HOW DO YOU COMPETE WITH THIS?

I won't mention any names here, but I recently talked to a client that was really angry.  She said she just got off the phone with her manufacturer.  She told me that she had recently met three people that were very impressed with her work and the look of her clients.  This was a social gathering and she spent some time talking about her salon and told her that the product they use on their hair is very important.  She bragged about the "salon only" product that she sold.  Big mistake. 

When these three new clients came into the salon, they said that they had went to the manufacturers website and purchased the product on line.  Not only that, they had purchased the product for the same price that she had to pay.  In other words, no markup for her.  If she tried to sell the product, it would be twice as expensive. 

Now I know that not all manufacturers sell on line or at cost, but you can see the potential problem.  First there was diversion then "just like and as good as salon only product," now this.  No wonder retail sales are falling off.

OBAMACARE - WHAT DOES IT MEAN TO YOU

Unless you live in a cave, by now you've heard that the U.S. Supreme Court has upheld the key provisions of the Affordable Care Act, or "Obamacare." In an unexpected twist, the Court ruled that the controversial individual mandate is constitutional, but under the government's power to tax, rather than to regulate commerce.

We don't need to go into the details of the ruling itself -- just turn on your television, and somewhere, somebody is opining on it right now! But we do want to remind you the Court's decision means several new taxes will go into effect as scheduled:

·         On January 1, 2013, the Medicare Tax will go up by 0.9% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately).

·         Also on January 1, there will be a new "Unearned Income Medicare Contribution" of 3.8% on investment income, for those earning more than $200,000 ($250,000 for joint filers).

·         Beginning on January 1, 2014, there will be a new $2,500 limit on tax-free contributions to flexible spending account.

·         Also beginning January 1, 2014 employers with more than 50 employees will face a penalty of $2,000 per employee for not offering health insurance to full-time employees.

·         Finally, the threshold for deducting medical and dental expenses rises from 7.5% of adjusted gross income to 10%. This will make these expenses even harder to deduct without help from advanced strategies like Health Savings Accounts or Medical Expense Reimbursement Plans.

That’s not all.  On January 1, 2013 the so called “Bush Rates” are repealed and we go back to the “Clinton Tax Rates.”  This change impacts every taxpayer.  So, while the constitutional issues of Obamacare may be settled, several planning challenges certainly remain. We'll be following developments carefully in order to help you navigate these new challenges. If you have any questions, don't hesitate to call us at 402.362.6636.  In addition, now that the Supreme Court has ruled we will be planning a local seminar and/or webinar to keep you informed.

HOW DOES A UNMARRIED COUPLE HANDLE A JOINT ACCOUNT FOR TAX PURP0SES

Q:  I want to open a joint savings account with another person.  How do we do this and what is the potential issue with splitting the interest for income tax purposes?
A:  Well, no problem opening the account.  The issue is that the bank will want a W-9 which has one of your Social Security numbers.  That is the person that will get the 1099 showing the full amount of the interest.  If the income is material and you want to split it on the two tax returns, we can do what is called a "Nominee 1099."  With this whoever gets the original 1099 reports all the income and then we subtract half of the income and include that half on the other persons return.  The nominee 1099 is then filed with both returns and with the IRS. 

OCTOBER SURPRISE? U.S. COULD HIT DEBT LIMIT BEFORE ELECTION

The U.S. government's debt is nearing $15.8 trillion. And now there are reports that at the recent pace of debt growth, the U.S. will reach its $16.4 trillion statutory debt limit some time in October — just before the 2012 election. According to a reportby Investor's Business Daily, the government can employ some accounting maneuvers to stay below the ceiling for a few months, giving lawmakers a grace period. But if the economy continues to weaken -- and federal tax receipts decline in growth -- the debt limit deadline could arrive just in time to play a large role "the super-charged environment of a presidential election." In addition to the debt limit, Congress must also decide what it wants to do about the pending tax increases -- which, collectively, would be the largest tax hike in U.S. history -- as well as the automatic spending cuts that were a part of last summer's debt ceiling deal. Already, Fitch has warned that the U.S. will lose its AAA credit rating without a credible deficit-reducing plan. And "paired with last year's Standard & Poor's downgrade, a Fitch cut would add chaos in financial markets and raise U.S. borrowing costs," according to IBD.

