by Kristin Gravitt | TaxBiz
It’s no secret that for many people who get in hot water with the IRS, a very common reason is payroll taxes. For many, they aren’t filing properly, “assuming” that their bookkeeper is handling it or their payroll software. But that isn’t necessarily the case, I’m sad to say. ☹️ So, this week, I thought I’d give you a quick primer on the subject … because it’s definitely something to make sure your Lake Norman business has covered.
How To Handle Your Lake Norman Company’s Payroll Taxes
“To win in the marketplace you must first win in the workplace.” – Doug Conant Payroll taxes are crucial for Lake Norman business owners, but not many know how to pay them. If you, or someone you know, needs to take care of payroll taxes, please forward them the information below. The IRS made this process simpler through online payments. Therefore, it’s not as intimidating as it may seem. What’s Included? There are a few items included in the taxed payroll given to employees. Consider the following:
- Federal income taxes withheld
- Federal Income Contributions Act (FICA)-related taxes (including Social Security and Medicare)
- Federal unemployment taxes
“Look-Back Period” + Deposit Schedule Depending on your look-back period, you will need to deposit accordingly. How to determine your look-back period? Simply put: it’s the time and amount used for your payroll tax deposit. More pointedly, it’s the total amount of employment taxes reported by his or her employer, over a 12-month period, that culminated the preceding June 30th date. I know that’s a little confusing … consider that payroll tax deposits would be the 12-month period that ended June 30th in the previous year. If you still have questions on the look-back period, please let me know! Give me a call, and I’d be glad to answer additional questions. Once you figure out the look-back period, you will fall into one of three buckets: If payroll obligation is <$2,500 then you deposit a “timely filed return” (with Form 941). If payroll obligation is $50,000 or less, then you deposit monthly. If payroll obligation is more than $50,000, then you deposit semi-weekly. Electronic Federal Tax Payment System (EFTPS) Enrolling in EFTPS allows you to submit payroll deposits online. After you sign up, you will enter your business banking info (account + routing number) and schedule payments accordingly. You have the ability to schedule up to 365 days in advance, and the EFTPS will record all payments for your records. Again, please reach out to me if you have any additional questions on making payroll tax deposits. No matter your payroll status, it’s vital this payment component is a part of your business routine. Similar to holiday bonuses, payroll payments are one way to take care of your people after all of their hard work. And, of course, to stay out of hot water with the ol’ IRS. Warmly, Kristin D. Gravitt Kristin Gravitt, PLLC
by Kristin Gravitt | TaxBiz
Let’s address an unfortunate reality: As a business owner, you have a greater number of tax reporting obligations than a regular person has. (Of course, you have MANY more tax-savings opportunities as well.) But with those increased obligations comes increased opportunity for things to slip through the cracks, potentially resulting in business tax penalties and interest charges from the IRS.
Some of these penalties are straightforward and simple. Others get really complex in how they’re calculated.
Of course, your best course of action is to just let us deal with all of this for you. This is, after all, what we do.
But just in case there’s any question in your mind about what your filing and payment responsibilities are to the IRS for your business, let’s run through them from the perspective of the business tax penalties that can be assessed if you don’t take care of them.
Buckle up, partner. There are lots in here…
Kristin Gravitt, PLLC’s Three Business Tax Penalties To Avoid When Possible
“Tell me and I forget. Teach me and I remember. Involve me and I learn.” – Benjamin Franklin
Your Lake Norman business may have a variety of tax return filing requirements. The exact forms you need to file will depend on the legal structure of your business, whether you have employees or utilize independent contractors, and the dollar amounts of some of the taxes you have to pay.
There are over 150 different penalties in the Internal Revenue Code. In this Strategy Note, we’ll cover the most common ones you need to be aware of.
Business Tax Penalty #1: Income Tax Return Penalties
Just like you need to file a 1040 return each year for your personal income taxes, your Lake Norman business has tax return filing requirements, too.
If you operate your business as a sole proprietorship, your business tax return is the Schedule C that gets attached to your personal 1040 return. If you don’t pay enough tax money throughout the year, you may end up owing an Estimated Tax Penalty from your self-employment income. In addition, you could be subject to Failure to File and Failure to Pay penalties, which we’ll go into detail below.
If your business operates as a partnership, you must file a Form 1065, Partnership Income Tax Return, each year. If you file this partnership tax return late, you’ll be charged an IRS penalty of $210 for each month it’s late, times the number of partners. This penalty is maxed out after 12 months of being late.
