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Have you heard the phrases “marginal tax rate” (or tax bracket) and “effective tax rate” and wondered what the distinction is between them? In order to explain the difference, it is first important to note that in the United States, we do not pay a flat tax – we are on a graduated system and therefore pay taxes in tiers.

Let’s say that you are a Single filer, and you have taxable income of $60,000 for the 2020 tax year. According to the IRS tax tables, that puts you in the 22 percent tax bracket – in other words, that is your marginal tax rate. Twenty-two percent of $60,000 is $13,200, but luckily, you don’t have to pay that much.  If you calculate the tax based on the 2020 IRS Tax Tables, the amount of tax is $8,990, which is less than the $13,200 based on the 22 percent marginal rate.

This scenario illustrates the difference between your marginal tax rate (tax bracket) and your actual effective tax rate. Even though you would be in the 22% bracket based on $60,000 of income, you do not pay 22 percent flat tax.  You would pay less than that since there is one bracket below your tax bracket: the 12 precent bracket. (There are really two for you math geeks: 12 percent and 0 percent.)

The rate that you actually pay in taxes is your effective tax rate. This rate is unique to you individually and is simple to calculate.  Just take your total tax liability and divide it by your taxable income. In our example, that would be $8,990 / $60,000 = just about 15 percent.  Compare that to the 22 percent marginal rate and it sounds pretty good!

The effective rate is often more useful because it gives you an average rate you pay on all the money you make during the year. It is much more accurate in terms of gauging what you might owe based on your projected taxable income. In most cases, the effective tax rate is less than the marginal rate.

The marginal tax rate is still helpful to know for tax planning.  For example, you can get a feel for how much potential benefit you could receive from an additional deduction. For example, how much would you benefit from making a $6,000 IRA contribution?  Your taxes would be reduced by $1,320, or 22 percent of $6,000. Looking it up in the tax tables is another way to double-check the math and yields the same savings.

Understanding the difference between your effective and marginal tax rates makes you a smarter taxpayer!

Do you have a lot of customer service inquiries in your business? If so, it can be a challenge to manage them all. Being responsive with customer service can make all the difference in your company’s success, so it makes sense to take a look at some tools that can streamline the process.

The most common solution to automating customer service inquiries is to implement a ticket management system, which is also called help desk software. Some of the things that are important to consider include:

• How fast you can respond to a customer
• How well you solve the customer’s problem
• How to track a customer’s issue if it has to be open for a while before it can be solved
• How to do all of this in a cost-effective and efficient, yet friendly, manner

These days, an inquiry can come from a multitude of places:

• Phone calls and voice mails
• Emails
• Text messages
• Social media accounts, for all the platforms you have a business presence
  • Posts, replies, and comments
  • Messaging
  • Any other methods you have set up in your social accounts
• Chat feature on website
• Snail mail

That’s a lot of inputs to organize. When they can all be fed into the same system, you have just unified your messaging input and taken a giant step toward organizing all of these moving parts.  A good ticketing system will accomplish this, and the feature you want to ask for is multi-channel accessibility.

Keeping your customer service costs low is another factor, and one way to accomplish that is to help users self-serve and solve their own issues when they can. This requires a robust knowledge base feature. A knowledge base is a set of how-to articles and videos of the most frequently asked customer service questions.

Here are a few very basic topics to consider including in your knowledge base:

• What forms of payment do you accept?
• What is your shipping policy?
• How can I get help if I need it?
• What is your return/refund policy?
• What is your privacy policy?
• What is your guarantee?
• Is my data secure with you?
• How do I update my credit card/address/phone/email?
• When will my items arrive?
• What licenses do you have?
• What are your hours?
• Do you have hours for seniors?
• How do I login?
• How do I access my digital items?
• What are your covid-19 policies for your employees? For customers?
• Are you hiring? How do I apply? What are your employment policies?

A good ticket system will also have the ability to customize the ticket, the customer service agents, the customer records, and the other important parts of the system. For example, you may want to set up your own status items for each ticket.  Open, assigned, active, hold, and complete are typical status types, but you may need another one.

The workflow must also be considered in a ticket system.  How does a typical ticket flow through your business, and can the system replicate that flow.

Other important features of a ticket system include:

• Support for multiple languages
• Customer response to tickets, as well as customers can view status of their tickets
• Uptime of system – service-level agreements
• Tracking, such as number of open tickets, tickets on hold, and the like
• Reporting metrics, such as wait time, ticket servicing time, and number of tickets handled by each agent
• Ticket tagging and categorizing
• Feedback loop for customer suggestions of product improvements
• Ease of use for customers and agents
• Notifications

A few of the most popular ticket management systems include:

• Zendesk
• Freshdesk or Freshservice by Freshworks
• Zoho Desk
• HubSpot Service Hub
• Salesforce Service Cloud
• LiveAgent

There are literally hundreds of technology options for any size business.

If you want to take your customer service to the next level or just want to get more organized, consider looking into these ticket systems.

When you think about a nonprofit, the first thing that often comes to mind is that it is tax-exempt. Most nonprofits are not subject to federal, state, and local income tax.

Does that mean nonprofits are completely free of ANY tax liability? The answer to this is likely no – there are still some taxes that a nonprofit might be liable for. If you are considering starting a nonprofit organization, you won’t want to be surprised, so we’ll break it down for you.

Taxes That Do NOT Apply to Nonprofits 

Generally a nonprofit is not subject to income tax at the federal, state, or local level on funds raised in direct association with the organization’s mission.  The reasoning behind this exemption is that it allows more resources to be put toward its cause(s).

A nonprofit that qualifies for federal tax-exempt status is also exempt from paying property tax in all 50 states, by law. Sales tax is also often waived for certain transactions related to the organization’s mission, but not always. It depends on the nature and amount of sales activities of the nonprofit.