NEW INFORMATION ON TIP REPORTING

The Internal Revenue Service just issued a new determination on tip reporting. This does not really have a big impact on salons and is more directed towards restaurants, but there is some good information that reminds us about tips.

In the revenue ruling, they state some background on tips. They list a lot of code sections, etc. but basically what it confirms is that tips received by an employee through the course of employment are considered remuneration for that employment and are deemed to have been paid by the employer for purposes of the employer’s portion of the FICA tax. Nothing new there. The remuneration is deemed to be paid when a written statement including the tips is furnished to the employer by the employee. Again, nothing new there and just a confirmation that as an employer you do not need to worry about the tips until the employee informs you. This is where the 4070A form comes in that you should be receiving on a monthly basis.

The ruling goes on and defines what a tip is. The ruling lists four factors that make a payment a tip:

1. The payment must be made free from compulsion.
2. The customer must have the unrestricted right to determine the amount.
3. The payment should not be the subject of negotiation or dictated by the employer policy.
4. Generally the customer has the right to determine who receives the payment.

This ruling was about restaurants that do an add on tip for parties of ten or more and that type of situation. In that type of situation, this is not considered a tip but rather wages and the employer does not have to get a statement from the employee regarding the tips.

Again, nothing new here but I thought you might be interested in a summary.

STUDENTS AND SUMMER JOBS

School’s out and many students will be starting summer jobs. I want to remind you that  employers may be withholding taxes, so you may not get all of the money that you earn and if you don't take action you may have to file a tax return to get your refund. 

Here is a tip that might help.

When you first start a new job, you must fill out a Form W-4, Employee’s Withholding Allowance Certificate. This form is used by employers to determine the amount of tax that will be withheld from your paycheck.

If you have multiple summer jobs, make sure all your employers are withholding an adequate amount of taxes to cover your total income tax liability. To make sure your withholding is correct, use the Withholding Calculator on www.irs.gov.

If you do not anticipate owing any tax and did not owe tax last year, you can simply indicate on your W-4 and your employer should not withhold.

WATCH SIMPLE CONTRIBUTIONS FOR EMPLOYEES WITH ANNUAL SALARY

Every time I think that I have a good grasp on the tax law I read something that humbles me.   

Recently I read a article on SIMPLE IRA plans which surprised me.  Matches must be based on a participant’s annual salary, according to IRS, even if the employee joins or leaves the plan in midyear. 

For example if a worker with a salary of $60,000 joins the plan on Oct. 1 and contributes $2,000 for the rest of the year,the plan’s matching payin is $1,800...3% of $60,000 (most SIMPLEs have a 3% match).  The matching contribution isn’t based on the $15,000 the employee was actually paid.  If the worker in this example only put in $1,500, the match would fall to $1,500.

FAMILY MEDICAL LEAVE ACT (FMLA)

Q:  I have 10 employees.  Some are part time.  I have two of my employees pregnant. I can't afford to give them a lot of time off.  What do I have to do?

A:  First, hopefully I read you wrong.  You say that "I have two of my employees pregnant."  I hope that doesn't mean that you are the responsible one.  If so, you may have more problems than time off. 

Anyway, this is a complicated subject so when in doubt we strongly recommend that you check with an attorney that practices in the HR area.  Here are the basics.

The federal law does not apply to businesses with fewer than 50 employees. However, many states have additional laws with different rights that apply to employers with fewer employees. And many states also grant employees leave for reasons and periods beyond those granted under the FMLA.

If you are subject, covered employers must grant an eligible employee up to a total of 12 work weeks of unpaid leave during a 12-month period for one or more of the following reasons:

For the birth and care of the newborn child of the employee.

• For placement with the employee of a son or daughter for adoption or foster care.
• To care for an immediate family member (spouse, child, or parent) with a serious health condition.
• To take medical leave when the employee is unable to work because of a serious health condition.

That's the basics but each situation and state is different.