So, for example, if your business has four partners, and you file the tax return 14 months late, your penalty would be $210 x 4 x 12 = $10,080. That’s a big check to write to the IRS for a tax return that normally doesn’t have any taxes due!
But wait, there’s more! Since each partner in the partnership is required to receive a Form K-1 from the partnership, reporting their share of income, the IRS imposes additional penalties for failure to provide these K-1 forms. This penalty starts at $280 per K-1, and increases significantly if the requirement to issue the K-1 was “intentionally disregarded.” This intentional disregard is difficult for the IRS to prove, but if they can do so, the maximum penalty against the partnership can be up to $3,392,000.
That’s not a typo. The maximum penalty can be over three million dollars. Such penalties are incredibly rare, but they do happen.
If your business operates as a subchapter-S corporation, you must file a Form 1120S each year to report the business’ income, expenses, and other information. The same $210 per month penalty applies, multiplied by the number of shareholders of the corporation during the year. In addition, the same $280 penalty can be imposed for not providing the appropriate Form K-1 to shareholders on time.
Bottom Line: File these returns on time! There is usually no income tax due on a 1065 or 1120S return, so you should have no concerns about paying a balance due. The issue that most businesses face is that their bookkeeping isn’t up to date to get these returns prepared. We can help you get caught up and get returns filed to avoid these massive penalties.
Business Tax Penalty #2: Employment Tax Penalties
If you have employees within your Lake Norman business, then the payroll taxes that you pay to the IRS in relation to those employees are one of the highest enforcement priorities for the government. Over half of all the tax debt owed to the IRS is employment tax debt. These taxes consist of income tax withholding from your employees, plus both halves of Social Security and Medicare taxes.
Depending on your total payroll tax liability for each quarter during the previous year, the frequency with which the IRS expects to receive employment tax payments from your business can change. However, the vast majority of small businesses must deposit these taxes on a monthly basis.
If your business fails to make the required tax payment, you may be subject to a Failure to Deposit (FTD) penalty. This penalty is pretty stiff and increases the longer it takes you to pay. The penalty is:
2% if you’re 1 to 5 days late
5% if you’re 6 to 15 days late
10% if you’re more than 16 days late and the IRS hasn’t sent you a bill
15% if the IRS sent you a bill and has to chase you down for the money
In addition to making these routine tax deposits, most businesses also need to file a quarterly tax return to report wages, income tax withholding, and Social Security and Medicare taxes, among other items. If you file this tax return — Form 941 — after the due date, you can also be subject to a Failure to File (FTF) penalty of 5% per month, which caps out at 25%.
On top of these two penalties, the IRS will charge you a Failure to Pay (FTP) penalty on top of the FTD and FTF penalties. This penalty will accrue at the rate of:
0.5% per month as the base rate
Reduced to 0.25% per month if you’re on a payment plan
Increased to 1% per month if the IRS has threatened to seize some of your assets, and you still don’t pay
This FTP penalty has a maximum cap of 25%. If you don’t file and don’t pay, you do get a slight break, as the combination of the FTF and FTP together caps out at 47.5% combined.
With all these penalties combined — FTD, FTF, and FTP — the total can equal up to 62.5% of the tax liability.
Oh, and to top it off, they charge 3% interest on both the tax and penalties.
Can you see the IRS clearly isn’t playing around when it comes to employment taxes?
Business Tax Penalty #3: Information Return Penalties
Are your penalties out yet? The IRS has many, many more penalties to throw at your Lake Norman business. Here are two super important ones to also be aware of.
– If you utilize the services of independent contractors within your business, you’ll need to file a Form 1099-NEC for each contractor that you pay over $600 in a year. If you file this return late, the IRS may assess a penalty between $50 and $270 per 1099, depending on how late you file it. This penalty is interesting because it can be assessed for both the copy of the 1099 you’re supposed to send to the contractor and the copy you’re supposed to send to the IRS — effectively doubling it.
– If you have employees, you also need to prepare and file a Form W-2 for each employee, plus a Form W-3 to reconcile them with the IRS. Filing these late incurs similar penalties as those 1099 forms, ranging from $50 to $280, depending on how late you file them.
Both of these penalties are subject to the same $3,392,000 maximum penalty described earlier.
