Year-End Bookkeeping and Accounting Checklist for Small Business Owners
The end of the year is a hectic time for small business owners. Between catching your breath after tax season and managing holiday sales, year-end bookkeeping and accounting tasks understandably fall to the bottom of the to-do list. xendoo is here to help you avoid the year-end scramble. Check out our year-end bookkeeping checklist to organize your finances and successfully wrap up the year. 1. Get Your Books Caught Up The first step is to make sure that your books are up-to-date. You can do this by: Accounting for all bills and invoices, even if they haven’t been paid yet. Reviewing bank and credit card statements to confirm that they match. Recording any expenses that you paid for with personal funds. Accurate records ensure reliable financial statements. If your books are behind a few months, or even years, you are not alone—25% of business owners are behind on their books. xendoo’s online bookkeepers provide catch up bookkeeping services, so you can focus on the future. 2. Collect the Necessary Forms Once January arrives, your accountant will request certain forms to close your books and file your small business taxes. Be sure to collect them as soon as possible to ensure a smooth start to the new year. Here are common forms and their deadlines. Form W-2 Business owners use form W-2 to report salary information for their employees. It also helps businesses report the taxes they withhold from paychecks. Employees need this information to file their personal tax returns. Business owners are responsible for sending this form to the IRS. Employers must provide the form to their employees no later than January 31st so that employees have enough time to file their taxes. Form W-9 If you worked with an independent contractor or vendor and paid them $600 or more, you will report those payments to the IRS using Form 1099-NEC. The information you need to complete this form is on Form W-9, which you can collect from your contractors. If any W-9s are missing, reach out to your independent contractors and have them complete the form before the end of the year. Schedule K-1 CPAs provide the Schedule K-1 or Form 1065. The Schedule K-1 must be sent to shareholders and partners by March 15th. S-Corporation shareholders and partnership members use it to report their share of the business’s profits and losses. They’ll also include the form with your personal tax return. Form 1099-K The 1099-K tracks the payments received through third-party payment networks, like eBay, Stripe, Shopify, PayPal, and others. You should receive one 1099-K from each of the Online Payment Networks you use by January 31st. You are required to complete each one. Your gross receipts must be at least as high as the amount that you report on your 1009-K. The 1099-K shows gross sales, which is the amount before fees are deducted. What appears in your bank account is the Net Amount, the amount after fees are deducted from the Gross Amount. The sales from each vendor must be reported as the Gross Amount, which is what appears on the 1099-K. If you use freelancer platforms like Upwork or Fiverr to hire independent contractors, they may also send 1099-Ks to your freelancers instead of 1099-NECs. Since they are considered Online Payment Networks, these platforms typically send 1099-Ks to freelancers that make over $20,000 a year and have at least 200 transactions. However, if you paid freelancers more than $600 outside of their platforms, then you will need to send out a 1099-NEC. Click here to download our Tax Documentation Checklist. 3. Follow Up on Past-Due Invoices Review past-due invoices to see what you are owed. If there are any outstanding payments, reach out to your customers before the end of the year to successfully close your books. 4. Account for Inventory If your business stores inventory, perform an end-of-year inventory count to make sure your totals match your Balance Sheet and your books. This review will provide insight into waste and loss management, as well as reduce inaccuracies in inventory counts and receivings. Consider utilizing inventory management software to streamline inventory creation and order fulfillment. 5. Review Your Financial Statements Once you or your bookkeeper completes your bookkeeping, review your financial statements to confirm your numbers are correct. You can also take that time to review how your business grew over the course of the year. Was there a steady increase in profits? Can you identify connections between your costs and sales? The financial statements provide visibility to confirm that you are on track to meet your goals, make projections, and prepare for the future. Click here to learn more about the key financial statements. 6. Reach Out for Help Everyone deserves a supportive team of people who care. If you feel overwhelmed with year-end bookkeeping, reach out to an online bookkeeping service. xendoo’s bookkeeping and accounting team provides monthly bookkeeping and accurate financial reports. We’ll give you financial visibility throughout the year and deliver insights to make strategic business decisions. Ring In Success Juggling the holidays with running a business can be hectic. Although this year-end bookkeeping and accounting checklist can help you prepare for tax time, you don’t have to do it alone. xendoo has a range of plans with flat monthly fees. You can get certified, professional online bookkeeping, accounting, tax, or CFO services to help you manage your finances and grow your business. Schedule a call with one of our online accountants to get started.
