Preventing Fraud Losses Across Multiple Business Locations

If you operate your business in multiple locations (as with retail or restaurant chains), you face some extraordinary fraud-prevention challenges. After all, you can’t be everywhere at once. And the more locations you operate, the harder they are to monitor. Without the appropriate checks and balances in place, fraud losses in one store could threaten the health of your entire company. If you don’t already have one, consider implementing a robust antifraud program.

A comprehensive strategy

Whether you operate multiple locations as an independent owner or franchisee, fraud is an ever present risk. Depending on the products and services your business offers, employee, credit, returns and gift card fraud are all schemes your business potentially faces. Mitigating these risks requires a comprehensive strategy that doesn’t rely exclusively on individuals to do the right thing when faced with temptation.

For example, to combat employee fraud, require all serious job candidates to undergo background checks to help uncover any previous misconduct. Background checks also deter potential fraudsters by signaling that your business is committed to ethical operations.

Then, mandate that new employees receive fraud prevention training. Your program should include an overview of the controls you have in place — for example, procedures for handling cash and protecting customers’ credit card information — and the critical role employees play in preventing financial losses. Also provide regular antifraud refreshers to existing workers. This is particularly important because criminal schemes evolve quickly, as does the technology your employees may use to fight fraud.

Segregation of duties

One of the most important antifraud principles for any company is segregation (or separation) of duties — preventing employees from controlling more than one step of a business or accounting process. Here’s why: Employees who have access to your company’s books, incoming mail and bank account may be able to commit all kinds of fraud schemes and prevent their discovery. So you might, for instance, want to outsource payables and receivables to a third-party accounting service, receive mail for all locations at your office, and require individual store managers to deposit daily takings according to strict procedures.

Periodic job rotation, mandatory vacation policies and surprise audits also make it harder for crooked employees to steal and avoid detection. Fraud professionals have consistently found that making an anonymous fraud tipline available to workers, vendors and customers alike slashes fraud risk. So be sure to offer a hotline and visibly post the number at all of your stores.

What’s more, depending on the size of your business and number of locations, you may want to engage a CPA or fraud examiner to conduct a fraud risk assessment. Such assessments generally document existing internal and external fraud threats, their probability of occurring given current controls, and the controls likely required to mitigate risks. It’s possible that some of your locations are better protected than others, which would allow you to focus on the stores harboring more serious fraud threats.

Leveraging technology

New technologies can also help you mitigate fraud risk in multiple locations by monitoring point-of-sale transactions and conducting store surveillance remotely. Artificial intelligence (AI) is now being used to identify employees who process excessive returns or refunds and flag excessive inventory turnover or higher-than-expected costs relative to sales. Such red flags don’t prove fraud, but they provide a starting point for investigation.

To learn more about how new (and old) technologies can help multiple-location business owners prevent and detect fraud, contact us. We have strategies for powerful — and scalable — internal controls.

If you want to withdraw cash from your closely held corporation at a low tax cost, the easiest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax efficient since it’s taxable to you to the extent of your corporation’s “earnings and profits,” but it’s not deductible by the corporation.

5 different approaches

Thankfully, there are some alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five possible options:

1. Salary. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). The same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In either case, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If it’s excessive, the excess will be nondeductible and treated as a corporate distribution.

2. Fringe benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.

3. Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the “debt” repayment may be taxed as a dividend. If you make cash contributions to the corporation in the future, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.

4. Loans. You may withdraw cash from the corporation tax-free by borrowing money from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporation’s receipt of interest income.

5. Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.

Minimize taxes

If you’re interested in discussing any of these ideas, contact us. We can help you get the maximum out of your corporation at the minimum tax cost.

Many small business owners run their companies as leanly as possible. This often means not offering what are considered standard fringe benefits for midsize or larger companies, such as a retirement plan.

If this is the case for your small business, don’t give up on the idea of helping your employees save for retirement in a tax-advantaged manner. When you’re ready, there are a couple account-based options that are relatively simple and inexpensive to launch and administrate.

SEP IRAs

Simplified Employee Pension IRAs (SEP IRAs) are individual accounts that small businesses establish on behalf of each participant. (Self-employed individuals can also establish SEP IRAs.) Participants own their accounts, so they’re immediately 100% vested. If a participant decides to leave your company, the account balance goes with them — most people roll it over into a new employer’s qualified plan or traditional IRA.

What are the advantages for you? SEP IRAs don’t require annual employer contributions. That means you can choose to contribute only when cash flow allows.

In addition, there are typically no setup fees for SEP IRAs, though participants generally must pay trading commissions and fund expense ratios (a fee typically set as a percentage of the fund’s average net assets). In 2024, the contribution limit is $69,000 (up from $66,000 in 2023) or up to 25% of a participant’s compensation. That amount is much higher than the 2024 limit for 401(k)s, which is $23,000 (up from $22,500 in 2023).

What’s more, employer contributions are tax-deductible. Meanwhile, participants won’t pay taxes on their SEP IRA funds until they’re withdrawn.

There are some disadvantages to consider. Although participants own their accounts, only employers can make SEP IRA contributions. And if you contribute sparsely or sporadically, participants may see little value in the accounts. Also, unlike many other qualified plans, SEP IRAs don’t permit participants age 50 or over to make additional “catch-up” contributions.

SIMPLE IRAs

Another strategy is to offer employees SIMPLE IRAs. (“SIMPLE” stands for “Savings Incentive Match Plan for Employees.”) As is the case with SEP IRAs, your business creates a SIMPLE IRA for each participant, who’s immediately 100% vested in the account. Unlike SEP IRAs, SIMPLE IRAs allow participants to contribute to their accounts if they so choose.

SIMPLE IRAs are indeed relatively simple to set up and administer. They don’t require the sponsoring business to file IRS Form 5500, “Annual Return/Report of Employee Benefit Plan.” Nor must you submit the plan to nondiscrimination testing, which is generally required for 401(k)s.

Meanwhile, participants face no setup fees and enjoy tax-deferred growth on their account funds. Best of all, they can contribute more to a SIMPLE IRA than they can to a self-owned traditional or Roth IRA. The 2024 contribution limit for SIMPLE IRAs is $16,000 (up from $15,500 in 2023), and participants age 50 or over can make catch-up contributions to the tune of $3,500 this year (unchanged from last year).

