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The shortage in the workforce; does it mean that people working remotely have an advantage? And does all of the bad news about San Francisco portend trouble ahead for business? Tax credits for employers.
Episode Transcript
Intro:
Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.
Disclaimer:
The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.
Chip Franklin:
Welcome to practical tax with tax attorney, Steve Moskowitz. I’m Chip Franklin. Steve, how are you today?
Steve Moskowitz:
Doing great. I’m always happy when I get to talk about taxes and when I say that people laugh, but you know I mean it, because we did radio together for so many years.
Chip Franklin:
One of the things obviously we’re going to talk about today is unemployment. So I got a question for you to start things off. Do corporations like 10 99 employees or full time employees, what do they prefer?
Steve Moskowitz:
They’re different. So what happens is, from the employer’s point of view with a 1099, you only pay the amount, that’s it. There’s no benefits, there’s no healthcare, vacations, et cetera, et cetera. With an employee then of course, usually there’s the payroll taxes, the worker’s comp and everything else that goes along with it and vacation, health benefits, pensions and so on and so forth. Some companies choose to have part-time workers because if somebody works for you less than a certain number of hours a week, you can not give them any benefits. So some companies do that.
So it’s a variety of factors and where a lot of businesses get in trouble because they don’t want the hassle of all those payments and the expenses. So they misclassify employees as independent contractors. If you’re doing that, if the IRS comes down, you’re going to come down really hard. Because there’s the unpaid taxes and social security and penalties and all that. But the IRS has this great voluntary program and what it is, if you otherwise qualify, basically you pay a tiny and I mean really tiny little pittance. All is forgiven. And then you switch people to employees, but you can’t do that when you get caught. You have to do that before you get caught.
Chip Franklin:
Joining us right now is Casey Hastem she’s director of recruiting at, weareVIP.com. Casey, great to have you here. Thanks.
Casey Hastem:
Hello. How are y’all today?
Chip Franklin:
Great. Casey, let’s start with this question. Unemployment numbers are steady, but we just can’t seem to get good people to fill positions in the workplace. Is that right?
Casey Hastem:
Yeah. And that’s kind of what I do for a living is I help businesses find good people to join their team interestingly and I didn’t realize we were officially in a recession because I’m not an economist. And so I pulled the jobs report that I think it just came out today, as a matter of fact, I don’t know if you guys have seen this and I believe we exceeded expectations. We added almost 375,000 more jobs.
Steve Moskowitz:
Hmm. Good job.
Casey Hastem:
Yeah. And so even before, for every person out there looking for a job there were two jobs. Now there’s like two and a quarter. So I think this is why you’re seeing that unemployment go down. But I do want to say one of the trends that we’ve seen recently, because we work with companies from your small mom and pops to Fortune 500s. Those are our clients across all industries. This last week, we’ve started to see a little turn. You hear Tesla’s starting to lay off. He said, he’s going to reduce his salaried positions by 10%. But, and that’s like, okay, that’s Tesla. That’s way out there. We don’t have to worry about that. We had three clients this week, pull back their searches and tell us that they had a hiring freeze.
Steve Moskowitz:
Well, you know what, Casey, my mind always goes back to taxes. If you me ice cream cone, I’ll somehow think about taxes, but you’re talking about hiring. And the government both takes money from us, but they give a lot of money away. And one of the things they’re giving to employers is a credit for hiring certain groups of people like veterans and people who’ve been unemployed for a while. And a laundry list of people they’ll give the employer up to $9,600 per employee. So imagine some restaurant that says I can’t be open my full hours because I don’t have enough people. Well, what if they hired 10 people under these circumstances, they could get up to $96,000. What a difference that would make. And for the most part, the big businesses know about this, but the small businesses, I bet you never heard about it, but that $9,600 a head would make a big difference to them.
Casey Hastem:
Absolutely. And I didn’t know about that. I’m going to share that with some of my clients.
Steve Moskowitz:
Well, you see, that’s the thing about being a tax attorney. I’ve dedicated my life to this minutia. And what I’ve said to Chip is the big companies have an army of people like me who say do this and don’t that. Think of it like this, I called the magic business card. If I gave you a magic business card and said, “Casey, take this down to the IRS and they’ll give you a million dollars.” I bet you would. Wouldn’t you?
Casey Hastem:
Yeah.
