Starting a New Business? How to Set Up a Solid Accounting System

Can you feel the excitement in the air? Starting a new business is an adventure and a risk wrapped into one experience. The possibilities are limitless, but you need to be willing to step out of your comfort zone to create opportunities for the future.

As an entrepreneur, how are you creating the right systems to support ongoing business activities? It is common for people to be too focused on the implementation and growth of a new business that they overlook some of the foundational details that will influence the future of the company.

Getting the business off the ground is just the first step. When you are starting a new business, you need to be sure that you are prepared with the right systems that will minimize problems in the future. Financial systems are critical to tracking profitability, managing expenses, and staying ahead of the other accounting responsibilities that need to be managed over time.

Why Your Accounting System Matters

We understand how easy it is to push bookkeeping and accounting aside. When you are excited about new product development, marketing campaigns, and other details that affect your business growth, then it seems boring to crunch the numbers and run Profit and Loss reports.

But, neglecting your accounting system is a surefire way to set your business up for failure in the future. You need to know where the money is coming from, how much is coming in, and all of the expenses that are required to keep your company in business. The right accounting system provides the structure and framework so you can keep up with these details without putting in a lot of time for data entry and number crunching.

Starting a New Business: Accounting Tips

Most business owners don’t have formal accounting training. If you don’t know where to start, then you should consider the investment of hiring an experienced accounting team for assistance. DIY might seem like an effective option for reducing expenses. But it is likely that you will be losing money if there are errors or problems in your accounting system.

Here are a few things that should be a priority when you are starting a new business and creating a functional bookkeeping and accounting system:

  1. Register Your Business: It’s important that you can legally run a business from your location, which means that the first step is to obtain a business license. Once this paperwork is in place, then you can move forward with the other steps needed for your financial system.
  2. Open a Bank Account: New businesses often start in the basement or garage of your family home. These startups don’t need to be glamorous or elaborate to have the potential for future growth. But the problem is that business expenses are often mixed in with personal spending, making it hard to track expenses and profits. When you are starting a new business, it is critical that you open a new bank account so all of the finances can be separated from your personal spending.
  3. Hire an Accountant: Even though it might feel premature to bring on an accountant, it is critical that you consider this professional advice for your company. Don’t hire a full-time accountant, because it isn’t common to need 40 hours a week of accounting services. Instead, it is smart to hire an outsourced accountant who can walk you through the process of starting a new business. Make sure that your accountant of choice has experience working with small businesses and entrepreneurs.
  4. Choose an Accounting Software: There is no reason why you should be doing accounting and bookkeeping by hand. Technology enables business owners to avoid busywork by using accounting software that automates these processes. If you aren’t sure what software to use, then talk to your accountant to learn about recommendations based on your unique business needs.
  5. Track Expenses and Profits: Now that your accounting software is in place, you need to be sure that you are prepared with ongoing maintenance of the transactions that are moving through your account. If your bookkeeping and accounting reports are going to be accurate, then it is essential that you build a solid foundation of accurate transaction tracking. Not only do you need to pay attention to the money that is coming in, but you also need to be detail-oriented with the expenses that are required to keep your company running. Tracking these expenses helps you build financial statements, itemize expenses that can be deducted on your annual taxes, and ensure that you are ready when tax season rolls around.
  6. Organize Paperwork: You will have invoices and receipts coming across your desk, which is why you need a good system for organization. A filing system will enable you to pull up receipts when they are needed in the future. It might be as simple as designating a file-folder system in a cabinet next to your desk. Or, you can consider a digital filing system if you don’t want to juggle stacks of paperwork. These receipts and invoices are necessary in case the IRS decides to complete an audit of your business in the future. At that point, you will need to provide documentation that backs up any deductions claimed on your taxes.
  7. Handling Payroll: Depending on how your business is structured, you will need to evaluate how payroll will be managed. This task is another area where your accountant can assist to ensure that the money is managed efficiently. When starting a new business, you might be the only employee. Eventually, your company will grow and it will be time to hire outside help. You have the option to bring on an employee or pay the person as an independent contractor. The worker classification will influence how the person is paid. Not only do you need to ensure that timely payments are provided to your workers, but you need to be prepared for other payroll-related paperwork in the future (such as 1099 forms or W2s).
  8. Tax Systems and Procedures: The specific taxes that need to be paid vary depending on the type of company that you are running. For example, if you are selling physical products, then it is likely that sales taxes need to be collected and paid. A variety of factors influence how sales tax is managed, such as where your business is located, where the goods are shipped, and any tax exemptions that might apply. Your accountant can provide guidance to ensure that you have the right system in place for the collection and payment of sales tax. Other taxes that need to be considered include quarterly taxes, self-employment tax, income tax, employment taxes, excise taxes, and more.
  9. Assess Profitability: The goal of running a business is to bring in a profit for yourself and any investors participating. When you are starting a new business, you can see the possibility of making money. But you need to be sure that your sales are matching up. Are you earning more than you are spending? It is common for new businesses to be “in the red” for the first few years. Even if you aren’t making any money yet, you need to show that your company is moving in the right direction. Your accounting reports are key to evaluating profitability and calculating margins that are available. These numbers provide a clear picture of your current financial standing. Then, gross margins can be improved by cutting costs and optimizing sales.
  10. Funding for Growth: When you are starting a new business, you probably aren’t ready to bring on investors at this point. As your company grows, you will eventually need more capital to boost your business to higher levels of success. Even though you aren’t ready to connect with investors right now, you need to consider how you will access funding in the future. The steps that you take in the earliest stages of business growth will contribute to the possibilities that can be achieved in years to come. If you want to be able to secure funding, then you need to be sure that you are tracking financial details. If money is needed right now, then you might be able to obtain the funding through a small business loan based on your personal credit history.

Professional Accounting Services for Your New Business

The best investment that you can make is hiring an outsourced accounting team to support the growth of your new business. Don’t let yourself be distracted with the reporting and bookkeeping that needs to happen each week. Instead, you can free up your time by letting the pros handle these details.

Our staff at Easier Accounting is just a phone call away. We invite you to contact us in the earliest stages of starting a new business. We’ll help with the implementation of accounting and bookkeeping systems that will set you up for growth and success in the future. Call us at (888) 620-0770 to learn about available services.

How to Create a Growth Culture in Your Business

As you are expanding product offerings and working to connect with new customers, have you considered how you are supporting the growth culture for your business? Too often, business owners get so caught up in the day-to-day tasks that they overlook the way culture impacts current results and success in the future.

The truth is that developing a growth culture might be one of the most important things you can do for your company. This strategy can be designed to promote improved productivity, tap into new skill sets among employees, and boost overall engagement in many aspects of your business systems.

What is Growth Culture?

Every company has a business culture, regardless of how proactive you are in creating the culture that you desire. If you aren’t deliberate in designing a culture built on growth and productivity, then it is likely that your company is falling into a culture of stagnation.

The key is to develop a growth mindset that can be shared with employees and management. This mindset will naturally affect every aspect of the business, including customer interactions, product development and more.

Your growth culture should be founded in the belief that skills and systems can be improved, and the development of these growth opportunities is an important part of the work that is completed on a day to day basis. Designing a growth culture is the process of developing an environment that supports continuous improvement for all team members.

Why Your Business Culture Matters

Why does it matter if you are proactive with designing the right company culture? When you create a work environment that promotes ongoing development among team members, it boosts employee performance and engagement. This trickle-down effect impacts profits and customer satisfaction, which is the perfect recipe for helping your business grow in the future.

It’s been found that employee engagement is a critical driver for business growth. When employees are motivated, day-to-day activities have a direct impact on customer ratings, overall productivity, and profitability.

At the same time, the opposite is true: poor company culture results in unmotivated employees. As a result, team members are doing the bare minimum to get by each day in the workplace. You are either developing a cycle of success or an environment of mediocrity.

Creating Growth Opportunities in the Workplace

Employees won’t naturally seek out growth opportunities without the right support and encouragement at work. As a business owner, you can help employees engage more effectively by providing situations that help employees with continuing education, stronger certifications, and the development of new skill sets that support company needs.

This engagement with employees can help to reduce missed days at work and improve overall employee satisfaction. The positive benefit is that happy employees are willing to stay with a company long-term, which means that investing in growth culture can be an effective way to reduce turnover each year.