Are you convinced that you should leave all of this to the professionals? If you’d like a review of your business filing requirements to avoid these and the other 100+ penalties the IRS can assess, let’s talk.
To getting things done,
Kristin D. Gravitt
(704) 817-7624
Kristin Gravitt, PLLC
by Kristin Gravitt | TaxBiz
Today, let’s reach for some small business tips you should be taking away from this past season.
As Lake Norman business owners, we always need to be ready to adapt to changing times — this time around change just happened to come … faster.
So, what should we do about this? That’s my subject today.
Some Small Business Tips Your Lake Norman Business Should Learn…
“Your talent determines what you can do. Your motivation determines how much you’re willing to do. Your attitude determines how well you do it.” – Lou Holtz
For Lake Norman businesses, there really are a few small business tips that you MUST come away with after this past season’s disruptions.
So, let’s dive right into these lessons for any business…
Small Business Tips #1 – Establish and maintain a reserve of operating capital.
Just like every family needs an emergency fund of at least 3 months of living expenses, so too should every business have a working capital reserve. In my years of working with small businesses, it’s rare to see such reserves. When you operate on tight margins, it can be difficult to establish such a reserve, but as we saw at the start of the pandemic, it can make the difference between staying in business in trying times versus closing the doors forever.
Small Business Tips #2 – Critically evaluate your need for physical office space.
While the work from home trend has been slowly growing for over 20 years, the pandemic accelerated the trend by at least a decade, overnight. This means an incredible opportunity to reduce your office space costs, even if you’re in a type of business that requires physical space. Since lease expenses commonly account for 5 to 15 percent of a business’ expenses, saving on this cost can be substantial to surviving economic downturns. This means you could be an operating business, but instead of being tied to a physical location, you would have the freedom (and reduced cost) that a virtual business affords. Sounds nice, right?
For service businesses, think about how much office space you actually need. If your whole team can work remotely, maybe you don’t even need a dedicated space. Maybe you can get by just fine with a virtual office or coworking membership that gives access to conference rooms as needed.
If you run a store selling physical merchandise, you obviously need some square footage. But do you need back-office space for administrative staff, or can they work from home? What about inventory storage? Can you find a cheaper off-site storage space?
If your lease is up for renewal, think about getting into a more affordable location. And even if your lease isn’t up for renewal, why not ask your landlord for a rent rate reduction? A lot of commercial landlords would rather give you a discount than lose you as a tenant entirely, which means lowering your expenses, which means better things ahead.
Small Business Tips #3 – Embrace the digital.
2020 was a gut-punch to any Luddites that are still in business. Small businesses with tech-centric processes were clearly able to pivot to the “COVID economy” way faster and more seamlessly than other businesses.
For service businesses, the bulk of interaction can go totally digital. Even Lake Norman retail businesses can do most of their sales and customer service virtually.
People have really started to appreciate things going digital because now they don’t have to take the time to physically go to the store for small things. Depending on the nature of your business, offering value-added services like pick-up and delivery can not only boost business but also help in reducing the need for square footage.
The change train is a way of life, and this train is chugging faster than ever right now. Making sure your business doesn’t miss that train is no easy task, but we’re here to make sure you get on it.
Whether you need help with securing working capital, reducing expenses, or evaluating digital solutions, we’re here for you.
Let’s talk about how we can help.
Warmly,
Kristin D. Gravitt
(704) 817-7624
Kristin Gravitt, PLLC
by Kristin Gravitt | TaxBiz
During the first Super Bowl that Tom Brady won (with the Patriots), these were some of the companies who advertised (hat tip to Jon Erlichman of Bloomberg):
AOL
Blockbuster
Radio Shack
Circuit City
CompUSA
Sears
HotJobs
Yahoo
VoiceStream Wireless
Gateway Computers
The year was 2002, and life looked a little different, eh? BUSINESS looked different. Over the past few years, we’ve all had to adjust to some things.
It’s a large part of my job to work with Lake Norman business owners by “picking up the pieces” of their finances, and unfortunately, it’s often too late to have done any good.
Of course, we work with plenty of thriving businesses by helping them spot hidden opportunities buried within a mess of data.
That’s because every day my staff and I swim in an ocean of numbers, and we’ve become pretty quick about knowing what’s happening in a business by seeing where the “currents” are leading (if you will).
But often we’re stuck looking historically instead of real-time because too many Lake Norman business owners don’t have a system in place for getting those numbers to us quickly. But when they do, we can very quickly know how to help.