On the downside, that contribution limit is lower than the limit for 401(k)s. Also, because contributions are made pretax, participants can’t deduct them, nor can they take out plan loans. Then again, making pretax contributions does lower their taxable income.

Perhaps most important is that employer contributions to SIMPLE IRAs are mandatory — you can’t skip them if cash flow gets tight. However, generally, you may deduct contributions as a business expense.

Is now the time?

Overall, the job market remains somewhat tight and, in some industries, the competition for skilled labor is fierce. Offering one of these IRA types may enable you to attract and retain quality employees more readily. Some small businesses may even qualify for a tax credit if they start a SEP IRA, SIMPLE IRA or other eligible plan. We can help you decide whether now is the right time to do so.

Effective January 1, 2024, U.S. and foreign entities doing business in the U.S. may be required to disclose information regarding their beneficial owners to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). This requirement is being implemented under the beneficial ownership information (BOI) reporting provisions of the Corporate Transparency Act (CTA) passed by Congress in 2021.

Who is impacted?

Companies are required to report BOI information only when they meet the definition of a “reporting company” and do not qualify for an exemption. A domestic reporting company would generally include a corporation, limited liability company (LLC), and companies created by filing documents with a secretary of state, such as a limited liability partnership, business trust, and other limited partnerships. The term “foreign reporting company” generally includes entities formed under the law of a foreign country that are registered to do business in any U.S. state.

Reporting companies created or registered to do business in the U.S. after January 1, 2024, must file an initial report disclosing the identities and information regarding their beneficial owners within 30 days of creation or registration (FinCEN has recently proposed extending this deadline to 90 days). A beneficial owner is broadly defined as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. Reporting companies are required to file a BOI report electronically through a secure filing system, FinCEN’s BOI E-Filing System, which began accepting reports on January 1, 2024.

Reporting companies created or registered to do business in the U.S. prior to January 1, 2024, are required to file an initial report by January 1, 2025. Once the initial report is filed, an updated BOI report must be filed within 30 days of a change. The failure to make required BOI filings may result in both civil (monetary) and criminal penalties.

Who is exempt?

Twenty-three specific types of entities are exempt from the new BOI reporting requirement. Most exemptions apply to entities that are already subject to substantial federal reporting requirements, such as some public companies, banks, securities brokers and dealers, insurance companies, registered investment companies and advisors, and pooled investment companies.

An exemption is also available for a “large operating company,” generally defined as a company with more than 20 full-time employees, a physical office within the U.S., and more than $5 million in gross receipts or sales from U.S. sources (as shown on a filed federal income tax or information return).

Practical challenges

Every company doing business in the U.S. will need to determine whether it is subject to BOI reporting or whether an exemption applies. Because many of the exemptions depend on an entity’s legal status under various statutes (e.g., the Securities Exchange Act, the Investment Company Act), coordination and confirmation with counsel may be necessary. Further, companies that are eligible for exemption will need to implement processes to continuously assess eligibility for the exemption.

Companies that are subject to BOI reporting will need to implement processes to identify its beneficial owners and gather the information necessary to file the required BOI report. For some entities, operating agreements, subscription agreements, and similar documents may need to be reviewed to take into account the new BOI disclosure obligations. Further, because the definition of beneficial owners includes not only shareholders but senior officers and important decision-makers within the reporting company, processes to identify changes in leadership or key management will need to be considered to comply with BOI reporting obligations going forward.

Next steps

The new BOI reporting requirements are mandated under Title 31 of the U.S. Code. The new rules include the legal requirements of who must file, exemptions from filing, and the information to be reported. The CTA is not part of the tax code and as such the assessment of the requirements and determination of beneficial ownership interests may necessitate legal advice.

Companies should begin working with their legal counsel to proactively assess their filing obligations under the new BOI reporting rules. Penalties for willfully violating the CTA reporting requirements include 1) civil penalties of up to $591 per day, 2) a criminal fine of up to $10,000 and/or 3) imprisonment of up to two years.

Yeo & Yeo will not provide assistance with filing or determination of filing obligations under the CTA.

Where can you learn more?

For additional information, revisit the December 2023 BOI reporting blog article. Visit www.fincen.gov/boi and sign up for FinCEN updates to receive immediate email updates on beneficial ownership.

FinCEN BOI Reporting Resource Center

The top line of an income statement for a for-profit business is revenue (or sales). Reporting this line item correctly is critical to producing accurate financial statements. Under U.S. Generally Accepted Accounting Principles (GAAP), revenue is recognized when it’s earned. With accrual-basis accounting, that typically happens when goods or services are delivered to the customer, not necessarily when cash is collected from the customer.

If revenue is incorrectly stated, it can affect how stakeholders, including investors and lenders, view your company. Inaccurate revenue reporting also may call into question the accuracy and integrity of every other line item on your income statement, as well as amounts reported for accounts receivable and inventory. So, auditing revenue is an essential component of a financial statement audit.

Audit standards

Under GAAP, you typically must follow Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. This standard went into effect in 2018 for calendar-year public companies and 2020 for calendar-year private entities. It requires more detailed, comprehensive disclosures than previous standards.

Under ASC 606, there are five steps to determine the amount and timing of revenue recognition:

Identify the contract with a customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations.
Recognize revenue when the entity satisfies the performance obligation.

When auditing revenue, auditors will analyze your company’s processes, including the underlying technology and internal controls, to ensure compliance with the rules. The goals are to ensure that your process properly records every customer obligation accurately and that revenue is reported in the correct accounting period.

Audit procedures

During fieldwork, auditors will scrutinize internal controls related to every phase of a customer contract, the appropriate segregation of duties and the accounting processes governing the booking of revenue in the appropriate periods. They’ll also select a sample of individual customer transactions for in-depth testing. This may include reviewing contracts and change orders, inventory records, labor reports, and invoices to ensure they support the revenue amounts recorded in the general ledger. In addition to helping validate your revenue recognition process, testing individual transactions can uncover errors, omissions and fraud.