As a business owner, it is important to understand that investing in your employee’s professional, personal, and financial growth can potentially result in excellent returns on your investment in the future. Your staff is motivated to improve performance, which is essential if you want to help your company grow in the future.

7 Tips for Developing a Growth Culture

Setting the intention of developing a growth culture is just the first step. Implementation can be a challenging path to follow, especially if you are working to overcome a negative company culture that is currently in place. Here are a few things you might consider if you want to ensure optimal success with a change in growth for your company culture:

  1. Employee Buy-In: These positive changes will only impact your company if employees buy into the initiative. Growth will only happen if the employees are willing to engage in the process and focus on personal development. Instead of forcing specific types of development, it’s important to understand the desires and interests of each employee. Then, potential opportunities can be offered that match a wide range of preferences.
  2. Immediate Implementation: As an employee is developing a new skill set, it is essential that they have the opportunity to use these skills as soon as possible. Reducing the gap between learning and implementation is critical so they don’t lose the skills or fall back into old systems again.
  3. Start at the Beginning: The communication that happens in the hiring process and through onboarding will set the tone for the way new employees will engage in the workplace. Look for ways you can show encouragement and growth opportunities from the moment a new hire steps through the door for their new job.
  4. Mission Statement: Spell out your growth culture goals in the company mission statement. Not only does your mission statement bring in the right types of employees who fit your desired culture, but it reminds current employees that there is a strong emphasis on continuous learning and growth.
  5. Build Skills: Employees need tangible ways they can build new skills and knowledge. Create trainings and potential ways for people to learn both industry-specific skills and soft skills that can boost daily performance. For example, an employee might benefit more from learning how to manage distractions in the workplace compared to a long lecture about industry-specific laws. While it’s important to maintain current information in your industry, it is more important to help your employees develop a mindset where they are interested in learning new things.
  6. Connection and Communication: Building a strong team environment is the foundation for creating a growth culture. When people are working together, they can help each other overcome common weaknesses and issues along the way. Look for ways you can create more cohesiveness among team members. If employees don’t have a lot of face-to-face time with other people in the organization, then technology can be used to increase interaction among employees.
  7. Long Term Initiatives: Remember that your company culture won’t change overnight. While the hope is that your employees will be engaged in the process right away, it often takes time to shift mindset within an organization. Your growth culture initiatives need to be focused on the long-term goal of changing how the company moves in the future. You will start noticing benefits from the moment these changes are implemented, but the most notable benefits are still a few months (or years!) down the road.

With the right company culture, it is possible to empower employees and help them strive for their highest potential. These learning opportunities show individuals that anything is possible when they are striving for optimal levels of achievement. There is no limit to possible growth when a person is engaged and proactive in their personal development.

How to Motivate Employees in Your New Growth Culture

In most work environments, it is necessary to find the right motivation that will help employees buy into new initiatives. These are a few methods you might consider that can help employees take personal responsibility for looking at what drives their development and performance:

  • Recognition: It feels good to have a pat on the back and acknowledgment for a job well done. Design a program to recognize employees for outstanding behavior. This positive reinforcement will encourage people to continue striving for more.
  • Mentorship: Newer staff members have a lot to gain by working side-by-side with the more seasoned employees. Create a mentorship structure that enables interactions between all team members. This mentorship system needs to be built on both inclusion and diversity.
  • Money: It’s no surprise that the main reason why employees continue showing up for work is because of the paycheck. Employee growth can be incentivized monetarily by rewarding specific accomplishments. Designate a portion of your budget that allows a cash bonus system as appropriate. Gift cards, a bonus pay-out, or small gifts can go a long way in providing tangible reinforcement of the culture you want to develop within your business.
  • Modeling Behavior: Management needs to be fully engaged in the process to show their teams how they can be growing professionally. Managers can influence behavior by leading by example. When everyone is working together on growth, it is easier for individuals to do their part in contributing to the team effort.
  • Promotion Opportunities: It is important that employees see a way forward in how their careers can develop in the future. If you invest in employee growth without giving them a potential for promotion, then it will likely result in a turnover as the employees look for new opportunities with other businesses.

Implementing the Right Business Systems

Also, don’t overlook the importance of implementing business systems that support productivity. For example, a good bookkeeping and accounting system is critical for reducing financial mistakes and minimizing data entry and other busywork.

If you are looking for ways to create a growth culture and improve your business financial systems, then Easier Accounting is just a phone call away. We specialize in small business accounting services. Contact us for a consultation to learn about the available services: (888) 620-0770.

Sole Proprietor vs LLC: The Pros and Cons of Each

One of the most important decisions you can make as a small business owner is choosing the right structure for your new company. Even though the business structure seems like a minor detail, it impacts the taxes that are paid and paperwork that needs to be filed with the IRS. In this article, we are breaking down the differences so you can choose between a sole proprietor, LLC, or another type of business structure.

Types of Business Structures

Selecting the right type of business structure is key for finding the best balance of protection while optimizing available benefits. Here are some of the most common business structures used for small companies and startups:

  • Sole Proprietor: Many business ventures start as a sole proprietorship, which is the most common type of business structure. It means that one person is the sole owner and operator of the company, which is a good solution if you want to manage all of the details of the company. There is not a separate business entity, so it means that all personal income and business expenses are filed on the personal tax return.
  • Limited Liability Company: The nickname for this structure is LLC. It is a flexible structure that gives you the benefits available through both corporations and sole proprietorship. The business is structured as a separate entity, so business and personal liabilities are not mixed. LLC requirements vary in each state, so it is important to work with a professional to ensure the proper formation of this structure.
  • General Partnership: When two or more people are owners in the company, then a partnership agreement can be formed. In this situation, all partners are responsible for the business and hold ownership of the debts and liabilities of the company. The losses and profits are shared equally among partners. Similar to a sole proprietorship, profits are also taxed through personal income.
  • Limited Partnership: The minimum requirements for a limited partnership is that there must be at least one general partner and one limited partner. The general partner is involved in the day-to-day activities of the business, as well as major business decisions. On the other hand, the limited partner has no rights to the business decisions, they only act in the capacity as an investor. The general partner maintains responsibility and liabilities, which means that the limited partners hold ownership without the risk.
  • C Corporation: Commonly referred to as a C- Corp, this business structure is created as a separate entity from the owner. The business is structured as an independent legal entity. The benefit of this separation is the protection against personal liability. Specific tax requirements and regulations need to be met, including extensive reporting and recordkeeping. It is a complicated business structure but sets the business up for future expansion if desired. Double-taxation occurs with this business structure.
  • S Corporation: Commonly known as an S- Corp, this structure passes the profits and losses through the business owner’s personal income, without the cost of corporate tax rates. The corporation has a max limit of 100 shareholders. Strategies can be used to avoid double taxation, with the owners and shareholders being taxed.

Small Business: Choosing Between a Sole Proprietor vs. LLC

In most cases, it makes sense for small businesses to be structured as a sole proprietor or LLC, depending on the needs of your company. You don’t need to read the fine print to know all of the details and differences. Instead, talk to an experienced accountant and business attorney for advice in structuring your company.

Also, know that this business structure is just the starting point. Your accountant can offer recommendations in the future when it is time to grow, depending on the trajectory of your business success. Sometimes businesses need to be restructured to manage taxation and liabilities.

In the next few sections, we will break down the benefits and drawbacks of both sole proprietorships and LLCs. This information will give you a general overview of your options. Then, you can talk to your accountant and/or business attorney with a clear understanding of how the structure will impact your business.

