Reasons Why Married Couples Might Want to File Separate Tax Returns

Married couples often wonder whether they should file joint or separate tax returns. The answer depends on your individual tax situation.

It generally depends on which filing status results in the lowest tax. But keep in mind that, if you and your spouse file a joint return, each of you is “jointly and severally” liable for the tax on your combined income. And you’re both equally liable for any additional tax the IRS assesses, plus interest and most penalties. This means that the IRS can come after either of you to collect the full amount.

Although there are provisions in the law that offer relief, they have limitations. Therefore, even if a joint return results in less tax, you may want to file separately if you want to only be responsible for your own tax.

In most cases, filing jointly offers the most tax savings, especially when the spouses have different income levels. Combining two incomes can bring some of it out of a higher tax bracket. For example, if one spouse has $75,000 of taxable income and the other has just $15,000, filing jointly instead of separately can save $2,512.50 for 2020.

Filing separately doesn’t mean you go back to using the “single” rates that applied before you were married. Instead, each spouse must use “married filing separately” rates. They’re less favorable than the single rates.

However, there are cases when people save tax by filing separately. For example:

One spouse has significant medical expenses. For 2019 and 2020, medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income (AGI). If a medical expense deduction is claimed on a spouse’s separate return, that spouse’s lower separate AGI, as compared to the higher joint AGI, can result in larger total deductions.

Some tax breaks are only available on a joint return. The child and dependent care credit, adoption expense credit, American Opportunity tax credit and Lifetime Learning credit are only available to married couples on joint returns. And you can’t take the credit for the elderly or the disabled if you file separately unless you and your spouse lived apart for the entire year. You also may not be able to deduct IRA contributions if you or your spouse were covered by an employer retirement plan and you file separate returns. You also can’t exclude adoption assistance payments or interest income from series EE or Series I savings bonds used for higher education expenses.

Social Security benefits may be taxed more. Benefits are tax-free if your “provisional income” (AGI with certain modifications plus half of your Social Security benefits) doesn’t exceed a “base amount.” The base amount is $32,000 on a joint return but zero on separate return (or $25,000 if the spouses didn’t live together for the whole year).

No hard and fast rules

The decision you make on your federal tax return may affect your state or local income tax bill, so the total tax impact should be compared. There’s often no simple answer to whether a couple should file separate returns. A number of factors must be examined. We can look at your tax bill jointly and separately. Contact us to prepare your return or if you have any questions.

Yeo & Yeo CPAs & Business Consultants is proud to announce the promotion of two associates effective January 1, 2020.

Ashley Rabie, CPA, Ann Arbor, was promoted to Manager and transferred to the firm’s Ann Arbor office. She specializes in business consulting services with an emphasis on the healthcare and retail sectors. Rabie joined the firm in 2014 and provides financial statement compilation services, business tax planning and preparation, and accounting system advisory services. She is a QuickBooks Certified ProAdvisor and a member of the firm’s Healthcare Services Group and the Client Accounting Software Team. She holds a Bachelor of Business Administration, majoring in accounting, from Saginaw Valley State University

In the community, Rabie is a member and former treasurer of Women in Leadership – Great Lakes Bay Region. She looks forward to becoming more involved in her new community in Ann Arbor.

Chelsea Meyer, CPA, Kalamazoo, was promoted to Manager. She specializes in tax planning and preparation for individuals, businesses, trusts and estates. She also provides compilations of financial statements and financial reviews for businesses, with an emphasis on the death care industry. Meyer is a QuickBooks Certified ProAdvisor and a member of the firm’s Client Accounting Software Team, assisting clients with improving efficiency in their accounting systems.

Meyer has been with Yeo & Yeo since 2013. She holds a Bachelor of Business Administration in accounting and a Master of Science in Accounting from Grand Valley State University.

