Posted on Dec 5, 2018

On January 1, 2019, many states and localities are increasing their minimum wage amounts. In some areas, the amounts paid to tipped employees is also increasing and garnishment limits may also be changing.

This chart briefly details the changes that will kick in on New Year’s Day. For more information about your situation, consult with your payroll advisor.

State Change on January 1, 2019
Alaska    The minimum wage will increase from $9.84 to $9.89 per hour. Tipped employees must be paid this same rate.
Arizona    The minimum wage will increase from $10.50 to $11 per hour. The cash minimum wage for tipped employees will increase from $7.50 per hour to $8 per hour. In Flagstaff, the minimum wage will increase in from $11 to $12 per hour.
Arkansas    The minimum wage will increase from $8.50 to $9.25 per hour. For tipped employees, the cash minimum wage will remain at $2.63 per hour.
California    The minimum wage will rise from $11 to $12 per hour for employers with more than 25 employees. It will increase from $10.50 to $11 per hour for employers with fewer than 26 employees. Tipped employees must also be paid this rate. The minimum wage will also increase in Belmont, Cupertino, El Cerrito, Los Altos, Mountain View, Palo Alto, Redwood City, Richmond, San Diego, San Jose, San Mateo, Santa Clara and Sunnyvale.
Garnishment limits may also change. In CA, the maximum amount subject to garnishment can’t exceed the lesser of 25% of weekly disposable income, or 50% of the amount by which the individual’s disposable earnings for the week exceed 40 times the greater of either the state or local minimum wage rate in effect where the debtor works when the earnings are payable.
Colorado    The minimum wage will increase from $10.20 to $11.10 per hour. The cash minimum wage for tipped employees will increase from $7.18 per hour to $8.08 per hour. The garnishment limit is also changing.
Delaware    The minimum wage will rise from $8.25 to $8.75 per hour. For tipped employees, the cash minimum wage rate will remain at $2.23 per hour.
Florida    The minimum wage will increase from $8.25 to $8.46 per hour. The cash minimum wage for tipped employees will increase from $5.23 per hour to $5.44 per hour.
Maine    The minimum wage will increase from $10 to $11 per hour. The cash minimum wage for tipped employees will increase from $5 per hour to $5.50 per hour. The garnishment limit is also changing.
Massachusetts    The minimum wage will rise from $11 to $12 per hour. The cash minimum wage rate for tipped employees will increase from $3.75 per hour to $4.35 per hour.
Minnesota    The minimum wage will increase from $9.65 to $9.86 per hour for large employers (those with annual gross sales of $500,000 or more, exclusive of retail excise taxes). The minimum wage for small employers will increase from $7.87 per hour to $8.04 per hour. Tipped employees must also be paid these rates.
Missouri    The minimum wage will increase from $7.85 to $8.60 per hour. For tipped employees, the cash minimum wage will increase from $3.925 per hour to $4.30 per hour.
Montana    The minimum wage will increase from $8.30 to $8.50 per hour. Tipped employees must also be paid this rate.
New Jersey    The minimum wage will increase from $8.60 to $8.85 per hour. The cash minimum wage for tipped employees will remain at $2.13 per hour.
New Mexico The state minimum wage will remain at $7.50 per hour, but the minimum wage rate will increase in Albuquerque, Bernalillo County and Las Cruces.
New York    On December 31, 2018, the minimum wage will rise from: 1) $13 to $15 per hour for NY city employers with 11 or more employees; 2) $12 to $13.50 per hour for NY city employers with 10 or fewer employees; 3) $11 to $12 per hour for Nassau, Suffolk and Westchester county employers, and 4) $10.40 to $11.10 per hour for employers in areas not noted above. The cash minimum wage for tipped employees varies by industry. The garnishment limits will also change on January 1.
Ohio    The minimum wage will increase from $8.30 to $8.55 per hour. The cash minimum wage rate for tipped employees will increase from $4.15 per hour to $4.30 per hour.
Rhode Island    The minimum wage will increase from $10.10 to $10.50 per hour. However, the minimum cash wage for tipped employees will remain at $3.89 per hour.
South Dakota    The minimum wage will increase from $8.85 to $9.10 per hour. The cash minimum wage for tipped employees will increase from $4.425 per hour to $4.55 per hour. The garnishment limit will also change.
Vermont    The minimum wage will increase from $10.50 per hour to $10.78 per hour. The cash minimum wage for tipped employees will increase from $5.25 to $5.39 per hour.
Washington    The minimum wage will increase from $11.50 to $12 per hour. Tipped employees must also be paid this rate. The minimum wage will also increase in Seattle, SeaTac and Tacoma.