Some numbers don’t necessarily show up on balance sheets — and they’re perhaps even more important than what you see on a P/L statement …
Developing Accountability In Your Lake Norman Business Is Crucial
“You have been blessed with a mind that can direct your actions in any way that you choose.” -Ramon Luis
It’s easy to get lazy when a business can pick the low-hanging fruit available in an easy marketplace.
But, that’s not always the case, is it?
Markets shrink, funding dries up, prospects aren’t as easily found, or profitability margins decrease. So what do you do? Many Lake Norman business owners don’t know how to tweak their marketing and sales systems, so they can track the numbers at each step in the sales process and grow in new directions.
I have seen (in several industries) that the businesses who create a culture of accountability, have weekly sales meetings, track their numbers, and hold team members accountable, are successful … while those that guess and “assume” are usually out of business. It’s just a matter of time.
The key is knowing the numbers — what is the average expected result, and how you are measuring up against that result for each step in the process. This is where accountability starts.
But many people don’t want to track the numbers, because they might have to admit that they aren’t doing their job and letting their teammates down. Others simply do not have the systems or do not understand how to track those numbers or understand the benchmarks of the average business, the good business — and the great business.
Many self-employed business owners just feel what they are doing is “working” without having tested it or tracking where they are at. Sadly, this reflects a naivete that will eventually bite you in the rear end.
Unless you have completed valid measurements and received statistically reliable results, you don’t have any idea whether you are improving or going backward.
Especially in a crazy lockdown economy, it’s important to get ahead of the curve and not rely on lazy systems for your business.
So, here is the cold, hard truth: if you don’t know how to test scientifically — or if you do know but you think it’s not necessary — your business is on the slow road towards oblivion.
Here are the sort of things you should be watching…
If you want to develop business mastery, it starts with expertise in direct marketing and sales. And that means establishing the ability to measure the following factors and develop accountability around them:
- Statistically valid testing at each stage of the sales process
- Structuring price, term, refund, and premium tests for profit — and what works
- Determining the true lifetime value of every new customer
- Calculating “allowable acquisition costs” (what you can spend to get a customer)
- Measuring responsiveness by advertising source
- Identifying the “doubling date” or “half-life” of a new offer or customer
- When is the right time to purge unproductive prospects and staff
- How do you identify opportunities for multiple streams of revenue within your business (the numbers should tell you)
If you don’t have the ability to measure these areas in your Lake Norman business — or if your key people cannot — consider your business to be in trouble.
That being said, these are the sorts of conversations we love to have with you. We’d love to be a resource and to help you see the opportunities — and the traps — within your business.
We’re here to help.
I’m grateful for our partnership and for your referrals.
Warmly,
Kristin D. Gravitt
(704) 817-7624
Kristin Gravitt, PLLC
by Kristin Gravitt | TaxBiz
There is a difference between income and wealth.
Tax returns aren’t about wealth — they’re about “income”, and how that is defined.
Business owners and real estate investors have access to powerful tax advantages that wage earners do not … and wage-earners probably wouldn’t understand them.
This is true for smart business owners the world over.
Or perhaps you’re considering STARTING a Lake Norman business?
Let’s talk about making that business actually work on your behalf today.
Kristin Gravitt, PLLC’s Top 5 List of Potentially Fatal Business Mistakes
“Life isn’t about finding yourself. Life is about creating yourself.” – George Bernard Shaw
Based on what I’ve seen in my work with local Lake Norman businesses, here are the basic business mistakes people make when starting and operating a small business. These are by no means an exhaustive list of business mistakes, merely the most common — and eminently avoidable…
• Not having a CLEAR business plan. A good business plan will guide you through the first few months and years of your business. It should contain metrics that help you monitor costs as well as progress.
It doesn’t have to be fancy, or even something that would hold up under an investor’s scrutiny (though, certainly, if you’re going down that road, go the extra mile and make sure it’s good). But it does have to give you a roadmap to the goals you should be hitting by certain points — 3 months, 6 months, 12 months.
• Doing everything yourself. Even in a one-person operation, you’ll have your hands full. If you’re not in a position to hire employees, at least be ready to outsource the tasks that aren’t integral to your daily operations.
In this way, of course, you free yourself for the highest-level activities, such as marketing and sales.
• Targeting the wrong market. Nothing takes the place of solid market research before you launch your Lake Norman business. Find out who needs your product or service, where they are, what they expect to pay for it, and whether there are enough customers for you to survive.