Sole Proprietor: Pros and Cons

There are advantages and disadvantages to structuring your business as a sole proprietor:

  • Pro – Simplicity: As a sole proprietor, you don’t have to go through any paperwork or complicated systems when setting up the company. In the beginning, there is no state paperwork that needs to be filled out and filed. Additionally, you don’t need to worry about annual state filing.
  • Con – Liability: Since the business assets are in your name, you will be held personally liable if anything goes wrong. If your business is in debt, then your personal assets could be at risk. For example, a creditor could go after your car, home, or other personal property of significant value to repay outstanding debts.
  • Pro – Maximizing Business Deductions: Any time you spend money on business expenses, those costs can be written off your personal tax filing as deductions.
  • Con – Restructuring as the Business Grows: Once you reach a threshold of annual earnings, it is usually best to restructure the company to optimize tax payments. Maintaining a sole proprietorship could cost more money, in the long run, depending on how much money you are earning. Talk to an accountant for personal recommendations.
  • Pro – One Tax Filing: As a sole proprietor, there is no need to file a separate tax return for your business. If you have a corporation, then two returns need to be filed (one for your personal taxes and one for your business taxes).
  • Con – Building Busines Credit: Since the business expenses are in your name, it can be difficult to build business credit. A lack of business credit could have an impact on your ability to get financing in the future when needed. As a result, it might be hard to get funding when your business is expanding.
  • Pro – Managing Business Taxes: Since all profits and losses are passed through your personal tax return, you only need to pay federal, state, and local taxes, as well as Federal Insurance Contributions Act (FICA). Some of your personal expenses can be leveraged as business expenses, such as your home or car that is used for business activities.

LLC: Pros and Cons

Does it make sense for you to set up a Limited Liability Company (LLC) for your new business venture? Here are a few pros and cons that should be considered before moving forward with this business structure:

  • Pro – Various Benefits: The main reason why people choose an LLC is to take advantage of the benefits available as a sole proprietor, with the protections that come through a corporate structure.
  • Con – Limited Lifespan: If the business structure changes, then your LLC might be dissolved. For example, if a partner joins or leaves, then it might be necessary to restructure.
  • Pro – Flexibility: This business structure is flexible, making it easy to adjust the structure based on your individual needs.
  • Con – State Requirements: Every state is unique in the way LLCs are managed, so the tax liabilities vary depending on where your business is located. It is important to learn about state requirements before deciding whether an LLC is the right structure for your business. Sometimes industry-specific licensing is needed in addition to the state requirements.
  • Pro – Avoid Double Taxation: Double taxation occurs for most corporations, with taxes required for the business and the individual. An LLC protects you from double taxation.
  • Con – Paperwork: Not only do you have paperwork that needs to be completed for the formation of an LLC, but there are often annual state filings as well.
  • Pro – No Business Debt Liability: LLCs protect small business owners from personal liability for the business debt. If a creditor is demanding payment or your business is facing a lawsuit, it means that your personal assets (such as your home and car) are safe.

Choosing Between Sole Proprietor and LLC

Is it time for you to structure your new business venture? As you are getting started, it is helpful to talk to industry pros to learn more about the most strategic approach for your unique needs. This conversation should cover a variety of details that can impact the success and long-term profitability of your company, including:

  • Tax burden and how to minimize the amount you will be paying each year
  • Cost of setting up and maintaining the business structure
  • Legal liabilities carried by the business, yourself, and partners
  • Flexibility of the business structure and how it meets the needs of your company

Easier Accounting is Here to Help

If you need accounting and bookkeeping assistance for your small business, then our team at Easier Accounting is just a phone call away. We specialize in small business bookkeeping and can help with a variety of business structures, including a sole proprietor, LLC, and corporations. We take care of the financial details so that you can keep your focus on other business responsibilities to help your company grow. Call to learn more about how we can assist: (888) 620-0770.

Accounting Steps to Set Your New Business Up for Success

The systems and processes set up in the newest stages of your business will have a profound impact on the long-term success of your company. It is an optimal time to implant a solid foundation that you can build on for years to come. One of the most important aspects of financial success is to implement specific accounting steps so you can track income and expenses within the company.

If you don’t have a formal background in finance or business management, then these accounting steps might not seem intuitive. Too often, new business owners assume that they can maintain their focus on customer acquisition and product development, and then deal with the financial details later. Yes, you can choose to leave accounting and bookkeeping on the backburner… but you need to consider the long-term consequences that might be faced by ignoring these important elements of running a business.

At Easier Accounting, we understand the importance of following a proven financial system when starting a new company. Our team is here to assist with the essential accounting steps, helping you create an effective system that will serve the needs of your company – now and in the future. You are welcome to contact us at any time if you are interested in learning more about how these available services can have a positive impact on your new business.

New Business Idea, But Don’t Know Where to Start?

Starting a new business can be both exciting and overwhelming at the same time. You probably feel like you have a long list of to-do items: business registration, local licensing, product manufacturing, website design, accounting systems, and more.

Don’t let yourself be paralyzed by all of the things that need to be done. Instead, consider the benefits of tapping into information and support offered by experts. Finding specific skill sets to support your business needs can be an invaluable way to share the responsibility. As a result, you don’t have to navigate the rocky road without support.

Our team at Easier Accounting specializes in financial systems for startups and small businesses. We are here to guide you through the accounting steps to create a solid financial system that will support the needs of your company. Here are a few important steps to follow:

  1. Open Business Financial Accounts: Even if you are starting as a sole proprietor, it is important that you have clear boundaries between personal spending and business spending. You need to know where your income will be going and how you will be paying for business expenses. Keeping the business finances separate makes it easier to track the results of your business efforts, and it is much easier to gather applicable information for your accountant when tax time rolls around. Choose a financial institution that you would like to use and find out what is needed to set up a business bank account. Set up a business savings account, checking account, and even one or more credit cards that can be used if needed.
  2. Track All Expenses: The costs can add up, especially when you are getting the business off the ground. Implementing these accounting steps in the earliest stages of your business efforts means that you will be able to maximize available tax write-offs. If you want to claim the deductions, then you need to keep records of the money that is spent for business purposes. A good accounting system can be an invaluable asset in tracking every expense for your business. Also, hold onto any related paperwork, such as receipts, bank statements, canceled checks, bills, proof of payment, invoices, financial statements, 1099 forms, or any other documents related to income or expenses. Get in the habit right now and you will find it easier to maintain the momentum of tracking every transaction and keeping every document.
  3. Implement a Bookkeeping and Accounting System: Using proven computer software can be a valuable asset to track all of the transactions moving through your account. The easiest way to get started with a bookkeeping and accounting system is to hire an accounting expert who can help you line up the financial accounts and integrate everything with your point of sale systems. Not only should you start using accounting software as soon as possible, but it is smart to have monthly services that help you keep up with reconciliations and ongoing bookkeeping. It is a time-consuming and boring task to monitor all of the business transactions, which is why you are smart to outsource these tasks to an experienced small business accounting team.
  4. Payment Processing: Two details need to be considered when it comes to payment processing. First, you need to have a system in place to receive payments from your customers. Next, you need to consider how you will be paid and how the money will be provided for contractors, employees, and accounts payable invoices. Most businesses don’t manage only on cash. You need to have a digital system that can be used to accept payments through mobile apps and/or credit cards. These systems ensure convenience for your customers when they are ready to buy the products or services that are offered. Will you accept online payments only? Or do you need to have the option for in-person payments as well? These details will influence the type of system that is selected to match your business needs. At the same time, you also need to have a streamlined system in place to ensure that you are keeping up with payroll and other bills that are due throughout the month.
  5. Payroll Processing: Setting up a payroll system deserves a mention on its own because of the importance of taking care of your employees. Payroll processing is a bit more complicated than providing a credit card number to pay a bill. This necessary task requires withholding calculations, ongoing deposits for tax payments, benefits calculations, and more. While there are payroll processing software systems that can be used, it is best to work with an experienced payroll provider for assistance. Consider hiring an accounting team that offers both payroll processing and tax strategy so you have the convenience of all financial services from one provider.
  6. Design a Good Tax Strategy: Now is the time to hire an experienced tax accountant who can assist with your tax strategy throughout the year. There’s no need to hire a full-time accountant in your company. Most small businesses don’t have the cash or resources to pay for the accountant’s salary. Instead, consider the benefits of outsourced accounting so you can talk to a tax pro without the need to carry the overhead costs. As you are choosing accounting services, it is best to pick an accounting provider that understands your unique needs and specializes in small business services. Tax strategy varies depending on the type of company and the size of the business. A small business accountant will know proven methods that can be applied to your business, which will optimize your overall results.
  7. Systems for Monitoring Business Profits: It is essential that you monitor profits and losses throughout the year. Even though you might feel like your business is doing well, it can be a surprise to look at the numbers and discover that your margins are tighter than you thought. Implement accounting reports so you can see how much is going out and how much is coming in. This data can help you evaluate the true costs for the production and sales of your goods or services. Then, you can determine if your pricing is accurate to ensure that you are staying in a profitable space with your business efforts. Also, keep in mind that good financial reports are essential if you decide to bring in outside investors in the future. You need to show the history of the company’s success before people will be willing to invest in your business efforts.
  8. Ongoing System Upgrades: Following these accounting steps will ensure that you start in the right place with your new business venture. But you should never assume that your new accounting and financing strategies will last forever. The truth is that you should always be monitoring the effectiveness of your accounting systems. If weak points or areas of opportunity are uncovered, then you can tweak the system to ensure that you are maintaining the highest levels of performance within your company. An experienced accounting team can assist with the ongoing management and maintenance needed for your business financial systems.

