RETAIL: The Economic Bailout For Salons

The National Cosmetology Association recently posted this article on retail. They are challenging salons to look at retail in a new way. The article states, "The difference between successful salons and those who continue to struggle is, without a doubt, the high profits associated with retail sales."

This summarizes what Kopsa Otte has been saying all along. In case you missed the article, here's the link: http://www.ncacares.org/retail/.

FIVE TAX FACTS ABOUT SUMMERTIME CHILD CARE EXPENSES

Many of you who work must arrange for care of their children under 13 years of age during the school vacation.

Here are five facts about tax credits available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year.

1. The cost of day camp can count as an expense towards the child and dependent care credit.

2. Expenses for overnight camps do not qualify.

3. If your childcare provider is a sitter at your home or a daycare facility outside the home, you'll get some tax benefit if you qualify for the credit.

4. The actual credit can be up to 35 percent of your qualifying expenses but normally it amounts to about 20 percent. The percent depends on your income.

5. The maximum is $3,000 of the unreimbursed expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals to figure the credit.

QUESTION ON LABOR LAWS

Larry, I own a small business and I'm confused about labor laws when it comes to hiring minors. Could you tell me what I qualify for, and what I can and can't do?

Les

Les, we are not labor attorneys so the first thing I would recommend is that you talk with your attorney. I can however, give you the basic rules.

The U.S. Department of Labor says that a child's most important job is to get an education. Therefore, there are limits on the hours and times during the day that a minor can work. Here are some of the basics:

• Adolescents aged 14 & 15 can only work up to three hours on school days and eight hours a day on holidays and weekends.
• They cannot work more than 18 hours per week while school is in session.
• They cannot start work before 7am, or work past 7pm.
• During the summer, they can work until 9pm.
• There are no hour restrictions on 16 & 17 year olds because most state laws only require school attendance through the age of 16.

This is just the tip of the ice burg. There is certain equipment that children are not allowed to handle. State law may also be more rigorous than Federal law in certain areas. This is why it is important to talk with your attorney.

I hope this information is helpful.

Larry Kopsa CPA

QUOTE OF THE WEEK

Enjoy the little things, for one day

you may look back and realize

they were the big things.

Robert Brault

MORE INFORMATION ON CASH FOR CLUNKERS

I read your post about getting cash for my old vehicle. Can you give me any more information on that?

Adam

Adam, I have attached the information that I have on what they call Cash for Clunkers. Normally I don’t like to post long answers, so here is a link to the whole enchilada on our website: "Cash For Clunkers" Legislation in Effect.

NATIONAL DEBT ROAD TRIP

As you know, I'm very concerned about government spending. The following YouTube video explains the National Debt in terms we all can understand.

Check it out by clicking on: National Debt Road Trip.

MINIMUM WAGE INCREASE

Just in case you missed it, the Federal Minimum Wage Increase to $7.25/hour went into effect on Friday, July 24th.

Here is a link to a U.S. Department of Labor article that you may want to read: Federal Minimum Wage Increase.

ADULTERY AND TAXES

I am headed out this week on vacation. After discussing the following with my wife Maggie, she said that I think about taxes way too much and it is time to take a break.

Anyway, I had read about Senator Ensigns affair and the payment that his mistress received from the senator's parents. (I had to wonder if my parents would have helped fund an affair for me. I did not discuss that with my wife.)

I guess I spoke with a little too much excitement when I told Maggie that the payment was a tax maneuver by the parents.

In case you missed it, Sen. John Ensign (R-Nev.), had an extra marital affair for eight months with Cynthia Hampton, a campaign staffer who is married to Douglas Hampton, Sen. Ensign's chief of staff. Sen. Ensign's parents made $96,000 in gifts (hush money) to the Hampton's in the form of eight checks of $12,000 each -- four checks each from Sen. Ensign's father and mother to Cynthia Hampton, her husband, and their two children.