What Is Bank Reconciliation: Template and Step-By-Step Guide
This article was updated on October 19, 2022 with new links, resources, and templates. Bank reconciliation may sound like a daunting task for a business owner, especially those without an accounting background. As a business owner who already has too many tasks and not enough time, you may overlook or put off this important task. You need to know how much money in your bank you can spend. Bank reconciliation helps you do that. Skipping out on bank reconciliation is not something you can afford to do. It is a necessary part of running a business. However, with these bookkeeper-approved tips and tricks, you can make bank reconciliation almost painless. We’ll explain what a bank reconciliation is and why you need it for your accounting and bookkeeping. Plus, we’ll share a free bank reconciliation template. What is bank reconciliation? Many business owners check the balance in their online bank account or most recent statements. They assume that the number in front of them is the amount of money they have available to spend. The problem with this approach is that it doesn’t account for the items that don’t appear on your bank statement yet. Let’s say a business has a bank balance of $20,000. The owner writes a check for new equipment that cost $8,000. However, the supplier hasn’t cashed the check yet. So you need to factor it into your balance. The true balance in the account is not $20,000. It’s $12,000 since the $8,000 is already promised to someone. If the owner forgot about the outstanding check and withdrew $15,000 from the company’s account, the check would bounce. A bank reconciliation also helps you identify transactions that went through the bank but weren’t recorded in the company’s accounting system. As more businesses opt to pull in direct bank feeds for their companies, this is less of an issue. But even direct pulls from bank accounts can have glitches that leave some transactions unrecorded. To reconcile the bank, your company should compare the transactions. With bank reconciliation, you compare your bank statement against the transactions in your accounting software to ensure that everything is recorded. Bank reconciliation terms to know There are several commonly used terms in bank reconciliations that you should be aware of. Deposit in transit: Deposits that have been sent to the bank (either electronically or through a visit to the bank) but that have not been posted to the company’s account at the end of the period. This does not include payments expected to be received in the future from customers. Outstanding checks: Outstanding checks are any checks written by the company prior to the end of the reconciliation period. They have not been cashed by the recipient yet. Not sufficient funds (NSF): A check may be rejected if the account does not have sufficient funds to cover the amount of the check. An NSF check may show up as being cashed by the bank with a reversal of the amount when the check is flagged for NSF. Most banks charge fees for NSF checks and these need to be recorded as well. Stale Checks: A stale check is one that has gone uncashed for a long time, usually over six months. Depending on the purpose of the check, the company may consider voiding it. Some checks, such as payroll checks cannot be voided and need to be remitted to state agencies. How often should you do bank reconciliation? While bank reconciliation can be performed at any time, it is usually a monthly task. Your bank generates a monthly statement anyway, so each month you should compare your bank statements to your internal accounting records. The process of bank reconciliation is nothing more than confirming that what appears on your bank statements matches what you see in your accounting software. But, how does bank reconciliation work? How To Do a Bank Reconciliation Each month, your business will conduct several transactions, so you’ll see money coming in and going out. Those transactions should all be tracked in online accounting software like QuickBooks or Xero. Also, you should see those transactions in your bank account (or accounts), usually a day or two after they occur. The details of doing a bank reconciliation will vary from software to software, but the basic process is the same across the board. 1. Download your bank statement The very first step of any bank reconciliation is locating your bank statement. The bank statement gives you the beginning and ending bank balances along with the activity for the period (which is usually one month). 2. Locate reconciliation in your software or spreadsheet If you are using accounting software such as Xero or QuickBooks, there is a section of the software designed specifically for bank reconciliations. Once you open up the bank reconciliation module, you will find a list of all the deposits and withdrawals that are in your books. If you are using a spreadsheet to reconcile your bank, create a new copy of your template for the current period. 3. Reconcile the deposits If you have already recorded all of your deposits in your accounting software, you should be able to match each deposit to a line item on the bank statement. Bank statements will list cash and electronic deposit separately. Deposits from different electronic sources (credit cards, Paypal, Zelle, wires, etc) will show up as separate deposits on the bank statement. It will also try to include a description (although it’s sometimes a bit vague) of the deposit. 4. Reconcile checks Reconciling checks is the easiest step in a bank reconciliation. Your bank statement will list each check in numerical order. For each check that appears on the bank statement, you cross off the check number in your accounting software or spreadsheet. Once you’ve checked off all the cleared checks in your accounting software, you can verify the total amount of checks paid. 5. Reconcile any electronic payments Though most companies are diligent about recording checks written to vendors
Free Small Business Expense Tracking Spreadsheet
Small business expense tracking can be tedious, but it’s one that all companies–from “mom and pop” shops to international enterprises–must do. Fortunately, business expense tracking apps make the job easier. An app is ideal if you have a business with many employees, sales, and tax considerations. For some small businesses, however, paying a subscription fee for an expense tracker may not be feasible in the beginning. In this case, they can use a free business expense tracker or template. While expense tracking will remain manual, it will keep their finances organized in one place. We’re sharing a free business expense tracking spreadsheet that you can use. You can jump to the spreadsheet here and scroll further to learn how small businesses can keep track of expenses for free or at little cost. Why do you need to track small business expenses? What are common business expenses? What is the best way to track expenses for small businesses? Small business expense tracking spreadsheet Why do you need to track small business expenses? As you may know, you’re required to file taxes each year. Come tax time, no one wants to sift through old receipts to account for each expense. Once you start expense tracking regularly, you can eliminate such hassles. Moreover, up-to-date records ensure that you file tax returns accurately. Therefore, should the IRS audit your company, you won’t have anything to worry about. Besides saving you time, you’ll also want to track expenses to take advantage