These accounting steps show an overview of what you need to be doing for your new business. It is common for business owners to have questions about how the details should be implemented based on the unique needs of their company. If you are interested in learning more about your options, then our team at Easier Accounting is always just a phone call away. Contact us to discuss available accounting services and how this support can have a positive impact on your business success. Call our team at (888) 620-0770.

Small Business Owners – Don’t Believe These Business Tax Myths

Tax code can be complicated, so it’s easy to see how business tax myths spread among small business owners. You are carrying the responsibility of running your company, managing employees and working on product development. Tax regulations are not on your mind and often fall to the bottom of the priority list.

While it is important to focus on all aspects of your business, failing to keep up with the tax code can be disastrous for your company. If you run into issues with the IRS, then you will be facing fines, interest costs, and late fees. Additionally, poor bookkeeping and accounting practices can cost you a lot of money in potential business deductions.

Preparing for the Upcoming Tax Season

While April 15th is still two months away, right now is the time to get started on your tax preparation. Good bookkeeping should be happening year-round, to ensure that your reports are ready when it is time to file your paperwork.

The assistance of an experienced accountant can be invaluable in helping with accurate filing. Not only do you have a pro to guide your decisions, but an experienced accountant can minimize the risk of you getting caught in some of the most common business tax myths.

Business Tax Myths to Avoid

There is a lot of misinformation about tax loopholes, deductions, and write-offs that may or may not apply to small businesses. Just because you read someone’s advice online doesn’t mean that the information lines up with the guidelines set by the IRS. If you want to stay away from trouble with the IRS, then you need to be sure that you are thorough and accurate in your tax filing. Avoiding these common misconceptions will protect yourself and your business. Here are some of the most common business tax myths:

  • Myth #1 – Tax Filing is Optional: This myth might seem blatantly obvious to many people, but it’s surprising to see how many people mistakenly think that tax filing is an optional activity each year. There is a phrase in the instruction book for Form 1040 that uses the word “voluntary” in reference to the tax system, and some people have interpreted it to mean that individuals have no legal obligation to file taxes. The truth is that the voluntary portion is the individual’s responsibility for calculating the amount of taxes that are owed. Tax filing is legally required, and it’s up to you to ensure that your filing information is correct.
  • Myth #2 – All Start-Up Costs Should Be Immediately Deducted: The timing of your business deductions varies depending on the nature of your business and the types of purchases you are making. Certain costs should be deducted upfront, which means that you take the value of the write-off in the year the purchase was completed. But there are instances where is it more effective to take the tax benefits through depreciation, which means the write-off is calculated over a period of time. For example, costs for specific office equipment or machinery might fall into the category of Section 179 expensing. Also, you can deduct up to $5,000 of your organizational costs and $5,000 of the business start-up costs, and remaining costs might need to be amortized. The best solution is to talk to your accountant for personal recommendations to ensure optimal tax savings each year.
  • Myth #3 – I Don’t Have to Pay Taxes on Money Made Online: The internet has opened a whole new world for businesses, with a large portion of retail sales happening online. These numbers continue to grow each year. If you are doing business online, then it means that you haven’t filed a W4 with an employer – so no structure is in place to withhold taxes from your pay. But don’t assume that means you don’t have to pay taxes on the income! If you make $600 or more working as a contractor, then you must report that income to the IRS. You will be required to pay self-employment taxes, so make sure to set aside money every month to be prepared for the upcoming tax bill.
  • Myth #4 – Incorporating is the Best Way to Minimize Tax Burden: Remember that there isn’t a one-size-fits-all solution that works for all types of businesses. While there are undeniable benefits to incorporating, sometimes it makes sense for self-employed individuals to stick with a sole proprietor business setup. The truth is that incorporating too early could have a negative impact on your tax burden. For example, if you don’t make money for the first few years, then you bear the burden of minimum corporate tax payments and not enough income to pay the bill. Work with your accountant and business attorney to determine the right timing of incorporation for your small business.
  • Myth #5 – Home Office Deductions Increase the Risk of an Audit: Are you a small business owner who works from home? You might be nervous about maximizing the deductions for your home office because you are worried about the increasing risk of an audit. Years ago, a home office wasn’t as common as it is in our digital business world. At that point, it might have been true that a home-based business could potentially raise red flags for the IRS. But self-employment at home and remote employment are becoming so popular that home business write-offs are quite common. As long as your deductions are legitimate, there is no reason why you should be worried about increasing the risk of an audit. The most important thing you need to do is ensure that your workspace at home meets the regulations established by the IRS.
  • Myth #6 – Only Large Corporations are Audited: On the other hand, some small businesses assume that they don’t bring in enough profit to be audited by the IRS. The truth is that the amount of income you receive doesn’t have as much to do with the auditing process as other factors. Certain activities can send up red flags. Regardless of the amount of income you receive, it is essential to ensure that you have thorough, detailed business records to track all deductions and income. This paperwork should be kept on file for a few years so you can defend your tax filing if the IRS comes calling.
  • Myth #7 – “Audit Proof” Your Business by Overpaying on Your Taxes: There is no reason why you should send the IRS more many than what is owed. Some people assume that overpaying on their taxes means that they are protected against an audit. The truth is that the IRS doesn’t care if you pay what you owe or overpay, the excess will just be sent back to you in the form of a tax return. Their main concern is to ensure that you aren’t paying less than you owe. Your goal should be to pay what you owe as closely as possible, then all deductions need to be backed-up with solid recordkeeping.
  • Myth #8 – File an Extension if You Don’t Have Cash for the Tax Bill: Filing an extension is an option if you need more time to prepare your tax paperwork. But just because an extension is filed doesn’t mean that you are buying more time to pay your bill. This process extends the date for your filing only. It is still your responsibility to pay the money that is owed by the original due date. Failing to make a timely, accurate payment could result in additional costs for interest and penalties. If you need more time to pay taxes, then you might consider payment plans that can be arranged through the IRS. You will pay more money overall though because of the interest that is accrued on the overdue payment.
  • Myth #9 – My Accountant Holds the Responsibility if Tax Mistakes are Made: Hiring an accountant is an invaluable step for businesses of all sizes. It is important that you have someone to guide you through the tax rules and regulations. While your accountant can help you avoid common missteps in your tax filing, the ultimate responsibility still lies on you. It’s up to you to ensure that you are providing accurate numbers and information, then the accountant uses this information to prepare the tax paperwork. The quality of your tax filing is only as good as the financial details that are provided to your tax accountant.
  • Myth #10 – It’s Good to Get a Big Tax Refund: Whether you are a small business owner or an employee, it might feel like a relief to receive a big tax refund in April. Even though this check might feel like “free money,” it is important to remember that the money was yours in the first place. A big tax refund means that you overpaid on your taxes – you essentially gave the IRS a free loan. If you get a tax refund, then it means that you should talk to your accountant to adjust your withholdings or estimated payments going forward.

The simplest way to avoid common business tax myths is by partnering with an experienced accountant who can guide your financial decisions throughout the year. Easier Accounting is here to help! Call us at (888) 620-0770

The High Cost of Poor Bookkeeping Systems

In a small business setting, it is far too common for paperwork and bookkeeping systems to fall to the bottom of the priority list. Business owners and managers often get caught up in the activities of each day: employee management, customer support, product development, marketing, and more. While these responsibilities are important, failing to keep up with bookkeeping and accounting can lead to big issues in the future.

How often do you have stacks of receipts or invoices that pile up on your desk? These piles of paperwork can be daunting, often resulting in the choice to push off the task until tomorrow. One day leads to another… before you know it, you are months down the road with a daunting project of sorting through all of the transactions that have moved through your business.

