Displaying items by tag: accountant

Most businesses with twenty or fewer employees choose to hire an external accountant to perform limited functions for the business. Below is a list of services that you should look for before deciding on a local accounting firm.

Accounting and financial statements

• Statement of Operations / P&L
• Balance sheet
• Cash flow statement
• Industry comparison (benchmark) report
• Cash Disbursement Journal
• Transaction Journal / General Ledger
• Payroll Journal
• Bank Reconciliation

Form filing to taxing authorities

• Sales Tax – Monthly or Quarterly prepared
• Payroll Tax Deposits – Monthly or Quarterly prepared
• Quarterly Payroll Taxes prepared – Form 941 and State
• Federal and State Unemployment prepared – Form 940 and UITR
• Withholding Statement for Employees
• W-2 Forms or 1099s
• Business Personal Property Tax

Unlimited consultation

Tax planning

• Advise the client of the new tax laws that affect their business
• Quarterly Estimated Income Tax

Income tax preparation

• Personal Income Tax Returns prepared
• Corporate and Partnership Income Returns prepared

Other considerations

• Do they provide pickup and delivery?
• Do they provide software solutions as part of the service at no additional fee?
• Do they meet clients and prospects face to face at their place of business?
• What kind of support and expertise does the company have?
• Do they provide the service consistently, timely and accurately each and every month?
• How soon after receiving the documentation and data does the accounting firm take to return sales tax returns, payroll tax returns and financial statements?
• How long has the company been in business?
• Ask for a list of references and call some of the references.

There are many choices in the market place as far as an accountant. The highest level of knowledge and skills will be found in certified public accountants (CPA). With the many alternatives and it is difficult for someone to determine whether someone has matching qualifications for the needs of the business. However, by choosing a CPA you will have made a safe choice. CPAs are regulated by a state department of regulatory agencies, required to be licensed, required to continuously update their skills and knowledge through educational requirements every single year, have at minimum a Bachelors degree in accounting, have been supervised by another CPA who approved the CPAs skill level before becoming a CPA, passed the CPA exam and must follow high ethical conduct standards. No other type of accountant has any of these requirements. Unfortunately, by selecting a non-CPA, you run the risk of severely undermining your business. You may think that the hourly rate of a CPA is too high for your budget, but I think you will more often than not find that it will be less costly to hire a CPA than to hire a cheaper accountant.

Most small business owners are not accountants and their time is more often than not
better spent on growing revenue than on functions that feed into financial statements on the expenditure side. Financial statements should be prepared monthly at a minimum so that the business owner can adjust for issues with more current information in the form
of profit and loss, balance sheet and cash flow statements.

Taxes and Payroll Preparation

Many small business owners are scared of handling taxes, so they often have
professionals prepare tax forms such as sales tax forms, payroll tax forms and income
tax forms. They are more likely to handle their own accounting and bookkeeping. Bookkeeping is defined as routine business transactions such as accounts payable (paying
vendors), accounts receivable (invoicing customers, collecting payments and managing not yet collected invoices) and other routine related functions such as operating a point of sale system where sales are recorded and inventory managed. Accounting is defined as non-routine business transactions and financial statement preparation to mention two functions related to small businesses.

However, sales tax form preparation and payroll tax preparation, which most small business owners are hesitant to handle themselves, are typically the easiest accounting functions requiring the least amount of
knowledge and skills. A small business should instead make
sure that professionals are preparing their financial statements. Without timely, accurate and reliable financial statements a business owner is operating blindly. The business owner must get an accurate picture of where they are before she/he can determine where they can go.

The owner-operator of an entity taxed as an S-corporation typically wants to minimize the required amount of taxes to be paid which can be managed by paying a lower wage to the owner-operator thereby reducing payroll taxes to be paid. This pertains to a concept in the tax laws called reasonable compensation. In short, the tax laws require that an entity taxed as an S-corporation must pay reasonable compensation to owner-employees who
provide services to the entity taxed as an S-corporation.

