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Accounting and Taxes Articles


Can Hiring Family Members Mean a Tax Break for Your Small Business?

November 23rd, 2010 :: Karen Axelton

By Karen Axelton

Keeping track of tax breaks available to small businesses—especially in the current political climate—can be a complex task. The good news is, there is one kind of tax break that just about every small business can take advantage of: the advantages gained by hiring family members to work in your business. Here’s a closer look at some of the options:

Hiring your spouse: In general, the IRS considers a spouse an employee as long as an employer/employee relationship exists. In other words, one spouse must truly control the business in terms of making key management decisions, and must direct the other spouse’s work duties and activities. Specific rules related to hiring your spouse depend on the business structure you’ve chosen for your company. Visit the IRS website for more detailed information about tax issues related to husband and wife businesses.

Hiring a parent: Hiring a parent is becoming more of an option these days with many seniors and retirees more interested in continuing to work—or needing to work to supplement retirement income. If you are hiring a parent, know your business will be subject to income tax withholding, Social Security tax, and Medicare tax; however, you are not subject to Federal Unemployment Tax Act (FUTA) tax.

Hiring your children: Having your children work for you in the business is a great way to transfer income from your higher tax bracket to your children’s lower one. This is also a way you can transfer wealth to your children without worrying about gift and estate taxes.

If your company is a sole proprietorship or partnership, wages paid to your children under age 18 are not subject to Medicare or Social Security taxes; wages paid to children under 21 are not subject to FUTA tax. At any age, their wages are subject to income tax withholding. If your business is a corporation, get more details about the tax issues of having your kids work in your business at the IRS website.

Before hiring any family member, discuss the issue with your accountant to make sure you follow all the rules. It’s especially important to maintain detailed records of the person’s duties and the hours he or she works to protect you from any questions of fraud. And, of course, be sure the person’s salary or wages is in line with what he or she actually does, or you risk raising red flags.

Tax savings aren’t the only benefit of hiring family members. Working with your spouse can build bonds as you feel that you’re working together for a goal. Children at any age can gain responsibility and learn from seeing their parents working hard to build a business. Children approaching adulthood can be groomed to take full-time roles in the business and be part of your succession plan. Start your children in the business at a young age, and you’re less likely to face resistance from other employees as your kids take on more important roles.

DISCLAIMER: The information posted in this blog is provided for informational purposes. Legal information is not the same as legal advice — the application of law to an individual’s specific circumstances. The information presented here is not to be construed as legal or tax advice. Network Solutions recommends that you consult an attorney or tax consultant if you want professional assurance that the information posted, and your interpretation of it, is appropriate to your particular business.

How Will the New IRS Audit Program Affect Your Small Business?

November 17th, 2010 :: Rieva_L

By Rieva Lesonsky

Has your business ever been audited by the IRS? Just hearing those words can send a shiver of fear down any entrepreneur’s spine. Unfortunately, small business owners have more reason than usual to be nervous about opening their mail for the next few years thanks to the IRS’s Employment Tax National Research Project (NRP).

The NRP is a comprehensive audit that will hit 2,000 small companies each year at random in 2010, 2011 and 2012. The goal is to see how well businesses are complying with employment tax regulations. The last NRP was conducted 25 years ago, and with the federal government seeking all possible sources of revenue it can, the IRS is looking to make sure it’s getting all the money it’s owed by small business taxpayers.

An article in CFO Zone reports that the NRP is honing in on four areas:

  1. Worker Classification: Classification of workers as employees or independent contractors
  2. Executive compensation: Salary and non-salary compensation, such as loans, deferred compensation and stock
  3. Fringe benefits: This includes both executive and employee perks
  4. Payroll taxes: Forms 941 and Form 1099/W-2 will be examined regarding withholding and next-day deposit requirements.

The IRS has stated these audits will be “comprehensive” and if you are hit with one, be ready to open all your records. However, you don’t have to get audited to be affected by the NRP: The results of the completed study will be used to adjust tax regulations and tighten up compliance in these four areas above.

Don’t wait to get audited—make sure your company is in compliance. Have your accountant take a look at your finances and ensure any problems are corrected sooner, not later.

Image by Flickr user Lisa Percival (Creative Commons)

DISCLAIMER: The information posted in this blog is provided for informational purposes. Legal information is not the same as legal advice — the application of law to an individual’s specific circumstances. The information presented here is not to be construed as legal or tax advice. Network Solutions recommends that you consult an attorney or tax consultant if you want professional assurance that the information posted, and your interpretation of it, is appropriate to your particular business.

