Balancing Financial Priorities As You Start Your Career – Q&A with Chuck Porter

As we meet and work with people in all stages of life, some common questions come up again and again. Canon Capital Wealth Management Senior Investment Advisor Chuck Porter addresses the balance of financial priorities when you’re starting out in your career.

Question: “My husband and I are in our late 20’s.  We would like to be able to put money towards our retirement, but we just can’t afford it!  How do other people make ends meet and save money to retire?” 

Gone are the days of guaranteed pensions, stable social security, and retirement healthcare coverage. Today’s retirees are facing tough decisions and even tougher realities, and young professionals are watching. Seeing the prior generation work later in life, live longer, and the deterioration of Social Security benefits has many people of your generation thinking ahead. 401(k)s are taking over as the most popular method of employer-sponsored retirement saving. People are forced to budget their own retirement savings and make sound investment decisions. Many are not properly educated in the area of personal finance when they are required to start making these choices; sadly, this leads to bad financial decisions and will continue to be a concern for future generations.

Many people fear that they will have no spending money if they start putting money towards retirement and delay saving in favor of short-term needs. In reality, one percent of your pay pre-tax is usually the difference of one or two coffees in a month. The benefit you receive if your employer offers a match is worth far more. What many people consider to be a ‘small’ company match will generate tens of thousands of dollars in retirement earnings over time. If you do not contribute enough to earn the full company match, you are leaving free money on the table.

If you are hesitant about contributing, start out small. Begin by maximizing the employer match from the day you are eligible. A general rule of thumb is to increase your contribution with every raise that you earn, so even if you receive a small raise, bump up your contribution in proportion.  It is much harder to save more when you’ve gotten used to spending that extra cash. Make the most of your savings by creating a mixed portfolio appropriate to your age and time until retirement, and if you have questions, seek help from a financial professional. An advisor can also assist you if you are self-employed or if your employer does not offer a match or a retirement plan.

After you have started saving through your company retirement plan, look at your income and spending habits. Cash management is crucial to making ends meet: a realistic budget could help solve a lot of social and economic problems. While it can seem overwhelming, the principles are the same no matter your income level.

  1. Debt
    Chances are that you and/or your partner have some form of debt. Start by organizing it all and make sure you understand the terms. Use a spreadsheet, debt reduction calculator, or work with a financial professional to compare different payoff scenarios. Often, paying off high-interest debt like credit cards can save you hundreds of dollars. Paying off low balances first lends you more money each month to ‘snowball’ into the next piece. Whatever method works best for you, resist the temptation to stop retirement savings. Even 1 or 2% going into your 401(k) throughout the years of debt reduction can make a major difference long term. Try not to take on new debt – if you can’t afford it now, don’t assume you will be able to later.
  2. Buffer
    Make sure you leave money for living expenses. Your outgoing loan payments should not exceed 40% of total income. Expect something unexpected to happen and try to keep three to six months’ worth of expenses available for an emergency so that you are not taking on new debt to cover it. One major word of caution; don’t lie on applications so that you can “afford” a bigger mortgage or newer car.  While it is harder to get away with nowadays, stretching for larger loans forced millions of Americans into foreclosure during the Great Recession. To build up this buffer, set up a consistent amount monthly that you are saving, and try to add to it with irregular income like bonuses. It may be 5-10% of income, or just $25-50 a month. Either way, create the habit.
  3. Spending
    I encourage new couples to individually keep track of all their purchases in a small notebook for one month and review it together. There are multiple apps that can assist with this too, if you are open to it. My wife and I did this when we were first married, and it was amazing to see where our money was really going.  What we soon found was that we were thinking at the register and we quickly began making less frivolous decisions and had more money to save. You can also look back over the past 3-6 months of transactions in your accounts. Be very realistic with your budget; don’t say that you will only spend $20 on hair products if you have consistently been spending $50.
  4. Fixed vs. Variable Expenses
    Start your list with fixed expenses, like rent and debt. Try to round up debt payments by $5, $10, $50 dollars if possible; even a little extra adds up. After you cover your fixed expenses, break up your variable costs into categories that reflect your lifestyle. Do you want to track spending at coffee shops, restaurants, dessert, and markets individually? Or is one ‘dining’ category okay? Finally, be sure to set aside some money each month to go towards irregular expenses. You know you will have to spend money on your car, health, or home, but it’s rarely in the form of an even $25 a month. Be prepared for big bills by setting up an intermediate bucket to cover those costs – without hitting the emergency fund.
  5. Reward
    You should reward yourself for good habits! Set a goal that when you pay off a debt, you will use that $200 for a nice dinner the next month before moving on to the next one. Reach an emergency savings goal? Use a weekend to stay-cation and imagine what your next savings goal will be – maybe a vacation or car fund? Once you hit a few milestones, you will feel more in control.

