MUSTS for Accounting Software

So you have made the decision to purchase accounting software for your small business.  Congratulations!  That means you’re becoming successful enough to make such an investment and counting on future success.  You want to get on top of organizing your finances so your business has room to grow.  Now, where to begin when choosing WHICH software option is right for you.  The top two priorities when deciding which software is right for you are ease of use, and time savings.  This can encompass different things for different businesses, so here are a few guidelines when considering which software options to purchase.

1.  Basic Accounting Functions

Tasks like invoicing are essential, basic functions to bring money into your business.  Most businesses need an interface to create invoices either through email or by post.  Being able to tally income and track expenses as well as generating reports based on that information is valuable to your company and helps you make more informed decisions.  Another basic, but key function would be client and vendor administration.  Being able to pull up the histories between you and your clients with a click of a button means ease of use and less filing cabinets.

2.  Automation

If your calendar isn’t flooded with day to day tasks and making personal calls to your clients is something you pride yourself in, automation might not be a necessity.  However, if you have multiple projects happening at once, automation of invoicing, late notices, recurring payments, deposits, etc. is a godsend.  Keep your credit on track by paying your bills automatically.  Knowing when to cut off services by keeping track of who hasn’t paid yet can be a money and time saver.  Automation is essential to time-management for any business.

3.  Tax Preparation

This feature makes you and your accountant’s life WAY easier at the end of the year.  You can automate tax calculations at different tax rates and easily transfer data to your accountant.  Having an expense report, or any large purchase deductions at the ready equals time savings not tallying up your shoebox of receipts at the end of the year.

These are the major three you want to consider when making an accounting software purchase.  Lots of programs offer free trials, so you have a chance to try out the interface.  If your business has already blossomed, there are a few more features to assess.

4.  Quotes and Estimates

Some software allows you to generate templates on which to create quotes for potential clients, then automatically convert them to invoices.

5.  Payroll Processing

Calculating time sheets is time consuming.  With a payroll processing feature you can calculate hours, rate of pay and print checks.

6.  Third-party and mobile input.

If you want to be able to access and input data from anywhere you are, this is an important feature.  Automatically input data from your phone using a mobile version of your software or integrating a third party app such as a mileage tracker or device such as a POS system.

There are multiple solutions for your business accounting needs, the trick is finding the option that works for you.  Remember, its all about ease of use and time saving.  The software with the most bells and whistles can sometimes take up more of your time figuring out.  Pick the software within the scope of your business and it is likely to be as straighfoward as you.

New At Being Self Employed? Be Aware of Self-Employment Taxes

Did you just start your own business or become self-employed? First things first, I think congratulations is in order! However, there are many things to consider when you’re working for your self, one of them is of course taxes and more specifically self-employment tax. For those new to this concept there are a few things that you need to know, self-employment tax has been put in place to cover social security and medicare totaling 15.4% of your income earned for 2014. For previous years, the rate varies. Anyone who makes under $177,00 will pay this tax, however if your earning over that amount you’ll have to pay an additional .09% medicare tax on income earned. 

Something else to consider:

"You can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your self-employment tax." (From the IRS.gov website) 

Anyone earning over $400 must file for self employment tax unless you’re a Church Employee, in that case you must file if you earned over $108.28.

So you have set aside every month, or quarter, an amount that equals in what you owe in Self-Employment taxes, what do you do next? You'll need form 1040-ES in order to complete this process. 

No one said that being self-employed was easy but these are some of the things you need to be aware of when filing and preparing your taxes for this and next season.

For complete information about self-employment tax please visit the IRS.gov website by clicking here

Taking The Leap To Accounting Software

     Nobody likes doing homework.  You’re a small business owner and you’re passionate about what you do, but sitting down with a giant ledger, a pencil (with eraser) and a calculator at the end of the day feels like the homework that you hated doing back in your school days.  Unfortunately, it is a necessary evil all small business owners must suffer for the financial health of their growing business.  This is where modern technology comes in to save the day!  There are lots of software options out there to help free up your time and make the tedium of recording expenses and creating reports a little more bearable.  Choosing the right software can be a crucial step for your business, and will even help make tax time a little easier.

 

     First and foremost, is investing in accounting software right for you?  If you’re one of the few people who find zen in numbers, maybe a handwritten ledger is enough for you.  If crunching numbers isn’t your forte, but you’re still on the fence about making that investment, here are a few things to consider.

     If you’re just starting out, investing in accounting software from the jump is a great idea.  Not only will you have a sophisticated accounting method in place from the beginning, but the tool you have just invested in is already counting on the future success and growth of your business.  It is way easier to start with efficient accounting practices than try to incorporate them down the line.  The object is to see your numbers grow, and accounting software will help you track, streamline, and invest smartly.