Looking Ahead in 2019

On July 1, 2019, the minimum wage will go up in the District of Columbia from $13.25 to $14 per hour.

In Oregonthe minimum wage will increase in July of next year to various amounts, depending on where an employer is located. For employers located within the Portland metro urban growth boundary, the minimum wage will go from $12 per hour to $12.50. In smaller cities, it will go from $10.75 to $11.25 per hour. And in non-urban counties, the minimum wage will rise from $10.50 to $11 per hour. All of the changes in Oregon are effective on July 1, 2019.

In addition, both houses of the Michigan legislature have approved legislation that would increase the state’s minimum wage rate from $9.25 per hour to $10 per hour, effective March 1, 2019, with annual increases until it reaches $12 per hour, effective January 1, 2022. The legislation had the effect of keeping an approved ballot measure off the November 6 election ballot that would have allowed voters to decide whether to increase the minimum wage rate. However, several published reports say that the Republican-controlled legislature passed the bill not only to keep voters from determining the issue, but with the intention of later killing the measure. They are reportedly working to scale back the minimum wage legislation and paid sick legislation before they leave office in December.

Posted on Nov 15, 2018

Today, approximately 38 million private-sector employees in the United States lack access to a retirement savings plan through their employers. However, momentum is building in Washington, D.C., to remedy this situation by helping small employers take advantage of multiple employer defined contribution plans (MEPs).

Could a MEP work for you and your workers? If the federal government expands these retirement savings programs, small employers will need to carefully consider the pros and cons before jumping at the MEP opportunity.

Wheels of Change

In September, President Trump issued an executive order, asking the U.S. Department of Labor (DOL) to investigate ways to help employers expand access to MEPs and other retirement plan options for their workers. The order also aims to improve the effectiveness and reduce the cost of employee benefit plan notices and disclosures.

The DOL followed up by publishing proposed regulations that would expand eligibility for MEP participation. Those regulations are expected to be finalized in early 2019.

A MEP essentially acts as the sponsor of a defined contribution (DC) plan, on behalf of a group of employers under its administrative umbrella. “The employers would not be viewed as sponsoring their own plans under ERISA. Rather, the [MEP] would be treated as a single employee benefit plan for purposes of ERISA,” says the Society for Human Resource Management. The MEP’s sponsor “would generally be responsible, as plan administrator, for complying with ERISA’s reporting, disclosure and fiduciary obligations.”

In principle, the administrative efficiencies of participating in a MEP would lower the costs of providing employees with retirement savings plans. But there are additional factors to take into consideration in evaluating MEPs.

Current rules only provide for “closed” MEPs that are sponsored by an association whose principal purpose is something other than sponsoring the MEP, and whose members must also have a “commonality of interest.”

Under the DOL’s more relaxed proposal, membership in a MEP would open up to companies in the same geographic area or in the same trade, profession or industry. Also, sponsoring the MEP could be the association’s primary purpose, so long as it had at least one secondary “substantial business purpose.”

Several additional requirements for associations that sponsor MEPs were listed in the proposed regulations. Among them, the association must:

  • Have a formal organizational structure with a governing body and bylaws,
  • Be controlled by its employer members,
  • Limit participation in the MEP to employees or former employees of MEP members, and
  • Not be a financial institution, insurance company, broker-dealer, third party administrator or recordkeeper.

The regulations would allow PEOs (professional employer organizations) to sponsor MEPs, if the PEOs meet certain requirements, including to perform “substantial employment functions” on behalf of their employer clients. Also, self-employed individuals and sole proprietors would be eligible to participate in a MEP.

Legislative Improvements

Even though the proposed DOL regs would ease current restrictions on MEPs, enough constraints would remain that could limit their expansion. A major issue that the proposed regulations fail to resolve is the so-called “bad apple” rule. That is, if one employer in a MEP fails to fulfill its administrative requirements, that failure, depending on its severity, could cause the entire MEP to be disqualified under the DOL proposal.