It may be tempting to stop saving and pay off debt or ignore the debt until you reach a savings goal. Make sure you keep all the pieces going, even if it is slowly. By applying these principles, you are on your way to financial independence. As your income grows and your obligations shrink, you will be able to shift how much is going to each item. In  10 years, you could be putting 10-15% into retirement and have healthy savings, while feeling in control of your spending.

Chuck Porter Jr.Chuck has been with Canon Capital since 2006 and was admitted to the company as a unitholder (owner) in 2018. He is a Senior Investment Advisor specializing in serving high-net-worth individuals and families. Chuck graduated from Widener University where he majored in Economics with an emphasis in Personal Financial Service. He has a Certificate in Financial Management for the Family Office from Pepperdine University’s Graziadio School of Business and Management and he is an Accredited Investment Fiduciary.

This article is designed for general information only. The information presented should not be construed to be formal advice nor the formation of a client relationship.

2020 Ushers in Long-awaited Update to Overtime Pay Regulations

Workers in the United States recently saw the first update to overtime eligibility salary levels in 15 years. Effective, January 1, 2020, this final rule under the Fair Labor Standards Act (FLSA) brings the following threshold changes to the salary and compensation levels to receive overtime pay:

  • raising the “standard salary level” from the currently enforced level of $455 to $684 per week (equivalent to $35,568 per year for a full-year worker)
  • raising the total annual compensation level for “highly compensated employees (HCE)” from the currently-enforced level of $100,000 to $107,432 per year
  • allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices
  • revising the special salary levels for workers in U.S. territories and in the motion picture industry.

The Department of Labor (DOL) has advised that this change means that an estimated 101,800 workers will now be eligible for overtime pay.

Questions about this new rule and how it might affect your company’s payroll? We are happy to help. Call 215-723-4881 or contact us online.

Cutting Corners? Where Not to Skimp on Your IT Services

We know how tempting it can be to cut corners in business, but cutting corners almost always leads to a problem further down the line when we must face the consequences of not having implemented something correctly the first time around. This same concept applies to your IT. If you cut corners with IT, the consequences to your business can be major. Here are three places where you never want to cut IT costs:

Equipment

You want to set up a wireless network, but you don’t want to spend more than $50. So, you spend that $50 and call it “good.” While this new router may deliver a wireless signal that reaches every employee, you could be making a mistake.

Routers are an ideal example of technology you want to put extra thought and money into. You want equipment that not only makes sense for your business’s network needs but that will also perform reliably and securely. Cheap routers aren’t known for their security features. You want something that will complement the firewalls or security software you have in place.

This same idea applies to all other equipment and software. You don’t want to put your data at risk if you’re buying cheap, potentially faulty equipment. Do research, ask questions and work with an experienced IT company to make sure your equipment is up to snuff.

Growth of Your Business

Whether you’re just getting started or you’ve been in business for a while, you always want to invest in hardware and software that will scale with your business. It’s safe to say that most businesses want to grow, which means adding more customers and more employees. When that’s the plan, scalability becomes a big deal.

Part of it comes back to the first point: cheap equipment isn’t typically designed with scalability in mind. It’s a quick-fix investment. It’s not made for the long haul. Where do you plan on being in five years? What are your growth goals? You need to ask these kinds of questions to determine what type of investment you need to make, whether it’s in billing software, customer service software, workstations or your network infrastructure.

If you don’t think about scalability, you’ll be hit by growing pains as soon as your business starts to increase. You’ll have to reinvest in technology, and as a result, you’ll be spending far more than necessary: once for the first investment (on non-scalable tech) and again for the second investment (to catch up with your growth).

Data Security

Just because your data is locked away in the back room doesn’t mean it’s safe. Small businesses are the biggest targets for cybercriminals because most small businesses skimp on data security, making it easier for cybercriminals to steal data and cause a lot of problems. To make matters worse, if you get hit with a cyber-attack or data breach, it can be incredibly difficult to recover, and many small businesses don’t.

