Paid Sick Leave in NJ? What You Need to Know

Another change in New Jersey that affects both employers and employees in the state is paid sick leave, which was effective starting October 29, 2018. Here are the details:

Number of sick days: The New Jersey Earned Sick Leave Law allows employees to accrue 1 hour of sick leave for every 30 hours worked, up to a maximum of 40 hours each year. An employee is eligible to use the earned sick days beginning 120 days after commencing employment.

Permitted usage of sick leave: Sick days can be used for diagnosis, care, treatment or recovery from an employee’s mental or physical illness or for the needs of a family member. The time can even be used by an employee in connection with their child to attend a school-related conference, meeting, or function.

Alternatives: An employer is in compliance if they offer paid time off, including personal days, vacation days, etc. that can be used as sick days, as long as they are accrued at the same or greater rate.

Carry forward: The employer shall not be required to permit the employee to accrue or use in any benefit year, or carry forward from one benefit year to the next, more than 40 hours of earned sick leave.

The interesting aspect of this law is that as an employee-owner, you have to include yourself. When do owners take a sick day?!

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Are there Alternatives to Traditional Health Insurance?

My last post titled, “Did You Know that NJ Now Requires All Residents to Have Health Insurance?” gave a few exceptions to the new New Jersey mandate that requires all New Jersey residents to have health insurance. One of the exceptions to the mandate is health care cost sharing, which almost no one has ever heard of. It may be a good fit for you or maybe not, but here are some details regarding health care cost sharing to help you decide.

Examples of health care cost sharing ministries: Solidarity Healthshare (my family and I are currently members), United Refuah, and Christian Healthcare Ministries

What is health care cost sharing: This is taken from Solidarity Healthshare’s website https://www.solidarityhealthshare.org/ :

“Health care sharing ministries provide a way to pay for health care costs that is different than traditional health insurance.

As a member of a health sharing ministry, you pay a Monthly Share Amount. This monthly share is then used to pay for the health care needs of other members. When you have a health care need and if you have met your Annual Unshared Amount, other members will pay for your health care needs.

Members also agree to a common set of beliefs that help determine which medical costs the community will share towards. With Solidarity HealthShare, guidelines on the medical expenses that members share towards are primarily guided by the moral teachings of the Catholic Church. These beliefs help define what is and is not eligible for sharing.”

What is the cost: For Solidarity, the monthly cost to join ranges from $149 for a single person under 30 years of age to $449 for a family under age 65. The amount that each member is responsible for before their costs are eligible for sharing is between $500 for a single person to $1,500 for a family. Each health care cost sharing ministry encourages and supports healthy behaviors and lifestyles and encourages you to be in charge of your own health care. This is what enables the ministries to be so cost effective.

What’s covered/not covered: All three healthcare sharing ministries seem to be very transparent about what expenses they cover and do not cover. Their websites list medical expenses that are covered, which is very comprehensive.  Items that are generally not covered are:  pre-existing conditions may be limited, dental, vision, and other expenses that are outlined as not eligible for sharing. Each health care cost sharing ministry has difference guidelines.

Caveats: Unfortunately, the cost of your monthly membership is not tax deductible. Additionally, you want to make sure that you thoroughly review what is covered and what is not covered according your situation and needs. Also, it seems that health care cost sharing makes most sense for individuals that are not covered with health insurance by their employers, such as self-employed individuals.

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Did You Know that NJ Now Requires All Residents to Have Health Insurance?

Starting this year, New Jersey is requiring all residents to have health insurance. Even though the Federal government has gone in the opposite direction, there are a handful of states that have their own mandates or are considering a mandate. What are some of the requirements, exceptions, and penalties regarding this new law?

Requirements: The law requires you to have minimum essential health coverage or qualify for an exemption of coverage. If you do not have coverage or qualify for an exemption, then you will incur a shared responsibility payment when you file your 2019 New Jersey tax return next year.