Fortunately, the House of Representatives has already passed a bill (the Family Savings Act) that addresses the bad apple issue. A similar measure (the Retirement Enhancement and Savings Act) is now pending in the Senate. The proposed legislation would clarify that the plans would separate noncompliant employers from other employers — or in essence “quarantine” the bad apples.

The bill also clarifies that employers’ fiduciary liability for the operation of the MEP is limited. But employers can’t avoid fiduciary liability altogether. That’s because they remain responsible for:

  1. Selecting a MEP and its investment lineup, and  
  2. Ensuring that the MEP and the association that sponsors it adhere to the quality criteria the employer used when deciding to join the MEP.

The Senate version of the legislation would create a type of MEP known as a “pooled employer plan” (or PEP). PEP participants would interact with the plan electronically to help keep the plan’s administrative costs as low as possible.

Boom or Bust?

It’s unclear whether the new-and-improved MEPs will have a significant cost advantage — or whether that’s even a primary objective of employers that decide to join a MEP. Inexpensive Web-based 401(k) plan sponsorship platforms have emerged in recent years that help to address the cost issue.

Plus, there’s concern that some MEPs will lower costs by transferring fiduciary responsibilities to employers. But many employers may look beyond cost when deciding on a retirement plan. They may also value the simplicity of outsourcing plan administration and sharing fiduciary responsibilities with the plan sponsor.

Need more information about your situation? Your benefits advisor can help you select the retirement savings plan options that make the most sense for you and your employees.

Posted on Jun 1, 2018

Would you like to invest in a business that allows you to subsequently sell your stock tax-free? That may be possible with qualified small business corporation (QSBC) stock that’s acquired on or after September 28, 2010. Sales of QSBC stock are potentially eligible for a 100% federal income tax exclusion. That translates into a 0% federal income tax rate on your profits from selling stock in a QSBC.

Here’s what you need to know about the 100% stock sale gain exclusion rules, including important restrictions and how this deal may be even sweeter under the Tax Cuts and Jobs Act (TCJA).

Tax-Free Gain Rollovers for QSBC Stock Sales

Sales of qualified small business corporation (QSBC) stock may potentially be eligible for a gain exclusion. (See main article.) But that’s not all. There’s also a tax-free stock sale gain rollover privilege — similar to what happens with like-kind exchanges of real property.

Under the rollover provision, the amount of QSBC stock sale gain that you must recognize for federal income tax purposes is limited to the excess of the stock sales proceeds over the amount that you reinvest to acquire other QSBC shares during a 60-day period beginning on the date of the original sale. The rolled-over gain reduces the basis of the new shares. You must hold the original shares for over six months to qualify for the gain rollover privilege.

Essentially, the gain rollover deal allows you to sell your original QSBC shares without owing any federal income tax and without losing eligibility for the gain exclusion break when you eventually sell the replacement QSBC shares.

The Basics

Whether you’re considering starting up your own business or investing in someone else’s start-up, it’s important to learn about QSBCs. In general, they’re the same as garden-variety C corporations for legal and tax purposes — except shareholders are potentially eligible to exclude 100% of QSBC stock sale gains from federal income tax. There’s also a tax-free gain rollover privilege for QSBC shares. (See “Tax-Free Gain Rollovers for QSBC Stock Sales” at right.)

To be classified as tax-favored QSBC stock, the shares must meet a complex list of requirements set forth in Internal Revenue Code Section 1202. Major hurdles to clear include the following:

  • You must acquire the shares after August 10, 1993.
  • The stock generally must be acquired upon original issuance by the corporation or by gift or inheritance.
  • The corporation must be a QSBC on the date the stock is issued and during substantially all the time you own the shares.
  • The corporation must actively conduct a qualified business. Qualified businesses don’t include 1) services rendered in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services or other businesses where the principal asset is the reputation or skill of employees, 2) banking, insurance, leasing, financing, investing or similar activities, 3) farming, 4) production or extraction of oil, natural gas or other minerals for which percentage depletion deductions are allowed, or 5) the operation of a hotel, motel, restaurant or similar business.
  • The corporation’s gross assets can’t exceed $50 million immediately after your shares are issued. However, if the corporation grows and exceeds the $50 million threshold after the stock is issued, it won’t cause the corporation to lose its QSBC status with respect to your shares.