You should invest in a mix of firewalls, malware protection, data encryption, data backups, password managers and, as mentioned at the start of this piece, good equipment that is designed with reliability and security in mind. This feels like (and can be!) an overwhelming amount of security to enable, and as you dive further into the topic of data security, you’re likely to have more questions. It is very hard to run a business and try to be a data security expert at the same time, so consider pairing up with an experienced IT company that specializes in security.

Whether you hire outside IT assistance or you invest in your in-house IT support, remember not to take shortcuts and reevaluate your plan at least once a year to determine the best level of security for your business.

Questions? Or maybe you’re not sure where to begin? Contact Kent Gerhart at 215-723-4881 x131 to arrange for your free Technology Review today.

What You Don’t Know Can Tax You

I was reading an article on a recent tax court decision in which the court trial was borne out of an examination of an individual taxpayer.  One passage from the article read as follows:

“The IRS auditor analyzed the taxpayers’ bank statements and records to identify total deposits and asked the taxpayers where the deposits came from.  Deposits for which the taxpayers could not identify the source were classified as taxable by the auditor.”

There’s a lot to unpack here, but before we get started, let’s discuss some background items.

A few general facts

First, the fact that this case is an individual exam is irrelevant to you the reader.  As I teach in my classes, you and your business are one and the same.  Therefore, in any exam, an auditor will audit both you and your business.  Even if your business is a separate entity.  There is no hiding behind separate entities.

Second, any exam is going to carry on for multiple years; three years is the most likely scenario to start.  If you’re unfortunate, it will only grow from there.  Outside of certain circumstances, the IRS can generally audit any of the last three years filed.  So as of December 2019, the IRS can freely audit 2016, 2017, and 2018 returns.

Third, while I’m an accountant and have a different perspective, I know taxpayers generally don’t keep accurate “books and records” for themselves.  How do I know?  Easy.  Every time I go to the bank, the teller asks me, “Do you need a balance?”.  The accountant in me thinks this is quite possibly the worst question ever asked because the bank never has a correct balance.  However, it seems to be of great service to the general population because the bank keeps asking.  Thus, the fact that a bank, who never has the correct balance, is better than the individual’s own records tells me the individual must have less of a clue than the bank as to what their correct balance actually is.

Unpacking the details

With that background established, let’s start unpacking the passage in the article, kind of like you would  your favorite Bible verse:

First, the auditor analyzed ALL the taxpayers’ bank statements and records. So, if you have four bank accounts, you’ll be required to hand the examiner 144 statements (4 accounts for 12 months for 3 years).  No exceptions. Keep in mind, a lot of online banking services only go back one year and we as individuals don’t keep good records. Thus, you could very well need to pay for nearly all the statements to be reproduced. As of December 2019, the only statement available to us online for our 2016–2018 exam is December 2018.  Yikes, that’s a lot of bank charges!

Second, the auditor added up total deposits on the bank statements. An auditor will subtract transfers between accounts, which could be documented if they are done electronically.  However, if you’re writing a check from one account to the other, even a transfer may not be documented clearly.  After this, the auditor compared TOTAL ADJUSTED DEPOSITS to known income. It’s extremely important to know an examiner will ALWAYS do this analysis – either for a business or individual. They are looking for unreported income.

Next, the auditor was nice enough to ask the taxpayers where the deposits came from. Nice, huh? We all assume it would be the auditor’s job to figure out sources and amounts of income.  However, that’s a very bad assumption. We, as either businesses or individuals, need to know the sources for all our deposits.  It’s not for the IRS to figure out.

As a result, “Deposits for which the TAXPAYER could not identify the source WERE CLASSIFIED AS TAXABLE.” Think about that for a moment. EVERYTHING not identified was classified as taxable.  EVERYTHING. You’re probably thinking, “That’s not fair!”. It certainly isn’t. However, auditors have a godlike power. They can pretty much do anything they want. That’s just the way it is.

So, let’s think about this in terms of ourselves. We have already determined individually we don’t keep good books and records.  So that $350 deposited on 7/6/16.  What was that?  Don’t know? Bam! Taxable. That $890 deposit on 8/31/17.  What was that?  Don’t know? Bam!! Taxable. In reality, these could have been insurance refunds; redeposit of left-over cash you took on vacation; your kids’, family’s, or friends’ reimbursement for some expenses; mileage reimbursements; legitimate gifts; and on and on. ALL OF THAT IS NOW TAXABLE because you were too lazy to keep a simple check register. This is now rubbing salt in the wound after you had to pay to obtain the bank statements.

