Bookkeeping FAQsCash vs. Accrual
Businesses are required to use an accounting method to report income and expenses. The two most commonly used methods are cash and accrual. You select the method when you file your first tax return and it must be used for all subsequent returns unless you get IRS approval to change.
Cash Method - A popular choice for small business because of it's simplicity, To determine gross income, add up the cash, checks and fair market value of property and services you receive during the year. Expenses are usually deducted in the year they are paid.
Accrual Method - This is the method required by GAAP (generally accepted accounting principals). GAAP prohibits recording an incoming payment as revenue unless you have earned it. But if you have earned the revenue, you must recognize it (record the revenue on your books) even if you have not received any payment.
Choosing a Tax Year - Calendar vs. Fiscal
Each business must figure taxable income on the basis of an annual accounting period for keeping records and reporting income and expenses.
Calendar Year - runs from January 1 through December 31 and generally may be adopted by anyone. In some instances, a calendar year is required.
Fiscal year - runs for 12 consecutive months ending on the last day of any month except December.
What are the different types of Business Structures?
Sole proprietor - an individual who owns an unincorporated business by themself.
Partnership - a relationship where two or more persons join together to carry on a trade or business. Each person contributes money, property,labor or skill, and expects to share in the profits and losses of the business.
Corporation - a relationship where prospective shareholders exchange money, property or both, for the corporation's capital stock. Profits are taxed to the corporation when earned and then taxed to the share holders when distributed as dividends.
S Corporation - a corporation, meeting certain criteria, that elects to be treated as an S Corporation. Generally an S Corporation is exempt from income tax; the shareholders report the S Corporation's income, deductions, loss and credits on their individual tax returns.
LLC - an entity - statutorily authorized in certain states - that is characterized by limited liability for debts similar to that of a corporation, managed by members or managers and pass-through taxation similar to that of a partnership, or in the case of a sole member – aka sole proprietor.
Do I need an Employer Identification Number (EIN)?
You will need an EIN if you answer "yes" to any of the following questions:
1. Do you have employees?
2. Do you operate your business as a corporation or partnership?
3. Do you file any of these tax returns: employment, excise or alcohol, tobacco and firearms?
4. Do you withhold taxes on income, other than wages, paid to a non-resident alien?
5. Are you involved in any of the following types of organizations? -Trusts, Estates, Real estate mortgage investment conduits, Non-profit organizations, Farmers' cooperatives, employee plans.
I'm hiring an employee, what forms need to be filled out?
Form I-9: Employment Eligibility Verification must be completed for each newly hired employee to demonstrate the employer's compliance with the law and the employee's work authorization.
Form W-4: Employee's Withholding Allowance Certificate. Ask each new employee to complete and return W-4 showing filing status and withholding allowances. Verify the Social Security number with the employee's Social Security Card.
What else do I need to do when hiring a new employee?
Different State laws require that your report newly hired employees within a certain number of days of the date of hire.
Independent Contractor or Employee?
Employers need to correctly determine whether individuals providing services are employees or independent contractors. Generally, you must withhold and pay income taxes, Social Security and Medicare taxes, and pay unemployment tax on employee wages. You do not generally have to withhold or pay any taxes on payments to independent contractors.
Whether a worker is an employee or independent contractor depends upon how much control you have as a business owner.
Three characteristics are used by the IRS to determine the relationship between businesses and workers:
1. Behavioral Control - covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
2. Financial Control - covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.
3. The Type of Relationship - factor relates to how the workers and the business owner perceive their relationship.
If you have the right to control or direct not only what is to be done,but also how it is to be done, then your workers are most likely employees.
If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.
Employers who mis-classify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
If you have an independent contractor, you may be required to issueForm 1099-MISC for any payments totaling $600 or more in a calendar year. Form W-9, Request for Taxpayer Identification Number and Certification, may be used to obtain the payee's taxpayer identification number and to certify that no backup withholding is required.
A company needs good records to prepare accurate financial statements. These include income statements and balance sheets. These statements can help you in dealing with your bank or creditors and help manage your business and bottom line.
Income Statement (Profit and loss) - Shows the income and expense of the business for a given period of time.
Balance Sheet - Shows the assets, liabilities and equity in the business on a given date.