Taxes That Do Apply to Nonprofits 

If a nonprofit organization hires employees, it will be subject to payroll taxes. Just like employees of for-profit entities, these individuals are required to pay tax on their earnings, and the organization is liable for the employer’s share of the payroll taxes.

Sales and use tax may also need to be paid. With sales tax, there is a distinction between paying sales tax on purchases, and collecting and remitting sales tax on sales. A nonprofit may need to pay sales tax on purchases from a vendor depending on the rules of its state and other considerations.

On the flip side, if a nonprofit is engaged in a business activity unrelated to its charitable mission and/or involved in sales of taxable items or services to customers, it may be obligated to collect and remit sales tax.

It is important to distinguish between these two areas and keep in mind that even if a nonprofit is exempted from paying sales tax on purchases, that exemption does not necessarily extend to collecting and remitting sales tax on outside sales.

Another area where a nonprofit might be liable to pay tax would be on what is called Unrelated Business Taxable Income (UBTI). This is income that is unrelated to the nonprofit’s core mission. As an example, a fundraising event to sell merchandise to raise money for equipment that will directly help carry out the entity’s cause would NOT be considered an unrelated activity, despite the sale of items to customers, because the money is going directly towards helping to advance the charitable mission.

On the other hand, if that merchandise is sold as part of a trade or business that is regularly carried on by the nonprofit and the proceeds are used to fund general operating costs like payroll or office expenses and not specific program expenses, that income could be considered UBTI because it is not substantially related to the organization’s charitable purpose.

If a nonprofit has over $1,000 of UBTI it must file Form 990-T and pay tax on that income. If the nonprofit is structured as a corporation, it will pay the flat 21 percent rate on that income, like the 21 percent tax paid by for-profit corporations.  If it’s set up as a trust it will be taxed at trust rates, the highest of which is 37 percent. Because this is a gray area of the law and subject to some interpretation, it is highly recommended that a nonprofit seeks the advice of a tax professional in navigating the rules and determining if it is subject to UBTI reporting and taxation.

So, as you can see, taxes are not completely off the table just because an organization is exempt from federal income tax. Several different types of tax could come into play for a nonprofit, depending on whether it has employees, the nature of its activities, and other considerations.

If you need help with taxes in your nonprofit, please contact us.

Independence is a key concept in accounting, especially in the assurance or auditing area of accounting. Assurance services are services where a licensed CPA reviews an organization’s financial statements and accounting records and provides an opinion about them. This opinion takes the form of a report that can be shared with third parties such as banks and shareholders. Auditing services are one of many forms of assurance services.

Only a licensed CPA can provide assurance services; this is regulated by the states. A CPA who provides certain assurance services must be independent from the business that it is writing an opinion for. Essentially, independence means that the auditor must be able to do their work objectively and with integrity. And it goes farther. The auditor must not be perceived as having any kind of bias or connection with the business it is auditing. There must be no perception of any impropriety.

To this end, the auditor must not have a relationship with the company’s executives. A CPA cannot, for example, audit her brother’s company.  A CPA cannot be an investor in the company and also be the auditor because of the financial relationship. The audit opinion must not be influenced in any way by a relationship between the auditor and anyone in the company. The CPA must be able to provide an honest, professional, and unbiased opinion when auditing financial statements.

Being independent also means the CPA must have a healthy dose of skepticism.  A common phrase in the accounting profession is “Trust, but verify.”

Numerous rules abound to protect auditor independence. For example, an auditor cannot be paid on a contingent or commission basis. All practicing CPAs must complete ethics courses every few years, and these almost always include independence scenarios and case studies.

If you have any questions about independence, assurance, or auditing, please feel free to reach out any time.

If you are paid a salary and receive a W-2 from your employer, part of your paycheck goes to Uncle Sam as federal withholding. These are payments toward your taxes. If you earn additional income beyond your salaried income, if you are under-withheld, or if you have your own business, you may need to make estimated tax payments through the tax year.  These estimated tax payments can be made on a quarterly basis.

The general rule is that as you earn income, you should also be paying a portion in taxes. If you don’t pay in enough, you may be subject to penalties.  To avoid penalties, the amount you pay as a minimum should be the lesser of 100% (or 110% depending on your income level) of your prior year tax or 90% of your current year tax during the year.

Whether the payments are made via withholdings or estimated tax payments, the IRS expects those payments to be made evenly and consistently throughout the year. If you don’t make any payments at all throughout the year and then pay a large amount late in December, you might get an estimated tax penalty because you didn’t remit payments as you earned the income.

Exceptions are allowed if your earnings substantially fluctuate throughout the year, quarter-by-quarter. You can complete Form 2210 to help minimize any penalty if you have fluctuating income and tax payments.

Generally, estimated tax payments become applicable when you have either Schedule C or flow-through business income or significant investment income (interest, dividends, and capital gains), because there is usually no withholding on that type of income.

To make a payment or get directions on how to make a payment, go to https://www.irs.gov/payments. Payments can be made by check (include estimated tax vouchers provided by IRS when you send them – 1040-ES forms) or online using a credit card or bank draft.

The due dates for remitting these payments are generally on the 15^th of April, June, September, and January, unless one of those days is on a holiday or weekend (in which case payment would be due on the next business day). For 2021 estimated tax payments, these dates are as follows:

April 15^th, 2021 (1^st quarter payment)

June 15^th, 2021 (2^nd quarter payment)

September 15^th, 2021 (3^rd quarter payment)

January 18^th, 2022 (4^th quarter payment)

If you have big payments due or big refunds due in April each year, then you are either paying too little or too much. Doing a good job at estimating your taxes will smooth out your payments throughout the year. If you’d like to get a projection for Tax Year 2021, feel free to reach out any time.