Business Taxes

As an employer, it’s critical to stay informed about changes in regulations that impact how you classify workers.

The U.S. Department of Labor has updated the rules regarding independent contractor classification. The traditional tests used to classify independent contractors versus employees are no longer valid, requiring a shift in how you approach this distinction when hiring.

For years, many employers have grappled with the blurred line between independent contractors and employees. Misclassifying workers can lead to significant legal and financial consequences for your business.

The DOL released a comprehensive six-part test to assist you in correctly classifying workers as either independent contractors or employees. Here’s a brief overview:

1. Is the work vital to your business? If the worker’s role impacts the core operations of the business, they’re likely economically dependent on the employer. On the other hand, the work of an independent contractor is usually inessential to the organization.
2. Does the worker’s managerial skill affect their opportunity for profit or loss? An independent contractor can experience both profit and loss based on their managerial decisions, such as hiring, purchasing and marketing. In contrast, an employee’s ability to earn more money is not tied to their managerial skills.
3. How does the worker’s relative investment compare to your investment? Independent contractors typically make investments that contribute to the growth and success of the business, while an employee’s investment is usually minimal compared to the employer’s.
4. Does the work require special skill and initiative? A worker’s business skills and initiative play a role in determining their economic independence. But having specialized skills alone does not automatically classify a worker as an independent contractor.
5. Is the relationship permanent or indefinite? If the worker’s association is ongoing or indefinite, they’re likely an employee. Independent contractors work on a project basis.
6. What is the degree of your control as the employer? The level of control exerted by the employer is a key factor in determining the worker’s economic dependence. Independent contractors have more autonomy over their work, while stringent control over a worker’s job schedules and tasks indicates an employer-employee relationship.

Implications for employers

It’s essential to review and update your current practices and contracts to ensure compliance with the updated classification criteria. This includes outlining the scope of work, payment terms and the level of control exerted over the contractor.

By keeping detailed records, you can demonstrate compliance in the event of an audit or legal dispute. The U.S. Department of Labor requires employers to maintain careful documentation for each exempt and independent contractor hired including:

• Forms signed by independent contractors acknowledging their classification
• A copy of contract between the employer and the independent contractor
• Copies of any licenses or registrations held by the independent contractor

Taking a proactive approach

While the new regulations may require adjustments to your current practices, they also present an opportunity to ensure fair treatment of all workers and uphold the integrity of your business.

If you’re looking for guidance regarding your employee classifications or business structure, reach out to our business advisory team– we’re here to help.

One crucial element that can make or break your business? Financial management.

Understanding the financial health of your organization is essential for making informed decisions and planning for the future. But to gain valuable insights and take proactive steps to improve your financial stability, you need to know what metrics to track.

Every business is different, but the following metrics can serve as a solid foundation:

Profit and Loss (P&L) statement. Also known as an income statement, your P&L is a fundamental financial tool that tracks your business’s revenue, expenses and profitability. This statement provides a snapshot of your financial performance over a specific period — typically a month, quarter or year — revealing your gross profit margin, operating profit margin and net profit margin.

P&L statements are very telling in terms of how effectively your business generates profit from its core operations and oversees day-to-day financial operations.

Cash flow statement. A cash flow statement shows how cash moves in and out of your business over time, while separating cash inflows (sales revenue, loans or investments) from cash outflows (expenses, loan repayments or asset purchases).

By regularly reviewing this statement, you can identify potential cash flow gaps and take proactive measures to address them. For example, you can negotiate more favorable payment terms with suppliers or make tweaks to optimize your inventory management.

Key performance indicators (KPIs). KPIs are specific metrics that measure various aspects of your business’s operations, helping assess its overall health and progress toward your goals. Important financial KPIs include revenue growth rate, customer lifetime value, return on investment (ROI) and customer acquisition cost (CAC).

By tracking these KPIs, you can best prioritize customer retention efforts, assess the profitability and efficiency of your business’s investments, and identify areas of strength and weakness within your business. CAC, for example, is a straightforward metric. Simply divide the funds spent on customer acquisition by the number of prospects who converted during a given time period. Understanding your CAC is crucial for marketing planning and budgeting, ensuring you’re not overspending time and resources in the pursuit of new customers.

Revenue per employee. This ratio can help you keep an eye on how well you’re utilizing resources, as well as how productive your employees are. The formula is simple: Calculate the total revenue for a set time period and divide your employee count for the same period. The result is a general idea of the value you’re getting from your talent, making sure they’re contributing to your profitability.

