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Accounting and Tax Best Practices for Small Businesses
- 1. Accounting & Tax Best Practices for Small Businesses & Their Owners
- 2. Best Practices o Structuring your company o Accounting refresher o Financial statements o Bookkeeping basics o Taxes (income, sales, payroll, etc.) o 2014 tax planning
- 3. Choosing a Structure Making the Decision… Sole Proprietorship Partnership LLC S-Corp C-Corp How easy is it to setup? How expensive is it to setup? Am I stuck with double taxation? How flexible is the structure (e.g. # of members, distributions)? I want to go public in the near future… Will I be personally liable for my company’s debts?
- 4. “Double Taxation” – Smith Inc. LLC or S-Corp Smith Inc.’s Profit $ 100 60% of the profit (your portion) 60 Taxed at 40% (24) You pocket $ 36 C-Corp Assume… • You own 60% of Smith Inc. • You pay tax at 40% • The corporate tax rate is 35% • Dividends are taxed at 20% • All profits are distributed Smith Inc.’s Profit $ 100 35% corp tax (35) After-tax profit 65 60% of the profit paid to you as a dividend 39 20% dividend tax (7.8) You pocket $ 31.2
- 5. “Double Taxation” – Smith Inc. Can’t I just pay myself a salary instead of paying dividends? Yes How limited is limited liability? • Generally, pretty limited • “Piercing the corporate veil” – common for failure to pay “trust fund liabilities” • i.e. Withheld payroll or sales tax owed to the government
- 6. Financial Statements 101 o Types of Assurance o Audit o Review o Compilation Most Stringent Least Stringent o Why would I pay an external accounting firm for financials?
- 7. Accounting Methods Cash Accrual • Timing of revenue and expenses is based on cash inflows and outflows • Does not show what you owe or what is owed to you • Commonly used for small- business tax returns, even if books are kept using the accrual method • More accurately reflects real life • Shows money owed to you and money you owe • As company grows, may be required to use Accrual method for tax return
- 8. Bookkeeping Basics o Record of all transactions o Common Options o Quickbooks – Industry leader, desktop and browser-based options o Xero – Browser-based, targets small business owners o Generates Balance Sheet & Income Statement
- 9. Bookkeeping Best Practices o Keep your books up to date o Do not overlap business and personal, use separate bank accounts and credit cards o Engage an external accounting firm to review your books monthly or quarterly
- 10. Small-Business Tax Basics o Income tax o Sales tax o Payroll tax o LLC fees
- 11. Income Tax o Payments due quarterly o Estimate year-end profit to determine quarterly payments o Corporate tax return is due 3/15, can be extended to 9/15 (4/15 & 10/15 for partnerships, LLCs & individuals) o Even if extended, full payment is due 3/15 or 4/15
- 12. Sales Tax o Am I selling a product? Services generally do not incur sales tax o Do I have nexus? o In-state sales usually lead to sales tax o Complicated rules to determine nexus, largely based on “targeting sales efforts” in the state o Payment frequency based on sales volume o No statute of limitations!
- 13. Payroll Tax o Fica, Medicare, FUI, SUI o Payroll services (e.g. Paychex, ADP) handle Payroll administration and, if you choose, tax filings and payments for you o PEO services (a.k.a. leased employees) put your employees on their payroll and lease them back to you o Mandatory employee notifications
- 14. Personal Income Tax Timeline o March – Get a K-1 from your business o April – File your personal tax return & pay 1st estimate o June/Sept – Pay 2nd & 3rd estimates o Nov – Project your business’s profits and personal income. Determine your estimated tax liability for the year o Dec/Jan – Pay 4th estimate, determine Dec or Jan state payment based on AMT
- 15. Choose entity type Check name availability Register entity with the state, receive filing receipt & certificate of organization Obtain EIN (Business ID #) from the IRS Choose managing member Make S- Election Choose officers Open a business bank account Choose a bookkeeping system LLC S-Corp Payroll? Sales tax? Register for state unemployment insurance, workmen’s comp & disability PEO Service? Yes Payroll Service? File quarterly payroll tax returns & make tax payments No No Register for sales tax in every state you will collect and pay Yes Collect sales tax at point of sale File sales tax returns and make tax payments Outside Vendors? File & issue 1099s as required Yes Entity Structure LLC Consider purchasing a general business insurance policy LLC Fee & UBT Est. Tax NYC Est. Tax S-Corp Profitable? Projections & personal income tax estimates Yes
- 16. Accounting & Tax Best Practices for Small Businesses & Their Owners wffacpa.com @wffacpa Wagner, Ferber, Fine & Ackerman talenttechlabs.com @talenttechlabs Talent Tech Labs
Editor's Notes
- Introductions Mention mustaches? Open forum for questions
- Table of contents
