December 31, 2012

Here it is the end of the year.  The end of 2012.  Time to celebrate, I guess.

I waited until the last minute to write this entry to see what Congress would do with the "fiscal cliff".  It seems they are not too concerned about slowing the U.S. growth and then the whole world.  That is if predictions are true.  Predictions are often not true.

Recently my daughter asked me about economics.  That is a very difficult subject.  I took a class in economics when I was in college at the University of Tennessee.  All I remember was a lot of formulas and graphs trying to predict how people would make purchases.  Supply and demand.

But it seems to me that economics is all that and more.  The "more" are people.  Who could have predicted a run on pet rocks?  We all know if we have the patience to wait, the newest electronic device will drop in price.  It will certainly drop in price right before the newest model is released.  But if we all wait for this price drop, if no new devices are sold as we all wait patiently for a good buy, then there won't be a new one because the old one didn't sell.  That's also economics.

So, what did I tell my daughter?  I told her economics was an attempt to explain by numbers the emotional buying behavior of large groups of people.  I think that's what it is.  Blind men groping around in the dark looking for the sharpest item while wearing very thick gloves.  It's a guess what will happen on January 1, 2013.

Well, not completely a guess.  Taxes are going to rise.  Spending cuts are going to happen.  Congress will act in January and claim they have saved us all and don't we want to re-elect them to do more of this same job?  I don't want to get political.  That's not the purpose of this blog, so I'll change the subject in the next paragraph.  It will be an abrupt transition so I'll prepare you for it here.

Right now go out and check the odometer on your work vehicle.  If you don't have a work vehicle then you can skip this task.  But if you do have a work vehicle you will need to know this number.  If you keep accurate and detailed travel records then you'll have this number already recorded in your log.

If you haven't yet purchased W-2 forms, then you don't need to.  You can file your W-2s directly with the Social Security Administration.  The added benefit of this is that you'll know immediately if the employee name and Social Security number match because the web site won't let you enter the information if it doesn't.

This coming year of 2013 will see massive new changes - in many ways - but I mainly speak of taxes.  This year the New Health Care Act will begin to be fully implemented.  That will change so many things I can't begin to predict what they might be.

I will leave you with this.  Your next major tax dates are January 15, 2013, to make your final estimated tax payment for 2012 if you are self-employed.  And January 31, 2013, is the deadline to file and pay the 4th quarter and year end payroll taxes.  But I'll speak more about that in January.

As always, if you have any questions or suggestions for future blogs, let me know.  Happy New Year.

End of Year Review

Tomorrow is December 1, and a good time to make a end of year plan.  If you are a cash basis tax payer, and many small businesses are, then you only have until December 31, to pay any expenses or take any action to modify your tax picture for 2012.

I know it's a difficult time with Congress seeming to march over the dreaded Fiscal Cliff and taxes set to rise on January 1, if they do.  But you can't trade on futures or worry about tomorrow.  Today's problems are sufficient for today, to butcher a very nice quote.

What can you do today?  Begin to summarize your income and expenses.  If you have a general ledge program and are using it to enter your income and expenses, now is the time to start running reports and looking at you annual financial picture.  Are you going to be fortunate enough to have a profit?  Can you lessen that profit and therefore you taxes by buying a new asset you  need to increase business in 2013?  Don't buy anything you don't need or can't use just to lower your taxes.

What about employee Christmas bonuses?  Gifts of money to employees need to be treated as payroll.  But small gifts such as bottles of wine, a ham, a gift card of $50 or less do not need to be treated as payroll.

Even if you don't want to pay your taxes until the last minute - April 15, according to the IRS; October 15, if you don't mind a little penalty and interest - it's a good idea to get started on pulling tax information together.  It will give you time to find information you need to prepare, or have prepared, a good tax return and keep you from pulling your hair out at the last minute.

I hope everyone has a Merry Christmas and a happy holiday season.  I'll keep writing and we'll all keep working and hoping for a great 2013.

Third Quarter Payroll reports

941?  940?  SUTA?  What are these?  Should I care?

If you are a small business and pay a payroll, then you need to care.  You are required to file payroll reports quarterly and remit to the federal government the amount of Social Security, Medicare and income taxes that were withheld from your employees' wages.

