Now is a great, if not extraordinary, time to start (or to continue operating) a small business, or to shift from W-2 (employee) status to 1099 (independent contractor) status. The new small business tax breaks in effect beginning 1/1/18 are almost unbelievable.
Even doctors, accountants, attorneys and other “professionals”, (who typically pay more tax than other small business owners), with married household NET income at or below $315,000, will qualify for ALL of the most lucrative new tax breaks ($157,500 for single filers). And ALL small business owners, regardless of net income thresholds or “professional” status, will enjoy the new top pass-through tax bracket of 25% on all business income.
Although higher earners will continue to be subject to Alternative Minimum Tax (AMT), AMT income thresholds are significantly higher under the new law, therefore, for most, AMT should generate much less of a tax burden than in prior years.
For a small business owner to truly take advantage of current tax law, he or she should consider filing taxes as an S-Corp. Georgia companies (as in most states) registered as an LLC, PC, or other corporate structure, can maintain their existing corporate status and, at any time, elect to file taxes as an S-Corp. Unless you have serious legal tax problems, the S-Corp election is almost always allowed by the IRS.
Filing as an S-Corp can significantly reduce self-employment tax (SE tax). SE tax is (essentially) social security and Medicare tax paid by a small business owner when filing his or her 1040 (annual income taxes). When a small business owner prepares his or her personal income taxes, SE is calculated automatically on 100% of business net income, and is nearly impossible to avoid. However, S-Corp owners DO NOT pay SE tax; instead, S-Corp’s typically pay a significantly reduced social security and Medicare tax. One caveat to filing taxes as an S-Corp: since S-Corp operating and accounting/tax prep expenses are significantly higher than for non-S-Corps, Doorstep Mobile Tax suggests that all of our clients delay S-Corp tax status until net business income (income after expenses) is anticipated to be $17,000 – $20,000, or higher for the current year. Note that higher income = greater S-Corp tax savings; therefore, when net business income exceeds $20K – $30K, not filing taxes as an S-Corp could be very costly.
Caution: Be aware that many other factors, such as your industry (what your company does), and owner’s profession, are extremely important factors that must be considered when determining the optimum time to file taxes as an S-Corp. You can, however, request S-Corp status at any time after your business has started, so no worries for existing business owners who wish to take advantage when the time is right.
Unfortunately, the IRS rarely allows retro-S-Corp status to cover prior periods, with the exception of an approximate 5 month lookback (see example below):
Example: In May 2018 you determine that you want to qualify all business income earned since 1/1/18 as S-Corp income. S-Corp status requests filed in May 2018 or earlier are almost always retro-approved to 1/1/18 (unless you request a later S-Corp start date). Although there is no “true” S-Corp election cutoff date, S-Corp status requests filed in June 2018 or after would risk being assigned a much later S-Corp start date (sometime after 1/1/18). In such a case you’d pay SE tax on all income earned prior to your S-Corp start date (a 2018 start date that the IRS would randomly assign), and file a separate S-Corp tax return for business income earned after the assigned S-Corp start date.
Regardless of the caveats, startup expenses and learning curve (i.e. headaches), electing optimal S-Corp status, combined with the tax new laws, is a home run for almost all small business owners!
Free services provided by your business, free passes and complementary service i.o.u’s should NEVER be reported in your books as a “discount” to revenue, nor should they ever be reported as an “expense”. Doing either is an IRS auditor’s wet dream. However, if you want to simply track the value of your free services, coupon redemption or free passes given and redeemed, keep reading, there is a simple solution. Reporting free services as expenses or revenue discounts would illegally reduce net income (net taxable income). That would be great if you could get away with it, but under audit you’d lose. If you give away free goods, or if free goods or incidental items are included as part of a free service, you’d expense the goods at cost or LCM (and reduce your inventory accordingly), but, again, there would be no expense or revenue discount entry for the actual free service – never, ever.
