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Why Business Structure Matters

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When you start a business, there are endless decisions to make. Among the most important is how to structure your business. Why is it so significant? Because the structure you choose will affect how your business is taxed and the degree to which you (and other owners) can be held personally liable. Here’s an overview of the various structures.

Sole Proprietorship

This is a popular structure for single-owner businesses. No separate business entity is formed, although the business may have a name (often referred to as a DBA, short for “doing business as”). A sole proprietorship does not limit liability, but insurance may be purchased.

You report your business income and expenses on Schedule C, an attachment to your personal income tax return (Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don’t take paychecks themselves.

Limited Liability Company

If you want protection for your personal assets in the event your business is sued, you might prefer a limited liability company (LLC). An LLC is a separate legal entity that can have one or more owners (called “members”). Usually, income is taxed to the owners individually, and earnings are subject to self-employment taxes.

Note: It’s not unusual for lenders to require a small LLC’s owners to personally guarantee any business loans.

Corporation

A corporation is a separate legal entity that can transact business in its own name and files corporate income tax returns. Like an LLC, a corporation can have one or more owners (shareholders). Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they’ve personally guaranteed.

If you make a “Subchapter S” election, shareholders will be taxed individually on their share of corporate income. This structure generally avoids federal income taxes at the corporate level.

Partnership

In certain respects, a partnership is similar to an LLC or an S corporation. However, partnerships must have at least one general partner who is personally liable for the partnership’s debts and obligations. Profits and losses are divided among the partners and taxed to them individually.

Hiring An Independent Contractor? Your Tax Obligations

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Working together on laptopFirst time hiring an independent contractor? Here’s what you need to know about taxes.

Two months ago in this column, we explained the differences between employees and independent contractors. The IRS has strict rules that you must follow when you make this distinction because there are very different tax rules for each type of worker.

If you’re hiring an independent contractor for the first time, here’s the good news: Your income tax obligations are much simpler than they’d be if you were bringing on a new employee. You are not responsible for withholding and submitting payroll taxes to the IRS and state agencies. You simply pay the compensation that you and your worker have negotiated.

Here’s a look at the forms you and your independent contractor will need to complete.

The W-9

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Independent contractors must complete a W-9 before they can get paid by you.

Where employees have to fill out a Form W-4 form to get paid by their employers, independent contractors are required to enter tax-related data on a Form W-9. This is a very simple document, requiring only the taxpayer’s:

  • Name, address, and business name (if different).
  • Business entity type (sole proprietor, partnership, LLC, etc.).
  • Taxpayer Identification Number (TIN). This will most likely be your contractor’s social security number, though in rare cases, it may be an employer identification number (EIN).
  • Signature and date signed.

You or your independent contractor can print out a copy of the W-9 here. He or she can either send you a completed paper copy or scan it and email it to you. As the employer, you’ll use this information to report your independent contractor’s annual income. The IRS advises you to keep this form for four years in case it has questions at a later time.

Form 1099-NEC

Before tax year 2020, nonemployee compensation was reported in Box 7 of the Form 1099-MISC. Now, though, there is a separate form for it: the Form 1099-NEC. If you paid someone who is not your employee $600 or more during the tax year, you must complete this form. You’ll need to submit one copy to the IRS, one to state taxing agencies, and one to the contractor by January 31 of the year following the year the income was earned.

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You’ll need several copies of the 1099-NEC for distribution.

In addition to the taxpayer’s name, address, and TIN, and your TIN (account number is optional), you must include the following information on the Form 1099-NEC:

  • Box 1 should contain the total that you paid the independent contractor during the tax year (nonemployee compensation)
  • If the Box 2 is checked, it signifies that you sold $5,000 or more in consumer products to the contractor for resale, on a buy-sell, a deposit-commission, or other basis. The contractor should report income from these sales on the Form 1040’s Schedule C.
  • Box 3 is not currently being used by the IRS.
  • If you withheld federal income tax from the contractor’s payments, as is required when he or she does not supply a TIN, you must report it in Box 4.
  • Boxes 5-7 would only be used if you withheld state income tax.

