/Taxes

How to Handle Payroll for Your First Employee

Business is booming, and it’s time to hire your first employee. Finding great talent, hiring someone, and making sure that all of your new hire paperwork is in order is often a steep learning curve for entrepreneurs. Fortunately, once you go through the on-boarding process with one employee, you’ll be ready to handle many more as your company grows.

Do You Really Need to Hire an Employee?

First, you’ll need to determine whether or not you truly need to hire a full-time or part-time employee or whether contract labor or a freelancer can do the job.

Understanding the difference between the two main categories of employees versus independent contractors is critical, since mistakes can lead to hefty IRS penalties for not paying the appropriate employment taxes. An independent contractor has more autonomy in how they work, where they work, and how they complete each task, while an employee works directly under your supervision on set tasks, at the time and place of your choosing.

You cannot keep someone as an independent contractor status and treat them like an employee. The IRS takes a dim view of this approach since some companies use it to avoid paying unemployment taxes and other benefits. You must also be quite clear about job hours, since there are different insurance and tax requirements for part-time versus full-time employees.

Consider how you’ll track employee hours. If it’s just one employee, it may be easy to note when they arrive at work and when they leave. If you plan to expand your workforce, a computerized tracking system may needed to accurately track hours for benefits and payroll.

Once you’ve settled upon hiring an employee, create a job description for the position. Include roles, responsibilities, requirements for the job, and a list of tasks associated with the job itself. This will guide your hiring process and help wanted ad, too, so it’s an important task.

Finding Great Help

You can hire locally through newspaper or online classified ads. You can also place ads on job boards such as Indeed, Monster, and other sites. Base your job posting on the description. Receive resumes, review them, and interview the three most promising candidates.

Congratulations! You’ve found your candidate and extended a job offer. If they accept, it’s time to begin the hiring process, step by step.

The Hiring Process, from Start to Finish

There are certain legal and tax rules you must follow when you hire a new employee.

  1. Obtain an EIN: An EIN, or employer identification number, is a number used on many legal and tax documents. You apply for an EIN on the IRS website
  2. Register with your state’s labor department: You must register with your state’s labor department to pay the appropriate unemployment compensation taxes.
  3. Purchase Worker’s Compensation insurance: States require employers to carry Worker’s Compensation insurance to cover their employees in the event of an accident or injury on the job. Each state sets its own policies regarding Worker’s Compensation insurance, so check with your state’s labor department for the rules for your state.
  4. Set up your payroll system: You can set up your own payroll system or work with online payroll software to handle weekly payroll filing needs.
  5. Complete forms: Each employee should fill out a W-4 form, the withholding allowance form, and an I-9 form with verification of eligibility for employment. Photocopy proof of eligibility, such as driver’s licenses, etc., and return the originals to your employee.
  6. Report the employee: You must report employees to the state’s hiring agency. The state then checks against records of people who owe for child support.
  7. File IRS Form 940: You’ll need to complete IRS form 940 each year to report federal unemployment tax.
  8. Set up personnel files: Setup files for your new employees that includes copies of their resume or job application, employment verification, IRS forms, and emergency contact information.
  9. Sign up for benefits: If your company offers benefits, review them with your employee and ask them to enroll.
  10. Finish the process: Create an employee manual and hang up required “Employee’s Rights” posters. Follow all OSHA workplace safety regulations. Get your new employee the tools they need to do their job – a desk, computer, cash register, car or whatever else you need. Then welcome them aboard!

Other Considerations

Depending on your business needs, you may need to include in your hiring process an NDA. NDA stands for “Non Disclosure Agreement”. It is a legally binding contract that prevents employees from sharing trade secrets with anyone else. This protects your business if you have any important information that you don’t want getting out into the public.

Which Candidate Will Be The Best President For Small Business?

Quite the question, right? But relax, I’m not here to get on a political soapbox and tell you who to vote for. Rather, I’m encouraging you to think about what’s important to you as a business owner and as an individual.

