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What You Need to Know About Incorporating Your Business

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481339471Incorporating your small business the right way can bring tax benefits and protect your personal assets. Read on to learn more about what incorporation is, why you might want to incorporate, and how an accountant can help you navigate the questions that come with selecting the right business structure.

What is Incorporation?

When discussing “incorporation” in terms of a business, the term denotes how the business is organized or structured.

Regardless of the structure you choose for your business, incorporation is a legal process that brings your business into existence. The following are business structures commonly used in a small business.

Sole proprietorship

If you conduct business as an individual and do not register as any other type of business, you are a sole proprietor. With this business structure, your personal and business assets and liabilities are not separate. Sole proprietorships are relatively simple structures and a good choice for low-risk businesses or entrepreneurs testing a business idea. However, this business structure does not offer liability protection, so the owner is personally responsible for business debts and obligations. Another drawback is that it can be more challenging to get bank financing and business credit with this structure.

Partnership

When two or more individuals own a business together, the simplest structure is the partnership. There are limited partnerships (LP) and limited liability partnerships (LLP). LPs consist of a general partner with unlimited liability; the remaining partners have limited liability and limited control in the business. The partner without limited liability pays self-employment taxes. In LLPs, every owner has limited liability, protecting them from business debts and the actions of the other partners.

Partnerships can be a good choice for multiple-owned businesses and professional groups like physicians, attorneys, and veterinarians.

C-corp

Sometimes called a C-corp, a corporation is a separate legal entity from the business owner(s). The benefit of a corporation is that they offer the most robust protection for owners from personal liability; however, it costs more to form a corporation than it does to establish other business structures, and business profits are taxed at the personal and corporate level. Further, the record-keeping, operations, and reporting are more involved for a corporation. This structure is usually best for higher-risk businesses or those that raise money or plan to become publicly traded in the stock market.

S-corp

An S-corporation, or S-corp, is designed to avoid the double-taxation of a C-corp. This avoidance is possible because, in an S-corp, profits and some losses go through the owner’s personal income to avoid corporate taxes. S-corps are taxed differently in different states, so it is essential to have your accountant help you understand the guidelines and laws in your state.

LLC

A limited liability company (LLC) has the benefits of a corporation and a partnership. The owner is protected from personal liability in situations like bankruptcy or lawsuits and can avoid corporate taxes because profits and losses can pass through their personal income. However, there are self-employment taxes and Medicare and Social Security contributions since LLC members are considered self-employed.

An LLC is an option for owners with significant assets that need protection and who want the benefit of a lower tax rate than a corporation pays.

How to Incorporate

When you’re ready to incorporate your business, consult your trusted CPA or accountant so that you have a full view of what incorporating will mean for you and your business initially and for years to come.

Discover how our insights and experience can translate into a better bottom line for your business. Call us today at 479-242-1236 to learn more or request a consultation through our website and we’ll reach out to you to set up an appointment.

Employee or Independent Contractor? The Differences

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Confident young man at his deskThe distinction may be challenging to make sometimes, but the IRS has very strict rules about it.

Depending on the size of your business, onboarding a new hire can involve a lot of reading and writing for both of you. You may want the new worker to fill out a personal profile. There could be a company handbook for the individual to read and detailed job specifications and a contract to absorb. And tax forms.

But which tax forms? That depends entirely on whether your new staff member is an independent contractor or an employee. The distinction involves more complex issues than their actual physical work location (your office or elsewhere) and their schedule (full-time 9-5 or an odd assortment of part-time hours).

The IRS takes this distinction very seriously. So seriously, in fact, that it’s been known to do lengthy investigations of large companies to determine whether staff members are being classified correctly.

Tax plan tips

You’ll need to determine whether workers are employees or independent contractors, so you know which tax form to send in January, a 1099-NEC or a W-2.

Three Factors

If you’re hoping for a magic formula that will help you make this determination, you’re not going to get one from the IRS. The agency does lay out the factors it looks at, but they’re somewhat murky. You have to look at three different elements of the relationship between management and workers as you try to make this call. They are:

  • Behavioral. How do the workers do their jobs, and what do they actually do? Does the boss control this or the employee/contractor?
  • Financial. Do workers pay for their own computers and smartphones and the other supplies and tools required to do their jobs, or does management? How are individuals paid? Are their expenses reimbursed? You’ll need to look at various aspects of the business relationship.
  • Type of relationship. Will this be an ongoing relationship? Are there “extras” involved besides basic compensation, like employee benefits (health insurance, retirement plans, etc.) and written contracts? Will the new staff member be providing a work product that is a “key aspect of the business?”