Revenue and receipts are an important cycle in any nonprofit organization’s day-to-day business. This is how the nonprofit receives the funds it needs, whether in the form of contributions or exchange revenue, to continue to fulfill its programs and mission. Yet, does your nonprofit have effective internal controls in place for processing revenue and receipts? In this Nonprofit Quick Tip, let’s look at internal controls for receipts.

A nonprofit’s biggest nightmare is becoming a top story in the news for fraud or inappropriate use of funds. Incoming funds are one of the areas most susceptible to fraud and errors. A strong internal control environment can help deter fraud and errors and keep revenue coming in uninterrupted.

So how do you protect your organization when it comes to receipts? Like any internal control matters, you must think about how someone could steal or make an error in the process. Then, you implement controls to help strengthen those identified weaknesses.

All nonprofit organizations should implement a few simple controls regarding receipts.

Someone who is not performing the general ledger accounting should open the mail and make a receipts listing. Also, it’s a good practice to stamp any incoming checks immediately as “for deposit only.”
The individual collecting the receipts should not be the person depositing them. This segregation helps ensure that all receipts coming in make it to the bank.
The receipt listings created when opening the mail should be compared to the general ledger and deposit slips to ensure everything was deposited and recorded.
Receipts on hand should be kept in a secured location, such as a safe, to which a limited number of people have access.
Making deposits timely is also a good practice.

Read more in-depth internal controls recommendations in our blog article, Internal Controls: Segregation of Duties in Small Nonprofits.

Most governmental finance managers are aware of the Government Finance Officers Association (GFOA) Certificate of Achievement for Excellence in Financial Reporting Program, and most governments choose to participate or not participate based on historical patterns – either to continue a long-standing series of Certificate awards, or to not participate in the program at all. Program participation, according to statistics on GFOA’s website, is more heavily weighted toward larger governments than smaller ones, but many smaller entities choose to participate. Will your local unit be the next to enter the program?

Many of us have seen the rows of award plaques on the wall of longtime program participants and understand the motivation to keep that pattern going into the future, but participation in the program is not really about the actual awards. The Comprehensive Annual Financial Report contains additional information that is not required by generally accepted accounting standards (GAAP) that allows a governmental unit to demonstrate enhanced transparency, full disclosure, and a level of competency in financial reporting that sets program participants apart from nonparticipants. This additional information is helpful to citizens, regulators, creditors, and others as they try to understand a government’s financial position and activity by analyzing the annual Comprehensive Annual Financial Report.

The Comprehensive Annual Financial Report is broken down into three sections – the Introductory Section, the Financial Section, and the Statistical Section. A standard GAAP financial statement is comprised of the Basic Financial Statements as well as some Required and Other supplementary information which would generally correlate to the Financial Section of a Comprehensive Annual Financial Report. All that being understood, though, what are the most significant additional items that are included in a Comprehensive Annual Financial Report that most governments are not currently preparing? Those would be:

A Letter of Transmittal included in the Introductory Section
Additional budgetary comparison schedules included in the Financial Section
Inclusion of the Statistical Section

The Letter of Transmittal is written by the government and signed by the chief financial officer. It is generally three to four pages in length and discusses overall information about the governmental unit such as the reporting entity and services provided, governmental structure and the local economy, local points of pride, significant ongoing or upcoming projects, information on the external audit, as well as awards and acknowledgments. We generally find that the Letter of Transmittal, once it is written, is updated annually with a minimal amount of effort by the governmental unit. Writing it from scratch for the first year is generally the biggest challenge.

The second significant addition is that a Comprehensive Annual Financial Report requires presentation of budgetary comparisons for all budgeted funds, as opposed to a GAAP financial statement that requires budgetary comparisons only for the general fund and major special revenue funds. If your auditor drafts the annual financial statements, adding these additional budgetary comparisons should be a straightforward task.

The final additional item is probably the most significant one, which is the inclusion of the Statistical Section in the Comprehensive Annual Financial Report. The Statistical Section contents are defined by Governmental Accounting Standards Board (GASB) Statement No. 44. GASB 44 requires information to be presented generally for the last ten years regarding financial trends, revenue capacity, debt capacity, demographic and economic information, and operating information.