You can see an example of the Form 1099-NEC here, but you can’t just print or scan and email all of the copies needed. Copy A goes to the IRS, and the other copies go to state tax departments and the independent contractor. You must have an official IRS version of Copy A because it needs to be scanned by the agency. The other copies can be downloaded and printed.

The Form 1099-NECs that you send to the IRS must be accompanied by Form 1096, Annual Summary and Transmittal of U.S. Information Returns. We’ll tell you more about acquiring and preparing all of these forms as the deadline for the 2021 tax year gets closer. Your relationship with your independent contractor should be fairly uncomplicated where taxes are concerned. But if you’re dealing with a situation that causes you to question your handling of it, please let us help. We can also advise you on your classification of your new hire (independent contractor vs. employee), a distinction that the IRS takes very seriously. As always, we’re available to help with year-round tax planning and eventual preparation and filing.

We invite you to request a consultation online now or call us at 404-459-4174 to learn more about how we can help you save money on your taxes.

8 QuickBooks Online Tips

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There are always more things to learn about the applications we use every day. Here are some tips for expanding your use of QuickBooks Online.

We tend to fall into the same old patterns once we’ve learned how to make a computer application work for us. We learn the features we need and rarely venture beyond those unless we find we need the software or website to do more.

QuickBooks Online is no exception. It makes its capabilities known through an understandable system of menus and icons, labeled columns and fields, and links. But do we really see what else it can do? Expanding your knowledge about what QuickBooks Online can do may help you shave some time off your accounting tasks and better manage the forms, transactions, and reports that you work with every day. Here are some tips.

Edit lines in transactions. Have you ever been almost done with a transaction and realize you need to make some changes farther up in the list of line items? Don’t delete the transaction and start over. QuickBooks Online comes with simple editing tools, including:

  • Delete a line. Click the trash can icon to the right of the line.
  • Reorder lines. Click the icon to the left of the line, hold it, and guide it to the new position. This is tricky. You may have to work with it a bit.
  • Clear all lines and Add lines. Click the buttons below your line items, to the left.

Click the More link at the bottom of a saved transaction to see what your options are.

Explore the More menu. Saved transactions in QuickBooks Online have a link at the bottom of the screen labeled More, as pictured above. Click it, and you can Copy the transaction or Void or Delete it. You can also view the Transaction journal, which displays the behind-the-scenes accounting work, and see an Audit history, which lists any actions taken on the transaction.

Create new tabs. Do you ever wish you could display more than one screen simultaneously so you can flip back and forth between them? You can. Right click on any link in QuickBooks Online, like Sales | Customers, and select Open link in new tab.

Use keyboard shortcuts. Not everyone is a fan of these, mostly because they can’t remember them. Hold down these three keys together to see a list: Ctrl+Alt+?. Some common ones include those for invoices (Ctrl+Alt+i) and for expenses (Ctrl+Alt+x).

Modify your sales forms. Do you need more flexibility than what’s offered in your sales forms? It may be there. Click the gear icon in the upper right and select Account and settings under Your Company. Click the Sales tab. In the section labeled Sales form content, notice that you can add fields for Shipping, Discounts, and Deposits by clicking on their on/off switches. You can also add Custom fields and Custom transaction numbers.

Add attachments. Sometimes it’s helpful to have a copy of a source document when you enter a transaction. To attach a receipt to an expense, for example, look in the lower left corner of the transaction. Click Attachments and browse your system folders to find the file, then double click on it.

Record expenses made with credit cards. Who doesn’t use credit cards for expenses sometimes? You can track these purchases in QuickBooks Online, as pictured above. Click the gear icon in the upper right and select Chart of Accounts under Your Company, then click New in the upper right. Select Credit Card from the drop-down list under Account Type. Enter Owner Purchase in the Name field and then Save and Close. When you create an expense, select Owner Purchase as the Payment account.