of tax deductions and better financial health. Tax Deductions Everyone has to deal with taxes every year–companies and individuals. You may be eligible for tax deductions for certain expenses or activities. If you qualify for a deduction, you can lower the tax amount you owe and use the savings to grow the business. While it may surprise you, many small business expenses qualify for tax deductions. However, only a small proportion of small business owners benefit from them. This is primarily due to inadequate expense tracking practices and not knowing how much you can save. With reliable accounting software, you’ll have expense reports. These will give you a complete picture of your spending and tax deductions. If you’re unsure what counts as a deduction, you can review our list of over 20 tax deductions for small businesses. Financial health Data from the Bureau of Labor Statistics (BLS) shows that 20% of small businesses fail within the first year. This figure rises to 50% by the fifth year. But there’s a silver lining. Most of these businesses do not fail because there’s no market. Surprisingly, some companies make a lot of money and still fail. Some of the reasons for this include: Financial mismanagement Cash flow issues Unsustainable growth Poor planning As you can see, all those factors are related to finances. By ironing up your expense tracking processes, you can significantly increase the chances of success for your business. You’ll be able to quickly spot unnecessary, unusual, and fraudulent activity that may bring your business down. This way, you can limit business expenses to necessary expenses and prevent costs from going overboard. In addition, you can learn how to read and interpret financial statements. What are common business expenses? Businesses in varying industries have different expense profiles. Even still, there are expenses that almost all businesses have. In the expense tracking spreadsheet, you’ll find areas to record each of these expenses, including: Advertising and marketing – Costs associated with hiring a marketing agency or a consultant. Auto expenses – If you use your car for business, you can expense repairs and mileage. Bank charges – Fees and costs for a business bank account and credit cards. Commissions – They will be recorded here if you pay out sales commissions. Contract labor – This is for businesses that hire freelancers or contract employees. Interest – If you have a business loan, its interest is considered an expense. Legal & professional – Consult with lawyers, accountants, and other professionals. Merchant fees – These are costs that merchants like Shopify and Amazon charge. Payroll, payroll taxes, and processing – Expenses related to paying employees and processing those payments. Recruiting & HR – Costs associated with finding and hiring employees. Training & Education – Expenses related to furthering your or your employees’ business education. Software and tools – Many tools you use for your company are expenses (and tax-deductible). Rent or lease – If you have a physical store or office, you can add it as an expense. Utilities – Many utilities, including the Internet, are business expenses. These are just a few examples. You’ll find more inside the small business expense tracking spreadsheet. What is the best way to track expenses for small businesses? At this stage, you know why it’s important to track business expenses, but how do you do it? You have two options: business expense tracking spreadsheets or apps. 1. Business expense tracking apps The best options for business expense tracking are expense tracker apps. These solutions sync to your bank accounts and business credit cards and categorize your expenses. This eliminates most of the manual work and automates inputting the costs yourself in a spreadsheet. As a result, the only expenses you usually add manually are those you pay for in cash. Such solutions generate expense reports in addition to maintaining expense records. These reports help you understand your spending habits and how they impact cash flow and financial health. You don’t have to set time aside for this. You can review your expenses using a mobile app while on the go. Overall, they reduce the amount of time you spend on expense records. Some business expense tracking apps include: Mint Quickbooks (integrates with xendoo) Xero (integrates with xendoo) Zoho Expense Expensify To learn more about each app and if it’s a good fit for your company, you can view our guide to expense tracking apps here. 2. Business expense tracking spreadsheets While business expense tracker apps may be ideal, they’re sometimes
The Top 5 Benefits of Catch Up Bookkeeping
Whether they coach chess players or sell organic puppy food online, every small business owner shares a common driving force: a passion for growing their business. Increasing sales and gaining new customers is one part of the equation. Consistent bookkeeping provides the financial insight needed to strategize for long-term success. With so many obligations resting on the business owner’s shoulders, it can feel like there are not enough hours in the day to accomplish every task, and eventually the books may fall behind. Even if the books are only behind a few weeks, up-to-date records are crucial for the financial well-being of every business. Catch up bookkeeping accelerates business growth by increasing financial visibility, which enables business owners to make decisions based on accurate information and remain tax-compliant throughout the year! In this blog post, we are exploring the top 5 benefits of catch up bookkeeping! Reliability in Your Opening Balance The Opening Balance is the amount of money in your bank account at the beginning of a new financial period, such as the start of the month. Be aware that your bank account does not necessarily reflect the exact amount of cash that is available to spend. For example, if your Opening Balance states that you have $50,000, but $20,000 worth of checks have not cleared yet, the actual balance is $30,000. The best practice is to consult your updated accounting software or financial statements, which provide insight into your true financial position. The financial statements report revenue, expenses, and profitability, all of which contribute to the Opening Balance. They also guide decision-making and reveal opportunities for business growth. The more up-to-date your books are, the more reliable your financial statements (and Opening Balance) will be! If your bookkeeping is behind, there will be little to no financial data for that time period, which means you will not know your true Opening Balance for today. For example, if your account was reconciled in January, but February was skipped, the Opening Balance would be incorrect for March. This could skew your numbers going forward, and costly choices could be made based on inaccurate data. This could also affect future bank account reconciliation, as well as the balances in your revenue, costs, and expenses. It is a vicious cycle. Catch up bookkeeping corrects these issues and provides clarity and accuracy in your financials. Once your books are caught up, keeping them up-to-date becomes second nature. Financial Accuracy Through Bank Account Reconciliation A bank account reconciliation is performed to confirm that your accounting records match the information in your bank account. It is an opportunity to identify and correct any bookkeeping errors before the financial statements are finalized, as well as detect and prevent