The 3 Most Common MLM Tax Myths

Multi-level marketing companies (MLMs) have exploded over the last decade. Tens of millions of Americans participate in MLMs or "network marketing". There have been countless articles written over both the potential risks and successes of these companies, so we're not going to dig into that debate. The fact of the matter is, like with any industry, some people make money in multi-level marketing, and some people don't.

What we are interested in, however, is the preponderance of tax myths we see bandied about when it comes to network marketing. New MLM participants are often encouraged to take advantage of myriad deductions that will open up when they start their own business, and are promised significant tax savings.

Unfortunately, it's our responsibility to set the record straight on that.

Here are the three (inaccurate) MLM tax beliefs we see most frequently...

 

Mileage Auto DeductionsIf you put an advertisement on your car, all your vehicle expenses are deductible!

If this was true, every person should just file a d.b.a. and slap the name of their "company" on their vehicle, because the tax savings would absolutely be worth it. Unfortunately, it's not true. However, we still talk to many new clients who have heard this.

This myth is so pervasive, in fact, that the IRS put out a special note on it in their 2016 version of Publication 463 (which pertains to transportation deductions). A vehicle wrap is not a free pass for the government to pay for all of your fuel purchases for the year.

However, the cost of the car advertisement itself is fully deductible as a marketing expense. Also, your business mileage (excluding commute) is still deductible.

 

Meal DeductionsYou can write off all your meals!

Don't go crazy on eating out, thinking you'll get it all back at the end of the year.

For one thing, business meals are limited to those which are not considered "lavish or extravagant". For another, except for under very specific conditions, meals are only 50% deductible. So you can still lose a lot in meal expenses if you aren't careful.

Also, don't try to classify every meal as a "business" meal. Meal deductions are frequently abused, and can show up as a "red flag" to the IRS.

Loss on TaxesIt doesn't matter if you aren't making money...Just write off the loss!

Bad news: The IRS isn't dumb.

There was an actual case that came about due to a couple who were involved with Amway as a hobby. They threw extravagant parties for their friends, ostensibly for the purpose of selling Amway products, and claimed the losses on their taxes each year. That's when the IRS came in with hobby law.

Hobby law specifies the conditions under which your business can be reclassified as a "hobby". There are various criteria involved, but one major aspect is failure to turn a profit year after year. Regardless of the type of business, if your business is facing long-term failure, that is a problem.

 

If you have questions about how to handle your MLM business's accounting, don't take the word of your friends or upline. Talk to a professional, so you don't run into trouble.


FLSA Compliance: Three Distinctions to Understand in Classifying Workers

The Fair Labor Standards Act has been in the news a great deal, lately.  Multiple class-action lawsuits have been filed on behalf of unemployees who believe they have not been fairly compensated.

Many of these lawsuits have ended in either large settlements, or employers paying hefty fines and back wages.

To ensure that your business is in compliance with FLSA guidelines, understand the following three distinctions in classifying those who work for your business.

Who is a contractor and who is an employee?

Some employers have tried to lower their wages and tax liabilities by hiring independent contractors in place of employees.  This is an option so long as you follow the criteria for contractors.

Per the IRS's "common law rules", there are three categories assessed when judging whether a worker counts as an independent contractor.

Behavioral Control.  For an independent contractor, the business does not direct or control how their work is completed.

Financial Control.  If the business controls financial or business aspects of the worker's job (such as purchasing equipment, advertising the worker's services, etc.), the worker is an employee.

Type of Relationship.  Whether a worker is an independent contractor or an employee is determined by such aspects as the duration/permanency of the relationship, contracts describing the relationship, benefits provided to the worker, and whether the work performed is "a key aspect of the regular business of the company".

In addition to the IRS classifications, the U.S. Department of Labor provides their own "six-factor realities test" to determine whether a worker might be considered an independent contractor.

1.  Is the work an integral part of the employer's business?  This is similar to the language in the IRS rules regarding type of relationship.

2.  Does the worker's managerial skills affect their opportunity for profit or loss?  In other words, is the worker managing the business of the services they provide (for better or for worse) or is the employer directing that?

