Tag Archives: small business

First-Quarter “Safe-Harbor” Quarterly IRS Estimated Tax Payments: Why and How to Make Them

April 9, 2024 Nancy McClelland Leave a comment

For years, we have stressed the importance to our clients of making quarterly estimated tax payments. And unlike many tax preparers, we also do bookkeeping, accounting, and consulting for our small business owners — so we’ve also encouraged them to have us do a quarter-by-quarter calculation of how much to pay.

There were many reasons for this:
· Making sure the client had their books up-to-date and reconciled for the quarter, so they can be used for real-time managerial decisions;
· Matching the cash flow of a given quarter (or the actual sales and vendor invoices, for accrual-basis clients) to the related tax liability;
· Preventing the common situation of getting to tax-time and having a huge refund or balance due.

However, times have changed. We still want folks to make quarterly payments (see my related IRS & Illinois posts for how to do it online), but for the first quarter, at least, we’re asking everyone to use “safe-harbor” calculations.

Why Use 1Q Safe-Harbor Calculations Instead of Annualizing?

For one, the immense number of changes to our tax code since the Tax Cuts & Jobs Act (TCJA) took effect in 2018 has made tax planning substantially more complex than it used to be. The amount of time it takes to do a “back of the envelope” or “paper napkin” calculation has tripled. (And in case you’re curious — we use tax software and Excel, not used envelopes and paper napkins in our firm. That’s how you know you’re working with a real professional.) Both the effort involved and the cost to the client have increased accordingly.

Relatedly, first-quarter estimated tax payments are due on the same day as personal 1040 and C-Corp 1120 taxes are due. And since our tax-time work is a deeper dive than it used to be, and the estimated tax calculations are more complex as well, there simply isn’t enough time to do a full-on calculation for each and every client that requests it — at least, not if we also want to be well-rested and in good health, so we can do our very best on the remaining annual tax returns.

There’s good news, too, however — the state of Illinois — and many other states, used legislation to create a loophole for getting around a pesky TCJA limitation on the State And Local Tax (SALT) deduction. I won’t explain it all here, but the result is that all of our S-Corp and Partnership (aka “Pass-Through Entity”, or PTE) clients are paying their personal state taxes through the company. This is a very easy and predictable calculation, as Illinois charges a flat tax (not socially progressive, but it certainly is simple) and requires the annual liability to be divided by four and paid evenly across the quarterly deadlines.

(Side note: the deadlines are not actually quarterly. Due to the timing of the federal government’s fiscal year-end and individuals’ calendar year-end, they are skewed such that they’re not even the same number of months per quarter. You would think that of all the government departments that could count properly, it’d be the IRS, but apparently not. The due dates are 4/15, 6/15, 9/15 and 1/15 — though many are better off making the final state tax payment by 12/31.)

As a result, quarterly calculations for the state simply aren’t necessary for the first quarter (possibly even the first three quarters, depending). Given that the states seem to live for assessing penalties and interest for underpayment of estimated taxes (they are wildly aggressive about it), this is the best approach to take.

But it’s not just the states that issue penalties and interest for underpayment of taxes — the IRS does, as well. Much less aggressively, however, and they do still have the notion (that the new Illinois PTE tax law does not) of “annualizing” your quarterly taxes. This means that you presume the amount you made year-to-date is representative of the whole year, and paying quarterly tax based on that projection. It works great for small business owners who have lower income in the first three-quarters of the year and then make most of their profit in the final quarter.

Just to be clear: we still do this for our clients… but we wait until the second or third quarter, and in some unusual cases, we wait until November and then do a thorough analysis of the year thus far. It’s just that there’s little point in running these calculations for the first quarter anymore — it’s almost never representative of the rest of the year, and it places them into a precarious situation where they may end up underpaying by too much and then owing penalties and interest. Or, at the very least, having to pay us at tax-time to fill out the complicated annualization schedule on the tax return. If you want to be more accurate with your calculation, because you expect your income to be substantially higher or lower than last year, then ask to book a May tax-planning session to get squared-up for the 2Q payment, due June 15.

Last, but not least — we’ve decided to have all our clients commit to a monthly bookkeeping and accounting contract with us. Doing annual clean-ups during tax season simply is no longer sustainable (to be honest I’m not sure it ever was, which is one of many reasons so many CPAs are burned out), and isn’t cost-effective. It’s also not fair to our other clients — who are on a monthly schedule — to have to wait in line while we work on those who swing through just once-a-year. And most importantly, we truly believe that all small business owners should be looking at their financial statements regularly to help them make impactful decisions throughout the year — ones that can sometimes be the difference between turning a profit or enduring a loss. And since everyone will be on a monthly schedule, the motivation no longer exists to do quarterly reviews for estimated tax purposes, purely as a way to get clients motivated to catch up on their books.

Where To Find Your Safe-Harbor Amounts and How To Pay Them

If you’re a client of ours, or of pretty much any tax professional out there, calculating safe-harbor quarterly estimates can and should be a part of preparing your annual tax return.

