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Online Bookkeeping Solutions Blog

The Online Bookkeeping Solutions Blog is an timely collection of interesting and helpful information for those companies who want to outsource their bookkeeping solution and utilize bookkeeping services by subscription. Outsource your bookkeeping to a cloud based solution backed by experienced CPA's.

Understanding Sales Tax

Ray Kirschner - Wednesday, December 21, 2011

Just because you are a business owner does not mean you are a tax expert. But it behooves your overall business if you understand some sales tax basics to ensure your business remains tax compliant — especially since it is the business’s responsibility to collect all sales taxes owed to the government.

Sales tax is defined and applied differently in every state in the country.  Its various forms include:

  • Gross Receipts Tax — levied on all sales of a business
  • Excise Tax — levied on certain goods as alcohol or tobacco products
  • Use Tax — levied on items used within a certain county but bought elsewhere
  • Value Added Tax — levied at each stage of production based on the value added to the product at  that stage

The most common sales tax however is the Retail Sales Tax.  It is generally applied as a separate charge, to a sale, based on a percentage imposed by the city, county, state or sometimes a combination of all three that is tied to the geographic location of the business where the sale is made.

One of the problems this presents is to be sure the rate charged is correct for the locale.  Cities in Cook County, IL are an example of the complications that may arise as there are many layers of Retail Sales Tax rates within the different sections of the county.  Some border cities that cross county lines might have two different tax rates in one city.

Unless they have a physical presence in a state, online retailers are exempt from paying sales taxes. And, not surprisingly, record-breaking Cyber Monday sales this year were 22 percent higher than last year, according to Internet research firm comScore. The rise of online shopping may impact future tax legislation because of the negative impact this has for city revenues everywhere.

Tax rates change from time to time and a business owner should always be aware of the current rate for their location.  January 1st is a day when many rate changes occur.
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How To Run Payroll Schedules In QuickBooks

Ray Kirschner - Wednesday, November 9, 2011

As a business owner you are in the driver’s seat when it comes to setting up the payroll schedule for your employees. You can issue payroll on a weekly, bi-weekly, semi-monthly (ex. the 15th and the 30th), or even on a monthly basis. You can even have different payroll schedules for different employees (ex. salaried v. hourly employees). But it will be important to your employees to know when to expect their paycheck, and to receive it on time. Fortunately, with QuickBooks payroll schedules, this is easy to execute.

If in fact your employees are paid at different intervals, or if some are paid via direct deposit while others receive physical checks, you can streamline the need to classify each employee’s pay date and/or method by creating different payroll schedules and assigning the appropriate employees to the appropriate schedule type. How do you do this? Just follow these simple steps in QuickBooks.

  1. Go to the Home page, and click the “Pay Employees” icon. The Enter Payroll Information window opens, allowing you can to set up the pay period, check date, and which employees to pay.
  2. Select “Employees | Add Or Edit Payroll Schedules.” When the Payroll Schedule List window opens, create a new payroll schedule, and give it a name. Make sure to use descriptive names, so you know what each payroll schedule stands for. For example, maybe you name one schedule “bi-weekly, direct deposit employees”
  3. Proceed to fill in the rest of requested information for this payroll schedule, including: pay period frequency, the next pay period end date, and the next paycheck date.

Keep in mind that for tax purposes, the paycheck date is all that will be relevant. Your 941/W-2 forms use only the paycheck dates. The rest of the information in your payroll schedules is for your convenience in facilitating payroll operations.
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Choosing a Calendar or a Fiscal Year

Ray Kirschner - Wednesday, July 13, 2011

Something worth thinking about when starting a business is the decision to report on a calendar year or a fiscal year. A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. A fiscal tax year is 12 consecutive months ending on the last day of any month except December.

Most U.S. businesses report their taxable income on a calendar year. Businesses that would benefit from reporting on a fiscal year are those that, for example, are highly seasonal by nature—such as a restaurant in a summer resort area. For this type of business, reporting on a fiscal year would provide a better measure of how the business performs over its natural cycle.

Once your business has decided on either the calendar or fiscal year, you’re pretty much locked into it. And depending on how your business is set up, your choices may be limited in the first place. For the most part, sole propeitorships, S corporations, and partnerships use the calendar year.