Auditors will also analyze financial metrics to root out possible anomalies that require additional inquiry and testing. For example, they might compute gross margin (gross profit divided by revenue) and accounts receivable turnover (revenue divided by accounts receivable) over time to evaluate whether those ratios have remained stable. They might compare your company’s ratios to industry benchmarks, too, especially if demand or costs have changed from prior periods.

Eyes on the top line

Stakeholders — including investors, lenders, suppliers, customers, employees and regulatory agencies — use the information included in financial statements for many purposes. If your revenue recognition process is flawed, it tends to trickle down to other financial statement line items, compromising the integrity of your financial statements. So, it’s important to get it right. Contact us to discuss audit procedures for revenue and ways to improve your revenue recognition process.

Most employees today recognize the need to save for retirement and expect to be offered a 401(k) or other qualified plan when hired. But there’s another aspect to everyone’s golden years that’s much less discussed, possibly because it’s unpleasant to think about. That’s the possibility of being stricken by a debilitating medical condition.

Long-term care (LTC) insurance can help mitigate the financial impact of such a crisis. However, many people find the premiums prohibitively expensive, assuming they can qualify for a suitable policy in the first place.

Employers may be able to fill a critical role in this regard. By offering group LTC insurance as a fringe benefit, you can create a relatively simple avenue for employees to acquire coverage. Of course, that doesn’t mean it’s a “no-brainer” for your organization.

Standalone vs. hybrid

Group LTC insurance tends to take one of two forms. The first is a traditional standalone policy. The second is a hybrid policy that combines a long-term care benefit with group term life insurance and a death benefit. Although there are some differences in the details, both types provide benefits when a policyholder:

Requires assistance with at least two of six activities of daily living (bathing, dressing, eating, transferring, toileting and continence), or
Has a cognitive impairment that requires supervision.

With either type of policy, care may be provided in the policyholder’s home, in an assisted living or nursing facility, or in a comparable setting. Generally, benefits received for qualified LTC expenses are tax-free to policyholders while employers can deduct premium payments as a business expense.

But there’s a key difference between the two plans. The value of a standalone policy vanishes upon the policyholder’s death. On the other hand, hybrid policies with a life insurance component build cash value and may provide early access to the death benefit. If long-term care is never needed, the death benefit is paid out to the policy’s designated beneficiaries. These policies may offer other options as well, including riders and flexible payment plans.

Employee appeal

LTC insurance as a fringe benefit can appeal to employees for several reasons, including:

Competitive premiums. As mentioned, people who shop for LTC coverage on their own often find the premiums cost-prohibitive. But group plans — which spread and, therefore, reduce insurance risk — typically offer discounted premiums. Some employees may consider them more affordable.

Favorable underwriting. Insurers typically streamline underwriting for group plans. Individuals who try to obtain an LTC policy must undergo a health evaluation, and many are deemed uninsurable as a result. Group plan requirements are generally less stringent, and insurers may offer open enrollment to all members of the employee group.

Convenience. Simply put, it’s easier to buy LTC insurance through an employer’s plan than it is to engage with an insurer individually. As the employer, you do the “legwork” of vetting providers and negotiating premiums and policy terms. And because those premiums are deducted from employees’ paychecks, participants don’t need to worry about making (or missing) payments.

Research necessary

The primary reason to consider LTC insurance as a fringe benefit is to attract quality job candidates and retain employees who will value the coverage. Regarding the latter point in particular, organizations with a stable workforce of relatively older workers are more likely to find success with this benefit.

To get a better idea of whether it’s right for you, analyze your workforce demographics, conduct an employee benefits survey, and discuss the concept with your leadership team and advisors. For help estimating the costs, projecting the financial impact and understanding the tax implications of LTC insurance as a fringe benefit, contact us.

When creating or revising your estate plan, it’s important to take into account all of your loved ones. Because each family has its own unique set of circumstances, there are a variety of trusts and other vehicles available to specifically address most families’ estate planning objectives.

Special needs trusts (SNTs), also called “supplemental needs trusts,” benefit children or other family members with disabilities that require extended-term care or that prevent them from being able to support themselves. This trust type can provide peace of mind that your loved one’s quality of life will be enhanced without disqualifying him or her for Medicaid or Supplemental Security Income (SSI) benefits.

Preserve government benefits

An SNT may preserve your loved one’s access to government benefits that cover health care and other basic needs. Medicaid and SSI pay for basic medical care, food, clothing and shelter. However, to qualify for these benefits, a person’s resources must be limited to no more than $2,000 in “countable assets.” Important note: If your family member with special needs owns more than $2,000 in countable assets, thus making him or her ineligible for government assistance, an SNT is useless.

Generally, every asset is countable with a few exceptions. The exceptions include a principal residence, regardless of value (but if the recipient is in a nursing home or similar facility, he or she must intend and be expected to return to the home); a car; a small amount of life insurance; burial plots or prepaid burial contracts; and furniture, clothing, jewelry and certain other personal belongings.

An SNT is an irrevocable trust designed to supplement, rather than replace, government assistance. To preserve eligibility for government benefits, the beneficiary can’t have access to the funds, and the trust must be prohibited from providing for the beneficiary’s “support.” That means it can’t be used to pay for medical care, food, clothing, shelter or anything else covered by Medicaid or SSI.

Pay for supplemental expenses

With those limitations in mind, an SNT can be used to pay for virtually anything government benefits don’t cover, such as unreimbursed medical expenses, education and training, transportation (including wheelchair-accessible vehicles), insurance, computers, and modifications to the beneficiary’s home. It can also pay for “quality-of-life” needs, such as travel, entertainment, recreation and hobbies.

Keep in mind that the trust must not pay any money directly to the beneficiary. Rather, the funds should be distributed directly — on behalf of the beneficiary — to the third parties that provide goods and services to him or her.

Consider the trust’s language

To ensure that an SNT doesn’t disqualify the beneficiary from government benefits, it should prohibit distributions directly to the beneficiary and prohibit the trustee from paying for any support items covered by Medicaid or SSI. Some SNTs specify the types of supplemental expenses the trust should pay; others give the trustee sole discretion over nonsupport items.

Alert family and friends

After creating or revising your estate plan, discuss your intentions with your family. This is especially important if your plan includes an SNT. To ensure an SNT’s terms aren’t broken, family members and friends who want to make gifts or donations must do so directly to the trust and not to the loved one with special needs. Contact us with any questions regarding an SNT.

