Catching Up with Your Contractors Before 1099 Time

In a little over a month, it will be 2015 and time for year-end accounting chores.   One of those chores is getting your 1099s out, and now is a good time to tie up loose ends so the year-end process can go smoother.  Here are some tips to do just that:

1.     Go through your vendor list and make sure each contractor that you are paying is marked in your accounting system as a contractor eligible for a 1099. 

2.     Obtain a W-9 form from each contractor if you haven’t already, and update the address and federal EIN for each contractor.  This will ensure that you have the most current information for each contractor and that they will receive their 1099 promptly. 

If you need to make any changes in the way you are paying them or withholding taxes, you’ll have a chance to update that information as well. 

3.     Ask your contractors for a worker’s compensation certificate.  If you don’t have one, you might need to add their payment totals to your payroll amounts on your worker’s compensation audit worksheet. 

4.     If your accounting system doesn’t break out payment type, you’ll need to do that on a separate spreadsheet before you input the 1099 amounts.  Contractors paid with a check will require 1099s.  Contractors paid via PayPal or credit card will not.   If you have paid them both ways, you will need to break it out.  You can do the bulk of the work now and post the remainder of the year after year-end. 

5.     Consider re-evaluating each contractor as to whether they meet the employee versus contractor tests from the IRS.  If you are accidentally misclassifying a contractor who the IRS defines as an employee, you will be responsible for social security, withholding, and other payroll taxes, which can add up to huge numbers for small businesses.

This is a “red flag” area for the IRS, meaning they are looking to “bust” employers.  However, they also have a Voluntary Classification Settlement Program for people who have been misclassifying workers in the past and want to come clean.  

Following these five steps will put you in great shape for year-end.  And if you need help catching up with your contractors or with any related issues, please let us know. 

What Is Real-Time Accounting (and Why Should You Care)?

Real-time accounting is when your books are caught up to the present and you know exactly where you stand with your account balances, revenue, and profit.  It’s truly doing your accounting in real time. 

The opposite of real-time accounting is getting your books done once a year (or worse, being years behind).  When you wait to do your books once a year, say at tax time, you lose the power of being able to monetize opportunities in real time.   Some examples are realizing your prices are too low and your profit margins need adjustment, seeing what’s selling well and restocking sooner than later, or discovering a worker is not productive based on your pay rates and prices.

Today’s cloud accounting systems and bank feeds allow you the potential for real-time accounting, where the benefits include:

·      Better cash flow management

·      Faster correction of pricing, hiring, stocking, and margin mistakes, saving money and increasing profits faster

·      Faster identification of any tax liabilities as well as the ability to reduce or eliminate penalties from paying late or underestimating taxes due

·      Ability to see whether you are making a profit or a loss

·      Potential to catch fraud or identity theft much faster if you become a victim

·      Lower accounting costs when errors snowball over time

·      More peace of mind

·      Ability to be more proactive in your business management, capitalizing on opportunities that show themselves in the numbers

Consider moving to real-time accounting if you haven’t already.  For example, if your books are done annually, moving to quarterly or monthly services will begin to provide the advantages listed above. 

What’s Your Hourly Worth?

Time is the most precious resource on the planet, but sometimes we don’t treat it that way.  In our businesses, it’s important to get everything done, but we can also get overwhelmed with all the little things that need to be done to take care of customers.  One of the big differences between highly successful entrepreneurs and less successful ones is how they manage their time:  the more successful simply value it more and treat it as the scarce commodity it is.

A great exercise to bring this home is to track what you do in one day.  You can write a diary as you go through the day or simply recall what you did at the end of the day.  List the tasks you did; then write the hourly market rate of each task you did next to the task. 

Did you spend time on low-level tasks such as email cleanup, filing, order-taking, order filling, or handling routine customer questions?  Or did you spend time calling up power partners, dreaming up new products or services, or restyling your marketing message so that it’s more impactful and reaches more customers?     

What was the average hourly rate of the tasks you did today?  Multiply that by 2,000 hours and compare it your gross revenues.  If your gross revenues were higher than the value of the tasks you did today, then your revenue might be stagnant.  If your annualized day was worth more than your gross revenues, then congratulations; you’re moving up and giving yourself a raise.  Your business is likely growing. 