If you’ve already filed under a calendar year and want to move to a fiscal year, or vice versa, you have to show the Internal Revenue Service there is a legitimate business purpose for doing so. With the exception of a sole proprietorship, if you can show there is a business reason for operating under a different tax year, the Internal Revenue Service can make an exception. That reason would likely be the seasonal nature of your business.

 
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Form 941 Deadlines

Ray Kirschner - Wednesday, March 30, 2011

Form 941 is used for the portion of taxes that employers pay of taxes withheld from employees and the employer’s share of Social Security and Medicare.  More than four different payment deadlines exist for federal employer taxes.

The majority of employers must deposit Form 941 payroll taxes on either a monthly or semiweekly deposit schedule. Exceptions exist if you owe $100,000 or more for a single day, or if you owe $2,500 or less for the quarter. When federal employer taxes for a single day exceed $100,000, the taxes must be paid by the next banking day. If payroll taxes are under $2,500, payment is due quarterly when Form 941 is filed.

Sound confusing? It is, and it is wise to consider outsourcing this aspect of payroll to experts, and avoid the complexity and liability associated with meeting your payroll tax deadlines. If you fail to make your required deposits on time, or if the deposits are for less than the required amount, the penalties can add up quickly.

For amounts not properly or timely deposited, the penalty rates are as follows:

  • 2% – Deposits made 1 to 5 days late
  • 5% – Deposits made 6 to 15 days late
  • 10% – Deposits made 16 or more days late

As you can see, it’s not only complicated to figure out how much you owe, but also to figure out when you owe payment. Since fines add up quickly, it might end up saving you money to outsource payroll to professionals rather than risk incurring these fines.

 
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5 Tax Tips for Small Business

Ray Kirschner - Wednesday, March 2, 2011

Small businesses can easily have a smooth experience when they file their taxes, especially if they’ve planned accordingly. This means having the right bookkeeping solution in place, as well as a good accounting system, to aid with filing and to decrease costs associated with tax preparation.

Here are some quick tips that can help you be ready at tax time.

  1. Keep all invoices and receipts. You can reduce the amount of taxes you owe by writing off everything that can be classified as a business expense. For example, if you buy new business assets, such as office equipment, you may be able to write off the cost that year. Not sure if you incurred a “business expense?” Be cautious and hold on to that receipt!
  2. Update financial records daily. This will be easy if a trusted online bookkeeping system is in place to ensure that your invoices and receipts are entered into your accounting system.
  3. Keep all your tax documents for at least four years. Four years is only a guideline; many small business owners keep tax documents indefinitely. You should consider saving your tax documents electronically if you don’t already.
  4. Keep track of how much you use your car for business purposes. Keep a small travel diary in your vehicle and write down your odometer readings each time you travel for business purposes. You can deduct the mileage that you accumulate for the business portion of your travel.
  5. Check the Internal Revenue Service’s website for small businesses. You can gather information and download forms that will be helpful to you. Often, there are business tax credits available for you to take advantage of. You may also learn things you were unaware of that will help with your taxes. For example – If you have taken out a loan to start up or operate your business, the interest on that loan is tax-deductible.

 
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Small Business Health Care Credit Act – What You Need to Know

Ray Kirschner - Wednesday, February 9, 2011

Not sure if you qualify for a credit under the Small Business Health Care Act? Now that tax season is under way, it’s definitely important to know if you qualify, and how to take advantage of this new tax legislation.

The purpose of the Small Business Health Care Act is to encourage small businesses and tax-exempt organizations to offer and maintain healthcare coverage to employees. It was specifically designed to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

How does this translate to your business? If, in 2010, you contributed an amount equal to or at least half of the cost of single coverage of health insurance for your employees, then you are eligible. From now until 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations.

The terms of this act reflect it’s true target: the small business owner. The maximum credit goes to the smallest employers – those with 10 or less full-time employees earning annual wages of $25,000 or less. The credit is completely phased out for employers that have 25 full-time employees or more or that pay average wages of $50,000 per year or more.