The eight checks thus took full advantage of the $12,000 gift tax annual exclusion available in 2008 (it is $13,000 this year). Although there is no income tax consequences to the gift, there is most likely an eventual estate tax reduction. Assuming an estate tax of say 45%, the parents just saved over $43,000 in taxes. Furthermore, the money is not taxable to the Hampton’s.

Nice tax planning.

Off to R&R

Larry Kopsa CPA

TAX INCREASE POSTING ON UTUBE

As you know, I am absolutely against an increase in tax rates. As a tax practitioner, I know exactly what happened when taxes increased back in the 1980’s. I have personal examples where individuals have not started new projects or grown their business simply because the risk reward was not worth it.

Why risk twenty to fifty thousand dollars to hundreds of thousands of dollars just to have your profits be taxed at a 70% or higher rate. The 70% takes into consideration federal income tax, state income tax and payroll taxes along with, in some cases, city taxes.

This video on Utube from Cato Institute lists the five reasons that we should be opposed to higher taxes. It’s eight minutes long but in my opinion it summarizes well the whole tax increase policy.

Click on the link to view: http://www.youtube.com/watch?v=XeXPibDuy6M&feature=player_embedded

MORE ON HEALTHCARE REFORM

A few days ago I sent out an email informing you that you may be in danger of losing your cafeteria/flex spending account. If you missed this email you can find it on the right side of our blog by clicking on Section 125 Accounts In Danger Again.

Well, that's not all. The Senate Finance Committee has proposed several options for funding healthcare reform. One of the options is to cap or eliminate the employer group health tax exclusion.

Currently, healthcare premiums and contributions (paid by you and your employer) are taken from your paycheck before taxes are deducted. If these health benefits are taxed, it's estimated you will lose between 9 and 14 percent of your take-home pay, depending on your household income and tax situation.

Here's what the opponents are saying...

Proposed healthcare reform impacts you!
The U.S. Congress is moving rapidly to create new healthcare legislation that could have a dramatic impact on your take-home pay.

The government needs to fund health insurance for 48 million uninsured Americans.
You don't currently pay taxes on your health insurance, dental, or vision premiums. You don't pay taxes on your flexible spending account (FSA) and health reimbursement arrangement (HRA) contributions. Congress is considering taxing these benefits.

Why should you care about taxing health benefits?
Taxing these benefits will have a direct, negative impact on your paycheck! Whether you're single or have a family, your take-home pay will decrease.

If Congress votes to tax benefits provided by your employer...
You will pay more for healthcare out of your own pocket. It will reduce your take-home pay, increase your taxes - and individuals and families who use FSAs and HRAs will be penalized even more.

Taxing health benefits provided by employers would affect millions of hard-working Americans:

• Employers will have less money to provide healthcare coverage to their employees.
• Some industry experts predict employers may reduce or eliminate employee health insurance as a result.
• Employees will pay more taxes and bring home less pay.

MORE ON THE TERRIBLE TREND

In an earlier posting, THE TERRIBLE TREND, I responded to a question regarding a salon's revenue that was spiraling downward. Below is the rest of our email conversation.

Larry, thank you so much for answering my email. I can only imagine your inbox. (I can't keep my own clean).

Having 1 on 1 is a good idea. I did this at the end of 2007 (our first year) but neglected to do it at the end of last year. Perhaps I can get ready for mid-year 1 on 1's and talk this very thing. I have a couple stylist who are close to retirement and whose husbands still work. I think they do it just to give them a little more family money and they love their clients. More of a social than an economic motivation to work. BUT - I do have 4 young ladies raising families, and I'm sure this is where I can light a fire and get back to growing this business.

Thank you for your advice. It will be acted on.

Randy

Randy, I really see results when meetings are held more often than annually. Monthly would be great. It creates some accountability for the technicians. Knowing what their goals are and that you are going to be comparing goals to actual seems to help keep their eye on the ball.

Larry

Wow, that's a lot of work on me. But I agree with you that they would see their goals better.

How hard-line do you suggest? Are the goals mandatory and rigid? Or is it more of a "Hey, it's up to you. Here's what you have to do to increase YOUR income" type of thing?

