Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 15

  • Pay the final installment of 2020 estimated tax.
  • Farmers and fishermen: Pay estimated tax for 2020.

February 1 (The usual deadline of January 31 is a Sunday)

  • File 2020 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • Provide copies of 2020 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
  • File 2020 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2020. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2020 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

March 1 (The usual deadline of February 28 is a Sunday)

  • File 2020 Forms 1099-MISC with the IRS if: 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 16

  • If a calendar-year partnership or S corporation, file or extend your 2020 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2020 contributions to pension and profit-sharing plans.

© 2020 Covenant CPA

Rightsizing your sales force

With a difficult year almost over, and another one on the horizon, now may be a good time to assess the size of your sales force. Maybe the economic changes triggered by the COVID-19 pandemic led you to downsize earlier in the year. Or perhaps you’ve added to your sales team to seize opportunities. In either case, every business owner should know whether his or her sales team is the right size.

Various KPIs

To determine your optimal sales staffing level, there are several steps you can take. A good place to start is with various key performance indicators (KPIs) that enable you to quantify performance in dollars and cents.

The KPIs you choose to calculate and evaluate need to be specific to your industry and appropriate to the size of your company and the state of the market in which you operate. If you’re comparing your sales numbers to those of other businesses, make sure it’s an apples-to-apples comparison.

In addition, you’ll need to pick KPIs that are appropriate to whether you’re assessing the performance of a sales manager or that of a sales representative. For a sales manager, you could look at average annual sales volume to determine whether his or her team is contributing adequately to your target revenue goals. Ideal KPIs for sales reps are generally more granular; examples include sales by rep and lead-to-sale percentage.

More than math

Rightsizing your sales staff, however, isn’t only a mathematical equation. To customize your approach, think about the specific needs of your company.

Consider, for example, how you handle staffing when sales employees take vacations or call in sick. If you frequently find yourself coming up short on revenue projections because of a lack of boots on the ground, you may want to expand your sales staff to cover territories and serve customers more consistently.

Then again, financial problems that arise from carrying too many sales employees can creep up on you. Be careful not to hire at a rate faster than your sales and gross profits are increasing. If you’re looking to make aggressive moves in your market, be sure you’ve done the due diligence to ensure that the hiring and training costs will likely pay off.

Last, but not least, think about your customers. Are they largely satisfied? If so, the size of your sales force might be just fine. However, salespeople saying that they’re overworked or customers complaining about a lack of responsiveness could mean your staff is too small. Conversely, if you have market segments that just aren’t yielding revenue or salespeople who are continually underperforming, it might be time to downsize.

Reasonable objectives

By regularly monitoring the headcount of your sales staff with an eye on fulfilling reasonable revenue goals, you’ll stand a better chance of maximizing profitability during good times and maintaining it during more challenging periods. Contact us for help choosing the right KPIs and cost-effectively managing your business.

© 2020 Covenant CPA

The COVID-19 pandemic and resulting economic impact have hurt many companies, especially small businesses. However, for others, the jarring challenges this year have created opportunities and accelerated changes that were probably going to occur all along.

One particular area of speedy transformation is technology. It’s never been more important for businesses to wield their internal IT effectively, enable customers and vendors to easily interact with those systems, and make the most of artificial intelligence and “big data” to spot trends.

Accomplishing all this is a tall order for even the most energetic business owner or CEO. That’s why many companies end up creating one or more tech-specific executive positions. Assuming you don’t already employ such an individual, should you consider adding an IT exec? Perhaps so.

3 common positions

There are three widely used position titles for technology executives:

1. Chief Information Officer (CIO). This person is typically responsible for managing a company’s internal IT infrastructure and operations. In fact, an easy way to remember the purpose of this position is to replace the word “Information” with “Internal.” A CIO’s job is to oversee the purchase, implementation and proper use of technological systems and products that will maximize the efficiency and productivity of the business.