Preparing for the New 1099 Requirements for B2B Transactions

July 30th, 2010 :: Steven Fisher

If you are in business for yourself it is safe to say that you probably utilize sub-contractors for your own business or for a client project. In the past it was pretty straightforward – if the person was not a corporation, they were a 1099 contractor. Company to company or B2B transactions were filed with the IRS through an I-9 form but that was pretty much it.

New regulations (don’t you just love them?) have mandated that all B2B transaction must be filed with a 1099 form. Section 9006 of the massive Patient Protection and Affordable Health Care Act will mean yet another huge paperwork burden for your small business. I wanted to thank Bobbie Lee who wrote this great article on Entrepreneur.com on the details buried in the new Healthcare legislation.

Here are some excerpts:

“Beginning in 2012, all businesses will be required to prepare 1099s for all services and goods purchased from all vendors in excess of $600. Current law dictates that only services provided in excess of $600 must be reported via form 1099 and that corporations (with the exception of attorneys) are exempt from receiving 1099s.”

“Beginning in 2012, corporations will no longer be exempt, and purchases of goods must also be included. The passing of this legislation is an attempt by the government to close the $300 billion tax gap, which will help pay for health-care reform. So I guess it indirectly relates to the Patient Protection and Affordable Health Care Act in which it was included.”

Depending on the industry, many businesses must collect, report and pay over a variety of excise taxes, as well. How much does all that cost your business in bookkeeping and payroll preparation fees? Now business owners must report all business-to-business transactions. So purchases your business makes from Staples, Office Depot and other vendors are included as reportable transactions.”

To read the full article with more details on the impact on small business, check out http://www.entrepreneur.com/money/taxcenter/taxpertisecolumnistbonnielee/article207404.html

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The IRS Is Not A Bank

April 9th, 2010 :: Gary Honig

The Internal Revenue Service is not a lender of last resort. By not paying taxes, you are ultimately borrowing from the Government, at extremely costly rates. The addition of compounding interest and penalties will make a bad situation much worse. Any unpaid taxes due will garner a daily interest rate, plus a monthly 5% penalty each month up to 5 months for a maximum of 25%.

For businesses, the most common tax payment problems come from not paying the payroll tax. Failure to pay 941 payroll taxes can easily put the entire business in jeopardy and have a drastic affect on the business owners’ assets. If the company is dissolved, the IRS will still require the owner to pay outstanding balances of payroll taxes.

The best advice for tax problems is to be pro-active at all times. Like most bad situations, ignoring it will not make it go away. If there are not enough funds to pay taxes on a timely basis, there is a strong indication the business is improperly capitalized. This can cascade into difficulties that may be hard to get out of, which could create lasting negative obligations.

As far as the IRS is concerned, first they will send a letter for a balance due. Upon not hearing anything from the taxpayer they might send a few more. When the bureaucracy figures out no one  is heeding the message, they will assign a case worker. This means your account has moved down a notch.  At this point either a payment plan is negotiated or a Notice of Federal Tax Lien is filed. Avoiding a tax lien is highly recommended. Once a payment plan is in place, it is imperative that payments are made on a timely basis. With good cooperation a payment plan can be in place without having a formal tax lien.

The latest news is that the IRS is now checking that Federal contractors are in compliance. Meaning, they conduct a review of certifications of non-delinquency in taxes for any companies bidding for Federal contracts. This could potentially kill an active solicitation bid if there are outstanding taxes due.

In some cases a factoring company can actually assist in situations where there is a delinquency. But once a lien has been levied against a company it will require written subordination from the IRS in order for any commercial finance company to even consider funding. . When a payment schedule is in place, the factor may send advances from invoices directly to the IRS. This insures that payments are being made in a timely fashion per the IRS agreement.

Fortunately tax problems can be remedied, but they can’t be ignored.

An Interview with the Taxgirl

April 1st, 2010 :: Thursday Bram

Kelly Phillips Erb is the Tax Girl — not only is she a top-notch blogger covering the topic of taxes, but she also is a top notch tax lawyer. She took some time to answer our questions about taxes for small businesses.

How did you get to be Tax Girl? What’s your background as a tax expert?

On my site, I joke about being in law school in Moot Court wearing an oversized itchy blue suit and hating it. But it’s true. It was horrible. In a desperate attempt to avoid anything like that in the future I enrolled in a tax course. I loved it. I signed up for another. Before I knew it, in addition to my JD, I had a LL.M Taxation. I worked for other law firms for a few years after graduation and decided that I could do it better on my own – so I convinced my (not quite yet at that time) husband to quit his BigLaw firm job and work with me. We opened our firm ten years ago.