3.  Compare the worker's relative investment to the employer's relative investment.  If the business is providing the supplies, equipment, training, etc., the worker is likely an employee.

4.  Does the work require specialized skills and initiative?  Independent contractors are frequently professionals with specific skills over or in addition to those of the company's regular employees.

5.  Is the relationship permanent or indefinite?  Though they may work for the company for a very long period, contractors typically operate on a project-based or monthly contract.

6.  What is the nature and degree of employer control?  This correlates with the "behavioral control" aspect of the IRS common law rules.

Incorrectly classifying employees as contractors shifts tax burden to the workers, a misattribution which might later be remedied in court.

Of course, even if you only hire employees and no independent contractors, you still need to know...

Which employees qualify for exempt status?

"Exempt" employees are, essentially, those to whom you do not have to pay overtime.  (Specifically, they are legally classified as being excluded from the FLSA overtime rules.)  Non-exempt employees must be paid overtime in any period in which it is earned.  As might be surmised from the topic of this article, knowing the distinction is important.

Certain professions are essentially exempt by definition.  These are typically the classic "learned professions", such as doctors, lawyers, teachers, clergy, etc.  However, they can also include high-level administrative positions.  This does not mean that you can sit a secretary at the front desk for 60 hours a week and not pay him or her overtime wages.  To be considered high-level, administrative employees must be intensely involved in the running of the business, or in assisting executives to do so.  Think of a character like Pepper Potts from "Iron Man", who helps keep Stark Industries running by managing every aspect of Tony Starks's life.  She would qualify for exempt status.  (If you're not a fan of superhero movies, think of Emily Blunt's character in "The Devil Wears Prada".)

Excluding those jobs which are already considered exempt, there are three "tests" a position must pass to be considered exempt from overtime.

1.  The salary level test.  An employee must be compensated gross wages of $455 weekly ($23,600 annually) to be exempt.

2.  The salary basis test.  For any week in which any amount of work is performed, the employee is guaranteed a minimum amount.  (Typically, the weekly figure is calculated by dividing a contractually-guaranteed annual salary.)

3.  The duties test.  This is actually three tests in one, and is designed to protect employees from being labelled "managers" in order to deprive them of overtime wages.  For someone to be accurately considered an exempt supervisor:

a.)  He or she must supervise two or more other employees.

b.)  Management must be their primary duty.

c.)  He or she must have genuine input into the job status (hiring, firing, promoting, etc.) of other employees.

To give an example, a store cannot put someone in a "keyholder" position (where they might just be the "Manager on Duty" available to customers, but with no genuine managerial authority over other employees, and the majority of their duties not specific to managers) and then work them over 40 hours a week without overtime.

What if the worker in question is not a contractor nor an employee?  What if it's just a young person hanging around to learn the ropes?

For our third and final category, we are discussing...

When should interns be paid?

There have been several high-profile lawsuits recently regarding wage theft of unpaid interns.  Young people hoping to get a "foot in the door" in their industry of choice were instead worked ragged with no compensation.

Fortunately, the U.S. Department of Labor has provided a clear six-part set of standards to determine whether an unpaid internship is valid under the Fair Labor Standards Act.

1.  The internship must provide similar vocational training to an educational environment.  The internship should resemble an educational training program more than it does a job.

2.  The intern should be the primary beneficiary in the relationship.  In other words, the intern should receive more education and experience from the employer than the employer receives work out of the intern.

3.  If the intern is performing work for which the employer would have otherwise hired additional staff or required staff to work additional hours, the internship should be paid.  Again, the employer can't use an unpaid internship to get work performed without compensation.

4.  There should be no immediate benefit to the employer and the internship should be to the intern's interest.  The employer might even be temporarily inconvenienced by the internship.  However, under the ideals of an unpaid internship, it is presumed that the employer might recover long-term benefit from later hiring the intern as a well-trained employee, already familiar with company culture and procedures.

5.  An unpaid internship can come with no job guarantee.  This prevents employers from stringing along an intern for free work with the lure of future employment.

6.  Both parties understand that no wages will be paid.  An intern must be made aware from the beginning (before their first day at the internship) that this is not a paid position.


