The following list is designed to help you avoid common bookkeeping errors:

1. Large expenditures such as equipment and vehicles: these are often incorrectly booked as expenses. Call your accountant for guidance when booking large purchases.  Items such as equipment and vehicles must be set up as assets and set up for depreciation.  Don’t make your accountant play hide & seek at the end of the year to hunt these down in your expense accounts!
2. Adding New Accounts: avoid adding new accounts to the General Ledger!  In most cases, there should already be an account on your list that you can use.  If you open a new bank account or credit card, or purchase assets (see #1 above), call your accountant for help in setting up the account properly.
3. Duplicate Vendors or Accounts: You know you pay Missouri Department of Revenue every month.  QuickBooks is now asking you to add them as a new vendor. JUST SAY NO! Take the time to look through your vendor list – it’s probably in there with a different spelling, such as MO Dept of Revenue.  Same goes for duplicate accounts.
4. Sub-Accounts: use ‘em or lose ‘em.  Only set up sub-accounts when really needed.  When entering transactions, look at your drop-downs, and if sub-accounts exist for the account you need, choose one.  For example, you might have “Repairs & Maintenance” as an expense account, then “building repairs” and “grounds” and “maintenance” as sub-accounts.  If you do not choose a sub-account, it will show up as “Repairs & Maintenance – other” on the PL, and your accountant must spend time at year end to clean it up.
5. Reconcile Statements in QuickBooks: Always reconcile your bank and credit card statements.  If you have trouble, call for help.  We no longer accept QuickBooks files for tax preparation if they are not reconciled.
6. Loan & Credit Card Payments should not be booked as expenses!  First reconcile the loan or credit card statement, entering the interest and finance charges in the reconciliation screen.  Then make the payment, and select the credit card or loan (liability) in the account field.  The only exception would be interest-only loans.
7. Payroll Processing is a common source for bookkeeping errors  Also, IRS penalties for missed payroll taxes can be severe.  If you process your own payroll, make sure you are fully instructed and call for help whenever you run into trouble.  The most common problems are caused by incorrect set-up of employees or payroll liabilities, and failure to use the Liability Payment window in the Payroll Center.
8. Donations can often be booked as advertising expense instead.  Is your business name listed in a program or on a team jersey?  Did your contribution allow you to attend an event where you can promote your business? Contact your accountant if you are not sure.
9. Health & Disability Insurance expenses for S-Corps and C-Corps: the shareholder portion of the expense should be split out with a special expense account, and not lumped together with the amount paid for regular employees.  You can memorize the transaction after you have set it up correctly.
10. Other Names List: On the QuickBooks menu bar, look at “lists/ Other Names List.”  There should be VERY FEW, if any, names on this list.  If you see a lot of names here, most of them are probably vendors and should be changed.  This is important for 1099 processing at the end of the year.
11. Loan proceeds: If you are taking out a new bank loan, there may be a tangled mass of capitalized expenses, transfers, and deposits.  Your best bet is to save all the paperwork until after the dust has settled, and and call your accountant to help you book it correctly.  We appreciate it if clients get this handled during the year, instead of dealing with it during tax preparation.
12. Owner Transactions: Fully document money transferred between personal and business accounts. (Do not deposit personal cash into a business account, as you will have difficulty proving to the IRS that it is not income.)

• Money moved between personal and business accounts should usually be booked to an equity account, not income and expense!  There are a variety of ways to track owner transactions, and the best method for you will depend on your practices.
• A great way to give your accountant headaches is to use personal accounts for business expenses and business accounts for personal expenses.   It’s better to transfer funds where needed, then pay from the proper account.
• Since we’re on the subject, it’s good practice to have a plan for regular owner salary and/or draws, rather than handling this randomly.  In many cases, the business owner should be taking a minimum salary.

Employers can qualify for a payroll exemption if the employer hires a worker who has been unemployed for at least 60 days and they are not a “replacement” hire.

Please see the IRS Website for more information about the HIRE Act Employment Tax Incentive.

link to revised Form 941 and instructions.

1.  DO NOT IGNORE IT!  If you haven’t noticed, most bad things only get worse when ignored.

2.  CALM DOWN; the IRS computers automatically generate notices and mail them without human interaction.  Our experience is that tax notices are often inaccurate.