     If your business is expanding, don’t wait to get overwhelmed by your growing numbers.  Tackle your accounting issues with software and automated reports, this will save the day.  Using accounting software for your growing business will save you tons of time and can accommodate any amount of expansion your business is taking on.  You’ll be able to see more easily where you’re money is going, what areas need more growth, and areas where you could save a little.

     If you’re into instant gratification, well, more like instant access to data.  Having accounting software can give you on-demand access to customer information such as client and vendor contact information and their purchase history.  You can also link accounts and credit cards so purchases you make will immediately get recorded.  If you’re utilizing any third party solutions, such as POS systems, data will immediately be updated by your accounting software.  Streamlining your business operations will contribute to its success.

     Finally, if you want to make sure you’re operating under laws and regulations.  Keeping a ledger by hand can not ensure you’re following all the accounting principles or tax law guidelines.  Accounting software can do all of that legwork for you and save you the headache.  Especially at the end of the year when you’re worried about tax season, having everything organized and in compliance with regulation is a huge time saver.

     Ultimately investing in accounting software is investing in yourself and your success.  Having a advanced accounting system set up for your business can help you track its financial health faster, easier and more efficiently.  Not only will it help you file taxes at the end of the year, but you can write it off as a business expense.  Its a win/win all around.

The Risks of Missing Tax Deadlines

Haven’t done your taxes yet? You’re not the only one, but what happens if you miss a tax deadline? Do you go to jail? Even though the IRS can be one of the scarier branches of the government, it doesn’t work quite like that and there is some flexibility on how and when you file. 

Can’t make the deadline because of an extreme circumstance? You can file an extension to file your taxes later on, however you need to pay at least 90% of your tax bill before April 16th, otherwise you will be hit with a late payment penalty. In other words, you still need to calculate how much you owe in taxes even when you file a tax extension. 

Filing a tax extension doesn’t necessarily mean you get a free pass to not pay them until you feel like it, like I said before, you need to pay the majority of it off before April 16th or you’ll start accruing interest charges. What you owe will accrue interest, starting at .5% of your bill the first day that you’re late. Also, there will be a 3% compounding interest fee on the unpaid balance. 

So let’s say you don’t file you taxes and you don’t file an extension, you could be facing a penalty of 5% to 25% of your tax bill. If you wait more than 60 days you’ll be charged $135 or 100% of the taxes you owe, whichever is less. This only applies when you owe money, if you don’t you don’t get a penalty at all but this should not serve as encouragement to miss deadlines because if you wait too long you may not qualify for a refund at all, more on that later. 

People who do file their taxes but didn’t pay for them by the deadline also get penalized but not quite as harshly as those who have missed these deadlines. The percentage added on is .25% for outstanding balances as long as you have a payment agreement in place which can cost anywhere between $52-$105 to apply for. 

What happens when you don’t file or pay taxes? This is the LAST scenario that you want to be in but if this ends up happening to you the IRS will take control of the situation. They'll calculate what you owe and you’ll have all of the fees mentioned above for not filing and not paying on time. If the government owes you taxes and you have waited more than three years, you won’t get your money back so time is always of the essence when dealing with the IRS. In very extreme situations you may qualify for a Offer in Compromise which is basically a reduced tax bill, but you have to prove that you are going through extreme financial hardship to qualify.

When you can’t come to an agreement with the IRS they can actually levy a federal tax lien on your finances which can mess up your credit in more ways than one. You don’t want to be in this situation EVER because this means they could take the taxes that you owe from your Bank Account, Retirement, Social Security and even your wages. Being proactive about filing taxes even if you’re filing late is better than getting to this point with the IRS. As an accountant and someone who deals with helping with people with their taxes, I can tell you that you need to be proactive about your taxes rather than just letting it go for a few years and have to deal with garnished wages. 

March Tax Deadlines

For those small corporations, March 16th is an important date to remember.  Here are a couple things you need to have your tax filings up to date for the month of March.

March 16

Form 1120— File and pay a 2014 income calendar year income tax return.  

Form 7004— It is an Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns.  This form give you a 6 month extension to file, make sure you deposit an estimated amount of what you owe.

Form 2553— S Corporation Election.  Its the form small businesses need to elect themselves to be treated as S Corporations beginning in calendar year 2015.  If this form is filed late, treatment as an S corp won’t begin until calendar year 2016.

Form 1120S— S Corporations need to file and pay a 2014 calendar year income tax return.  They also must distribute the schedule K1 (1120S) to each shareholder.

Form 1065B— Electing Large Partnerships.  Provide each partner with a schedule K1 (1065B).  This due date still applies even if the partnership is filing for an extension (Form 7004).