Exceptions: There is a whole list of exemptions, and some of them are as follows: income related, such as marketplace affordability and income below filing thresholds, gaps in coverage of less than two consecutive months, hardships, and group memberships, such as being a part of a health care sharing ministry.

Penalties: The minimum penalty is the greater of 2.5% of your household income or $695 for an individual taxpayer. This increases to a maximum of $15,060 for a family of two adults and three dependents with a household income greater than $400,001.

The penalties are steep so make sure that you are properly covered or are able to receive an exception to the penalties. For those who are looking for non-traditional coverage options, health care sharing ministries such as Solidarity HealthShare or Christian Healthcare Ministries may prove to be good, low-cost options. However, make sure to perform your due diligence to make sure that these can be the right fit for you.

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Small Business, Large Profits

All small business owners want to increase sales, open new locations, obtain more customers, add employees and grow, grow, and grow some more. It sounds good, but is it really necessary? Is there an alternative?

Necessity: It is necessary to grow your business as the alternative isn’t too appealing. You have financial obligations and people that depend upon you, such as family, employees, and customers. So, yes, it is necessary, however, here is a different view on growth.

Focus on profitability: If you double your profit margin then this has the same impact as doubling the sales of your business. Even if you increase the profit margin by several percentage points then it has the same impact as increasing sales. It sounds too easy, but here are some ways to do this:

  1. Decrease the number of services/products. Spreading yourself too thin usually decreases your profitability because it is hard to do everything well.
  2. Service the proper clients by targeting a more defined niche.
  3. Use marketing methods that only target the customers that you want to serve.
  4. Plan ahead for large purchases or investments, including space requirements, people, vendors, equipment, and technology.
  5. Price your products and services properly.

The interesting fact is that when you are more profitable, then each additional dollar of business is worth more to you, which makes it easier to actually grow further.

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How Long Should You Save Your Tax Returns and Financial Records?

The IRS says that you should normally keep your records for 3 years, and for some situations you should keep them for 6 to 7 years. However, I strongly disagree and here is what you should do and how to do it:

Tax returns: Do you want to know the prudent answer to how long you should save your tax returns? Until you are dead, and even then your heirs should probably keep them until years after the estate is settled. Why should you do this even though the IRS has 3 years to audit your returns and 6 years if you under report more than 25% of your income? Here are several real-world practical reasons:

  1. It is far too common that the State of New Jersey will send a letter to you stating that you never filed a tax return from more than 10 years ago. Additionally, if you are selling your business, trying to obtain a specific license, dissolving a business, or for any number of reasons, then the State will perform research to see if you filed all of your tax returns. Even though the State may be wrong, you will still generally need to file the returns.
  2. Information carries over from year to year. As your tax return becomes more complex, your income tax information tends to carry over for many years, such as investment losses and rental property purchases.
  3. A safe way of storing your tax returns is to keep both digital and hard copies.

Financial records/receipts: What if social security has incorrect information about your earnings from 25 years ago? If you have the actual records then you can prove your case more easily. This includes tax information, such as W-2’s and paystubs. Here are some timeframes based on the types of documents:

  1. Tax documents should be saved forever, just like you save your tax returns. This especially relates to business tax records. Brokerage statements should be included as part of your tax information as they contain purchase price information.
  2. Bank and credit cards statements can be discarded after a few years. However, if they contain tax information or are connected to a business or real estate, then you should save them forever.
  3. Utility bills can be discarded after about 6 months. Sometimes you need these to prove your residency, but the timeframe needed is generally a few months.
  4. ATM and purchase receipts can be discarded once you view the transaction on your bank statement or online. However, when purchasing from a restaurant, you should make sure that the amount after a tip is accounted for actually settles, which can take several days.
  5. Receipts for improvements to your home or for large business purchases should be saved forever.
  6. If you are short on physical space then save your records electronically, but make sure that you have a cloud backup.

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Should You Talk About Religion and Politics in a Business Setting?