After reviewing and signing your return, your CPA (or EA, JD or non-credentialed preparer) will e-file it, and once it’s accepted by the IRS and state agencies, they will either send over vouchers (which I wouldn’t bother using, because we want to pay taxes online almost every time that’s an option), or a list of required payments — whether that’s in a letter or a little chart form where you can check ’em off. However you get them — put them in your calendar now. Do not rely on your tax preparer to remind you. This is not their job. You are a grown person running your own business, surrounded by technology that is designed for precisely this kind of thing.

While you’re at it, save these links for instructions on how to pay online:
– IRS: How To Pay IRS Quarterly Estimated Taxes Online — Don’t Let Your Checks Get Buried Or Lost In The Mail (msn.com)
– Illinois: How To Make Quarterly Estimated Taxes Online — Illinois IDOR | The Dancing Accountant

And if you’re in a panic and can’t find the amounts, the general rule is that you want to pay 1/4th-ish of your total tax liability for the prior year (a bit higher for some states, such as Illinois). Again, if we do your taxes, you should have already received these totals for 2024, or will be receiving them as soon as your return is finalized.

Frequently Asked Questions

1) What if I have an extension?
Two options here: a) provide your tax preparer all the docs you already have and ask them to do their best to give you an estimate; they can even add that to the amount you’ll need to pay with an extension — which means if your extension payment estimate is short, the 1Q estimate will make up the difference, and either way, you’ll just apply the balance to the current tax year; or, b) go ahead and keep paying the same amount you paid for last year’s quarterly taxes; some payment is better than none.

2) What if I don’t have a tax preparer?
All the DIY tax programs out there can do this, too — they’re not very helpful for the tax planning that we do with our clients for 2Q & 3Q, and certainly not for 4Q — but they do a perfectly fine job with safe-harbor estimates. Alternatively, check out my colleague Hannah Smolinski‘s great YouTube primer on how to calculate estimated taxes.

And since you asked, here’s a fabulous photo of Hannah and me at QuickBooks ConnectFest.

3) What if I can’t afford to pay my quarterly estimates?
Pro tip: Did you know you can break your quarterly payment into smaller chunks? Let’s say you owe $2400 per quarter and you’re worried that you won’t have enough set aside by the time the due date arrives, because it’s so hard not to raid your own savings account when opportunities call. Just go online and pay $800 per month instead. Or $200 per week. It gets tricky with the weird quarterly tax due dates, but you are a smart cookie and can figure out the math. The point is that you don’t have to save it all up and then make the payment. If you have cash on hand, you can go in there now and do it while it’s on your mind, even if it’s a partial payment. Something is better than nothing.

4) What if I forgot to pay for a quarter?
Go in there and make a payment now. The penalties are per day, so the sooner you make up the difference the better.

5) What if I have additional questions about the process?
Throw whatever you can at the quarterly estimates and contact a CPA to help you… after Tax Day. Please be respectful of the plight of tax preparers right now. It will not serve you long-term to try to wedge yourself onto someone’s calendar last-minute: almost all the good ones had a deadline for submitting tax materials weeks ago; we’re all exhausted and likely to make mistakes this time of year if we’re taking on too much and not taking care of ourselves; and you want to start off on a good foot when building a relationship with a trusted advisor. The amount of penalties and interest that will be due if you underpay slightly is not that significant if you’re going to be making up the difference in a month, so just pay what you can and get on-track later.

Now, get yourself online and go make those first-quarter safe-harbor quarterly tax payments, already!

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

IRS, Software, Tips

Tax Preparers Rejoice! Here’s How To Prepare SECURE 2.0 Form 8881 Retirement Tax Credit If You Use Gusto & Guideline

April 5, 2024 Nancy McClelland Leave a comment

As my readers and colleagues know, I’m a huge proponent of leveraging technology to remove the drudgery from our jobs and those of our small business clients. We all have enough on our plates already!

As a CPA whose company works with loads of small businesses that need to process payroll, I’ve used quite a few payroll systems through the years… and Gusto has become our favorite. It’s not without its quirks and issues, but overall it does a great job for a great price, and — key for the work we do — it syncs nicely with QuickBooks Online, as well as with Guideline Retirement, saving us oodles of time that we used to spend on benefit reconciliations. (In my recent MSN article about choosing the best state-mandated small business employee retirement plan solution, I cite this as one of the main reasons to go with Guideline.)

This week, I discovered a gift that Gusto created for tax preparers with clients that use the Gusto+Guideline combo — a reporting tool that will literally prepare the Form 8881 “Credit for Small Employer Pension Plan Startup Costs” for you. No joke. And it works!

I want to shout it from the rooftops, because it’s a massive timesaver. The previous SECURE Act credit was super-easy to claim, but this year, the Form 8881 was updated for SECURE 2.0 to include loads of information that most CPA firms are simply not going to have access to — not only current tax-year payroll information, but prior-year data on a per-employee basis; as well as information on how many employees qualified to participate (whether or not they actually participated), again both in 2022 and in 2023.

It was such a balm on my tired tax-preparing soul to know that they were looking out for us and trying to make our lives better through technology. The only thing I can’t figure out is why no one told me about it sooner. (Honestly, I randomly stumbled on it when I went into my own Gusto account to run weekly payroll.)