I'll see if I can discipline myself to that. Larry, I work full time at the US Post Office, plus have a lot of family challenges right now. But God is faithful in helping me manage both the time and the money that He has given me.

Thanks for that input of monthly, Larry. Best of everything to you.

Randy

It does take a lot of time but if it works it can be very beneficial. I think working up front with the people and letting them help set their goals gives them some ownership of the targets. At the same time, if their expectations are really low then you have to decide as an owner if the operation can be profitable at the level that they set. If not, you need new people or you are going to continue to tread water.

Larry Kopsa CPA

QUOTE OF THE WEEK

"I have learned that to be with those
I like is enough."

Walt Whitman, American poet

HEALTHCARE REFORM - WHAT'S HAPPENING IN WASHINGTON?

I see that you were on a round table on health care reform. I own a small business and I am concerned about being able to afford any additional expenses. Don’t they know in Washington that these are tough times? Can you tell me what is happening in Washington?

Wanda

Wanda, there are several proposals going on in Washington. The plan seems to be changing daily. President Obama wanted this passed by August 8th but the latest is that there are too many unanswered questions. I just sent out an email warning people that the government wants to take away some of our tax benefits to fund health care reform. In my opinion, if you make more of your hard-earned money subject to tax this is just a tax increase.

Here is what I know. Unfortunately, they are using the tax code as an enforcement tool, not just to raise money to offset the costs of reform. “Play or pay” is the plan that is most talked about. People would have to buy basic coverage and employers offer insurance or face a big fee. Both the House and Senate agree that is the way to make a requirement for universal coverage stick.

Many people are in opposition to this approach so there are battles ahead on the details. The biggest fight involves employer penalties.

House Democrats would threaten firms with an excise tax…8% of payroll if they fail to fund 65% of the insurance premium for an employee’s family coverage and 72.5% for singles. Smalls companies with payrolls of less than $250,000 would be exempt for the time being.

Even though small companies would be exempt, it is going to put them at a competitive disadvantage in attempting to hire and keep good employees.

Senate health lawmakers lean toward a different approach. They would impose a flat fee of $750 a year per full-time employee and $375 for each part-time worker from firms that don’t pay at least 60% of worker premiums for basic coverage. The requirement wouldn’t apply to small companies with fewer than 25 employees.

A third competing plan from Senate tax writers would give firms a pass if enough of their workers were able to buy insurance in the open market and didn’t take government sponsored coverage.

We will just have to wait and see what happens. Hopefully they are not so hung up on getting this passed by August 8th that they at least read the bill. It appears that the key is getting businesses to accept a mandate. If companies that are paying high health insurance believe health care reform will yield significant cost savings, they will go along with the plan.

But lawmakers will walk a tightrope trying to get the penalty just right. Set it too high and business support will evaporate. A penalty that is set too low could prompt many companies to pay it and ditch the hassle of insuring employees. That could leave the government stuck covering a slew of newly uninsured workers. If this were the case, we would have socialized medicine.

As someone recently said, “we will have our health care with the attitude of the IRS and the efficiency of the post office.”

Larry Kopsa CPA

DONATION TO EMPLOYEE'S FAMILY

We had an unfortunate incident in our business and one of our employees passed away unexpectedly. I would like to give money to the family from my business. If I do this is it deductible?

Stan

Stan, prior to August 20, 1996, an employer could give a $5,000 benefit to the family which would not be taxable to the family and would be deductible by the company. Unfortunately, this was taken out of the tax code.

As the rules are right now, any money given to the family would be deductible by the business but would be income to the family. The money earned by the individual prior to this death would be included on his last paycheck and would be subject to normal withholding. There would be no withholding on the monies given to the family. If you should give them over $600 you would be required to prepare a 1099 at the end of the year.

It would be possible to make a gift to the individual. In this case it would not be deductible to you nor would it be income to the recipient. You can make a gift of $13,000 to any one person in any one year without filing a gift tax return. Handling of this gift would vary depending on your form of organization, whether or not you are a corporation, partnership, LLC, S corporation etc.

