How to Avoid the Perils of Payroll Taxes

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los angeles

It is the nightmare scenario for every business owner. A letter from the IRS arrives demanding payment for unpaid payroll taxes. The statement lists the amount owed along with penalties and interest. Thousands of businesses are faced with this situation everyday. Even worse, many of these companies are forced into bankruptcy when they are unable to make the payment demanded.

The IRS also considers the problem of unpaid payroll taxes significant. Payroll taxes represent a significant portion of the IRS’s accounts receivable. Fines for a business that collect the taxes but fail to pay the IRS are significant. The IRS considers this their money that is simply held by the business.

Most unpaid payroll taxes are a function of mistakes rather than deception. Depending on the size of your company, the time to file is quarterly, monthly or even the day after payday. Missing the due date by even one day can generate a sizable fine. Knowing what forms to file and when is the problem for many business owners who have a million other things they are working on.

Timing is not the only problem. The tax rates that must be withheld are a moving target that often change. There are rates for Social Security and Medicare taxes that have rates for withholding from the employee and the employer contribution. These two taxes sum to the Federal Insurance Contribution Act, FICA.

Federal Unemployment Tax and Federal Income Tax must also be collected from each employee and that is just for the federal government. There are also taxes that must be collected for the state and even some local governments.

The various rates, numerous schedules and countless forms are enough to make any business owner’s head spin, but the failure to get it exactly right is even scarier.

The process starts with a letter and then a phone call. If not corrected, an IRS agent will pay you a visit. If they determine your business is salvageable they may work out a payment plan. If however, they determine your business is failing, then they can sell your assets to collect the money ahead of your creditors.

An even worse scenario exists if the company defaults. The IRS can hold the business owner or the officers of the company liable for the unpaid taxes.

With such a complex system and such steep penalties, it is not surprising that so many companies are turning to payroll services to help them navigate the payroll tax maze. Below is the criteria you should use to find the right service.

  • Liability – If there are ever mistakes will your payroll company stand behind you and pay the fines or do you maintain the liability for any errors? You also want to make sure they have the financial security to backup their promises if ever needed.
  • Access – How will you enter your payroll information? Some services have websites or you may need to call it in to their representative.
  • Customer Service – If there are ever any changes you need to make how easy is it to contact the service. Make sure you can get a real person on the phone if that is ever needed.
  • Price – Your costs will primarily vary by how many employees you have and how often you run payroll. Make sure you ask about any additional charges like check delivery or quarterly filing.

By getting several quotes and doing some due diligence you will be getting a good payroll service at a reasonable price. Now you can get back to running your business instead of untangling the payroll tax knot.

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Why Startups and Entrepreneurs Need Accountants, and How to Choose One

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Many first time and even repeat or serial entrepreneurs who launch their startup will initially try wearing the accountant’s hat by doing their own accounting and taxes, in addition to doing everything else in their business. The advent of simple desktop and online or cloud-based bookkeeping software packages like Quickbooks, Xero, Wave, etc., make it easy for even a layperson to keep track of their basic business finances, however, this is still not an efficient nor an effective approach.

In a growing enterprise, there comes a time when it makes sense to hand over the responsibilities for accounting, taxes, and the rest of the financial reporting and analysis to an accountant. For the successful entrepreneur, the right time to choose an accountant for your startup is before you even incorporate, closer to the time you are still developing the idea fully. A well-qualified and experienced outside accountant can make all the difference in how and if the business succeeds, providing valuable insight and first-hand experience. Great CFO‘s can work with dozens of companies over their careers, however great outside CPA’s work with hundreds annually.

Benefits of Startup Accountants:

Accurate and reliable books and records are the foundation of all successful businesses. This is not an easy task for new entrepreneurs, who have no extensive knowledge in accounting, taxation, compensation, and other financial and non-financial factors, but this is much more than just good bookkeeping.

Choosing an outside accounting firm who provides a wide range of services to entrepreneurs and new businesses will help growing companies stay on top of both regulations and opportunities.