What you’re looking closely at here is control. How much control does the boss have over employees or independent contractors?

You may get frustrated as you try to answer these questions. It may seem that some of your answers would indicate that the individual is an independent contractor, while others point to employee status. You might also discover that some of the individual’s work and workdays fit one definition while other work would indicate the other.

Like we said earlier, there’s no magic formula you can use to make this determination.

A Helpful IRS Form

Tax plan tips

If you absolutely can’t determine whether an individual is an employee or independent contractor, you can try to get help from the IRS by completing a Form SS-8.

You may find that you simply can’t make a determination based on how the IRS wants you to define your relationship with a specific worker. If that’s the case, you can complete and submit the multi-page IRS Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. This may help, but unfortunately, it takes roughly six months for the IRS to respond to your query. It may even take longer considering the slowdowns caused by the COVID-19 pandemic.

You’ll also have to contact your state’s labor office because each state has its own criteria for determining a worker’s status based on unemployment insurance and workers’ compensation laws. In addition to the questions the IRS poses, some states ask you to consider how economically dependent the person is on your business. Go to this page to find contact information for your own state’s labor offices.

Help With Onboarding?

If you’re in the process of hiring a new staff member or plan to during 2021, keep in mind that you’ll need to know immediately which IRS tax form you need to have them complete before you pay them for the first time. An independent contractor will get a W-9 (usually no taxes withheld) and an employee, a W-4 (taxes withheld).

Hiring an independent contractor is generally fairly easy. They usually send you invoices for their work. You pay them, and they’re responsible for their own income taxes. Onboarding an employee, however, is a more complex process, primarily because of the income tax piece. We encourage you to contact us if you’re having trouble distinguishing between employees and contractors and/or if you’d like help dealing with taxes for a new hire. We’ve worked with other small businesses in this area, and we’d be happy to assist you.

Call our Fort Smith, AR accounting firm* today at 479-242-1236 or request a consultation.

Common (and Costly) Payroll Errors and How to Avoid Making Them

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accounting services fort smith AZPayroll is one of the most important aspects of any business, but it’s one that, when running smoothly, business owners don’t tend to think about; however, when there’s a payroll glitch, it jumps to the forefront of an owner’s mind. Here are several payroll mistakes that can cost you a bundle and how to avoid them in your business.

1. Misclassifying employees

How you classify employees when you hire them impacts how you and your employees are taxed. If you hire an office staffer to answer phones and file paperwork for an hourly wage, that is a non-exempt employee. Alternatively, if you employ an individual as a salaried Head of Operations, they are exempt. The main difference is that non-exempt employees are eligible to receive overtime pay; exempt employees are not.

There is also a distinction between employee, freelancer, and contractor. An employee receives a regular wage, while freelancers and contractors are typically paid per project. Misclassifying employees may not seem like a big deal at first, but in time, the IRS will find out, and your business will end up paying the taxes due, the associated fines, and of course, the interest on the past-due taxes.

To avoid this issue, understand the classifications and the capacity in which you hire your employees. To classify employees, be sure to use IRS definitions. For example, the IRS defines independent contractors this way: “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

2. Miscalculating pay

There are many payroll aspects to consider, such as overtime, commissions, deductions, paid time off (PTO), and more. When it comes to calculating pay, payroll admins should keep in mind that different policies apply to each state, and that must also be considered. For example, the federal overtime law dictates that overtime wages (pay for hours worked over 40 hours in a workweek) are paid at 1.5 times the employee’s regular hourly rate. However, some states have different policies regarding overtime. For example, in Alaska, California, Colorado, and Nevada, overtime is also based on hours worked in a day. As a general rule, a business should comply with the more generous law for the employee.

In addition to overtime pay miscalculations, poor time tracking capabilities also contribute to miscalculated pay. To avoid an issue miscalculating pay, be sure to know your state’s guidelines on overtime pay. Further, be sure that your company has a reliable tracking system for keeping up with employee hours so that pay, overtime, and other payroll aspects like PTO are correctly recorded and calculated. This process will significantly reduce the chance of payroll overpayment or underpayment mistakes that could become costly payroll corrections.