Information in this article was updated on May 17, 2024.

Intuit has sent notices to users of QuickBooks Desktop 2021 and older stating that the software will be unsupported as of May 31, 2024. Users can still upgrade to a newer supported version of QuickBooks but must do so before July 31, 2024. Intuit recently announced a stop sell of some Desktop products to new customers as of this date. Therefore, those currently using QuickBooks Desktop Pro or Premier 2021 and older should start planning now for the upcoming changes.

What you need to know

Users will need to upgrade to a supported ‘Plus’ version before July 31, 2024. The ‘Plus’ version is subscription based and charges an annual subscription. The subscription price includes an upgrade to the newest version of QuickBooks Pro or Premier Plus on an annual basis.

- Active desktop subscriptions support the three most recent years of QuickBooks Desktop software.
- Those already using QuickBooks Desktop Pro or Premier 2022 and newer are already paying this annual fee. When the 2025 version becomes available, users of QuickBooks Desktop Pro/Premier 2022 will need to upgrade to 2023, 2024, or 2025. This upgrade is included in the annual fee they are already paying.

After July 31, 2024, unsupported users will be unable to upgrade their current QuickBooks product.
If users do not upgrade their product before July 31, 2024, only QuickBooks Desktop Enterprise or QuickBooks Online will be available for purchase.

After July 31, 2024, customers without an active QuickBooks subscription will no longer be able to purchase QuickBooks Desktop Pro or Premier, QuickBooks Desktop Mac, and QuickBooks Desktop Enhanced Payroll.

This change will not impact the following QuickBooks subscribers:

Existing QuickBooks Desktop Plus and Desktop Payroll subscribers can continue to renew their subscriptions after July 31, 2024.
QuickBooks Desktop Enterprise products are also not impacted by this change, and customers can continue to purchase Enterprise subscriptions after July 31, 2024.
QuickBooks Desktop Pro Plus, Premier Plus, Mac Plus, and Desktop Enhanced Payroll will not be discontinued. This is a stop sell only for new purchases, not a discontinuation (sunset) of this product line. Existing subscribers of these products can continue to renew their subscriptions after July 31, 2024.

Intuit encourages those that are new to QuickBooks to consider QuickBooks Online. QuickBooks Online provides many great benefits over Desktop, such as remote access, enhanced flexibility, and real-time collaboration. Migration from QuickBooks Desktop to QuickBooks Online is easier than ever.

Beware of QuickBooks deals

If you see a deal for QuickBooks on eBay or elsewhere for a “three-year license,” be aware that all QuickBooks Desktop software is now subscription-based, and these marketing tactics are misleading. Some QuickBooks resellers offer very good pricing due to the volume discounts they receive, but there are also many scams online. Please proceed cautiously and only purchase QuickBooks from Intuit directly, Yeo & Yeo, or a trusted QuickBooks reseller.

Next steps

It’s vital to remain on a supported version of QuickBooks Desktop to maintain access to live technical support and to access any of the other Intuit add-on services that can be integrated with QuickBooks Desktop. This includes QuickBooks Desktop Payroll, QuickBooks Desktop Payments, and online bank feeds. Unsupported versions also won’t receive the latest critical security patches and updates.

For more information, refer to Intuit’s Frequently Asked Questions about the stop sell.

For assistance with evaluating the options or to upgrade your version of QuickBooks Desktop or move to QuickBooks Online, contact your Yeo & Yeo professional.

The State of Michigan has updated the filing requirement for those who qualify for the Eligible Manufacturing Personal Property Tax Exemption (Form 5278). Eligible Manufacturing Personal Property (EMPP) is defined as all personal property located on occupied real property if that personal property is predominately used in industrial processing or direct integrated support.

Beginning in 2024, parcels that received the EMPP exemption in the immediately preceding year carry forward the exemption in each subsequent year until the property becomes ineligible for the exemption. If the EMPP was exempt in the previous assessment year, a Combined Document (Form 5278) no longer needs to be filed for the EMPP to be exempt for the current assessment year. To reiterate, any parcel that received the EMPP exemption in 2023 is exempt in 2024. No Combined Document (Form 5278) should be filed in 2024 for a parcel that received the exemption in 2023.

A Combined Document (Form 5278) should not be filed to report additions or disposals on an EMPP parcel. Taxpayers will report the addition or removal of property from each of their EMPP parcels on their Essential Service Assessment (ESA) Statement filed electronically with the Department of Treasury through the Michigan Treasury Online (MTO) system.

Manufacturers must still file their ESA statement on MTO by August 15, 2024. There is a 3% late penalty for every month ESA is not paid.

Taxpayers are required to report any parcel that no longer qualifies for the EMPP exemption. A parcel may cease to qualify because the property no longer meets the definition of “eligible manufacturing personal property” or because the parcel has no value (e.g., all equipment has been removed, the parcel is subject to an expired IFT certificate, etc.). To report this change, Form 5277 must be filed by February 20, 2024.

For more information, refer to additional guidance related to the 2024 filing requirements from the Michigan Department of Treasury.

If you believe you are eligible for this exemption or have additional questions, please reach out to your tax advisor.

Businesses basically have two accounting methods to figure their taxable income: cash and accrual. Many businesses have a choice of which method to use for tax purposes. The cash method often provides significant tax benefits for eligible businesses, though some may be better off using the accrual method. Thus, it may be prudent for your business to evaluate its method to ensure that it’s the most advantageous approach.

Eligibility to use the cash method

“Small businesses,” as defined by the tax code, are generally eligible to use either cash or accrual accounting for tax purposes. (Some businesses may also be eligible to use various hybrid approaches.) Before the Tax Cuts and Jobs Act (TCJA) took effect, the gross receipts threshold for classification as a small business varied from $1 million to $10 million depending on how a business was structured, its industry and factors involving inventory.

The TCJA simplified the small business definition by establishing a single gross receipts threshold. It also increased the threshold to $25 million (adjusted for inflation), expanding the benefits of small business status to more companies. For 2024, a small business is one whose average annual gross receipts for the three-year period ending before the 2024 tax year are $30 million or less (up from $29 million for 2023).