Steve Moskowitz:
I took that magic business. I put it in the back of a dump truck, stirred it up with a million other business cards, regular business cards and dumped it all in your office. You walked in and said, “Oh my God, look at this mess. I’ll have somebody just haul this out of here so I can get back to work.” You didn’t know the million dollar business card was there. You threw it away. That’s what small businesses do. We know where the magic business cards are and we say, “Wait, wait over here, take this one, take this one. Throw the rest of them away.”
Chip Franklin:
But even if you give a company, a tax break, if there’s no increase in demand, are they still going to go out and hire people?
Steve Moskowitz:
Chip, when you talk about increased demand for products, that’s why we have marketing departments and sales and research. Oops, there we go. R&D, research and development credit. The government gives you more money to research and I can’t help it Casey
Chip just sits back because he’s put up with years of this with me. You’re new. You’re just getting it today. But what happens is you say, okay, so the government gives you some more money and you say, you know what? Here’s a product that you can use. Or here’s an improvement in a product. Look at all the cars. We didn’t really need more cars, did we? But all of a sudden we have all these electric cars. Why is that? Now look at the electric cars when they first came out, look at them now. So the bottom line is you go into an area where there was lots and lots and lots of cars, but somebody said, you know what? We need to make more cars, but we’ll make these different. And we’ll have an advantage here and look at them now with the prices of gas going up and up more and more people that thought they’d never do it are now looking at that electric car.
Chip Franklin:
Steve, how does a government or the IRS feel about the hustle economy or the gig economy?
Steve Moskowitz:
So that works both ways, because the government would like to see everybody be an employee because taxes are withheld and reported to the government. The reason the government is so against 1099s, is that a lot of people that don’t have taxes, withheld just don’t file returns and just don’t pay taxes. It’s wrong, it’s illegal. But the government has to hunt them down one by one. So the government really prefers employees to independent contractors. However, ever since the pandemic, the side hustles have just jumped up because all of a sudden somebody’s home. Now they say, “Well, wait a minute. I’m home anyway, I can do such and such. And my employer just shipped my job overseas and I don’t want to go back in the office and do that, but I can do this”, or I like having a job. And I like having the benefits, but for whatever reason, either I’m not getting enough money or I just want to put some away or I want to pay off some debts, whatever. I pick up the side hustle. So I see both areas are going to grow.
Chip Franklin:
Casey, I know you work with companies trying to find people, but people also come to you as well. Are they looking for full-time jobs or side hustles?
Casey Hastem:
So, okay, so I’m going to address the W2 versus the 1099 first because I think that’s really interesting. We just had a conversation in the office as a whole about this. We have three different pillars within our organization. We have the direct hire side, which is where I sit. So I’m your W2. If you need a W2 candidate or talent, you’re going to come to me. We have a contract and contract to hire, which that’s going to be your 1099, but they’re actually not 1099s because they go on our payroll. We pay their wages on behalf of the company. Of course, then we add a burden and all that kind of stuff so that we make our money off of it.
Steve Moskowitz:
And that’s popular with a lot of employers too. Because you take all care of all the hassles.
Casey Hastem:
Yes. And so, but they’re still getting reported as employees. And then we have our solutions, which doesn’t really apply to this. But it’s just think long term projects. So what we are seeing, we just had a contractor convert to full time. So they went off our payroll, went onto the client’s payroll permanently. And we were sitting there looking at the number of contractors that we had out. We had 10% of the number of contractors that we would normally have this time of year out on assignment. And that’s huge. And so here’s the point I’m trying to make with this is that right now, I don’t think companies really have a choice for the most part between whether or not they want to hire somebody W2 or contract because this is still for whatever reason, it’s a candidate’s market and the candidates are demanding that they get those direct hire roles along with the benefits that come with them.
Chip Franklin:
Casey, are there enough jobs in this country for people who want full-time employment and their shot at the American dream?
Casey Hastem:
Yes, absolutely.
Steve Moskowitz:
What about benefits, with benefits?
Casey Hastem:
Now that’s another story because a lot of those jobs are going to be at more of your non-professional roles and I’m sure you know this too, Steve, that they are more… Think about your retail, like your Starbucks, your Walmart, your malls, those kind of things. And those places don’t always typically offer benefits, I believe. And I don’t know the statistics, but I think Walmart typically when they hire W2s they hire them part-time.