The blog kind of grew organically out of opening our firm. I was updating our firm web site fairly constantly because tax law changes so quickly. I was looking into a better way to do it (because that’s how I’m always thinking) and I came across this notion of a blog – this was years ago when the word wasn’t even in mainstream vocabulary. I loved the idea of a site that was constantly moving and encouraging dialogue about tax. So I started blogging about tax. A bit after I started, I took the plunge and made an offer for the domain (taxgirl.com) since it had been my moniker for years. I bought it and I’ve been at taxgirl.com ever since.

What’s the strangest tax question you’ve ever gotten?

Gosh, I get literally thousands of questions so it’s hard to pin down the strangest… The absolute oddball ones tend to be related to tax evasion schemes, like the notion that if you’re service based and not product based that you don’t have to pay taxes or the ones that say the government has “secret accounts” that you can access. But the ones that really blew my mind were the folks trying to maximize rebate checks that were based on the number of dependents – one guy had something like 10 kids that he had not been supporting and he was wondering if the government would chase him for back child support if he claimed the kids this year. It’s unbelievable what people will say and do to get a refund.

What would you say are the key differences between completing your taxes as an individual and as a business owner?

Individual taxes are much easier because there’s usually just the one (income tax). Business taxes tend to be more complex because you may have other issues to worry about – corporate tax reports, franchise taxes, sales & use taxes, use & occupancy taxes, payroll taxes… Depending on what kind of business owner you are, the list can be fairly extensive.

I think, because of the sheer number and types of taxes, business owners have to focus on tax planning and compliance all year round as opposed to your individual taxes which, for better or worse, you can typically crank out your individual obligations in a day or two. Perhaps a painful day or two, but still…

What sort of key problem areas should business owners be on the look out for when tax season rolls around, especially if they’ve already been in business for a couple of years?

It’s easy to lose track of tax items that you may have already elected to report a certain way like depreciation, use of your car, etc. That’s why having a regular accountant can be helpful.

I think business owners tend to fall down on the record-keeping side when it comes to meals and entertainment. Inevitably, on examination, business owners struggle to remember what they were doing at a meal – and with whom. Contemporaneous record-keeping, even if it’s just writing little notes on the backs of receipts, helps a lot.

The same issue comes up on the home office side. It’s a wildly misunderstood deduction and there’s just so much bad information out there that I don’t think taxpayers always keep the right kind of records. I recently wrote a post about home offices and the comments, even from alleged tax professionals, just showed a real lack of comprehension about what’s acceptable. That actually ties in with the idea that overall knowledge about what is and is not deductible is pretty lacking – of course, I don’t blame taxpayers, I blame Congress. The rules and the changes are just out of control.

As a tax professional, what characteristics do you think are key for a business owner looking to find help with his taxes?

Trust and communication. You have to feel comfortable with your tax professional. If you feel intimidated or stupid around him or her, it’s time to find someone new. You need to feel as though you can ask any question and get a good, complete answer.

If you can only offer one piece of tax advice for a small business owner, what would it be?

Be educated. You don’t have to know everything about taxes but you need to know enough to make smart decisions. Don’t rely on your tax professional or anyone else to tell you about your business – that’s your business, to know what’s going on. You don’t have to know the intricacies of the Tax Code (that’s what you’re paying someone else to do, right?) but you need to know the basics: what constitutes income, what kinds of things are generally deductible, and the timing and nature of your filing obligations. Don’t be that business owner that just signs returns each tax season: know what (and why) you’re signing.

Creating a Financial Workflow

March 25th, 2010 :: Thursday Bram

When you run a small business, bringing in someone to handle bookkeeping and similar tasks just isn’t always an option. The cost of hiring help can make it necessary to do that sort of work, although it doesn’t hurt that keeping your own books guarantees that you’re familiar with every aspect of your business.

The biggest problem for many business owner when it comes to updating financial records is actually getting around to it. It’s easy to put off tasks like tracking expenses — after all, you can always catch up at the end of the week. Then a week turns into a month, which turns into a quarter, which turns into a year before you even notice. It’s easy to focus on tasks that directly make you money, rather than figuring out where that money goes. Having a financial workflow in place, though, can help you manage your business’ money in such a way that it doesn’t get out of hand.

Your Financial Workflow

A workflow is a series of steps, each one following the next so that you can complete a larger task — usually a task that you must complete on a regular basis. It can make sense to write down the steps you need to keep up with your finances: from reconciling your bank statements with the receipts you have to entering information into your bookkeeping software, having a checklist makes the process smoother. It’s easy to say that you already know what you need to do, but it’s easy to miss a step or put things off entirely because you feel like there’s so much to do. Having it in writing lets you build a habit of handling your finances, making it easier to stay on track.

