New Year’s Resolution - Avoid Accounting Regrets

One thing that I hear a lot from clients is that they don’t really know how to separate their business accounts from their personal accounts. This can make end of the year accounting a pain, not just for your accountant but for your business too.

As a New Year’s resolution you should consider paying yourself a salary if you’re self employed. I know this may sound a little bit weird since the money comes into a business that you own, so it makes sense to just use the money of the business to cover any expenses, right? Well the problem with that is that the IRS does not really see it that way. A business and an individual are two separate entities, this of course depends on how your business is setup but most businesses including LLC’s will benefit from keeping separate finances.

What you may not realize is that this will make it easier for you to track profit and loss. For example, if you’re paying yourself a consistent salary, then you’ll know exactly how much of a profit is left every month from the incoming transactions that a business has. There are many benefits from doing this but a lot of small business owners don’t realize that they should and probably have to do this to run a more efficient business.

On the flip side, if you pay yourself a salary you know how much money you can spend every month and budget accordingly. Business owners face the additional challenges of not having a steady paycheck, this can be especially difficult for those who have grown accustomed to having a job working for someone else. Knowing how much money you are paying your employees from a business stand point is important, and you should consider yourself an employee of your company.

Setting up a salary for yourself should not be so difficult, just look at your bank statements from previous months and approximate how much net income you’ve accrued constantly every month. Make sure to leave some buffer for unexpected expenses but at the same time make sure you’re being compensated fairly to avoid dipping back into the business account.

This New Year, make a resolution of being a better business by avoiding a whole year of accounting regrets, you'll be glad you did come tax season.

Christmas Bonuses and Uncle Sam

Thinking about giving an employee a Christmas bonus? That’s a wonderful idea! However, how will this really affect the way you do taxes this year? 

IRS rules indicated that you’re required to withhold 25%-28% of their total bonus if it’s done separately. If the payment is done with their regular wages, then just withhold the percentage amount that you would regularly withhold from them. This is a very simplified version of the IRS tax law when it comes to bonuses, not only Christmas bonuses. 

One thing to consider is that it is still money being paid to your employee, so no matter what, there needs to be a certain amount of taxes withheld. What you need to take away from is that if you don’t withhold taxes on your employees earnings then that money could be coming out of your company’s pockets and just never good. 

The easiest way to do bonuses may be to pay the bonus alongside with their regular earnings, you don’t have to separate the items as an itemized deduction. This way your employee knows that they are getting a bonus since their pay will be elevated from what it usually is, also understanding that they have to be taxed on it. Doing it separately may come off as a double taxation since they are being taxed separately on the bonus.

For more information about Bonuses and Taxes, refer back to the IRS and their guidelines by visiting the following link.

Merry Christmas to all! 

http://www.irs.gov/publications/p15/ar02.html