Tag: accounting

Posted on Mar 30, 2018

Every company or organization will have different needs for payroll administration based on business and compensation structures, benefit offerings, the specific industry and the state and local tax laws. While determining a good fit for outsourced payroll, anticipate how much time the set-up of such services could take. A long set-up time and possible mistakes could have a significant impact on business management and employee morale. Rather than having our clients input all of their data, we walk them through the data collection process. We also provide consultation on areas where the company has had questions or problems, such as garnishment deductions or shareholder compensation. We alert them to any changes in wage and hour laws or multi-state laws that could affect them.

Our goal is to limit client exposure to penalties as we manage payroll. Common questions include:

  • Structure of the payroll
  • How often employees are paid
  • Direct deposit or by check (or both!)
  • Structure of the company and number of offices and employees
  • Location of offices (multi-state?)
  • Types of benefits
  • Unusual deductions
  • Unusual compensation

Collecting this information up front allows us to help clients design an outsourced model that makes sense for them, and doesn’t leave them trying to figure it out for themselves. We find that some clients like to manage parts of the payroll and benefits process themselves, while other parts are best handled through outsourcing.

The Outsourced Payroll Onboarding Process

As a CPA firm dedicated to payroll administration and consulting, Cornwell Jackson has onboarded new clients in less than a month depending on the level of payroll complexity. Our goal is always onboarding within 30 to 45 days. We typically recommend that companies convert at the beginning of a new quarter or pay period — or at year-end — to make the transition align with financial reporting deadlines. A typical onboarding process with our firm looks like this:

  • Client consultation to design the outsourced model
  • Client data gathering
  • Buildout of the payroll account
  • Payroll set-up checklist to cover all items

Once your company has an efficient model for payroll administration, it is much easier to adjust items as needed through the year. For example, we run across a lot of questions regarding personal use of a company-owned vehicle as a benefit. The ratio of personal use must be calculated for the employees’ W-2s and the benefit run properly through payroll. New hires and promotions also bring with them a wealth of payroll questions, but are more easily handled with an efficient system.

When your CPA is in touch with daily business realities through payroll administration, the long-term value extends beyond payroll accuracy. A dedicated team can consult with you on decisions such as when to hire more employees, when to adjust tax planning and cash flow strategies and timing of bonuses. Payroll efficiency even ties into business valuations as a consideration of overall processes and systems in place to run the business.

Payroll is the most up-to-date KPI in a business — and the most expensive.  Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Download the Whitepaper: With Payroll Outsourcing, Don’t Go it Alone

Scott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published May 13, 2016. Updated on March 30, 2018. 

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Posted on Mar 20, 2018

Payroll Outsourcing

For many small businesses, payroll may be handled in-house. And yet, the laws and regulations surrounding employee compensation and benefits can challenge owners and back office staff to stay efficient and compliant. Payroll ties directly into individual and company tax reporting as well as employee benefit compliance. If and when companies choose payroll outsourcing, they must weigh the potential benefits against the ability of the payroll provider to deliver a high level of customer service and communication. Companies and industries differ on how they structure payroll and benefits. Laws and regulations also vary state by state. Consulting on payroll structure, schedules, regulatory changes and reporting, therefore, should be part of the relationship while still being cost effective for the company. It’s helpful to start this discussion with your CPA.

What to Ask your CPA about Payroll Outsourcing

Some CPA firms offer payroll administration as part of basic or strategic Payroll Outsourcing WP Downloadaccounting services. The level of administration and services vary widely. The potential benefit of having your CPA firm handle payroll administration, however, is that the team understands the world of taxes and accounting. They can streamline payroll reporting, deposits and filing schedules into the audit or tax deadlines they already handle for the business.