If you have other questions about this please feel free to contact me.

Larry Kopsa CPA

HIRING YOUR CHILD

Larry, A while back you wrote an article in your newsletter about paying the kids during the summer. I have a teenager that is working for me and I can’t find the article. Could you send me a copy?

Brian

Brian, thanks for the question. I am sure that there are others that would be interested in this great tax planning technique. Things have changed a little since I posted the article so I will update.

If you are self-employed, employing your children (or grandchildren) can lower your family’s overall tax bill. By paying your child wages, you effectively shift income from a higher bracket taxpayer (you) to a lower bracket one (your child). Because the income is considered "earned income" to your child (as opposed to "unearned income" like dividends and interest), it can be offset by his or her standard deduction ($5,700 for 2009). To the extent the income is taxed, a low 10% rate will generally apply to all or part of it. Thus, the family’s income tax savings can be significant since some of the income normally taxed at your rate might escape taxes entirely or be taxed at your child’s low rate.

There can also be payroll tax savings when employing your child. Wages paid to a child under the age of 18 from a parent’s sole proprietorship are exempt from social security and unemployment taxes. Thus, depending on your total self-employment earnings, your tax savings can also include up to an additional 15.3% of the amount of wages you pay to your child, since you avoid paying self-employment tax on that amount and no payroll taxes are due on the wages.

Here is an example. Suppose a business person operating as a sole proprietor is in the 35% tax bracket. He hires his 17-year-old daughter to help full-time during the summer and part-time into the fall. She earns $5,350 during the year (and doesn't have earnings from other sources).The business person saves $1,872.50 (35% of $5,350) in income taxes at no tax cost to his daughter, who can use her $5,700 standard deduction for 2009 to completely shelter her earnings. The business person could save an additional $1,400 in taxes if he could keep his daughter on the payroll for a longer period and pay her an additional $5,000. She could shelter the additional amount from tax by making a tax-deductible contribution to her own IRA.

Employing your teenager has the side benefit of enabling him or her to make an IRA contribution. With earned income (received from your business or elsewhere), your child is eligible to make a 2009 contribution to a traditional or Roth IRA, up to the lesser of $5,000 or earned income. Generally, the Roth IRA is the better choice because although no deduction is allowed for the contribution, the earnings will never be taxed if your child does not withdraw them until at least age 59½. That’s a long time for the funds to grow. And if you choose, you can gift your child the funds to make the allowable contribution.

Before leaving this subject, it’s important to point out two things. First, you must make sure that any wages you pay your child are reasonable based on the work performed and the child’s age. Second, if your child is in college or is going to college soon, shifting income to him or her can have a detrimental impact on your family’s eligibility for need-based financial aid.

Please let me know if you need further information. It is a pleasure serving you.

Larry Kopsa CPA

NON-BUSINESS ENERGY PROPERTY CREDIT

Larry, I recently heard some news of a $1,500 energy credit. I have already used the $500 energy credit on my 2007 taxes. Do I still get the $1,500 credit on my taxes this year, even if I previously used the $500 credit?

Thomas

Thomas, you are referring to the Non-Business Energy Property Credit. Taxpayers do get the $1,500 credit even if they have used the previous $500 credit. Here's some more information that may help you to understand the credit better.

The Credit is available during the 2009 & 2010 tax year.

The Credit is nonrefundable.

The amount allowable of the credit is a lifetime cap of $1,500. This amount can be reached by taking 30% on the following items:

• Insulation, exterior windows or skylights, exterior doors, and certain metal or asphalt roofing.


• Energy –efficient property including electric heat pump water heaters, electric heat pumps, central air conditioners, natural gas, propane, or oil heaters and biomass fuel stoves.


• Qualified natural gas, propane, or oil furnaces or boilers.


• Advanced main air circulating fans.

The $1,500 can be claimed in 2009 and 2010 even if they have used the $500 credit in 2006 and 2007.