Not only did we end up using these reports for our own tax clients, but we also sent them over to our colleagues who prepare the tax returns for certain bookkeeping clients of ours, to help them out. And now we’re superstars to them. In fact, here’s a great idea for all the bookkeepers reading: run this report for all your clients, prepare a zip file for each of the tax preparation firms you work with, and send them this beautiful present all tied up with a pretty virtual bow. I’m always talking about collaboration and co-firming between bookkeepers and CPAs (come see me this June at Scaling New Heights for “The Tax-Ready Bookkeeper”) and this is a great example of it! Who do you think they’re going to recommend when a tax client needs accounting and bookkeeping assistance? You!

Keep in mind that these reports are only accurate if a) the client was on Gusto and Guideline, and b) were on them both for all of 2023.

These are the steps I walked through and the screens I clicked on to make this magic happen.

Sign into Gusto and go into a client that used Gusto+Guideline for all of 2023. (No other payroll, no other retirement company.)
On the left side bar, click on “Tax credits”.

3. Under “Available credits”, find the one that says “401(k) tax credit” and click the “Learn more” button.

4. Check out the overview and the FAQ, and then click the “Get started” button.

5. Fill out the short questionnaire. The information below was correct for my own company, but may not be the same answers for yours or for your clients, so make sure to answer accurately. Then click the “Continue” button.

6. At this point, Gusto will provide you with the amount of the credit, as well as all the information you need to prepare the Form 8881. Review it carefully. This is particularly important if you have employees who are not represented in Gusto because you are using another payroll provider simultaneously. And as I mentioned above, if the client switched retirement companies from another provider to Guideline part-way through the year, this information will not be accurate. Once you’ve reviewed the data, then click the “Generate credit form” button at the bottom of the page.

7. On the next screen, you will have two options:

If you click the “Download” button it gives you an incredible PDF with not only all the information you need to know to prepare the 8881, but a copy of the IRS form itself, filled-out exactly as it should be, according to their records + Guideline’s records.

If you click “Review Details” (to the right of the amount of your credit) you’ll get a screen pop-up from the right that you can scroll through to review the same information they noted above. From here, you can click “Reset credit form” if some of the information looks incorrect and you need to edit the questionnaire, or simply click “Close” if you’re done.

That’s it. It was simply that easy. The process of figuring out all this information prior to discovering Gusto’s beautiful gift took about two hours — which doesn’t count the digging through reports in Gusto and Guideline to figure out which ones told us what we needed to know, reaching out to Guideline support and asking for a custom report to be generated for each client that would show which employees qualified (turns out they are completely unaware that Gusto has this great resource, too — someone should definitely let them know)… and it definitely doesn’t count the ridiculous amount of time we spent figuring it out for our last remaining ADP client hold-outs — their reports can’t even be exported into Excel! PDF-only, you heard me. I’ve been warning those two clients for years that one day I’m going to issue an ultimatum. That day might be coming soon.

One small glitch: for some clients, it shows an extra month of Guideline service fee payments compared to what is in QuickBooks Online, which I think is simply a timing issue. It’s also a small-enough amount that if it gets claimed in 2023 instead of 2024, that’s not a huge deal. However, we manually edited ours accordingly, and hope that this gets cleaned up for next tax year.

And while we’re here — did you know that our Gusto referral link will get you a $100 prepaid Visa card when you sign up and run your first paid payroll? Or — $200 if you have over 10 employees! And for accountant partners, signing up through this link will earn you $500 once you’ve added and run payroll for three clients. Next year, you too can be reveling in the glory of pre-prepared small business retirement credits!

Education, QuickBooks Software, Software, Tips

QuickBooks Ledger: Welcome to the Family! We’re Glad You’re Here.

March 8, 2024 Nancy McClelland Leave a comment

QB Ledger was announced at QB Connect a few months ago.

If you’re like me, March is that special month from hell where clients that have ignored your pleas for four quarters in a row suddenly show up again… and lucky you. Because now they’ve got a new AirBnb rental property in tow! Or yet another side gig! Or even better: an estate that they have to manage until it settles, and it’s caught up in probate!

To be honest, I’ve been slowly weeding these folks out of our client list – and I feel like a jerk about it – but it just doesn’t make sense for us to spend time during our busiest season getting them caught up on a year’s worth of transactions. Especially because these are the same characters that tend to be super price-conscious, and are somehow convinced that because they have a low volume of transactions, they shouldn’t have to pay for the monthly QuickBooks Online subscription – “can’t you just use our bank statements or a spreadsheet?”

For anyone reading this who isn’t intimately familiar with these classic dance moves already – no, we can’t just use bank statements or a spreadsheet. There’s no double-entry bookkeeping, no debits and credits, no Balance Sheet, and far too many potential lurking mysteries to be uncovered only after all the manual data entry is already complete. At some point we put a stop to these shenanigans… only to find ourselves sitting in QB Desktop, doing all the write-up work on behalf of our clients – a total reconstruction job. More reliable, but not less effort. (And moot at this point, since QB Desktop has gone subscription and is slowly asphyxiating.) And yet – I was a tiny startup at one point, too! I get not wanting to spend big bucks on a full-featured bookkeeping package for an activity that’s not earning much money.