3.  READ THE NOTICE CAREFULLY when you can do so in a relatively calm state of mind.  Take threatening language with a grain of salt.  The notice may make your feel like Public Enemy #1, but they are dealing with the entire spectrum of society, including a few tax-cheats

4.  FOCUS ON THE YEAR AND TAX FORM in question.  It’s easy to jump to conclusions, so make sure you understand which tax form and year (or quarter) is being addressed.

5.  RESPOND BEFORE THE DEADLINE.  You usually have 30 days to respond to the notice.  If you can’t handle it now, write yourself a note to follow up and handle it.

6.  DON’T GET ANGRY OR BLAME YOUR TAX PROFESSIONAL.  The IRS has the authority from Congress to audit any taxpayer’s last three tax returns.  The IRS uses a complex statistical formula to try and identify where they can generate the most tax revenue, but they still use a random sample to keep everyone respectful of their civic duty to pay taxes.

7.  DON’T SEND MONEY until and unless you are sure you agree with the notice.  I know people who paid tax they didn’t owe because they were intimidated by the IRS.

8.  READ THE NOTICE AGAIN.  Read the notice in detail, and try to find the reason they say you owe or what you did wrong.  Highlight or underline the main points.

9.  DECIDE IF YOU NEED HELP.  Some people have a head for numbers and the patience it requires to follow through with a process that often takes many months.  But, if there is a large amount of money in question, most people would be wise to engage a professional to help them understand and reply to the notice and subsequent correspondence.  Also, if the reason you owe more tax is due to Form 1099-C, Cancellation of Debt Income, your preparer can determine if you qualify for one of several exclusions.

10.  CONTACT THE PREPARER.  If the tax return in question was prepared by a professional, make sure to contact the preparer and send (mail, fax or email) them a copy.  They will help you determine one of three possibilities: 1) the IRS made the mistake or has incorrect information, 2) something was missed in the preparation, or 3) vital information was not provided to the preparer.  If it was a preparation error, the preparer should be willing to handle the matter for you at no extra fee.  If it was an IRS error, or an error in the information you provided, you will want to ask about fees before having your tax preparer handle it for you.

11.  DOCUMENT COMMUNICATION.  Communicate before the deadline. Send letters via certified mail, and keep a copy for your records.  If calling, make detailed notes of the conversation, including date, time, number called, and the name and ID number of the IRS agent.

12.  REQUEST ADDITIONAL TIME.  If you are getting close to the deadline stated in the notice, call for additional time.  You can usually obtain an additional 60 days to respond to the notice if you will simply contact the IRS (before the deadline stated in the notice) by phone, fax, or letter that you need more time to gather facts and respond to the notice.  If you call, document (see #11 above).

13.  PATIENCE.  If the notice is incorrect you will have the burden of proving your side. So, be prepared for a lengthy process to get it straightened out.  It can take months of phone calls and letters during which the IRS computers will continue sending out notices.  Keep detailed notes of all phone calls, and keep copies of all letters sent and received.

14.  PAYMENT.  If you understand the notice (and the cause of the additional tax) and you agree that you owe more taxes, then you can either pay the tax or request a payment plan (installment arrangement).  Most notices have a place to sign if you agree with their assessment.  If you return the signed assessment without full payment, they will send you a bill for the balance and Form 9465, Installment Agreement Request.  Complete and submit the Installment Agreement Request  if you cannot pay the balance due.  Be sure to choose a monthly amount you can afford, since missing a payment will void your installment agreement.

15.  REQUEST ABATEMENT OF PENALTIES.  You may be able to receive an abatement of all or most of the penalties that have been assessed and disclosed in the notice.  In general, taxes and interest are statutory and cannot be abated, but penalties can.  I suggest that you pay only the tax portion of the notice (if you agree that you owe it) and include with your payment a written request for abatement of penalties along with a reason.  The IRS is required to consider waiving penalties for reasonable cause.

If you are unable to file your tax return by April 15, you can file IRS Form 4868 Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

Current Columbia CPA Group Clients – if we have not prepared your 2009 tax return by the 4/15 due date, we will file the automatic extension for you.  Call our office if you have any questions.

What happens when I file Form 4868?