To track service giveaways, create a liability account called, for example, “Free Passes Given” and a second liability account (to be used as a contra liability) called “Free Pass Redeemed”. You can name the accounts anything that you like, but you must ensure that both are categorized as liability accounts. At the time when you begin providing a free service or you issue free passes or i.o.u.’s for free services, you would credit the “Free Passes Given” account and debit the “Free Pass Redeemed” account for the standard $ amount that you would have charged for each service unit or free pass given. When the service is completed, or when a free pass is redeemed, you’d debit “Free Passes Given” and credit “Free Pass Redeemed”.
Example (Free Passes): A skating rink sponsors skating races and gives away a total of 20 free entry passes to the 1st, 2nd and 3rd place finishers. Normally the rink would charge a $3 entry fee per person (per pass). To account for the free passes when given to the racers you would credit $60 (3 x 20) to “Free Passes Given” and debit $60 to “Free Pass Redeemed”. At a later date, when one of the racers redeems a free pass, you’d credit $3 to “Free Pass Redeemed” and debit $3 to “Free Passes Given”. At any time the credit balance of “Free Passes Given” would be the amount of outstanding passes not yet redeemed; the credit balance of “Free Pass Redeemed” would be the total value of passes that have been redeemed.
If you provide a free service and do not issue free passes or service i.o.u.’s, but you want to track your time/forgone revenue for free services, you’d use the same method as provided in the magazine clipper coupon example above; to calculate the correct credit and debit entries, you’d simply multiply the number of complementary hours worked X your hourly rate and and use the same method for reporting flat-fee based services.
You may wonder, why use a liability account to track free services? Two good reasons are as follows: 1) The passes (or agreement to provide a free service) are liabilities of sorts (you are liable to provide the service promised). 2) Use of a liability and contra liability account will ensure that, at any time, you will have an accurate and timely record of all passes issued and of all passes redeemed, without ever accidentally making confusing entries into your asset or equity accounts, or falsifying your balance sheet, income statement or statement of cash flows.
If a customer present you with a discount coupon, you would NOT use the above method. You would complete the following:
Example (coupon redemption): Bob owns a carpet care business. For a job that he just completed, he would normally charge $200; however, the customer presents a $50 discount coupon that she clipped from a magazine ad. Bob would report a $200 (cr) in his normal revenue account and $200 (dr) in his normal receivable account; $50 (dr) in a contra-revenue account called “Coupons Redeemed”, a $50 (cr) to a contra-receivable account called “Coupon Discounts”. When the customer pays $150 for the discounted service, Bob would record a $50 (dr) to the contra receivable account, and $150 to his bank account (dr). At any time, including at year end when preparing taxes, the debit balance in the “Coupon Redemption” account would be total discounts provided to-date.
Note that in a Nevada, Texas, Washington and Ohio, state income tax is calculated as a small % of gross income; all other states and the IRS tax net income (after expenses). In these four states, and states that have franchise tax, state law may require that you include all free services as part of gross revenue for calculating these taxes. In such cases, review the state’s laws and, if free services are required to be included in gross income, it would be prudent to use the coupon redemption (outlined above) for reporting both free services AND discount coupon redemption.
This should do it. Any further questions contact Troy Bryant, Doorstep Mobile Tax, LLC (Atlanta, GA Metro). email@example.com or 404.786.6309.
By: Troy Bryant, CEO, Doorstep Mobile Tax
Likely Effects of a Higher Minimum Wage:
1. More productive workers will keep their job; poor performers will lose jobs:
Employers mandated with a higher minimum wage will most certainly move quickly to dismiss underperforming employees and assign additional tasks to more motivated workers. Some employers may elect to pay a few hours of overtime to a more select workforce and eliminate other workers; while in companies where a substantial number of minimum wage employees currently enjoy overtime, employers may opt to hire additional workers, eliminate overtime and potentially reduce full-time status for others. Regardless of the method used, aggressive employers will push back against the new wage laws, crunch numbers and adjust as necessary to optimize employee cost. Many minimum wage workers, likely most of them, will suffer the consequences. Since higher minimum wages will most certainly affect a sudden decrease in job openings, those who keep their jobs will be forced to succumb to employers’ stricter demands or face potential job loss.