The financial trend information is easily derived from current or past audited financial statements, so it is readily available.
Information on revenue capacity speaks to the ability of a local unit to generate own-source revenues by providing schedules on the revenue base, rates, and principal revenue payers. This information is generally available in-house or from the local County Treasurer or Equalization department.
Debt capacity information includes ratios of outstanding debt, direct and overlapping debt, debt limitations, and pledged-revenue coverage. That information is generally obtained from federal census records, internal information, and debt issues of other nearby governmental units.
Demographic and economic statistics would encompass readily available information on population, personal income, unemployment rates, and the like, as well as information on principal employers that may require reaching out to an economic growth department or commission or similar entity.
Finally, operating information would list the number of government employees by function over time, present operating indicators specific to each government, as well as capital asset information – all of which should be available in-house.

It is important to note that when a Comprehensive Annual Financial Report is presented, the independent auditors do not audit the Introductory or Statistical sections. The independent auditor’s report will delineate what information is audited and what is not.

Submitting a Comprehensive Annual Financial Report to the GFOA for entry into the program involves filling out an application and paying a fee that increases based on population. Once the Comprehensive Annual Financial Report is submitted, the GFOA will assign the report to a reviewer. Comprehensive Annual Financial Report reviewers are volunteers who handle the actual review on behalf of the GFOA (two Yeo & Yeo Principals are Comprehensive Annual Financial Report reviewers) and provide comments and pass/fail grades on various aspects of the report back to the local unit based on their review. Those comments are generally helpful reminders to include something that may have been missed, a request for clarification in a certain area, or to address a deficiency that the reviewer has identified. The comments, with responses from the local unit, are sent back to the GFOA with the subsequent year’s application.

Does the Comprehensive Annual Financial Report program sound like it may be something of benefit to your governmental unit? Please don’t hesitate to reach out to your Yeo & Yeo professional – we are here to help!

Accounting for capital assets generally is not on a school district’s radar for day-to-day accounting. Usually, capital asset workpapers are completed at the end of the audit. Because they are presented only at a district-wide level, they are frequently overlooked. However, these assets are often one of the largest amounts on the financial statements. Proper accounting for capital assets is important to ensure that this balance is accurate and represents actual assets held by the school district.

Managing the capital asset listings

Capital asset listings are generally very large and may contain items from the formation of the school district. Additions during the year are identified through items coded to a capital outlay object code (6000). These transactions should be reviewed to determine which of them exceeds the school district’s capitalization policy and should be added to the listing to begin depreciation. The Michigan Public School Accounting Manual (Bulletin 1022) provides major class codes for land, building and additions, site improvements, equipment and furniture, vehicles other than buses, school buses, educational media and textbooks, construction in process, and other capital assets.

Capital asset disposal

While additions are straightforward to identify, disposals are not as simple. Many times, the disposal of a capital asset does not result in the school district receiving proceeds; therefore, items may be removed, and the business office will not know about the transaction. Capital asset policies should be established to define proper disposal procedures. The business office must communicate the policies throughout the school district to ensure that all information is properly reported.

A physical inventory of assets purchased in whole or in part under a federal award must undergo a physical inventory a least once every two years. The school district may want to consider performing a full capital asset inventory at this time. Procedures usually include the tagging of equipment with barcodes and updating asset valuations to ensure the listing is as accurate as possible.

Capture as much identifying information as possible

What type of information should be on the listing? As much identifying information as possible! To help combat the disposal issue noted above, assets should be easily distinguishable. The description should include the location, serial number, date added, original invoice information, etc.

