business entity and deserving of the independent contractor status.

You should always have a proper written and signed independent contractor agreement that defines all the relationships and the duration of the work, and lists the responsibilities of each party to pay certain taxes and insurance. Of course a contract alone will not be a determining factor, but it will be a positive factor.

An independent contractor should also have all the licensing and business registrations required to provide their services. They should at least have a business license and have filed a Fictitious Business Name Statement. If they were incorporated, that would provide the best possible evidence to prove the validity of the independent contractor status (unless you have set them up as a corporation yourself). Remember, an independent contractor must be determined to not only be a business, but to be a separate business entity.

Here is a sample checklist of documents you should require from an independent contractor:

– Signed contract
– Signed W-9 form
– Copy of Fictitious Business Name Statement
– Information on how business is structured (sole proprietorship, partnership, corporation, or LLC)
– Business address and phone number
– Unemployment insurance number and Employer Identification Number (if contractor has employees)
– Copies of professional or business licenses
– Contact information for other clients
– Samples of marketing materials (ads, website info, Yellow Pages listing, etc.)
– Business card, professional stationary, invoice form, etc.
– Copies of insurance certificates

If You’re Still Uncertain About a Worker’s Status
Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. If you do ask for an IRS determination, keep in mind that it may take five or six months for them to respond.

You can find out more about the determination of a worker’s status as an independent contractor or an employee at the IRS website.

Minimize the Tax Filing Ordeal

December 27th, 2010

I know from speaking to other small business owners that virtually all of them are concerned about taxes. But the real issue is typically about all of the filing requirements, the things you have to do to keep in compliance with the revenue collection practices of various governmental entities.

There are so many tax related activities required for small business that the IRS publishes a small business tax calendar every year. It’s a really useful tool that is normally released during the fourth quarter of the year. If you want to make sure you don’t miss any deadlines, you can subscribe to the tax calendar in your Outlook calendar.

So here are some of the key tax related obstacles facing small business owners, where they go wrong, and what they should do about it.

Key Obstacles for Small Business
The biggest obstacles for small business owners are knowledge and understanding, because tax law is constantly changing. Most small business owners have no time or desire to keep up with these changes.

The variety of taxes a small business faces often is a shock to start-ups. In addition to the well-known federal income tax, businesses also face various types of state and local taxes, including income, franchise and/or sales taxes. If you have employees, you must deal with payroll taxes, including not just payments but information filings to the government and your employees. Many businesses also face specific excise taxes. And even the type of business entity you’ve chosen, such as sole proprietor, partnership, LLC, or corporation, affects your taxes. Too often a small business overlooks or misfiles some of these tax responsibilities.

That’s why so many small business owners take the wrong steps when it comes to taxes.

Common Tax Mistakes Small Business Owners Make
The most common mistakes are not keeping good records, not planning for the payment of taxes, and not setting aside the funds to pay the taxes owed.

They also need to be conscious about classifying workers properly. Classifying workers as independent contractors when they should be employees could get you in serious trouble. Make sure you follow the IRS guidelines fully to save potential fines and penalties.

Do-It-Yourself or Hire a Professional?
There are plenty of software packages that will help walk you through the steps, so it’s very tempting to be a “do it yourselfer” when it comes to filing taxes. However, you would serve your business better by focusing on what you do best and hiring a professional who specializes in small business to have them do what they do best, prepare your taxes.

A professional knows the ins and outs of applying allowable deductions and can help you not only file properly, but will make sure you get the deductions you deserve along with identifying things you can do to reduce your taxes for the following year.

And remember, small business taxes aren’t just a do it once, set it and forget it activity. A tax professional can help you manage all the changes in tax compliance, and to meet the ever-present deadlines.

10 Important Small Biz New Year’s Resolutions

December 1st, 2010

The approaching new year provides small business owners with an opportunity to reflect back on the previous year and make an objective evaluation of the state of their business. Everyone should conduct this exercise, but however it turns out, what’s done is done, and the only thing to do is to move forward and onto greater success and/or to make the appropriate course corrections to improve their operations and change their fortunes. Here are ten improvement projects every entrepreneur should undertake.

1. Develop a Strategic Plan
An extension of your original new company business plan, the strategic plan is it’s annual revision based on the realities and discoveries that have occurred over the past year. You won’t be able to get where you want to go unless you know where you want to be. Be sure to let your employees know as well.

2. Constantly Promote Your Business
You can’t execute just one marketing effort each year and expect your business to grow. Plan marketing efforts quarterly or even monthly and plan time for follow through and tracking of results. 

3. Survey Your Employees
Sometimes the biggest employee dissatisfactions are the easiest things to fix. Know what changes your employees would like to make in their work lives, and do your best to improve the quality of their work life, as this will usually have a positive impact their productivity as well.

4. Create action plans for each person in your organization
Make sure every employee knows how his or her job relates to the company’s overall vision, and that each has individual objectives and goals with measurable standards and timetables.

5. Survey your customers and your suppliers
Maybe the way you are doing business is costing you relationships with suppliers and customers. Know what will make it easier for them to do business with your company.

6. Produce only the key indicator reports from your business performance measurements that you need to run your business
Don’t waste your time and staff time compiling reports you never use. Know what you need to know to run a successful business, study those reports every month, and use them to take action.

7. Determine your level of compliance to all applicable human resource laws
Unless you have an HR department, you are likely unaware of all of the compliance laws regarding employees that can put you in serious legal trouble. Have an audit done by an outside professional and prevent problems that could result in million dollar lawsuits by unhappy ex-employees.

8. Know your top 10 customers well
List your top ten customers by sales and let everyone in your organization know who they are. Are they in a particular geographic region, of a particular type, and what is similar about them? What more can you do for them? Where can you find more just like them? Do everything you can to build on those relationships.

9. Get a coach or mentor, or join a business support group
Build accountability into your own personal planning by asking others to help you turn your dreams into reality. Enlist people who you can trust to give you objective feedback and create deadlines for your planned successes.

10. Make a list of the year’s accomplishments and celebrate your successes with your employees
Don’t forget to acknowledge and celebrate each of your milestones as they are achieved throughout the year. The best part of creating a plan is to know when you’ve reach your goals, allowing some time to pause and appreciate the accomplishment, and begin to create your next set of goals.