I’ve observed that Republicans typically tend to push for less regulation and encourage more business boosting initiatives than politicians in the Democratic Party. And the Democrats tend to push for initiatives that are in the interest of the middle class, the class that includes most small business owners. Of course, what candidates say they’re going to do and what actually happens don’t always match. Good intentions don’t always come to fruition because there are many obstacles that stand in the way of execution. Sometimes plans that sound too good to be true end up being just that after more research into their feasibility is done. And sometimes, sadly, candidates simply don’t follow through on their promises.

If you review each candidate’s website, you’ll see what their intentions are for small businesses. Below, I’ve listed what stands out to me:

Trump’s Pro Small Business Initiatives:
• Putting a stop to overregulation that makes it difficult to start and run a business.
• Lowering the business tax rate from 35% to 15%.
• Renegotiating trade agreements so American companies have a fair shake when pursuing doing business with other American companies.
• Increasing the production of American energy onshore and offshore (which potentially—eventually—would cut energy and transportation costs for all Americans, including small businesses).

Clinton’s Pro Small Business Initiatives:
• Stimulating small business lending by easing burdens for community banks and credit unions.
• Allowing entrepreneurs to defer student-loan payments with no interest while they start their businesses.
• Offering incentives to state and local governments to cut the red tape involved in starting a new business.
• Simplifying the tax filing process and creating a standard income tax deduction for small businesses.
• Cracking down on big businesses that don’t pay or late pay small businesses.

Devil Is In The Details
Clinton’s website goes into more detail about her proposals than does Trump’s, giving us some peace of mind that she has thought things through. But could her position on some other key hot button issues (like health care and raising the minimum wage) hurt small businesses in the long run. As for Trump, will what he proposes benefit the smallest of businesses or only large corporations?

According to the weekly reader poll, SmartPulse, in SmartBrief on Leadership, 69 percent of business leaders believe this year’s elections will either tremendously or moderately affect their businesses.

It’s clear the business community is tuned into and watching this presidential election closely.

Whether you’re starting a business or running an existing one, you should be, too. Think about what you want for the future of your business and your family—and vote on November 8 for the candidate you believe will work to fulfill your vision.

Photo: Adobe Stock

                               

Ready For Estimated Tax Payments?

When starting a business, you need to do quite a bit of heavy lifting. Of course, a big part of this is handling the complexities of the US tax system. In fact, one particular area that often trips up entrepreneurs is something called estimated tax payments.

The main reason is that this is quite different from when you have a job. You see, a self-employed person needs to essentially do what an employer does – that is, make ongoing payments to the IRS.

This often comes as a complete surprise to first-time entrepreneurs. After all, when April 15th rolls around, they usually get stuck with fees from the IRS for interest and penalties. But even worse, the overall tax bill can be hefty. As a result, you may have no choice but to take steps to resolve this, such as with an installment agreement (hey, the early days of a startup can be very lean).

So what do you need to know about estimated taxes? First of all, they include not only federal income tax but also the amounts for Social Security and Medicare. You’ll also need to make equal payments according to the following schedule:

April 15 (first quarter)
June 15 (second quarter)
September 15 (third quarter)
January 15 (fourth quarter)

Note: You may also have to pay estimated taxes for the state you are based in and the deadlines could be different (as is the case with California).

OK, there are some exceptions to being required to make estimated tax payments. They include:
• You expect to owe less than $1,000 for the year (whether as an individual, sole proprietor, member of an LLC or S-Corporation)
• You did not have to pay any taxes during the prior year
• You have a corporation where you expect to owe less than $500 for the year
• You are in an area that has suffered a natural disaster

Now, if you do not meet the above, you will need to follow either of these:
• You pay 100% of the tax you paid for last year (the percentage is 110% if your adjusted income is $150,000 or $75,000 if you are married and file separately) or
• You pay 90% of what you will ultimately owe for the current tax year.

And if you have a corporation, the requirement is that you pay the lesser of
• 100% of the tax you paid for the last year or
• 100% of what you will ultimately owe for the current year.