Previous Transaction Button. Are you trying to find a transaction that you entered recently but don’t want to do a full-on search? With a transaction of the same type open, click the clock icon in the top left corner. A list of Recent Expenses will drop down. Click on the one you want.

Whether you’re new to QuickBooks Online or you’ve been using it for years, there’s always more to explore. We’d be happy to help you expand your use of QuickBooks Online by introducing you to new features, building on what you’re already doing on the site to improve your overall financial management. Call us to schedule some time.

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QuickBooks Online can do more than you think. We can help you expand your use of the site to improve your financial management.

Do you want to use keyboard shortcuts in QuickBooks Online, but can’t remember them? Hold down Ctrl+Alt+? for a list.

If you use credit cards for expenses, you should set up an account to track them. We can show you how.

Looking for a transaction you recently created but don’t want to search? Click the clock icon in the upper left corner for a list.

We offer a FREE initial consultation for business owners. Please call us at 404-459-4174 and ask for Dorsey CPA to discuss your specific needs.

Revisit and Review Your Last Tax Return

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preparing taxesCarrying out a post-tax season review of your income tax return can be very helpful way to gain new insight into your financial situation. It’s a bit like looking at a familiar place from a different and fresh perspective — you never know what you might discover. See what a review of your federal income tax return might reveal about the following issues.

Investments — Your Winners and Losers

Look for evidence of excessive gains and losses within a compressed time frame. If you are a trader, this might be typical. However, if you are an average investor, these gains or losses may point to the fact that you are buying and selling too frequently. You should consider the fees associated with excessive trading as well as whether your portfolio is structured in a way that meets your goals and your tolerance for risk.

You may have a capital loss carryforward that represents an unused loss you are carrying over to offset future capital gains. If you intend to rebalance* your taxable account investments, see if there will be capital gains that can be offset by the loss you are carrying forward.

Another possible way to reduce taxes is to consider municipal bonds. Interest on municipal bonds is generally exempt from federal income taxes and possibly state and local income taxes. Of course, the credit ratings of municipals should be analyzed before purchase. Although bonds with lower credit ratings may offer higher yields, they typically carry a higher risk of default.

Retirement Planning

You may be able to lower your current year’s income tax liability by increasing the amount you contribute to tax-favored retirement plans (limits apply). If you are taking distributions from a retirement plan still held with a former employer, you may want to consider a rollover into one account to consolidate accounts and simplify your recordkeeping. If you have multiple individual retirement accounts (IRAs), also think about consolidating accounts.

Your Business

If you operate a business, review of your tax return may point to a wealth of tax-saving and other planning opportunities. For example, if you are self-employed as a sole proprietor and filed a Schedule C, look into whether a different business form could make sense. For example, an S corporation can limit a business owner’s personal liability and may offer tax savings. If you do not already have a retirement plan in place, consider establishing one. A retirement plan established through your business allows you to save for your future financial security and deduct your contributions. Additionally, there may be income-shifting opportunities among family members through employment in the business.

Itemized Deductions

Review your Schedule A for potential opportunities. Is it possible to get a better rate and term on your mortgage loan? Would refinancing or switching to a 15-year term make financial sense? If you make charitable donations, look into contributing appreciated stock in place of cash. When you donate appreciated stock held more than one year, you receive a deduction for the value of the gift and you avoid paying capital gains tax on the appreciation.

You could also investigate establishing a charitable remainder trust. Doing so allows you to make a gift to charity, retain an income from the donated assets for life, and claim a current tax deduction for your gift.

Other Considerations

If your filing status has changed due to a life change such as marriage or divorce, make sure that change is reflected when you file this year’s tax return. In addition, be sure to keep your beneficiary designations on your retirement accounts and insurance policies current so that they accurately reflect your present status. If you have children, you may want to consider setting money aside for their future education. There are tax-advantaged college savings opportunities that you should look into further.

A review of your tax return and your investment transaction statements can help you identify areas where you may be able to lower the taxes you’ll have to pay next year. Your financial and tax professionals will be able to assist you in that effort.

