The new 1099 reporting requirements recently included in the new healthcare bill have caused quite an uproar in the business community. Even the IRS’s own Taxpayer Advocate, Nina Olsen, expressed concerns in her latest report to Congress about the IRS’s new 1099 information-reporting burdens.
Already, the Department of the Treasury and the IRS have issued a proposal to exempt credit card purchases from the reporting requirement. Now, Senator Mike Johanns of Nebraska has sponsored a bill, the Small Business Paperwork Mandate Elimination Act, to repeal the new reporting requirements before they become effective in 2012.
The Senate is now considering a new bill aimed at helping home-based businesses … finally!
The State Small Business Credit Initiative Act (see more details at OpenCongress) has two major provisions aimed at micro-businesses and the self-employed.
In the House version, it would allow sole proprietors to take a one-year business deduction for health care costs. At this point, sole proprietors have been able to deduct their health insurance premiums as an “above-the-line” deduction against their income taxes but not their self-employment taxes. While only a one-year deduction, this could be the shot in the arm that is needed for the 23 million self-employed business owners in our country.
In the Senate version, the full deduction for self-employed health insurance seems to have disappeared, but another welcome change was introduced by Senator Barbara Boxer of California. She proposed an amendment that would create a standard home office deduction, dramatically reducing the complexity of claiming a deduction for an office in your home.
After months of bailouts and stimulus packages that seem to help Wall Street more than Main Street, it’s refreshing to see some legislation aimed at supporting the “solopreneurs” out there! Let’s just hope that these provisions remain in the bill as it’s signed into law!
So you’re ready to clock out of the corporate world and hang out your shingle as a solo-professional. You’ve figured out how much you can reasonably expect to earn and estimated your expenses for marketing, computer equipment, training and so on. You’re ready to go, right?
Don’t forget to include the extra tax burden that the self-employed businessperson faces each year, the self-employment tax. Back when you were on a company’s payroll, you had 7.65% of your wages withheld for Social Security and Medicare while your employer kicked in a matching amount. Now that you’re self-employed, you’ll be responsible for the entire 15.3% of your net business income … in addition to income taxes!
Not only are you going to be responsible for those self-employment taxes and income taxes, but Uncle Sam is now going to be expecting you to send in those taxes on a quarterly basis as “estimated tax” payments. Gone are the days when your employer withheld your taxes; you never saw the money and never had to worry about it. Now you need to set aside a little bit of your profit from every job or project and send in those taxes on your own.
Of course, the key to calculating your net profit each month, and your corresponding tax liability, is to have a reliable accounting system. If you’re not comfortable with bookkeeping or just don’t have the time to devote to it, consider hiring a virtual accounting consultant! Every day, we set up accounting systems and maintain accounting systems for clients just like you!
According to a group of Democratic senators, the IRS needs to reduce the paperwork burdens that will fall on small businesses from the new 1099 reporting requirements due to hit in 2012.
The new requirements may place a hardship on small businesses by creating an extra paperwork burden. … We insist that the IRS develop ways in which small businesses can reduce expected paperwork from this requirement.
So, thanks go out to Senators Ben Nelson of Nebraska, Mark Begich of Alaska, Jeanne Shaheen of New Hampshire and Evan Bayh of Indiana for recognizing the obvious nightmare coming down the road and making efforts to halt the tide of paperwork about to hit small businesses nationwide!
We’re well past the April 15th filing deadline and you’re taking some time to clean out your files. After running your business for several years, the paperwork really starts to pile up! So how long is long enough to keep your tax docum
ents?
The IRS has three years from the date you filed your taxes (or the due date, whichever is later) to audit your return information. In the case of small business deductions, travel and entertainment expenses top the list of expenses most likely to be audited. For this reason, you should keep your records in a readable, searchable condition for at least three years from the year you filed your return.
Certain financial records, though, should be kept forever. These include any legal documents such as articles of incorporation or organization, trademark and copyright documents, and payroll information.
Here’s some quick guidelines to start with:
Business Records – Keep for One Year
- Deposit slip duplicates
- Purchase Orders
- Correspondence with customers and vendors
Business Records – Keep for Four Years
- Bank statements
- Petty cash vouchers
- Employees’ time cards
- Expired insurance policies
Business Records – Keep for Six Years
- Accounts Receivable and Accounts Payable records
- Cancelled checks
- Employment tax records
- Expired leases
- Invoices you’ve sent to customers
- Payroll records (W-2, W-4, Earnings Records, etc..) for terminated employees
- Sales records
- Travel and Entertainment records
Business Records – Keep Forever
- Articles of Incorporation & bylaws
- Cancelled checks for any tax payments
- Corporate documents & minutes
- Documents and receipts related to fixed assets you’ve purchased
- Deeds
- Depreciation schedules
- Year-end financial statements
- Legal records & correspondence
- Mortgages and note agreements
- Property records
- Stock records
- Tax returns and corresponding worksheets
- Registrations for trademarks, copyrights or patents
- Sales & use tax returns
Ready to start shredding? Check with your insurance company and creditors first, as they may require you to keep some records longer than the IRS does.
ShredCorp has a great online Document Retention Schedule at www.shred-corp.com.
UPDATE: New 1099 Reporting Requirements Repealed!
The IRS has issued a proposed regulation to help deal with the flood of paperwork associated with the new 1099 reporting requirements that are set to take effect in 2012.
