Everyone Needs Someone to Call
Interview with Enid Hoffman, CPA
By Kathryn Gordon and Jessie Riley
Kathryn: Enid, we’ve been discussing various tax aspects of new businesses while we’ve been driving around in the van in rural France! (Check out Kathryn’s trip under www.moulinbregeoncuisinecourses.com or trips through www.iceculinary.com).
I know you are a partner in a company with 250 accountants or so, so you’ve seen lots of food businesses over the years. Let’s try to formalize some of the great recommendations you have for food start ups.
What’s the biggest accounting issue you’ve seen for start-up bakeries, cake/chocolate specialists, etc?
Enid: The most constant question I’ve seen over my 34 years in the accounting business is: you need help, but are you going to pay this person as an employee or an independent contractor? There are legal and illegal ways to pay workers. The legal way adds an average of 15% to your cost structure, and that is a huge expense for a new company. By law, if you hire an employee you have to pay workers’ compensation, disability, and you have to match the employee’s Social Security contribution. If you pay the worker as an independent contractor you do not have to pay this extra 15%, but this method of payment is illegal if the person is working as an employee in your place of business.
Kathryn: Is the cost of processing an employee’s payroll also an issue? Like costs an employer would have to pay to someone through ADP?
Enid: No, that’s small potatoes, maybe $20 a month per employee. And I would definitely recommend someone with more than one employee to use a service for the payroll, because a payroll service can and should impound the payroll taxes. If you utilize this service, the tax and insurance liabilities are withdrawn from your bank account immediately. That guarantees the start up business will actually have the money paid to the various government agencies when the debt is due.
The business may not use a payroll service but still must remit the money on a monthly or quarterly basis. Too many businesses think they will have the funds available but then spend the money for other business needs. A new business cannot survive if they are not able to pay their bills on time, and you don’t want to accrue penalties from the government.
Jessie: Speaking of survival, I think new businesses are also afraid of having to pay an accountant on a monthly basis and what those accounting services will cost them.
Enid: Sole proprietorship income and expenses are incorporated in a personal tax return. If you have a good computerized general ledger such as Quickbooks, and no payroll, the return should run $700-$800 if there is no employee payroll.
Kathryn: So you recommend people use Quickbooks?
Enid: Some sort of accounting program should be used daily or weekly to assess your cash flow. You could post entries into Quicken, but it is less robust than Quickbooks. Either will tie to your bank account, but Quickbooks will allow more long term flexibility and growth with your company. You still need an accountant to help you set up the books correctly, conduct a review of the books and records every 3 months for the first year, then semi annually thereafter.
In any business you must reconcile the books and the bank statement which Quickbooks does as a byproduct of the program. If you do not reconcile, the books become unreliable because one does not know if all items have been posted and therefore you may or may not be reporting more profit or not showing the proper loss.
Kathryn: I gather you recommend people absolutely hire an accountant.
Enid: A lot of food-oriented businesses are cash businesses. One of the biggest mistakes I’ve seen people repeat over the years is that if it’s a cash business – and you either pay too many people in cash, and/or take out too much cash yourself – you can’t justify to an auditor that you’re making enough money to justify the expenses you’re claiming such as food costs or your personal living expenses. For example, you need to take money to live on, or your business will never be sustainable, and auditors know that. You do not want to create a risk of a longer, more extensive audit because your expenses, sales and labor costs do not tie.
Let’s say you operate a 24-hour a day pizza business. If you claim expenses for vast quantities of flour for your pizza dough, and you don’t show commensurate sales or payroll for the workers, then a government auditor would clearly know you are hiding sales and will conduct a tougher audit – and you could be facing criminal charges and would lose more than the cost of hiring an accountant to provide advice in the first place.
Jessie: I know several small food-related businesses that don’t seem to handle everything exactly correctly, like co-mingling personal and business funds or might have questionable practices paying their employees…
Enid: If you are co-mingling funds into one checkbook, the IRS or the state could audit all of your personal and business transactions which can be a costly and tedious audit. If the business has a separate account, the auditors will audit only the business account and will not review the personal expenses.