 
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IRS Increases Small Business Audits – Be Ready

Ray Kirschner - Wednesday, January 12, 2011

The Internal Revenue Service (IRS) has begun its Employment Tax National Research Project (NRP). This project entails comprehensive business examinations, similar to audits. This is the first NRP after a 25-year hiatus, to see how well business are complying with tax regulations, which have changed significantly over the past years. Now more than ever it’s critical to make sure your business is compliant.

From 2010-2012, two thousand small businesses annually have received or will receive an NRP examination letter notifying them they have been randomly selected to participate in this project. The audits focus on four key areas:

  1. Worker Classification: whether workers are classified as employees or independent contractors
  2. Executive Compensation: salary and non-salary compensation
  3. Fringe Benefits: perks for executives and employees
  4. Payroll Taxes: Form 941 and Form 1099/W-2 will be carefully examined for issues including withholding and next-day deposit requirements

The best thing you can do to be prepared for receiving this letter is to have all your ducks in a row and keep well-organized, compliant records to expedite this process and make sure your business emerges compliant. Think about some of the topics discussed even in this blog, and consider transitioning some of your processes, such as payroll and bookkeeping, to more current and efficient systems. Conduct an internal audit, and if anything questionable arises, be proactive and take immediate steps to resolve the issue.

Because even if your businesses never receives the audit letter, the results of the NRP project will still have far-reaching effects on small businesses. The findings of the NRP will be used to develop long-term crackdown policies on business tax compliance with employment issues in particular.

 
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Employee or Independent Contractor – And How This Impacts Your Payroll

Ray Kirschner - Wednesday, December 22, 2010

On the surface, an independent contractor may not appear different from a formal company employee. Both an independent contractor and an employee may work on the same projects, share the same office space, and work the same hours. But from a tax and payroll perspective, the differences between an employee and an independent contractor are substantial.

What difference does it make to classify a worker as an independent contractor instead of as an employee? Here are some of the responsibilities an employer has towards an employee:

  • Employer Payroll Taxes. Employers owe, and must remit, their own share of payroll taxes, such as FICA and federal and state unemployment insurance, on employee wages.
  • Reporting. Wages paid to employees (along with the amounts of the various taxes withheld) are reported on Form W-2; amounts paid to contractors are reported on Form 1099. Additionally, Forms 940 and 941 (and perhaps others) must be filed for wages paid to employees.
  • Employee Benefits. Employees generally enjoy employer funded benefit programs such as vacations, holidays with pay, health insurance and pension and profit sharing plans; contractors generally do not receive these benefits.
  • Employee Withholding. Employers are responsible for the withholding and timely remittance of federal income taxes, state and local income taxes, and FICA taxes from wages paid to their employees.
  • Labor Laws. Worker’s compensation, working condition, and minimum wage laws all impose on employers certain financial and other requirements for the benefit of employees.

With more and more companies using independent contractors, the IRS and State Unemployment and Revenue departments are growing increasingly suspicious that companies are trying to avoid withholding and payment of payroll. Thus employers need to use caution in the classification of their employees. If an employer misclassifies an employee as an independent contractor with no reasonable basis for doing so, that employer may be held liable for employment taxes and penalties.

The following three guidelines exist to determine whether a worker is an independent contractor under common law:

  1. Behavioral Control – If the business directs or controls how the work is done through instructions, training, or other means, the worker is an employee.
  2. Financial Control – If the business controls the financial and business aspects of the worker’s job, you are dealing with an employee. These questions will guide you to classifying a worker as a contractor:
    • Does the worker invoice the company
    • How the business pays the worker
    • Does the worker have un-reimbursed business expenses
    • Does the worker make his services available to the relevant market
    • Can the worker realize a profit or incur a loss
    • Does the worker invest in the facilities used in performing services
  3. Type of Relationship – How do the parties perceive their relationship? This includes things like:
    • The permanency of the relationship
    • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
    • Written contracts describing the relationship the parties intended to create
    • The extent to which services performed by the worker are a key aspect of the regular business of the company
    • The extent to which the worker is available to perform services for other, similar businesses

Simply stated, if you have behavioral control and financial control, you likely have an employee.

 
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