3. Missing deadlines

One of the most damaging payroll mistakes for a business is missing payroll tax deadlines. Missed deadlines can cost thousands of dollars in penalties, and in extreme cases, a company’s business license can be suspended.

To avoid this critical error, use the IRS Calendar Connector to help you remember your tax deadlines. However, if you miss a tax deadline, contact the tax agency immediately because late payment penalties pile up quickly. The quicker you get in touch with the IRS, the lesser penalty you will have to pay.

4. Messy recordkeeping

What is the word a small business owner least likes to hear? There are likely a few, but “audit” has to be right at the top of the list. The anxiety that term induces should be reason enough to keep accurate, complete payroll records that are well-organized. The price you pay for not doing that could be fines, penalties, and a plethora of costly payroll-related tax issues. For example, if you accidentally file W-2 forms late, you will pay between $50 and $260 in fines depending upon how late the W-2s are filed.

The same goes for late-filed 1099 forms or any other tax-related documentation. The fines vary. For example, if you do not provide a contract employee with a 1099 form, that’s a $250 fine.

To avoid this issue, keep accurate, complete, up-to-date payroll records for all employees. Mind your paperwork like W-2 forms, timesheets, 1099 forms, and pay records. Also, be sure to retain employee records for the four-year minimum that the IRS requires after an employee leaves your company. FYI: The SBA recommends retaining payroll records for six years.

5. Missed tax forms

An extension of point four above targets the end-of-year task that some payroll admins dread – preparing and sending all the necessary tax forms to all employees, whether they are full-time (W-2), part-time (W-2), or independent contractors (1099). Remember, form 1099 is required to be sent to an independent contractor who earned $600 or more during a tax year.

To avoid this issue, make sure tax rates are in order, payroll is correctly calculated, and all forms are correctly filled out and sent to employees promptly.

Payroll-related tax issues are avoidable. Take time to speak to your trusted tax preparer or CPA today so that you avoid these mistakes and keep your business running as it should.

Discover how our insights and experience can translate into a better bottom line for your business. Call us today at 479-242-1236 to learn more or request a consultation through our website and we’ll reach out to you to set up an appointment.

Billing Customers for Time and Expenses in QuickBooks Online

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Group of people having meeting and disscusing at the officeSometimes, you have to spend money on your customers. Make sure you’re billing them for it.

Usually, money flows from your customers to your business. But there may be times when you have to purchase items for a job whose costs will eventually be reimbursed. Or you, or an employee, might spend time providing services for customers and get paid for those hours by your company before you receive payment from the responsible party. If you’re a sole proprietor with no payroll and no reserves, of course, you just have to wait to be paid for your work.

In the first two cases, you’re spending money upfront that will eventually be paid back. In all three cases, QuickBooks Online calls these billable expenses and billable time, and it does a good job of tracking these transactions – much better than if you were scribbling notes on a receipt or a paper timecard.

Obviously, you want to be paid for these expenditures as soon as possible to minimize their impact on your own cash flow. So QuickBooks Online “reminds” you that they need to be billed when you create an invoice for a customer. It also offers reports that help you track unbilled time and expenses. Here’s a look at how it works.

Tracking Billable Time

It’s easy to create a billable time activity. Click +New, then Single time activity. Fill in the blanks and select items from drop-down lists until you’ve completed a form. The critical section of this screen is pictured below:

 

In this example, the employee will receive $50/hour for the work done (Cost rate). Because the Service being provided will be billed back to the customer, you click in the box in front of Billable to create a checkmark. You’re charging the customer $65/hour (a $15/hour markup), so you enter that number in the Billable field. You don’t have to worry about remembering that. QuickBooks Online, as it does with all of your other company information, retains that and makes it available to you.

Tracking Expenses

You probably already know how to record expenses in QuickBooks Online. You can either click the +New button and then Expense, or you can click the Expenses link in the toolbar and the New transaction | Expense. Just as you did in recording time activities, you complete the fields and place a checkmark in the Billable column and select the Customer/Project from the drop-down list.