In addition to eligibility for the cash accounting method, small businesses can benefit from advantages including:

Simplified inventory accounting,
An exemption from the uniform capitalization rules, and
An exemption from the business interest deduction limit.

Note: Some businesses are eligible for cash accounting even if their gross receipts are above the threshold, including S corporations, partnerships without C corporation partners, farming businesses and certain personal service corporations. Tax shelters are ineligible for the cash method, regardless of size.

Difference between the methods

For most businesses, the cash method provides significant tax advantages. Because cash-basis businesses recognize income when received and deduct expenses when they’re paid, they have greater control over the timing of income and deductions. For example, toward the end of the year, they can defer income by delaying invoices until the following tax year or shift deductions into the current year by accelerating the payment of expenses.

In contrast, accrual-basis businesses recognize income when earned and deduct expenses when incurred, without regard to the timing of cash receipts or payments. Therefore, they have little flexibility to time the recognition of income or expenses for tax purposes.

The cash method also provides cash flow benefits. Because income is taxed in the year received, it helps ensure that a business has the funds needed to pay its tax bill.

However, for some businesses, the accrual method may be preferable. For instance, if a company’s accrued income tends to be lower than its accrued expenses, the accrual method may result in lower tax liability. Other potential advantages of the accrual method include the ability to deduct year-end bonuses paid within the first 2½ months of the following tax year and the option to defer taxes on certain advance payments.

Switching methods

Even if your business would benefit by switching from the accrual method to the cash method, or vice versa, it’s important to consider the administrative costs involved in a change. For example, if your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles, it’s required to use the accrual method for financial reporting purposes. That doesn’t mean it can’t use the cash method for tax purposes, but it would require maintaining two sets of books.

Changing accounting methods for tax purposes also may require IRS approval. Contact us to learn more about each method.

Although financial statement fraud is the least common form of occupational theft (9% of incidents), it costs organizations the most in financial losses, according to the Association of Certified Fraud Examiners. Businesses defrauded by financial statement schemes had median losses of $593,000.

Early revenue recognition, which distorts profits and can artificially boost a business’s financial profile, is popular among financial statement fraud perpetrators. To comply with Generally Accepted Accounting Principles and preserve your company’s reputation, you must prevent such activities on your watch. It’s also important to be able to detect them in the financial statements of business partners, including acquisition targets and customers applying for credit.

Schemes and warning signs

Owners, executives and others with access to financial statements might recognize revenue improperly by delivering products early, recording revenue before full performance of a contract, backdating agreements or keeping the books open past the end of a period. Some early revenue recorders have shipped merchandise to undisclosed warehouses and recorded those shipments as sales. Or they’ve used bill-and-hold agreements where a customer agrees to buy merchandise, but the company holds the goods until shipment is requested.

Probably the most obvious marker for early revenue recognition is when a business records a large percentage of its revenue at the end of a given financial period. Significant transactions with unusual payment terms can also be a warning sign. When these or other red flags are unfurled, it’s time to call in a fraud investigator.

Fraud professionals typically compare revenue reported by month and by product line or business segment during the current period with that of earlier, comparable periods. They generally employ software designed to identify unusual or unexpected revenue relationships or transactions. Increasingly, they’re using AI tools to analyze what can be large volumes of data and suspicious patterns.

Examples of investigations

If, for example, professionals suspect merchandise has been billed before shipment, they’ll look for discrepancies between the quantity of goods shipped and quantity of goods billed. Professionals will also:

Examine sales orders, shipping documents and sales invoices,
Compare prices on invoices with published prices, and
Note any extensions on sales invoices.

What if professionals suspect merchandise was shipped prematurely? They compare the period’s shipping costs with those in earlier periods. Significantly higher costs could indicate an early revenue recognition scheme.

Fraud professionals also might sample sales invoices for the end of the period and the beginning of the next period to confirm the associated revenues are recorded when they should be. If phantom sales are suspected, reversed sales in subsequent periods and increased costs for off-site storage may provide evidence of fraud.

Preventing fraud

Early revenue recognition could be carried out by one person or several working in collusion. One of the best ways to prevent such schemes is to minimize executive stress. For example, don’t tie all of an employee’s compensation to achieving specific revenue targets. Strong oversight by your company’s board of directors and its finance committee is also critical. Contact us with questions and concerns.

In today’s uncertain marketplace, many businesses are stashing operating cash in their bank accounts, even though they might not have imminent plans to deploy their reserves. However, excessive “rainy day” funds could be an inefficient use of capital. Here’s a systematic approach to help estimate reasonable cash reserves and maximize your company’s return on long-term financial positions.

What’s the harm in stockpiling cash?

An extra cushion helps your business weather downturns or fund unexpected repairs and maintenance. But cash has a carrying cost — the difference between the return companies earn on their cash and the price they pay to obtain cash.

For instance, checking accounts often earn no (or very little) interest, and many savings accounts generate returns below 2%. If a company has cash reserves while simultaneously carrying debt on its balance sheet, such as equipment loans, mortgages and credit lines, it will pay higher interest rates on loans than it’s earning from the bank accounts. This spread represents the carrying cost of cash.

What’s the optimal amount of cash to keep in reserve?

Unfortunately, there’s no magic current ratio (current assets divided by current liabilities) or percentage of assets that’s right for every business. A lender’s liquidity covenants are just an educated guess about what’s reasonable.

However, you can analyze how your company’s liquidity metrics have changed over time and how they compare to industry benchmarks. Substantial increases in liquidity — or ratios well above industry norms — may signal an inefficient deployment of capital.

Prospective financial reports for the next 12 to 18 months can be developed to evaluate whether your company’s cash reserves are too high. For example, a monthly forecasted balance sheet might estimate expected seasonal ebbs and flows in the cash cycle. Or a projection of the worst-case scenario, based on certain what-if assumptions, might be used to establish a company’s optimal cash balance. Forecasts and projections should take into account a business’s future cash flows, including capital expenditures, debt maturities and working capital requirements.

Formal financial forecasts and projections provide a method for building up healthy cash reserves. This is much better than relying on gut instinct. You also should compare actual performance to your forecasts and projections — and adjust them, if necessary.

What’s the highest and best use of excess cash?