• Your due date to file your individual tax return is automatically extended to October 15.
• Payment is still due April 15.
  • As long as 90% of your total tax is paid by April 15 (for example, by withholdings on your wages or estimated payments), there is no late-pament penalty.
  • If you think you will owe more than 10% of your tax and wish to avoid the penalty, you can make an estimated payment with the extension form.
  • The late-payment penalty is ½% to 1% per month calculated from April 15.  (Note:  that’s 6%-12% annual rate, less than most credit card interest.)  For more information, go to the IRS web site.
• Other than the possible late-payment penalty, you will not get any reprimands, hand-slaps or black marks from the IRS for filing the automatic extension, as long as you file your tax return by the extension due date of October 15.
• Missouri accepts the Federal Extension.  Include a copy of the IRS form 4868 with your Missouri tax return before October 15.

Disclaimer:  IRS regulations are exceedingly complex.  This information is meant to be helpful, but not complete, and does not replace a professional consultation.  We advise you to exert due diligence to apply the appropriate IRS regulations to your situation.

Note -  current clients of Columbia CPA Group:  we have filed an extension for you if your 2009 return is not filed yet.  Call our office if you have any questions.

Partnership returns, form 1065, are not due until April 15.  However, the extension is only for 5 months, so the extension deadline will be September 15, the same as corporate business returns.

If filing a C-Corp Return (Form 1120), you may want to send an estimated payment with your extension application, if you expect to owe, to avoid late pay penalties.  The automatic extension is for filing, not for paying.

LLC’s file as Schedule C  or 1065 Partnership, unless the IRS has approved a request to file as an S-Corp, form 1120S.

This article will discuss various types of payroll services and the potential advantages or disadvantages of each.

1. Full Service Payroll with Tax Impound

With this type service, you supply the employee hours etc before every payday, the service provider prepares the checks and/or direct deposits, charges your checking account for the net pay plus all tax withholdings and employer taxes.  The service makes all your payroll deposits for you.  You will probably sign a POA that allows the service provider to sign and file your payroll returns for you as well.

Fees are charged to your bank account each payday.  Since these types of service providers specialize in payroll processing, they can operate efficiently and the fees are usually reasonable.

Pros: High level of accuracy for tax computations with little risk of penalties from calculation errors or missing a payroll deposit.  This is a good choice if you are likely to forget to make your payroll deposits or if you find it difficult to set aside the necessary funds.

Cons: Service may not be as customized as you would like.  If there are any errors on the paychecks, you may need to wait until the next payday to make the adjustment.  Also, payroll information usually must be submitted several days in advance, so there may be more of a delay than your employees are accustomed to.

Note: It can be difficult to change services mid-year if you are already using this kind of service. It’s best to wait for year-end to change providers to avoid confusion with the filings.

2. Full Service Payroll (employer responsible for payroll tax deposits)

If you feel you can handle making your payroll tax deposits in a timely manner, you will have more options for choosing a payroll service provider.  Most accounting offices offer payroll services, and there are some on-line options as well.  Small business owners often prefer the convenience of working with their regular accountant.

Issuing checks or initiating Direct Deposit:  Your service provider may run the checks and/or direct deposits for you, or simply give you pay stubs and you take care of printing the checks.

Tax Payments: Your service provider should remind you of due dates for your payroll tax deposits.

Quarterly and Annual Payroll Returns:  Your service provider will prepare your quarterly payroll tax returns and W-2’s at year end.  You may be asked to provide verification of your tax payments (so the forms can be completed correctly), and you may need to sign the quarterly and annual tax reports.

Fees may be based on hourly rates or a fixed rate according to the level of service and number of employees.

Pros: High level of accuracy for tax computations (and less risk of penalties); more options in choosing a service provider; personalized service.

Cons:  Penalties can occur if you are late with payroll deposits.

3. Limited services: employer processes payroll checks, service provider prepares quarterly reports and W-2s.

Many small employers use their own bookkeeping and payroll software, such as QuickBooks, to run their payroll checks.  If this is your situation, we recommend that your accountant or a payroll professional prepare your quarterly reports and W-2’s for you. This will assure that all taxes have been computed correctly.   Also, tax payments can be computed for you if needed, along with due date reminders.  Your service provider should also be available to answer questions you have about running your payroll.

Fees may be based hourly rates or a fixed rate based on number of employees.  If fees are based on hourly rates, your bill will be higher if you make a lot of errors on your payroll.

Pros: You have direct control over payroll processing. You may experience faster turn-around time.  With more employees, you can save on processing fees.