TAX TIPS FOR JOB SEEKERS

I hope that you do not need this information because you are employed, but just in case, or if you know someone that is job hunting here you go.
With unemployment so high right now, many people are looking for jobs.  There may be some tax advantages by deducting costs related to job search. The amount is limited because you can only claim job search expenses as an itemized deduction (long form) and only the amount that is more than 2 percent of your adjusted gross income.  You figure your deduction on Schedule A. 

1. To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation.
2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income, up to the amount of your tax benefit in the earlier year.
3. You can deduct amounts you spend for preparing and mailing copies of your resume to prospective employers as long as you are looking for a new job in your present occupation.
4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
6. You cannot deduct job search expenses if you are looking for a job for the first time.

HIRE YOUR KIDS – FOLLOW UP

A week ago I blogged the tax advantages to hiring your kids.  Here are a few follow-up suggestions:

The IRS tends to view employment arrangements between parents and children with a touch of skepticism. So be careful to observe the strict letter of the law when you hire your child for the summer. Here are a few points to keep in mind.

• Treat your child like any other employee. Make sure the child completes a W-4, fills out time sheets when appropriate and follows other company procedures. Don't give your child special leeway to run personal errands while he or she is on the clock.
• Pay your child the going rate for the job. Providing an exorbitant salary for an entry-level position or setting a flat rate at the beginning of the summer is likely to draw the ire of the IRS. Establish an hourly rate that is reasonable for the work performed.
• Follow the payroll tax rules. Impose the usual withholding amounts to your child's wages unless he or she qualifies for exemptions. Issue an annual Form W-2. Don't make any exceptions for your child.

Of course, taxes will be withheld from your child's wages, even if he or she won't have any income tax liability for 2012. But in this case, you can have your child avoid income tax withholding by entering the word "EXEMPT" on Line 7 of Form W-4.

This is only available to a child claimed as your dependent if he or she had no tax liability for 2011 and won't earn more than $5,950 in 2012. If your child exceeds the limit, a new W-4 should be filed.

RETREAT FOLLOW-UP QUESTION

Q: Recently you mentioned a business retreat.  I understand the steps.  Do you have any suggestions on how we get the retreat started?

A:  Make sure that you have an agenda.  Items on the agenda include financial; staffing; budget; goals etc.  Those things are basically reports but are necessary.  I think the thing that really gets the conversation and planning process going is DOS.  This stands for “dangers” “opportunities” and “strengths.”  Start out by identifying and discussing these three phases of your business. 

Another suggestion, use these three questions and points in meeting with your staff.  You might be surprised at their response.

WANT TO BE A BETTER HAIR COLORIST – CHECK OUT THE ABCH

I was honored to speak in Los Angeles at this year’s ABCH Energizing Summit the weekend of June 9th.  This conference is sponsored by the American Board of Certified Haircolorists (ABCH).   If you have never attended an Energizing Summit give it a try next year.  You are in for a real educational experience. The American Board of Certified Haircolorists goes to the extreme to make this event an unforgettable experience. Each year they bring an array of talented educators. The big difference in this conference is that the educators who are successful in doing what they teach, as opposed to teaching a class scripted by a manufacturer. There are no manufacturers represented.  It is all about the art of hair color, not “what our product can do.”

This is a one of a kind seminar produced completely by haircolorists. I think one of the biggest benefits of attending the Energizing Summit is the opportunity to rub elbows with other haircolorists and share information, along with some business knowledge (hence me being there).

The classes are small so you can ask lots of questions and interact with the educators. In talking to Andre Nizetich, the ABCH president, he told me that “It is important educators understand the challenges haircolorists are faced with. We offer a variety of haircolor subjects so you can really learn. Some classes are creative in nature while others are more technical. We even have business classes that are centered on hair coloring. You have the opportunity to participate in hands on classes and have the opportunity to work with a variety of haircolors and bleaches."

There were 600 in attendance this year.  All true hair color professionals.  If you want to advance in hair color don’t miss this program next year.

INTERESTED IN ANOTHER NEWSLETTER

One of my favorite newsletters is penned by a friend of mine Charles Marcus.  I see Charles several times a year at different events where we both are speaking.  His rooms are always full.  He puts out a very good free monthly newsletter.  If you are interested her is how you can subscribe.

