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. 

Six Common Payroll Mistakes to Avoid

Getting payroll done has gotten so much easier than it used to be for small business owners.  But there are still some minefields when it comes to state and federal compliance.  We’ll take a look at six of them in today’s article.   

1-    Business or Personal?

A great admin might want to help you in any way they can, including personal errands.  But time spent having your admin fetch your dry cleaning and drug store prescriptions is not deductible as a business expense, even if it makes you more productive at work.  

Be sure you separate your business payroll from personal payroll to avoid tangling with the IRS on this issue. 

2-    New Hire Report

It’s not every day that a small business needs to hire additional help, and the New Hire Report is easy to overlook.  It’s due to your state within a certain number of days of your new employee’s hire date.  Some payroll companies will file it for you, and some won’t, so it’s best to check so that you don’t make the common mistake of forgetting to file this report. 

3-    Worker’s Compensation

When you have employees, you need worker’s compensation.  When you bring on your first employee, you’ll need to overcome this learning curve of figuring out what you need. 

Even if you’re a veteran employer, you may have coverage holes in your worker’s compensation coverage.   Do you have employees who work at home?  Are you sure they are covered?    In some states, employees have to be specifically named in the policy before they are covered to work at home. 

Be sure you ask the right questions so there’s not a risky gap in this essential protection for employers. 

4-    Posters

There are both state and federal notices that must be posted for employees to be able to read.  California is especially zealous and liberal about issuing fines (up to $17,000 per location) for employers that do not have their posters, well, posted on workplace walls. 

5-    Employee versus Contractor

The proper classification of a worker as a W-2 employee or a 1099 contractor has long been an area of scrutiny for the IRS.  The IRS has rules as well as court cases that have established the guidelines that exist in this area. 

If you classify a worker incorrectly as a contractor when they should be an employee, then you can be held liable for paying employment taxes on that contractor. 

6-    Bonuses

Bonuses can often be a spur of the moment thing or something that’s done at the very end of the year when we’re occupied with the busy holiday bustle.  It can be easy to forget that the bonuses need to be run through payroll like all other wages so that the proper deductions and taxes can be calculated. 

Use these six items as a checklist to avoid these common mistakes as well as reduce your business risk in the payroll compliance area. 

Summertime Strategies for Your Business

Summer is a great time of year for most businesses to pause for just a little while to take stock, congratulate yourself on what you’ve accomplished so far this year, and make big plans for your future.  Here are five summertime strategies to help you regroup, reassess, and rejuvenate your business. 

1-    Mid-Year Review

If your business runs by the calendar year, 2014 is already more than half over.  This is a perfect time to stop and reflect where you’ve been, what you’ve accomplished, and where you want to go next.  You can make this process as informal or formal as you want.  Some firms hold complex retreats; you may simply need some quiet time on a weekend where all your family is busy doing something else.   

If you’ve never done any planning and feel like you need a guide, consider the book, The One-Page Business Plan written by Jim Horan. 

2-    Take a Vacation

There’s nothing better to rekindle your creative juices than to get away from the business for a while.  Summertime is when most people take vacation, so if your business is not having its busy season, this might be a good time to go away for a while. 

If you’re anxious about being away from your business, you’re not alone.  In your annual planning process, plan for and block out your vacation time way ahead of time.  Book the reservations with no refunds several months in advance so that you won’t chicken out at the last minute.  There is life beyond your business, and you will be a better business owner when you take regular breaks away. 

3-    Celebrate

Take time to pat yourself on the back and congratulate the people around you for the goals you’ve reached and the efforts your team has made on your behalf.  We all could use more praise and more celebrations in our lives.  Perhaps you can organize a party, or if you are not the partying type, a quiet word individually with your team can go a long way, maybe more than you know.

4-    Prune Your Projects    

Is your plate too full?  Most of us would say “yes” to that question, so the next step is to ask yourself what you can afford to stop doing that doesn’t make sense.  Is there a project or two that can wait?  If so, decide to stop stressing about not getting it done and give yourself permission to put it on the back burner for now. 

5-    Focus

Ask yourself what one thing you could do today that will make all the difference in your profits, revenues, goals, or simply peace of mind.  And get that thing done. 

Try these five summertime tips to rejuvenate your business.    

Does Your Small Business Need a CRM?

Have you ever stayed at a hotel and then returned, finding that they have stocked your room with everything you asked for the last time you were here?  Your special allergenic pillow was already waiting for you, you were asked if you would like a dinner reservation made just like you always do the first night, and there were even extra hangars because you always need extra hangars.  None of this would be possible for the hotel if it didn’t have a CRM, customer relationship management, system in place. 

Would your clients be impressed if you remembered all of the details about your last conversation, their last purchase, or their preferences?  If so, your business might benefit from a CRM system. 

Businesses that have more than 30 or so clients may benefit from a system that allows you and your employees to enter detailed information about each client interaction that they have.  It can work for both current and future clients, i.e., prospects.  A CRM is basically a great big customer database at its core.  It contains master file information on a customer or client, such as name, company, address, contact info, and custom fields.  It is also transaction-driven in that you can log activity such as calls, meetings, proposal dates, and more. 

A good CRM system is also integrated with your other internal systems, such as your accounting or POS system or both.  In some CRM systems, you can see invoice and payment history, so that when a client calls in, you can also peek to see whether they owe you money or what goods they ordered that they may be calling about. 

There are literally hundreds of CRM systems to choose from.  The gold standard for large companies is SalesForce.com; however, some small businesses use it as well.  SugarCRM is the largest open source CRM, meaning its programming code is available to the public.  ZohoCRM is one of the largest small business CRMs and offers a suite of products for small businesses.  And Act! is also very popular and plays well with social media. 

Before choosing a CRM, decide what you want it to do and how you will be using it.  One of the most important aspects of profiting from a CRM is to make sure it gets used, and that takes some habit-changing from you and your staff.  Once you have your requirements, you can evaluate the software options available, and choose the one that works best for you. 

When your clients start talking about how great your service is and how much attention you pay to the details they care about, you’ll know your CRM is paying off for you.