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Common Money Myths

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set of icons of tax day vector illustration designDon’t let common money myths stand in the way of pursuing your financial goals. Just because a belief is widespread doesn’t mean it’s true. Take our quiz to see if money myths may be sidetracking your financial success.

True or False?

Money management strategies are for the rich only. False. Anyone can benefit from basic financial strategies, such as budgeting, regular investing plans, and debt management.

I’m too young to plan my finances.

False. It’s never too early. Even children can benefit from simple money management strategies.

Planning for the future is all about planning for retirement.

False. While planning for retirement is an important goal, planning for other goals, such as buying a house, starting your own business, sending a child to college, or making sure your family is provided for should you die or become disabled are also important to you and your family’s financial future.

Life insurance coverage should equal five times your salary.

False. Your life insurance coverage should be based on your personal situation and your family’s financial needs.

Everyone should save 10% of their salary for retirement.

False. It depends on your situation and goals. If you’re young and getting an early start on your retirement savings, 10% may be sufficient. If you’re older and are just starting to save for retirement, you may need to put away significantly more. But, remember, any amount you save for retirement will help.

I’ll need only 75% of my preretirement income during retirement.

False. While it’s a common rule of thumb to figure that you’ll need at least 75% of your preretirement income during retirement, many people need more to be able to enjoy the retirement lifestyle they want.

How QuickBooks Online Helps You Track Mileage

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qb-progress-invoicingWith gas prices so high, you need to track your travel costs as closely as possible. Consider getting a tax deduction for your business mileage.

If you drive even a little for business, it’s easy to let mileage costs slide. After all, it’s a pain to keep track of your tax-deductible mileage in a little notebook and do all the calculations required. If you do rack up a lot of business miles, you probably forget to track some trips and end up losing money.

QuickBooks Online offers a much better way. Its Mileage tools include simple fill-in-the-blank records that allow you to document individual trips. You can either enter the starting point and destination and let the site calculate your mileage and deduction or enter the number of miles yourself.

If you use QuickBooks Online’s mobile app, it can track your miles automatically as you drive (as long as you have the correct settings turned on). Here’s a look at how all of this works.

Setting Up

To get started, click the Mileage link in QuickBooks Online’s toolbar. The screen that opens will eventually display a table that contains information about your trips, but you need to do a little setup first. Click the down arrow next to Add Trip in the upper right corner and select Manage vehicles. A panel will slide out from the right. Click Add vehicle.

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You’ll need to supply information about your vehicles before you can start entering trips.

You’ll need to supply the vehicle’s year, make, and model. Do you own or lease it, and on what date was the vehicle purchased or leased and put into service? Do you want to have your annual mileage calculated by entering odometer readings or have QuickBooks Online track your business miles driven automatically? When you’re done making your selections and entering data, click Save.

Entering Trip Data

You can download trips as CSV files or import them from Mile IQ, but you’re probably more likely to enter them manually. Click Add Trip in the upper right corner. In the pane that opens, you’ll enter the date of the trip and either the total miles or start and end point. You’ll select the business purpose and vehicle and indicate whether it was a round trip. When you’re done, click Save. The trip will appear in the table on the opening screen, and your current possible total deduction will be in the upper left corner, along with your total business miles and total miles.

If you want to designate a trip as personal, click the box in front of the trip in that table. In the black horizontal box that appears, click the icon that looks like a little person, then click Apply. Now, the trip will appear in the Personal column and will not count toward your business tax-deductible mileage.

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When you select a trip in the Mileage table, you can mark it as personal so it’s not included in your business tax-deductible miles.

Personal Trips Can Count, Too

If you use your vehicle(s) for personal as well as business purposes, tracking some of those miles can also mean a tax deduction. For tax year 2022, you can deduct 18 cents per mile for your travel to and from medical appointments. Note: Medical mileage is only deductible if medical exceeds a certain percent of AGI. Be sure to check with the IRS yearly tax code, as they update the mileage amounts annually.

And if you do volunteer work for a qualified charitable organization, the miles you drive in service of it can be deducted at the rate of 14 cents per mile. You can also claim the cost of parking and tolls, as long as you weren’t reimbursed for any of these expenses. Obviously, the IRS wants you to keep careful records of your charitable mileage, and QuickBooks Online can provide them.

QuickBooks Online doesn’t track these deductions, but you’ll at least have a record of the miles driven.

Auto-Track Your Miles

The easiest way to track your mileage in QuickBooks Online is by using its mobile app. You can launch this and have it record your mileage automatically as you’re driving. Versions are available for both Android and iOS, and they’re different from each other. They also have more features than the browser-based version of QuickBooks Online, like maps, rules, and easier designation of trips as business or personal.