We are taught that you should not speak about religion and politics because it causes tension, disagreement, and bad feelings. What about in a business setting at work with your boss, employees, co-workers, and clients/customers? The correct answer is . . . .

Maybe. Here are some examples of when and when not to speak about these emotionally charged topics:

When it’s not ok: First, take a look at yourself. If you are unable to speak about religion and politics without letting your emotions take control, without insults (I do not mean being politically correct), and being open to both learning from the other person and teaching the other person, then you need to first work on this before speaking about religion and politics. Similarly, are you able to speak to the other person and have a conversation, or do they just want to spew their beliefs without regard to having an actual discussion? Does the other person disagree with you regarding everything because they do not want to even hear facts or truths? If that is the case, then it is probably futile to speak with them about religion and politics and possibly any other topics as well.

When it’s ok: It’s okay when the exact opposite is true of when it’s not ok. When you are able to speak to people with charity then you are ready. When you are ready to have a dialogue and are open to learning the other’s position, even if you do not fully agree with them, then you are ready.  If you are passionate about your beliefs, then don’t beat people up to get your point across, even when you are 100% correct. Don’t be afraid to speak the truth, but also be sensitive to your timing. Lastly, you can communicate more by the way you live your life then with verbal communication.

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8 Red Flags That Could Trigger an IRS Small Business Audit

My colleague, Brad Paladini, has granted me permission to post this article that was originally posted on his blog: 

Last year, the Internal Revenue Service (IRS) audited just over one million returns. That’s a lot less than the 1.74 million returns they audited in 2010, but it’s still no fun for the millions of taxpayers that had to go through the process!

Overall, the IRS audits only about 1 in 200 returns. But some returns attract much more scrutiny than others. The IRS doesn’t want to waste its time getting blood out of a stone, and so they focus their investigative efforts on those returns and taxpayers that are statistically more likely to have discrepancies, such as small business owners.

Common Red Flags

Here are some of the major ‘red flags’ that can increase the likelihood of attracting IRS attention in the form of a small business audit:

1)  Higher Personal Income

While the average taxpayer has a 1-in-200 chance of getting audited in any given year, those with incomes of over $1 million are looking at odds of 1-in-20. That is, if your income is greater than $1 million, the probability of your return being selected for audit is ten times greater than it is for the average taxpayer.

At the same time, if you have an income of less than $200,000, the chances of your return being audited falls to just 1 in 154, based on 2016 numbers. But if your income was above $200,000, your chances of being audited increase to 1.70 percent, or 1 in every 59 returns.

So, if you’re showing an unusually high personal income, you are more likely to face an IRS small business audit. If you own a flow-through entity, such as an S-Corporation or LLC, the audit is likely going to extend to your New Jersey business as well, and any other business interests you own.

The same is true of partnership income. If you are showing substantial income from a limited or general partnership, and the IRS flags you for an audit, the audit very well may extend to the partnership – especially if you are the managing general partner in a limited partnership and your K-1s are showing a lot of suspicious losses.

2)  Owning an All-Cash Business

Owners of businesses like restaurants, food trucks, convenience stores and other businesses that deal a lot in cash sometimes fall to the temptation to take cash transactions “off the books” in order to conceal income. Your credit card processor submits a 1099-K to the IRS detailing the credit card payments they’ve made to your business account. The IRS has a pretty good feel for how much of a business’s receipts are going to be in cash vs. credit cards, checks and other forms of payment. If your numbers are way out of whack for similar businesses in your industry, you can expect some additional IRS scrutiny.

3)  Suspiciously Low Salary Income for Corporation Owners

This is a common red flag for New Jersey business owners. Some business owners try to report as much income as possible as dividend income and little or no salary income in order to sidestep FICA taxes. The IRS is wise to this trick, and will often look closely at business owners who report W-2 salary as suspiciously low, compared to the size and profitability of their businesses.

Some people fill out their Schedule C (Business Profit and Loss) forms to show just enough income to qualify for an earned income tax credit or other lucrative tax credit, but not much more. This also attracts IRS scrutiny.