fraudulent activity in your bank account. Bank account reconciliation also ensures that you are accurately reporting your income to the IRS. The best practice is to reconcile your bank account once a month. Proper bank account reconciliation can only be accomplished when the books are up-to-date. By getting your books caught up, you can ensure the reliability and accuracy of your financials each month. Cash Flow Management Catch up bookkeeping can have a significant impact on cash flow. When your books are caught up, you can pinpoint how and when cash enters and leaves your business each month. This delivers a deeper understanding of your cash needs, so you can create a plan for cash flow management. For example, as your books are caught up, you may uncover past due invoices, or find that you are sending out vendor payments before you receive the cash needed to cover them. With this insight, you can monitor your Accounts Receivable to ensure you are paid in a timely manner going forward, and find solutions for the timing of your own payments. You can also forecast future cash needs to be confident you have what you need for continued operations. Click here to learn more about cash flow. Insight into Net Income Keeping your books up-to-date plays a vital role in calculating your bottom line, or Net Income, which is the profit that remains after all costs and expenses are subtracted from revenue. In order to know your true Net Income, all business expenses must be accounted for through accurate and timely bookkeeping. This understanding of your Net Income provides the opportunity to increase your bottom line. Getting your books caught up is also essential when applying for loans. Creditors and investors examine Net Income when deciding to invest in a business, as it highlights the business’s ability to pay back loans efficiently. Catch up bookkeeping determines your bottom line, so you can understand and increase the profitability of your business, meet loan requirements, and secure funding for your next venture! Click here to learn more about Net Income. Tax Compliance As tax season draws closer, a concern that many business owners have is under or over reporting their earnings, and missing out on deductions. They may also experience a back and forth with their Tax CPA over missing documents and gaps in their financials. Breathe a sigh of relief – catch up bookkeeping takes the headache out of tax season! By getting (and keeping) your books caught up, you can identify the deductions you qualify for, maximize your tax return, and stay compliant all year long! Get Your Books Caught Up with xendoo Behind on your bookkeeping? You are not alone! 25% of business owners are behind on their books. Get a fresh start with catch up bookkeeping services from xendoo, so you can take your time back and focus on the future of your business. Let’s chat! We would love to get to know you and your business. Click here to schedule a free consultation.
How Do I Pay Myself and My Taxes as a C-corporation?
When businesses are first created, every responsibility falls on the business owner. As they juggle increasing sales, customer service, marketing, and even bookkeeping and accounting, two questions come to mind – how do I pay myself? How do I pay my business’s taxes? Self-payment for small business owners is far from simple. There are certain requirements for the amount you pay yourself, and even how you receive payments. That is why the xendoo team has created this guide to help you navigate self-payment and taxes as a C-corporation owner! How to Pay Yourself as a C-corporation: Salary or Dividends The payment you receive depends on your role within the company. C-corporations are made up of the following roles: Directors, officers, and employees in a C-corporation take a salary, which is subject to payroll taxes. Shareholders can take a salary and dividends, which are allocations of stock from retained earnings, if the company chooses to distribute profits. Some shareholders opt not to take dividends, which will be discussed shortly. In smaller C-corporations, one person can act as the shareholder, director, officer, and employee. Shareholders can also be involved in the day-to-day operations of the company, and are referred to as shareholder-employees. How Do I Pay My Taxes as a C-corporation? C-corporations are considered separate legal entities from their owners. This means that the business is taxed at the corporate level, with dividends being taxed again at the shareholder level, resulting in double taxation. Smaller companies may choose to avoid dividend payments for this reason. C-corporations file their taxes using Form 1120, which reports the business’s income, losses, credits, and deductions. If shareholders take dividends, they use Form 1099-DIV to report the amount that was distributed to them. To ensure that your C-corporation taxes are filed correctly and on time, you can partner with an online CPA. They will help you to maximize your tax savings and enjoy peace of mind during the most stressful time of the year. Are Salaries and Dividends Tax-Deductible? Dividends are not tax-deductible expenses, but shareholder-employee salaries are – as long as they are reasonable. Some business owners may take high salaries in order to reduce the company’s taxable income. However, if the salary is too excessive, it could be reclassified as a dividend payment, taxed at the shareholder level. The company would then lose that excess salary as a deduction. On the other hand, if the salary is too low, it can be considered an attempt to avoid employment tax liability, which could draw scrutiny from the IRS. Every business is different, so the salaries that business owners take will vary. To get started, you can take a look at the factors the IRS uses to determine a reasonable salary for shareholder-employees in C-corporations: What comparable businesses pay for similar services. If an employee’s salary falls in line with what similar businesses pay for that position, the salary will be considered reasonable. Character and condition of the corporation. If the company is performing exceptionally well, an above-average salary can be considered reasonable. The role of the employee within the business. The IRS considers the hours the employee works, the duties they perform, and the contributions they make to the success of the business. If the employee receives a raise, they must also receive an increase in responsibility for their salary to be considered reasonable. Internal consistencies in establishing compensation levels. Inconsistencies in the compensation of other employees can suggest that the employee’s salary is unreasonable. Conflicts of interest in setting compensation levels. Conflicts of interest occur when there is a clash between personal interests and professional obligations. For example, if a shareholder attempted to disguise dividends as a deductible salary, the IRS would deem the salary unreasonable. You do not have to figure your salary out on your own. Discuss your options with an online C-corporation accountant at xendoo today! xendoo is Here for You Every business owner deserves an accounting team that is dedicated to their financial success. xendoo provides online bookkeeping and accounting services to C-corporation owners, so they can make the most informed decisions for their business! We would love to get to know your business. Click here to schedule your free consultation. Want to learn more about the different business entity types? Click here.