But as should be no surprise, coming up with the amounts can be tricky. In fact, you may ultimately pay way too much, which essentially means you are loaning money to the IRS! Because of this, you may want to use software like TurboTax or get the assistance of a tax professional.

And once you come up with the amount, the process of making the payment is straightforward. You can either file Form 1040-ES or Form 1120-W (for a corporation). But the easiest approach is to use the IRS’s Electronic Federal Tax Payment System.

The good news is that – once you get things setup – the process of handling estimated taxes should be smooth. But of course, the important thing is to make sure you make it a habit.

                               

By | September 20th, 2016|Business Filings, Running A Small Business, Taxes|1 Comment

How a Small Business Can Avoid Being Audited

It’s true that the odds of being audited are fairly low – under 1%.  Yet this may not last long.  The IRS has been changing some of its procedures – such as allowing agents to conduct audits via mail — and has also been increasing its hiring.

Besides, the agency tends to focus more on smaller businesses.  Why?  The assumption is that the recordkeeping is not as disciplined and business owners may be doing their own tax preparation, which could increase the risk of getting things wrong.

When it comes to audits, though, there is one important thing to keep in mind:  the selection process is mostly done by a massive computer, which crunches huge amounts of data to find missing income and inconsistencies.  All this is put into something called a DIFF (Discriminate Income Function) score.  The higher it is, the higher is the chances the IRS will pick you.

No doubt, an audit is often a stressful experience as well as time-consuming and expensive (yes, the kinds of things that can be poisonous for a business). And if you lose to the IRS, the outcome could be devastating.

So what are some of the ways to help avoid the prospects of an audit?  Well, there is nothing you can do that is full-proof (hey, we are dealing with the IRS here!)  But there are some strategies that should help out:

Know The “Hot Buttons”:  There are certain types of deductions and credits that raise questions, especially with the IRS computer.  Often alarm bells go off when there are large amounts of items that appear to be personal, such as entertainment, meals and travel.  But there are other deductions that can trigger scrutiny like casualty losses, health expenses and bad debt losses.

Now this does not mean you should avoid these.  But rather you need to make sure you document the expenses and have a business purpose for each.  This is where having a solid cloud accounting system – like QuickBooks or Xero – can be a godsend.

Something else:  If there is a large amount of a certain type of deduction, then you might want to attach a statement that explains it and also provide copies of supporting documents (like receipts and checks).  This may be enough to stop an audit when someone from the IRS reviews your return.

Don’t Miss Deadlines:  A great way to help increase the odds of an audit is to not file your tax return.  In fact, the penalties can be onerous.  So even if you cannot pay your tax, you still should file your return.  Period.

Report Your Income:  I know there are times when it seems like it would be impossible for the IRS to know if a payment was for business or not.  But keep in mind that the agency has spent years developing systems to detect unreported income.

Avoid Round Numbers:  Yes, it seems the IRS computer will take this into account.  Let’s face it, there would be understandable skepticism if you put $2,000 for meals and entertainment.  It simply looks too contrived.

Self-Prepared Returns:  Granted, applications like TurboTax are excellent.  They use sophisticated analytics to check for errors and even provide you with the chances of an audit.

But software is never full-proof.  If you provide the wrong information, then you may be get the attention of the IRS.

Instead, if your return has been prepared by a tax professional, then this should give the agency less confidence in pursuing an audit.

Hobby or Business:  If your business looses money year after year, then the IRS will likely target you.  The reason is that the agency may consider your operation a hobby, not a business.  If this situation, you may have a large tax bill as you will lose plenty of deductions.

Then what do you have to do to be considered a business?  First of all, the IRS will presume this if you report a profit for three out of the five past years, then you should have no problem.  But if not, then you will need to provide convincing proof that your operation is not really just a way to reduce income from other sources.  And this can be pretty tough to do.

Incorporate:  The audit rate for those who file Schedule C’s is much higher than the average (at over 2%).  Because of this, you might want to consider incorporating, such converting your business to an LLC, S Corporation or C Corporation.

