Taxes

Non-Employee Compensation – Quick Tip

Sharon M. Simeone

The IRS has replaced their 1099 Miscellaneous Form regularly provided to subcontracted labor (or non-employees) with a new form: the 1099 NEC beginning with the 2020 calendar year.

If you’ve outsourced work and paid subcontractors a minimum of $600 throughout the year, this is now reported in box 1 on the 1099 NEC Form provided to the recipient. Transmittal Form 1096 still accompanies these 1099’s when submitting to the IRS.

For more information, visit https://www.irs.gov/pub/irs-pdf/f1099nec_20.pdf

State Income Tax – Quick Tip

Sharon M. Simeone

If you’re self-employed in the state of Massachusetts, you’re probably in the habit of paying quarterly state income taxes. This year, the MA income tax rate for 2019 has been reduced to 5.05% down from 5.10%. A small savings but one to take note when budgeting and completing your quarterly Form 1-ES for Mass DOR this calendar year.

The good news is if this tax trend continues, the rate is expected to drop to 5% by the tax year 2020.

See the following link for more info:

https://www.mass.gov/news/income-tax-rate-to-drop-to-505-on-jan-1

Mileage Rate – Quick Tip

Sharon M. Simeone

Happy new year!

Many of us are wrapping up the past year by closing out our books. At the same time, we’re preparing for the new year by upgrading our accounting software, reviewing new budgets, and establishing new and improved ways to grow our small business.

Be ahead of the game by making even the smallest applicable adjustments to your bookkeeping now for 2018. One change that may affect your employee expense reimbursements and your deductions at year-end is the new mileage rate of 54.5 cents per mile up from 53.5 cents in 2017.

These pennies add up!

See the following link for more info:

https://www.irs.gov/newsroom/standard-mileage-rates-for-2018-up-from-rates-for-2017

 

Where Does the Money Go? Paybacks vs. Expenses

Sharon M. Simeone

You’ve helped your business survive the startup or difficult times and before you knew it, you’ve loaned thousands of dollars to your company and it’s finally paid off, literally. It’s payback time. Whether your company is reimbursing you in a lump sum or dribs and drabs, every dollar needs to be allocated. And, if accounting is not properly managed, it often leads to a string of misallocations on the books.

This is a common scenario: Upon receipt of the funds loaned to the company, the company will deposit and inadvertently post the transaction to an income account. The cash is then utilized for various expenses and liabilities and posted as such.

The next step – the payback. In the minds of the lender, a.k.a. owner, and the recipient, the loan’s purpose was to keep the company afloat; in other words, to pay necessary expenses to keep the doors open. More often than not, a disbursement made to reimburse the owner will then be incorrectly expensed to an account of choosing, usually miscellaneous which should be avoided as much as possible. These transactions create a domino effect of, to put it bluntly, a mess!

The loan was booked to income which not only creates a bogus gross profit but also increases the company’s tax liability. The payback was expensed which not only duplicates expenses previously recorded (roughly) but also may also lead to problems on the owner’s personal tax return.

To avoid misallocations that are time-consuming to investigate and adjust later, create a loan payable account to correctly reflect the original loan transaction. As funds are slowly paid back to the lender, the balance on this liability account will work its way down. At inception, when the funds are deposited into the checking account, the cash is treated like any other transaction when used. It’s expensed or posted to a liability account and business is run as usual.

No payments to the lender/owner are expensed whether the funds were used for phone bills, payroll, or staff lunches. These items have already been expensed in real-time and expensing again is double-dipping, (i.e., creating bogus expenses to the company’s profit and loss statement).

The aforementioned transactions need extra care and attention. They exceed basic data entry of everyday receivables and payables. Be selective in who manages your accounting and try to keep it to one person. A good practice is to have a month-end close which will provide the opportunity for reconciliations, corrections, and analysis of your financial statements.

If you stay on top of your monthly activity, your year-end will be quick and painless!

The Habit of Hiring Contractors

Sharon M. Simeone

It’s that time. Small business owners are scrambling to gather their paperwork in preparation for tax season. If you wear several hats in your business, you’re one of many who may be feeling overwhelmed in meeting the multitude of deadlines we’re all facing. In these challenging first months of the new year, it may be a good idea to take the time to make room for improvements now as you discover where you went wrong in the prior year.

One common oversight in the small business is neglecting to process the proper paperwork in anticipation for reporting 1099-Misc forms at year-end. If you’ve hired subcontractors, or independent contractors, throughout the calendar year and have no W-9 Form (requests for tax payer identification number) for them on file, you may find yourself making last-minute requests for information to get 1099-Misc Forms out the door.

A good habit to practice is to have the W-9 completed upon agreement of the contract for employment and prior to commencement of work. Taking it further, if you utilize an accounting software program such as QuickBooks, entering their information and denoting their vendor profile as “1099 eligible” will make the year-end process for outside service providers seamless.

Lastly, keep all W-9 Forms for a minimum of 4 years for IRS purposes. If you rehire the contractor, be sure all information is current, including the mailing address to ensure the recipient receives his/her copies of the 1099-Misc Form.