How Do I Pay Myself and My Taxes as a Partnership?
Every partnership owner faces the unique challenges of self-payment, tax filing, and maximizing their tax savings. Although they would rather focus on growing their business, taxes and payroll often take up too much of their valuable time. If the self-payment struggle is all too familiar to you, xendoo is here to help. We have created this guide to help you pay yourself and maximize your savings as a partnership owner! How to Pay Yourself as a Partnership Owner: The Owner’s Draw or Guaranteed Payments Partnership owners pay themselves by taking an owner’s draw or a guaranteed payment, with profits distributed to each member based on the partnership agreement. Note that partnership owners are not permitted to take a salary, as the IRS states that you cannot be both a partner and an employee. The Owner’s Draw An Owner’s Draw differs from a regular salary in that you can take money from the company’s earnings as needed, rather than on a scheduled basis. Depending on how well your business is performing, you can draw more or less, allowing for flexibility in your payments. If your business is profitable, subtract liabilities (any debt your company owes) from assets (items of value the company owns). The remaining amount is referred to as ownership equity, which is what you will take your draw from. This amount is reflected on the Balance Sheet, under Owner’s Equity. Once you determine the amount you want to take, it can be transferred from your business bank account to your personal account. Because the Owner’s Draw is taken from ownership equity, it reduces the funds that can be used for operating or growing the business. Partnership members must balance how much they need to support themselves and what the business needs to thrive. Guaranteed Payments What if your business is in the early stages, and not producing profit yet? The solution lies in guaranteed payments. Guaranteed payments are a minimum amount that is guaranteed to be paid to a partner regardless of business profitability. The payments must be made even if the result is a loss for the business. They provide a consistent income to partners as the business grows and becomes profitable. Note that if the business is operating at a loss and providing guaranteed payments to partners, that loss must be funded through debt or investments (equity) to ensure that the necessary expenses of the business can be paid. Discuss your options with an online partnership accountant at xendoo. They will provide the financial insight needed to make the most informed decision regarding self-payment in your partnership! How Do I Pay My Taxes as a Partnership Owner? Partnerships file their taxes using Form 1065, which determines that each partner is reporting their income correctly. Each partner must complete an accompanying Schedule K-1, which breaks down their share of the profits and losses. They also report this information on their individual tax return (Form 1040), with a Schedule E attached. The owner’s draw is not subject to payroll taxes, but it is considered personal income and is taxed accordingly. If partnership members take the owner’s draw, they must pay estimated taxes, which helps decrease their tax bill. Guaranteed payments are tax-deductible to the partnership, and are treated as self-employment income for the partnership members. They are reported on the Schedule K-1, and noted as income on the Schedule E. If the partnership members choose to take guaranteed payments, they will pay both income tax and self-employment taxes as individuals. What are the Tax Advantages of Filing as a Partnership? No Double Taxation The partnership itself does not pay income taxes. Partnerships are considered “pass-through entities”, meaning that profits and losses “pass through” the business to the partners, with each paying a portion of the total income tax of the business’s earnings. In this situation, profits and losses are only taxed at the personal level, which allows partnerships to avoid double taxation. Even with a significant tax advantage, taxes can still be stressful. Talk to a small business CPA at xendoo. We provide online accounting for partnerships, as well as online bookkeeping services so you can stay tax-ready all year long. xendoo is Here for You You are not alone as you navigate self-payment, tax filing, and all the financial ins and outs of your partnership. xendoo is here to help! Our online bookkeeping and accounting team provides partnership owners with the financial insight needed to make the most informed decision regarding self-payment and partnership taxes! Are we a fit for your partnership? Get started today with a free consultation. Want to learn more about the different business entity types? Click here.
How Do I Pay Myself and My Taxes as an S-corporation?