2. Chief Technology Officer (CTO). In contrast to a CIO, a CTO focuses on external processes — specifically, with customers and vendors. This person usually oversees the development and eventual production of technological products or services that will meet customer needs and increase revenue. The position demands the ability to live on the cutting edge by doing constant research into tech trends while also being highly collaborative with employees and vendors.

3. Chief Digital Officer (CDO). For some companies, the CIO and/or CTO are so busy with their respective job duties that they’re unable to look very far ahead. This is where a CDO typically comes into play. His or her primary objective is to spot new markets, channels or even business models that the company can target, explore and perhaps eventually profit from. So, while a CIO looks internally and a CTO looks externally, a CDO’s gaze is set on a more distant horizon.

Costs vs. benefits

As mentioned, these are three of the most common IT executive positions. Their specific objectives and job duties may vary depending on the business in question. And they are by no means the only examples of such positions. There are many variations, including Chief Marketing Technologist and Chief Information Security Officer.

So, getting back to our original question: is this a good time to add one or more of these execs to your staff? The answer very much depends on the financial strength and projected direction of your company. These positions will call for major expenditures in hiring, payroll and benefits. Our firm can help you weigh the costs vs. benefits.

© 2020 Covenant CPA

If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred to as the pass-through deduction or the Section 199A deduction.

The QBI deduction:

  • Is available to owners of sole proprietorships, single member limited liability companies (LLCs), partnerships, and S corporations, as well as trusts and estates.
  • Is intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
  • Is taken “below the line.” In other words, it reduces your taxable income but not your adjusted gross income.
  • Is available regardless of whether you itemize deductions or take the standard deduction.

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2020, if taxable income exceeds $163,300 for single taxpayers, or $326,600 for a married couple filing jointly, the QBI deduction may be limited based on different scenarios. These include whether the taxpayer is engaged in a service-type of trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.

The limitations are phased in. For example, the phase-in for 2020 applies to single filers with taxable income between $163,300 and $213,300 and joint filers with taxable income between $326,600 and $426,600.

For tax years beginning in 2021, the inflation-adjusted threshold amounts will be $164,900 for single taxpayers, and $329,800 for married couples filing jointly.

Year-end planning tip

Some taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions at year end so that they come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020. Depending on your business model, you also may be able to increase the deduction by increasing W-2 wages before year end. The rules are quite complex, so contact us with questions and consult with us before taking steps.

© 2020 Covenant CPA

Lessons of 2020: Change management

The year 2020 has taught businesses many lessons. The sudden onset of the COVID-19 pandemic followed by drastic changes to the economy have forced companies to alter the size of their workforces, restructure work environments and revise sales models — just to name a few challenges. And what this has all meant for employees is change.

Even before this year’s public health crisis, many businesses were looking into and setting forth policies regarding change management. In short, this is a formalized approach to providing employees the information, training and ongoing coaching needed to successfully adapt to any modification to their day-to-day jobs.

There’s little doubt that one of the enduring lessons of 2020 is that businesses must be able to shepherd employees through difficult transitions, even (or especially) when the company itself didn’t bring about the change in question.

Why change is hard

Most employees resist change for many reasons. There’s often a perceived loss of, or threat to, job security or status. Inconvenience and unfamiliarity provoke apprehension. In some cases, perhaps because of misinformation, employees may distrust their employers’ motives for a change. And some workers will always simply believe the “old way is better.”

What’s worse, some changes might make employees’ jobs more difficult. For example, moving to a new location might enhance an organization’s image or provide safer or more productive facilities. But doing so also may increase some employees’ commuting times or put employees in a drastically different working environment. When their daily lives are affected in such ways, employees tend to question the decision and experience high levels of anxiety.

What you shouldn’t do

Often, when employees resist change, a company’s decision-makers can’t understand how ideas they’ve spent weeks, months or years deliberating could be so quickly rejected. (Of course, in the case of the COVID-19 pandemic, tough choices had to be made in a matter of days.) Some leadership teams forget that employees haven’t had time to adjust to a new idea. Instead of working to ease employee fears, executives or supervisors may double down on the change, more strictly enforcing new rules and showing little patience for disagreements or concerns.