If you are using a payroll program, and most employers are, then the reports will be prepared by your program and all you need to do is generate these reports and send them in by the deadline, which is October 31.  If you are still preparing payroll by hand, which you may be doing if you have always done it that way or you only have one or two employees and can't justify the cash outlay for a payroll program, you have a bit of math in front of you, but your deadline is still the same, October 31.

How do you determine if the people you work with and pay are employees?  Basically, if you tell them when to show up, where to show up, how long to stay and what tools to use, these people are employees.  If you discuss with them the job to be done and when it is to be completed and they come and go as they please, use their own tools and send you invoices for services rendered, then they are sub-contractors and you don't owe any payroll taxes for them.

Some employers want to avoid payroll and payroll taxes and try to pay everyone as a sub-contractor.  That only works until the state or IRS auditor comes knocking asking to see proof that your subs are really subs.  How do you prove that?  Sub-contractors are in business.  You are not their only client so they have business cards that they hand out to make it easy for you to remember them.  Keep those cards.  They bid on jobs.  Keep the bids.  Employees don't usually have professional business cards and never bid on jobs, they fill out applications.

A word to the wise:  Keep up with the payroll tax payments.  Pay attention to when you need to pay and how you need to pay.  If the IRS says pay weekly and pay on line, then do it that way.  Paying any other way will get you a fine.  If the IRS says pay monthly, you can still pay weekly.  The IRS will always accept money more quickly but never more slowly.  The penalties and interest on payroll taxes can mount up quickly.

If you do have sub-contractors, make sure you get their Social Security number and address so you can send them a 1099-MISC at year end.  If they have a business ID number, get that as well.  If anyone refuses to give you this information, consider carefully the advisability of continuing to work with them.

Some forms you need to have, which you can download from the IRS web site: W-9 Request for Tax Payer Identification number for sub-contractors, W-4 Employee's Withholding Allowance Certificate for employees and don't forget the I-9 which employees fill out to prove they can legally work in the United States.  This is the form that would stop all illegal workers if employers required that it be filled out.  The employee would either have to lie and provide false documents or not work.  In fact all employers are required, by law, to have this form filled out and on file for every employee.

You might also want to check out Pub 15 or Circular E- Employer's Tax Guide, which gives much more detail on all the topics I've touched on here.

So what's SUTA?  This is the State Unemployment Tax.  This is a tax on employers only and is not withheld from the employee and not paid at all for sub-contractors.  This tax is a percent of the payroll paid to each employee that is over $9,000 (used to be $7,000 but the recent high unemployment required the state of Tennessee to raise the base) per year.  The rate is based on several factors and is determined by the state each quarter and sent to the employer.  Generally, employers with low turn over, that is few people who draw unemployment, have a lower rate than those with high turn over, or a lot of employees who draw unemployment.

People who are self-employed, that is sole-proprietors, don't pay payroll taxes on themselves.  They pay self-employment tax on their personal tax returns.  If you're self-employed and making money, you'd better be making quarterly income tax deposits which include amounts for federal income tax, Social Security and Medicare.  If you don't, and you don't have a large amount of money when it comes time to pay your taxes, you may be in trouble.  Sole-proprietors do not get to draw unemployment if they go out of business, so they don't pay into the Unemployment Tax fund.

There you have a run down of the payroll taxes.  Probably more than you wanted to know, but if it's less, let me know and I'll write some more.  Don't forget to leave me a comment on this topic or any other topic you'd like to see me address.

Tax Deadlines in October

More on these later, but first a heads up.

Monday, October 15, is the final deadline to file the 1040.  FINAL!!!  There are no more extensions.  If you, for some reason, can not file a final return, file something.  You can amend it later.  But you run the risk of a late filing penalty if you don't file something that is postmarked October 15.

Wednesday, October 31, is Halloween and the deadline to file the 941 - the quarterly payroll tax report.  In Tennessee, and maybe other states as well, this is also the deadline to file and pay your State Unemployment Tax or SUTA.

And if your company has a large enough liability you may need to make a quarterly deposit toward the 940 or Federal Unemployment Tax or FUTA.

October 20 is a Saturday which means you have until Monday, October 22, to pay your monthly or quarterly sales tax report in the state of Tennessee.

These are all the deadlines I'm going to be dealing with this month.  This doesn't mean this list is all inclusive.  Other tax deadlines may apply to you, but these are a start and I'll talk more about them as the month progresses.