However, not every CPA firm offers payroll administration. Due to its complexity, it’s also important that the firm has a staff of professionals dedicated to this area of your business. If, in fact, the firm offers a focused niche in payroll administration and consulting, there are several benefits to the arrangement:

  • Expanded resources to monitor new compliance issues
  • Reduced overhead costs (assuming a packaged engagement with other services)
  • Multi-state payroll experience
  • Corrected instances of overpayment or underpayment
  • Managed filing and payment schedules with IRS, state and local tax authorities
  • Limited client exposure to potential penalties
  • Consulting on software options and efficient payroll structures
  • Streamlined communication with other tax, audit and business needs

At Cornwell Jackson, we offer payroll administration and consulting services to our clients. We have invested in software and training for a team dedicated to this service, including certification as a CPP through the American Payroll Association.

The need was evident after too many instances of misclassification 1099 errors as well as W2 mistakes at tax time. We also noted mistakes in HSA and life insurance reporting and general improper reporting of cash and non-cash benefits. Our clients were paying for payroll administration, and then paying our firm to fix mistakes. We realized that our experience could help reduce or prevent problems before they even happen — and reduce our clients’ expenses.

After investigating the value our firm could provide in this area, we learned about many differences between payroll providers. When discussing payroll administration with your CPA firm or an outsourced service, there are several questions you should ask:

  • How much experience does the provider have in payroll administration — and is there a dedicated team?
  • Will the team walk you through data collection and set-up or are you on your own?
  • Who is your go-to contact to ask questions about liabilities or deadlines?
  • Is the provider NACHA compliant for ACH direct deposits?
  • Can you arrange for payroll tax payments on a schedule that supports cash flow along with compliance?

This last question is an important business consideration that most companies don’t know about. Some payroll services withdraw all funds from the business account for payroll transfers and taxes all at once, even if taxes aren’t due for a few weeks. If your receivables come in the first week of the month and payroll taxes are due on the 15th of the month, you can schedule payments in a way that supports cash flow while still being compliant. In addition, payroll services may not provide guidance on industry-specific issues like auto dealer comps or law firm shareholder bonuses, for example. Business owners must carefully consider the level of expertise a provider has in your industry.

Payroll is the most up-to-date KPI in a business — and the most expensive.  Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Continue Reading: Outsourced Payroll Onboarding: Build in time for transition and results

SB HeadshotScott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published April  18, 2016. Updated on March 20, 2018. 

 

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Posted on Mar 8, 2018

Payroll Outsourcing and Payroll Administration

There is a common story we see across small businesses of all sizes. Owners and operators of the company are focused on top line growth, hitting the pavement to bring in new business. They add employees to support the new business growth. They add benefits to keep those great employees. Before realizing it, the owners and small bookkeeping staff are overwhelmed with benefit and payroll administration. Is the company doing it right? Do owners and employees know what they don’t know?

At this point, the owners seek advice from other business owners and their CPA. Would outsourcing payroll make sense or should they add in-house staff to manage it better? After reviewing a few payroll services, the company is understandably faced with more questions about which service provides the best options — not to mention price.

Once decided on a payroll service, the real education begins. The company is still providing a lot of information to the payroll service to set up the structure and system, such as personnel information, their employment status, types of benefits and how each employee wants those wages and benefits managed through payroll. Later, staff also must reach out when there are new hires, promotions and changes to benefits. Depending on the payroll service, owners and operators might not get a lot of help understanding everything. They are also on their own to figure out internal processes that make information gathering and sharing simpler.

Let’s say the business expands even more to another state. Then the owner is faced with multi-state payroll complications. Although the solution to a well-managed payroll and benefits system takes time and strategy, the opportunity to address payroll complexity first lies with your CPA. This relationship can either simplify or increase complexity, so let’s look at some of the payroll pitfalls and questions every business owner should consider.

Pitfalls of Poorly Managed Payroll Administration

Businesses can face serious fines and penalties from the Internal Revenue Payroll Outsourcing WP DownloadService and other tax authorities for failing to comply with timely payments and reporting. At a minimum, employers must account for federal income tax, federal and state unemployment tax, Social Security and Medicare. Many companies have run into trouble in the areas of paying unemployment taxes, making late payroll deposits, incorrectly classifying employees as independent contractors on 1099s and assuming that depositing payroll is the same as reporting.