This is only a partial list. Consult your tax advisor to determine whether your venture can meet all the requirements of a QSBC.

Gain Exclusion Rules and Restrictions

To take advantage of the gain exclusion break, the stock acquisition date is critical. The 100% gain exclusion is available only for sales of QSBC shares acquired on or after September 28, 2010. However, a partial exclusion may be available in the following situations:

  • For QSBC shares acquired between February 18, 2009, and September 27, 2010, you can potentially exclude up to 75% of a QSBC stock sale gain.
  • For QSBC shares acquired after August 10, 1993, and before February 18, 2009, you can potentially exclude up to 50% of a QSBC stock sale gain.

The tax code further restricts QSBC gain exclusions for:

C corporation owners. Gain exclusions aren’t available for QSBC shares owned by another C corporation. However, QSBC shares held by individuals, S corporations and partnerships are potentially eligible.

Shares held for less than five years. To take advantage of the gain exclusion privilege, you must hold the QSBC shares for a minimum of five years. So, for shares that you haven’t yet acquired, the 100% gain exclusion break will be available for sales that occur sometime in 2023 at the earliest.

TCJA Impact

The new tax law makes QSBCs even more attractive. Why? Starting in 2018, the law permanently lowers the corporate federal income tax rate to a flat 21%.

So, if you own shares in a profitable QSBC and eventually sell those shares when you’re eligible for the 100% gain exclusion, the flat 21% corporate rate will be the only federal income tax that the corporation or you will owe.

Right for Your Venture?

Conventional wisdom says it’s best to operate private businesses as pass-through entities, meaning S corporations, partnerships or limited liability companies (LLCs). But that logic may not be valid if your venture meets the definition of a QSBC.

The QSBC alternative offers three major upsides: 1) the potential for the 100% gain exclusion break when you sell your shares, 2) a tax-free stock sale gain rollover privilege, and 3) a flat 21% federal corporate income tax rate. Your tax advisor can help you assess whether QSBC status is right for your next business venture.

Posted on May 6, 2018

The Tax Cuts and Jobs Act (TCJA) expands the first-year depreciation deductions for vehicles used more than 50% for business purposes. Here’s what small business owners need to know to take advantage.

Depreciation Allowances for Passenger Vehicles

For new and used passenger vehicles (including trucks, vans and electric automobiles) that are acquired and placed in service in 2018 and used more than 50% for business purposes, the TCJA dramatically and permanently increases the so-called “luxury auto” depreciation allowances.

The maximum allowances for passenger vehicles placed in service in 2018 are:

  • $10,000 for the first year (or $18,000 if first-year bonus deprecation is claimed),
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for the fourth year and beyond until the vehicle is fully depreciated.

If the vehicle is used less than 100% for business, these allowances are cut back proportionately. For 2019 and beyond, the allowances will be indexed for inflation.

Bad News for Employees with Unreimbursed Vehicle Expenses

The new tax law isn’t all good news. Under prior law, employees who used their personal vehicles for business-related travel could claim an itemized deduction for unreimbursed business-usage vehicle expenses. This deduction was subject to a 2%-of-adjusted-gross-income (AGI) threshold.

Unfortunately, for 2018 through 2025, the new tax law temporarily suspends write-offs for miscellaneous itemized expenses. So, an employee can no longer claim deductions for unreimbursed business-usage vehicle expenses incurred from 2018 through 2025.

There’s a possible work-around, however: Employers can provide tax-free reimbursements for the business percentage of employees’ vehicle expenses under a so-called “accountable plan” expense reimbursement arrangement. Contact your tax advisor to find out if an accountable plan could work for you.

First-Year Bonus Depreciation for Passenger Vehicles

If first-year bonus depreciation is claimed for a new or used passenger vehicle that’s acquired and placed in service between September 28, 2017, and December 31, 2026, the TCJA increases the maximum first-year luxury auto depreciation allowance by $8,000. So, for 2018, you can claim a total deduction of up to $18,000 for each qualifying vehicle that’s placed in service. Allowances for later years are unaffected by claiming first-year bonus depreciation.

There’s an important caveat, however: For a used vehicle to be eligible for first-year bonus deprecation, it must be new to the taxpayer (you or your business entity).

The $8,000 bump for first-year bonus depreciation is scheduled to disappear after 2026, unless Congress takes further action.