Steve Moskowitz:
Right. That’s to keep away from the benefits. And Chip what you were saying earlier, it all goes hand in hand because there’s an awful lot of jobs available at the lower echelons. A lot of pizza needs to deliver a lot of tables needed to be waited on at the higher echelons. It’s a whole different story. So we can’t really look at the job market. It’s more meaningful to look at the segments.
Casey Hastem:
Yes. I agree.
Chip Franklin:
Casey Hastem, you were awesome. Will you come back on with us, please?
Casey Hastem:
Oh, absolutely.
Chip Franklin:
All right. Coming up now is Ask Steve. Got a couple things today. This is a double header. These are important. This first one is if you’re part of a gig economy, you’re self-employed maybe can you deduct your medical expenses? And the second one is, if I have a foreign bank account, could I be in trouble?
Steve Moskowitz:
So anybody can deduct medical expenses. But what happens is first, remember it’s un-reimbursed medical expenses. Sometimes people forget about that. And then secondly, you have to meet a certain threshold. That’s what keeps an awful lot of people out. Between insurance and threshold a lot of people don’t incur that much in medical expenses, but what we shouldn’t overlook medical expenses are not just doctors’ visits and pharmaceuticals. There’s a lot of things like transportation to the doctor and somebody might be in a wheelchair and they have those vans that be expensive. Or even if you just drive there, you’re entitled to that.
And then there’s other things, things too, suppose you have to go to some area for a specialist, suppose you have a heart problem. And you say, you know what? My doctor said for my condition, the best specialists are in Houston and I live in San Francisco. Then your cost of flying to Houston and staying in a hotel there, that would all be covered. So obviously it has to be reasonable. If you say, I’m going to Paris to get my teeth cleaned, I wouldn’t recommend that one. But if you have, although I did have a client try to do that one time.
Chip Franklin:
That just sounds funny, man.
Steve Moskowitz:
I said no, but what happens is that if you have a valid reason, like your doctor says, look for the condition you have, this is the doctor you want. And he happens to be someplace else wherever it is, your cost of going there. And then you take a look at other things, too. For example, you may have to make improvements in the home. Suppose a doctor says “Chip, unless you swim every day, you’re going to be a cripple.” And you say, “Well, okay, I’m going to put a pool in my home.” That’s a tax deduction. That’s what people miss, a lot of them. Sure, basically, that’s why it’s so important that you go to somebody and this somebody talks to you and knows your situation. And you just ask these people. Most people don’t know this.
What I found like our last guest said, “Oh, I didn’t know about that credit.” Well, why would they? Just like I don’t know about dentistry or brain surgery. Why would I? But I’ve dedicated my life to this. And that’s why it’s so important with clients to say, look, have you considered this, this and this? And so many times Chip, when I meet with a client for the first time, they’ll say, “Oh, Steve, is that something new this year?” I say, “No it’s been around for years.” “Well, why didn’t my last guy tell me about it?” I said, well, that’s why you’re here because a lot of times, and that’s why I made the switch from CPA to tax attorney, because I didn’t want to be the guy to just shuffle the numbers from one place to another.
I wanted to be the person that says, look, you can do this and this and this and the way I’m always thinking and we’re talking to Casey. I wasn’t joking. No matter what you say to me, my way of thinking is, well, how’s that affect the taxes? Oh, you bought me that ice cream cone, are we talking about business? Do you get to deduct that? But that’s the way you should. When you’re dealing with somebody’s taxes that’s the way you should think.
Chip Franklin:
What if I have a foreign bank account or have one and don’t know it?
Steve Moskowitz:
A lot of people accidentally have foreign bank accounts. For example, you can marry somebody and your spouse’s parents put them on and all of a sudden you’re subject to all these special reporting requirements. And it’s a very big deal. This year, the justice department got a big increase in budget, both of money and attorneys to criminally prosecute people that don’t report their foreign bank accounts. And the irony is the government isn’t asking for any money on them. They’re asking for a special reporting. It doesn’t even go to the IRS. It goes to a scary sounding place called the Financial Crimes Enforcement Network. But if you don’t do this report, the punishment is draconian. It’s more serious than even income tax of evasion. You could do five years in federal prison and the fines begin at $100,000 per account per signature per year. And they go up from there. It can be much more than you ever have in a lifetime. So you really, really, really want to make sure that you go ahead and comply with these laws.