Determining just what steps you need to take can be a longer process. Before you try to create the perfect workflow, discover what you’re already doing that works. Follow the approach you normally take to get your books up to date and just write down the steps you take. If you’re not the best about doing so on a regular basis, you may have to actually spend some time on your books to start getting an idea.

Once you have a list of the steps you generally take in place, you can look for opportunities to tweak the process. You may find that you have to take information off the same piece of paper multiple times — that can be an opportunity to improve your system because if you can arrange things so that you only handle each piece of paper once, you can speed things up. There are also many tools that will help you speed up the process, such as receipt scanners.

You may find that you need to keep adjusting your routines as you go through them. The first couple of times, it’s possible to miss a step, especially if you haven’t practiced the habit. But having a list that you can work down on a daily or a weekly basis will help you to build the habit, as well as make things much easier when you are in a position to hand the bookkeeping off to someone else down the road.

Image by Flickr user ben_onthemove

Last-Minute Tax Tips

March 23rd, 2010 :: Thursday Bram

The due date for federal income tax returns is just around the corner. If you haven’t already gotten on top of your taxes, it’s time to do so. These last minute tax tips can help you meet that April 15th deadline without a problem with the IRS.

Estimate the Tax You’ll Owe

Ideally, you’ve been making quarterly estimated income payments and you have a clear idea of how much you’ll owe to the IRS. If, for any reason, you’re not going to get your tax paperwork done on time, you can easily file for an extension, as long as you’ve already paid however much tax you expect to owe on April 15th. It may not be a bad idea to overestimate, depending on the reason the rest of your paperwork won’t be ready — you can face penalties if you underestimated what you might owe.

Having an estimate can also make things easier if you will be on time with your tax return but just haven’t gotten around to it yet. You don’t want to be in the position that you need to make a payment and don’t have quite enough in your business checking account for any reason.

Get Organized

If you’re going to be asking your tax preparer for a rush job, you’ll have much better results if you aren’t handing over a shoebox of receipts or equally disorganized electronic files. There are tools out there that can scan and organize your receipts — Shoeboxed, for instance, just requires you to stick your receipts in an envelope and mail them off. There’s a fee for such services, of course, but if you aren’t going to get to it yourself, the fee is much lower than you might pay to your CPA for a similar service.

Check Your Resources

Trying to claim a particularly difficult tax deduction or credit? Check your professional associations or other resources for guides to doing just that. Many groups offer a regularly updated tax guide for those bumps in their industry, especially focusing on how to appropriately claim specialized deductions. For instance, if you are a building contractor, you may be claiming one of the various energy efficiency credits related to projects you’ve built over the last year. The paperwork can be complicated, but many local contractor organizations offer their own version of a guide to that particular tax credit.

Your personal resources can also make the process easier. If you work with the same tax preparer year after year, he may send you a simplified document to fill out about the changes in your business over the last year, rather than requiring you to fill out every form from scratch. You’ll still have to have all your paperwork but you can avoid having to calculate much more than what your bookkeeping software can already provide.

Image by flickr user alancleaver_2000

Putting Your Books in the Cloud: Your Options

March 16th, 2010 :: Thursday Bram

Keeping your books may not be the funnest part of running your own business, but it is one of the most important. If you don’t have a good grasp on your money, you can wind up without a business very quickly. But bookkeeping is getting easier. There are now many web-based tools that make the process easier to manage: not only can many tools available import information quickly but they take care of details like backing up your files and even emailing out notifications about late payments. Here are just a few of the options that are now available online.

  • Freshbooks: More than a million users rely on Freshbooks to keep their books. The web-based application handles everything from time tracking to invoicing, providing easy-to-use tools for creating estimates and managing contractors.It automates many steps of the bookkeeping process. Freshbooks’ plans range in price from $19 to $149 per month.
  • Outright: Not only can you handle all your bookkeeping tasks in Outright, you can have the application generate your tax forms based on your books and create reports for your CPA or tax preparer. Even better, Outright is entirely free to use. The site even offers forums where you can ask questions about taxes and other financial issues.
  • Blinksale: Focused first and foremost on invoices, Blinksale makes tracking payments easy. If you’re already using tools such as Basecamp, you can automatically import client data. You can even automatically create follow up emails for such tasks as reminding clients of invoices or thanking them for their payments. Blinksale’s monthly plans start at $6 and reach up to $24.
  • Harvest: One of the key features of Harvest is its ability to track time. Even if you aren’t at your computer, you can use Harvest’s smartphone apps to keep track of the time that you’re spending on specific projects. The web application can translate that information into invoices, budgets and the rest of your books. It can even export all that data into Quickbooks if your tax preparer is one of those folks who requests everything in a Quickbooks file.Harvests’ plans range from $12 to $90 per month.