When businesses are born, business owners are likely not daydreaming about taxes and payroll. Yet, they still face the unique challenge of figuring out how to pay themselves, file their taxes, and maximize their tax savings. As their business grows, many business owners opt for S-corporation Election due to the tax advantages it presents, but they must be mindful of how much they pay themselves, in order to remain compliant in the eyes of the IRS. Unless they moonlight as an experienced accountant, self-payment and tax filing can be confusing and stressful for small business owners – understandably so! Like most things involving taxes, it gets complicated. That is why we have created this comprehensive guide to help business owners pay themselves and maximize their savings as an S-corporation! How to Pay Yourself as an S-corporation: Salary and Distributions Under other business structures, you simply take a share of company profit as your payment. In an S-corporation, you have the option to pay yourself in two ways: Salary, your wages or reasonable compensation. This is considered taxable income to the payee by the IRS. Distributions, the earnings that are paid as distributions to you as the owner. These are not employee wages and are not taxed as self-employment income in an S-corporation. For example, if your business produced $100,000 in profit, you could take a reasonable salary of $40,000, and the remaining $60,000 as a distribution. It may seem strange to receive payment in two different forms, but it comes with significant tax savings, which will be discussed shortly. How Much Do I Pay Myself as an S-corporation? The short answer is, it depends. S-corporation shareholder-employees are required to receive a reasonable salary, which is generally defined as at least what other businesses would pay someone in that role for similar services. Every business is different, so the exact amount that business owners pay themselves will vary. To determine your reasonable salary, you can start with the U.S. Bureau of Labor Statistics, which provides insight into compensation across different industries. This will give you an idea of what you should be paying yourself based on your field and the profit you produce. Some of the factors the IRS considers to determine a reasonable salary are: Training and experience Duties and responsibilities Time and effort devoted to the business Distribution history Payments to non-shareholder employees Timing and manner of paying bonuses to key people What comparable businesses pay for similar services Compensation agreements Use of a formula to determine compensation You must be careful to pay yourself a reasonable salary. Paying yourself a salary that is too low (or none at all) can draw scrutiny from the IRS, as it is considered an attempt to avoid paying self-employment taxes. The good news is that you do not have to figure it all out on your own! The xendoo team is more than happy to help you determine your reasonable salary. Speak to one of our online accountants to learn more. How Do I Pay My Taxes as an S-corporation? The first step is to elect to be taxed as an S-corporation. To qualify for S-corporation status, your business must meet the following requirements: Your business must be incorporated in the United States. Your business may only have certain types of shareholders, including individuals, and certain trusts and estates. They may not be partnerships, corporations, or non-resident alien shareholders. Your business cannot have more than 100 shareholders. Your business can only have one class of stock. Your business cannot be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations). If your business meets all of this criteria, you can move forward by filing Form 2553, and sending it to the IRS. If your company has multiple shareholders, each of them must sign and submit this form as well. Once approved by the IRS, you will file your S-corporation taxes using Form 1120S. To minimize error and maximize tax savings, partner with an online Tax CPA at xendoo. We file your taxes for you so you can focus on growing your business. What are the Tax Advantages of Filing as an S-corporation? No Double Taxation C-corporations are taxed twice, with the business paying corporate income taxes, and shareholders paying taxes on their share of the income. On the other hand, S-corporations are not subject to corporate income tax. Instead, shareholders file a Schedule K-1 along with Form 1120S, which reports their share of the company’s profits or losses. This allows S-corporations to avoid double taxation. No Self-Employment Taxes (on Distributions) Another key advantage of S-corporations Election is that the distributions owners receive are not subject to self-employment taxes! Every small business must pay self-employment taxes to fund social security and medicare. If your business operates as an LLC, you are required to pay self-employment taxes on your entire share of the profit, regardless of how you use the money. On top of that, you will also be taxed at your personal income tax rate. As the owner of the S-corporation, you only pay self-employment taxes on your reasonable salary. The distributions you take are exempt from self-employment tax! To illustrate, let’s revisit the example from earlier: Your business makes $100,000 in profit. As a single-member LLC, you will pay $15,300 in self-employment taxes. If you file the S-corporation Election, you pay yourself a reasonable salary of $40,000. The remaining $60,000 is taken as a distribution from profit. You will pay $6,120 in self-employment taxes only on your salary. The remaining $60,000 is exempt, resulting in a tax savings of $9,180 compared to the LLC! For quick reference, take a look at the chart below: S-corporation Election is a simple, yet effective, way to maximize your tax savings. Are you ready to take the next step? Schedule a free consultation with a xendoo accountant today! xendoo is Here for You You are not alone as you navigate the waters of self-payment and tax filing. xendoo Online Bookkeeping, Accounting,
Learn When You Should Outsource Your Accounting