5 Things Business Owners Don't Realize They Need

We've all heard, "You don't know what you don't know."  This is particularly true in business, where it can be easy to develop tunnel vision and focus on your own expertise at the expense of the company.

Accepting the premise that you don't know what you don't know, we can extrapolate that you can't get what you don't realize you need.  Everyone knows they need sales avenues, customers, etc.  But there are other business essentials which, though not as well-known, are utterly necessary.  Here are five things businesses need (which you might not have thought of yet).

1. General Liability Insurance

It's no wonder that no one likes to think about getting insurance for their business.  Buying personal insurance, for your house, car, or health is enough of a hassle.  Getting quotes and comparing premiums and benefits for your business?  That's just piling on.

However, general liability insurance for your business is an absolute essential.  You can hope to never need it (I'm sure you're never planning to get sued) but, in the eventuality that you do, you will be grateful for it.  Depending on the nature of your business, Commercial Property Insurance might be a recommendation, as well.

2.  Workers' Compensation Coverage

Even more insurance!  Laws vary by state but, in North Carolina, you are required to carry Workers' Comp if you have three or more employees, or if you have at least one employee and your business works with radiation.  (If your business works with radiation, you'll definitely want those general liability and commercial property insurance policies, as well.)

Many employers try to avoid purchasing workers' compensation policies, but it is not a wise choice.  Not carrying coverage opens you up to charges of fraud, huge fines and, in some cases, even jail time.

Now let's move away from insurance and segue into something else that can protect you from being sued by employees or the government...

3.  A Good Payroll Provider

Unless your business is large enough for an in-house full-scale accounting department (in which case, we're flattered you're reading our blog), you need to be outsourcing your payroll.  Running payroll manually is intensely time-consuming, and very risky.  If you do not have a payroll expert on your staff, you are taking a big gamble with your tax withholdings and filings.  According to the IRS, 40% or small businesses pay an average of $845 per year for late or incorrect filings or payments.  (That's over a third of small businesses.)

Furthermore, outsourced payroll services have become ridiculously inexpensive and painless.  We at The Bookkeeper are huge fans of Gusto Payroll, and frequently recommend them to clients.  Their customer service is excellent, the interface is user-friendly (even for avowed Luddites), and packages start at less than $40 a month.  And Gusto is one of many simple, affordable payroll solutions.

Please, do not take on the headache and risk of penalities associated with payroll, without researching your provider options first.

And while we're on the subject of taxes...

4.  Sales & Use Tax

Who has to file sales and use tax?  According to the North Carolina Department of Revenue, "Every person engaged in the business of selling tangible personal property at retail, selling certain digital property at retail, renting or leasing taxable tangible personal property in this State, operating a laundry, dry cleaning plant or similar business, or operating a hotel, motel or similar business in this State must register with the Department and obtain a Certificate of Registration. This includes a person who sells tangible personal property and certain digital property, or provides a taxable service at a specialty market, flea market, fair, festival, sporting event, or another event or function."

Needless to say, there are many, many people who should be paying sales tax who aren't.  So if you are selling a tangible good, even if it's just from a booth at the fairgrounds on Saturdays, you should be filing sales and use tax.  And if you do not know to do so, contact someone who does.  If you are caught not paying sales tax, you may be assessed penaltyand interest.  The risk is simply not worth it.

Now that we've bummed everyone else by talking about insurance and taxes for four entries, let's move on to what's surely going to be the most controversial item on this list...

5.  A Website

In 2016, in order to maintain credibility, your business needs a website.  (No, a Facebook page doesn't count, though it's better than no web presence at all.)  A website (preferably with a unique, personally-owned URL, and not through a "freebie" site-building service) shows your customers and potential customers that you a legitimate, solid company.  Your website is the first place people will go to look for information about your business.  Not having any sort of web presence at all can read as very suspicious.

Furthermore, you are doing yourself a huge marketing disservice by not having a website.  Web marketing provides the absolute most "bang for your buck" out of any form of advertising.  Even if you have a successful business without a website, you could be reaching so many more potential customers and be more available to current customers.

Are there any other little-known business essentials you would add to this list?  Let us know, and we'll amend accordingly.