Prior-Law Allowances for Passenger Vehicles

These expanded deductions represent a major improvement over the prior-law deductions. Under prior law, used vehicles were ineligible for first-year bonus depreciation. In addition, the depreciation allowances for passenger vehicles were much skimpier in the past.

For 2017, the prior-law allowances for passenger vehicles were:

  • $3,160 for the first year (or $11,160 for a new car with additional first-year bonus depreciation),
  • $5,100 for the second year,
  • $3,050 for the third year, and
  • $1,875 for the fourth year and beyond until the vehicle is fully depreciated.

Under prior law, slightly higher limits applied to light trucks and light vans for 2017.

Good News for Heavy SUVs, Pickups and Vans

Here’s where it gets interesting: The TCJA allows unlimited 100% first-year bonus depreciation for qualifying new and used assets that are acquired and placed in service between September 28, 2017, and December 31, 2022. However, as explained earlier, for a used asset to be eligible for 100% first-year bonus deprecation, it must be new to the taxpayer (you or your business entity).

Under prior law, the first-year bonus depreciation rate for 2017 was only 50%, and bonus depreciation wasn’t allowed for used assets.

Heavy SUVs, pickups and vans are treated for tax purposes as transportation equipment — so they qualify for 100% first-year bonus depreciation. This can provide a huge tax break for buying new and used heavy vehicles that will be used over 50% in your business.

However, if a heavy vehicle is used 50% or less for nonbusiness purposes, you must depreciate the business-use percentage of the vehicle’s cost over a six-year period.

Definition of a “Heavy Vehicle”

100% first-year bonus depreciation is only available when an SUV, pickup or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. Examples of suitably heavy vehicles include the Audi Q7, Buick Enclave, Chevy Tahoe, Ford Explorer, Jeep Grand Cherokee, Toyota Sequoia and lots of full-size pickups.

You can usually verify the GVWR of a vehicle by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame.

Case in Point

To illustrate the potential savings from the new 100% first-year bonus depreciation break, suppose you buy a new $65,000 heavy SUV and use it 100% in your business in 2018. You can deduct the entire $65,000 in 2018.

What if you use the vehicle only 60% for business? Then your first-year deduction would be $39,000 (60% x $65,000).

Now, let’s assume you purchase a used heavy van for $45,000 in 2018. You can still deduct the entire cost in 2018, thanks to the 100% first-year bonus depreciation break. If you use the vehicle 75% for business, your first-year deduction is reduced to $33,750 (75% x $45,000).

Buy, Use, Save

The TCJA provides sweeping changes to the tax law. Many changes are complex and may take months for practitioners and the IRS to interpret. But the provisions that expand the first-year depreciation deductions for business vehicles are as easy as 1-2-3: 1) buy a vehicle, 2) use it for business, and 3) save on taxes.

If you have questions about depreciation deductions on vehicles or want more information about other issues related to the new law, contact your tax advisor.

Posted on Apr 3, 2018

In the life cycle of any auto dealership, there will be times when cash flow is tight. Buy here pay here dealers in particular face complexity to ensure enough inventory is on hand to attract buyers — and offset that investment with a healthy flow through collections and debt management. This balance is never perfect. Dealers need strong banking and/or equity relationships that will extend credit to fill in the cash flow gaps.

Debt Management is Proactive

Even if their balance sheet is healthy, dealers on the shy side of $1 million in receivables will likely get a less favorable interest rate on credit than more established or larger dealers. This does not mean that smaller dealers should accept rates of 10 to 15 percent. It pays to shop around and to understand how the bank or private equity firm will consider the characteristics explained above to justify their terms.

By working with your CPA, you can provide the lender with financial statements and accounting that aligns with their expectations. As part of the terms of the loan, dealers may be required to provide reviewed or audited financial statements. Because of this additional expense and also to get more favorable terms, it’s important for dealers to actively seek lower interest rates. It is perfectly acceptable to shop around. Contact competing banks as well as your existing lender and ask about new credit options. Talk to colleagues about the banks they are using. Request multiple offers.

Strong accounting, tax and compliance practices help with this process. On the accounting side, owners need regular financial statement preparation to view trends and forecast cash flow — helping them prepare for lending conversations and extensions of credit at the right time each year. On the tax side, the number one tax planning technique for buy here pay here dealers is the discount (or loss) on the sale of notes from the dealership to the RFC, which requires cash. Dealers may also qualify for opportunities such as bonus depreciation and deductions with regard to employee perks and compensation.