The CorpNet team can help you incorporate or Form an LLC. Call for a free business consultation at 888.449.2638

 Image: Adobe Stock
By | August 16th, 2016|Running A Small Business, Taxes|0 Comments

5 Ways to Simplify the Payroll Process

Man writing a payment cheque at the table with calculator and glasses

Paying your employees on time can be a headache for small business owners looking to do the task themselves. It sounds simple, but when you factor in taxes, fees, and other regulations, it quickly becomes one of the biggest minefields associated with running a business. Fortunately, by following the tips below, you should be able to streamline your payroll processes with minimal effort on your end.

Direct Deposit

As the name implies, direct deposit is a system which enables you to send employee payments directly to their bank accounts without having to worry about costly paper checks or errors in your books. Most banks and online accounting programs support direct deposit out of the box. In many cases it’s included as part of the service packages or it’s offered for a nominal fee.

Easy to Use Payroll Software

Many business owners make the mistake of assuming payroll software is costly and difficult to use. While many tools have a subscription fee, many payroll software options pay for themselves by enabling professionals like yourself to focus on running your company. Additionally, when you have hourly workers or need to track paid-time off, payroll software enables you to automate scheduling, accurately check employee time, and have all essential information viewable within a central dashboard.

Outsource Your Payroll

Payroll is a fairly complex topic which is constantly evolving and difficult for many to understand.  Some of the reasons employers choose to process payroll themselves is because they feel it’s more cost effective, a way to protect against wage theft, or they want to maintain complete control to handle last minute changes. Although these are all valid concerns, when you consider the lost time and potential penalties for errors, outsourcing payroll becomes a much more attractive option.

When you’re looking for payroll processing companies, remember that you’ll routinely be communicating with their representatives. When you’re looking for a payroll service provider you’ll want to choose a company which is known for providing exceptional customer service. You should request references from current clients and also ensure the customer service teams can answer questions to your satisfaction.

File Taxes Electronically

With payroll and other taxes, you’re obligated to meet deadlines and ensure you’re in compliance with laws on the books. By filing your taxes online, you won’t have to worry about postage costs, lost mail, or long lines at the post office. Most online filing services provide users with near-instant confirmation of your information being received. Some states even require businesses to file their taxes online, another reason your business should switch to paperless payroll workflows.

Consolidate Pay Schedules

When companies have hourly and salaried employees, they often maintain different pay schedules. For example, salaried employees might be paid monthly while hourly employees are paid weekly or bi-weekly. While it sounds fine in practice, juggling different schedules leaves plenty of room for error. If you’re not using a software, you can at least use an employee schedule template to help maintain your employees schedule as efficiently as possible. By paying all your employees on a set schedule, you’ll cut payroll costs, improve employee satisfaction, and have the peace of mind that you’re compliant with all relevant regulations.

Conclusion: A Dynamic Process

As a small business owner, you need to ensure you’re always able to keep pace with change. Even if you have a bookkeeper, payroll company, or accountant, it’s essential to at least have a basic handle on what’s going on. The best way to stay on top of these trends is to develop a trusted team of advisors and perform routine checks to ensure you have the right systems in place. While it might seem daunting at first, it gets easier once you’ve streamlined your payroll workflow.

Charles Costa is a writer and marketing analyst for Fit Small Business and other publications. He focuses on helping companies grow, one word at a time. His areas of expertise include software, hardware, biotech, finance and general technology. You can learn more about him at CharlesCosta.net.

Image: Adobe Stock

Expecting A Tax Refund? 8 Business-Savvy Ways To Spend It Wisely

US treasury check.

According to the IRS, it expects more than 70 percent of taxpayers will receive tax refunds this year. Last year, the average refund of the 109 million issued was $2,797. That’s no chump change!

If you’re one of the fortunate taxpayers who will get a tax refund this year, how are you planning to spend that “bonus”?

Decisions…decisions.

While you may find it tempting to blow the cash on a Louis Vuitton handbag or put a deposit on a tropical vacation getaway, there’s something more fulfilling you can do with that money:

Invest it into your business

Yes, I know it doesn’t sound very sexy at face value. But by putting that money back into your company, you’ll expand upon its potential and promise.