And if you haven’t, it’s crucial that we go to the government before they come to you because there’s a lot we can still do. What we want to do is get you legal and avoid paying these horrible penalties.
Chip Franklin:
Our next guest on Practical Tax with tax attorneys, Steve Moskowitz is Doug Fruehling. He is the editor in chief of the San Francisco Business Times. So Doug, what is the shape of San Francisco currently?
Douglas Fruehling:
Man, you had me on at a tough time. It is tough. There’s not a lot of sugar coating it when you look at downtown San Francisco and the issues that San Francisco is having right now. And then when you look at the belt tightening that a lot of our startups and larger tech companies are going through right now. I think there’s a debate about how much impact that will ultimately have on the broader Bay Area economy. But when you have daily instances of several hundred employees getting laid off at some of our marquee firms, it’s a tough climate.
Chip Franklin:
Steve, do you feel the same?
Steve Moskowitz:
We just upgraded our office. As a matter of fact, next month, we’re moving into our new office at 201 California Street. And I believe I wanted to provide a nice place for my employees to work. I wanted a nice place for my clients to come into. I wanted it to be convenient, safe, and those are all considerations. Now that doesn’t mean that we’re not still working remotely because some people come into the office all the time. Some people never come in. Some people come in part-time. The clients have really enjoyed doing it remote so they don’t have to drive, but some people want to come in. So we’re there. I believe in San Francisco, I’ve been in San Francisco for a long time and I said, okay, I want to make my commitment. And I did. And I signed up for that nice new beautiful office, but you know, to me it says something to the client. Now again, you have the choice of coming in or working remotely, but we have a presence in San Francisco as we always have for over 30 years.
Chip Franklin:
So Doug, I read in your publication, the Business Times that Google is making an impact in the city, they’ve just leased a huge swath of office space. Is that good? I mean, are we all happy about Silicon valley heading north?
Douglas Fruehling:
Me personally?
Chip Franklin:
Well, I mean-
Douglas Fruehling:
There’s already a blurring of the lines. There has been for the last decade, a blurring of the lines. I mean the whole startup community has basically moved to San Francisco from Silicon Valley. So you have a lot of big tech down in Silicon Valley and the startups are all here and then the startups grow up and they stay here. You have Uber and Twitter here, obviously Airbnb here in San Francisco. And so I think that ship has sailed and yes, San Francisco wants to see that big tech here. 300,000 square foot lease is huge for the city. It’s a huge vote of confidence and it we’re at record vacancy rates right now in San Francisco, downtown San Francisco. And we’ve got to fill this space. The high end class A space is maintaining its value. It’s maintaining high rental rates and there’s a demand for that. It’s that class B and C space that is much harder to fill. And something’s going to have to be done with these buildings that are vacant.
Chip Franklin:
How does that work? I mean, for the city’s tax based revenues?
Steve Moskowitz:
Well, all cities love to tax and that’s why some people actually move from one place to another. Because some people have left San Francisco because they didn’t want to pay the taxes. However, to me San Francisco is just such a hub, just a center of things and there’s lots of other nice places too. And there’s enough for everybody. If you want to be out in the burbs, that’s fine. And you can have a good business there. But to me there’s just something about being in the city. It means a lot to me.
And I’ve been in San Francisco for over 30 years as you know, although I have no accent whatsoever. I moved here over 30 years ago from New York City. And even then there was the feeling about businesses that the best ones were in Manhattan and the lesser ones were in the outer borough. That was a feeling a lot of people had. I don’t know if there’s any truth to that. You can have the same person being in Brooklyn or being in Manhattan. But when I lived in New York, everybody felt that if somebody was in Manhattan, he or she was better than the same exact thing in Brooklyn.
Chip Franklin:
This is such an unbelievable city. I mean, it’s an international city indefatigable spirit. I can’t imagine San Francisco ever really failing.
Douglas Fruehling:
They have written the obituary for San Francisco so many times and it has yet to happen and it’s not going to happen this time around.
Steve Moskowitz:
You know, Chip like almost everything else in life, what can you point to in life that’s all good or all bad? Usually there’s a mix and you say, okay, in my opinion, does the good outweigh the bad? And if the answer is, yes, I’ll do it. If the answer is no, I’ll move on. And I mean, yeah, if you want to go ahead and make a list of the bad things in San Francisco, you can put a bunch of stuff on the list. But if you make a list of the good stuff, I think it would be longer and heavier.