*Rebalancing a portfolio may create a taxable event if done outside of a retirement account.

We invite you to request a consultation online now or call us at 404-459-4174 to learn more about how we can help you save money on your taxes.

The Top 3 Reasons to Outsource Your Accounting

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Smiling businesswoman at meetingWhile you may think it’s better to take care of your small business accounting tasks in-house, you may be surprised to know that your business can benefit from having a professional accountant or CPA handle the job for you. Here are the top three reasons to outsource your accounting.

1. Peace of Mind

The number one reason for outsourcing your accounting is the peace of mind you will get regarding managing your accounting records. A qualified accountant or CPA on your team allows you to gain access to their professional knowledge and experience. Further, you can even choose an accountant that specializes in your unique business needs. A professional can help you keep your business records accurate and up-to-date. For example, payroll and tax documents will be maintained appropriately and submitted promptly. Timely and accurate accounting reduces your risk of penalties resulting from inaccurate record-keeping or lack of knowledge regarding aspects of accounting like tax laws and deadlines.

2. Focus on Business Development

When you enlist the services of a qualified accountant or CPA to manage your small business accounting needs, you minimize the time that you or your senior staff must spend performing or micromanaging those tasks. Freeing up your time in those areas enhances your ability to maintain a keen focus on the day-to-day tasks your business faces and any additional business needs that arise. Being able to focus your time on managing and growing your business, you improve operational efficiency. As you develop strategic goals, you can convey those to your outsourced accountant to garner their professional guidance and support when executing and realizing those goals.

3. Save Money

Many small business owners feel that handling accounting tasks in-house is more cost-effective because they can utilize existing staff. However, consider the total cost involved in hiring or training a staff member to manage your business’s accounting needs. There is also the associated time expenditure related to supervising an employee who manages the accounting. For a dedicated in-house staff member to handle the task, you must consider the additional costs of payroll, payroll taxes, and employee benefits. There is also employee turnover to consider, which, if high, could lead to additional training and expenses. By not electing to have a full-time dedicated employee handle accounting in-house, you also save on space and technology required to accommodate that individual.

For these reasons – and more such as getting timely financial advice, understanding cash flow, and maximizing your tax savings opportunities – it’s time to outsource your business’s accounting needs. What you gain far outweighs the cost.

Contact our firm to find out how we can create a package of accounting services for your small business.

We offer a FREE initial consultation to individuals and businesses in Roswell, Sandy Springs, GA and surrounding areas. Call us today at 214-361-1400 to discuss your needs.

Payroll Taxes: Who’s Responsible?

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PAYROLL Businessman working Financial accounting conceptAny business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare taxes (known as Federal Insurance Contributions Act taxes, or FICA), and forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld taxes in a timely manner will find itself in trouble with the IRS.

The IRS may levy a penalty, known as the trust fund recovery penalty, on individuals classified as “responsible persons.” The penalty is equal to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person?

Any person who is responsible for collecting, accounting for, and paying over withheld taxes and who willfully fails to remit those taxes to the IRS is a responsible person who can be liable for the trust fund recovery penalty. A company’s officers and employees in charge of accounting functions could fall into this category. However, the IRS will take the facts and circumstances of each individual case into consideration.

The IRS states that a responsible person may be:

  • An officer or an employee of a corporation
  • A member or employee of a partnership
  • A corporate director or shareholder
  • Another person with authority and control over funds to direct their disbursement
  • Another corporation or third-party payer
  • Payroll service providers

The IRS will target any person who has significant influence over whether certain bills or creditors should be paid or is responsible for day-to-day financial management.

Working With the IRS

If your responsibilities make you a “responsible person,” then you must make certain that all payroll taxes are being correctly withheld and remitted in a timely manner. Talk to a tax professional if you need to know more about the requirements.

We offer a FREE initial consultation to individuals and businesses in Roswell, Sandy Springs, GA and surrounding areas. Call us today at 214-361-1400 to discuss your specific needs.