There are some drawbacks to keeping your books in the cloud. Before you choose any of these options, it’s important to make sure that the security measures meet your requirements. Depending on the type of business you run, you may want to take additional steps to ensure that your customers’ data is protected. It’s also important to make sure that the system you choose meshes well with the type of business you run. Some tools work perfectly for the way a consultant bills but may not be up to handling products. The opposite can be just as true, so take advantage of free trials to actually get in to a bookkeeping tool and see how it will work with your business.

Image by Flickr user edinburghcityofprint

10 Easy-to-Miss Business Deductions

March 11th, 2010 :: Thursday Bram

The deadline for completing your tax return is closing in. There are so many different tax deductions, though, it’s easy for a few to slip through the cracks. Make sure that you claim all the deductions that you’re eligible for.

  1. Going green: Did you take steps to make your office greener in the last year? If so, you may be able to write off the expense of doing so as a deduction. Depending on your industry, there are even some tax credits available.
  2. Payment processing fees: Using online payment processors, like PayPal, is becoming more common among small businesses, but there’s a price tag that goes along with doing so. The fees charged on each of your transactions are deductible.
  3. Travel to and from the airport: The fact that you can write off business travel on your taxes is common knowledge, but did you know that you can even write off the taxi trip to and from the airport, as long as you’re traveling for business purposes?
  4. Tax preparation: Considering the expense of getting a tax return prepared when you own a business, it’s a good thing that you can deduct your tax preparer’s fees. The same holds true if you have any help throughout the year with tax planning or other tax-related tasks.
  5. Blog posts: If you hire a writer to put together posts for your business’ blog, it’s a marketing expense and can be written off. The same holds true for other social media help.
  6. Hidden bank and credit card fees: If you have a bank account or credit card in your business’ name, go over the statements very carefully. Even if you can’t get hidden fees removed, they are still business expenses and can be written off on your taxes.
  7. Unpaid invoices: As long as you’re using the accrual method of accounting, rather than cash, your unpaid invoices can be written off on your taxes. However, this deduction can be tricky, making it particularly important that you talk to your accountant before claiming it.
  8. Employee benefits: Of course you can write off any benefits that you provide for your employees, but that term can cover a lot of ground. If you buy an employee a monthly bus pass as one of their benefits, that’s just as deductible as health insurance.
  9. Holiday parties: Do you have a get-together for your employees during the holidays? The expenses for that shindig can be written off, as can holiday cards to your clients.
  10. New employees: The expense of hiring a new employee, from putting out a job listing to printing up new business cards, is entirely tax deductible. Even paying for a prospective employee’s travel for an interview is deductible.

It’s important to note that every business’ tax situation is different and it’s impossible to address every situation in a blog post. In order to make sure that your taxes are in order, it’s crucial to talk to a tax professional who can walk you through determining your eligibility for these tax deductions.

Image by Flickr user AlanCleaver_2000

Contractor vs Employee – Getting Scrutiny

March 5th, 2010 :: Gary Honig

You may not have noticed in the news, but the issue of “independent contractors” is becoming a hot item. This is where a company will forego making payroll tax payments and just hope the individual will pay their own way.

Make no mistake, one way or the other, tax on hourly wages must get paid. Either the company deducts them from a paycheck and makes monthly 941 payroll tax payments or the individual needs to make self employment tax payments. The IRS has determined there are three criteria for consideration when deciding whether an individual is an employee or independent contractor.

  1. Behavioral – Does the individual decide where to be, when to be there and what to do when performing their duties?
  2. Financial – Is the individual completely responsible for tracking their finances, negotiating their rate, paying for their own expenses?
  3. Type of Relationship – Does the individual conduct all aspects of their part of the business relationship with regards to contracts, starting, leaving, paying taxes?

If the answers to all of the above is Yes, without any reservations, the individual may be considered an independent contractor. But any shades of gray will pull toward requiring the company to pay the payroll taxes. One rule of thumb would be, when looking at the operating financial statement for the business, the cost of payroll should be one of the bigger, if not the largest cost of doing business.

The reason this is timely has to do with the loss of revenues to both Federal and State budgets. In an effort to recoup shortfalls, agencies are taking a hard look at companies that try to avoid making their necessary tax payments. And here is the kicker, if a company is found to have avoided paying payroll taxes and is levied with past due amounts plus penalties and interest – that liability follows the company owner until it’s paid. Liquidating the company will not resolve unpaid payroll taxes.