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The iOS version of Mileage in the QuickBooks Online app

In both versions, you’ll need to click the menu in the lower right corner after you’ve opened the QuickBooks Online app and select Mileage. Make sure Auto-Tracking is turned on. Your phone’s location services tool must be turned on, too. There are other settings that vary between the two operating systems. You can search the help system of either app to make sure you get your settings correct if the onscreen instructions aren’t clear enough.

Of course, you won’t see the fruits of your mileage deductions until you file your 2022 taxes. But you can factor these savings in as you’re doing your tax planning during the year. Please let us help if you’re having any trouble with QuickBooks Online’s Mileage tools, or if you have questions with other elements of the site.

4 Tips on How Small Businesses Can Reduce Taxes

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metaphor for the payment of taxesAs a small business owner, tax liability is the money you owe the government when your business generates income. With changing laws and gray areas regarding deductions, exemptions, and credits, it’s no wonder small business owners rank taxes at the top of the list of the most stress-inducing aspect of business ownership. To reduce that stress, taxes shouldn’t be something to focus on only at year’s end. Use these tips on reducing your business tax year-round and see your taxes and stress level decrease!

1. Business structure

Your company’s business structure is how it is organized – it answers questions like who is in charge, how are profits distributed, and who is responsible for business debt. The most common business structures are:

  • Sole proprietorships have one owner who takes all profits as personal income. The owner is personally liable for any business debts.
  • Partnerships are structured like sole proprietorships but can have an unlimited number of owners.
  • C corporations have unlimited shareholders who each own part of the company. Profits are distributed as dividends between them. Owners are not personally liable for business debts.
  • S corporations are structured like C corporations, but the number of shareholders is capped at 100.

In addition to affecting how a business operates, business structure impacts how much a company pays in taxes. The U.S. tax code is complex and includes four main tax categories:

  • Income tax – paid on profits
  • Employment tax – employee Social Security and Medicare contributions
  • Self-employment tax – Social Security and Medicare contributions for self-employed individuals
  • Excise tax – special taxes for specific goods and services like tobacco, alcohol, etc.

IA sole proprietorship or partnership is a good idea for businesses wanting tax simplicity. For those with less than 100 owners, an S corporation might be the right fit and best tax option. Again, business structure and tax laws are complex and are best determined by a qualified, experienced accountant.

2. Net Earnings

Net earnings (i.e., net income or profit) is the gross business income minus business expenses. Regardless of the business, it begins with gross income (the income received directly by an individual, before any withholding, deductions, or taxes), and allowable expenses are deducted to arrive at net income. How this figure is calculated is dependent upon business structure.

Net earnings are used to calculate business income taxes. Again, the calculation process differs slightly for different business structures. It is best to seek a professional to help with net earnings calculations for the proper calculation and maximum legal deductions.

3. Employ a Family Member

One of the best ways for small business owners to reduce taxes is hiring a family member. The (IRS allows a variety of options for tax sheltering. For example, suppose you hire your child, as a small business owner. In that case, you will pay a lower marginal rate or eliminate the tax on the income paid to your child. Sole proprietorships are not required to pay Social Security and Medicare taxes on a child’s wages. They can also avoid Federal Unemployment Tax Act (FUTA) tax. Consult a trusted accounting professional for details about the benefits of hiring your children or even your spouse.

4. Retirement contributions

Employee retirement plans benefit employees, but they can also be good for your small business. Employer contributions to an employee retirement plan are tax-deductible. They can also carry an employer tax credit for setting up an employee retirement plan. Again, this is a task an accountant can handle for you. They can guide you on retirement plan choices based on your business’s situation, employees, and other factors.

As a small business owner, you can deduct contributions to a tax-qualified retirement account from your income taxes (except for Roth IRAs and Roth 401(k)s). Sole proprietors, members of a partnership, or LLC members can deduct from their personal income contributions to their retirement account.

As with any tax situation, consulting your trusted accounting professional is always best. They are up to date on the latest tax laws, information, and allowable deductions. By being aware of ways your small business can reduce taxes, you can bring these topics up with your accountant, discuss the best options for you, and be prepared long before tax time rolls around.

Contact our tax professionals to learn more about how you can control tax exposure for your small business.

The 5 Most Common Small Business Accounting Mistakes

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Group of happy business people have meeting at workplace in office. Two positive woman working together using modern laptop for working conceptSmall businesses make accounting errors and oversights regularly. Here, we cover five of the most common small business accounting mistakes. Read on to see if you’re making any of these mistakes and how to avoid them in the future.

1. You don’t take bookkeeping as seriously as you should.

Recording everything is an excellent rule to follow for bookkeeping and accounting for a small business. Ensuring that everything is recorded and categorized correctly in your accounts is essential, from small transactions like purchasing office supplies to large payments from customers and clients. No matter how small your company is, accurate bookkeeping and accounting methods are essential for a reliable assessment of your company’s health.