By this point we’ve filtered out most of these types of clients, raising our minimum to price out some of the potential clients we really did (in theory) want to help – itty bitty start-ups or serial entrepreneurs, those that can’t resist a good deal on real estate, or people who sadly lost a loved one and are adrift as to how to handle the demands of bookkeeping for the estate. (I did this for both of my grandmothers back in the day, using my accountant’s copy of QuickBooks Desktop. It was not fun, but boy was my family relieved that they had a knowledgeable QB ProAdvisor handy.) But some remained. Clients who we really like who have been with us for ages, or who have another full-on business that we support, or whose side-gig really serves our community and they deserve a break.

(You read the title, right? I mean… you can see where this is going?)

Enter QuickBooks Ledger.

Those who know me know that I don’t mince words about Intuit as a company. They’ve created a core product that I love, which I’ve been using in some form or another since 1993 (oof, that dates me) – but when they cross me (and they do, more than I’d like), I call ‘em out on it. I don’t like the constant price increases (though I do see the constant improvements), nor the aggressive marketing of corollary products to us and to our clients. I don’t understand why they haven’t fixed some basic functionalities we’ve been asking about for literally years. But the only reason I bother complaining is that I truly believe in QuickBooks products, and the ecosystem they’ve built, and that other software companies have built around them. Which is why it was delightful to be there when QB Ledger was announced at QB Connect in November (see photo above), and all the more delightful that since then, I’ve been able to honestly say I’m in love with this new product.

Why? What’s the hype?

Nothing. There’s no hype. That’s what’s so great about it. It’s just plain old reliable QB Online that we know and love, but without all the bells and whistles, and therefore totally affordable for uncomplicated files. It basically strips down the system to the core functionalities but retains the tools that are the most timesaving. And therefore, they only charge you for the basics. It’s $10/month per client.

At this price, and with the connected bank feeds, rules and reconciliation features, we can blow through an entire year of transactions on a cash-basis filer in literally a couple hours, and still make it affordable for the client, while maintaining plump margin for our firm. Since the bank and credit cards are connected, we don’t have to rely on the client for statements before we get started, so we can take care of most of the work well before tax-season begins. In most cases, the client won’t ever need access to the system, because it’s not about managerial insights and analytics – it’s just a compliance engagement that gets us to the point where we can file an accurate return. But unlike QB Self-Employed, this is real accounting software that gives us double-entry accounting, adjusting journal entries, and spits out proper financial statements. And also unlike QBSE, it allows for a full-on easy upgrade should the side-hustle turn into a more full-fledged business, or the real estate toe-dipper turns full-on house-flipper. (And yes, two accountants can be connected, just like the other QBO products, so if you’re not doing CAS and tax in-house like us, you can have a bookkeeper firm and tax prep firm both connected.)

Things to know before you dive in:
– It seems like QB Support staff haven’t all been trained yet on what it can and can’t do, how many and which types of users can be attached, and which use-cases make the most sense, so be aware of that. It’s also sometimes tricky to get the client added (to set up the bank feeds) because the accountant user gets assigned both as accountant and admin; as with other versions, when this happens it can be a pain to switch that over to the client. So, make sure not to check the box to make yourself primary admin when setting it up.
– And… they’ve got a weirdo situation where you can’t use a Customer name anywhere in the file (presumably they deactivated this because there’s no invoicing, which is fine… but we still need that field). I’ve got it on good authority that this isn’t a bug. I suspect this was done with the expectation that those who have customer reporting needs will just upgrade, but I don’t personally think that it will serve the purpose of moving them to Simple Start. They’ll just use an external invoicing or scheduling program to track income by customer instead of upgrading – especially because those third-party apps do in fact create these customers in the app – and then they’ll be hooked on that invoicing feature… instead of tracking things by customer in QB Ledger and eventually upgrading to Simple Start. I have clients in all walks of QBO and there are startups that can’t initially afford Simple Start who will eventually get there… but they’re going to need customers to make that happen. Another workaround: some folks are using the Vendor field with a “-Cust” after the name to get around this.
– And lastly, bummer – you can’t downgrade, you can only start a new QB Ledger file or upgrade that file. (Yeah, they were thinking about all the reluctant clients who we had to talk into paying for Simple Start that don’t actually need A/R and A/P and would be fine on Ledger… really wishing they’d released this version years ago.)

Hector Garcia just released a half-hour complete tutorial on QB Ledger for accountants and bookkeepers, so if you want a deep dive on the specifics, then you’ve found your instructor.

Start-ups, trusts, estates, once-a-year write-up or tax prep clients, small side-hustles, AirBnB and other rentals, your glam diva marching band (ok, maybe my glam diva marching band)… the list goes on. Intuit has finally taken the core functionalities that are the reason we celebrate QuickBooks Online, and packaged them into an affordable option. It’s earning them goodwill, providing a pipeline for future upgrading customers, and will surely make the switch from Desktop to Online more attractive for the masses. For us, it fits seamlessly into our strategy to shift away from once-a-year rush work. For bookkeepers just getting their start, it allows them to take on small freelance and hustle clients. Welcome to the QB family, Ledger! We’re glad you’re here.