  1. Selecting the most suitable business structure: Accountants help to decide the most suitable structure for the business after evaluating factors such as legal exposure, tax advantages, portability should you need to relocate, and ease of operation from among the many choices: Sole Proprietorship, Simple Partnership, Limited Partnership (LP), Limited Liability Partnership (LLP), C-Corporation, S-Corporation, and Limited Liability Company (LLC).
  2. Financial planning and estimates: Banks, financial institutions and investors will require financial forecasts to find the potential profitability and risk profile of the business before they approve any business loan. Startup accounting firms make professional assessments of the business and thus enhance the chances of loan approval. Financial planning by startup accountants helps them to advise the new entrepreneur on how to raise money. They help with making sound decisions on whether fixed assets and other potential capital expenditures should be leased or purchased, whether funds should be raised by taking a loan, issuing more capital, or taking an overdraft.
  3. Budgeting: Maintaining company accounts out of the red will ensure that a business runs smoothly over its lifetime. They prepare business plans, cash flow projections, budgeting, as well as forecasts.
  4. Bookkeeping and payroll services: These services include preparation of financial statements, daily bank reconciliations, calculation of employee salaries and benefits, and the analysis and compliance for taxes such as preparing tax returns, preparing year-end accounts, advice on minimizing business tax, and handling any Federal, State or Local inquiries regarding tax.
  5. Auditing: Auditing services are often needed by banks and financial requirements as a condition of a loan. Whether performing the audit preparation work to ensure that the books and records are in compliance, to performing the outside audit itself, finding the right CPA for your startup is critical.

How to choose the best startup accountant:

Hiring an outside firm or outside accountant is a good first step for a startup business. This costs them less than a full-time, salaried employee and in addition, gives them a higher level of advice from a certified public accountant (CPA). The accountant will use the latest and greatest accounting and tax software to help them manage the books in a safe and secure way. After determining to choose an outside accountant, it is important to determine the qualifications and other criteria the accountant should possess. Things to look for when choosing the best startup accountant include:

Certifications: It is recommended for startups to look for someone who has professional accounting qualifications like:

CPA (Certified Public Accountant). CPA’s are real financial advisors who can provide more in-depth independent financial assessments about the business. They manage the daily bookkeeping of the business, provide tax advice and prepare tax returns. CPA’s also offers a wide range of other services such as debt management, cost-saving inventory measures, setting short-term and long-term goals, and managing cash flow in businesses.

Industry experience: Business owners often prefer to hire Certified Public Accountants that have experience handling similar businesses in the same industry. It is true that a professional with experience will be aware of the nuances in that particular industry.

Size of the firm: It is wise to look for an accounting firm that is comparable in size to the company. Generally small to medium firms specializes in small business work, provide personalized services and charge less compared to large firms.

Costs and charges: Fee charges are another important factor while selecting a startup accountant. Depending on the extent of work and size of the firm, costs and charges may vary. While it is important to get the right value for the money spent, experts advise that cost should not be the first factor in choosing an accounting firm or a CPA.

Additional services: Additional services may be offered by accounting firms such as specialized business advice apart from their basic accounting services. These specialized services can help startups plan better and grow successfully.

Choosing the best startup accountant is a milestone for many businesses. Choosing outside accountants signals that the company wants to improve its financial position, and position it for growth and success. Hiring an outside accountant should be done early. Many companies wait too long before making this decision which often results in inaccurate and sloppy reporting at a crucial time in the company’s growth.

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Starting a New Business? Here are the Accounting Decisions You Need to Make

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Starting a new business is exciting, but in that excitement are a lot of decisions to be made. Out of them all, the accounting decisions you will need to make are among the most important. When starting a new business, you will want to spend some time on the following areas:

  1. The type of organization your business is – Are you a sole proprietor or are you in business with someone else? Will you organize as a partnership or as a corporation? Limited liability companies are the newest form of entity – is this form right for your business? Choosing an organizational type will determine what federal and state income forms to file. For example, a corporation may need to file annual reports in the state of the incorporation.
  2. The fiscal year of your business – Most businesses use the calendar year, but that may not be the proper choice for your business. For tax purposes, many businesses choose a different beginning and ending date than the January through December calendar year.
  3. The accounting method for your business – Are you going to use a cash or accrual method of accounting? The cash method is easier for startup companies, however, if you have inventory – the IRS may force you to use accrual.
  4. You will have to decide if your business will follow GAAP (generally accepted accounting principles) or Tax Basis for financial statement disclosures. Your banker may prefer one over the other.
  5. The method of valuing inventory for your business – Accounting principles allow many methods, like LIFO (last in first out), FIFO (first in first out), and Lower of Cost or Market. You will need to choose the right method for your business.
  6. Financial records for your business – You have a lot of choices here! Are you going to use paper ledger sheets to record sales and purchases? Are you going to keep track of income and expense using a computer program? Some bookkeeping software has the ability to integrate your data with an accounting professional, thus saving you money. You will need to decide the best method for your business.

Feeling a little overwhelmed? All of the above can be much easier if you have an accounting professional to guide you. This is another decision you will need to make. Will you hire an in-house accounting clerk or will you out-source your accounting needs?