How might you use your tax refund to boost your business? Here are a few ideas for making good use of it:

  • Use the money for a consultation with your accountant about tax planning for the future. Just because you got a refund this year, doesn’t mean you will next year!
  • Give your website a make-over. If you’ve got a DIY site, consider hiring a professional to create one that will more successfully generate traffic and leads.
  • Register to attend a highly regarded business or marketing conference. Not only will you learn a lot of relevant information to make you a more enlightened business owner, but also you’ll make valuable connections with other professionals.
  • Get yourself or an employee some specialized training to up your game in the competitive market. When you expand upon your skill set and hone your craft, you make your products and services more valuable to customers.
  • Ditch an old, unreliable piece of office equipment (e.g., laptop, printer, etc.) and purchase a new one. Equipment that doesn’t do the job well can kill productivity and add a lot of stress. Your refund money will be well spent by giving yourself the tools you need to work more efficiently.
  • Buy yourself an ergonomic desk chair. Your comfort and physical well-being should always be a priority if you want to work like you mean business.
  • Join a well-respected networking group. Do some research and find a group that has highly motivated, accomplished members who have a genuine interest in supporting and encouraging each other. While no networking group membership guarantees you’ll get business from it, a culture of camaraderie provides a firm foundation for referrals and for the purchase of services or products between members of the group.

As you can see, you have plenty of ways to creatively use your tax refund to better your business. Whether you’re just starting your company or want to grow it, make the designer shoes and fancy cocktails in coconuts wait. Consider putting your refund dollars where they’ll really make a difference—into your business.

Image: Adobe Stock

One Month Left: 5 Last-Minute Tax-Filing Tips

Filing TaxesIf you haven’t yet filed your personal taxes, time’s a’ ticking. Here are some last-minute tips to ensure that your taxes get filed correctly.

1. Bone Up on Your Tax Deductions

Before you get knee-deep in filing your own taxes or head to a tax preparer to help, it’s wise to know what tax deductions you qualify for. For example, if you work from home, you may be able to deduct your home office expenses. If you travel for work, your travel expenses may be a writeoff.

2. Know How You’ll Pay

If you haven’t been paying your estimated taxes quarterly (a practice you may want to consider so you don’t have a hefty bill in April), you will need a strategy for paying your taxes come Tax Day.

If you’ve got the funds in your bank account, pay the entire amount at once. If that’s not an option, apply for a payment plan that will allow you to spread a monthly payment out over several months to ease the burden.

While it’s a last resort, you can also consider paying your taxes on an interest-free credit card (especially one that accumulates airline points or other rewards). Just make a plan for paying it off promptly.

3. Gather What You’ll Need

Hopefully you’ve been organized throughout the year and have all your W-2s, 1099s, and receipts, and you’ve properly categorized all your expenses in your accounting software. Being organized will make it easier for either you to DIY your taxes or for a professional to process them.

If you found it stressful to gather all of this paperwork this time around, make sure to be ready next year. Set up a folder for each tax year and put all the necessary paperwork there so it’s ready when you need it.

4. Ask for a Referral

If you plan to hire a tax preparer or accountant to file your taxes for you this year (a good idea if you’re overwhelmed with other things, or if your tax situation is complicated), ask people in your network for a referral to a good tax professional. Ideally the individual or company has experience with small businesses like yours. Now’s a good time to call for an appointment, since a lot of people wait until the last minute, and you’ll be in a long line to get your taxes done.

5. Apply for an Extension

If there’s no way you can get your stuff together in time to meet the April 18 deadline for taxes to be filed, consider applying for an extension. This will give you an additional 6 months to file your taxes. Keep in mind, however, this does not give you an extension on paying what you owe. You’ll need to pay your estimated tax by April 18 if you don’t apply for a payment plan as well.

Even if you’re a procrastinator, being organized and doing a little planning now will make filing your taxes a bit easier.