Once you’ve saved a billable expense, it will appear in the table on the Expense Transactions page. To display is again, click View/Edit at the end of the corresponding row. The transaction will open, and you’ll notice that there’s a small View link in the Billable column. Click it, and you’ll see this:

 

In this example, there’s been no markup applied to the transaction. If you want to add markup costs to all billable expenses, click the gear icon in the upper right and go to Account and settings | Expenses. Click the pencil icon to the far right of the Bills and expenses block of options. Click the box in front of Markup with a default rate of to create a checkmark and enter a percentage. All of your billable expenses will now include a markup of that percentage.

Invoicing Time and Expenses

The next time you invoice a customer who has outstanding time and expenses, QuickBooks Online will remind you that they’re pending. Open an invoice form and select a customer who you know has billables. The right vertical pane will contain a box containing information like this:

 

Click Open if you want to see the original expense record. Clicking Add will, of course, include that transaction on the invoice.

QuickBooks Online offers another way to see your pending billables. Click the Reports link in the toolbar and scroll down to the Who owes you section. You’ll see two related reports here: Unbilled charges and Unbilled time.

We want you to make sure that you’re getting reimbursed for all of the time and expenses you incur on behalf of your clients. So please let us know if you have further questions on this topic or if you have other QuickBooks Online issues.

SOCIAL MEDIA POSTS

Do you ever spend money on behalf of your customers? QuickBooks Online calls these billable expenses, and it can track them. Here’s how.

If you provide services for customers, you’ll have to invoice those hours as billable time. Did you know you can record this activity in QuickBooks Online? Here’s how.

Did you know when you invoice customers with outstanding time and expense charges, QuickBooks Online reminds you about them? Find out more here.

Confused about which customers owe you for billable time and expenses? QuickBooks Online provides specific reports for that. Find out more here.

ValueMetrik CFO offers QuickBooks support as part of our package of accounting services for small and midsized businesses. Call us at 479-242-1236 now and find out how you can leverage QuickBooks to precisely track your finances or request your complimentary consultation online.

PPP Loan Forgiveness in 2021

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PPP loan forgiveness memo on the wooden board.REFRESHER: What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) is a Small Business Association (SBA)-backed loan to help businesses retain employees during the Coronavirus (COVID-19) pandemic enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Funds can be used for payroll expenses and benefits and some non-payroll related expenses such as mortgage interest, rent, and utilities.

There are first and second-draw PPP loans. First-draw loans are available for first-time applicants, and second-draw loans are for businesses who already took advantage of a first-draw PPP loan.

PPP Loan Forgiveness

PPP loans can be forgiven if the following criteria are met:

  • employee retention and compensation rates must be maintained
  • loan funds must be spent according to the loan terms
  • no less than 60 percent of loan funds are spent on payroll

When Congress passed the new spending bill at the end of 2020, the covered period for PPP loans was extended through March 31, 2021. With this extension, the SBA released new guidance for these loans and loan forgiveness.

Expanded PPP Loan Forgiveness

Eligible Forgivable Non-Payroll Expenses

Under these new guidelines, the number of eligible “forgivable” non-payroll expenses were expanded to cover payments for:

  • software and cloud computing services
  • property damage costs related to vandalism or looting not covered by insurance
  • supplier costs for contracted goods (including perishable goods) ordered before taking out the loan
  • expenses related to compliance with federal, state, or local health and safety guidelines related to the pandemic from March 1, 2020, until the national emergency declaration expiration

Covered Period for Forgiveness

The covered period for PPP loans is when a recipient can spend the funds and still qualify for loan forgiveness. The covered period was either eight or 24 weeks; however, recipients can choose when the covered period ends under the new guidelines. They can choose a date between 8 and 24 weeks after their loan origination date.

Simplified Loan Forgiveness Application

For loans under $150,000, a simplified forgiveness application is available. For borrowers who submit a signed certification under one page in length to the lender, loans are forgiven in full. The certification must include:

  • the total loan amount
  • an estimate of the total loan amount spent on payroll costs
  • the number of employees the employer retained as a result of receiving their PPP loan

Applying for PPP Loan Forgiveness

Borrowers must wait until all PPP loan funds are used before applying for forgiveness. Forgiveness can be applied up to the maturity date of the loan. Forgiveness must be applied for within ten months after the last day of the covered period of the loan, or payments will no longer be deferred, and borrowers must begin repayment of the loan.