Business owners have a ton of demands on their plate, from bringing on the right staff members to marketing their products and working to improve the customer experience. But as your business starts to take off, it can leave you with a difficult choice. Should you focus on growing your core business or continue to focus on the administrative side, like managing your accounting and bookkeeping needs? When your business was small, it was easy to handle both. But now that you’re growing, it may be more difficult to adequately cover your administrative tasks. Getting behind in your books can leave you frantically preparing for tax season. Without accurate financial records, it can be harder to secure funding and prepare for the future, too. Outsource accounting services can help you stay up-to-date on your books, compliant with regulations, and firmly in control of your company’s financial future. With that in mind, here are some of the reasons why you should consider partnering with an online accounting firm. Scaling as Your Business Grows Your profitability depends on your ability to generate revenue and sustain growth over time. Outsource accounting services can help you accomplish this, providing a set of benefits that can help to cover back office responsibilities as you and your team focus on your core business tasks. Specialized Skills for Every Step of Your Journey While in-house accountants tend to be generalists, online bookkeeping firms can offer a specialized experience for every phase of your business journey. Outsource accounting firms can often provide experience in unique areas such as: Personal financial planning and assistance Forensic accounting Managerial accounting IT auditing Non-profits Tax preparation Additionally, the financial professionals found at today’s top firms often have experience in your respective industry, providing actionable advice that can optimize your company at every step of your journey. Tax Planning The specialized skills of an outsourced accountant typically include experience in tax planning and preparation. Outsource accounting services can not only ensure that your company has set aside sufficient funds to pay your annual income tax, but they can also help you to take advantage of the existing tax code to enhance profitability while staying in compliance with regulations. This can be crucial for growing businesses. As your business expands, you may discover that rising revenues and a changing customer base can place you in unique tax situations. These needs can best be addressed by a professional accountant. Outsource accounting teams can enable you to navigate the confusing world of tax law. Financial Reporting and Planning Growing businesses often rely on small business loans for tasks like: Increasing inventory Hiring new employees or contractors Investing in new technologies Expanding retail or office space Other overhead costs But in order to secure a small business loan, most lenders will want to see the basic data about your financials. If your books are “a little behind,” this can jeopardize your ability to secure the necessary funds to grow your business. Top-quality outsource accounting services can provide catch-up options designed to bring your books completely up-to-date. Best of all, with accurate reporting, you’ll be in a better position to secure additional funds as your business expands. Taking Your Time Back Your time is too valuable to spend on your books. And accounting doesn’t usually fall under your team’s core competencies. A core competency is a unique skill or advantage that is ultimately responsible for your company’s growth. Any business process that’s not a core competency should be outsourced, allowing your team to focus on their respective areas of specialty. That’s why bookkeeping and accounting rank among the top tasks to outsource for growing companies. Outsource accounting services can help you with these administrative processes so that you and your team can stay focused on your core business. Here are just a few of the additional benefits that you can expect when you partner with high-quality outsource accounting services: Saving Time While Staying in Control Running your company is job number one. Relying on outsourced online bookkeeping services to handle your books can liberate you from the tyranny of administration and put you back in a position to make data-driven decisions. Some business owners are reluctant to do this since it naturally means surrendering control. But letting someone else handle your books can actually mean greater control over your company—not less. For instance, most accounting firms rely on the latest cloud-based technology, offering access to your financial data 24/7 from anywhere in the world. And at xendoo, our professional team is never more than a phone call, text message, or email away. You save time and benefit from up-to-date, easy-to-access information about your company’s cash flow and financial forecasting, giving you confidence that you simply can’t match by juggling your own spreadsheets and flow charts. Keeping Your Employees Focused Of course, you may already be wise enough to delegate these responsibilities to another team member. But think about how much more your team could accomplish if they weren’t spending time clicking around in QuickBooks. Your office staff could divert their attention to revenue-generating tasks as: Social media management Marketing Contacting customers Pursuing new leads Negotiating with vendors Outsource accounting services reduce the burden on your staff as a whole, allowing you to direct your team’s attention to the key processes that go into running your business. Spending Less Time Hiring New Staff Members When you pursue outsourced accounting for small business needs, you won’t have to interview, hire, and onboard your own staff accountant. That means you’ll spend less time assembling a job description, posting a job ad, reviewing resumes, onboarding a new employee, setting up benefits, or securing an office space. With an outsourced accounting firm, you can rely on a partner that will be around for the long term. You’ll benefit from the reliability of a dedicated team that understands your needs and provides ongoing support. A Fast, Reliable Turnaround What happens if your in-house accountant needs to take a sick day or goes on
Celebrating Women’s Small Business Month: Thoughts from xendoo CEO and Founder, Lil Roberts