Only a starting point

Tracking the right financial metrics is vital for every business owner, and you may need to customize your approach based on your unique business circumstances. With the right knowledge in hand, you’ll be empowered to work smarter and drive your business forward.

At Magone & Company, we can help your business maintain a healthy cash flow and plan for long-term financial success. Reach out to us today at (973) 301-2300.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.

When saving for retirement, tax advantages play a significant role. Traditional individual retirement accounts (IRAs) and employer-sponsored retirement plans such as 401(k)s offer tax-deferred growth, so you don’t pay taxes on the investment gains — as long as the money stays in your account.

However, the IRS doesn’t want you to avoid paying taxes on these funds indefinitely.

If you’re approaching age of 70½, required minimum distributions (RMDs) will help ensure that you start withdrawing money from your tax-deferred retirement accounts and pay the appropriate taxes on those distributions. But did you know that a qualified charitable distribution (QCD) can fulfill your RMD obligations while avoiding taxes on the distribution?

The ABCs of a QCD

A QCD refers to a taxable distribution that is paid directly from an IRA to a qualified charity. According to the IRS, this includes nonprofit groups that have a charitable, educational, religious, literary or scientific purpose, or that work to prevent child or animal cruelty.

When a QCD is directly paid from your retirement account to an eligible charity, it’s not included in your taxable income, meaning the distribution is tax-free. The giver must be at least 70½ at the time the QCD is made.

Because it’s tax-free, you cannot deduct the QCD on your Schedule A as an itemized deduction. In order to claim that charitable contribution deduction, your total itemized deductions must exceed the standard deduction. Keep in mind, the increased income resulting from the distribution could impact your eligibility for certain tax credits and push you into a higher tax bracket.

Questions regarding qualified charitable distributions? Let us help you with tax planning to minimize your tax burden and make the most of charitable giving. Reach out to the tax experts at Magone & Company or call us today at (973) 301-2300 for an evaluation of your tax situation.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.

Fifty percent of small businesses fail within five years. Now, that’s a troubling statistic. What goes wrong? Are you making missteps that could lead to financial failure?

Find out the top financial mistakes that are all too common for small businesses — so you can ensure that you’re not caught in the same painful cycle.

Mistake #1: Not sticking to a budget. When you’re caught up in your business, it’s easy to overlook the importance of budgeting, which can lead to disastrous and costly consequences.

A budget provides a roadmap for your business’s financial journey, allowing you to set realistic goals, allocate resources effectively and make informed financial decisions. It also can help you identify potential financial pitfalls before they become major issues.

Mistake #2: Failing to differentiate personal and business expenses. By keeping personal and business finances separate, you not only maintain accurate records, but also protect your personal assets.

In the unfortunate event that your business faces legal issues or bankruptcy, having separate accounts can shield your personal savings, home and other assets from being seized to cover business liabilities. In addition, keeping separate accounts helps simplify your tax reporting, ensuring that you stay compliant and avoid unnecessary penalties.

Mistake #3: Using credit cards to cover business costs. While a credit card can increase your company’s purchasing power, business credit issuers can lower your credit limit and raise your interest rates at any time.

By putting major expenses on a card, you may pay significantly more in the long-run. Instead, business loans may be a smarter option due to lower rates.

Mistake #4: Expanding your headcount too quickly. During an upswing, it may be tempting to quickly to add to your team. But hiring, training and maintaining new staff is a hefty expense that might not be sustainable. And if you have to let them go, creating severance packages and extending insurance benefits also carry a price tag. Unless absolutely necessary, hold off on hiring to see if the growth persists.

Mistake #5: Neglecting to build an emergency fund. Failing to plan for unforeseen circumstances can leave your business vulnerable to financial shocks. Building an emergency fund is essential, providing a safety net to help you weather unexpected expenses, such as equipment breakdowns, legal disputes or economic downturns. Without an emergency fund, you may be forced to rely on credit cards, which can cripple your business’s financial health in the long-run.

Mistake #6: Doing your own taxes. Did you know that 77% of percent of small business owners feel the burden of business taxes? Unless you’re a tax professional, tackling your own business tax return can lead to trouble.

For example, if you claim too many deductions, you may find yourself getting audited. If you don’t claim enough, you could end up owing the government money that you haven’t budgeted for.  There are many variables that can impact your company’s tax circumstances, so it’s your best bet to consult with a trusted business or tax advisor.

Take charge of your finances now — before it’s too late

The professionals at Magone & Company can help you navigate debt traps, business taxes and smarter financial management practices to help keep your business afloat. Call us today at (973) 301-2300 for a specific evaluation of your situation.