If the equipment was purchased with federal funds, the school district is required to include the following in the property records:

a description of the property
a serial number or other identification number
the source of funding for the property (including the FAIN)
who holds the title
the acquisition date
cost of the property
percentage of federal participation in the project costs for the federal award under which the property was acquired
the location, use, and condition of the property
any ultimate disposition data including the date of disposal and sale price of the property (2 CFR 200.313(d)(1))

Clear, enforced policies are vital

Clear policies should be established and enforced by the school district to ensure that the balance is accurate. Review throughout the year can help eliminate any year-end headaches and make updating the records much less of an administrative burden. Yeo & Yeo has several solutions to assist in the proper maintenance of the capital asset listing and we would be happy to help.

One option business owners choose for succession planning is an employee stock ownership plan (ESOP). ESOPs can empower and retain employees as well as provide tax savings, but careful consideration needs to be given to how and when these plans are valued. The value of the privately held stock is subject to standards put in place by both the Internal Revenue Service and the Department of Labor. Both organizations have employed fair market value as the standard value, otherwise known as the price the stock would trade for on the open market.

ESOPs require valuations at different times and for different reasons. A company that is considering starting an ESOP would want to have a valuation performed before they go through the steps of establishing an ESOP so they will know an approximate value of the company and can compare this option to other alternatives they are considering.

A valuation would also need to be done anytime the ESOP is engaging in a security transaction to verify that the transaction is occurring at fair market value. The IRS does not allow a company to take a deduction for an ESOP contribution unless the ESOP has received shares worth the amount of the deduction.

Finally, a valuation needs to be performed each year to determine the value of stock that is owned by employees. If a plan participant, beneficiary, or retired employee would like to sell their stock, they would sell the stock back to the trustee at the price per share during this time.

Valuations for an ESOP are different from the average valuation in that they require additional analysis and disclosures. They also must satisfy Department of Labor requirements. It is important to make sure that when engaging in these types of transactions, you are working with a valuation analyst who is aware of these additional requirements to make sure your plan is compliant.

An array of tax-related limits that affect businesses are annually indexed for inflation, and many have increased for 2020. Here are some that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2020 at $137,700 (up from $132,900 for 2019).

Deductions

Section 179 expensing:
- Limit: $1.04 million (up from $1.02 million for 2019)
- Phaseout: $2.59 million (up from $2.55 million)

Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
- Married filing jointly: $326,600 (up from $321,400)
- Married filing separately: $163,300 (up from $160,725)
- Other filers: $163,300 (up from $160,700)

Retirement plans

Employee contributions to 401(k) plans: $19,500 (up from $19,000)
Catch-up contributions to 401(k) plans: $6,500 (up from $6,000)
Employee contributions to SIMPLEs: $13,500 (up from $13,000)
Catch-up contributions to SIMPLEs: $3,000 (no change)
Combined employer/employee contributions to defined contribution plans (not including catch-ups): $57,000 (up from $56,000)
Maximum compensation used to determine contributions: $285,000 (up from $280,000)
Annual benefit for defined benefit plans: $230,000 (up from $225,000)
Compensation defining a highly compensated employee: $130,000 (up from $125,000)
Compensation defining a “key” employee: $185,000 (up from $180,000)

Other employee benefits

Qualified transportation fringe-benefits employee income exclusion: $270 per month (up from $265)
Health Savings Account contributions:
- Individual coverage: $3,550 (up from $3,500)
- Family coverage: $7,100 (up from $7,000)
- Catch-up contribution: $1,000 (no change)
Flexible Spending Account contributions:
- Health care: $2,750 (up from $2,700)
- Dependent care: $5,000 (no change)

These are only some of the tax limits that may affect your business and additional rules may apply. If you have questions, please contact us.

Perhaps you’re an investor in mutual funds or you’re interested in putting some money into them. You’re not alone. The Investment Company Institute estimates that 56.2 million households owned mutual funds in mid-2017. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.

Tax basics

If you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax.

When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One difficulty is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.

What’s considered a sale

It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout.

It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares.

Another example: Many mutual funds provide check-writing privileges to their investors. However, each time you write a check on your fund account, you’re making a sale of shares.

