Archive for the ‘Bookkeeping Tips & Tricks’ Category

Be sure to review payments subject to be reported on Form 1099-Misc. Beginning with the 2011 tax year, the IRS requires you to exclude from Form 1099-MISC any payments you made by credit card, debit card, gift card, or third-party payment network such as PayPal. (These payments are being reported by the card issuers and third-party payment networks on Form 1099-K.)

Congress just passed changes to the Federal Insurance Contributions Act (FICA) reducing the employee Social Security tax rate by two percentage points to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduces the Social Security tax rate under the Self Employment Contributions Act (SECA) tax by two percentage points to 10.4% percent. (Act Sec. 601)

If you are an employer, all your employees will receive a 2% increase in their paychecks on wages paid in 2011. This will cost you, the employer, nothing but there are some potential bookkeeping hassles.

As a result, for 2011, employees will pay only 4.2% Social Security tax on wages up to $106,800 and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800. The maximum savings for 2011 will be $2,136 (2% of $106,800) per taxpayer. If both spouses earn at least as much as the wage base, the maximum savings will be $4,272.

If you use a software package like QuickBooks to do your payroll, you may have to manually override the employee portion of the Social Security if the software update is not available by the time you pay your first wages in 2011. If you are one of the many small business who manually calculate payroll, you will have a few extra steps to figure the amount of your payroll tax deposits.

Proof of a deduction or business expense takes two legs.  Under IRS §162, Trade or business expenses, a taxpayer must prove that the expense:

• was ordinary and necessary for carrying on a trade or business; and
• was actually paid.

It is not enough to have bank statements showing checks written to office supply stores and the U.S. Post Office, but not a detailed record of items purchased and how they relate to your business. Conversely, you must have invoices showing the amount due and how these items related to the business and also proof that the invoices actually were paid.

If your record keeping is scant, you risk being denied the deduction because you cannot prove both key elements for each deduction.

Some expenses, such as travel, meals, entertainment and auto expenses, require more proof under §274, Disallowance of certain entertainment, etc., expenses. The IRS and courts have no flexibility on these items and deny deductions unless all the substantiation required by the regulations is provided. [Fleming v. Commissioner, T.C. Memo. 2010-60]

If you have questions regarding deductions and record keeping, consult your accounting professional and CPA.

Unless the worker is an independent contractor, the answer is always!

There are specific criteria to determine if a worker is an employee or an independent contractor. The key word in that sentence is “independent.”  The most important factor is who is in control.  This is covered in more detail in our March 2010 article Employee or Independent Contractor?

But there are several other issues that can also trip you up.

Do you hate paperwork? Almost everyone does, but when it come to dealing with the Internal Revenue Service, you need to have all the proper paperwork and have all the i’s dotted and the t’s crossed.

When you operate as a corporation, the corporation is a separate legal entity from you, so you should have a corporate paper trail that clearly reflects intent and action. One area that can really be a minefield is accounting for monies paid to corporate officers, other than payroll.

Is it a Loan or a Dividend?

In one scenario, William H. Bruecher III paid more than $27,000 in taxes on money his corporation supposedly loaned to him. Instead of receiving a salary, the corporation paid his personal expenses, classifying the payments as advances.

In an audit, the IRS will check to see if such advances are loans or dividends. If repayment by the owner and collection by the corporation seem assured, the advance is a loan.

To decide whether there is intent to repay, the following are factors:

• Is there a promissory notes or other written promises to repay the advance?
• Is the interest charged on the advance?
• Is there collateral to ensure repayment?
• Is there a history of repayment?

Neither Mr. Bruecher nor his corporation could produce documentation of any of these factors; therefore, the advances were taxable dividends.