4)  Large Cash Transactions

Merchants must report cash transactions in excess of $10,000 to the IRS. Banks also report these transactions. Failure to report these transactions, or repeated transactions just below the threshold, could trigger IRS interest.

5)  Reporting Net Losses in Multiple Years

Reporting net losses in more than two years out of any given five-year period may attract a small business audit – especially for sole proprietorships, and any time business owners are trying to flow-through those losses to their personal income tax returns.

To qualify as a bona fide business, as opposed to a hobby, your enterprise needs to show a profit in at least three out of five years. The IRS presumes that if you can show a profit at least three out of five years, you are running a bona fide business set up to make a profit. Otherwise, the IRS will look closely at your claimed deductions, and you could run afoul of hobby loss rules, and get some deductions disallowed. See IRC 183 for more information.

6)  Net Operating Loss Carrybacks or Carry-Forwards

Business losses can be carried back or carried forward to apply against income in other years. But the IRS is interested in these transactions. Be sure to document any such carrybacks or carry-forwards carefully to withstand an IRS small business audit.

7)  Excessive Deductions for Vehicle Use

The IRS looks closely at 100 percent business deductions for car expenses.

First, you can deduct the IRS standard mileage rate for business use – 54.5 cents per mile for tax year 2018 (as of this writing, the 2019 mileage deduction has not been released yet.) Alternatively, you can deduct your actual vehicle operating expenses, including fuel, maintenance, repairs, and upkeep. You cannot deduct both. If you try, you may attract IRS scrutiny.

Secondly, be sure to carefully document the miles you drive and their purpose, and make sure the mileage you claim is genuinely deductible. For example, you can deduct expenses attributable to miles you drive to meet a client at a remote location, but you cannot deduct for mileage incurred driving from home to your office. That’s a personal commuting expense, not a business expense.

8)  Suspiciously High Rental Property Expenses or Rental Loss Claims

Rental losses are unusual and attract IRS attention. The IRS may look carefully at any deductions you make for depreciation, and at attempts to deduct improvement and renovation expenses entirely in the first year, rather than spreading these deductions out over a period of years under MACRS rules.

You can deduct repair expenses that are designed to restore the property to a functional condition in the year in which you incur them, but you cannot take a first-year deduction for improvements and renovations designed to enhance the value of the property. These you must deduct over a period of years, depending on the project.

Labor expenses on capital improvement projects must also be amortized over the life of the repair. Failure to adhere to these rules can trigger IRS scrutiny.

Facing an IRS Small Business Audit?

If you’ve received a notification for a pending small business audit from the IRS, the tax attorneys at Paladini Law are ready to work for you. Attorney Brad Paladini has spent his entire career helping individuals and businesses solve complicated tax problems. Brad is highly trained to negotiate and fight with the IRS on your behalf. Schedule a consultation to have your case reviewed and explore your legal options. Contact Paladini Law through our online form, or call (201) 381-4472 today.

Be Careful When Making Online Payments to the IRS

We usually recommend that taxpayers make their tax payments online to the IRS and states. Here are the benefits, but a few caveats to watch out for:

Benefits: When making payments online, your payments are generally credited on the day that you make the payment. Additionally, you can clearly apply your payments to a prior tax year, current tax year, or for estimated tax payments. This helps to minimize errors when the IRS receives your payments, such as applying them to the wrong tax year and the date the payment was made.

Beware of these issues: Recently, we discovered that it is imperative to use the primary taxpayer’s social security number when making payments online to the IRS, otherwise your payment may sit in limbo and not be applied to your account. Other tips include:

  1. Make sure that you specify the correct year that a payment should be applied to.
  2. Double-check your banking or credit card information to ensure that your payment actually gets processed.
  3. Save the confirmation that you paid your taxes as a pdf document or print it out

Overall, we have seen a much lower number of issues when clients make their payments online. Just make sure to adhere to the tips above.