Management may also consider a review of operational efficiencies or gaps in controls that can affect cash flow. Keep in mind that every dealership is different when it comes to managing cash flow, so best practices must occur within your own dealership.

As buy here pay here dealerships grow to portfolios of $4 million and above, more favorable financing opens up. But it’s not a guaranteed scenario. Dealers should weigh the benefits of obtaining more financing against the extra administrative costs of public accounting services.

Once you have the credit you need, there are various ways to reinvest in your business. Some dealers may decide to purchase their location — adding real estate holdings that support the extension of credit in the future. If the dealership also has a service department, cash flow can be set aside to cover repairs and maintenance on recently sold cars. Some dealers choose to cover repairs on cars shortly after purchase in order to support the customer’s ability and willingness to keep making monthly payments. For example, a repair may cost $800, but it leads to another six to 12 months of customer payments.

Compensation is another area that cash flow can support. Attracting and keeping good back office personnel supports collections, which in turn supports the business. Dealers may also consider additional compensation for good salespeople.

Let’s say you’ve done as much proactive management that you can. At certain points in the life of a dealership, you will still experience challenges. Some of these challenges can’t be handled alone. Whether you’re with a big bank and have secured a favorable interest rate or your dealership is still considered high risk for lenders, don’t ignore cash flow problems. Your CPA can help you formulate a plan to show numbers and communicate effectively with lenders in a way that is focused on solutions rather than the immediate problem. Lenders don’t like to call a loan for a short-term issue, and there is usually room for negotiation on loan modifications that will support cash flow as well as repayment.

However, year-over-year problems make lenders less willing to keep taking a risk on default. As soon as an issue comes to light, prepare your strategy to keep a strong lender relationship. Work through it like you and your lender are on the same side.  It’s in the best interests of you and the lender to find a solution.

Debt Management Supports Valuation

It is also in the best interests of the dealership long-term to show a consistent history of loan financing, healthy cash flow and debt management. Owners want to show a return on investment and consistent profitability, tied to valuation of the business.

There are different approaches to valuation. A key component, however, is determining equity value, which is the market value of the dealership assets minus the market value of its liabilities.

Assets include such things as the dealership’s auto inventory and fixed assets including real estate. They can include intangible assets such as the goodwill value of the dealership’s name and location, sales and service agreements, and also synergies such as multiple locations and strong management.

Liabilities will include debt, any excess compensation, tax and rent issues, inventories and contingent liabilities such as environmental issues related to the storage and disposal of fuel, oil or batteries.

The bottom line is that a well-performing portfolio, a good location and healthy foot traffic — combined with properly managed debt — will be attractive to a potential buyer. A dealership that is attractive to lenders is also attractive to buyers or outside investors, even with debt factored in.

If your dealership struggles with debt management or cash flow either intermittently or throughout the year, don’t let it hinder opportunities to grow. Talk to the team in Cornwell Jackson’s auto dealership practice group. They will help you understand the proper structure of financial statements to support proactive lender conversations.

Download the Whitepaper: Use Debt to Increase Cash Flow

Scott Bates is an assurance and business services partner for Cornwell Jackson and supports the firms auto dealership practice. His clients include small business owners for whom he directs a team that provides outsourced accounting solutions, assurance, tax compliance services, and strategic advice. If you would like to learn more about how this topic might affect your business, please email or call Scott Bates.

Originally published on February 29, 2016. Updated on April 3, 2018. 

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 payrollPayroll Outsourcing WP Download
  • 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. 

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. 

 

Posted on Mar 15, 2018

restaurant employee embezzlementIn regards to restaurant theft of food or supplies, at your POS, in accounting processes, or of intellectual property, mitigating the risk of loss through theft is an ongoing challenge. Automation has improved security in transactions as well as back-office functions. But with top concerns in the restaurant industry being wholesale food costs and building and maintaining sales volume, the reduction of theft can improve those concerns for restauranteurs.

Restaurant Theft of Food/Beverages/SuppliesRestaurant Embezzlement WP Download

Stealing food, beverages and supplies from restaurants can be coordinated by employees or in combination with vendors. There is outright stealing of food from the inventory, but there are also instances where vendors will agree to short shipments or deliver lower quality food while providing kick-backs to staff involved in ordering or inventory.