DIY Bookkeeping Won’t Save You Money

Often, small business owners will choose DIY bookkeeping as a way to save money. If you are working on a tight budget, then the cost of paying for a bookkeeper or accountant might feel like it is out of your budget. But the truth is that DIY often results in a disastrous outcome – especially if you don’t have formal training in bookkeeping.

The only time it makes sense to choose DIY bookkeeping is if you have the time and skills to ensure accuracy in your records. If you fail to keep the system current, or you are inaccurate in the data entry and calculations, then it will cost you quite a bit of money in the long run.

Bad Bookkeeping Systems Will Cost You Time and Money

Whether you have an outdated system, your books are a mess, or you aren’t doing anything with bookkeeping, now is the time to implement a system that works for the unique needs of your company. The truth is that inaccurate bookkeeping will cost you a lot of money – now and years down the road.

Here are some of the most common ways that you will pay unexpected costs due to poor DIY bookkeeping practices:

  • Mistakes: A few small mistakes here and there shouldn’t be an issue, right? Wrong! When profits or expenses are miscalculated, it has a domino effect on your financial reports, tax estimates, and overall calculations. Typos and errors start small in the beginning, but the snowball effect results in a messy problem several months or years down the road.
  • Incorrect Tax Calculations: Inaccurate bookkeeping systems will have a direct impact on your tax calculations. If you overestimate your profits and don’t calculate all of the expenses for the year, then it means that you are likely overpaying in taxes. Why pay more than necessary? On the other hand, underestimating taxes leads to issues with the IRS and could potentially result in files if you are audited.
  • Categorization Problems: It is important that all expenses and profits are calculated correctly. Claiming deductions that aren’t appropriate for your business could cost you a lot of money in back-taxes and fines when your books are audited by the IRS. Additionally, you need to ensure that all assets are categorized correctly based on income sources and profits.
  • Skipping Reconciliations: Just because you are entering and updating transactions as they are moving through your bank account, doesn’t mean that you are staying current with your bookkeeping systems. It is also important to maintain regular reconciliations, which is a step that is often missed when business owners choose DIY bookkeeping.
  • Misleading Financial Reports: When making big decisions for your company, it is essential that you look at the big picture. How much cash is available to reinvest in the business? How much debt are you carrying at any given time? Accurate bookkeeping reports show a real-time snapshot to give you a clear financial picture of your company. If you are making mistakes or behind with your bookkeeping entries, then these reports will be inaccurate. This misinformation can be dangerous in the way it affects your business cash flow. For example, you might choose to spend money on an unnecessary expense, not realizing that there aren’t sufficient funds to cover the upcoming overhead costs.
  • Higher Risk of Audits: One common mistake with DIY bookkeeping systems is that things don’t add up when the IRS is looking at your tax filings. Missing deadlines or having deductions that don’t make sense could increase the likelihood of an audit. If the IRS sees any red flags, then you could be facing an audit. It’s essential that your books are accurate so you can defend the numbers, otherwise, you could be facing expensive penalties and fees due to the irregularities found in the audit. Working with an experienced accounting team is one of the best things you can do to avoid an audit.
  • Miss Potential Tax Deductions: As a small business owner, you should take advantage of the benefit of maximizing tax deductions whenever possible. If you are spending money on business costs, then those expenses can be factored into the calculations when it is time to pay your taxes. A few missing receipts here and there can add up over the year, resulting in a situation where you are over-paying on your tax bill because you didn’t account for all of the expenses during the year.
  • Late Invoicing: When you complete the work for a client, it is essential to follow-through with a timely invoice. But a poor bookkeeping system makes it hard to keep things straight. If you don’t know which clients have outstanding bills and how much is owed, then it decreases the likelihood that you will be consistent in following through to get the funds that are due. Not only will it take longer for you to get paid, but you are likely missing out on money that should have been received. Too often, invoices are miscalculated or overlooked altogether because of DIY bookkeeping.
  • Late Fees and Overdraft Costs: If you are inconsistent with payments and you don’t pay attention to the account balances, then it is likely that you will run into issues with overdraft penalties and late fees. These small costs can add up to hundreds of dollars each year in avoidable expenses. They cut into your profit margin and also require additional time and effort to correct the problem.
  • Interest Costs and Cashflow Issues: Another way you are overpaying is because of the interest costs that are calculated on balances due. Whether you have a business loan or you use a credit card for business costs, the interest can add up over time. While it can make sense to use credit for building your business, don’t let poor cash flow habits make it difficult for you to pay off the money that is owed. Having an effective bookkeeping system gives you the benefit of staying ahead of the payments, which can help to reduce interest costs over time.
  • Payroll Errors: It’s no surprise that payroll errors result in employee dissatisfaction. Sometimes, DIY bookkeeping can cause delayed paycheck delivery or miscalculations that need to be fixed. Your employees will be unhappy if they aren’t being paid enough. At the same time, it costs your company money if you need to recalculate the paychecks and fix the errors. Additionally, you could be overpaying if the payroll calculations are too high.
  • Investors and Loans: When you are ready to take your business efforts to the next level, you need to have access to money through business loans or private investors. The problem is that a poor bookkeeping system doesn’t look good in the loan application process. Inaccurate financial records show your business in the wrong light, which will have a negative impact on your ability to get the financing that is needed.

Add up the costs listed above, and it is likely that you are losing out on thousands of dollars every year by choosing a DIY approach for your bookkeeping systems. When you consider the cost of investing in bookkeeping and accounting services, you will see that it is well worth the cost of these professional services.

Avoid Expensive Problems

The bottom line: DIY bookkeeping can be both time-consuming and expensive. If you don’t have the right system in place, then it will likely cost you a lot of money in the future to fix the problems and implement an effective bookkeeping system.

The best solution is to hire professional services right away. The sooner you start working with a bookkeeping and accounting team, the better success you will have with your financial tracking and recordkeeping. Get the right system in place so your business is ready for growth and expansion when the timing is right.

At Easier Accounting, we specialize in small business bookkeeping. Our team is here to assist with the financial details of your company so that you can focus on other tasks to help your business grow. Whether you need assistance with payroll, tax advice, or general bookkeeping services, we are here to help. Call us today to discuss the available services: (888) 620-0770.

New W4: What You Need to Know about the Changes in 2020

Many tax forms stay the same from one year to the next, which makes it simple for keeping track of necessary paperwork for your employees and contract workers. But there are times when the IRS updates the forms and/or tax laws, and it is essential that you maintain compliance with these changes as needed. This year, a new W4 form was released, with updated information that needs to be gathered from all employees.

As an employer, what do you need to know about this new form? Some of the information is similar to previous versions of the W4, but there are unique changes that every employer needs to know about. Here is an overview of what you need to know about the W4 changes:

Release of the New W4 Form

The latest version of the W4 form was released on December 4, 2019. This new document went into effect on January 1, 2020. These changes were proposed in 2017 through the Tax Cuts and Jobs Act, but the IRS needed time to finalize the new form and prepare it for implementation.

This update has been a long-time coming. The last time significant changes were made to the W4 form was in the 1980s. The goal of this update is to simplify the form, making it easier for both employees and employers. Instead of filling out complicated tax worksheets, employees now answer straightforward questions.

Every employee needs to have a completed W4 form on file with your company. The problem with the previous form was that many people thought it was complicated to list personal information for accurate tax withholdings. Now, the form is designed with simple worksheets and clear questions, helping individuals with more accuracy in the calculations of their federal withholding.

Most Significant Change: Allowances No Longer Assist

Multiple changes were made to Form W4, with the most significant being that there are no longer allowances listed on the withholdings form. Instead, the employee follows a list of steps that walk the person through the details to ensure the right withholdings.