Penalties can be classified and pursued as “failure to deposit,” “failure to pay” or “failure to file.” Worst-case scenarios if payroll issues aren’t resolved could include losing the business and/or being charged with a federal crime. Individual shareholders and even corporate officers can be pursued and assessed penalties under certain circumstances.

The Department of Labor’s impending changes to overtime exemption rules are creating even more angst in the area of wage and hour compliance. Employees previously exempt from overtime rules may now be considered non-exempt, leading to the need to track overtime hours and communicate possible changes in benefits. It may even require employers to dictate how employees can take time off or how they work outside of normal business hours. These changes tie directly into payroll administration and tax planning.

On the benefits side, employers can offer a variety of things to compete for talent as well as help employees work efficiently. Properly classifying these benefits and properly withholding for pre-tax or taxable benefits simply adds to the complexity. Handle something wrong, and you will have compliance problems as well as upset employees.

It is fair to say that payroll administration and compliance is a big deal, and the decision on whether or not to outsource should not be taken lightly.

Payroll is the most up-to-date KPI in a business — and the most expensive.  Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Continue Reading: Things to Ask your CPA about Payroll Outsourcing

SB HeadshotScott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published April 6, 2016. Updated on March 8, 2018. 

 

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Posted on Mar 13, 2017

In a significant case, homebuilders that want to realize income under the completed contract accounting method based on an entire development won a victory.

The United States Court of Appeals for the Ninth Circuit upheld a lower court ruling affirming that a homebuilding group could defer tax under the completed contract method rather than use the percentage-of-completion accounting method.

Background

A long-term contract covers the manufacture, building, installation, or construction of property, if not completed in the tax year in which the contract is signed. Although there are certain exceptions, contractors with these contracts generally must use the percentage-of-completion method, realizing income over time.

Under the regulations for long-term contracts, a job is complete on the earlier of:

1. When the subject matter of the contract is used by the customer for its intended purpose and at least 95% of the total allocable contract costs have been incurred by the taxpayer (the 95% test), or

2. When there is final completion and acceptance.
With the completed contract method, however, contractors don’t report any income until a contract is complete, although payments are received before completion. The completion date is determined without regard to whether secondary items in the contract have been used or finally completed and accepted.

The completed contract method may be engaged instead of the percentage-of-completion method in home construction and other real property construction contracts if the contractor:

Estimates that the contracts will be completed within two years of the start date, and

Meets a $10 million gross receipts test.
A home construction contract is one where 80% or more of the estimated total contract costs is reasonably expected to be attributable to the building, construction, reconstruction, or rehabilitation of dwelling units contained in buildings containing four or fewer dwelling units, and to improvements to real property directly.

Facts of the Case

Shea Homes Inc. and several subsidiaries formed an affiliated group of corporations. The group built and sold homes in master planned community developments in Arizona, California and Colorado. The communities ranged in size from 100 homes to more than 1,000. The group’s business model emphasized the special features and amenities of master planned communities, which can include parks, golf courses, lakes, bike paths, and jogging trails.

The purchase price of each home included the building, lot, improvements to the lot, infrastructure and common area improvements, financing, fees, property taxes, labor and supervision, architectural and environmental design, bonding and other costs. Income from the sale of homes was based on completion of the entire development, rather than on the sale of each individual home. The IRS disagreed with the group’s use of that accounting method and assessed deficiencies. Eventually, the case went to court.

Round 1. The Tax Court looked at eight representative developments out of 114 that the group built during the tax years in question.

The group contended that completion and acceptance didn’t happen until the last road was paved and the final performance bond required by state and municipal law was released.

The IRS argued that the subject matter of the taxpayers’ contracts consisted only of the houses and the lots upon which the houses were built. Under the tax agency’s interpretation, the contract for each home met the completion and acceptance test when escrow was closed for the sale of each home. It also said that these contracts, which were entered into and closed within the same tax year, weren’t long-term contracts.

But the U.S. Tax Court upheld the group’s interpretation of the completed contract method. It also held that the subject matter of the contracts consisted of the home and the larger development, including amenities and other common improvements.

The court rejected the IRS argument that the subject of the contract was just the lot and the house, and that the common improvements in the development were only secondary items that didn’t affect completion of the contract.