(What’s that, you want to learn more about QB Ledger? I knew you were gonna want to know how – so I’ve conveniently set it up for you to check out this page here.)

Note! As my readers know, I am downright fanatical about transparency and full disclosure (often to my detriment, as you may have noticed that I have a wildly popular award-winning blog that is non-monetized). Though this particular post is a paid partnership with Intuit, I want you to know that a) I wanted to write an article on QB Ledger anyway, but couldn’t find the time; getting paid allowed me the break from client work I needed to make it happen; and b) they didn’t edit a single thing when I presented it. In fact, they were totally cool with all my Intuit-bashing… which made me pretty impressed with them, to be honest. I might just do this again sometime. We’ll see.

Cooperatives, Education, Tips

Is Open Book Management Right for Your Restaurant?

March 4, 2024 Nancy McClelland Leave a comment

I first came across the concept of “Open Book” management (OBM) for restaurants back in 2009, when I purchased Zingerman’s Guide to Good Eating from a local food & wine retail client of mine and we were discussing their recent adoption of this business philosophy — first popularized by Jack Stack in his excellent 1992 book, The Great Game of Business. Having lived in Ann Arbor for 10 years and attended the University of Michigan, I was of course a fan of their world market and pricey-but-delicious deli salads and sandwiches. But it wasn’t until 2012, when I took a deep dive into restaurant accounting and attended a series of seminars by the former Restaurant Seminar Institute, that I made the deeper connection between healthy financial communication and healthy small businesses. The class instructor had referenced various approaches to management, and included OBM among others on the list. A year later, I began working with local restaurant Honey Butter Fried Chicken — whose owners, as it turns out, had taken Zingerman’s OBM course and were in the process of implementing it in their fledgling project.

I spent the next few years working with them as they fine-tuned their metrics, delivery, and compensation structures, as well as trained their managers and the rest of the staff on why any of it mattered. First-hand, the benefits of this transformative approach were made apparent, and I became an eager proponent of OBM. Later, as I began to specialize in co-ops, I saw the same lessons filtered through a lens of cooperative management and policy governance that in some cases fit nicely with the OBM framework (though not always — check out this excellent Columinate article on lessons learned the hard way; an illuminating quote: “Getting the responsibility into the hands of the staff each week is an important transition in making it successful. Yet, many times, we see managers hanging on to the reporting lines for too long, which leads to disengagement and disinterest on the part of the staff. They won’t learn it or care about it until they are responsible for it”).

So imagine my delight when I read this month’s Plate online magazine and saw that my former clients are participating in a free webinar on Open Book Management — and how to determine whether it’s a fit for your restaurant! From PlateTalks: “These owners will talk about what it takes to get your books in order, how they share key data points with their teams, and what their staff has gained from the model.”

According to Zingerman’s — and this lines up with my personal experience — OBM can lead to better results: but more importantly, it lines up with the values of many small business owners. Side benefits include building commitment, better business decision-making, and teaching everyone to think like an owner.

Open Book Management isn’t something that can be implemented in a silo, however — a concept summarized well in a case study by the non-profit International Council on Hotel, Restaurant, and Institutional Education (CHRIE), “…small to medium enterprises can greatly benefit from open book management, the creation of a strong and qualitative mission statement, and a cohesive organizational culture that blends well with the external macro culture. Any one of these elements appears to be dependent upon another. For example, Zingerman’s, or any other company could have an open book management style of operation – but without a clear mission, the company would not do as well in the marketplace. Zingerman’s could have a great organizational culture, but without open book management, employees would not take ownership of their jobs, and therefore the bottom line would suffer.”

There are loads of articles and courses out there on Open Book Management — and plenty of restauranteurs who are glad to network and share their experiences. For a short introduction, I encourage you to check out Josh and Christine and their colleagues, as well as the folks at Plate, on March 5, 2024 from 1-2 pm Central. This is not a referral link — I’m just excited to get the word out, to help as many small business restaurants as I can in my time. I’ve always maintained — and as our mission goes — we believe the vibrancy and character of our neighborhood depends on thriving small businesses lending their unique vision to our communities.

Education, IRS, Tips

Deciding Which Entity Structure is Best

February 9, 2024 Nancy McClelland Leave a comment

If you’re a regular reader, you already know that I’m a huge fan of the National Association of Tax Professionals (NATP), for a bunch of reasons:

Fabulous and affordable education with top-notch instructors
Straightforward “how-to” resources
Practical monthly newsletter with case-studies
On-demand “pay as you go” research service
And a very fun group of folks at the annual conference!
(That last one’s a teaser for the final photo in this post.)

I’m especially indebted to NATP because when I first started doing taxes, I wasn’t a CPA yet — and spoiler alert: they don’t really teach you that much about tax preparation when studying for your CPA exams; in fact, three-quarters of the test aren’t related to taxes at all. In those early days, NATP education was the best-quality, most affordable that I could find without being a member of AICPA. (And I tried *all* the groups out, to be clear.)