Determining the basis of shares

If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.

The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis.

First-in first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.
Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on June 1, 2015.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis.
Average basis. The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent.

As you can see, mutual fund investing can result in complex tax situations. Contact us if you have questions. We can explain in greater detail how the rules apply to you.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 95 years, and we want to share our knowledge with you.

Covering tax, accounting, technology, financial and advisory topics relevant to you and your business, Yeo & Yeo’s podcast is hosted by industry and subject matter professionals, where we go beyond the beans.

On episode four of Everyday Business, host David Jewell, tax partner in Kalamazoo, is joined by Terrie Chronowski, Tax Supervisor in our Saginaw office. Her expertise lies in all things related to individual income tax. Another guest is Jeff McCulloch, President of Yeo & Yeo Technology. Jeff shares some tips from an IT security standpoint, and how taxpayers can best protect personal information.

Listen in as David, Terrie, and Jeff discuss all things security that you should consider this tax season and beyond.

How do taxpayers most often find out that their identity or social security number has been compromised, and what should you do if your Social Security number is stolen and being used? (2:15)
How can you protect your information from a technology perspective? (7:18)
Should you use free public Wi-Fi? (15:17)
Information we share with our clients to keep them secure. (19:45)

Thank you for tuning in to Yeo & Yeo’s Everyday Business Podcast. Yeo & Yeo’s podcast can be heard on Apple Podcasts, PodBean and, of course, our website. Please subscribe, rate and review.

For more business insights, visit our Resource Center and subscribe to our eNewsletters.

DISCLAIMER
The information provided in this podcast is believed to be valid and accurate on the date it was first published. The views, information, or opinions expressed during the podcast reflect the views of the speakers. This podcast does not constitute tax, accounting, legal or other business advice, or an advisor-client relationship. Before making any decision or taking action, consult with a professional regarding your specific circumstances.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 95 years, and we want to share our knowledge with you.

On episode three of Everyday Business, host David Jewell, tax partner in Kalamazoo, is joined by Kelly Brown, a tax manager in our Saginaw office. Listen in as David and Kelly discuss the tax code credits and deductions and how you can strategize around education expenses.

Review the American Opportunity Tax Credit and the Lifetime Learning Credit. (2:05)
Strategy for tax credits and how parents can shift tax breaks to their children. (6:22)
Review of college savings programs and their benefits. (9:12)

Thank you for tuning in to Yeo & Yeo’s Everyday Business Podcast. Yeo & Yeo’s podcast can be heard on Apple Podcasts, PodBean and, of course, our website. Please subscribe, rate and review.

For more business insights, visit our Resource Center and subscribe to our eNewsletters.

Welcome to Everyday Business, Yeo & Yeo’s podcast. We’ve had the privilege of advising Michigan businesses for more than 95 years, and we want to share our knowledge with you.

On episode two of Everyday Business, host David Jewell, tax partner in Kalamazoo, is joined by Andrew Matuzak, tax manager in the firm’s Saginaw office. Listen in as David and Andrew discuss the new SECURE Act and the extensions taxpayers need to know about.

SECURE Act changes taxpayers will face. (2:16)
When will the SECURE Act changes take effect? (4:50)
Rules for Stretch IRAs. (5:34)
Appropriations bill extensions, key deductions, and credits. (6:30)
Planning strategies for new Appropriations bill provisions. (8:49)
Tax credits that are available for small businesses because of the SECURE Act. (10:50)

Thank you for tuning in to Yeo & Yeo’s Everyday Business Podcast. Yeo & Yeo’s podcast can be listened to on Apple Podcasts, PodBean and, of course, our website. Please subscribe, rate and review.

For more business insights, visit our Resource Center and subscribe to our eNewsletters.

Many people who launch small businesses start out as sole proprietors. Here are nine tax rules and considerations involved in operating as that entity.

1. You may qualify for the pass-through deduction. To the extent your business generates qualified business income, you are eligible to claim the 20% pass-through deduction, subject to limitations. The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction.