Click the following  link for a printable W-9 Form:

Click to access fw9.pdf

 

Non-Employee Compensation

Sharon M. Simeone

If your business paid an outside service provider $600 or more during the calendar year of 2016 and they require a 1099-MISC Form, it is due to the recipient of compensation on January 31, 2017. Reporting of Box 7 (non-employee compensation) on this form, is also due to the IRS on January 31, 2017.

Other payments reported on 1099- MISC, excluding Box 7, are due to the IRS with transmittal Form 1096 by February 28, 2017.

Click the following link for more information: https://www.irs.gov/pub/irs-pdf/p509.pdf

One Entity – Multiple Bank Accounts

Sharon M. Simeone

New small business owners who are gearing up to get organized and put their best foot forward in a new business venture encounter many daunting tasks in the first few months of business operations. Once settled in, most are ready to dive into an official method of accounting rather than a handwritten check register with an envelope full of receipts to serve as backup for future tax returns. However, some are unfamiliar with the basics of setting up their accounting system and common questions prior to taking on the task are, “What if I have two checking accounts? Do I need to split things up for my tax filings?”

Many business owners opt for two (or more) checking accounts and, perhaps, a savings or reserve account. Reasons for this vary and are the prerogative of the owner. But a common choice is utilizing a second checking account for payroll expenses only.

The business entity may have multiple bank accounts listed as assets on its balance sheet. And all cash transactions will run through one set of financial statements. These transactions will contribute to tax filings under one tax identification number. Therefore, there is no need to “split things up.” One entity is accruing all income and expenses regardless of the number of bank accounts holding funds.

Multiple bank accounts do not equate to a more complicated accounting process nor do they complicate your tax filings. What may seem superfluous for one, may simplify the process for another. The best choice is to fund your business in a way that works efficiently for you.

Recording Payroll and the Importance of Time

Sharon M. Simeone

A small business will often employ an outside payroll service to execute their payroll and all that it encompasses including filing the required federal and state payroll reports and making tax payments. If your business opts for an outside service, you may be familiar with the reports submitted to you upon completion of your periodic payroll. But, as you know, the procedure doesn’t stop there. Accounting must then be completed.

The reports contain all details for each paycheck, tax liabilities, and payroll fees for the period; all of which become part of the company’s financial statements. However, a common occurrence for the busy owner who wears many hats is just giving the reports a quick glance to confirm the operating fund has the cash requirements to cover the scheduled deductions. The reports are then set aside for a thorough review at a later date. The problem that arises is just that – the later date.

A frequent mistake when recording the payroll out of period is taking a shortcut by making a lump sum entry and ignoring individual paychecks and their actual dates. This is especially true when a company consists of a high number of employees as doing so will save time in bookkeeping tasks that have already fallen behind. Unfortunately, this method will not only create a headache when reconciling your bank statement, but will also create inaccurate tax liabilities and expenses which will lead to bigger issues at year-end.

Reconciling to the payroll reports each pay period is crucial for expenses and liabilities to be 100% accurate. To accomplish this, record actual gross wages and accrue tax liabilities in real time. In so doing, data will be contributed for processing of annual tax returns throughout the year.

This is a bookkeeping task that needs prompt attention and one more way to save money. Your tax accountant will earn more billable time with other clients!

Get the Memo and Track your Cash

Sharon M. Simeone

How many times have you written a check payable to cash or used cash as a form of payment? Although ill-advised due to security and tracking issues, it’s a transaction that happens more often than one would think in business practice. Whether you, a member of your staff, or an outside source is the recipient of the funds, a recording of the transaction must follow.

The reasons for a cash transaction vary and are unexplored here but it’s often simply requested by the service provider. However, the delivery of a cash payment is one of which to take note. In other words, write yourself a memo.

In all financial matters, whether using cash for your own business expense or a payment to a vendor, be sure to jot down a quick memo on the check, (or if using actual cash, a post it, or a napkin, or anything to help you remember), and record the transaction promptly. If possible, obtain a receipt and attach it to a copy of your cancelled check for proof of payment. Allocate the payment accordingly to track budgeted line items, reconciling of bank statements, and tax deductions.

Remember, your bottom line is your ultimate goal and every transaction contributes to your company’s financial statements. A quick memo will encourage you to take the transaction to completion and avoid unexplained and miscellaneous transactions in your business operations.

Off the Payroll – Quick Tip

Sharon M. Simeone

Many sole proprietors and small business owners choose to pay themselves off the payroll. When making drawings from your company or receiving compensation in the form of a payment from a client, accounting for income tax deductions is often overlooked. Falling behind with bookkeeping or failing to file proper paperwork with federal and state tax agencies is easy to do when busy schedules don’t allow for processing of these tasks.

To avoid accruing penalties and interest on unpaid taxes, estimated state (if applicable) and federal income taxes need to be paid on a quarterly basis and filed with the appropriate form. By adhering to the designated due dates and staying up-to-date throughout the year, annual tax liabilities will be kept at a minimum.

The end result – no surprises and less stress in the following year.

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

http://www.mass.gov/dor/docs/dor/forms/inctax15/addl/1-es-instructions.pdf