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4 Ways Small Business Owners Can Stay Tax Compliant

The Details Matter 

A crucial component of being a small business owner is meeting certain tax requirements in order to remain compliant in the eyes of the IRS. It can feel overwhelming to keep track of every rule and deadline, especially while juggling countless other business responsibilities day in and day out. 

That is why the Xendoo team has created this guide to help business owners stay on top of their tax requirements, remain compliant throughout the year, and effortlessly maximize their return! 

Keep Your Bookkeeping Up-to-Date

Up-to-date and accurate bookkeeping saves business owners time, stress, and money during tax season. 

By keeping your books up-to-date, you can be confident that you are reporting your income and expenses correctly, paying the proper amount in taxes, and paying your estimated taxes in a timely manner, which produces a stress-free tax season. Instead of playing phone tag with your finance professional over missing documents, you can work with an online accountant who will determine the tax deductions you qualify for and file your taxes on your behalf, so you can get back to what you love – growing your business! 

Pay Self-Employment Tax

In typical payroll situations, self-employment taxes are split between the employee and employer, each paying 7.65%. Self-employed individuals pay both halves: 12.4% for Social Security and 2.9% for Medicare – 15.3% all together, which applies to business profit. For example, if your business is an LLC, and made $100,000 in profit, you will pay $15,300 in self-employment taxes. Self-employment income is reported on the Schedule C that accompanies Form 1040. As a rule of thumb, self-employment taxes are required if you made $400 or more in net earnings from self-employment. 

While self-employment taxes cannot be waived, there is a way to decrease them. 

Self-employment tax payments can be decreased by electing to be taxed as an S-Corporation. S-Corporation owners pay themselves in two different ways: salary and distributions. While the salary is subject to self-employment taxes, the distributions are exempt, which allows S-Corps to avoid double taxation. 

It is always best to speak to a small business tax accountant. They will get to know your business, and determine if S-Corp Election is right for you. 

Pay Quarterly Estimated Taxes 

Because self-employed individuals do not have taxes withheld from their paychecks like W-2 employees, they pay quarterly estimated taxes in order to cover Social Security, Medicare, and income tax. Those that expect to owe $1,000 or more in income tax are required to make quarterly estimated tax payments, and will file using Form 1040-ES.

To ensure that your estimated tax payments are made on time, mark your calendar with the upcoming deadlines: 

  • January 18, 2022 (the final installment for 2021)
  • April 18, 2022
  • June 15, 2022
  • September 15, 2022 
  • December 15, 2022 

Now comes the fun part: calculation! By dividing last year’s tax liability by 4, you can determine what you will owe each quarter for this year. 

For example, if you paid $10,000 in taxes last year, you will owe $2,500 in quarterly estimated taxes this year ($10,000/4 quarters = $2,500).

If your income fluctuates, consider calculating your payments based on your quarterly earnings instead. You can also take advantage of Xendoo’s small business tax services. Our expert online CPAs are available all year long, so you can make informed decisions each quarter, and maximize your return when tax season arrives! 

To learn more about calculating your quarterly estimated tax payments, click here. 

Separate Personal and Business Bank Accounts

One of the most straightforward ways to remain tax compliant is to separate personal and business bank accounts. 

Using a business bank account and credit card ensures financial accuracy, which is crucial to tax compliance. Instead of sorting through personal and business expenses while bookkeeping, you will be certain you are only recording relevant expenses, and your books will reflect your true financial position. 

If you utilize personal assets for your business, like a home office or vehicle, keep detailed records of when and how they are used in order to support the deductions you claim. When tax season arrives, you will have the financial clarity needed to accurately report your financials to the IRS. 

Expert Tax Support, All Year Long 

You do not have to lose sleep over tax compliance. Xendoo is here to help! We provide online bookkeeping services, as well as catch up bookkeeping, so you can focus on growing your business. Enjoy peace of mind knowing your financials are always up-to-date, and that your business is always tax-ready.

Let’s chat! We would love to get to know your business. Click here to schedule your free consultation.

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:

Xendoo provides financial visibility to C-Corp owners through online bookkeeping, accounting, and tax services.

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.

A young woman works on a laptop to prepare her small business for the upcoming year

How to Prepare Your Small Business for the New Year

Business Resolutions Start Now

The end of the year is a bustling time for small business owners. Between skyrocketing holiday sales, extended hours, and juggling multiple duties, it can be difficult to find a moment to stop and think about preparing for 2022. 

Where do you start? What metrics can be used to predict and measure success? What steps can be taken to effectively prepare your business for the new year? 