If you would like to subscribe click on this link: www.cmarcus.com/newsletter.html

Note that in keeping with our anti-spam policy, you may receive an email message requesting a response from you in order to confirm your subscription.

WANT A TAX BREAK – HIRE YOU KIDS

By hiring the child to work for the business, it can be a win-win for the family.

Here are the potential perks.

·         Income tax savings. Say that you reduce your compensation by the amount of salary you pay your child. Instead of being taxed to you at rates reaching up to 45 percent this year, the income is taxable to your child. For 2012, your child can earn up to the standard deduction amount of $5,950 without paying any federal income tax. Any excess is taxed at a low 10 percent rate.

o   Example:

§  You pay your child $5,000 to work during the summer before she heads off to college. The entire $5,000 in wages is covered by the standard deduction. In contrast, if you are in a 33 percent bracket, $5,000 in wages would save you $1,650 in tax. In addition, your adjusted gross income (AGI) is also lowered, which means there is less chance that you'll be subject to unfavorable AGI-based phase-out rules.

·         Kiddie tax avoidance. Generally, the unearned income of a child under age 19, or a full-time student under age 24, is taxed at the parents' tax rate to the extent it exceeds an annual threshold ($1,900 in 2012). But this rule doesn't apply to "earned income" that your child is paid in wages.

·         Business tax deduction. You get a business deduction for money that, as a parent, you might have given your child anyway.  The wages you pay the child are deductible by the business just like the wages paid to any other employee of the company. However, when a family member is employed, you must take care to ensure that the wages are reasonable in amount for the services actually provided (see right-hand box).

·         Payroll tax savings. If a child under age 18 is employed by his or her parent in an unincorporated business, the earnings are exempt from FICA tax. This exemption also applies to FUTA tax up until the age of 21. These payroll tax breaks can provide significant tax savings for a parent who is self-employed or a partner in a partnership.

o   An unincorporated business includes a sole proprietorship; husband-and-wife partnership (owned only by you and your spouse); a husband-and-wife limited liability company (LLC); or a single-member LLC, which is treated as a sole proprietorship for federal tax purposes.

o   What if your business operates as another type of entity, such as a C or S corporation? Your child's wages are subject to Social Security, Medicare, and FUTA taxes, regardless of age. That's the bad news.

·         Children Age 18 and Older: After your children reach age 18, the tax advantages decrease, because their wages are then subject to Social Security and Medicare taxes (however no FUTA tax is due until age 21).

o   As the employer, your business must pay its share of the Social Security and Medicare taxes. The employee's share is withheld from your child's paychecks. However, again, the child's standard deduction still shelters up to $5,950 from the federal income tax. And you still collect a nice business write-off that cuts your income tax and self-employment tax bills.

·         Tax-free fringe benefits. As an official employee, the child is in line to receive tax-free company fringe benefits. This may include health insurance coverage, group-term life insurance coverage up to $50,000 and educational assistance plans. As with wages, payments under a qualified plan are tax-deductible by the business.

·         Individual Retirement Arrangements (IRAs). If your child has earnings from a job, he or she can contribute to a traditional or Roth IRA. The maximum contribution for 2012 is $5,000. Because the child's income is low, contributions to a traditional IRA are deductible on the child's return. Contributions to a Roth IRA aren't deductible, but any withdrawals made after age 59 1/2 are tax-free, as long as the account has been open five years. Retirement will seem like a long way off to the child, but this is a good way to save for the future.

Tax-smart idea: Have your child open a Roth IRA and fund it with summertime earnings. They can use these accounts to save money for college, a first home -- and, of course, retirement. By socking away some of their earnings in a Roth IRA, your youngsters can begin a savings plan that can grow into a small fortune.

Roth IRAs allow earnings to build up tax-free. And the tax law allows money to be taken out penalty-free in special circumstances, which include paying for college and buying a first home.

There's a lot to be gained by hiring your child to work for the business, but don't ignore the human element of the arrangement. Make sure it's a good fit for everyone involved.