Court’s Interpretation of the Primary Subject

The primary subject matter of the contracts included the house, lot, improvements to the lot, and common improvements to the development, the court ruled. The amenities were crucial to the sales effort and buyers’ purchase decisions as well as to obtaining government approval for the development. Accordingly, the amenities were an essential element of the home sales contracts.

Round 2: On appeal, the IRS tried a different argument. It conceded that the group’s home construction contracts encompassed more than just individual homes and lots and included common improvements of each planned community that the group was contractually obligated to build.

But it asserted that the group had applied the 95% test incorrectly.

The IRS argued that each contract pertained to the particular home and lot plus the common areas, but not the other homes in the community. By taking this approach, the IRS reasoned that the 95% test would be met only when the group incurred 95% of the budgeted costs of the home, lot and common amenities, but not the costs of the other homes.

The Ninth Circuit Court didn’t buy that argument. It said that the group’s application of the 95% test clearly reflected income because the purchasers of the homes were contracting to buy more than the homes’ mere “bricks and sticks.” . They were paying a premium because they expected to enjoy benefits and a certain lifestyle from the community’s amenities.

The Ninth Circuit affirmed the Tax Court’s decision.

A Victory for Deferring Taxes

This case clearly signals a victory for homebuilders that want to realize income under the completed contract method based on an entire development, not the separate sales of individual homes. However, other considerations may come into play. Consult with your tax advisor about the facts of your specific situation. (Shea Homes, Inc., No. 14-72161, CA-9, 8/24/16).

Another Circuit Court Sides with the IRS

The IRS prevailed in a similar case, but with a couple of important differences.

The Fifth Circuit Court of Appeals upheld a U.S. Tax Court decision that a residential land developer’s sale and custom lot contracts constituted long-term construction contracts, but weren’t home construction contracts as defined by tax law. Thus, the developer couldn’t use the completed contract method.

There are two critical distinctions in this case from the Shea Homes case before the Ninth Circuit Court of Appeals:

1. The taxpayer in this case wasn’t a homebuilder, but rather a land developer that sold finished lots to builders that sold the homes to consumers.

2. The tax deferral resulting from the use of the completed contract method by the Shea group was, on average, less than five years. In contrast, the deferral period in the Fifth Circuit case was much longer in a number of instances. (Howard Hughes Company, LLC, 805 F.3d 175, CA-5, 10/27/15)

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Posted on Jun 9, 2016

Recordkeeping

When starting a small business, taking the time to set up your recordkeeping system properly, right from the beginning, will save you time and money down the road — and could make the difference between success and failure.

Certified public accountants (CPAs) are experts in small business finance including taxes, financial reporting, business advisory, personal financial planning as well as bookkeeping and payroll processing.

According to CPAs, good recordkeeping preparation and planning can:

  • Make tax preparation easier. Back-up documentation may save you taxes, interest charges and penalties if the Internal Revenue Service (IRS) ever questions your return.
  • Allow you to comply with multi-state taxes, such as sales taxes (including internet sales) and payroll taxes.
  • Give you a better handle on your overall financial position, how your business is performing and help your CPA identify financial and tax planning opportunities.
  • Create efficiencies throughout the business by spending less time locating documents and information.
  • Provide your successor with a roadmap to your financial affairs if you die or become incapacitated.

BASIC CONSIDERATIONS

One of the first things you will need to determine is whether to use a traditional paper filing system, an electronic filing system or a combination of the two. You should carefully consider the pros and cons of each type of system in light of your business needs and resources.

CONVENIENCE AND FLEXIBILITY

To keep up with your recordkeeping, it’s important to build a system that is convenient. Electronic records are very easy to transport. You can move the equivalent of boxes of paper documents with the click of a mouse via encrypted email or a secure portal. When stored in the Cloud or a secure portal, you can work on them from home, the airport or the beach. CPAs work with both electronic and physical records, but your CPA will have specific recommendations due to the requirements for business recordkeeping in your state and/or within your industry. Be sure to consult with your CPA to find the recordkeeping system that best suits your needs.