Unfortunately, too many new businesses skimp on setting their accounting backbone up correctly at the start of their business. The financial backbone needs to be strong, as it is the support of your entire venture. You can get expert help in these initial stages, and decisions, in setting up a new business, so that your business starts off right.

Starting a new business is exciting! If you take the time to talk with your accounting professional about the above decisions, you will help ascertain the best possible beginnings for your business. Good luck!

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Accounting Consequences of Legal Business Organization

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If you are starting a business, one of the first decisions to make is the legal structure of the business. This decision will impact your taxes, liability, and control over the business. You will want to take into consideration the following:

  • How large do you expect the business to be?
  • What level of personal liability are you comfortable with?
  • Do you anticipate much liability in the daily operations of the business?
  • How much revenue do you project?
  • How comfortable are you with strict organizational structures?
  • How do the owner(s) plan to take profits out of the business?

This decision should not be taken lightly. Consult your accountant and attorney for advice before making a final decision. They can help guide you through the implications of how you organize your business. They are also the experts in any relevant state and federal laws.

There are three major categories of legal business structures with variations on each. Here are some of the most common legal structures with the pros and cons of each.

Sole Proprietorship

Most small businesses start out as a sole proprietorship. This is when there is only one owner who is also responsible for the day-to-day operations of the business. The owner controls all the assets of the business and takes on all the liability of the business operations. Profits and losses are reported directly on the owner’s personal income taxes. In effect, the business and the owner are the same entity legally.

Advantages of Sole Proprietorship

  • Easiest form of business to set up and dissolve.
  • Single owner has complete control over the business.
  • All profits can be re-invested in the business or can be used by the owner.

Disadvantages of Sole Proprietorship

  • Owner has full liability for business operations. This includes all debts or lawsuits against the business. The owner’s personal assets are at risk.
  • It is harder to raise capital from commercial sources with a management team of one.
  • Employee benefits can not be deducted from the business income. This includes the owner’s health insurance.

Variation of Sole Proprietorship

  1. There is only one type of sole proprietorship.

Partnerships

Partnerships are similar to a sole proprietorship except that this entity includes two or more people who share ownership of the business. The day-to-day management of the business may or may not be divided among the partners. Once again the law looks on the owners and the business as a single entity. An operating agreement should be drawn up by a lawyer and signed by all partners governing how the ownership is divided, profits will be distributed, new partners added, and the business dissolved. The cost for a lawyer to write up a good operating agreement is far less than the litigation that may arise over the life of a business.

Advantages of Partnerships

  • They are still easy to establish, but you should have a professionally written operating agreement.
  • Liability is spread over several owners.
  • All profits can be re-invested or flow directly to the owners.
  • It is easier to get capital from traditional sources including banks.

Disadvantages of Partnerships

  • All the partners are liable for the debt and lawsuits of the business. The partners’ personal assets are at risk.
  • Profits and decision-making is shared if conflict arises.
  • Employee benefits can not be deducted from the business income. This includes health insurance.

Variations of Partnerships

  1. General Partners — Members of the ownership team are responsible for day-to-day management, associated liability, and share of profits. Sometimes they are called active partners.
  2. Limited Partners (LLP) — Members of the ownership team only have liability up to their investment and generally have limited input into the day-to-day operations of the business. Sometimes they are called silent partners.

Corporations

A corporation is registered with the state where the company resides. Legally it is a unique entity from the owners. The taxes are paid by the corporation and it can be sued or enter into contractual agreements. A corporation is owned by shareholders who elect a board of directors to manage the day-to-day business decisions. A lawyer should draw up the ownership agreements.

Advantages of Corporations

  • Shareholders have limited liability for the corporation’s debts and liabilities.
  • Shareholders can only be held accountable for their investment in the stock of the business.
  • Easier to raise capital through the sale of stock or through commercial means.
  • Employee benefits can be deducted from the corporation’s profits for taxes.

Disadvantages of Corporations

  • More difficult to form than a partnership, however most states now have online options that eliminate the paperwork.
  • Additional regulations and reporting are required from federal, state and local governments.
  • Owners’ income may be subject to double taxation.

Variations of Corporations

  1. S Corporations — An S Corporation is only a tax election. It enables the shareholders to treat the earnings and profits as distributions and have them pass through directly to the owners personal income taxes, however the owners’ pay must be comparable to what any employee would be paid to do a similar job at another company. The IRS can reclassify the business and the shareholders will be liable for all payroll taxes if all requirements are not met.
  2. Limited Liability Company (LLC) — An LLC was designed to provide many of the benefits of both partnerships and corporations. There is limited liability to the owners like a corporation, but the flow of profit works like a partnership. The income of the business is reported on the shareholders personal income taxes as income.
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