Under the proposed regulation, any business purchases made with a credit or debit card will be exempt from the new reporting requirement because those purchases are already reported by banks and other payment processors.
Do you have any brilliant ideas for how to reduce the avalanche of paperwork even further?? The IRS would like to hear your thoughts! They have invited public comments on how to most effectively carry out the new law. To give the IRS your opinion, send an email to Notice.Comments@irscounsel.treas.gov and be sure to include “Notice 2010-51″ in the subject line.
According to the National Association of Tax Professionals, IRS auditors are now being instructed to obtain a copy of the taxpayer’s QB file for audits for any taxpayer that uses QuickBooks. If the taxpayer refuses to provide the database and the auditor deems it necessary, they can issue a Summons for the file!
There is definitely a trend that’s a direct result of so many small businesses using QuickBooks.
Whether you’re starting a business or growing a small business, you want to avoid those critical mistakes that could mean the end to your entrepreneurial effort. A recent article, “8 Mistakes That Devastate Business Owners” by Susan Schreter for Entrepreneur.com, lists some of the critical mistakes that could be catastrophic for your business:
1. Keep your retirement savings intact.
2. Avoid the lure of sole proprietorship.
3. Read the fine print.
4. Get insured.
5. Get an employment contract.
6. Protect your innovations.
7. Don’t promise what you can’t promise.
8. Check the books.
Of particular interest to me, of course, is #8: Check the Books. As a Virtual Accountant/Bookkeeper, it’s amazing to me how many business owners turn over all of their financial information, including account numbers and passwords, then wash their hands of all things numbers-related. This is a recipe for disaster, folks! I’ve worked hard to earn the trust of my clients, but not all bookkeepers out there are quite as scrupulous. What can you do to protect yourself?
- Pay attention! Review the checking account register every now and then, looking for suspicious charges. Be the person who opens the checking account statement and look for irregularities. Pay attention to statements from your vendors; are there charges there that you thought you paid? By paying attention to your own financial activity, you will greatly increase your chances of catching fraud before it causes serious damage.
- Review vendor statements. Fraud doesn’t always come from internal sources. Be sure that your vendors are charging you as agreed and aren’t sneaking in new charges without your approval.
- Review revenue statements. As Ms. Schreter points out, “Are you sure your company is really collecting all of its internet-search-related revenues, or is your web developer rerouting your internet earnings for some extra beer money each week?”
- Segregate duties. If you have a professional bookkeeper handling your books, it’s a good idea to have a separate tax professional helping you at year-end. Having a separate set of eyes to review your information can be invaluable in catching errors or out-and-out fraud.
Bottom line: Pay attention to the financial health and well-being of your small business to prevent the kind of catastrophic fraud that could lead to going out of business.
The economy is bouncing back … slowly. Sales are picking up … to some degree. So how is your business doing??
Not sure how to answer that question? Maybe you should give your business a weekly accounting checkup. Compare your own results, week to week, to look for signs of improvement or trouble areas that need your attention. What stats should you be checking? Every business is different, but these are a great starting point:
Cash balance: What is your cash balance in your checking account now and do you have enough cash to pay the bills that will be due in the next two weeks? If not, can you expect to collect any receivables in the next couple days? You should project out your cash balance at least one or two weeks to address any possible cash crisis before it hits.
Problems? In the short term, you should cut some expenses or shift some expenses from fixed expenses (the same every month) to variable expenses (those that are lower when your sales are lower, but increase when your sales increase). Any way that you can “ramp down” your expenses during the slow times will help you hold on to the cash that you have. Still looking at a cash crunch in the next two weeks? Explore ways that you can request extended terms from your vendors or look into a line of credit from your local bank or credit union.
Receivables: What payments do your clients owe you and are any of them late? If so, how late are they??
Problems? A friendly note may be all that’s needed to shake loose some of those payments. Instituting a finance charge on overdue invoices might give others the incentive they need to pay your invoice. In the near future, you might want to consider running credit checks on new clients to weed out those with poor repayment records. Another option is to establish more-aggressive payment terms or a substantial downpayment and payment before final delivery.
Sales: Are you on target against your projections?
Problems? What is the reason for the drop in sales and what can you do about it? A small investment in a marketing coach might help you rethink your approach to landing new clients.
Billable time: Do you have enough time to produce the work that you’ve already sold? What jobs are going to have deadlines in the next two weeks and are you going to meet them?
Problems? You may to need to bring in subcontractors or some administrative assistance to meet deadlines. Is that in the budget? Figuring that out now, before the crisis hits, might mean the difference between a happy customer and an ex-customer.
It’s almost time to pay those quarterly estimated taxes for your self-employment income. What are your options?
EFTPS: The EFTPS, or Electronic Federal Tax Payment System, is available online for free. Registration takes about a week, so register ahead of the tax payment due date. The best thing about the EFTPS system is that you can look up your payment history at any time. Your tax preparer will be giving you a big hug when you can produce a neat, printed report of your estimated tax payments for the past year!
IRS.GOV: You can always download a PDF of the paper payment coupon (1040-ES) and send it in with a check via snail mail. Instructions and the mailing address are included on the PDF.
If you need to make a payment but will be putting it on your credit card, you can always check out OfficialPayments for payment options. Be forewarned, though, that this option incurs a fee of 2.35% of the payment amount.
Need additional information on estimated taxes? The IRS has a handy, dandy page just for you: Estimated Taxes
Also, don’t forget to send in your state’s estimated tax payment, too!