RELIABILITY

Paper files are extremely reliable, provided you follow documented protocols for setting up and maintaining them. They are not susceptible to server failures or power outages. Nor are they dependent on the ongoing support of a systems vendor. Paper files, however, are susceptible to floods, fires and other natural disasters. It’s difficult and costly to maintain redundant backups of paper records. Although electronic media can also be easily damaged or destroyed, redundant backups are generally easily made and recovered.

SECURITY AND PRIVACY

Identity theft, fraud, privacy law violations and numerous other crimes have been enabled by electronic recordkeeping systems. Even some of the most sophisticated electronic security systems have been compromised. As a business owner you have a responsibility under multiple laws and regulatory bodies to protect the confidentiality and security of your customer’s records. Electronic records can be kept secure when proper measures are taken to protect privacy, but this is an entirely different process from keeping filing cabinets locked and installing an office security system. Because you are legally responsible for your data, you should NOT depend solely on your electronic recordkeeping systems vendor to ensure the security of your electronic records.

STORAGE

When it comes to storage, electronic files clearly have the advantage. The longer you’re in business and the more you grow, the more burdensome the space requirements for paper records. Many businesses resort to offsite records storage both to save space and to mitigate the risk of records being destroyed. At some point, paper records typically need to be shredded, which is labor intensive and costly.

COSTS

The cost of electronic record storage has become highly affordable compared to traditional paper-based systems. Some original documents should still be kept in paper copies, but the vast majority can be digitized.

FILE LOCATION AND ACCESS CONTROL

Although your filing system will need to be tailored to meet the needs of your specific business, the following elements can help you avoid common pitfalls.

STANDARD PROTOCOL

When it comes to filing, almost everyone has his or her own ideas about how they’d like to see the files organized. If left unchecked, one person’s innovation soon becomes another’s frustration. Set a standard protocol for every type of file, then teach, monitor and enforce it.

CENTRAL LOCATION For security and emergency purposes, keep all files in one central location that can easily be accessed without being dependent on a single person. The same principle applies to electronic files, which should be kept on a shared server or Cloud provider’s system rather than on an individual’s PC workstation.

LIMIT ACCESS

Access to files should be limited to only those who have a specific business purpose for doing so and security protocols should be set up accordingly. An advantage to most electronic recordkeeping systems is that a date and time stamp log is automatically generated each time a user accesses a file. If you implement an electronic system, you should periodically review access logs and follow-up on any unusual activity.

SAFE DEPOSIT BOX

Documents that are difficult or costly to replace should be kept in a safe deposit box. Your safe deposit box should hold any records of ownership such as deeds and titles and original business documents such as articles of incorporation, corporate resolutions, bylaws, partnership agreement, minutes from annual meetings, loan documents and so on. Because access to your safe deposit box could be delayed in emergency situations, keep copies in a clearly marked paper or electronic file. Additional copies should be held by your attorney.

FINANCIAL OVERVIEW

With your recordkeeping system in place, prepare a procedures manual explaining it for employee training purposes and in case someone outside the business needs access due to a long-term illness or other emergency. Be sure to include the location of important documents as well as insurance policy information. You should also list bank and investment accounts, as well as all credit accounts with account numbers. Also, you should list information on other debts, including mortgages and loan documents. Give a copy of this manual to trusted family members, your attorney, CPA and trustees, if any.

Setting Up Your Bookkeeping System

Your instinct may be to just set up bookkeeping system “from a box” of purchased software or from the Cloud. However, before you set up your system, you’ll want to talk to our team of CPAs about purchasing software that is right for your type of business and easy to use.

Your CJ CPA can help you design the proper chart of accounts that will give you key information on your business and will save you time in the long run. If you plan to manage your books in-house, making the investment in a system that works with that of your CPA could prove to be more strategic when seeking advice and easier when it comes to closing the year end, generating financial reports and filing income tax returns.

SB Recordkeeping CoverGuide to Small Business Recordkeeping

To download the Guide to Small Business Recordkeeping, which includes a list of what documents your business must keep and for how long, click here.

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