After prospective financial reports and industry benchmarks have been used to determine a company’s optimal cash balance, management needs to find ways to reinvest its cash surplus. For example, you might consider repurposing the surplus to:

Invest in marketable securities, such as mutual funds or diversified stock-and-bond portfolios,
Repay debt to lower the carrying cost of cash reserves,
Repurchase stock, especially when minority shareholders routinely challenge management’s decisions, or
Acquire a struggling competitor or its assets.

With proper due diligence, these strategies could allow your business to reap a higher return over the long run than leaving funds in a checking or savings account.

We can help

Contact us for help creating formal financial forecasts and projections and evaluating benchmarking data to devise sound cash management strategies. We can guide you toward more efficient use of capital, while reserving enough cash on hand to meet your business’s short-term operating needs.

Most anyone who’s ever put together a resume would probably tell you the easiest part is the very end. That’s where you put your educational degrees. However, thanks to a trend sweeping many industries, that part may be getting even easier. Why? Because many hiring organizations are no longer looking at education at all.

It’s called “skills-based hiring.” Under this approach, employers focus on candidates’ verifiable abilities, knowledge and experience applicable to some open positions rather than on applicants’ educational backgrounds.

Recent surveys

In an August 2023 post on its Talent Blog, social media giant LinkedIn reported that “those with paid Recruiter licenses on LinkedIn tend to search for candidates by their skills five times more often than they search for candidates by their degrees.” In addition, a multilingual analysis of job posts on the site revealed that many employers are more often advertising job roles unaccompanied by professional degree requirements.

Another report, conducted by student-focused data analysis firm Intelligent.com and published in November 2023, found that a perhaps astounding 45% of the 800 U.S. companies surveyed said they were planning to eliminate bachelor’s degree requirements for some of their positions this year. The survey also found that 55% of responding businesses had already removed degree requirements for some positions last year, particularly entry- and mid-level jobs.

Trend drivers

The skills-based hiring trend may catch many people off-guard — especially those who grew up being told, “Go to college and you’ll get a better job!” Its roots may lie in changing societal attitudes toward university education. The escalating price tag and high anxiety associated with student debt have many younger people rethinking whether they want to attend traditional colleges, and employers seem to be responding.

There are other reasons as well. Proponents argue that skills-based hiring reduces bias, strengthens objectivity and boosts diversity. They say job candidates are more likely to be judged on the skills they bring to the table rather than the prestigiousness of the institution of higher learning they attended.

If you’re looking for more practical reasons to follow the approach, there are those as well. Focusing on skills rather than education may result in better “job matching” — that is, aligning job listings with qualified applicants. Theoretically, and in many cases realistically, this reduces time to hire as well as boosts engagement and retention. Employees are hired to do what they do best rather than based on educational backgrounds that may not fit with what the hiring organization really needs.

No panacea

To be clear, skills-based hiring shouldn’t be regarded as a panacea that will cure any and all employment ills. Every organization, including yours, needs to develop a hiring strategy best suited to its mission, operations and job market. Nonetheless, this is a trend worth keeping an eye on. Our firm can help you measure and analyze your hiring and labor costs.

The Department of Labor (DOL) has announced adjustments to civil monetary penalties for certain failures associated with qualified retirement plans. These adjustments are made annually to account for inflation and ensure that penalties remain effective deterrents. As employers and plan sponsors, staying informed about ERISA compliance and potential penalties is crucial.

Penalty Adjustments for 2024

Failure to furnish or maintain records – $37 per participant.
Failure to file Form 5500 – $2,670 per day.
Failure to notify participants of certain Internal Revenue Code benefit restrictions or to provide an automatic contribution arrangement notice – $2,112 per day.
Failure to provide participants either a blackout notice or a notice of the right to divest employer securities – $169 per participant per day.
Failure to provide a Summary of Benefits Coverage – $1,406.
Failure to provide materials requested by the DOL – $190 per day, not to exceed $1,906 per request.

At Yeo & Yeo CPAs & Advisors, we understand the complexities of managing employee benefit plans. Our dedicated Employee Benefit Plan Audit Services Group comprises year-round, full-time specialists committed to understanding your unique needs. Partner with Yeo & Yeo to navigate the complexities of employee benefit plan compliance. Contact us today for a stress-free audit experience and knowledgeable guidance on your benefit plans.

A complete list of ERISA violations subject to penalty is available on the DOL website.

Typically, an estate plan includes accommodations for your spouse, children, grandchildren and even future generations. But some members of the family can be overlooked, such as your parents or in-laws. Yet the older generation may also need your financial assistance.

How can you best handle the financial affairs of parents in the later stages of life? Incorporate their needs into your own estate plan while tweaking, when necessary, the arrangements they’ve already made. Here are five critical steps:

Open the lines of communication. Before going any further, have an honest discussion with your elderly relatives, as well as other family members who may be involved, such as your siblings. Make sure you understand your parents’ wishes and explain the objectives you hope to accomplish. Understandably, they may be hesitant or too proud to accept your help or provide information, so some arm twisting may be required.

Identify key contacts. Just like you’ve done for yourself, compile the names and addresses of professionals important to your parents’ finances and medical conditions. These may include stockbrokers, financial advisors, attorneys, CPAs, insurance agents and physicians.

List and value their assets. If you’re going to be able to manage the financial affairs of your parents, having knowledge of their assets is vital. It would be wise to keep a list of their investment holdings, IRA and retirement plan accounts, and life insurance policies, including current balances and account numbers. Be sure to add in projections for Social Security benefits. When all is said and done, don’t be surprised if their net worth is higher or lower than what you (or they) initially thought. You can use this information to formulate the appropriate estate planning techniques.

Execute documents. The next step is to develop a plan incorporating several legal documents. If your parents have already created one or more of these documents, they may need to be revised or coordinated with new ones. Some elements commonly included in an estate plan are:

Wills. Your parents’ wills control the disposition of their possessions, such as cars and jewelry, and tie up other loose ends. (Of course, jointly owned property with rights of survivorship automatically passes to the survivor.) Notably, a will also establishes the executor of your parents’ estates. If you’re the one providing financial assistance, you’re probably the optimal choice.
Living trusts. A living trust can supplement a will by providing for the disposition of selected assets. Unlike a will, a living trust doesn’t have to go through probate, so this might save time and money, while avoiding public disclosure.
Powers of attorney. This document authorizes someone to legally act on behalf of another person. With a durable power of attorney, the most common version, the authorization continues after the person is disabled. This enables you to better handle your parents’ affairs.
Living wills or advance medical directives. These documents provide guidance for end-of-life decisions. Make sure that your parents’ physicians have copies so they can act according to your parents’ wishes.