And it’s here the implementation effort can break down and start costing the business real dollars and cents. Employees may resist change in many destructive ways, from taking very slow learning curves to calling in sick to filing formal complaints or lawsuits. Some might even quit.

The bottom line: by not engaging in some form of change management, you’re more likely to experience reduced productivity, bad morale and increased turnover.

How to cope

“Life comes at ya fast,” goes the popular saying. Given the events of this year, it’s safe to say that most business owners would agree. Identify ways you’ve been able to help employees deal with this year’s changes and document them so they can be of use to your company in the future. Contact us for help cost-effectively managing your business.

© 2020 Covenant CPA

Hit the target with your email marketing

Online retail sales have been booming during the COVID-19 pandemic. This trend has been driven not only by the buying public’s increased inclination to minimize visits to brick-and-mortar stores, but also by the effectiveness of many retailers’ virtual marketing efforts.

One such effort that can benefit most any type of business is email marketing. Although social media marketing tends to get the lion’s share of attention these days, email remains a viable medium for getting out your message — particularly to existing customers.

As your company endeavors to continue marketing its products or services in an uncertain economy, be sure your emails hit the target by relying on some tried-and-true fundamentals.

Draw their attention

Every email starts with a subject line; be sure yours are catchy. They should be no longer than eight words and shouldn’t be in all caps. Put yourself in the customer’s place by paying close attention to demographics. Ask yourself whether you would open the email if you fit the profile. Also, clearly indicate the message’s content.

If your subject line is compelling enough, your recipients will open the email. And the first thing readers should see upon doing so is an equally memorable headline. Make sure it’s different from the subject line, short (four or five words) and in a larger font size than the body of the message.

Make your case

When it comes to the body of the email, make it a quick and easy read. Most people won’t read a lot of text. Think of each marketing email as an “elevator speech,” a quick and concise pitch for specific products or services.

Above all, be persuasive. Customers want to fulfill their needs at a reasonable price, but they may not always have a clear idea of what those needs are. Don’t expect them to search for answers about whether you can meet these expectations. Show them what you’ve got to offer and tell them why they should buy.

Add finishing touches

Consider including visual and interactive content in your marketing emails — such as images, GIFs and videos. Bear in mind, however, that not all email providers support every type of interactivity. Use it judiciously and gather feedback from customers on whether the content is a nice touch or an annoyance.

Last, but not least, close with a “call to action.” Instill a sense of urgency in readers by setting a deadline and telling them precisely what to do. Otherwise, they may interpret the email as merely informational and file it away for reference or simply delete it. Be sure to include clear, “clickable” contact info.

Measure and improve

These are just a few of the basics to keep in mind. We can help your business measure the results of its marketing activity, email and otherwise, and come up with cost-effective ideas for improving the profit-potential of how you interact with your customers and prospects.

© 2020 Covenant CPA

Should you go phishing with your employees?

Every business owner is aware of the threat posed by cybercriminals. If a hacker were to gain access to the sensitive data about your business, customers or employees, the damage to your reputation and profitability could be severe.

You’re also probably aware of the specific danger of “phishing.” This is when a fraudster sends a phony communication (usually an email, but sometimes a text or instant message) that appears to be from a reputable source. The criminal’s objective is either to get recipients to reveal sensitive personal or company information or to click on a link exposing their computers to malicious software.

It’s a terrible thing to do, of course. Maybe you should give it a try.

An upfront investment

That’s right, many businesses are intentionally sending fake emails to their employees to determine how many recipients will fall for the scams and how much risk the companies face. These “phishing simulations” can be revealing and helpful, but they’re also fraught with hazards both financial and ethical.

On the financial side, a phishing simulation generally calls for an investment in software designed to create and distribute “realistic” phishing emails and then gather risk-assessment data. There are free, open-source platforms you might try. But their functionality is limited, and you’ll have to install and use them yourself without external tech support.