If you’d like a raise, then the first thing to do is to start delegating the lower level tasks that are eating up all your time.  They might be a comfortable way for you to pass the time, but they could also be keeping you stuck, overwhelmed, and moving toward burnout.   

We all have the same amount of time each day.  If we can free up our time to focus on more powerful action items that move our business forward instead of the chores that clog our progress, then our success will accelerate. 

Navigating Nanny Taxes and Household Payroll Compliance

Time is precious for most of us these days, and often, we need help at home so we can have more time to run our businesses or careers.  That may mean hiring help for personal tasks such as care giving for the young, elderly, or special needs family member.  When you first hire a household worker, there’s a whole different set of rules to follow compared to hiring for business.

Underground Payroll

There is a whole industry of “underground” payments made to domestic workers.  Individuals such as housekeepers, regardless if they live with you full time or work once a month, are wrongly paid as contractors, and often in cash, most of the time.  According to the IRS, in court case after court case, these workers should be paid as household employees, even if they are part-time. 

Cracking Down

One of the focus areas for the IRS is this area of household payroll.  The current and strong drive to bring this underground payment system to the light is caused by several new pieces of legislation.  A few states have recently passed a domestic workers bill of rights.  Changes in minimum wage and overtime requirements are going into effect in 2015.  And the health care act requires workers to document their wages before they can qualify for a subsidy, so this can bring more workers asking you to get them fully documented on your books. 

Getting It Right

The need to hire household workers is rising due to the silver tsunami – a term describing the aging of the populous Baby Boomer generation and their growing need for health care, which will truly stretch our system based on their numbers.  

Expert Guidance

When your family makes the decision to hire household workers, seek expert guidance so that you can get through the maze of compliance in this area.  You’ll want to be sure you learn about the risks and compliance issues in this area so that you can properly protect your personal wealth as well as your peace of mind.  And if we can help, please reach out and let us know.   

How to Read Your Balance Sheet

How to Read Your Balance Sheet

The Balance Sheet is an important report in your business’s financial statements.  Most small business owners are unsure of what all of the numbers mean on this report, so let’s see if we can shed some light on what they mean. 

A Summary of Balances

One big characteristic of a balance sheet is that it represents one date in time, for example, 12/31/2014.  The numbers represent balances, and since the balances change daily, a balance sheet only represents one point in time versus a range. 

Three Parts

There are only three parts to a balance sheet, and the easiest part to understand is the assets, or what you own.  Most balance sheets start off with cash balances, and these typically represent what you have in the bank less any uncashed checks that could reduce your account once they come in.

If customers owe you money that you have invoiced but not collected, you might see an Accounts Receivable balance on your balance sheet. 

If you sell products, the cost of all of them that you haven’t sold yet and that you may have stored in a warehouse is in the Inventory account. 

If you own equipment, furniture, cars or trucks or something similar that lasts for years, you will have a balance in Fixed Assets for what you paid for these items.   If it’s been a while since you’ve owned them, you may have a Depreciation account, and when you net the two, your Fixed Asset values are reduced. 

All of the above are assets and they are listed in the first section of a balance sheet. 

What You Owe

If you owe money for taxes, to vendors, or to employees, then it will show in the Liabilities section which is the second of three major sections of a balance sheet.  Day to day unpaid bills are in an account called Accounts Payable. 

If you have bank loans, they usually each have a separate account like a bank account does.   Each bank loan account represents the principal due on a loan (the interest you pay goes to another place).

Equity 

The final section of the balance sheet is Owner’s Equity.  It is the section that will vary the most depending on the type of entity your business is set up as.  For example, if your business is a corporation, then there will be a common stock account which will represent the original amount of money you put into the business; it will match the Articles of Incorporation that you drew up when you incorporated.  This amount will rarely ever change for the life of the business.

There is also usually an account called Paid-in Capital which is how much additional money you’ve put in or taken out of the company beyond the common stock balance. 