Free meals and drinks given to friends and family outside of alotted comps are another form of food theft. Employees also may walk away with supplies and quality equipment. At a minimum, employees may graze too much while on duty.

To protect against food and beverage theft, there are several precautions restaurant owners and management can take:

  • Regular stock checks, performed at unpredictable times or right before deliveries
  • Comparison of purchase orders against deliveries at the time of delivery
  • Monitoring of bartender habits when pouring drinks for consistency in volume
  • Review of comp practices against alottment
  • Policies enforced on employee meals and break habits
  • Security camera monitoring

There is a big difference between babysitting staff and developing a workplace environment in which employees are engaged in loss prevention. Restaurant owners and managers need to communicate with all employees about the costs of food loss, including costs passed on to patrons in the form of increased prices or even removing popular but pricier menu items. Increased menu prices or menu changes may reduce customer volume as well as tips. Another consequence of theft? Management can reduce hours per employee.

Theft at POS

There are many ways that employee theft can occur at the point of sale. Automated systems can reduce some loss, but not all. Common forms of theft at POS include cash taken from the register, voiding ordered items, dropping sales or improperly ringing up items and inflating tips.

At the bar, patrons may be charged for premium drinks and served well drinks with the bartender/server pocketing the difference.

Noticing lower profit margins even with the same number of meals and drinks can be a red flag that receipts are not matching sales. More subtle signs of theft can be a change in employee morale as honest staffers witness others taking advantage of the system.

More restaurants are transitioning to automated point of sale software programs, including programs that can be run from tablets as servers circulate. This eliminates data inputs to a central POS kiosk. The advantages of automation for loss prevention include the ease of tracking orders by employee ID (no more badge swiping), more transparent payment tracking against orders, and even integration with accounting and inventory systems. Tracking tip records can also uncover theft if percentages are higher than the industry average of 5-15 percent, or higher than historically at the establishment.

As employees learn systems, there are ways to get around safeguards. For example, many employee thefts occur through discount or loyalty programs, in which the employee inputs a discount for the customer but the customer pays full price.  Delaget, an expert in loss prevention, found that four in 10 discount codes are fraudulent. The most common discount theft was manager code theft.

Some solutions offered for this type of theft included monitoring discount codes through the POS system as well as instituting a manager discount policy and including a fingerprint (biometric) security feature.

Watch for changes in employee behavior such as defensiveness or acting secretive. Also, if your prices haven’t changed, but customers seem to be complaining about price hikes, this could signal fraudulent price inflation at the POS.

Restaurant Theft in Accounting

When most business owners think of theft, they think about the back office functions. In this area, the thefts are likely more elaborate and damaging to the operation. Restaurant closures due to employee theft are most often caused through extensive management or ownership fraud.

The person responsible for end-of-day reconciliations has one of the greatest opportunities to manipulate voids, cancel checks and perform other register manipulation — leading to thousands and sometimes millions of dollars in loss over time. More elaborate accounting fraud schemes occur through underreporting earnings on the balance sheet or setting up fake accounts payable. Small and infrequent deposit losses also add up.

Cash transactions are also a big source of loss when not monitored regularly against petty cash reconciliations. Cash is the most coveted form of theft, particularly for employees who suddenly experience an outside issue or concern that requires quick payment. Bleeding the till should include certain safeguards, such as sealing cash in an envelope with the manager’s name written across the back or moving cash when there are few employees around.

A strong loss prevention program should include a combination of proven automated technology, regular reports and analysis and good supervision by trusted staff. Incorporating a third-party review of the books adds another layer of control and analysis that can discover discrepancies in inventory, receipts, margins and general accounting methods that require a second look.

Sometimes, it’s the accounting system or analytics that are hiding opportunities for lower costs and higher profits. Managers may not be tracking the right KPIs or comparing A to B in a way that indicates losses. Incorporating better processes to leverage information from the restaurant’s POS and bookkeeping systems can identify operational improvements that support cost and theft reduction. For example, review of franchise and sales tax rates as well as permit and licensing fees can reveal overpayments.

Theft of Intellectual Property

 One area of theft not always talked about is a loss of intellectual property. Again, in close-knit restaurant communities, owners and staff want to protect proprietary processes, recipes and even certain aspects of branding that make the overall restaurant experience unique. Analyze the areas of the business that add the most value or profit, and look for ways to protect those assets.