Planning for the new year may seem overwhelming. Xendoo can give you your time back. In this blog post, we will help you strategically chart your path for success, so you can be ready for a new year of growth!

Review Financial Performance

To prepare for the future, take a look at the past year. Analyze your business’s performance from the previous year by reviewing your key financial statements.

  • The Balance Sheet summarizes a business’s assets, liabilities, and equity at a specific point in time. This statement provides insight into cash, inventory levels, Accounts Payable (money owed to others) and Receivable (money owed to the business owner), credit card and bank balances, and the equity in the company.
  • The Profit & Loss Statement outlines the revenue and expenses a business incurred during a specific period, which provides insight into the business’s profitability. It can be used to track and strategically plan for financial trends, such as seasons of high and low demand.  
  • The Cash Flow Statement provides visibility into when cash flows into and out of a business, and how cash balances have changed over a specific time period. It can also be used to project and prepare for the cash needs of the business.

These financial statements illustrate how your business performed throughout the year and reveal hidden opportunities for growth. The best practice is reviewing the financial reports on a monthly basis, as they gauge your business’s financial health and provide insights to timely decision making. 

Click here for more details on the financial statements. 

Forecast Cash Flow and Create a Budget

Cash flow represents the money that flows into and out of your business over time, and is crucial for ongoing business success. For more information on cash flow, click here

Like the financial statements, look at the past to plan for the future. Your cash flow history can be used to create a cash flow forecast, understand and predict upcoming cash needs, and create a budget for the new year. 

Healthy cash flow ensures that you will have the cash you need, when needed.

Understanding your cash needs and budgeting accordingly enables you to meet your financial goals and obligations, and continue to grow your business. 

Prepare for Tax Season Now

The earlier tax preparation starts, the greater the savings will be when tax season arrives. Start by taking a look at your financial statements and tax bills from previous years, which will provide an idea of what will be owed this year. From there, you can start setting aside money to reduce tax season surprises.

Up-to-date bookkeeping allows for tax-readiness throughout the year. Having income and expenses organized will save time and prevent confusion and stress when tax season arrives. 

Lastly, consider partnering with an online accounting service. Get access to an expert team that provides all-in-one bookkeeping, tax preparation, filing, and consulting, so you can make informed business decisions and maximize your savings all year long!

Outsource Your Bookkeeping 

Small business owners cover multiple responsibilities, one of the most stressful and time-consuming of which is bookkeeping. If you would like to take back 4 to 6 hours a month to focus on growing your business, now is the time to outsource your bookkeeping!

An online bookkeeper takes bookkeeping off your plate, so you can spend your time actively working on your business. They also provide monthly financial statements, delivering financial visibility and the actionable insight needed for long-term business growth. 

Online bookkeepers also provide catch up bookkeeping services to get previous years’ books in order. Whether you are behind a few months or years, Xendoo will bring your financials up to date so you can strategically plan for the future.

Spend the New Year with Xendoo

It is time to crush your business resolutions! Xendoo has your back with online bookkeeping, accounting, and tax services. Allow us handle the hassles while you focus on what you love to do: growing your business, all year round!

We would love to get to know you and your business. Schedule a call with one of our online accountants to get started.

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 their breath after tax season and managing holiday traffic and 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 checklist to organize your finances and successfully wrap up the year! 

Get Your Books Caught Up

The first step toward new year readiness is ensuring that your books are up-to-date, which can be done by:

  • Accounting for all bills and invoices, even if they have yet to be paid. 
  • Reviewing bank and credit card statements to confirm that they match. 
  • Recording any expenses that were paid for using 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 is here to help. Our online bookkeepers provide catch up bookkeeping services, so you can focus on the future. 

Collect the Necessary Forms 

Once January arrives, your accountant will request certain forms in order 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.

 

Form W-2

Form W-2 is used by business owners to report salary information for their employees, as well as the taxes that are withheld from their paychecks. Employees need this information to file their personal tax returns

 

Business owners are responsible for sending this form to the IRS. Employers are required to 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-MISC. The information needed to complete this form is listed on Form W-9, which can be collected from your contractors.

If any W-9s are missing, be sure to 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. It is used by S-Corporation shareholders and partnership members to report their share of the business’s profits and losses, and is included with your personal tax return.

 

Form 1009-K

The 1099-K tracks the payments received through third-party payment networks, like eBay, Stripe, Shopify, PayPal, and others. You will receive one 1099-K from each of the Online Payment Networks you use, and you are required to complete each one. Your gross receipts must be reported to be at least as high as the amount reported 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.

Click here to download our Tax Documentation Checklist.

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. 

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 for waste and loss management, as well as reduce inaccuracies in inventory counts and receivings.