It can also create a risk if an employee pays the staff without a W-2 (generating the 15% additional overhead for the workers’ compensation, disability and matched Social Security). This can result in a penalty for the business. Another problem is if you pay the worker as an independent contractor (also known as a 1099 worker) – unless the worker truly is an independent contractor. And for independent contractor status, the worker has to: a) work for more than one employer doing this type of work, and b) “hang a shingle out” advertising that you are in this type of business. For example, if you’re in the yellow pages as a freelance chef, only then, whether you work 1 or 30 hours for a company, you would get a 1099. Only if you are a corporation, you will not get a 1099.
Jessie: So what should businesses be aware of that might be a red flag for getting audited?
Enid: “Invisible employees.” A red flag is raised as soon as a company has a pregnant “invisible employee” who files for disability because she can’t stand in your bakery 12 hours a day. Other examples are someone washing dishes, who is paid as a “invisible employee”, gets hurt on broken glass and goes to the hospital thinking he/she has worker’s compensation, or the work is cyclical and the “invisible employee” files for unemployment in a down period after making seasonal chocolates.
There’s no record of the “invisible employee,” because the business hired the worker as an independent contractor (1099) therefore the company didn’t pay the required workers’ compensation, disability or match the Social Security – and that’s a risk for opening an enormous can of worms. Worker’s compensation alone can issue 5 years of financial penalties and close down a business!
Kathryn: I know that at some times in the past that I’ve been an “invisible employee.” I also know I’ve worked for someone who never issued me a 1099. Where do these lines get legally drawn?
Enid: There’s something called “20 common law questions” regarding having to issue a 1099 for someone who is truly working for you. The question has to do with who can generate the ultimate profit from a scenario. Someone is considered truly freelance and will receive a 1099 if they are in business for themselves. Then this person is not an employee.
For example, if I am hired to make a wedding cake and I hire you to do the work for $300, you can make the profit/loss depending on the ingredients and time it takes you. This person is an independent contractor. If I ask you to come to my bakery and bake a wedding cake and I give you $30 per hour and supply the ingredients, you are an employee, as the bakery is going to make the potential profit or loss.
Kathryn: What’s the threshold someone has to earn from one company to get a 1099?
Enid: If a company pays someone more than $600 in a calendar year, they should issue a 1099. Not all businesses do, but the burden is on the taxpayer as the taxpayer must report all income whether the taxpayer received a W-2 or 1099. An employer can get a $50 penalty – but it is rarely issued, so it’s a risk some businesses are willing to take. (By the way, if an independent contractor did not receive a 1099 and they feel that they should get one, they can report the business to the IRS via a complaint form you can download on the IRS website – and that’s a better way to get action than just making a phone call to the IRS).
Jessie: How often should I be contacting my accountant to make sure my business is doing everything the correct way?
Enid: As an accountant, I accept calls all the time. Every business needs someone they can just call. I truly enjoy helping new businesses establish themselves – what could be more rewarding? Eventually though, someone has to realize that time equals money for professionals, and you might be sent a bill if you continuously ask questions during the year.
Kathryn: So you might get a bill if you’re calling your accountant 5 times a day, I guess?
Enid: People ask questions all the time. It comes with the territory, and I like sharing my expertise. I’ve always liked helping young businesses, and have found that ones owned by women especially need pushing. I like doing it and it has become my niche, with over 70% of my client base being women business owners.
Kathryn: Do you ever make field calls and visit your clients?
Enid: It can actually be more cost effective to visit a business at least once so you have a better understanding of what the client is talking about, but on a routine basis for a single proprietor it probably makes more economic sense for them to come into the accountant’s office.
Hint from Chef Kathryn: Always enter your receipts on a timely basis into your accounting software, and scan them. After a period of time, most check register receipts fade. I've seen one (failing) small business not file their taxes for a long time, because they knew they wouldn't owe anything because their expenses far outweighed their receipts. Eventually garbage bags full of 5-year old, illegible receipts were brought to the accountant... Not a great business procedure.