There is a fine line, however, between encouraging creative development in the kitchen and limiting ownership of that creativity by staff such as head chefs. Each situation is unique and can’t be covered by generic nondisclosure or confidentiality agreements. But it is worth the conversation to maintain a competitive position in your market.

Cornwell Jackson has worked with retail businesses, including restaurants for decades, and provides direction on compliance as well as business advisory services. We help restaurant owners and franchisors determine policies and procedures, investments in technology and the viability and timing of additional locations. If you have questions around employee theft and how our team can support your accounting processes and daily POS or reconciliation methods, contact us for a consultation.

Download the Whitepaper: Protect Your Restaurant from Employee Embezzlement

Scott Bates, CPA, is a partner in Cornwell Jackson’s audit practice and leads the business services practice, including outsourced accounting, bookkeeping, and payroll services. He is an expert for clients in restaurants, healthcare, real estate, auto and transportation, technology, service, construction, retail, and manufacturing and distribution industries.

 

Article originally published on March 7th, 2016. Updated in 2018.

 

 

 

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. 

 

Posted on Mar 1, 2018

restaurant employee embezzlementMitigating the risk of loss in restaurants through theft is an ongoing challenge. Automation has improved security in transactions as well as back-office functions. But with top concerns in the restaurant industry being wholesale food costs and building and maintaining sales volume, the reduction of theft can improve those concerns for restaurateurs. We review the key areas for employee embezzlement and provide guidance on limiting loss with proper checks and balances.

In 2015, Texas reported a 4.8 percent growth rate in restaurant sales, one of the highest in the nation. Restaurant employment grew by 22 percent.

Texas is experiencing one of the highest growth rates in the country for restaurant sales, according to a 2016 survey by the National Restaurant Association. However, members cited the cost of food and the ability to build and maintain sales volumes among their top concerns.

Employee embezzlement could be a hidden contributor.

Restaurant owners and managers are always looking for ways to reduce overhead costs while keeping their prices competitive for the market. A hidden contributor to overhead costs and lost margins is embezzlement. If food or money walks out the door consistently because of employee theft, it needs immediate attention.

Anyone who has worked in a restaurant has probably witnessed questionable behavior — not just from the patrons. History has shown that some employees — from the line cooks to servers and management — can demonstrate unethical and even criminal behavior when presented with an opportunity to put a little extra in their pockets. It is up to management to put safeguards in place to reduce those employee embezzlement opportunities.

Common types of theft in restaurants include:

  • Food theft from deliveries or freezersRestaurant Embezzlement WP Download
  • Prepared food and beverages given to patrons (unticketed)
  • Theft of equipment and supplies
  • Pocketed cash for undocumented orders
  • Patrons overcharged and the difference pocketed
  • Misuse of discounts, reward programs or coupons
  • Fake accounts payables
  • Underreporting daily receipts
  • Underreporting of earnings to franchisor and investors
  • Theft of recipes, processes or intellectual property

As an owner or franchisor expands to more than one location and relies on management, the risks of theft can increase. The impact of theft over time can be exponential, including a lower return on profits, an inability to reinvest in the business or provide employee benefits as well as difficulty recruiting and retaining staff. Restaurant communities tend to be small, close-knit groups who can quickly identify red flags with regard to a restaurant’s ownership or management. Reputation is critical to keep top talent and attract patrons.

In the next restaurant blog article, we will address each of these risks with solutions that incorporate a combination of automation and sound operational controls.

Continue Reading: The Most Common Types of Restaurant Theft

Cornwell Jackson has worked with retail businesses, including restaurants for decades, and provides direction on compliance as well as business advisory services. We help restaurant owners and franchisors determine policies and procedures, investments in technology and the viability and timing of additional locations. If you have questions around employee theft and how our team can support your accounting processes and daily POS or reconciliation methods, contact us for a consultation.


Scott Bates, CPA
, is a partner in Cornwell Jackson’s audit practice and leads the business services practice, including outsourced accounting, bookkeeping, and payroll services. He is an expert for clients in restaurants, healthcare, real estate, auto and transportation, technology, service, construction, retail, and manufacturing and distribution industries.

Originally published on March 1, 2016. Updated in 2018.