Anyway, point here is that not only do you not have to be a CPA or EA to take and benefit from their classes — in fact, you don’t even have to be a tax preparer. I am a passionate proponent of teaching bookkeepers what they need to know about taxes to be better at their jobs, coordinate and communicate effectively with their clients’ tax preparers, and level-up by providing value-added advisory services to their clients.

To that end, here’s an upcoming NATP webinar that I suspect will be pretty dang useful for anyone doing client accounting work — bookkeeping, tax, advisory, CAS, and so on. You don’t even have to be a member to attend.

I get a lot of questions and see a great deal of misinformation out there about entity choice… here’s an opportunity to learn more about how to help your clients decide which entity structure is the best choice for them.

(Note: this is *not* a referral link — I’m just really excited about this education getting out there into the world. The presenter, Larry Pon, is a great guy and super-knowledgeable about all the ins-and-outs of this topic.)

From NATP:

Proficient knowledge in selecting the optimal entity structure is vital as it directly shapes a business’s tax outcomes. Strategic choices can enhance deductions, reduce liabilities and ensure regulatory compliance, contributing significantly to a business’s financial well-being and long-term success.

We know you want the best for your clients, so we want to arm you with the knowledge to do so.

As clients start new businesses, one of the major decisions to make is what entity type is best for them? Limited liability companies are by far the most commonly selected type, but did you know, the IRS doesn’t recognize LLCs as an official entity? LLCs can default to a disregarded entity or a partnership depending on the number of members they have, or they can select S or C corporation status.

Our upcoming webinar, Deciding Which Entity Structure is Best, will teach you how to:

List the different entity options
Identify the default entity options for LLCs
Summarize the pros and cons of the different entity options

Wednesday, Feb. 21, 2:00 p.m. CT
Thursday, Feb. 22, 10:00 a.m. CT
Pre-order the on-demand version
Register here.

Yes, it is open to non-members! The price varies from $0 to $48 depending on membership status.

And now, the promised photo from my teaser, above — one of many crazy pics at the 2019 NATP National Tax Conference in Chicago.

Yep, that’s me! They don’t call me The Dancing Accountant for being a wallflower, that’s for sure.

Illinois, IRS

Tax Season 2023 Is Officially Open! Maybe. Okay, Not So Fast.

January 30, 2024 Nancy McClelland Leave a comment

(Many thanks to the AICPA Town Hall for allowing members to leverage their resources, such as the slides included in this article. The opinions shared here are the author’s and not those of AICPA or CPA.com.)

Tax preparers everywhere spent the past two months gearing up for yesterday’s “opening day” of tax season, January 29th. It was an exciting time for us, as it was finally going to be a return to normal. What does that even mean anymore, you might ask? Well, most of the pandemic financial relief programs have wrapped up (save a straggler ERC claim here or there); amendments resulting from that era have almost all been filed; the odd rebates and credits that no one remembered the amounts for were a thing of the past; there were no last-minute tax extenders; and the season end-date actually lands on April 15th for the first time in ages. It felt like we finally had a handle on things and were back to the “normal” amount of seasonal overwork — rather than a Herculean lift, as was the case for the past four years.

Enter Congress. Despite the fact that The American Institute of Certified Public Accountants (AICPA), National Association of Tax Professionals (NATP) and small business advocacy groups have been lobbying for over a year to get an extension of certain popular tax benefits that expired in 2023, our leaders somehow managed to wait until after year-end to introduce legislation to that effect — Tax Relief for American Families and Workers Act — in a spectacular show of bipartisan ignorance. Never mind that the IRS e-file has been offline since November 18th, because it takes over two months to reprogram the systems for new tax laws, updates, and edits to tax forms.

As for January 30th, the legislation has yet to come up for a vote. And yet the IRS is telling taxpayers to go ahead and file when ready, and makes no reference to the pending legislation in today’s Outreach Connection email.

Some of the anticipated changes if the legislation passes as-written include popular business expensing programs that are designed to be leveraged throughout the year. Making them retroactive does nothing to spur the economy, as the decisions to buy equipment, invest in R&D, or take out loans were already made, last year.

To be clear: I’m not saying these aren’t potentially good changes for tax law, business, and the economy. Just that doing it at this late date is misguided in far too many ways.

And the part I really don’t understand is this: IRS Commissioner Werfel told reporters last Friday, “If there’s a change that impacts your return, we will make the change, and we will send you the update — whether it’s an additional refund or otherwise — without you having to take additional steps.” This is simply impossible for most of the business expensing features of the law, which are voluntary elections on the part of the taxpayer. Presumably this is a reference to the child tax credit provisions in the legislation — which have gotten the most press, but have little effect on small business owners, and are a small portion of the actual bill.

The House Ways and Means Committee released a statement recently indicating that the IRS “confirmed its intention to make necessary systems updates by around six weeks after the date of enactment”. Six weeks. Most refunds are issued within three. Six weeks takes us past the S-Corp and Partnership filing deadline. Six weeks?