If only a portion of the $500 credit was used, the remainder can not be carried forward.

The items must meet the criteria of the International Energy Conservation Code.

QUOTE OF THE WEEK

Don't go around saying the world
owes you a living. The world owes
you nothing. It was here first.
Mark Twain

TAX STIMULUS QUESTIONS

We are still getting questions on the tax relief that was included in The American Recovery and Reinvestment Act of 2009. If you are still confused, here is a summary.

1. Should my employees complete a new W-4 to change their tax withholdings?

No, employees do not need to complete a new W-4. The Making Work Pay tax credit is automatic. However, individuals with multiple jobs or married couples whose combined incomes place them in a higher tax bracket may elect to submit a revised W-4 to ensure enough is withheld from their paychecks to cover taxes on the combined income.

2. Will my employees owe money to the government at the end of the year because of the tax change?

People who receive more federal tax credit than they are entitled to will be required to pay it back as part of filing next year’s 1040 personal tax return. Individuals who work multiple jobs or married couples who both work may want to increase the amount of their withholding from one or more of their employers by completing a new W-4 form.

3. When does the tax credit end?

The Making Work Pay tax credit is for the 2009 and 2010 tax years. As currently written, it will end with employees’ last paycheck of 2010.

4. How will my employees know if their withholding is correct?

Employees who are unsure whether they are having enough money withheld should refer to IRS Publication 919 at www.irs.gov for guidance on tax withholding.

Let us know if you have any other questions.

Larry Kopsa CPA

FOR YOU NUMBER JUNKIES

Being a numbers person, this caught my attention. On July 8, 2009, at five minutes and six seconds after 4 AM, the time and date will be 04:05:06 07/08/09.

This will never happen again!

Well, that particular sequence won’t, but the six figures in order come into play on November twelfth 2013 when at 9 minutes and ten seconds after 8 a.m., it will be 08:09:10 11/12/13.

Oh, wait! On the ninth of August in 2010, when the time and date will be 05:06:07 08/09/10 it happens again.

And don’t forget when it is 06:07:08 09/10/11 on the tenth of September in 2011 it will also occur.

Well, never mind—it happens every so often. So, big deal. But it’s interesting.

TERRIBLE TREND

Larry, as you know, I attended most of the "Surviving" webinar on May 18th and I'd like to show you the depressing revenue trend I've realized for the first two years that my wife and I have owned this business.

I've attached three copies of my sales out of my point-of-sale software program. As you can see, we continue downward in revenues. If my calculations are correct, 2007 was 3.9% less than 2006 and 2008 was a larger loss of 8.4%.

I'm going to have a salon meeting tomorrow with all stylists (8 of them) and receptionists (3 of them). Should I tell them these numbers? Will it scare them too much?

What questions do you have for me to investigate the why's and do you have any immediate suggestions for me?

Thank you for looking at this

Randy

Randy, I hope you are doing well. I am sorry it has taken so long to get back to you. As you may or may not know, I have been out of the office at speaking engagements the last couple of weeks. I was at the IBS Show in Las Vegas this last weekend. Prior to that, I was at the AACS program in Las Vegas. I am sorry about the delay.

I looked at your numbers and I can certainly see your concern. I see no month or quarter where there are any increases. I am curious as to whether or not the same staff was in place this entire time. Sometimes we do see numbers go down because staff has left, pregnancy, or sickness.

I also would be curious as to your average service ticket to staff person.

Your question really is what can you do to reverse this trend. I would presume if you are dealing with the same staff that your staff is also feeling the hit and their commission has decreased. Without more details, it would be difficult to give an answer that I am certain of, but what I have seen many people do is this.

Look at your production software by individual and then meet with your people to determine if they are satisfied with their income. Most likely they are not. The next step is to show them how they can make more money. As I look at salons, I feel there are only five ways to increase the bottom line. These are:

• More clients – referral program.


• Clients come in more often – prebooking.


• Clients spend more when they come in – retail sales – upsell.

