We have all read the headlines; “IRS receives $80B to hire 87,000 new agents over the next decade”. Does this mean increased audits? Probably, who knows for certain, but time will tell.
Our role is to help keep you in compliance. Tax avoidance and tax evasive are radically different. Tax avoidance helps lowers your tax bill by PROPERLY structuring transactions, so you reap the benefits within the guidelines of the law. There are times you will feel like the poodle jumping through the ring of fire, but we need to properly navigate the tax landscape to ensure we are entitled to the deductions to lower your tax bill. Tax Evasion on the other hand is illegal and is an attempt to reduce your tax bill through underreporting, concealment, deceit, or subterfuge. Tax evasion gets you 3 meals and a cot.
Records to Keep to Allow Deductions in An Audit
1. Payroll Related Forms (Form W4/I9 and W9)
Your business has grown, and you need to hire people to help service your customer base. Welcome to one of the most rewarding and challenging phases of your business. From a tax law and record keeping perspective, this is probably the most complex issue you will face.
a. I hired someone – now what?
- i. If an employee, did they fill out all the required forms (W4 Employee Withholding, I9 Immigration Right to Work, and any state required withholding forms) Make sure the i9 is the most current form and properly completed. A missing or improperly completed I9 can have penalties of $2,500 to $10,000 per form.
- ii. Know your state laws – does your state mandate sick leave, vacation, retirement benefits, minimum wage rates, overtime rules and pay frequency?
- iii. Make certain you abiding by the classification rules for Exempt and Non-Exempt employees. This simply means exempt from overtime, IE a Salaried position. This does not mean you can make all positions in your company salary to avoid overtime. Here is a great article from the FLSA.
b. Are they an employee or independent contractor?
- i. Improperly classifying an employee as a contractor can have detrimental impacts to your business. IRS explains in this article.
- ii. Typical rule is if they provide this service to the general public. If so, they may be a contractor. If your admin assistant cleans your office and does not offer that service to the general public, then those hours are paid as an employee and not a contract labor and could be subject to overtime rules.
- iii. If the person is a true independent contractor, make sure they complete form W9 so that you may issue a 1099 form is applicable.
2. Reasonable Compensation
a. This is still one of the hottest audit buttons the IRS will push. If you are not taking reasonable compensation in your S Corporation and you are taking out any other form of money (loan repayment, dividends, certain benefits), then IRS in an audit can determine what your reasonable compensation should be based on your job duties. For example, if you own a landscaping business, think about the hourly wage you would pay someone to operate the mower versus the amount you would pay someone to manage the business. They are two different rates. If the majority of your time is spent operating machinery, your salary might be slightly lower than if all of your time was spent at the CEO level running the company.
Our firm offers Reasonable Compensation audits. This process takes several hours of discussion with the owner to determine your job functions and applies these functions to the average national rates of pay. The software we will be using is the same software that IRS will use in a reasonable compensation audit. Please contact us with any questions or if you need assistance.
We as preparers are responsible for the information on the return and have very large penalties for failing to comply with the law. We know our advice is not always what you want to hear, but sometimes it is what you need to hear to keep you safe in an audit and keep more of your money in your pocket.
Thanks for allowing us to help guide you through the complicated rules of owning a business. Contact us today to schedule a meeting with our tax experts.