Questions for the Tax Lady: October 4th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, I have a small business with about a dozen employees. If I throw a Halloween party can I deduct the expenses of the necessary supplies? Like decorations and food?

Absolutely. Your employees work hard for you, and I believe that rewarding them with a holiday -- any holiday -- party goes a long way in keeping employees feeling appreciated and happy. According to the IRS, the costs of holiday parties for your employees are 100% deductible. This includes food, decorations, entertainment and more. Just make sure to keep the expenses reasonable for the size of your staff. If you only employ 5 people, a $10,000 deduction for holiday parties will likely raise eyebrows at the IRS.

Question: What is the standard mileage rate for this year? Has it changed from 2009?

The IRS mileage standards decreased this year, since gas prices have fallen. The various mileage rates for 2010 are shown below:

• 50 cents per mile for business miles driven
• 16.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

These rates apply for cars, vans, pickups or even panel trucks.

Labels Matter to the IRS

Last week, I drafted a new article for WomenEntrepreneur.com on how to decide whether you should label your new employee as an independent contractor or a standard wage earning employee. You can find a snippet of the article below, or visit WomenEntrepreneur.com for the full text.

When business owners start looking into hiring employees, many are overwhelmed at how expensive it can be. Of course, you must pay this person a decent wage, but there are even more expensive costs: taxes.

And there are a lot of them to think about: unemployment taxes, payroll taxes (7.65 percent of the employee's total salary) and other taxes.

Some business owners try to sidestep these tax issues by hiring workers as "independent contractors." Sounds like a good idea, right? Independent contractors do the work but save you the hassle of payroll taxes, tax withholding and unemployment taxes. Hold on! Before you jump aboard the independent contractor bandwagon, you need to understand that the IRS has a say in the matter.

The IRS has very strict rules for determining who is an independent contractor and who is an employee. How you classify your workers revolves around three basic characteristics:

Behavioral control: Do you as the business owner have the right to determine how the work is done via training or instructions, for example?

Financial control: Do you as the business owner have the right to determine or control the financial or business aspects of the work?

Type of relationship: Do you or your workers perceive an employer-employee relationship?

Health Law Likely to Add to Employer Costs

Employer health care costs will likely rise by 7-8% in 2011 due to the health care reform law enacted by Congress back in March. Employees may see a rise in deductibles and co-pays to offset this increase. According to Kiplinger.com, the anticipated savings will probably take five or more years to realize. That’s when insurance exchanges and other measures will start to take effect.

What’s making costs rise for employers? Covering kids until age 26 is a big contributing factor. The elimination of lifetime benefit caps and unforeseen bookkeeping problems also will not help. With older kids being covered now, companies might not be able to charge any surcharges by law, but more firms will get around that by charging more for say, a family of 6 than for a family of 4. Deductibles and co-pays may go up as well like I explained above, to help employers counterbalance the increased cost.

For the time being, many firms are considering these options as a way to save money:

• High quality medical providers—for example, employers sending heart patients to the Cleveland or Mayo clinic instead of unnecessary appointments.
• Setting up a “medical home” for each patient, especially the chronically ill. A physician’s office coordinates specialists, nursing homes and other providers and shares in any cost savings.
• Tiered co-pays of non drug treatments, based on cost effectiveness—acupuncture and exercise instead of back surgery for example.
• Clinics and telephone care. Firms too small for their own on-site clinic set up kiosks so workers can consult by phone or the Internet with staff doctors or other health providers.

Read the full article here.

Why a $14/hour Employee Costs $20

Although we all hear about how expensive it is to be a business owner, most people rarely consider how costly it can be to hire new employees. CNN Money posted a very interesting article on why an employee making $14 per hour can really cost their employer as much as $20 an hour.

You probably cost your boss a lot more than you think you do.

For Jim Garland, who owns a corporate aircraft cleaning and support services company, a $14 per hour worker has a true cost of $19.63 per hour, or about 40% more than base pay. This so-called "loaded rate" includes fixed expenses -- federal and state taxes, health insurance, workman's compensation, uniforms, and paid time off -- along with soft costs like the time spent training a new hire.

Washington's lawmakers are throwing a lot of ammo at reducing the jobless rate, including a new tax break for hiring the unemployed. But no matter what incentives the government offers, it's hard to convince business owners to hire until they're absolutely certain they need to. Employees are often the most expensive investment a business makes.

"Our entire existence revolves around two numbers: revenue and payroll," Garland said of Sharp Details, in Dulles, Va., which he launched out of his car trunk in 1991. Payroll for 60 workers accounts for around 70% of his firm's operating costs.

Garland outsources his entire human resource department. Joe Sherrier, director of human resources for Employment Enterprises -- the company that manages Garland's HR -- said that as a general rule, business owners should to expect an employee to cost an additional 25% to 30% on top of base salary each year.