• Increase prices – increase your level of competency so you can charge more.


• Cut expenses.

As you can see by this list, four of the five relate to your stylists. Showing them how they can make more money by doing any one of the four items would certainly help your bottom line.

There are systems in place that will help you to achieve the above goals. Setting those goals with your staff and then monitoring those goals and meeting with them on a periodic basis can be the key to helping you become more profitable.

I know this is just basically a general outline of what you can do, but I thought it might help. If there is anything else I can do to assist you, please let me know.

Larry Kopsa CPA

QUESTION ON CLAIMING CHILDREN

Larry, I am supposed to claim one or both of my kids in all of the years-2006 through 2008. The problem is, my wife will not sign the form to release the exemption. Do you have any thoughts on what I should do?

Doug

Doug, unfortunately, you can't claim the kids without the signed Form 8332. If your wife will not sign this form, you will have to take her to court due to a contract violation (the divorce decree). Tax law and contract law are two separate issues. The IRS will not get involved. They say 8332 or no exemption.

If you should claim the children without the 8332 you will receive a notice from the IRS and this could be an audit red flag.

I wish you the best of luck with this situation.

Larry Kopsa CPA

TAX BILL INTRODUCED TO HELP SMALL BUSINESS

Here is a new proposal that would help small business.

Warning: Many bills are introduced that never get passed. This is just a bill that was introduced and has a long way to go before it gets into law.

The bill introduced by Sen. Charles Grassley, R-Iowa, is aimed at reducing taxes for small businesses. Grassley said the wide-reaching bill would help create jobs. "I hope this bill gets bipartisan support," said Grassley. "Job creation is a bipartisan issue and really should be a nonpartisan issue."

Here is a link: Small-business tax bill aims at creating jobs

ARE YOU READY FOR SOCIALIZED MEDICINE?

It was an honor for me to be selected by Nebraska Senator Mike Johanns to be part of an eight-member round table health care reform. There were seven other individuals on the panel representing various aspects of the health care industry. I was on the panel to speak for small business.

According to Senator Johanns, if you don’t want socialized medicine, you better be contacting your congressman to register your opposition. You must do this quickly; it appears that the current administration is hell bent on getting this passed by August 8. It seems like they want to run this through without the public knowing the details. It also seems that is the modus operandi of this administration. “Trust me!”

All of us on the panel realized that the health care issue needs to be solved. The problem is that the issue has been around for a long time. Why is it necessary to push legislation through that would essentially put everyone under a Medicare type program?

There are certainly two sides to this issue. In my comments to Senator Johanns I concluded with the statement that, “there is really no right answer...just a lesser wrong answer to the health care problem.”

I will keep you informed.

Larry Kopsa CPA

QUESTION ON CHARGED TIPS

My employees make 50% commission. For 5 service providers, they were tipped $200.00 on credit cards yesterday. Do you have any discussion on your blog as to whether or not I can legally charge them a fee for charged tips. I am thinking of going to no charged tips if I cannot pass a small fee on to them.

Thanks,
Paula

Paula, thank you for your question. Tips and credit card fee’s are a sticky situation for salon owners and I understand your frustration. I have posted many articles on our blog regarding this issue.

To answer your question: unfortunately you cannot charge the employees for the tips that are run through the credit card machine. This is a business expense of the owner and there is no way around this unless you go to no tipping with credit cards.

I hope this helps and best of luck!

Larry Kopsa CPA

SOCIAL SECURITY MONEY RUNNING OUT FASTER THAN EXPECTED

More news on the Social Security Trust Fund. The loss of 5.7 million jobs since the beginning of the recession, and the payroll taxes that went with them, have taken a toll on funding for Social Security and Medicare, the programs' trustees reported. The Social Security trust fund is on pace to run out of money four years earlier than expected, in 2037, while Medicare is on pace to become insolvent two years earlier than anticipated, in 2017, the trustees said.

The New York Times (5/12), USA TODAY/The Oval blog (5/12)