Drain the Fat.

I'm no cook.  I can boil water and operate a microwave, but cook a meal from scratch?  The 20 minute meal takes me several hours and leaves me too tired to eat it.  That is if my attempt is edible.  The simplest instructions stump me.  Take last night for example, one simple line, drain the fat.

All right.  How?  Into what?  The pan is hot.  The broken up hamburger is steaming and popping with its own hot oil.  The fat itself is rather dangerous to my skin and, I think, maybe to my drain pipes.  What am I to do with the stuff?  And really, what if I make a mistake?  What if I don't do it exactly right or as fast as an experienced cook?  It's only cooking.

Many people can throw together a meal, drain the fat, and cook a casserole.  They don't give it a second thought and if they mess it up a bit, no one cares.  Taxes aren't that way.  Do 'em wrong and people care.  IRS Agents care a lot and they'll let you know about it, too.  Don't worry.  You'll have directions on what to do and how to do it.  Directions that are obtuse, overly complicated and rarely on point.

But taxes to me are like cooking to an experienced cook.  Just as a good cook scans a recipe and automatically begins mentally listing the first steps and size of pan he'll need, I do the same with tax information.  Based on the informational forms the taxpayer presents, I begin to plan the tax forms I need.  1099 - better check it to see what income is being reported - rents (Schedule E), interest or dividends (Schedule B), K-1 partnership or S-corp (Schedule E page 2), 1098 (Schedule A).  Since the Schedule A is already in play, how about real estate taxes, medical bills, state taxes, contributions?  W-2, self-employed, retired?  Depreciation, vehicle expenses, employee benefits?  Each tax client is different just like a recipe.

I can't cook a meal but I can prepare a tax return with one had tied behind my back.

Well, not too tough with one hand and a computer.

How did I get this way?  Was I always strange and slightly crazy?  Well, maybe, but it could be years and years of experience.  Yep, that and growing up with a CPA.  My father ran a small one man shop.  Just like a good cook brings the children into the kitchen as babes to begin learning through observation and prep work, so it was in my childhood home with taxes.

My father's cottage industry involved the whole family from January to April.  My first job as a child was to read the appointment schedule to see who was coming in next.  Then pull the taxpayer's file to find out which forms had been used the year before.  After I had my stack of forms I wrote the taxpayer's name and ID on every one.  I put these in a folder and placed the folder on my dad's desk.

After my father prepared the tax return, my grandmother proofed his addition.  After he corrected any errors, my mother typed the tax return.  After my sister proofed her typing, the client was contacted to pick up the tax return.

The process was repeated in our house 100 to 150 times a year, every year.

Then around 1979, my dad bought a personal computer with some basic tax software and life changed forever.  Proofing and printing became a lot easier but knowing which forms to use and where to put the numbers required the same high level of knowledge.

Make a few mistakes in a recipe and you might have to eat a meal that's a little less tasty than you'd hoped, but probably not fatal.  And while making a mistake preparing a tax return isn't fatal either, it sure feels like it when that letter from the IRS arrives - usually two years after the return was filed - asking for an explanation about an entry the taxpayer doesn't remember making.

Many people begin to prepare their own taxes, just like I try to make my own meals, and get stumped by the instructions.  What does that mean?  How do I do that?  What form do I use?  It can be scary and it can be difficult, but it's not impossible.  Maybe you'll never prepare your own taxes, but by reading this blog you'll be more educated and organized when you sit down with your CPA and she starts asking questions.  Maybe your tax prep fee will drop because you bring the correct documents and information to the interview the first time and the CPA doesn't have to call you repeatedly to get the information she needs to finish the tax.  Maybe your anxiety level will drop and you'll gather your tax information without breaking into a sweat or screaming at your spouse and children.

Maybe you'll just read the blog because you can't believe anyone would write about something as boring as taxes.

I plan to write a new blog each week and discuss a topic that I find interesting or timely.  If my readers have questions or problems or confusion or fear, they can ask questions or make comments and I may use those for future posts.  Don't be shy.  I'm a real CPA licensed to practice in Tennessee.  Outside the state of Tennessee, my state specific information will be spotty, but if you're in the United States, my federal information will apply to all.  Until next time, keep cooking.