Cons: There is additional cost for the payroll software, and more of your time or an employee’s time is required.  There are also many opportunities for errors, from setting up employee information, processing checks, and recording corrections.  If there is not a high degree of accuracy in processing your payroll checks, it may be less costly in the long run to use full payroll service, especially when you factor in the cost of your own time.

4.  In-House Payroll Processing

Larger employers may be able to justify assigning payroll processing and reporting to skilled staff members (emphasis on skilled).  Payroll software is a must, but there are many options for in-house or on-line software.  We caution that it’s important to make sure to hire someone with the right training and skills, because of the risks involved.

Pros:  Simpler in terms of operations, since there is no need to communicate with an outside service provider.  This option may be more economical for very large employers.

Cons:  It is essential to find the right person (with experience and training) for the job.  Most business owners to NOT qualify to do this job themselves!  If tempted, please review the first paragraph above for warnings about payroll penalties.

This checklist walks you through the basics of forming a new business, and helps you avoid some common pitfalls.

Entity Formation.  Your attorney can help you determine the best choice for your circumstances and type of business.

Please note that if you wish to incorporate, you must stay current with annual registration and tax filings.  If you typically have trouble meeting filing deadlines, forming a corporation is not a good choice for you.

Tax Election. If forming an LLC, you must decide how the LLC will be taxed.  To be taxed as S-Corp or C-Corp, you must file IRS form 8832 Entity Classification Election.  Otherwise, your choices are Sole Proprietor (Schedule C) or Partnership.  Don’t forget to prepare for required tax reporting for your business by keeping good records and budgeting for accounting fees.

City business license (if inside the city limits).

EIN. This number identifies your business for payroll taxes and income taxes.  To apply for an EIN, use IRS form SS4. 

State tax registration.  You can register your business on-line at the Missouri Department of Revenue web site.

Paying wages.  It is very important to get professional advice before paying employees or contract laborers.  You can easily end up owing massive payroll penalties and back taxes to the IRS or state.  Civil Penalties can also be assessed for failure to make proper payroll deposits.  These civil penalties can be assessed individually against anyone responsible for the company payroll.

We recommend that all employers get some level of professional assistance with payroll.

We also strongly recommend that you review the IRS rules for determining whether a worker should be classified as an employee or contractor.

Insurance.  Talk to your insurance agent about:

BOP

Professional Liability

Workers Compensation

Business Interruption (partnerships/multiple owners)

Estimated Taxes — avoid tears at tax time!  Income taxes and Self-Employment tax catch many new business owners unaware their first year.  Planning ahead can help you avoid unpleasant news when your tax return is prepared.

For a sole proprietorship or partnership, we recommend setting aside 30% of your profit for taxes.

You may be required to make quarterly estimated tax payments.  Check with your accountant if you are not sure.   If quarterly payments are not required, it is still advisable to set aside a portion of profits for any taxes that will come due when your return is filed.

Record Keeping. If you only use bookkeeping records for tax return preparation, you are missing out on a vital tool for business success.  You wouldn’t drive your car with your eyes closed.  Don’t try to run your business without timely and accurate financial information.

You should be able to review your business profit/loss statements and balance sheets at least quarterly.   Bookkeeping software, such as QuickBooks, will provide these and other useful reports, but ONLY with accurate data entry. Your accountant should be able to help you interpret the reports if needed.

We find that business owners typically under-estimate the importance of keeping good financial records, and the skill it takes to do so.  Having your bookkeeping done or reviewed by a skilled professional will assure you have access to relevant and useful information.

Financing A start-up business can be a ravenous, cash-eating beast.  It may take several years before the business generates a steady profit.   Plan ahead by estimating your cash flow needs. Do you need a line of credit for seasonal declines in sales? Do you need a business loan or investors? Can you live on savings until the business starts to make a profit?

Written Business Plan. Identifying your purpose, your mission, and your target market can provide clarity that guides your every day management decisions.  Most of us can’t be all things to all people.  A business plan helps you focus on your particular strengths and goals, and will help you serve your target market more effectively.

HR Considerations:

Employment contracts

Bonding

Non-compete or non-disclosure agreements

Job Descriptions

Employee Handbook

Benefits

Employee leasing or temp services

Disaster Preparedness

Data back-up

Power back-up

Security, passwords etc.

Off-site storage / safe-deposit

Alternate location with access to computers/data