The appropriate loan form with all documentation for payroll and non-payroll expenses along with the forgiveness documentation should be submitted to the borrower’s lender to start the forgiveness process.

For more help with PPP loans, contact your accounting professional.

How to Create Recurring Transactions in QuickBooks Online

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Man and woman using computer togetherQuickBooks Online saves time and improves accounting accuracy in numerous ways. One example is its support for recurring transactions.

It’s easy to get distracted when you’re doing dull, repetitive accounting work. That distraction leads to errors sometimes. So, besides the time you’re spending on work that could be automated, you have to tack on additional time to chase down your mistakes.

QuickBooks Online already reduces repetitive data entry by saving your lists of customers, vendors, products, etc., and making them accessible when you’re creating transactions. But it does more to save time and minimize errors by allowing you to create recurring transactions. Enter a transaction like an invoice or bill once, and QuickBooks Online memorizes it for future use!

Here’s how it works. Let’s say you have a customer who wants to rent a printer from you for one year. You create an invoice for one month’s rental. At the bottom of the screen, click Make recurring. A partial view of the screen that opens is pictured below.

 

Much of this screen will have already been filled in. You’ll need to enter a name for the template you’re creating at the top of the screen, one that will remind you of its content. In the second field, the drop-down list displays three options for how the recurring transaction will be handled by QuickBooks Online They are:

  • Scheduled. Your invoice will go out automatically at the scheduled interval, with only a change to the date. As with any automated process, you should be very careful when selecting this option.
  • Reminder. You will get a reminder ahead of each occurrence so you can make any necessary changes before sending.
  • Unscheduled. No automation is involved here. The invoice is memorized, but you’ll have to remember when it needs to go out.

If you chose Reminder, the next field will read Create (x) days in advance. Enter the number of days here. On the next line, you’ll only have to check or uncheck the Options.

Under Interval, you’ll tell QuickBooks Online when the invoice is scheduled to go out. You can choose from Daily, Weekly, Monthly, and Yearly. The invoice in this example should be processed and sent on the first day of every month. The start date is January 1, 2021, and it will end on December 31, 2021. If your recurring transaction should continue to go on indefinitely, you’ll have the option to select None from the drop-down list under End. You can also choose After.

Check the fields below this line to make sure they’re correct. You can change the message if you’d like and add an attachment. If everything looks correct, click Save Template in the lower right corner.

Using Recurring Transactions

If you’ve set this transaction up to recur automatically, you don’t have to do anything more with it unless you need to edit it at some point. If you need to do so, or if you’re responding to a reminder (or chose not to be reminded), you can access the list of transactions you’ve memorized by clicking the gear icon in the upper right and selecting Recurring Transactions under Lists. A screen containing this section will open:

 

The table that appears will contain other columns describing the recurring transactions, like Type and Interval. The image above shows the end of each row that reads Edit until you open the drop-down menu. You can see what your options are. They include Use, which you would select when you want to edit and/or send a transaction. You can also create a Duplicate, Pause the recurrences temporarily, Skip next date, or Delete the template. Click the arrow next to Reminder List in the upper right and select Run Report to see the Recurring Template List Report.

As you can see, recurring transactions can not only save time, but they can also help reduce errors and minimize unnecessary work. They’re not overly difficult to create, but you should use caution if you choose to automate them. We’re available to answer your questions about this useful tool and about any other element of QuickBooks Online. Stay healthy, and here’s to 2021!

SOCIAL MEDIA POSTS

QuickBooks Online offers many ways to save time and reduce errors in your accounting. Recurring transactions are among them. Do you know how to set this up? Find out here.

Are you creating similar invoices over and over? QuickBooks Online allows you to create recurring transactions. Find out more here.

QuickBooks Online allows you to automate your recurring transactions, but you should be very careful if you choose this option. We can help step you through this.

Missing bill payments? You can set regular reminders in QuickBooks Online by creating recurring transactions to help with this. Here’s how.

ValueMetrik CFO offers economical accounting solutions and has a strong reputation for accuracy and dependability. Find out how you can save time and stop worrying about the numbers and leave the accounting to us! Call our Fort Smith, AR accounting firm* today at 479-242-1236 or request a consultation.