2. Although thinning out his or her employee base, reducing overtime or other direct employee cost adjustments will help to offset the effect of higher minimum wages, head count adjustments alone will not fully reduce the sting of a higher minimum wage. As a result, technology innovators, from fast food to janitorial, retail and manufacturing suppliers, will aggressively begin to offer new innovations for automating tasks currently performed by minimum wage workers. Currently the threshold for some of these technologies may not be cost effective for a business owner to implement. However, with the proposed wage hike, these new technologies may be more cost effective than paying a much higher minimum wage.
Note: An increase from $7.25/hour to only $12/hour for a 40 hour work week, per employee, plus the increase in employer FICA tax matching would increase an employers WEEKLY per employee cost by approximately $220 (would be slightly higher or lower based on employers’ State). Wow, imagine how much of an immediate negative impact this would have on a business with low gross margins and a significant number of minimum wage employees!
3. Some businesses would likely move from a higher minimum wage state into a lower minimum wage state, or move operations to another country. This would not likely be a viable option for the fast food and other retail industries. However, although the minimum wage argument has focused on “fast food” and “retail” workers, a significant number of minimum wage workers do not work in fast food or retail; therefore, moving operations would likely upset the economies of states adopting higher wages, and provide a boost for states that maintain a lower minimum wage.
4. Skilled and semi-skilled workers currently earning the equivalent of the proposed minimum wage (or wages near to the proposed increased minimum wage) will become disgruntled and demand higher pay, further affecting an employer’s move to offset the sudden new expense by reducing head count and further implementation of new technology to replace workers.
5. Currently, minimum wage workers at $7.25/hour earn about $14,500 per year gross salary ($29,000 for married couples) before deductions for social security and medicare, based on a 40 hour work week and 50 weeks worked per year). Current workers earning at or near this amount receive substantial “earned income” and “child tax credits”, which means that they pay NO income tax; the tax credits often total near $10,000 per couple, per year (and approach $6,000 for single parents). Although these “Credits” are reported on the tax return as a “Refund”, in fact this is free money given by the government to low wage workers. As a direct result of their “low wage” status, these workers are also eligible for food stamps, subsidized housing, SNAP Cash (free $300/mo cash), free healthcare, free or deeply discounted education costs and other benefits. By earning higher wages many will no longer qualify for substantial tax credits and other freebies. As well, many will likely owe a small amount of income tax.
6. Prices for goods and services will increase. Although a substantial minimum wage increase may result in increased consumer prices, it is unlikely that such an increase will be significant, as doing so will be perceived as “to risky” for most business owners – why panic and risk losing customers to competitors who do not increase their prices? Therefore, it is likely that the first move by most business owners will be to cut costs, and not to pass on the added wage expense to their customers.
Conclusion: Initially increasing minimum wage for unskilled workers will have significantly negative consequences for both workers and employers with little impact on consumer prices. However, potential loss of low-wage jobs, tax credits and other incentives for minimum wage workers, may act as a wakeup call for the unskilled work force, hopefully prompting an enrollment boost at vocational schools and colleges.
Should the impact of higher minimum wages reduce the number of available minimum wage job openings, unskilled workers seeking higher-level vocational training or a college degree, over the long term, should have a positive effect on the overall economy… but don’t count on it! Lazy is as lazy does! It is more likely that policy makers will adjust tax credits and other freebies so that, in the end, those who remain employed will enjoy no real increase or decrease in his or her standard of living. Of course, fewer minimum wage workers will most surely be employed.
Likely winners from increased minimum wages: technology innovators (startups), business strategists and the government.
Likely losers from increased minimum wages: many (but not all) low-wage and semi-skilled workers. Regardless, such a change will be a paradigm shift.
Any further questions contact Troy Bryant, Doorstep Mobile Tax, LLC (Atlanta, GA Metro). firstname.lastname@example.org or 404.786.6309.