HUGE PENALTY IF YOU DON’T REPORT FOREIGN ACCOUNTS TO THE IRS

Many taxpayers may have investments in overseas.  If this investment is in the form of mutual funds or other passive holdings, there is usually no extra reporting to the IRS or Department of Treasury.  However you can accidently have an account that might trip you up.  For example, if you have a timeshare that you sell, even though the money normally goes right out of the account to your US account you are subject to the stringent reporting requirements.  Why?  For a brief time, maybe only one day, you have money from the sale in a foreign account.

Also, if you own a foreign bank account, securities account, etc. and the value of these accounts exceed more than $10,000, than this needs to be reported, both to the IRS and to the Department of Treasury.  The reporting to the IRS is included with your tax return and the reporting to the Department of Treasury is on a separate form that is due by June 30 of each year with no extensions and it must be received by that date, not postmarked.

If you forget to report these holdings, in many cases, the penalty for not reporting these accounts can actually exceed the value of the account, so it is extremely important to review these accounts.  The penalties are high because Congress wants to stamp down on foreign accounts so they set the penalty high.

RETREATS: A POWERFUL BUSINESS TOOL

Two weeks ago my partners Candy Otte, Stacey Stark and I scheduled ourselves for our annual partner retreat.  According to the dictionary, a retreat is a place of privacy or safety. When you think of the work “retreat” you think of falling back but a retreat is a powerful way to move forward.

Retreats can be very helping to advance your business. They are an important part of bringing together key people in your company, at a well-planned destination, so that you can build camaraderie, enhance leadership, and give your team the extra push that they may need.  After our partner retreat, we then conduct a full staff retreat.  Sure this takes time and is expensive, but it is well worth it.  It is amazing how it can clarify your business goals, put everyone on the same page and help to refocus on working “on your business not just in your business.”  Every year, I come back with fresh perspectives and new insights, totally reinvigorated. An annual business retreat works great for me, and it might for you, as well.

Here are some tips on how to pull off the ideal business retreat:

     ·  Hold your business retreat at least one hour away from the office. The last thing you want is it to be interrupted with calls and clients that “just need a second.”  If you are not there, then you can stay focused. The idea of a retreat is to leave the office behind.

·  By being away from the office and staying overnight you won’t lose the focus by going home to hear the problem of the day form the spouse or kids. To get the most bang for your buck on a business retreat, you really need to make it an overnight event. This helps keep everyone from staring at their watch all day, assuming that when 5 p.m. hits, they get to jet. Overnight retreats let people relax and not rush the experience.

·  Aim to have all your meals together as a group. This will be a great time for bonding and personal insights to occur. And when people feel more connected and more trusting of each other, they will work together way better.

If you have never taken time to walk away and work on planning your business consider giving it a try.

HOW LONG SHOULD I KEEP PAYROLL RECORDS

Q: How long should my business keep payroll tax records?

A: Per the IRS, at least four years after the due date for employees to file their income tax returns for the particular year. Records to be retained include wages and payment dates and employee data such as names, Social Security numbers and addresses. Also copies of W-4 forms, payroll tax returns and valuation records for fringe benefits provided to employees.

CLEVELAND WAITRESS GETS $434,712 TAX REFUND CHECK FROM IRS

Just because you receive a check from the IRS does not mean that the money is yours.  The taxpayer rightly turned back the money to the IRS.  Here is the information as reported in USA Today.

USA Today, Cleveland Waitress Receives Huge IRS Refund Check by Mistake:

A longtime Cleveland waitress got the surprise of her life this week when an enormous income tax refund check arrived in the mail.When Ginny Hopkins filed her tax return, she expected a refund of $754 — money she really needs to fix her car, among other things. Instead of that check, she found a check mistakenly issued for $434,712 in her mailbox. ...

Hopkins knew that cashing the check could get her in a whole lot of trouble. "They'll put me in Alactraz, waiting on the night shift at Alcatraz," she said. "They'll reopen the place." ...

Hopkins made arrangements Wednesday to return the check to the IRS office at the federal building in downtown Cleveland. Since Hopkins needs the money right away, her friends at the restaurant and WKYC-TV in Cleveland advanced her the money. The IRS said sometimes mistakes like this happen, but it happens less often as more people file their taxes electronically. Hopkins should get her correct refund check in six weeks, the IRS said.