National Women’s Small Business Month celebrates women’s achievements in business, and highlights what they bring to their communities as small business owners. We took a moment to interview xendoo founder and CEO Lil Roberts, to get insight into what it takes to be a successful entrepreneur, and the importance of women leading in business. Build Up Your Team What encouragement do you have for women who are in male-dominated industries? Shift your mindset. Do not let who dominates the industry define your role within it. Succeeding in business is all about excelling at what you do best, and building up a team that compliments the areas that you lack experience in. A multifaceted team is what makes a business thrive. When your team is growing their skills and knowledge, when your customers are happy, that is where you will find true success in your business. It is crucial to focus on the problem that needs to be solved, and build a team that is as passionate about solving that problem as you are. That is what success looks like in every industry, no matter who it is dominated by. Inclusive by Nature What is the importance of women leading in business? Lil smiled and recalled a moment in which she had the opportunity to speak to Frances Frei, Senior Associate Dean for Executive Education at Harvard Business School. Frei shared her experience of solving problems with a team of women and immigrants, referencing studies that prove that when women lead, everyone wins. That is not to say that people and businesses cannot thrive under male leadership – they do. It simply highlights that women tend to be inclusive by nature, and adept at empowering those around them to do and be their best. This leads to the creation of supportive, passionate teams and therefore, successful businesses. Hats Off to You To all female business owners and entrepreneurs, we are rooting for you. Happy National Women’s Small Business Month from your friends at xendoo! Take time to celebrate your business and your amazing team this month. Focus on what you love – growing your business. xendoo has your online bookkeeping covered. Schedule a free consultation with one of our accountants. We would love to get to know you and your business, and partner with you as your bookkeeping, accounting, and tax team! Watch the full interview with Lil below: https://youtu.be/XNhPisxJZAs
How Franchisors Can Build a Strong Item 19
How Much Money Can I Make? As franchisors work to sell franchises, one question they will always be asked is, “how much money can I make?”. The answer to this question can be found within one section of the Franchise Disclosure Document: Item 19. In order to create a compelling Item 19, franchisors need financial data on the performance of each franchise location. Typically, it is up to the franchisees to keep their books up to date and share that data with the franchisor. But, like many small business owners, they juggle countless responsibilities, may not understand the complexities of accounting, and bookkeeping understandably falls by the wayside. An Expert Team Without the right tools, building a strong Item 19 can feel like a massive undertaking. But, with the support of a franchise bookkeeping team, franchisors can receive timely, accurate information that will help them build a compelling Item 19! What is Item 19? Item 19 is a section in the Franchise Disclosure Document (FDD), a document that must be presented to individuals who want to purchase a franchise. The purpose of Item 19 is for franchisors to lay out the financial performance representations (FPR) of the franchise. It paints a picture of how potential franchisees can expect to perform and estimates how much money they could make should they join the franchise. Why is Item 19 Important? Item 19 is more than just a rundown of financial performance. It is a powerful tool that aids in decision making, builds trust between the franchisor and potential franchisee, and sets realistic expectations. Decision Making. A strong Item 19 helps franchisors attract and select the ideal franchisee candidates. It also ensures that a franchise brand is a solid investment, and helps the franchisee compare their options to determine if they are joining a successful business. Trust and Transparency. Item 19 signifies financial transparency and creates trust between the franchisor and potential franchisee. It shows that a franchisor knows their numbers, and has no issue disclosing them. The more information that can be provided on financial performance, the better. This transparency creates strong relationships between franchisors and their franchisees. Realistic Expectations. Item 19 allows the franchisor to set realistic expectations for financial performance. While a franchise may be profitable as a whole, individual success can vary. An Item 19 that contains data-backed projections of how much potential franchisees could realistically make provides the clarity they need to make an informed decision. How to Build a Strong Item 19 What do franchisors need to build a strong Item 19? Put simply, clear, accurate financials. The key elements that create a powerful Item 19 are: Average Gross Profit Average Gross Sales Cost breakdowns of goods and services Operating cost insights EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) Industry-specific data points (number of customers served, number of services provided or products sold, etc.) These metrics provide financial insight into the franchise, clearly lay out the costs and obligations of a franchise purchase, and set realistic expectations for financial performance. The amount of information franchisors are able to share in Item 19 largely depends on the information their franchisees deliver. How can franchisees provide reliable, accurate information to their franchisors? It comes down to consistent monthly bookkeeping. The Necessary Resources Franchises have unique needs when it comes to bookkeeping and accounting, such as tracking royalties and advertising fees, and sometimes, multi-currency support. All of it needs to be properly recorded in accounting software so monthly reports can be produced. Franchisors need a team of trusted experts with knowledge of the franchise space, so they can receive accurate data from their franchisees. Consistent Monthly Bookkeeping. In order for franchisors to build a strong Item 19, they need up-to-date financial records for each franchise location. A bookkeeper can provide visibility into financial performance on the franchisee’s behalf, so franchisors have access to the information they need across all locations. An online bookkeeping service is particularly helpful in this situation. Instead of hiring multiple bookkeepers, the franchisor can rely on a single provider who delivers uniform services for each location – no matter where they are located. Accurate, Up-to-Date Reports. Accurate monthly reports are crucial to creating a solid Item 19, as all information is legally required to be accurate, truthful, and backed by numbers. A well-documented financial history showcases franchise growth and profitability and helps franchisors create a compelling Item 19. Expert Bookkeeping for Franchise Businesses xendoo Online Bookkeeping is a leading provider of online bookkeeping and accounting services for franchise businesses. Our franchise-focused team provides franchisors with timely report delivery and visibility into financial performance for each location. Are we a fit for your franchise? Let’s talk! Schedule your free consultation today.