Commercially available phishing simulators are rich in features. Many come with educational tools so you can not only determine whether employees will fall for phishing scams, but also teach them how to avoid doing so. Developers typically offer installation assistance and ongoing support as well.

However, you’ll need to establish a budget and shop carefully. You must then regularly use the software as part of your company’s wider IT security measures to get an adequate return on investment.

Ethical quandaries

As mentioned, phishing simulations present ethical risks. Some might say that the very act of sending a deceptive email to employees is a betrayal of trust. What’s worse, if the simulated phishing message exploits particularly sensitive fears, you could incur a backlash from both employees and the public at large.

A major media company recently learned this the hard way when it tried to lure employees to respond to a phishing simulation email with promises of cash bonuses to those who remained on staff following layoffs related to the COVID-19 pandemic. Users who “clicked through” were met with a shaming message that they’d just failed a cybersecurity test. Angry employees took to social media, the story spread and the company’s reputation as an employer took a major hit.

Plan carefully

Adding phishing simulations to your cybersecurity arsenal may be a good idea. Just bear in mind that these aren’t a “one and done” type of activity. Simulations must be part of a well-planned, long-term and broadly executed effort that seeks to empathetically educate users, not alienate them. Contact us to discuss ways to prudently handle IT costs.

© 2020 Covenant CPA

The subject of payroll has been top-of-mind for business owners this year. The COVID-19 pandemic triggered economic changes that caused considerable fluctuations in the size of many companies’ workforces. Employees have been laid off, furloughed and, in some cases, rehired. There has also been crisis relief for eligible businesses in the form of the Paycheck Protection Program and the payroll tax credit.

Payroll recordkeeping was important in the “old normal,” but it’s even more important now as businesses continue to navigate their way through a slowly recovering economy and ongoing public health crisis.

Four years

Most employers must withhold federal income, Social Security and Medicare taxes from their employees’ paychecks. As such, you must keep records relating to these taxes for at least four years after the due date of an employee’s personal income tax return (generally, April 15) for the year in which the payment was made. This is often referred to as the “records-in-general rule.”

These records include your Employer Identification Number, as well as your employees’ names, addresses, occupations and Social Security numbers. You should also keep for four years the total amounts and dates of payments of compensation and amounts withheld for taxes or otherwise — including reported tips and the fair market value of noncash payments.

In addition, track and retain the compensation amounts subject to withholding for federal income, Social Security and Medicare taxes, as well as the corresponding amounts withheld for each tax (and the date withheld if withholding occurred on a day different from the payment date). Where applicable, note the reason(s) why total compensation and taxable amount for each tax rate are different.

So much more

A variety of other data and documents fall under the records-in-general rule. Examples include:

  • The pay period covered by each payment of compensation,
  • Forms W-4, “Employee’s Withholding Allowance Certificate,” and
  • Each employee’s beginning and ending dates of employment.

If your business involves customer tipping, you should retain statements provided by employees reporting tips received. Also carefully track fringe benefits provided to employees, including any required substantiation. Retain evidence of adjustments or settlements of taxes and amounts and dates of tax deposits.

Follow the records-in-general rule, too, for records relating to wage continuation payments made to employees by the employer or third party under an accident or health plan. Documentation should include the beginning and ending dates of the period of absence, and the amount and weekly rate of each payment (including payments made by third parties).

Last, keep copies of each employee’s Form W-4S, “Request for Federal Income Tax Withholding From Sick Pay,” and, where applicable, copies of Form 8922, “Third-Party Sick Pay Recap.”

Valuable information

Proper and comprehensive payroll recordkeeping has become even more critical — and potentially more complex — this year. Our firm can help review your processes in this area and identify improvements that will enable you to avoid compliance problems and make better use of this valuable information.

© 2020 Covenant CPA

As year-end draws near, many businesses will be not only be generating their fourth quarter financial statements, but also looking back on the entire year’s financials. And what a year it’s been. The COVID-19 pandemic and resulting economic fallout have likely affected your sales and expenses, and you’ve probably noticed the impact on both. However, don’t overlook the importance of inventory management and its impact on your financial statements.