March 31

If you have missed the March 2 deadline, all forms below must be filed electronically by March 31.

1097, 1098, 1099, 3921, 3922, W-2G

See publication 1220 for filing these forms electronically.

Taxes and S-Corps

     S Corporations have been popularized as a way to structure a small business because of the many advantages it once held to avoid certain types of taxes at the end of the year.  The shareholder-employees of a pass-through entity, that defines an S corporation, could once navigate the vague terminology written in the tax law to lessen their payroll tax liability as well as dodge the self-employment tax.  In previous years minimizing one’s compensation in favor of shareholder distributions was considered savvy in order to minimize payroll taxes.  However, in the past few years, tax court precedents have been set that more clearly defines what reasonable compensation means, eliminating the ability to shirk tax liability through the shelter of an S corp business structure.

    An advantage of structuring your business as an S Corporation is not having to pay entity-level tax on the company's taxable income.  Attributes and income are instead distributed among the shareholders.  Those individuals then pay personal income taxes on these reported items.  This sheds light on the tax advantage over sole proprietorships, partnerships and LLCs.  Unallocated shares of the corporation’s income aren’t treated as self-employment income.  The other business structures would be liable for paying self-employment taxes. Employers and employees currently have to split 12.4% social security tax up a certain amount and 2.9% in medicare on all wages, without limitation.  Self-Employed individuals are responsible for the full amount.  S Corporation income is not at risk of the self-employment tax.  There is also great incentive for shareholders to prefer distributions over compensation, as distributions are not held to payroll taxes, either.

     However, no longer can a shareholder-employee evade payroll taxes by eschewing “reasonable” compensation.  Until recently it was left unclear what exactly reasonable meant and there was little guidance in how to prescribe a shareholder-employee’s salary.  Many methods have been used, some avoiding a salary in favor of distributions entirely, others have opted to disguise compensation as independent contractor fees and most popularly, under-compensation.  The IRS is now aware of these liability evading methods and have more clearly set compensation guidelines.

     In three court rulings over the past three years, the IRS has been building road blocks for those S Corporations trying to eschew their tax responsibility in these ways.  In one case, it was ruled that shareholders/employees who provide eminent services for a company may not take distributions in place of compensation.  In another case, a shareholder’s compensation was way below the industry average especially when taking into consideration his years of experience and level of education.  Independent contractor fees have been annexed from creative compensation options as well.  A court did rule, however, against the IRS in one of these claims dealing with S Corporations in which a shareholder took distributions in lieu of salary, but was able to justify it because of his minimal contribution to the company.

  

     Three determining factors in reasonable compensation has come out of these various rulings.  First is the performance of the employee; how much they contribute to the revenue of their business.  It is no mystery why professional fields such as law, accounting and real estate have set these precedents, because company profit is highly based on personal performance.  Salary comparisons within professional fields.  Based on region and firm size, a shareholder/employee should be making within a certain pay scale.  That pay scale can also be determined by company conditions.  If the business has excess capital not being used for expansion or reinvestment, that is a red-flag for the IRS.  Other company’s not in danger of this scrutiny would be where profit is based on capital and assets like in manufacturing and distributing.  In this arena, individual performance does not necessarily effect revenue.

     S corporations still hold their lustre as a tax saving business structure, it is just important to follow these guidelines in determining compensation so as to not raise any red flags.  There are also strategies in avoiding a large tax bill at the end of the year.  To be continued...

     

Recap: Prepping for Taxes Lunch & Learn

The Lunch and Learn yesterday was quite a success.  Some of the topics I went over, ironically one of them being how to pay your accountant less, were met with helpful questions and led to the group discussion “learning” portion of the lunch.  I’d like to go over some of the points I made just to recap and not leave out anyone that couldn’t make it.

How Prepping Can Save You Accountant Fees:

     This seems like a self-defeating point to make, but in fact it’s the opposite.  Most of our workload is done just a few months out of the year and the way you pay me less is by having your documents organized.  By saving me time, it saves you money.  Using expense and mileage apps organizes the information that you need and if you’re averse to technology, go through your shoebox of receipts ahead of time.  Organizing the information you gather from your documented expenses onto a sheet of paper that your accountant can decipher is very helpful.  Save the documents for your records, all an accountant needs is the numbers.

     Another way to save money is to get your documents in as early as you can.  It’s not uncommon for accountants to charge more for their work if you really put them in a time crunch.  This comes in handy in a couple ways, in fact.  Preparing your tax return early doesn’t necessarily mean filing your taxes early.  I recommend waiting until mid to late February to be able to adjust to any amendments that might be issued by then.  Also, it is helpful if you plan on filing for an extension.  You need to have a good estimate of your tax liability before filing for an extension and the best way to make that estimate is by preparing a tax return.