Make monetary gifts. If you decide the best approach for helping your parents is to give them monetary gifts, it’s relatively easy to avoid gift tax liability. Under the annual gift tax exclusion, you can give each recipient up to $18,000 in 2024 without paying any gift tax. Any excess may be sheltered by the generous $13.61 million gift and estate tax exemption amount in 2024. Contact us with any questions.

Kellen Riker was recently promoted to manager. Let’s learn about Kellen and his perspective on his career, working with clients, and what makes being an accountant fun.

What are your roles in the firm?

As a manager in the Assurance Service Line, I oversee assurance engagements, including communicating with the clients and training internal staff. I am a member of the Government Services Group and am involved in developing processes and ensuring our team is meeting compliance requirements. I am also the Yeo Young Professionals service chair for the Yeo & Yeo Foundation board, helping evaluate donation requests and coordinate the 2024 firm-wide service project.

Tell us about your career path.

I joined Yeo & Yeo in 2018 as a staff accountant in the Flint office. From there, I learned the ins and outs of the Assurance Service Line while obtaining my CPA license. Over the years, I have become more involved in the firm, joining the Foundation board, joining the Government Services Group, and serving as the Yeo Young Professionals president. Through these experiences and the mentorship of my managers, I’ve learned leadership skills that benefit both my clients and my colleagues.

What do you enjoy most about your career?

The thing I enjoy most about my career is the people I work with and the people I work for. I’ve developed great relationships with the clients I work with each year. I also collaborate with many people in different offices across the firm, which has helped me gain new perspectives. I truly feel that the people I work with are my friends and not just my coworkers.

What do you enjoy most about working with clients?

I enjoy getting to know each client on a personal level. As an auditor, we work with many of the same clients each year, which gives us the opportunity to really learn about who our clients are as individuals. I always look forward to catching up with clients, asking them how their families are or how their big vacations went. It’s very rewarding to know that I am delivering a great service and experience to each client and that I’m helping them achieve their goals.

What makes being an accountant fun?

There is a lot more to auditing than just performing an audit. I really enjoy helping clients achieve their goals above and beyond simply delivering the completed audit. Our job as accountants is to help our clients succeed. Sometimes, that includes providing consulting services, implementing a new standard, or offering training. Helping clients develop their skills and improve their expertise is fun and rewarding.

What do you enjoy doing outside of the office?

Some of my biggest hobbies and interests are reading books, watching hockey, playing video games, and spending time with my family.

What are some of the things you do to continuously learn and grow?

My favorite way to learn and grow is to listen to others’ input on topics and processes. When I can gain an understanding of another person’s thought process, it broadens my perspectives and helps me come up with new ideas.

For businesses, and people for that matter, the beginning of the calendar year can be a bit of a grind. The holidays have passed, summer vacations are relatively far off and everyone is trying to build momentum for a strong, healthy year.

Amongst all the nose-to-the-grindstone stick-to-itiveness, however, you and your leadership team shouldn’t lose sight of strategic planning. Your competitors probably haven’t, and the business landscape is always shifting in ways large and small. If you’ve let strategic planning slide a bit recently, here are some ways to reinvigorate it.

Push back against procrastination

Ideally, most companies should engage in an active strategic planning initiative at least once a year. This would involve doing research and holding meetings that eventually result in actionable, measurable goals.

However, some businesses may get so caught up in day-to-day operations that strategic planning goes by the wayside. Sometimes, this is a positive sign. Perhaps the company is so busy and profitable that it must focus on maximizing the opportunities at hand.

But it can be dangerous as well. A sudden market shift or disruptive competitor may leave the business flat-footed. Generally, companies shouldn’t let more than three years pass without productively engaging in strategic planning.

Go to your happy place

Because strategic planning is all about the big picture rather than the day-to-day, the process tends to work best when you put the people involved in a fresh setting. This is why the company retreat has long been an iconic undertaking, often depicted in movies and TV shows.

Granted, there is the potential for excessive spending and counterproductive distractions when organizing and holding one of these events. But if planned carefully and undertaken mindfully, getting your strategic planning team out of the office, or away from their computer screens at home, may pay off.

Engage an outside facilitator

Intuitively, it may seem like a business owner or CEO should lead a strategic planning session. And this can certainly be a cost-effective approach. But the objectivity of an outside professional may be worth investing in.

First, a facilitator may be able to better create a “there are no bad ideas” environment. Team members are often more willing to speak freely when they’re not directly addressing the owner or chief executive of the company. Plus, experienced facilitators are usually good at “working the room” (making people feel at ease), as well as adhering to a productive agenda.

Devise an action plan

Strategic planning should never be all talk and no action. Typically, the first session will review the business’s mission (what it does), vision (where it’s going), current financial results, and perhaps some of its recent notable successes and setbacks. It’s critical, however, to be results oriented. This means:

Setting several clearly worded goals,
Devising reasonable strategies for pursuing those goals, and
Identifying the specific objectives that will enable you to accomplish the goals.

One way to ease the pressure of strategic planning is to not try to do everything at once. If you can accomplish the three points above in one session, schedule a follow-up meeting to devise an action plan with a timeline and assigned responsibilities. That plan can then be formally approved by business ownership.

Helpful voices

One last point: Don’t restrict strategic planning to only internal voices. Your professional advisors can also lend their expertise to the process, whether by attending a session or reviewing an action plan. For help with the financial side of strategic planning, contact us.

If your business has significant inventory on its balance sheet, it can be costly. The carrying costs of inventory include warehousing, salaries, insurance, taxes, and transportation, as well as depreciation and shrinkage. Plus, tying up working capital in inventory detracts from other strategic investment opportunities.

Reducing these costs can help improve a company’s profits and boost operating cash flow. Here are two alternative inventory management systems to consider.