Overview of New W4 Steps

Here is an overview of the steps listed in the new W4 form:

  • Step 1 – Personal Information: The first part of the form remains the same as before. The employee needs to provide identification information, including name, address, and Social Security number. Additionally, the intention for filing needs to be listed: single, married filing jointly, etc.
  • Step 2 – Other Income: One of the biggest changes in the new W4 is a place where other income is accounted for. In this step, the employee should list money earned from other jobs or a spouse’s income. Listing this information ensures the most accurate withholding estimate. An IRS withholding estimator can be used, or there is a Multiple Jobs Worksheet that gives a rougher estimate. This step only needs to be completed if an employee has more than one job or another source of income in the household from their spouse. If the employee only has one job or is married and filing separately, then Step #2 can be skipped.
  • Step 3 – Dependents: Next, tax credits are calculated based on claiming dependents. In the past, this information was called “allowances,” now they are “tax credits.” The current rates for claiming dependents are based on the filer’s income. If a person earns $200,000 or less (or married filing jointly with an income of $400,000 or less), then a tax credit of $2,000 per child is offered for dependents younger than 17. $500 per dependent is available for other people 18 and older, including an older parent in the household. These tax credits are phased out for filers who earn more than the income thresholds listed above.
  • Step 4 – Misc Income Sources: Step #2 determined whether the employee has other sources of household income that needs to be considered. Step 4 is used to calculate other sources of income that are not related to a job. Examples of income that fall in this category include dividends, interest, and/or retirement income. Additionally, other deductions are listed here if the filer chooses to not take the standard deduction. This step is not required, but it provides the filer with more accuracy in their withholding amount. In this section, employees have the option to enter extra withholding if desired, indicating the additional amount that should be taken out of their paychecks.
  • Step 5 – Signature: Finally, the form is not valid without an employee signature in step 5. A date must be placed by the signature as well.

Note: If the employee will be claiming exemption on their taxes, then they should fill out step 1, write the word “Exempt” in Section 4(c), then sign in step 5.

Who Needs to Fill Out the New W4 Form?

Every employee needs to have a current W4 form on file with employers. This information is used by the employer in calculating withholdings and paying the appropriate taxes to the IRS. It has been used for decades to determine the right amount of federal income tax withholding, which is a calculation that varies from one person to the next.

Any employee starting a new job on or after January 1, 2020, must fill out the new Form W4. As an employer, it is your responsibility to ensure that you are using the correct form as new employees are onboarded into your payroll system.

If you have current employees with the old W4 form, it is not necessary to make them fill out the updated form. But it might be a good thing for current employees to update their forms as desired. It is recommended that employers do a “payment checkup.” It can be beneficial for employees to review the withholdings to ensure accuracy at all times.

Additionally, employees should fill out a new tax form when a major life change is experienced. For example, a marriage, divorce, or new baby changes the number of tax credits that can be claimed.

Why Accuracy is Important with Tax Withholdings

Accurate calculations for tax withholdings are important to dial in the amount that will be owed for the income received each year. Withholding too little will result in the need for the filer to pay a tax bill when it is time to file for the year. In some cases, penalties could be incurred, which increases the overall amount that needs to be paid.

The best way to avoid these big tax bills and potential penalties is by increasing the withholding amount if multiple incomes are in the household. For example, employees often choose to increase withholdings when they have more than one job or a spouse who is working as well.

On the other hand, withholdings should be decreased based on if additional tax credits will be applied to the calculations. Certain deductions can reduce a person’s liability for the year, such as deducting student loan interest.

The IRS has an online tax withholding estimator that can be used to walk employee’s through all of the important details. Withholding too much means that the filer is giving the government an interest-free loan. While it’s nice to get money back in the form of a tax refund, it’s better to avoid loaning money to the IRS for no reason. The goal with the estimator is to dial in the right amount to get as close to zero as possible on tax filing calculations.

Employer vs. Employee Responsibility

These W4 changes have the biggest impact on employees because they hold the responsibility for determining the right amount that needs to be withheld. As an employer, you hold the responsibility for providing the correct form and ensuring that you have a W4 for each employee. Then, the information on the W4 form is used for payroll calculations to determine the amount you need to be withholding from each paycheck.

It is important that you are familiar with these changes. It is likely that employees will ask questions about filling out the forms, especially when they see a different W4 than what they have seen in the past. As an employer, you shouldn’t be offering advice about the information that should be submitted on the form – the employee should talk to an accountant for personal recommendations. But you can offer general recommendations regarding the structure of the form and how it will affect the withholdings from the employee’s paychecks.

Professional Payroll Advice and Services

Keeping up with changing tax laws and different tax forms can be a challenge! As a small business owner, you shouldn’t be spending your valuable time calculating payroll withholdings. Instead, let an experienced bookkeeping and accounting team handle the details – freeing up your time to focus on other responsibilities within your company.

If you have questions about the new W4 form or need assistance with anything else related to bookkeeping and accounting, then our team is here to assist. We specialize in small business accounting services, with personalized service packages to meet your unique needs. Call us at Easier Accounting: (888) 620-0770.

What are the Differences Between Employees and Independent Contractors?

When you need additional workers for your business, you have the option to choose between hiring employees or engaging the services of independent contractors. Even though the services might seem similar, there are distinct differences that need to be addressed in the way each worker engages with your company. It is important that you consider your overall goals for the hire, as well as the way you want to be engaging with the worker.

In this article, we are going to talk about the differences between employees and independent contractors. Additionally, you can review the pros and cons of different classifications, to determine the structure that will work best for your business.

Examining the Relationship Between the Business and the Worker

What is the relationship that will be formed between your company and the worker? This relationship is the determining factor that shapes how the person should be paid. The IRS has specific guidelines and rules that need to be followed to ensure that you are using the right classification and payment structure for each person.

As a general rule of thumb, a person is classified as a contractor if the employer doesn’t have any say or control over what is done and how it is done. Instead, the business hires the contractor for specific deliverables that need to be met. The working relationship is only based on the result of the work, not the specifics of the day-in-day-out activities that are performed.

Here are a few considerations to help you determine if the worker is an employee or contractor:

  • Management: When an employer-employee relationship is formed, the business can control and direct the work that is performed by the worker. This includes instructions that are provided regarding when the work is completed and where the person can work. On the other hand, a contractor completes the deliverables with less management and control from the business.
  • Training: Usually, independent contractors leverage their own methods for the completion of the work, without specific training or guidance from the business. If the worker receives periodic or ongoing training about skills or task completion, then they likely fall within the category of employee.
  • Equipment: Contractors are responsible for supplying their own equipment, including computers, phones, office supplies, furniture, office space, and more. On the other hand, employees are provided all of the tools and equipment needed to complete the job. It is more common for contractors to incur unreimbursed expenses.
  • Profit or Loss: Employees are paid based on an hourly or salary structure, which means that they do not carry the risk of profit or loss. An independent contractor could be facing the potential of losses or profits, depending on the cost of supplies and the amount of time that is dedicated to the project.
  • Payment Structure: When someone is working as an employee, they are guaranteed a specific wage for the time that is worked. Paychecks are calculated based on hourly or weekly employment engagements. Most often, contractors are paid a flat fee for the work that is completed.
  • Benefits: Employees can receive benefits in addition to wages. Common benefits include insurance, paid time off (vacation and sick days), retirement contributions, and more. Independent contractors are provided payment only without benefits.
  • Length of Time: What is the permanency of the working relationship? If the person is offered work indefinitely, then it likely falls within an employee classification. On the other hand, contractors are often hired for a specific period or project without an indefinite promise of work.

Paying Your Workers

Worker classification matters because it determines how you will pay the person and whether you need to withhold taxes for income, Medicare, Social Security, and unemployment. When a person falls in the category of employee, then the employer is required to withhold the applicable taxes. Additionally, appropriate paperwork and timely tax payments need to be completed according to the deadlines set by the IRS.

On the other hand, your business is not responsible for the tax withholdings for independent contractors. Payments are made in full for the services provided. Then, the person receiving the earnings is responsible for taxation in their own filings and paperwork.

Be Careful to Avoid Misclassification

It is easy to get confused about the differences between an employee and a contractor. As an employer, it is your responsibility to stay current on these classification differences and ensure that you are handling payment structures correctly. The IRS has tests that can be used to determine a person’s working status.

The IRS has serious consequences for employers who hire workers as contractors but treat them as employees. You can’t choose a contractor classification for the sole purpose of avoiding employment taxes. If you choose to hire a freelancer or contractor, then you need to be sure the person is treated as such.

Sometimes, the agreement starts with clear expectations and structure – then it begins to shift over time. For example, the contractor might have flexibility in work times and how the work is managed in the beginning. Then, the expectations are changed as the employer increases demands regarding the management of the project. If the working relationship shifts into the category of an employee instead of a contractor, then you need to change the payment structure to match.