2. Report income and expenses on Schedule C of Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have losses, they will generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”

3. Pay self-employment taxes. For 2020, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment of up to $137,700, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

4. Make quarterly estimated tax payments. For 2019, these are due April 15, June 15, September 15 and January 15, 2021.

5. You may be able to deduct home office expenses. If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.

6. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.

7. Keep complete records of your income and expenses. Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.

8. If you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.

9. Consider establishing a qualified retirement plan. The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re are withdrawn. Because many qualified plans can be complex, you might consider a SEP plan, which requires less paperwork. A SIMPLE plan is also available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.

Seek assistance

If you want additional information regarding the tax aspects of your new business, or if you have questions about reporting or recordkeeping requirements, please contact us.

Yeo & Yeo’s eBook, Essential Nonprofit Policies, outlines some policies that all nonprofits should consider establishing, and the key components those policies should include. Ultimately, well-thought-out policies will help create defined processes that will decrease confusion and streamline operations for your organization. Documented policies will also help you respond to risk and reassure donors.

Once established, policies will promote appropriate and consistent decision-making and behavior that aligns with your organization’s mission.

In general, government contracts are awarded to the lowest bidder. Yet prevailing wage laws require contractors to pay wages that are comparable to those for similar work in the same city or geographical area. Such laws can make it difficult for contractors to win public projects.

However, you may have an opportunity to reduce costs and make your bids more competitive by leveraging fringe benefits. Let’s look at this strategy.

Cash Can Drive Up Costs

Prevailing wage rates — which are established by the U.S. Department of Labor or a relevant state agency — contain both a basic hourly rate (paid in cash) and a fringe benefit component. Government contractors typically can choose whether to pay the fringe benefit component of the prevailing wage in cash or to use those amounts to fund one or more “bona fide” employee benefit plans.

You may be tempted to pay fringe benefit amounts directly to employees in cash. After all, this option offers simplicity and administrative convenience. But it can also drive up your costs, making it more difficult to bid competitively. That’s because cash wages are subject to a variety of payroll liabilities, including:

Social Security and Medicare taxes (FICA),
Federal unemployment taxes (FUTA),
State unemployment taxes (SUTA),
Workers’ compensation insurance, and
Public liability insurance.

Depending on your state, these expenses can increase your labor costs by 25% or more.

For most contractors, funding employee benefits is a far more cost-effective strategy. Eligible benefit programs include health and disability insurance; life insurance; retirement benefits, such as 401(k) or profit-sharing plans; and paid time off. Contributions to employee benefit plans avoid payroll liabilities, significantly reducing your labor bid costs.

Some Examples

Suppose that a worker is entitled to a prevailing wage of $50 per hour, which includes a $35 base wage and a $15 fringe benefit. If you pay the entire $50 in cash (and assuming the payroll burden in your state is 25%), your labor cost is $62.50 per hour [$50 + (0.25 × $50)].

On the other hand, if you pay the fringe benefit component by funding one or more employee benefits, your labor cost is only $58.75 per hour [$50 + (0.25 × $35)]. Multiply the savings by dozens or hundreds of employees working 40 hours a week for several years and your bid costs are reduced by thousands, even hundreds of thousands, of dollars.

You can even use existing benefit plans to meet fringe benefit obligations. Let’s say, in the above example, that you sponsor a group health plan and your premium contribution is $500 per month or $6,000 per year. Assuming the worker in the example works 2,080 hours per year (40 hours per week × 52), the value of the health benefits is $2.88 per hour, which is credited toward the employee’s $15 fringe benefit.

In this second example, the health plan covers only a portion of your fringe benefit obligation. If you wish to avoid paying fringe benefits in cash, consider other types of benefits — including employer contributions to retirement plans — to make up the difference.

