Phone: 206-743-0189 | Email: info@kristymonahan.com

Month: January 2017



January 30, 2017

Let’s Clean Up This Mess!

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Get your books cleaned up now or spend your audit sweating bullets.

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It’s everybody’s favorite time of year!  Tax Time! Cue the crickets…

Okay, okay, it’s likely the most dreaded time of the year.  We check the glove box, the dashboard, purses, and wallets for crinkled-up receipts, barely legible from sitting in the sun.  We grab every spare paper, statement, and invoice, throw it all in a shoe box, and head for the accountant’s office. Time to pay the tax man!

Do you have any idea how much you’re going to owe in taxes?  Do you have a clue how much you actually netted this year after all expenses?  Did you FIND all of your receipts so that you could write them off and take deductions?  What business strategy were you able to put together from staring at the pile of receipts hanging out on your dashboard?  If I were to wager a guess, I would say your strategy looked something like this:

Logs into online banking.  Thinks to self: “Cash in the bank account?  I’m set!”

That’s not a strategy.  That’s flying by the seat of your pants.

It’s common for me to get calls from tax preparers during this time of year, asking if I can repair, rebuild, or start a new set of books for a business from scratch.  A good tax accountant is going to look at what you give them and make sure you are being compliant.  It’s hard for them to do this if they can’t rely on the data you hand them.  Even if you use software like QuickBooks, unless you know some basic accounting (ie: what needs to go where, when and why), you’re going to mess that up, too.  Not only do they not have the time for these clean ups, but CPA’s will also charge you at their hourly rate – I’ve seen upwards to $300/hour, just to do your overdue or bad bookkeeping.  Yikes.

Even worse, if you file your taxes based on incorrect data and are audited by our friends at the IRS, they can make you amend your returns and can look at up to seven years of prior returns.  If they find errors, they will make you rebuild.  Not only will you likely owe additional taxes, but they’ll have the pleasure of tacking on fees, interest, and penalties for late payments.

I get it, taxes are no fun and minimizing what we have to pay is what we all strive to do.  Under-reporting income or attempting to write off personal bills as business expenses, however, is very bad for business.  Conversely, you may have a slew of expenses not even recorded in your books!  You could’ve actually owed less!!!  You can’t possibly make good decisions for the future of your business on faulty data and you certainly won’t have an accurate picture of what your business is worth when it comes time to sell.

If any of this sounds like you, please know that a proactive approach to cleaning up the mess and correcting your books will go a long way in the eyes of the IRS, especially if you tackle the problem before they force you.  No one wants to pay taxes – but I can safely say I’ve never seen anyone smile while writing a check for penalties.  Schedule an appointment with us if you’re ready to get cleaned up!


Kristy Monahan is where the buck stops at Dynamic Bookkeeping. In addition to cleaning up books, she can be found uber-ing children to their extracurriculars and sipping on wine (but never at the same time). If you have a shoebox filled with receipts, if you are freaking out, or if you just need a sanity check on your books, drop her a line at kristy@dynamic-bk.com.

January 21, 2017

Payroll Taxes: Explained

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Ah, payroll taxes.  They seem so straightforward, yet they’re anything but.  Even some of the most seasoned accounting pros have to pull out the good ‘ole T-account scratch paper to help make sense of what is going on!  If payroll taxes confuse you, know that you are not alone.

For simplicity’s sake, I’m only going to attempt to tackle the most common federal taxes, also known as Social Security, Medicare, and Withholding (which are reported on your Form 941/944).  Know that each state has their own taxes that may or may not be handled in the same ways as I describe below.  Also note that another federal tax, Unemployment (Form 940), is not included in this infographic as it is an annual tax paid only by employers (read: doesn’t get withheld from employee paychecks).


How Payroll Taxes Work 150

 

 

So, what have we learned?  In the example above, Robert gets paid a gross amount of $3,000.00 but the check he receives is the net (after taxes are withheld) amount of $2,483.12.  It becomes John T. Owner’s responsibility to set Robert’s taxes aside to be sent to the IRS on the schedule set for his company.  Robert’s taxes are comprised of contributions to Social Security, Medicare and Federal Withholding (which is determined by Robert’s Form W-4 he filled out when he was hired).

