Independent Contractors vs. Employees

 Many businesses hire independent contractors to fulfill work they need done rather than hire someone as an employee.  Plus, they may need the workers for a short-term basis, depending on the industry. Businesses may also use independent contractors to obtain a specific skills for which they do not currently have from their staff.  

Whatever the purpose for the use of independent contractors, independent contractors provide businesses with the opportunity to obtain flexible labor and expertise when they need it.

Despite the positive aspects of independent contractor labor, the IRS has some specific guidelines businesses must be aware of when hiring such individuals. Misclassifying someone as independent can become costly for an employer.  Information from the IRS can be obtained here.

In general, the key indicator as to whether someone is an employee vs. an independent is the amount of control the employer places over an individual to perform the work.  There are other factors to consider, but control of the end result is extremely important to assess so as not to misclassify the relationship.

The two forms of control the IRS will look at to determine the nature of the business relationship are:

• Financial Control
• Behavioral Control

Financial control can be described in simple terms as does the individual contractor have a financial interest in the endeavor, that is, do they have anything invested in the process besides their time (equipment, etc) and would they recognize a profit or loss from the activity.  

Behavioral control would include a business dictating how something is to be done, when someone needs to come in to work, and  where the work is to be performed.

Proper evaluation of an employee/independent contractor situation before making the decision to bring someone on board is vitally important. Assessing whether someone is an employee or independent contractor can be difficult to determine.  LFC can help with these assessments.  Contact LFC to discuss work classifications for your business.

Sales Taxes

Sales tax complexity

 Sales tax compliance can be challenging for businesses.  One needs to understand not only what items or services are taxable, but also what rate is applied to transactions.  

In Minnesota, sales tax rates are assessed based on where a product is delivered, not where the transaction originated.  Plus, if a business has sales in other states, one needs to determine if those sales are taxable, and assess whether the volume of sales in a particular state (sales threshold) or total number of sales within the state (sales transactions) meets its reporting criteria.  Once the threshold criteria have been met for a particular state, a business will need to register with a state's Department of Revenue in order to file sales tax reports in the future.

The state of Minnesota provides Sales Tax information to guide businesses through this process.  You can find it here.  Streamline Sales tax reporting can help with sales tax issues in other states.  This information can be found here.

The state of Minnesota's complex sales tax system is compounded by the number of entities that assess a sales tax.  Many counties and cities have imposed sales taxes.  Here you will find a guide (thru 9/30/26) of sales tax rates for the many municipalities that impose a sales tax in the state.

Quickbooks software

Quickbooks software can manage sales taxes for businesses.  Whether a business is a stand-alone retail operation, or a business that distributes its products to a wider geographical area, Quickbooks can handle the process.  For more complex sales tax situations, 3rd party apps are available to work with Quickbooks to properly calculate sales taxes. 

If you need assistance with sales tax issues, contact LFC.

Possible expansion of capital gains exemption on home sales

Recently, there has been discussion by the Trump Administration to expand the capital gains tax on home sales.  Due to significant increases in home prices and low inventories of existing homes, the discussion is important.

Let's review the tax provision as it currently sits.  The existing law goes back to 1997 where the following parameters were put in place:

Excluded gain on sale of home                               Filing status

250,000 or less                                                        Single

500,000 or less                                                        MFJ

The 1997 law was significant legislation and provided considerable tax relief to taxpayers for selling their homes.  However, since that time, there has been no indexing gains to inflation.

Right now, this is an idea has been brought up for discussion.  It will take an act of  Congress  to draft the legislation, plus a vote in the affirmative along with a signature from the President for it to become law.  We don't know what form this proposal will eventually take, but LFC will be watching  the development of this idea in the weeks and months ahead.

Consulting Businesses - accounting for retainers

 In the consulting business, retainers are received from clients for future work on projects or on-going consulting services.  How to handle this for accounting purposes is an important concern.  

First of all, if the consulting business accounting system operates on a cash basis, the receipt of a retainer would be recorded as income even through no work has been done yet to be applied against the retainer received.  Therefore, a system outside of the accounting system, perhaps a spreadsheet, would monitor hours worked and applied against the retainer.  

If the accounting system is an accrual system, the initial receipt of the retainer is recorded as Unearned Revenue.  This means that the receipt of the retainer does not generate income.  Work performed and invoiced against the retainer is when the income is earned.  Once work is performed, invoices can be created and applied against the retainer based on how work is charged: per hour, flat rate, etc.  

If charging customers by the hour, one could make use of Quickbooks timesheets to monitor time charged against a project and applied against an already received retainer.  This will help keep track of the work performed as well as know how much of the retainer has been used.

Keep in mind, if a retainer has not been fully exhausted, the remaining balance would be a liability for the company and owed back to the customer.  

If your business accepts retainers and is unclear how to handle them, contact Liberty Financial for more information.

2026 Tax Preparation - things to know

 Some key provisions of the One Big Beautiful Bill Act (OBBBA) of 2025 kick in for 2026 or are adjusted for inflation.  Below is a short list of important items for the 2026 tax preparation season:

1.  Educator expenses of $350 to be deducted without itemizing.  Excess of $350 can be deducted on Schedule A and not subject to 2% AGI limitation.

2.  $2500 of Education loan interest is deductible.

3.  Annual gift tax exclusion amount is $19,000.

4.  Standard mileage (use of car for business, charities, or medical) per mile:

      a.  Business - 1/1/26 to 6/30/26:   72 cents; 7/1/26 to 12/31/26:   76 cents

      b.  Charities - 14 cents

      c.  Medical - 1/1/26 to 6/30/26:  20.5 cents:  7/1/26 to 12/31/26:  23.5 cents

5.  Recipients of 1099 Misc or 1099 NEC:  reporting organizations will issue forms if amount paid to qualifying individuals is $2,000 or more (prior to 2026 amount was $600).

6.  Child and Dependent Care credit - up to 50% of expenses (prior years: 35%)

7. Mortgage insurance premiums are included as qualified mortgage interest.

8.  Gambling losses are reduced to 90% of losses against gambling winnings.

9.  SALT (State and local tax) deduction limitation raised to $40,400 for 2026.

10.  Charitable deduction of $1,000 ($2,000 for Married filing jointly) for non-itemizing taxpayers.

11.  529 Education Plans - distribution increase from $10,000 to $20,000 for elementary and secondary school expenses in 2026.

 

These are some of the provisions of the OBBBA for 2026 to be aware of.  LFC can help taxpayers learn more about the 2026 filing season and what other items of the law may impact them.  

Contact LFC for more information or set an appointment.