Speaking of that deadline, many states announced e-filing would begin on the same date as the IRS opened federal tax season, but it turns out that our state (and I’m guessing others) did not release their S-Corp or Partnership forms with enough advance notice for our third-party tax software to program them into their system, so we are unable to e-file any Illinois business tax returns until February 7th. And we were freaking out about that delay. I can’t imagine what six weeks will look like.

To say nothing of the fact that the next government shutdown deadline is scheduled for one week before business tax returns are due. This should make for an even more laid-back season.

And to add to all of this, that the bill is being funded by an early end to the Employee Retention Credit program, as of January 31, 2024. We spent all of last week scrambling to get the remaining claims in, and won’t know whether that sprint was worth the anxiety or not until this bill passes (or doesn’t) — I feel terrible for those who find out in February that their claim’s due date is suddenly in the past.

Again, some of the provisions in this bill are great ideas — well thought-through, balanced, as well as good for business, families, and potentially the economy. Bad players in the world of ERC mills will finally have to deal with some consequences, and the 1099 burden for small vendors and freelancers will be eased as the threshold is finally indexed for inflation. Some good stuff.

So let’s pass this as 2024 legislation, just in time for the new year, as it should be… and get out of the way of tax season, already!

Education, Software, Tips

How to Issue 1099s and W-2s from Gusto Payroll (for 2023)

January 18, 2024 Nancy McClelland Leave a comment

(By the way, our referral link will get you a $100 prepaid Visa card if you sign up and run your first paid payroll before Jan 31st, 2024! Bonus! Happy New Year!)

It seems that for 2023, Gusto has slightly changed the details for how they handle distribution of 1099 and W-2 forms — and so that no one ends up without a copy of their important documents, I am sharing the step-by-step process that we went through for our own firm, in hopes that it helps you manage it in your own small business.

Spoiler alert: the process of DIY-ing (aka creating the packet of 1099 or W-2 PDFs, going to the Tax documents section and finding/ downloading these PDFs, printing them, and mailing them) was enough of a pain that for sure next year I will just click the option to pay $3 per form to have them mailed for me for anyone who hasn’t selected “electronic-only delivery”. But before then, I will contact all my employees and contractors and ask them to please change their preferences to be electronic-only delivery next year, since the thing I would be mailing them is literally a printout of the same PDF that they can download themselves from their Gusto account.

And now — here’s the process I went through, in real time, as I walked through the steps myself.

First off, as the company/ employer, I received an email from Gusto (though it incorrectly stated that these are client tasks, rather than firm tasks) stating that I need to distribute important payroll forms to recipients before the IRS deadline of January 31, 2024.

When I click on the “Let’s do it” button for 1099s, it takes me (after logging in) to the screen below, which notes “If you have us mail forms for you, you can choose to exclude anyone who’s consented to have them delivered electronically.” This is pretty important, as I encourage everyone to accept this delivery method, even if they also request a paper copy. I am curious to see if they make this option clear even if I select “I’d like to download and distribute them on my own,” and will give that approach a try.

After selecting the second option — “I’d like to download and distribute them on my own” (DIY), I get this screen:

And then this screen:

And good news! Even in the DIY version, you can select “Only contractors who haven’t requested electronic-only copies,” which is a real win for everyone. It would be nice if they made that clearer on the first page, and simply said, “you can choose to exclude anyone who’s consented to have them delivered electronically.”

I take that back! NOTE: After going through the whole process (you’ll see this below), I never did get a packet that was just for the electronic-only folks. I was only able to download a packet for ALL employees. I will have to pick out which ones selected paper delivery and only print and mail those. Or I can go into each employee and download the form individually. What a pain! I don’t want to reward Gusto for handling this poorly, but if I could go back again, I’d have chosen to have them mail the ones who set their preferences for paper forms, for $3 each.

I clicked on “Create packet”, and nothing happened. However, this box shows on the right-side, so I’m guessing that’s why:

(I think this could have been handled a bit better by the Gusto programmers.)

Now, if you had any contractors who did not select electronic delivery, you would in theory eventually get a copy of that packet, and use the PDFs of the 1099s that were made available to you by Gusto — you would print and mail them yourself. But in my experience with the W-2s (below), I was only ever able to download a copy of ALL the forms, not just the ones that set their preference to receive a paper copy. Or I could go to each employee and download them individually. Therefore, as I keep saying… if I had this to do over, I’d pay Gusto the $3 per form for just the ones that requested paper forms. And in future onboarding, I’d ask them to set it to “electronic-only”.

Next, we’re going to give the W-2 form distribution a try. I clicked “Home” to get to the main page of my Gusto account but got an error message, probably because as an accountant user, it got confused about whether to take me to my own firm homepage or my client dashboard. So I went back to the original email and started from there. As expected, it brought me here:

And after selecting DIY, it took me here:

After clicking “Continue” it took me to a page that nicely spelled everything out for me:

It turns out that four of my employees have requested paper copies. They may have also requested electronic copies, but since that doesn’t matter one way or the other here, it’s not indicated. (Note to self: ask your team members to select electronic-delivery-only!)