But the BEST way to do this is not to use statistics or data … it’s to start small, and sell something to your targeted market first which is very similar to what you are wanting to ultimately provide. Survey results are one thing, but having people “vote” with their pocketbooks is a much better predictor of future results.
• Failure to prioritize sales. Your great idea for a product is only that–an idea. To actually grow, you’ve got to devote sufficient time to sales. Instead of trying to perfect your product, work on getting it out to customers. Let your customers help you perfect things, especially after you start selling to them.
• Underestimating your resources. No matter how detailed your business plan is, chances are your startup will require more time and money than you anticipate before it gets off the ground. Be patient, and plan for the long haul.
In fact, here’s a good rule of thumb:
1) Take your projected costs: double them.
2) Take your projected revenue: cut it in half.
If your proposition is still profitable, give it a shot.
Warmly,
Kristin D. Gravitt
(704) 817-7624
Kristin Gravitt, PLLC
by Kristin Gravitt | TaxBiz
If we’ve learned anything from 2020, it’s that our best-laid plans don’t always turn out. As the great philosopher Mike Tyson once said: everyone has a plan until they get punched in the face.
What is your plan for exiting your Lake Norman family business?
You need to have a direction.
For many, it’s moving the family business towards a sale. But for many others, they want to see their work passed onto subsequent generations, and to provide an ongoing source of supply and fulfillment for their children.
That’s who I will address today.
Passing Down Your Lake Norman Family Business
“You can always amend a big plan, but you can never expand a little one.” -Harry S. Truman
According to the most recent data I’ve seen, only 34% of family businesses successfully pass to the second generation, and only 13% make it to the third generation. Those aren’t great numbers, considering that many family business owners (including many in the Lake Norman area) try to pass down their businesses to their children.
Those who are successful balance three different dynamics well: family, business and ownership — each of which have different goals and objectives, as well as rules of behavior.
Things that can be talked about with ease around a business roundtable might not go over well with family, and the kind of intimacy present within a family structure doesn’t always lend itself to wise business decisions.
So, let’s take a look at each of these areas and see how they should be approached.
The Family Role
For most Lake Norman family businesses, this is the most important dynamic to consider. The challenge when it comes to succession is that the older generation would want to pass on not just business sense, but also the particular ideals by which the family seeks to operate the business.
To do so, each generation has to be actively raised to the level of “peer” by the actions and attitudes of the generation before them. There are many ways to go about ensuring this happens, but my suggestion is that proven family character must be required for leadership in the family business, and some kind of outside advisory board (whether formal or not) with at least two outsiders can help keep family values intact.
The Boundaries of Business
For a business to be successful, it has to be able to make quick decisions and create change when needed. Because it needs to make a profit long term, it must (by definition) be market-oriented — which means not family-focused. As a result, family members can’t be treated equally. If one family member works part-time, while another chooses to work full-time, plus nights and weekends, the monetary incentive needs to be in proportion to the profit each brings into the business.
If a business is passed from one member of the older generation to one member of the next generation, many of these issues can be postponed or ignored. But if the business moves from a single owner to a partnership of siblings (and then to a set of cousins who are shareholders), the business must continue to run like a business — while simultaneously dealing with a possibly wicked brew of family tension. You need to plan for: leader selection, the role of non-employees, conflict resolution, and the shared control of different family branches.
Further, those actually running the business must also be trained in the financial responsibility of management, preferably before the change of ownership. There will need to be policies for fair dividend distribution for those not employed. Again, it’s a very good idea to involve outside advisors, and not just during the succession period itself.
Who Owns It?
As soon as a family business is divided into shares, there will be those working “in” the business and those who merely own shares in the business. As a result of this, you need to make a predetermined plan for buyouts, professionalized management, mentoring, and family council meetings.
The ownership component is probably the easiest to transition and transfer, but it won’t achieve your succession goals without a solid family structure AND a healthy business structure in place.
Family businesses are complex, and there are many things to consider. But to do it right, you need to make sure you are training family business leadership well, that business decisions are made for business reasons only, and that ownership transfers are made according to a good plan.
That’s the way you pass down a good family business.
Easy, right?
Again, if you are operating a family business, make sure you get all of this straightened out.
Warmly,
Kristin D. Gravitt
(704) 817-7624
Kristin Gravitt, PLLC