A corporation will also have a Retained Earnings account.  This reflects accumulated profit (or loss) through the years of operation. 

If your business is set up as a partnership, the equity section will include an account for each partner that represents their balance in the firm, which is the net amount of money they have put into the business over the years plus or minus the business income or loss through the years.

Keeping It Simple

These are the very basics of the numbers represented on your balance sheet.  If you have questions about any of the numbers, please feel free to reach out and ask. 

Is There an App for That?

The technology side of the accounting industry is rapidly changing and expanding.  Literally hundreds, if not thousands of new companies and new software applications have sprung up to help small businesses automate their processes and save time and money. 

The best way to profit from all of this innovation is to first identify where you can best use the technology in your business.  Here are three places to look:

1-    Paper Chase

What business tasks are you still using pen and paper for?   Look what’s on your desk or in your filing cabinet in the form of paper, and that will be your next opportunity for automation.  For example, are you still hand-writing checks?   There’s an app (or two) for that.

Sticky notes and to do lists have been replaced with Evernote.  Business cards you collect can go in a CRM (customer relationship manager).  All of your accounting invoices and bills can be digitized and stored online. 

Make a list of all the manual and paper processes you do every day and look for an app that can make the task faster for you.

2-    Fill the Gap

Take stock of what systems you already have in place.  The opportunity to fill the gap is where you might have systems that should talk to each other but don’t.  If you need to enter data into two different places, there may be a chance to automate and/or integrate the systems or data.  For example, your point of sale or billing system should integrate well with your accounting system.  A few other examples include accounting and payroll, CRM and accounting, inventory and accounting, project management and time tracking, and time tracking and payroll. 

The more your systems integrate and work as a suite, the better.  

3-    Mismatched

It could be you have your systems automated, but the systems are not the best choice for your business requirements.  If your systems don’t meet many of your business requirements, it may be time to look for an upgrade or a replacement. 

If you are performing a lot of data manipulation in Excel or Access, this might also signal that your systems are falling short of your current needs.  Look where that’s happening, and you will have identified an opportunity for improvement. 

Look in these three areas in your business, and I bet you’ll not only find an app for that, you’ll also find some freed up time and money once you automate. 

Shortcut Your Management Time with Exception Reporting

Do you spend a lot of time reviewing stacks of reports each month so you can get the information you need to make decisions?  Do you find out after the fact that something went wrong in your business and that if you had known about it sooner, you would have made different decisions? 

If so, you might benefit from a special type of reporting called exception reporting.  Exception reporting highlights red flag areas that you need to take action on.  It contrasts with regular reporting, which lists lots of data that you may or may not need to take action on.    

Here’s an example:  How often do you check your bank balance?  You probably check daily or even more, right?  Do you really need to? 

Ask yourself when do you really need to know about your bank balance?  You need to know when it falls below a certain amount, or when you don’t have enough to cover imminent bills, right?  Why not stop checking your balance all the time and replace it with an alert that will send you an email under the conditions and criteria you set?  This will save you time. 

Some exception reports are already built into some accounting systems.  A couple of good examples are the A/R aging report which shows past due invoices that have not been collected and the inventory re-order report that lists inventory items that reached their re-order points and need to be re-ordered. 

There are many ideas to generate exception reports:

·      Missed and upcoming deadline tracking such as project due dates, tax forms due, and payroll due

·      Employees on vacation

·      Bills overdue

·      Expiration date tracking like end of lease and insurance policy renewal dates

·      Large variances in budget to actual reports

To take advantage of exception reporting, here are a few steps:

1.     Identify the reports you currently receive that you review but take no action no matter what.  Do you really need them?  If not, throw them out.  If so, ask yourself what trigger would have you taking action and change the regular report into an exception report that reports on that trigger.  

2.     Think about what data you access all day that is not in a report or easy to use format.  Can you create an exception report or alert out of it and save yourself time?

3.     What information would you like to start receiving that you don’t have now?  It should be something that you would take action on if you knew about it.  Can you create an exception report for these new information needs?

Try exception reporting, or take it to the next level of implementation in your business, and watch your time free up and your management decisions sharpen.