1. JIT method

Just-in-time (JIT) inventory management involves planning shipments of raw materials to arrive just before they’re required. This saves money in inventory costs by reducing the amount of inventory on hand. It also increases production responsiveness and flexibility. Elements of JIT management include:

Smaller lot sizes. This allows your company to be more flexible and meet changes in market demand. It can also decrease inventory cycle time, lead times and pipeline inventory. Because lot sizes are smaller, companies that use the JIT method can achieve a consistent workload on the production system.

Tighter set-up times. By reducing set-up times and the associated costs, you can afford to produce smaller lot sizes. Also, if your company is inefficient on machine setups, you’ll likely change products less often.

Flexibility. A flexible workforce can quickly reassign tasks during bottlenecks or unplanned spikes in demand.

Close supplier relationships. Suppliers must provide frequent, on-time deliveries of high-quality materials. So, close ties with them are vital to the JIT system. Long-term relationships with suppliers promote loyalty and improved overall quality.

Regular maintenance schedules. For companies with a high degree of automation, preventive maintenance is critical. Unplanned downtime can be disruptive and costly.

Quality control. JIT systems are designed to control quality at the source, rather than later in the process. For that reason, production workers are responsible for their own work, and if a defective unit is discovered, it’s returned to the area where the defect occurred. This makes employees accountable and empowers them to produce higher-quality products.

2. Accurate response method

Accurate response inventory management systems focus on forecasting, planning and production. The underlying premise of accurate response focuses on flexible processes and shorter cycle times to better match supply with demand. By speeding up the supply chain process, management can delay decisions regarding raw materials, obtain more market information and better determine production requirements.

This inventory management method incorporates the following key elements:

Overall performance. Accurate response measures the cost per unit of stockouts and markdowns. Then it factors this information into the overall evaluation of the company’s performance. Let’s say your company can’t meet demand. The lost sales would be factored into the overall costs, which would then justify increasing production to obtain and maintain customers.

Predictable and unpredictable products. Predictable products can be made further in advance to “reserve” capacity during the selling season for unpredictable products. Then your company won’t have to accumulate and pay for large inventories.

For more information

Incorporating JIT and accurate response techniques can dramatically improve your company’s efficiency. Lowering inventory levels cuts operating capital needs and gives you a competitive edge. Reducing the expenditures for warehouses, employees and equipment produces a stronger balance sheet and income statement and improves cash flow. Contact us discuss whether it makes sense to implement these systems at your business.

When launching a small business, many entrepreneurs start out as sole proprietors. If you’re launching a venture as a sole proprietorship, you need to understand the tax issues involved. Here are nine considerations:

1. You may qualify for the pass-through deduction. To the extent your business generates qualified business income, you’re currently eligible to claim the 20% pass-through deduction, subject to limitations. The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction. Be aware that this deduction is only available through 2025, unless Congress acts to extend it.

2. You report income and expenses on Schedule C of Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses from activities in which you weren’t “at risk.”

3. You must pay self-employment taxes. For 2024, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment up to $168,600, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separate returns and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

4. You generally must make quarterly estimated tax payments. For 2024, these are due April 15, June 17, September 16 and January 15, 2025.

5. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.

6. You may be able to deduct home office expenses. If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable part of certain expenses, including mortgage interest or rent, insurance, utilities, repairs, maintenance and depreciation. You may also be able to deduct travel expenses from a home office to another work location.

7. You should keep complete records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and home office expenses, require extra attention because they’re subject to special recordkeeping rules or deductibility limits.

8. You have more responsibilities if you hire employees. For example, you need to get a taxpayer identification number and withhold and pay over payroll taxes.

9. You should consider establishing a qualified retirement plan. The advantages are that amounts contributed to it are deductible at the time of the contributions and aren’t taken into income until they’re withdrawn. You might consider a SEP plan, which requires minimal paperwork. A SIMPLE plan is also available to sole proprietors and offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.

Turn to us

Contact us if you want additional information regarding the tax aspects of your business, or if you have questions about reporting or recordkeeping requirements.

Many employers rightly proclaim that their employees are their most valuable assets. If this holds true for your organization, it stands to reason that paying those employees consistently and accurately is among the most important things you must do.

Unfortunately, payroll errors plague many employers. Among the biggest dangers of inaccurate payroll administration is that your organization may fall out of compliance with its payroll tax obligations.

Failure to properly withhold or deposit

As you’re no doubt aware, employers are obligated to properly withhold income tax, Social Security and Medicare contributions from employees’ pay, as well as match the Social Security and Medicare contributions.

Setup errors involving Form W-4, “Employee’s Withholding Certificate,” may occur that compromise this process. Residential address change mistakes and visa status changes can adversely affect withholding as well.

Perhaps the most dangerous mistake is failing to timely deposit withheld income taxes, Social Security and Medicare contributions, and employer matching amounts. IRS penalties accrue quickly because they increase as time goes by. That is:

If a deposit is one to five calendar days late, the penalty is 2% of the unpaid deposit,
If a deposit is six to 15 calendar days late, the penalty is 5% of the unpaid deposit, and
If a deposit is more than 15 calendar days late, the penalty is 10% of the unpaid deposit.

The penalty amount may be 15% if more than 10 calendar days elapse after the date of the first notice or letter from the IRS. Alternatively, a 15% penalty may apply on the day a notice or letter for immediate payment is received.

If the IRS can make the case that a failure to deposit payroll taxes was willful, a 100% penalty may apply. And such penalties can be levied personally against all responsible individuals in an organization.

Failure to include items in taxable income

Remember, salaries or wages aren’t always the only includable items in employees’ taxable incomes. Employers must also include the value of awards, bonuses and, as required in certain cases, fringe benefits.

Failing to withhold sufficient amounts from employees’ total reportable income can also result in noncompliance with IRS rules. In turn, this could lead to penalties for failing to properly withhold or deposit payroll taxes. What’s more, the employer could be subject to information return penalties for incorrect Forms W-2, “Wage and Tax Statement.”

A multifaceted threat

Make no mistake, payroll errors are expensive — not only because of IRS penalties but also because of the resources you must expend to correct them.

Perhaps worst of all, they hurt your employer brand. Many employees will put up with only a few mistakes, if any, before they jump ship to another job. Contact us for help identifying all your payroll costs and assistance catching costly errors.