Continue reading at CNN Money.com…

Threats Against IRS Employees on the Rise

From the Wall Street Journal:

The federal agency charged with ensuring the safety of IRS employees said it has seen an increase within the past several years in threats against agency personnel.

In the past four years, there appears to have been a "steady, upward trend" in the number of threats against IRS employees, said an official with the Treasury Department's Inspector General for Tax Administration. That assessment, offered in response to an inquiry from Dow Jones Newswires, is based on preliminary data, the official cautioned.

On Thursday, 53-year old Andrew Joseph Stack crashed his private plane into an Austin, Texas, office building that housed IRS workers, killing himself and one IRS employee and injuring 13 others.

Following the attack, Inspector General J. Russell George said his agency will consider whether changes to security policies are necessary to improve safety.

"There's no question that in the wake of this tragedy, we will be directing attention to that very issue," Mr. George said in an interview. "There are limitations, however, on what you can anticipate about what a disturbed, troubled person can do."

Holiday Gift Advice for Employers and Employees

Last week the Roni Deutch Tax Center – Tax Help Blog posted a season entry with holiday gift advice for employers and employees. Since there is so much confusion over presents and holiday bonuses from employers I wanted to make sure and share this informative article with my readers. You can find a snippet of the entry below, or checkout the full text at the Roni Deutch Tax Center – Tax Help Blog.

Seasonal Presents for Employees

As the holiday season swings into full force, it has become very common for employers to give out presents to their employees. For the most part, employees will not have to worry about claiming the value of these gifts on their tax returns unless it is a cash bonus. Additionally, employers can write off these expenses if they meet certain restrictions.

The Intent of Giving

In the case of Duberstein v. United States, the Supreme Court determined that the common law understanding of the term "gift," is different than the business tax related definition. The court found that some gifts given by employers were often intended to reward past performances or serve as incentives for future performance. In order to be excluded from payroll taxes a gift given by an employer must be made generously with "respect, admiration, charity or like impulses."

De Minimis Fringe Benefits

According to the Internal Revenue Code Section 132(e)(1), a de minimis fringe benefit is "any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees." In plain English, a de minimis benefit is a gift given by an employer that is not subject to payroll taxes and is a deductible business expense.

Turkey, Ham, or Gift Basket Rule

You may have heard of the turkey, ham, or gift basket rule when it comes to taxes on employer provided presents. Essentially, non-cash holiday gifts of property given to an employee will not need to be considered part of an employees wages and will therefore not be subject to payroll taxes. The Federal tax code even allow for items such as flowers, books, gift baskets, etc. to be given to employees. The IRS asserts however, that these gifts must be of a "low fair market value," but does not provide any clear rules on what that monetary limit is.

Continued at RDTC.com…

NTEU Calls for IRS Mileage Rate Increase

With taxes prices increasing a record rates, the National Treasure Employees Union has called on the IRS to issue a mid year adjustment to the IRS’ 2008 standard mileage rate. I have included the full text of the release below, but if you would like to download it in Word format head over to NTEU.org.

NTEU Leader Seeks Mid-Year Adjustment From IRS in Mileage Reimbursement Rate

Washington, D.C.—In the wake of record—and still rising—gas prices, the head of the nation’s largest independent union of federal employees has called on the Internal Revenue Service (IRS) commissioner to make a substantive mid-year adjustment in the reimbursement rate for personal use of a vehicle for business reasons.

In a letter to IRS Commissioner Douglas Shulman—who has the policy authority to make such a mid-year adjustment, which would impact everyone in the country—President Colleen M. Kelley of the National Treasury Employees Union (NTEU) noted that record levels of gas prices are “placing an especially heavy burden on those who must travel to perform their work duties.”

These include a great many NTEU members employed by the IRS, as well as those at a number of financial regulatory bodies and other federal agencies. The NTEU leader made the request in the interest of all federal employees and others who use their personal vehicle for business travel.

The federal government’s reimbursement rate is set by the General Services Administration (GSA), but cannot exceed the amount set by the IRS as the maximum rate allowed as a business deduction. That rate currently is 50 ½ cents per mile.

“Given the extraordinary rise in gasoline prices,” currently averaging more than $4 a gallon across the nation, President Kelley wrote, “I would request that the IRS make a mid-year adjustment to the mileage reimbursement rate to accurately reflect the actual cost traveling employees pay.”

Pending legislation in the Senate would raise the rate to 70 cents per mile, she noted, but said that action by the IRS “would provide much more timely relief than depending on the slow pace of the legislative process.”

While unusual, this would not be the first time the IRS has made such a mid-year change in the rate; in 2005, then-IRS commissioner Mark Everson used his authority to honor a request from NTEU that the maximum rate be increased. Then, as now, gas prices were rising rapidly and with little prospect they would moderate.

“The needed relief his action provided to private and federal sector employees,” Kelley wrote of the Everson decision, “helped save many employees from having to pay work-related traveling expenses out of their own pockets.”

As the largest independent federal union, NTEU represents 150,000 employees in 31 agencies and departments.