- Work through each row Give explanations for why each entity type is easy or hard
- Taxation of an LLC/S-Corp vs. a C-Corp Smith Inc. makes $100
- Can’t I just pay myself a salary instead of paying dividends? Yes, which is why with small businesses, it is often an unexpected situation in which the double taxation is really felt However, the effects of double taxation is often most felt by a small business following an IRS audit, where they often will reclass T&E expenses that were actually personal You have to pay corporate tax on the additional income that comes from not deducting the reclassed expenses Since the money is already out of the Corp, it is a deemed dividend, and they make you pay 20% dividend tax as well
- Audit – Checking every detail. High level of assurance Review – Making sure things are “reasonable” by comparing to prior periods and industry Compilation – No assurance Who uses them? Banks, investors, government agencies
- Cash Doesn’t matter when you sell something Doesn’t matter when you get the benefit of something – e.g. 1 year insurance contract paid in January A/R & A/P More flexibility and control over timing of expenses Accrual Smoothing of expenses, e.g. payroll, insurance contract A/R & A/P Gross receipts test
- Integrates with your day-to-day business Invoicing and bill-pay Inventory
- Don’t leave yourself with a full year of books to write up in December, it’s impossible to remember what you did 12 months ago Keep monthly books allows you to use them for managerial purposes, not just for regulatory/tax purposes
- If your business is profitable, you will have to consider income taxes If you sell a product, doesn’t apply to most services, to a state where you have “nexus”, which basically means “you have to pay sales tax on sales to our state”, you owe sales tax. You will collect this sales tax from your customer, hold it until it is due to the government, and then pay it in Depending on the volume of your sales, sales tax is usually paid in quarterly, monthly, or weekly Payroll tax is only relevant if you have payroll If you are an LLC and don’t have any employees, you don’t have to deal with payroll tax Payroll tax includes things like Social Security, Medicare and unemployment insurance Generally, payroll taxes are paid half by the employee and half by the company, but the company will usually withhold what the employee owes from their paycheck and pay it all in to the government together LLC fees are fees charged by the state for being in existence as an LLC In NY, the size of the fee is dependent on the volume of your sales, not on your income. The minimum fee is $25/year
- Due quarterly for both business income taxes (Corporate taxes owed to NYC) and personal income tax on the company’s profits (1040) At the end of Q2, you should have paid in ½ of the taxes owed on your expected full-year profits Safe harbor – If you pay in 110% of your prior year’s tax, you will not owe penalties for underpaying, you just pay the rest by March or April 15
- Due quarterly for both business income taxes (Corporate taxes owed to NYC) and personal income tax on the company’s profits (1040) At the end of Q2, you should have paid in ½ of the taxes owed on your expected full-year profits Safe harbor – If you pay in 110% of your prior year’s tax, you will not owe penalties for underpaying, you just pay the rest by March or April 15 Nexus Complicated rules to determine Many court cases Based on targeting sales efforts towards the state No statute of limitations This means that if you’ve been selling goods to a customer in Kansas for 10 years, and in year 11 Kansas decides that you should have been paying sales tax all along, and the courts agree, Kansas can force you to pay all of the sales tax you would have owed on all sales in the state for the past 10 years. This is a huge problem because if you had known all along, you would have collected it from your customer, but good luck telling your customer that you want them to pay you sales tax on all of the stuff they’ve purchased from you for the past 10 years, so you’re on the hook to pay it
- Payroll taxes Fica (SS and Medicare), Unemployment, federal, state and city withholdings Payroll services A la carte services, you can choose to file your own payroll tax returns or pay them to file them Can get health insurance or flexible spending plans through them PEO service Your employees are technically employed by the PEO. The employees are then leased to you for a fee Whereas the payroll services will file your payroll tax return for you, with a PEO you don’t even have a filing requirement for payroll services because you technically have no employees Mandatory employee notifications Require businesses to provide certain notifications to employees upon hire or at other times, such as their legal entitlements (paid sick time in NYC)
- Determining the amount and timing of state income tax payments is a key function of your tax advisor in helping to maximize tax savings
- Handout available