For rainy day Monday fun, I looked at my own records. While I do, in fact, know where and what all my deposits are for, I pretended I didn’t have good records, or any at all. I can prove my wages and account transfers.  But again, I’d have no way of remembering or proving insurance refunds, tax refunds, expense reimbursements from my kids, or my sister giving me cash as a reimbursement for my parents’ anniversary present, some small court settlements, etc. For one year, the total was $4,995. So over three years, that would mean $15,000. While $15,000 isn’t enough to rise to the level of fraud, it is enough to cause a lot of hurt. If we assume a fairly common tax rate of 24%, that would mean an examiner could assess me with an additional tax of $3,600 in an exam BEFORE penalties and interest. Now we’re taking sandpaper to that wound.  Again, all because I was too lazy to keep a simple check register.

Keep in mind, I did nothing wrong. I correctly reported all items of income and deductions correctly under the law. I just was lazy with my recordkeeping.  Now I’m out $1,440 – $3,600 for bank statement copies that cost me $10-$25 per copy, $3,600 in assessed tax, and hundreds more in interest and penalty. Lastly, I may want to have someone represent me in an exam. That could easily cost me another $3,000 – $5,000.  Remember, since I don’t have good records, the guy charging $200/hour is going to have more time than if my records were good. And after all this, I HAVE NO DEFENSE TO APPEAL THE DECISION.

Yes, this is very real and can happen.  I’ve seen it.  Remember, as you suspect with the IRS, you are guilty until proven innocent. What you don’t know can indeed tax you.

 

BrentThompson fromwebBrent Thompson, CPA has been with Canon Capital since 1998. He provides management advisory services, tax and general business planning, tax preparation, and financial statement preparation and review services for numerous businesses and their owners. He holds the Certified Management Accountant (CMA) designation and a Chartered Global Management Accountant (CGMA) designation. Brent is a member of the AICPA and the Institute of CMA’s.

This article is designed for general information only. The information presented should not be construed to be formal advice nor the formation of a client relationship.

Minimum Wage Rates on the Move in 2020

While the Federal minimum wage has remained at $7.25 per hour since 2009, the minimum wage is on the rise in many states, counties, and municipalities across the United States.

We have seen increases in the minimum wage as nearby as Philadelphia, where city contractors, subcontractors, and municipal government workers began receiving a minimum wage increase on a schedule, with plans to continue raising the minimum wage according to the Consumer Price Index for all Urban Consumers. New Jersey residents saw a similarly scaled increase to the state minimum hourly wage, with plans to grow it from $8.85 to $15.00. Legislation has been proposed to raise Pennsylvania’s minimum wage via State Senate Bill 79, which currently is under discussion in the State House Labor and Industry Committee.

How has the minimum wage changed across the United States? Here is an interactive map providing a current overview.

We are happy to answer any questions you might have regarding these updates or any other issue related to your payroll. Call 215-723-4881 or contact us online.

IRS Issues New Mileage Rates for 2020

It’s a new year so that means it’s time for the IRS to issue new mileage rates. These are the optional standard mileage rates used to “calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.”

The 2020 mileage rates are:

  • 57.5 cents per mile driven for business use (a half of a cent decrease from the 2019 rate)
  • 17 cents per mile driven for medical or moving purposes (a three-cent reduction from the 2019 rate)
  • 14 cents per mile driven in service of charitable organizations (no change)

The IRS website notes that “under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, except members of the Armed Forces on active duty moving under orders to a permanent change of station. For more details, see Rev. Proc. 2019-46 (PDF).”

Questions on this or any other payroll or accounting matter? Call 215-723-4881 or contact us online.

Canon Capital is Co-working in Lancaster, PA!

You are likely aware by now that earlier this year Canon Capital combined offices to our new location in Harleysville, PA. But did you know that we have a satellite location in Lancaster, PA? Wealth Management has expanded to a co-working space called The Candy Factory, where full-time Investment Advisor, Marissa Illingworth, works. She shares her co-working experience in this blog post.

What is co-working?

For those who might not know, co-working is a community of professionals who all share space while working independently. The Candy Factory is comprised of a half-city-block compound offering conference rooms, video call booths, an event space, shared workspaces, a media production room, and private offices. Members also share and collaborate at lunch-and-learns, networking events, social clubs, and professional development services. No, there is no candy onsite; the name comes from the original building, a historic candy factory in downtown Lancaster.

What is the benefit?