When it comes time to send those taxes in, John T. Owner adds a matching Social Security & Medicare payment (which he gets to write off) to Robert’s portion (which he does NOT get to write off).  That is how we arrive at a total owed to the IRS of $746.38.

The Balance Sheet (specifically the liabilities section) houses any money we are holding in trust for someone else (like the IRS).  The Profit & Loss Statement is where we get to show how much our company contributed to payroll taxes.

And for all of my bookkeeping brethren who feel their blood pressure rise when booking these crazy taxes, feel free to adapt this T-Account for your needs.

Booking a Paycheck:

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Making a tax payment to the IRS:

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Payroll is one of those very tricky parts of running a business.  If you don’t already have a professional processing your payroll, you should.  There are many cost-effective and knowledgeable companies in the marketplace to take the liability off of your shoulders.  Don’t chance late fees, interest, and penalties to save a few bucks in the short-term.  Payroll is best left to the pros.

January 7, 2017

Pay Payroll Taxes or Go To Jail: Your Choice

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In my line of work, it’s quite common to see employees being paid as independent contractors in a small business.  With the holidays behind us, it’s also common to see employee bonuses handed out as a reward for all of the hard work.  However, according to the January issue of The General Ledger (a monthly newsletter given to members of the American Institute of Professional Bookkeepers), these scenarios could now land business owners in jail.

White Collar Crime. It's a real thing, folks.
White collar crime. It’s a real thing

According to The General Ledger,

“The IRS is working with the Department of Justice to increase criminal prosecutions, including an amendment to the U.S. Sentencing Commission Guideline Manual.  The Manual will no longer say that employment tax violations are ‘infrequently prosecuted.’

Violators may not only have their bank accounts and receivables levied and their property – including business assets – seized, they may also face little-known and neglected legal tools to obtain unpaid employment taxes – such as levies on their bank accounts and assets before a final notice and a hearing on the new assessment.

More IRS employees are being trained to work with the Department of Justice to obtain injuctions against employment tax violators when these taxes are well in arrears and when other methods are not resulting in collection.  Result: The owner may be barred from opening a new business or missing another payroll tax deposit.  And if the next payroll tax deposit is missed, the owner can end up in jail with no additional administration action by the IRS. [Tax Notes Today]”.1

 

These kinds of things only happen in movies, though, right?  I wish this were true.  I have personally seen bank accounts seized and accounts receivable lists garnished.  Ignorance is NO EXCUSE to the IRS.  If they’re owed money, they’re coming to get it.  So, what can you do to make sure you never check “spend time in jail” off your bucket list?

  • head_in_the_sand-461x307
    Time to pull that head out of the sand!

    Make sure you know rules that turn your independent contractors into employees.  Both the IRS and each state have ample resources online for you to ensure you’re making the correct distinction (https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee and http://www.lni.wa.gov/TradesLicensing/Contractors/HireCon/IndContractor/Default.asp if you’re in Washington State; google “independent contractors vs. employees [state]” for state-specific rules).

  • If you’re providing your employees with bonuses, make sure to tell your payroll processor and have it run through your payroll software.  There’s nothing more frustrating than getting to tax time and finding unreported wages hiding in your books (and yes, we look for those things).  A quick call to your payroll or accounting professional is all it takes to ensure the proper amount of taxes are withheld.  If you manually process your own payroll, know that bonuses are considered supplemental wages and should be taxed at 25%.
  • If you need to reclassify contractors as employees, be proactive.  Even though ignorance is never an excuse, the IRS may be more lenient if you are able to show that you are attempting to rectify your mistakes.  Ensure your employees are set up properly from the get-go by utilizing a professional payroll processing company.  Your tax or bookkeeping professional can provide recommendations for outsourced services and Do-it-yourself software.
I only have two.

Bottom line, know your responsibilities as a business owner or add professionals to your corner who can advise you on such matters.  Ignorance and mistakes can be costly and we only have so many “get out of jail free” cards at our disposal.

 


1Tax Notes Today (2017, January 1). IRS stepping up criminal prosecution of employment tax violations. The General Ledger, 34 No. 1. 

 

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