If you’ve slacked in this area, find the weak spots. For example, you may need to: categorize your assets and liabilities correctly, have a monthly accounts review, or establish a new bookkeeping system. A sound bookkeeping and accounting system is the only way to know how your business performs.

2. You refuse to outsource your accounting needs.

If you read point one above and the need to establish a new bookkeeping and accounting system rings true, you’ve identified a serious issue. Many small business owners decide to handle bookkeeping and accounting in-house because they feel “too small” to justify outsourcing those tasks. While the temptation to reduce costs by controlling the books in-house is tempting, it can be overwhelming when trying to manage a business and wear the accountant hat.

Handling your own accounting could be costing you money. Accountants understand ways to save businesses money that can escape others. They know all the ins and outs of taxes, deductions, write-offs, etc. It’s what they do all day, every day. Consider outsourcing your accounting to a qualified firm instead of missing out on opportunities to save money.

3. You outsource, but you fail to communicate with your accountant.

So, maybe you have already outsourced your business’s accounting. Are you communicating with your accountant? Does your bookkeeper know what’s happening in your business? Keeping up with all transactions – great or small – and sharing those with your accountant is vital. Overlooking even a small purchase can lead to costly issues over time.

A great way to make sure your accountant is fully apprised of any and all expenditures. Keep receipts and a record of all transactions. You can use receipt tracking software or keep a paper or digital log. Regardless of the method, your accountant will appreciate your efforts. Their job will be easier, and it can save you money in the long run.

4. You don’t record every expense, even the small ones.

This point cannot be emphasized enough. It is essential to record all business spending, no matter how insignificant you think. That $5 of petty cash you took out of the register to send your employee to pick up stamps for the business counts! This is particularly crucial for cash-based (i.e., retail) businesses. No expense is insignificant. This is a fundamental rule to follow for new companies. While it is easy to overlook the small stuff, as your business grows, you will be glad you were attentive because it makes managing your books so much easier. Again, this can be a big money-saver in the long run.

The bottom line: No transaction is too small to record. Save receipts, keep a record, tell your bookkeeper.

5. You assume that profit always equals healthy cash flow.

If you make a sale of $1000 that cost your business $300, did you profit $700? Not necessarily. Depending on the type of business you are in, additional costs could be associated with the sale that reduces the profit. For example, if you’re in retail sales, you must account for expenditures like overhead. What if the merchandise is returned and refunded? Handling the refund costs you money, and that cuts into profit. Suppose you’re in a business that provides services like construction or home improvements. In that case, you must consider setbacks and delays due to receiving materials, weather, etc. Any setback you experience in completing a job means less profit to your firm.

Not accounting for costly setbacks can give you a false sense of how your business is performing. While the numbers may look good on paper, a distorted picture of its financial health is detrimental to your success.

Awareness of these small business accounting pitfalls can help you improve in weak areas and position your business for long-term success and a healthy financial future.

Contact our accounting professionals now for more help managing your small business finances.

Bundling Items in QuickBooks? Build Assemblies

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If you regularly sell the same groups of products, you can save time by creating assemblies.

Some things just naturally go together. If you manage a fast-food restaurant, for example, you probably sell similar combinations frequently, like a double cheeseburger, fries, and a soft drink. If you run a car dealership, there are numerous ways to upsell your customers by adding accessories, maybe at a discount. Even very small businesses can bundle items. You might sell handmade jewelry and want to put together a package that includes cleaner and cleaning cloths for one price.

You can, of course, continue to sell all of those products separately. But you may find you can bump up your sales (and profits) by creating assemblies (sometimes called “kits”), bundles of items that are sold as one unit. You can build these automatically if you’re using QuickBooks Desktop Premier or above. Here’s how.

Putting Items Together

If you’re already creating item records and recording product sales in QuickBooks, you probably already have Inventory turned on. If you don’t, open the Edit menu and select Preferences. Click Items & Inventory, then Company Preferences. Make sure the boxes are checked for the options you want.

Haven’t started creating item records yet? We can help with that if you have questions about how QuickBooks handles this. In fact, we encourage you to contact us about this critical process, because some of the records’ fields may be foreign to you. If you want to try it on your own, open the Lists menu and select Item Lists. Click the down arrow next to Item in the lower left corner and then click New. The New Item window will open.

Since you’re going to be building assemblies, you have to create records for all of the products that will be included. So choose the Inventory Part option under Type. Complete the rest of the fields here and click OK.

Once you have enough product records created to start building assemblies, go through the same steps you went through to open the New Item window. Rather than selecting Inventory Part under Type, though, click on Inventory Assembly. Instead of defining a single item in this window, you’ll be choosing the components that will be included. This is your Bill of Materials.

You won’t have to complete every field in this window, but several are required. Give your assembly its own Item Name/Number. Then, so you know what you’ll be pricing, jump down to the Bill of Materials window and select the items that your assembly will include in the table provided. If you completed all of the fields in the product records, QuickBooks will fill in the other columns on each line except for quantity (QTY), which you must enter.