Cut back as necessary

Carrying too much inventory can reflect poorly on a business as the value of surplus items drops throughout the year. In turn, your financial statements won’t look as good as they could if they report a substantial amount of unsold goods.

Taking stock and perhaps cutting back on excess inventory reduces interest and storage costs. Doing so also improves your ability to detect fraud and theft. Yet another benefit is that, if you conduct inventory checks regularly, your processes should evolve over time — increasing your capacity to track what’s in stock, what’s selling and what’s not.

One improvement to perhaps budget for here: upgraded inventory tracking and ordering software. Newer applications can help you better forecast demand, minimize overstocking, and share data with suppliers to improve accuracy and efficiency.

Make tough decisions

If yours is a more service-oriented business, you can apply a similar approach. Check into whether you’re “overstocking” on services that just aren’t adding enough revenue to the bottom line anymore. Keeping infrastructure and, yes, even employees in place that aren’t contributing to profitability is much like leaving items on the shelves that aren’t selling.

Making improvements may require some tough calls. Sadly, this probably wouldn’t be the first time you’ve had to make difficult decisions in recent months. Many business owners have had to lay off or furlough employees and substantively alter how they deliver their products or services during the COVID-19 crisis.

You might have long-time customers to whom you provide certain services that just aren’t profitable anymore. If your company might start losing money on these customers, you may have to discontinue the services and sacrifice their business.

You can ease difficult transitions like this by referring customers to another, reputable service provider. Meanwhile, your business should be looking to either find new service areas to generate revenue or expand existing services to more robust market segments.

Take a hard look

As of this writing, the economy appears to be slowly recovering for most (though not all) industries. An environment like this means every dollar is precious and any type of waste or redundancy is even more dangerous.

Take a hard look at your approach to inventory management, or how you’re managing the services you provide, to ensure you’re in step with the times. We can help your business implement cost-effective inventory tracking processes, as well as assist you in gaining key insights from your financial statements.

© 2020 Covenant CPA

If your small business is planning for payroll next year, be aware that the “Social Security wage base” is increasing.

The Social Security Administration recently announced that the maximum earnings subject to Social Security tax will increase from $137,700 in 2020 to $142,800 in 2021.

For 2021, the FICA tax rate for both employers and employees is 7.65% (6.2% for Social Security and 1.45% for Medicare).  

For 2021, the Social Security tax rate is 6.2% each for the employer and employee (12.4% total) on the first $142,800 of employee wages. The tax rate for Medicare is 1.45% each for the employee and employer (2.9% total). There’s no wage base limit for Medicare tax so all covered wages are subject to Medicare tax.

In addition to withholding Medicare tax at 1.45%, an employer must withhold a 0.9% additional Medicare tax from wages paid to an employee in excess of $200,000 in a calendar year.

Employees working more than one job

You may have employees who work for your business and who also have a second job. They may ask if you can stop withholding Social Security taxes at a certain point in the year because they’ve already reached the Social Security wage base amount. Unfortunately, you generally can’t stop the withholding, but the employees will get a credit on their tax returns for any excess withheld.

Older employees 

If your business has older employees, they may have to deal with the “retirement earnings test.” It remains in effect for individuals below normal retirement age (age 65 to 67 depending on the year of birth) who continue to work while collecting Social Security benefits. For affected individuals, $1 in benefits will be withheld for every $2 in earnings above $18,960 in 2021 (up from $18,240 in 2020).

For working individuals collecting benefits who reach normal retirement age in 2021, $1 in benefits will be withheld for every $3 in earnings above $46,920 (up from $48,600 in 2020), until the month that the individual reaches normal retirement age. After that month, there’s no limit on earnings.

Contact us if you have questions. We can assist you with the details of payroll taxes and keep you in compliance with payroll laws and regulations.

© 2020 Covenant CPA