Chip Franklin:
What’s the latest on Lyft and Uber, their relationships to the city, to the taxi industry, and I guess to the state who wants to see them not as gig workers, but as employees?
Douglas Fruehling:
Well Uber now has an arrangement where they will send a taxi to you. In New York and San Francisco, if you go on your phone and you get an Uber, a San Francisco or New York City taxi cab may show up, which when you think about it is genius because they can’t get enough drivers. And there’s all these taxis on the road that don’t have this great little contraption to hail a car. So it makes perfect sense to do. And I think they’re having great success with that. I haven’t gotten a taxi yet when I’ve ordered an Uber.
In terms of the whole independent contractor issue, that drama will probably go on for quite a while longer. The prop 22, which was the voter initiative that exempted Uber and Lyft and door dash drivers from the independent contractor bill, which was called AB5, was ruled unconstitutional. And now that’s on appeal. So we’ll see where that ends. There was another development just this week with the truckers who had tried to become exempt from AB5. And it went up to the Supreme Court and the Supreme Court chose not to take the case, sent it back to the lower court. So that stands now. So by the ABC standard, which the AB5 established trucking companies now have to hire employees and not independent contractors.
Chip Franklin:
And Steve what’s the latest on AB5, because this originally was supposed to be for Uber and Lyft drivers. But now it seems like it’s extended to writers, to musicians, to comedians, will the state ultimately rule out all the gig economy?
Steve Moskowitz:
Employees are much better for the government than independent contractors because the employer is taking the money out of their salary every pay day and saying, here you go. Here’s the money. As opposed to the independent contractor, the government hopes that they pay and as a tax attorney, as illegal and wrong as it is a lot of people, a lot of independent contractors, just don’t file or pay, whereas employees, the money’s already going to the employer.
Chip Franklin:
This is kind of an odd question, but I wanted to ask you guys, in San Francisco right now, is it more beneficial to buy an existing business or to start your own? Steve you first and then Doug.
Steve Moskowitz:
There’s all kinds of incentives for business. Once you’re in business, no matter how you got there, there’s all kinds of tax incentives and what the last big tax law did on the tax cuts and jobs acts essentially that decreased the opportunities for employees and greatly increased opportunities for employment. Take a look at 199A. That’s where if you otherwise qualify and you’re in business, you can pay tax on only 80% of your income instead of 100. So suppose we have this situation, suppose Chip, you are an employee and you get $1 million and Doug is your next door neighbor. And he’s a qualified business owner. And he also makes a profit of $1 million. For the first time in American history, Doug, if he does it right only has to pay taxes on 800,000 where you’re paying taxes on the million. Why? Because he’s a business owner and you’re an employee.
Chip Franklin:
Are you saying it doesn’t matter? There’s no difference between the two?
Steve Moskowitz:
Everything always matters. There’s things you have to watch out. Because if you buy somebody’s business, you might be buying his troubles and you might be buying his lawsuits and you might be buying his tax problems. That’s why a lot of people say, okay, I’m not going to buy your business. I’m going to buy your assets. And the client list could be an asset. That’s why you have to be very careful when you buy somebody’s business because that business owner might forget to tell you a few things.
Chip Franklin:
Well, that’s a guarantee. They’ll definitely forget to tell you some things. Doug, what are you seeing in the city?
Douglas Fruehling:
During the pandemic startups and entrepreneurs have been opening new businesses at a much higher rate than before the pandemic. And there’s so many of these sociological economic things that go into that. But people are looking to be their own boss and do something and the pandemic made everyone realize, Hey, if you’re ever going to do it, do it now.
Steve Moskowitz:
Well, I can also add something to that. A lot of people over the years have talked to me about, well, should I stay an employee or should I start my own business? The reason that most people stayed an employee and didn’t start their own business, they were afraid to take the risk. The pandemic comes along and you are fired and doesn’t seem like anybody else wants you. That’s an excellent time to start your own business because you don’t have to worry about the risk. You don’t have a job anymore and your prospects for getting one doesn’t look so great.
Chip Franklin:
Doug, thank you so much for being with us. Will you come back?
Douglas Fruehling:
Absolutely, glad to.
Outro:
Thanks for joining us on the Practical Tax podcast with tax attorney Steve Moskowitz. To hear more and view more podcasts, go to moskowitzllp.com/practicaltax.