• Do withhold FICA on part-timers, including retirees. Even if someone who works for you part-time also has a full-time job where they have had 100% of their FICA withheld for the year, you must withhold the full amount of FICA from their pay. These individuals can obtain a refund of any overpaid FICA on their 1040. Similarly, if a retiree receiving Social Security benefits works for you, say, one day a week, you must withhold FICA.

• Don’t assume former employees who return part-time are ICs. If they do the same job they did before they left, especially in the same tax year, they are employees, not independent contractors.

• Do not base worker status on length of service. A worker who fits the definition of “employee” is an employee and all employment taxes apply—even if he or she works for you only for a few hours on only one day, is still an employee.

• Do not assume you must give benefits to part-timers, or summer help or those hired for holidays. Nor are you required to include temps and part-timers in health, pension and other benefits. But to exclude them, have a written plan stating which benefits are not available to these workers.

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Password protection for sensitive personal and other data is only as good as the password itself. Easily accessed “cracker,” “breaker,” or “recovery” software runs millions of passwords per second through a log-on box. A password of even 6 characters combining numbers, symbols and upper- and lower-case letters can be broken in 5 hours; only numbers, symbols or letters, in minutes.

Your password should:

• contain a minimum of 8 characters;

• not use any word found in a dictionary (dictionaries in any language can be downloaded to be used in cracking software);

• combine numbers, symbols and upper- and lower-case letters;

• not include personal information—it’s too easy to obtain a user’s name, address, birthday, and names of relatives.

• lock users out of the system after a few tries at the correct password fail (prevents hacking software from trying 1,000s of passwords per second).

Lastly, compartmentalize electronic files and allow access only to those authorized to use each file.

Nontaxable gifts: Fruit baskets, hams, turkeys, wine, flowers and occasional entertainment tickets, such as to a show or sporting event, generally are nontaxable de minimis fringes.

Taxable gifts: Gift certificates (“cash in kind”) are wages subject to FIT, FITW, FICA, and FUTA, even for a de minimis item. For example, a gift certificate for a turkey is taxable, even though giving a turkey as a gift is not. Cash gifts of any amount are wages subject to all taxes and withholding. [26 CFR 1.132-6(e); TAM 200437030]

The target: Buyers from other states who fail to pay a use tax on purchases made online or by phone. Vendors in these states are not responsible for collecting sales taxes unless they have a physical presence in the buyer’s state, so their state sales tax will not appear on the invoice. But the buyer is still responsible for reporting the purchase and paying the use tax to his/her local tax authority. Failure to do so can add interest and penalties to taxes owed.

Biggest mistake: assuming that not reporting such purchases eliminates the problem. States now monitor large out-of-state sales and may notify the buyer’s state, which can then track down the buyer. Also: Customs transmits declaration statement data to state tax agencies, enabling them to track overseas purchases.

Best bet: Pay the use tax on inter-state purchases. Amounts are not usually large—unless failure to pay results in interest and penalties.

But your state revenue department will be going after even the most honest, tax-paying businesses for more revenue by selecting you for a state sales and use tax audit.

Here’s what you should do:

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To avoid mispostings—and liability for another employee’s misdeeds, follow these simple steps:

Returned checks. When the bank notifies you that it is returning a customer’s check for NSF (not sufficient funds), debit the customer’s account immediately—even if you plan to redeposit the check the same day. For good internal controls, instruct your bank to address all returned checks to someone other than you—possibly the owner or a senior manager. This can protect you if an employee tries to use fictitious checks to cover temporary shortages.

Postdated checks. If a customer gives you postdated checks, treat them as a note receivable. In other words, debit it to Notes Receivable, not to Cash. On the date written on the check, deposit it to your firm’s account, debiting Cash and crediting Notes Receivable.

Problem: Employees try to increase their take-home pay by handing in a new W-4 with more withholding allowances or by claiming exempt from withholding.

Solution: Tell employees that you are not required to post the new W-4 until the first payroll period ending on or after the 30th day from the date the new W-4 was submitted (see IRS Circular E). This is the most time that the law allows.

Example: Joe is paid on the 15th and 30th of each month. On September 10, he gives you a new W-4. The September 10th withholding changes must be applied to his paycheck of October 15, the first payroll period following September 30.

To avoid major penalties, audit your own practices to ensure FLSA compliance, advises Shawn Smith, Next Level Consulting LLC, Harrison, NY. She cites four common problems:

1. Worker classification. You cannot avoid overtime pay simply by paying employees a salary and classifying them “exempt.” To avoid misclassification, know what jobs are exempt (regardless of whether they are salaried or paid by the hour), then review job descriptions and how each job is actually performed.

2. Docking pay. An exempt worker docked for a partial-day’s absence may lose his/her exempt status, costing you retroactive overtime pay, unless the docking is connected to an FMLA-related leave.

3. Voluntary or unauthorized work. Nonexempt employees must be paid for time worked, voluntary or not. Even if your policy requires that a manager approve paid overtime, your firm must still pay at least 1½ x the employee’s hourly rate for each hour worked over 40 hours in the workweek.

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For example, suppose your firm makes an estimate of an asset’s life at time of purchase, then a new estimate several years later. How does the change affect annual depreciation expense? Here is the answer.

Example: On Jan. 1, 20X5, DryCo acquires for $40,000 a machine with an estimated useful life of 10 years and no residual value which will be depreciated under the straight-line method. On Jan. 1, 20X9, DryCo changes the machine’s estimated useful life to 12 years. What is depreciation expense on the machine for 20X9 and subsequent years?

To compute:

* Depreciation for the 4 prior years

On Dec. 31, 20X9, DryCi records the following entry:

* 12 years (new estimated life) – 4 years already depreciated = 8 years to be depreciated

$24,000/8 yrs. = $3,000 new annual depreciation expense. Thus, depreciation expense for 20X9 and future years is $3,000 a year.

Password protection for sensitive personal and other data is only as good as the password itself. Easily accessed “cracker,” “breaker,” or “recovery” software runs millions of passwords per second through a log-on box. A password of even 6 characters combining numbers, symbols and upper- and lower-case letters can be broken in 5 hours; only numbers, symbols or letters, in minutes.

Your password should:

• contain a minimum of 8 characters;

• not use any word found in a dictionary (dictionaries in any language can be downloaded to be used in cracking software);

• combine numbers, symbols and upper- and lower-case letters;

• not include personal information—it’s too easy to obtain a user’s name, address, birthday, and names of relatives.

• lock users out of the system after a few tries at the correct password fail (prevents hacking software from trying 1,000s of passwords per second).

Lastly, compartmentalize electronic files and allow access only to those authorized to use each file.

In 2006, your firm purchased a copier for $20,000. To date, depreciation expense of $12,000 has been taken. In 2009, your firm trades in the copier for a new one costing $25,000. The trade-in allowance is $3,000. What is the journal entry to record the trade-in?

Copier (new)                                Debit 25,000
Accumulated Depreciation   Debit 12,000
Loss on Trade-In                       Debit   5,000

Copier (old)                                             Credit    20,000
Cash                                                            Credit    22,000*

* $25,000 for new copier – $3,000 trade-in allowance for old copier = $22,000 cash required

The new copier is recorded at list price. The cost of the old copier and its related, accumulated depreciation is removed from the books, and the loss is recorded.