Satisfy Wage Obligations

To ensure that fringe benefits satisfy your prevailing wage obligations, it’s important to design your benefits program carefully. Remember, credit toward fringe benefit obligations is only available for “bona fide” benefits. It’s not available for use of company vehicles, tools, mobile phones, travel expenses or benefits a contractor is legally required to provide.

Contrary to popular belief, contractors can use self-funded health plans to offset fringe benefit obligations. To be eligible, however, these plans must meet several requirements, including a funding arrangement that provides for irrevocable contributions.

Note that penalties for prevailing wage violations can be harsh. For example, under the Davis-Bacon Act they may include fines, contract termination, “debarment” (that is, exclusion from future federal contracts for up to three years) and withholding of contract payments to cover unpaid wages and other damages. What’s more, contractors or subcontractors that falsify payroll records or solicit kickbacks of wages are subject to civil and criminal prosecution.

Rules Are Complex

If you regularly bid on government contracts, take a look at how you pay fringe benefits to learn whether cost-cutting opportunities exist. Because the rules governing prevailing wages are complex, be sure to talk with your professional advisors before making major changes to the benefits you offer.

In January, many companies are preoccupied preparing budgets, forecasts and performance-related goals for the year. So, it’s all too easy to overlook plans for preventing fraud. But to avoid financial losses and maintain a healthy organization, you need to give your fraud prevention efforts some attention this month. Here are five things your business can do to reinvigorate your internal controls and other fraud deterrents.

1. Revisit Your Fraud Risk Assessment

A fraud risk assessment (FRA) is a document that captures the threats facing your organization, as well as the internal controls you have in place to mitigate such risk. To ensure your FRA delivers the most value, assign ownership of every internal control to an individual within your company. If an internal control requires changes to improve its effectiveness, the individual who “owns” that internal control should assume responsibility for the update.

If your fraud risk assessment is older than 12 months, or you think the risk environment has changed, consider conducting a new risk assessment.

2. Educate Employees

Your first line of defense against fraud is your employees. If you haven’t provided training recently, it’s time to get employees back into the “classroom.” Fraud prevention training should cover the types of occupational and external fraud facing your company, including cybercrime.

Also educate workers about what steps they should take if they spot or suspect fraudulent activities. And make sure your employees clearly understand what your company is doing to detect and prevent fraud, and the potential consequences of stealing — for example, dismissal or legal action.

3. Address Past Incidents

If your business experienced fraud last year, your executive team should review the incident and ensure they understand what happened and what your company is doing to prevent it from happening again. The postmortem should consider people, process and technology failings. Also discuss whether the problem is your internal controls or adherence to the controls. In many organizations, fraud occurs despite the existence of detailed controls because owners and managers neglect to enforce them — or they routinely override controls themselves. If changes are needed, assign one person to take the lead and complete the process as swiftly as possible.

4. Keep Your Eyes Open

Some companies can go years without experiencing a fraud incident or fraud losses. If that’s your business, congratulations! But it’s important not to become complacent, particularly if you haven’t kept your anti-fraud measures current. Keep abreast of fraud reported by other businesses in your industry and geographic region and pay attention to alerts from federal agencies such as the Federal Trade Commission and FBI. Regular IT security updates are particularly critical, as cybercriminals are constantly devising security workarounds and launching new attacks on unwary companies.

5. Make Smart Hires

If your business plans to hire employees this year, make sure you screen candidates carefully. Allow enough time to thoroughly interview potential employees, check their references and perform background checks. The types of checks depend largely on the position. For example, you should review the credit reports of accounting staffers and others who will have access to financial functions. And you’ll want to perform criminal background checks on anyone who will work with children or other vulnerable populations, such as the elderly. If you simply don’t have the internal resources to investigate job applicants yourself, outsource the function to one of the many services that can do it for you.

New Year, New Opportunities

The new year is a good time to review past errors and challenges, such as fraud incidents, and take steps to improve. Take some time this January to review and bolster your anti-fraud program. Your financial advisors can provide you tips and, if required, recommend more comprehensive fraud prevention plans.