Differences in the Management of Employees and Contractors

The business relationship should differ depending on the classification of the worker. Here are some of the most notable differences:

  • Employment Laws: Contractors aren’t protected under labor and employment laws. But employees have certain workplace protections under these laws.
  • Hiring Process: When hiring an employee, the person submits an application and resume to the Human Resources department and goes through an interview process. When a job is offered, the new employee must provide details about citizenship status, date of birth, and marital status. On the other hand, a contractor works directly with the person overseeing the project. A proposal is submitted, then a contract is created based on the scope of work that will be completed.
  • Payment Timing: Employees are paid based on the payroll schedule, usually weekly, biweekly, or monthly. Employment laws require that payroll checks are distributed based on the agreed payment timeline. In comparison, contractors provide an invoice to the Accounts Payable department for the work completed. The terms of the contractor dictate the payment timelines and the amount that is distributed.
  • Payment Calculations: Employees are paid based on salary or hourly earnings. Contractors typically have a flat-fee agreement that is calculated based on the work that is performed.
  • Tax Reporting: Certain withholding and reporting activities need to occur for employees, as listed earlier in this article. Employers are responsible for both state and federal unemployment filings and payments. In a contractor relationship, the business is not responsible for these reporting activities.
  • Tax Documents: Employee income is reported on a W2 Form, while contractor payments are reported on a 1099 Form.

Which is Better: Contractor or Employee?

When you need more help in your company, it is better for you to hire a contractor or employee? This decision should be determined based on your overarching goals and the specific needs that will be filled.

For example, if you are looking for ongoing help and need assistance 20 to 40 hours a week, then it is likely that the worker classification will fall into the category of employee. On the other hand, if you need assistance with certain tasks and don’t require to have someone in the office at specific times during the day, then this business relationship will likely fall in the category of a contractor.

The benefit of hiring an employee is the opportunity to manage when, where, and how the job duties are completed. There are times when it makes sense to have a worker on-site for specific needs.

At the same time, there are benefits to hiring a contractor instead of an employee. One of the main benefits is the reduction in overall expenses for the work that is provided. The company doesn’t need to carry the burden of overhead costs for equipment, office space, and benefits.

Additionally, the agreement for an independent contractor can be structured for a short-term engagement. You might choose to bring these services onto the team during the busy season or for specific projects that need to be completed. This agreement can save money compared to paying the fully-burdened costs of bringing on another full-time employee.

Questions about Payroll or Contractor Payments?

If you have questions about the right way to structure the classification with your workers, then it is best to talk to an experienced team that can offer guidance along the way. At Easier Accounting, we offer much more than basic tax preparation services. Our accounting team is here to provide recommendations and implementation for payroll processing, invoice management, financial systems, and more. We partner with our clients throughout the year to ensure optimal accounting services that support the unique needs of each company.

For more information about these quality services, contact us at Easier Accounting: (888) 620-0770.

January Accounting To-Do List for Small Businesses

Staying ahead of essential accounting and bookkeeping tasks is a never-ending process for a small business owner. As each year comes to an end and the new year begins, it is a good opportunity to evaluate the financial details for your company. Not only do you need to look at the numbers that will affect your success going forward, but there are essential tax deadlines that need to be met in the next few weeks.

January Tax Deadlines for Small Businesses

Every year, businesses have a few to-do items that need to be done by the end of January. These forms need to be completed and filed or as required by the IRS:

  • W2 Forms for Employees: When you have employees on payroll, you are legally required to provide every person with copies of form W2 (Wage and Tax Statement). Not only does this form need to reflect wages that were paid in 2019, but it should also show the total value of special gifts or accrued bonuses.
  • W3 Form for the Social Security Administration: Additionally, a form W3 needs to be submitted to the Social Security Administration, outlining the wages, tips, and other compensation employees received. The data on Form W3 should match up to the total numbers on the distributed W2 Forms.
  • Form 1099 Misc Income: If you paid any contract workers, freelancers, or service providers more than $599 in 2019, then they need to be provided with a copy of Form 1099 Miscellaneous Income.
  • Form 1096 Summary: Additionally, the information on distributed 1099 Misc Forms needs to be summarized on Form 1096 (Annual Summary and Transmittal of U.S. Information Returns). This document is filed with the IRS to report non-employee compensation. This form isn’t due until February 28. But it’s worth mentioning here with the January deadlines since it relates to the 1099 forms that are distributed. Many businesses find that it is convenient to complete this form and send it at the same time as the 1099 Misc documents.

Forms W2 and W3

When payments and wages total $600 or more in a calendar year, then you are required to provide a Form W2 or 1099 Misc to the employee or contractor. Even if the individual is no longer working for your company, it is still necessary to send the form with applicable income information.

The worker classification (employee or contractor) depends on the relationship they had with the company. For example, if the person was on payroll and your business deducted income taxes, Medicare, FICA, or Social Security taxes, then these numbers need to be reflected on Form W2 and provided to the individual by January 31st. Multiple copies of Form W2 should be created:

  • Copy A is sent to the IRS
  • Copies B & C are provided to the employee (or former employee)

You also must keep a copy for your business records. This information is summarized on Form W3 and provided to the IRS. Form W3 lists the number of W2s that were distributed, as well as total numbers paid and withheld during the calendar year. Form W3 is submitted along with the copies of W2s.

Form 1099 MISC

Non-employees receive payments, but you are not required to withhold taxes. The individual or service provider holds the responsibility of calculating and paying applicable taxes, including estimated tax payments, Social security, Medicare, and FICA. As a business owner, you are required to report taxable income on this document, then the totals from all W3s need to be summarized in your 1096 Summary submission.

Each employer is responsible for managing the classification of employee vs. contractor. For example, employees and contractors can provide similar work – but there are clear legal differences that classify the relationship with the worker. Some companies choose to maintain contractor relationships instead of hiring employees. As a result, the employer doesn’t have the overhead costs of withholding calculations, employee taxes, and more.

If you choose to pay a provider as a contractor, certain qualifications must be met:

  • You don’t control what the worker does or how the job gets done
  • Business aspects of the position are not managed by the company, such as supplies, equipment, expense reimbursement, dedicated office space, etc.
  • Benefits are not provided, including vacation pay, insurance benefits, or retirement
  • This relationship may be a short-term agreement, based on the contract determined for the work that needs to be completed

For more information about employee vs. contractor classifications and payments, you can view the distinguishing details on the IRS website.

Other Upcoming Deadlines for Small Businesses

  • Estimated Tax Payment: The schedule for estimated tax payments (1040ES) falls with one of the quarterly payment deadlines in January. By January 15th, you should have paid the amount that your accountant listed on the payment voucher. This estimated payment is applied to your overall tax calculations, with all of the details of the year being calculated before the tax date coming up on April 15th.
  • Employment Taxes: Review the due dates for employment taxes this year. Make sure that your calendar is marked so that you don’t overlook any of these important deadlines. Follow the applicable deposit due dates to ensure you are keeping up with the requirements set by the IRS. Your schedule is determined by the tax liability reported on Form 941. Keep in mind that the schedules for depositing taxes and reporting taxes are different. Your small business accountant can provide guidelines and support to determine the right deposit and reporting schedules based on the unique needs of your company.

Why Payroll Compliance Matters

Why does it matter if you submit all of these payment forms on time? It’s easy for the paperwork to get lost in the shuffle because other business responsibilities take priority. Keep in mind that the IRS has strict guidelines for deadlines and payment structures, and every business owner needs to maintain the responsibility of abiding by these guidelines.

For example, failing to distribute W2 Forms by January 31st means that you could be facing fees and penalties from the IRS. It is considered a federal violation to miss these deadlines. Additionally, you need to consider how the failure to distribute the forms will impact employees. Each person needs their income details to complete their tax filing for the year. The W2 form is one document that will be required when the person is completing and submitting their annual income tax forms.

In order for the tax forms to be completed “on-time,” they need to be delivered or postmarked by the applicable due date. For example, if the tax forms are due by January 31st, then the postmark date should be on or before January 31st.

Don’t Wait Until the Last Minute

Just because a deadline is a few weeks away, doesn’t mean that you should wait until the last minute to complete the necessary accounting preparations. Being proactive gives you the advantage of completing these documents with plenty of time to spare. Not only do you have sufficient time to ensure the accuracy of the calculations, but you also have a buffer in case something goes wrong and you need a bit of time to correct the issues.