Consider utilizing an inventory management software to streamline inventory creation and order fulfillment.   

Review Your Financial Statements

Once your bookkeeping is completed, review your financial statements to confirm your numbers are correct and that you are utilizing accurate data. 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 in 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. 

Reach Out for Help

Everyone deserves a supportive team of people who care. If the year-end scramble has you feeling overwhelmed, reach out to an online bookkeeping service. It is an excellent resource for accurate financials and time-saving solutions! 

Xendoo’s bookkeeping and accounting team provides consistent monthly bookkeeping and timely, accurate financial reports, delivering financial visibility all throughout the year. This provides the insight needed to make the most informed decisions for your business.

Ring In Success

Now that the year-end bookkeeping and accounting checklist is complete, you are ready to welcome a new year of successful growth! We would love to partner with you as your online bookkeeping, accounting, and tax team! 

Schedule a call with one of our online accountants to get started. 

Xendoo provides online bookkeeping, accounting, and tax support for your partnership business.

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 to pay yourself if you're an S Corporation

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, and Tax is here to help! We move at the speed of business, so you can make informed decisions faster – like deciding if an S-Corporation Election is right for your business!

Want to learn more about the different business entity types? Click here. 

Click here to access Form 2553.

Click here to access Form 1120S.

Click here to access the Schedule K-1.

A female small business owner smiles inside her boutique shop

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:

3 Keys to Working Smarter, Not Harder in Business

Work Smarter, Not Harder

At SmartScout, we built our business around the idea of working “smarter”. Easy enough to say. What steps can small business owners take to work smarter? Glad you asked.

The three keys to working smarter, not harder, in business are education, technology, and delegation. In this blog post, we will show you how you can use these keys to expand your knowledge, streamline your workflow, and delegate work to your team to grow their skills.  

1. Never Stop Learning

What counts as educating yourself? It is both more and less than you might think. Reading this blog, for example, counts toward educating yourself. You either came to this blog because you were already following it, or you were searching for the answer to a specific question. It is crucial to stay informed on what is happening in your business niche so you can keep up with the competition and continue to grow your knowledge. However, this tends to keep you on surface level subjects, and when you find a topic that really interests you, you need to dive in deeper.

Watch Youtube videos, listen to podcasts, and take training courses. Even better is to learn from experts who actually walk the walk. Follow industry leaders on social media, and ask them questions when you can. Attend networking events and trade shows to connect with industry leaders and fellow life-long learners.

Most important of all, never stop learning. Self-improvement is a never-ending game, so find the way it works best for you, and keep at it!

2. Automate with Technology

Automate tedious work with technology to save time and minimize human error. One of the beauties of the modern world is that technology can steamline almost any task. There are solutions for every business function, including product research

For example, eCommerce business owners can save time by utilizing an online research tool such as SmartScout. The SmartScout database enables you to find thousands of lucrative products for arbitrage, calculate and reduce FBA fees, and increase product visibility with strategic advertising – just to name a few! Work that once took hours now takes moments with the SmartScout database. 

The goal is to balance time saved with money spent. If the task is outside of your area of expertise or simply takes up too much of your time, utilize tools that will save you time and sanity.  

3. Let Go and Delegate

Just like you need to give thoughtless tasks to technology, give thoughtful tasks to other people, so they can do their highest level thinking. This gets hard when it comes to things you are passionate about. Ask yourself, what are you holding onto that you need to let go of?

This is the reason why people who are promoted for their skills in a field often struggle as managers. They do not communicate with their team, nor do they trust them to follow through on assignments. To be a good delegator, you must become a good manager. Communicate clearly with your team and trust them with the tasks you give them, so they can help grow the business and their skillset.

What about the tasks that you do not like to do? If you lack expertise in a particular area and do not have a team member to take up the responsibility, partner with a professional. 

Many business owners spend countless hours on bookkeeping, which takes time away from running their businesses and enjoying their lives. By partnering with an online bookkeeper, they can effortlessly keep their financials up to date and stay tax-compliant, all with the support of an expert. This gives them the freedom to focus on what they love – growing their business. 

Need to improve your managerial or tech skills? Head back to the top of the list, and the cycle continues!

Always Getting Better

Successful business owners are always looking for ways to improve. The key is to work smarter, not harder! Continue to learn, automate mundane tasks with cutting-edge technology, and delegate work to save time and help your team grow in skill and knowledge. These simple practices can help you become the best business owner you can be!

What does your Amazon business need to succeed? With SmartScout, you have access to more product, brand, and seller data than anything out there. If you are ready to turbocharge your business, we are here to help!

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.