When you’ve completed the table for your assembly, enter the Total Bill of Materials Cost in the Cost field above it, then supply the Sales Price that you will charge. Select the correct Tax Code and Income Account. Then go down to the bottom of the screen under Inventory Information and select the appropriate Asset Account. You’ll also need to specify at what point new assemblies should be built (minimum and maximum). There are four other fields on this line that QuickBooks will fill out once you start building assemblies and selling them.

Building Assemblies

The hard work is over now. When you want to actually start building assemblies, open the Vendors menu and click Inventory Activities | Build Assemblies. Select the kit you want by opening the drop-down menu next to Assembly Item. The items you selected will appear in the table below. QuickBooks will also display the maximum number of kits you can build given the quantity of inventory on hand. Enter the number you want in the Quantity To Build field and click the Build & Close button.

Now, when you go back to your item record, you’ll see that QuickBooks has filled in the On Hand number to reflect the assemblies you just built.

The process of building assemblies may feel a little foreign at first. And if you’re going to keep some on hand, you’ll need to pay extra attention to your inventory levels, which you can do by running the Inventory Stock Status by Item report. So, this is an area where you may need to consult with us. We’re available to go over inventory and assembly concepts with you, or any other element of QuickBooks.

Hiring An Independent Contractor? Your Tax Obligations

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Businesswoman working at the officeFirst time hiring an independent contractor? Here’s what you need to know about taxes.

Two months ago in this column, we explained the differences between employees and independent contractors. The IRS has strict rules that you must follow when you make this distinction because there are very different tax rules for each type of worker.

If you’re hiring an independent contractor for the first time, here’s the good news: Your income tax obligations are much simpler than they’d be if you were bringing on a new employee. You are not responsible for withholding and submitting payroll taxes to the IRS and state agencies. You simply pay the compensation that you and your worker have negotiated.

Here’s a look at the forms you and your independent contractor will need to complete.

The W-9

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Independent contractors must complete a W-9 before they can get paid by you.

Where employees have to fill out a Form W-4 form to get paid by their employers, independent contractors are required to enter tax-related data on a Form W-9. This is a very simple document, requiring only the taxpayer’s:

  • Name, address, and business name (if different).
  • Business entity type (sole proprietor, partnership, LLC, etc.).
  • Taxpayer Identification Number (TIN). This will most likely be your contractor’s social security number, though in rare cases, it may be an employer identification number (EIN).
  • Signature and date signed.

You or your independent contractor can print out a copy of the W-9 here. He or she can either send you a completed paper copy or scan it and email it to you. As the employer, you’ll use this information to report your independent contractor’s annual income. The IRS advises you to keep this form for four years in case it has questions at a later time.

Form 1099-NEC

Before tax year 2020, nonemployee compensation was reported in Box 7 of the Form 1099-MISC. Now, though, there is a separate form for it: the Form 1099-NEC. If you paid someone who is not your employee $600 or more during the tax year, you must complete this form. You’ll need to submit one copy to the IRS, one to state taxing agencies, and one to the contractor by January 31 of the year following the year the income was earned.

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You’ll need several copies of the 1099-NEC for distribution.

In addition to the taxpayer’s name, address, and TIN, and your TIN (account number is optional), you must include the following information on the Form 1099-NEC:

  • Box 1 should contain the total that you paid the independent contractor during the tax year (nonemployee compensation)
  • If the Box 2 is checked, it signifies that you sold $5,000 or more in consumer products to the contractor for resale, on a buy-sell, a deposit-commission, or other basis. The contractor should report income from these sales on the Form 1040’s Schedule C.
  • Box 3 is not currently being used by the IRS.
  • If you withheld federal income tax from the contractor’s payments, as is required when he or she does not supply a TIN, you must report it in Box 4.
  • Boxes 5-7 would only be used if you withheld state income tax.

You can see an example of the Form 1099-NEC here, but you can’t just print or scan and email all of the copies needed. Copy A goes to the IRS, and the other copies go to state tax departments and the independent contractor. You must have an official IRS version of Copy A because it needs to be scanned by the agency. The other copies can be downloaded and printed.

The Form 1099-NECs that you send to the IRS must be accompanied by Form 1096, Annual Summary and Transmittal of U.S. Information Returns. We’ll tell you more about acquiring and preparing all of these forms as the deadline for the 2021 tax year gets closer. Your relationship with your independent contractor should be fairly uncomplicated where taxes are concerned. But if you’re dealing with a situation that causes you to question your handling of it, please let us help. We can also advise you on your classification of your new hire (independent contractor vs. employee), a distinction that the IRS takes very seriously. As always, we’re available to help with year-round tax planning and eventual preparation and filing.