It is hard to pick just one single benefit. I have truly felt inspired by the community and remain excited to enter the space daily. The unique aspect is working alongside other professionals who are not traditional co-workers. Instead of going through the same things, or perhaps having competition, you can really engage across fields and learn and share with each other. It is very cool to see so many people doing what they love. It also provides me with opportunities to socialize and expand our network.

How do you keep up?

My passion is truly for technology in business solutions, so working remotely does not hinder me. My entire office fits into one backpack – a laptop, portable second screen, mouse, headphones, and business cards. I can turn on a hotspot and work anywhere – from a train, airport, or car! In the co-working space, I do have a desk with monitors, and I do keep a printer at home. I find it exciting to keep my digital desk organized. With cloud storage and electronic communication tools, I am constantly in touch with clients and coworkers.

While it isn’t for everyone, I think more and more industries will move to remote/flexible work environments. With a little routine (and a great space to focus), it is very sustainable. When I am working, I am entirely focused, and when I’m not, I don’t have to worry about a long commute or bad weather. I believe it makes me more productive and more available.

What do you think about co-working? Could your business or industry work that way? If you have any questions, I’m always happy to chat!

New Form W-4 Issued by IRS for Use in 2020

The IRS has issued a new Form W-4 for 2020. All employers will be required to use this form for new employees hired as of January 1, 2020.

The 2019 Form W-4 underwent two previous updates, one in May and one in August, to incorporate the changes that came with the Tax Cuts and Jobs Act (TCJA). Those changes included suspension of personal exemptions and increasing the standard deduction, but previous versions of Form W-4 still included the withholding allowance based on the personal exemption amount. As such, some taxpayers were over-withheld and some under-withheld.

Current employees are permitted to submit a new Form W-4 after the first of the year, especially if they wish to adjust their withholding amounts. If current employees do not submit the new 2020 Form W-4, employers are required to base withholdings on the data provided on the 2019 version of the form so it would serve everyone best to make sure all employees complete a new Form W-4 in the New Year.

Learn more about the new Form W-4 in this FAQ guide provided by the IRS.

If you have questions about this topic or any of our other business service offerings, please don’t hesitate to call 215-723-4881 or contact us online.

Is This Holiday Gift Taxable to My Employee?

The holiday season is here, and for many business owners it is the time of year to show employees gratitude for their service with year-end bonuses or gifts.

Cash is always taxable and must be included in an employee’s W2 wages, so a gift card or gift certificate might seem like the preferred option. However, according to the IRS, even if the cash is given in the form of a gift card or certificate since it can be considered as a cash equivalent, it is still taxable:

“Cash or cash equivalent items provided by the employer are never excludable from income. An exception applies for occasional meal money or transportation fare to allow an employee to work beyond normal hours. Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable.

A certificate that allows an employee to receive a specific item of personal property (i.e. a grocery store certificate for a turkey, Christmas tree, etc.) that is minimal in value, provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances.”

Therefore, gift cards such as those issued by Visa, Amazon, Target, etc., are taxable and must be included in an employee’s W2 wages. As stated above, gift cards or certificates that can be redeemed for a specific item or service may be excluded as a “de minimis,” or fringe, benefit.

If you have a question about the gift you’re considering for your employees, we are happy to help. Call Canon Capital Payroll Services at 215-723-4881 or contact us online.

 

Church Payrolls Add Extra Twists to Already Complicated Tax Regulations

If you are processing your payroll in-house, the twists and turns of payroll tax regulations can make it a confusing and frustrating endeavor. If your organization is a church, there are additional factors to consider, such as the clergy member’s employment status and housing allowance.

Clergy: Employees or Self-employed?

Under Federal law, most clergy members have what is called dual status. Dual status means that for Federal income tax purposes, clergy are considered employees; but for Social Security and Medicare purposes, they are considered self-employed. Based on this premise, Social Security and Medicare taxes are not deducted from the clergy member’s pay even if they have not elected out of contributing to Social Security and Medicare.

Instead, due to their self-employed status related to Social Security and Medicare, clergy are responsible for paying both the employee and employer portion of these taxes.  Churches are relieved of the burden of paying the employer portion of Social Security and Medicare. A church might choose to pay clergy for the employer portion of these taxes, but it will need to be included in their taxable income.

Housing Allowance

Under Federal law, clergy members are entitled to claim a housing allowance which provides certain tax advantages. Housing allowances are not taxable for federal and local tax (except Philadelphia) purposes, but the allowances are taxable to the state of Pennsylvania.

If you would like help making sure your church payroll is in compliance, please contact us online or call 215-723-4881.