Additionally, consider the benefit you can enjoy due to lower stress levels. It can be a nail-biting experience if you wait until the last day to complete the necessary tax forms. It’s not worth the stress to delay these to-do list items until the last minute.

Finally, preparing ahead of time gives you the option to hire an accounting team to assist with the calculations and preparation of all tax forms. As a busy business owner, you are already carrying a lot of responsibility to oversee the day-to-day functions of the company. Let a professional team take care of the paperwork so that you can keep your focus on other tasks that matter. January doesn’t have to be a busy month when you engage the services of an experienced outsourced accounting team for assistance.

Looking Ahead for the Rest of the Year

Once these deadlines are met, and the tax forms are done, don’t be fooled into thinking that you are off the hook for the rest of the year. Financial planning and tax strategy should be an ongoing process to optimize your systems, increase profits, and minimize overhead expenses. One of the best investments you can make for your company is to leverage the services offered through an experienced small business accountant.

Our team is here to assist with report generation, data analysis, and other financial strategies that can improve your results in 2020. Whether you need assistance with the preparation and filing of W2 and 1099 Misc forms, or you are looking for a long-term accounting strategy, we invite you to call us to learn more about available services.

At Easier Accounting, our specialty is small business accounting. We understand the unique challenges that need to be addressed for startups and small businesses in a variety of industries. We’d love to assist with your financial system this year. For more information, you can contact us for a consultation: (888) 620-0770.

10 Business Tax Deductions You Should Be Leveraging

Tax Day is still a few months away, but you shouldn’t wait until it’s time to file your taxes before thinking about the deductions that can be used for your business. Are you leveraging the business expenses correctly to take advantage of the available write-offs? One of the benefits of having a small business is that you can deduct certain expenses that are necessary for your business efforts. It can be hard to keep up with all these transactions, which is why you might consider leveraging the services of an outsourced accountant for assistance.

How Tax Deductions Work

A tax deduction, also commonly known as a business write-off, is particularly useful for small business owners and anyone self-employed. Whether you have a small side-gig at home or you are working full-time on a start-up, you can manage your tax burden by deducting expenses that are spent on business costs. Even if you are a W-2 worker and earn income from an employer, you can still write off any expenses related to business efforts outside of your employment.

This process lowers the income on paper, showing a reduced taxable income when it is time to file your taxes. As a simple example, if you collect $100,000 in a given year through the business, but you spent $20,000 on business expenses, then your taxable income for the year would be $80,000.

The IRS has a detailed tax code, which includes allowances for small business owners and self-employed workers to write-off business costs. If you are spending money that is required for your business, then it can likely be listed as a write-off. The best way to ensure that you are following the rules is by hiring an experienced tax accountant for tax preparation and filing. For example, an outsourced accountant will help you in determining the expenses that qualify as tax deductions. The goal is to maximize the write-offs as much as possible, while staying within the guidelines set by the IRS.

IRS Guidelines for Business Write-Offs

The IRS allows deductions for anything that can be categorized as a “reasonable business expense.” A few specific guidelines are in place to help you determine if your expense can qualify as a deduction:

  • The cost is related to your business directly
  • The expense is necessary and ordinary
  • The amount spent is reasonable

Examples of Tax Deductions for Your Business

Here are some of the most common tax deductions that are used by small business owners:

  1. Health Insurance Premium: Most people who are self-employed need to pay for private health insurance. Since you don’t have an employer to provide health care support, you can write off a portion of your insurance premiums.
  2. Vehicle Mileage: Track your miles throughout the year because a per-mile deduction can be used on your taxes. These driving miles need to be related to your business. For example, if you drive to the bank or you are driving to meet a client, then those miles can be included on your log for the year. Your commute to and from work does not count as deductible mileage.
  3. Home Office: Do you work from home? A portion of your rent/mortgage, utilities, and more can be written off as tax deductions. It is important that you have a dedicated space for business activities. Additionally, it needs to be the primary place where your business is operated. Then, this square footage can be calculated based on the overall size of your home and the associated monthly expenses.
  4. Professional Fees: Hiring an accountant or lawyer for assistance with your business can be a tax write-off. Any legal or professional fees that are paid for business purposes fall into this category. For example, if you hire an accountant to assist with tax preparation, then the cost of the accounting services can be included in your list of expenses for the year.
  5. Retirement Savings: Self-employment tax deductions can be used if you contribute money into a retirement savings account. The numbers vary from year to year, so the best solution is to work with your accountant and a financial advisor to determine the amount that can be deducted. Your financial team can also provide guidance regarding the most effective way to invest this money. Options include 401(k)s and IRAs.
  6. Startup Costs: Getting a business off the ground can be expensive. Not only are you putting money into product development, hiring employees, and office supplies, but the marketing and initial costs can add up over time. Keep track of all of these expenses so you can use them as tax write-offs.
  7. Bad Debt: Do you have uncollected money from customers? When accounts receivable turns into bad business debt, then it can be used as a tax deduction. In this situation, you need to have documentation proving that you took reasonable steps to collect on the invoice.
  8. Travel and Food: When you are taking a business-related trip, keep track of the expenses incurred for airline tickets, car rental, taxis, hotel fees, and more. You can’t write off personal vacations that aren’t related to business. But there are times when you can travel for business to leverage the write-offs, while still having a bit of time for entertainment or personal activities.
  9. Charitable Donations: Donating to a charity of your choice is a great way to feel good about giving back to the community. Additionally, these donations can be used as tax deductions as well. The rules change depending on the type of donation, the recipient, and the amount that is donated, so talk to your accountant for more information.
  10. Continuing Education: Most business owners need to continue learning to stay relevant in the industry. If you pay for work-related education, then those costs can be used as tax deductions. Examples include tuition, lab fees, books, supplies, transportation to the classes, and any other expenses related to your participation in the classes. For these expenses to qualify, the classes need to “maintain or improve skills needed in your present work.”

Tips to Maximize Your Tax Write-Offs

As you can see, there are many ways you can increase your tax deductions each year. But it takes work and organization to ensure that you are taking the write-offs your business is entitled to. Taking as many deductions as possible can help to lower your taxable income, which in turn reduces the amount that you will be paying in taxes each year.

Are you leveraging the write-offs for your business? Here are a few tips to follow so that you get the best results possible with your tax deductions:

  • Good Bookkeeping System: It is essential that you are keeping track of all of your business costs. In order to utilize the deductions, you need to know where the money is going. Use a bookkeeping and accounting system to record every transaction that moves through your bank accounts and credit cards. You need to have specific details about the amount of money that was spent, how it was spent, as well as documentation to back up the spending. The IRS won’t accept estimates, and you might need to verify the write-offs if you are audited in the future.
  • Check the Requirements: Talk to your accountant about specific requirements that need to be met for the deductions. For example, you should keep copies of the receipts when purchases are made. You can file these paper copies in a folder for each year. Or, consider a digital system with scans or photographs of the receipts for easy reference. Other requirements include logs or tracking information, such as a mileage log that records the odometer, purpose of the driving, and the number of miles traveled. This documentation does not need to be filed with your tax return, but you need to have it available in case there are questions about your filings in the future.
  • Simplify and Outsource: You can spend your time filing receipts and recording the transactions, but these busy-work activities are a waste of time when you can hire an outsourced accounting team to help. As a busy business owner, you shouldn’t be spending your limited hours on tasks that can be handed off to the experts. Instead, focus on your strengths and skills, and let the pros handle the number crunching and reporting for you. Outsourced bookkeeping and accounting allow you to focus on your business without getting behind on the never-ending paperwork and admin tasks.

When it is time to file your tax return, your accountant will help you claim the write-offs in the correct Schedule C section of your 1040. As this information is compiled, make sure you have open communication with your accountant regarding the rules around the deductions you are planning to take. An experienced tax accountant can provide valuable advice to help you avoid problems with the IRS in the future.

Easier Accounting is Here to Help

Are you ready to maximize your tax deductions for your upcoming tax filing? Our team at Easier Accounting is here to assist. Not only can we help with your current tax prep, but we can also create a system to ensure that you aren’t overlooking important deductions in the future. Call to learn more about available accounting services: (888) 620-0770.