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Is It Better to Pay Off Debts or Invest?

Almost everyone has some sort of debt and economic data shows that this is the case. Between mortgages, student loans, credit cards, business debts, and auto loans and leases (yes, a car lease is debt), many people find themselves allocating large portions of their income towards debt payments. When you are in a position to start paying off debts, should you do so or invest your extra funds? Let’s take a look at the pros and cons of each.

Pay off debts: Pros: Paying off debts with your extra cash will help you to decrease your liabilities, save interest, which can be significant with credit card debts and some business loans, and eventually enable you to free up cash flow. A non-conventional way to pay off debts is to start with the smallest balance debt to get the momentum going.  Cons: If you focus solely on paying off debts while ignoring investing then you will have no assets for long-term or short-term needs. If a short-term emergency arises, then you will be forced to incur debt to pay for it.

Invest your extra funds: Pros: Investing and savings will hopefully produce a much larger amount of assets over time and enable you to take care of emergencies that arise. Keep in mind that funds for emergencies should be kept very liquid, and a reasonable amount to set aside should be 3 to 6 months of expenses. Cons: Your liabilities will decrease slowly, interest expense will remain high, and you most likely will earn less on your investments especially when factoring in risk, then if you were to pay off debts.

Alternative: The decision to pay off debts or invest does not have to be an either or. Some well-known experts advocate at both ends of the spectrum. Why not do both? Assess your debts and savings to see where you will get the most bang for your buck. For example, let’s say you are able to allocate 6% of your income to savings or investments, then you can use 2% to pay off high interest debts, 2% to save for short term needs, and the remaining 2% can be used to save for retirement.

What if you don’t have extra funds?: The solution is simple, but not easy. Assess your lifestyle to see where you can cut expenses while working to increase your income. If you spend everything that you make currently and work to increase your income by 3% and decrease your expenses by 3% then you will now have extra funds. If your situation is more extreme, such as expenses that are higher than your income, then you will have to take stronger action. For smart ways to cut expenses, then type “expenses” in the search function of this blog.

The mature approach: If you have large excess funds then don’t incur more debts and pay off existing debts quicker once your savings rates are much greater than needed. You can be the only one on your block that doesn’t have debt and no one has to know. I am sure that the quality of your sleep will improve!

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How to Successfully Start a Second Business

Quite often entrepreneurs want to start a second business or even possibly a third, fourth and so on. What are the ways to make this successful, especially without selling or potentially harming your existing business(s), and what are some alternatives?

Similar or complementary business: Instead of say, an attorney, starting a restaurant, they may consider developing software to help other attorneys manage their practice better. Since they already have the experience of being a practicing attorney, they can transfer this knowledge into helping other attorneys and ideally use it in their own law practice.

Business with similar customers: Some businesses also serve your customers with a different product or service. To determine the other business that your customers use, observe which products or service providers your customers are also using and see if there is a pattern. Also, look to see who you are referring your customers to. For example, a landscaper may constantly refer their clients to a lawn sprinkler company, pest control business, or tree removal service.

Have a foundation in place: Make sure that you have a foundation in place for your existing business(s) so that they do not suffer as you develop other businesses. This usually takes years, but the main goal is to make your current business less dependent on you with everyday tasks. If your business suffers when you are not there for a few days then you are not ready.

Alternatives to starting another business:

Add a location: If you are successful in one location and have a good business model, then it is much easier to repeat this with another location. This can include second or third offices for a medical or professional practice, additional restaurants, and additional sales offices.

Purchase an existing business in the same industry: Having a strong foundation is important because you can easily absorb another business in the same industry as long as you have all of the infrastructure in place. This can include capital, space, employees, technology, and operating procedures.

Operate a business within your existing business: Instead of creating a distinctly separate business you can operate the additional business within your own business as a separate service offering or division. This can work well if the service offering is very similar to your existing business. Legal and tax implications should always be considered.

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