     One more note on organization.  If you’re self-employed, it is important to clearly separate your personal expenses from your business expenses for your accountant.  Again, it is a time saver.  Furthermore, separating your expenses by becoming a corporation or a limited liability company saves your personal finances from being encroached upon if your business is on the hook for any sum of money.  Separating your finances also helps you claim the “reasonable compensation” you’ve paid yourself throughout the year.  The format in which you do so depends on which business structure you choose. 

Planning:

     Plan for the self-employment tax.  If you are a pass-through entity or a sole proprietor, I recommend deciding on a fixed percentage to withhold on your W-4 form to do this, especially if you estimate you’ll have a good business year.  You can reduce your tax liability by keeping accurate records of your work mileage and expenses throughout the year.  If you have a home office, you can reimburse yourself through the company for that space in your home.  Another way to avoid that big bill you’re expecting by making scheduled payments, however, depending on your company’s financial status I don’t necessarily recommend doing it this way.  Less funding is going to the IRS, which means less agents.  I’ve personally known some scheduled tax payments to be lost, so again, I stress: document, document, document!

     Make sure your financial planner and your accountant are in cahoots.  The best way to achieve your financial goals is to make sure these two entities are talking with each other.  It helps your accountant know how to file, how to better spread your finances throughout the year, etc.  These two capacities, while very different, are complimentary to each other and can help you better if they’re working with each other.

Being Selective:

     If you have any more than a W-2 form, I recommend seeking a professional tax-preparer.  However we are not all equal.  Seeking out an Enrolled Agent or a CPA is probably best for your business and tax liability.  While a CPA can represent you in tax court, both enrolled agents and CPAs pass similar standard tests to assess their proficiency.  Other tax preparers who are not held to these standards, simply have to file for a PTIN, a tax preparer identification number, annually in order to do your taxes.  Interview your tax preparer and ask for their qualification and experience.

Thanks to all those that made yesterday’s Lunch and Learn a success!  I enjoyed it.  I’m glad both Pat and I had a chance to share our knowedge with local business owners during tax season.  Hope it helped to get the most out of your return

Tax Time - Last Minute Considerations

When you’re running a business it’s hard to do it all. Filling your taxes in a timely manner can be difficult and if you’re a business owner this is especially true because you typically have a lot on your plate. The problem with waiting until the last minute to file your taxes is that you may miss some things that will work to your advantage. Here are some of the things you want to pay attention to when you’re filing this year:

Free Filing

If you made less that $57k in the past year, you are eligible to use free e-filing software. What’s great about this is that there is little to no out of pocket expense to you and it's typically self-explanatory. You get asked questions about your business and finances, and you fill out the form like you would any other questionnaire. 

Start-Ups

Did you start your business last year? You qualify for a $5k deduction since starting a business is considered a capital expense. This may not apply to everyone but it definitely applies to some, and if you did start a new business last year, congrats! It’s not easy. 

Education

Did you take a class or course to receive training to improve your business? If so, that also qualifies as a deduction. Things like seminars and conventions count too!

Driving

Mileage is one of the easiest deductions for you to qualify for. Whether it’s meeting clients, getting supplies or doing research around town, you can get a deduction for using your own vehicle to run your business. Most business owners have to do this at some point or another, just make sure that you keep track of your miles and maybe even use a helpful app to do it for you!

Working from home

Being your own boss is great, but if you also get to work a lot from home and have a dedicated space just for that, that also qualifies as a deduction. You do have to specify square footage but that shouldn’t take too long to figure out. 

Insurance

There’s no one looking out for you but yourself when you’re self employed, this is why getting health insurance is on you. Not to worry though, IRS knows that this can be a costly expense on someone who has their own business and sometimes either offers assistance or a tax break to ensure you’re healthy enough to run your business. 

Software and subscriptions

Quickbooks, Photoshop, Paypal - if you’re a business owner you may be familiar with some of the these software programs. Most of these require a monthly subscription which can end up costly hundreds of dollars a year, take this as a deduction also because it is considered a business expense.

Hotels and Meals

We never know where work will take us, but we do know that covering these expenses can get costly. That is why saving all your receipts for both meals and hotels is important. Most of these things, as long as they are a business expense, are also deductible. 

Want to know more? Accounting works will be hosting a Lunch & Learn free to members of the Richmond Business Alliance 3.3.2015. Non-members can attend for $10.00. RSVP right here.

Official Event Name: Lunch & Learn - Tax Time Sponsored by Accounting Works & Pat McAleer, CFP®, ADPA® from Kasch, Levitch, McAleer & Associates 

Also, check out our Facebook event here.