Make paying taxes next year a breeze by letting CorpNet convert your business to a corporation. We can tell you all about the tax benefits of doing so.

Image: Photo Dollar Club

7 Smart Things Freelancers Can Do For Their Taxes Before 2016

business freelance office workTaxes may be the last thing you want to think about as a freelancer, but they’re still really important to pay attention to. Looking back, did you maximize your business expenses and keep your accounts in order? If not, there’s still time to set yourself up for success come tax time next year.

1. Spend Money (on the Right Things) Before Year’s End

Qualifying business expenses can help reduce your taxable income for the year. If you’ve pined for a new laptop, now is the time to buy it. Not only will it count toward the expenses you deduct on your taxes, but you could get a great deal on it, since holiday sales are happening right now

2. Max Out Your Retirement Contribution

One thing that’s a drag about being a freelancer is that you don’t have an employer matching your 401(k) contributions, nor automatic withdrawals coming out of each paycheck. That means you have to be on top of your retirement savings. Did you realize that contributing to your retirement plan gets you a tax credit of up to $5,500 a year for a Roth/Traditional IRA? It’s better to put that money aside to earn interest for your retirement than to give it to Uncle Sam!

If you’re scrambling to put money in your retirement account now, it’s a good idea to set up an automatic contribution in 2016 to make it easier to hit that limit and maximize your tax credits.

3. Collect All the Money You Can Before the End of the Year

The more money you can collect before 2015 rolls over, the fewer loose ends and unpaid invoices you’ll have to start the year out with. Also, some of your clients may need to use up their budgets this year, so make it easy for them! Continue reading “7 Smart Things Freelancers Can Do For Their Taxes Before 2016” »

By | December 2nd, 2015|Business Finance, Taxes|0 Comments

[NEWS] What You Need to Know About Nevada and Taxes

Long known for having no income tax and being a popular choice for incorporating a business, Nevada has some big changes underfoot that could affect you if you run a business (or are incorporated there).

Big News: a Commerce Tax

Nevada recently implemented a commerce tax that applies to every business that is engaged in business in the state. The good news is: while you have to file a tax return, you don’t actually have to pay any tax unless your gross revenue in Nevada for the taxable fiscal year is over $4 million.

The tax rate depends on the industry you’re in, but ranges from 0.051% for Mining, Quarrying, Oil, and Gas Extraction businesses to 0.331% for businesses in Rail Transportation.

The Details

Nevada’s taxable fiscal year starts on July 1 and ends June 30. If you use a different taxable year to report your revenue for taxes, you’d use your internal records to calculate and report your gross revenue in Nevada for the fiscal year used in the state.

Remember: even if you don’t bring in more than $4 million, you still have to file your tax return. The return (and commerce tax, if you owe it) are due within 45 days of the end of the fiscal year, which means they’re due August 15. The first time you’ll need to file and pay will be in 2016 (for 2015 taxes). Continue reading “[NEWS] What You Need to Know About Nevada and Taxes” »

By | November 2nd, 2015|Taxes|0 Comments

Have you Maxed Out Your Tax Deductions?

US tax form 1042, foreign person's US source income subject to Witholding

While you have still got several weeks before the end of the year — and therefore the end of the tax year — now is a good time to think about your tax deductions and make sure that you maximize your business expenses  to benefit when you file your taxes Every expense you invest in your business can be an expense that helps you reduce your taxable income. That’s why it’s important to make sure that you max out your tax deductions before the end of 2015.

What is Tax Deductible?

If you’re new to filing small business taxes, you not might not be sure what expenses qualify as deductible ones on your tax return.

Essentially anything that you use to grow your business, including advertising, office equipment, software, and payroll, are considered business expenses that you need to list on your taxes come April.

Don’t overlook your home office if you work from home. The IRS allows deductions based on a calculation that takes the size of your home office into account, as well as your rent or mortgage.

In this post, you can learn about some other commonly overlooked tax deductions. Continue reading “Have you Maxed Out Your Tax Deductions?” »

By | October 5th, 2015|Business Finance, Taxes|0 Comments