The owner of an S-corporation is allowed to receive a combination of wages and shareholder distributions as compensation. The advantage of being taxed as an S-corporation is that the company and employee will not be paying payroll taxes on the portion taken out as shareholder distributions. The amount that is allowed to be received by the shareholder as distributions depends on what reasonable compensation is determined to be.

Reasonable compensation can be defined as “what would you pay someone if you were to hire somebody to do the job of the owner-employee?” To determine reasonable compensation, it is common to go to Internet resources such as salary.com or bls.gov. On those websites, you can search for job functions similar to the owner employee jobs. Or you may use whatever is the closest available. Local recruiters may provide another reference point. The search results will provide an upper and lower end of a range.

It is in the S-corporation owner’s best interest to pick the lower end of the range when picking reasonable compensation as that maximizes the distributions paid. When you have done the research and documented it, circumstances of the business become factors e.g. can the business sustain paying reasonable compensation with its current cash flow.

If you have not done the research and until you do, a 50-50 split between distributions and wages may be used as a temporary guideline. However, I recommend that you do the research and document it and subsequently pay reasonable compensation within weeks, not months.

Please note that the reasonable compensation paid with withholding of federal and state income taxes have a direct relationship with quarterly estimated income tax payment
requirements. That is, everything being equal, paying lower wages with corresponding withholding will require higher quarterly estimated income tax
payments due every year on April 15, June 15, Sep 15 and January 15 (following year, 1/15/11 for tax year 2010).

The above is an excerpt from our free ebook.

Now that you have written the business plan, it should be easier to make a lot
of decisions. One of the first will be how you wish to do business. That is, will
you incorporate the business or form some other kind of legal entity. Many
business owners have a limited liability company set up for them and think that
they are ready to go. My first question to them is: “How do you want to be
taxed?” Most small businesses fall into one of four categories in terms of how
they are taxed as follows:

• Sole proprietorship
• Partnership
• C-corporation
• S-corporation

Here is an example of what to consider for a limited liability company (LLC). An
LLC is not a corporation. Depending on the circumstances an LLC could be
taxed four different ways.

A one member LLC will be taxed as a sole proprietor by default. A two or more
member LLC will be taxed as a partnership by default. An LLC can elect to be
taxed as a corporation, S or C. If an LLC elects to be taxed as an S or C
corporation, the election does not make it a corporation. The LLC will provide
the same liability protection no matter which way it is taxed. If an LLC elects to be taxed as an S-corporation, the business must behave like such a corporation from a tax perspective. If an LLC elects to be taxed as a C-corporation, the business must behave like such a corporation from a tax perspective. The owners are still members and not shareholders, although from a tax perspective they will be treated as such.

Most small businesses choose to be taxed as an S-corporation for a maximum
reduction in their tax liability. Being taxed as an S-corporation reduced payroll taxes paid, which provides for the most beneficial tax situation in most cases. IRS form 2553 enables an entity to elect to be taxed as an S-corporation. Be aware of deadlines, built-in-gains from the time a corporation was taxed as a c corporation and effective dates for filing of form 2553. Being taxed as an s corporation enables the owner to avoid double taxation realized for an entity taxed as a C-corporation. An S-corporation is considered a flow through entity as the income from the S-corporation, or entity taxed as an S-corporation, is taxed by the owner(s) although a separate income tax return is prepared for the S-corporation.

Income from partnerships is also taxed at the partner level, while a sole proprietorship, including an LLC taxed as a sole proprietorship, is prepared on
schedule C as part of the individual’s income tax return. Entities taxed as a partnership should be paying guaranteed payments to members of partners
providing services to the company.

If you have an entity, e.g. an LLC, in which you have operated a business for years and you have determined that it is time to elect for the LLC to be taxed as an S-corporation, consider making the change effective at a year-end as you would otherwise be required to have two sets of income tax returns prepared which may be more costly than you would like.

This blog is an excerpt from our free ebook.