So this time when I clicked the “Create packet” button, I got a pop-up.

I clicked on the “Go to Tax documents” button and it took me to a very familiar screen (since I have to download this information on behalf of clients from time-to-time), with a tab for each type of tax document.

I clicked on W-2s and followed the prompt to download my 2023 W-2 packet — but this turned out to be the entire employer-copy of the W-2 packet. So, I clicked below that on the option to “Distribute 2023 W-2s” — but that just took me back to “Choose how to distribute W-2s” starting page.

To be fair, it did say in the pop-up that they’re creating my packet and would email me when it’s ready… I’ll go check email next.

But first I want to point out that this page also makes it clear in the employee list at the bottom what the delivery preference for each employee is, making it easy for me to make good on my “note to self” above and reach out to those who requested “paper and electronic”. (By the way, my own name is on that list. Sigh.)

It’s many minutes later and I still don’t have an email saying my packet is ready.

At this point, I’m wishing I’d just paid Gusto $3 each for them to mail these for me.

I’m going to sign off on this blog post for now and return to it once I get an email from Gusto. And if I don’t, I will shake my fist at them and ask my team members if I really have to spend $3 each to send them a paper W-2 when they already have a PDF.

Update: I never did get an email from Gusto saying my packet of just the ones that need paper copies was ready. And when I went back in to just pay Gusto the dang $3 each, I got this screen:

So apparently that’s not even an option anymore. Heads-up! (This is the part where I scroll back to the top of my post and give everyone a spoiler alert before starting this process.)

The key takeaway I’d like to share with clients and readers is that you should absolutely, unquestionably go into “Tax Documents” and look at the list of people under the W-2s and 1099s tab to see if anyone chose paper-only (I am presuming that’s an option but do not truly know… because it’s 2024 and who would choose that, anyway). If anyone did *not* consent to electronic delivery, then go spend that $3 per employee. For everyone else, reach out and ask if this is really necessary, and suggest they (myself included, whoops) change their settings — not because the $3 per form is a prohibitive cost, but because the amount of time and energy spent in making that happen (any at all) is simply not worth it in this day and age of electronic communication.

I will leave you with a hilarious poem that a dear colleague of mine shared with me recently.

Education, IRS, Tips

Rules for When To Issue a 1099 Form to a Vendor – Updated for 2023

December 26, 2023 Nancy McClelland 8 Comments

As is the case every year, we’re hearing from lots of folks confused about when to send a 1099 form or other “information returns” to someone. It is true that over time, these forms have continued to change, and the rules have become more specific… but the basics remain the same. The most important point is that only businesses need to issue 1099s — if you paid someone for personal purposes, you are not (yet) required to send them or the IRS a Form 1099.

WHAT’S NEW (or isn’t) FOR 2023:
– Beginning in 2022, the 1099-NEC was made so that it’s no longer year-specific; there are no changes to the form for 2023.
– The IRS launched IRIS, a new free online portal, for businesses to file 1099 returns. (Beginning January 2024, you will no longer be able to file using a legacy transmitter code using the old FIRE system.)
– You must file now file 1099 Forms electronically if you have 10 or more information returns (down from 250).
– There are even more complexities regarding whether or not to issue a 1099 based on the payment type, and I expect this area to become even more challenging in future years, as new payment platforms continuously come into being.

Here’s a crash course for each type of form, followed by an FAQ.

1099-NEC
This form was new for 2020 and replaces the old Box 7 of Form 1099-MISC. “NEC” stands for “non-employee compensation”. It is due to recipients and the IRS by January 31st (or the first business day after that, if 1/31 falls on a weekend).

If you paid:
1) a NON-corporation (*see below);
2) for services (not products);
3) via check, cash, ACH, Zelle, or wire transfer — but not merchant services or electronic payments (such as credit & debit cards, PayPal Business, Venmo Business (**see below);
4) $600 or more in a calendar year;
then you need to send them a 1099-NEC.

(*) A lot of folks get confused and think the rule is if you paid an “individual,” but really the rule is a “non-corporation,” which means that partnerships and LLCs are included. Just because they have a business name doesn’t mean they’re incorporated. You cannot depend on the company’s name to determine corporate status, nor can you rely on the state LLC/Corp database, as it only indicates the entity type at the state level — almost any type of entity may elect corporate status with the IRS.

So, keep in mind that a company can be an LLC but be taxed as a corporation. In this case, you would not need to send them a 1099, because in the eyes of the IRS, they are incorporated. Here’s an example of a W-9 showing an LLC that is taxed as an S-Corp:

This is one of many reasons you should collect Form W-9 from all service vendors before giving them their first check, just to be safe. The person filling out the W-9 will indicate their entity type and whether or not they are taxed as a corporation.

There’s also an exception to the incorporation rule for attorneys and law firms. You must issue a 1099 to a lawyer or law firm regardless of whether they are incorporated. (Law firms and attorneys have so many specialized 1099 issues, they get their own blog post.)

(**) There’s a lot of confusion over Venmo and PayPal, because there are personal-use “Friends & Family” versions as well as business versions of both platforms. Legally, no business should be using the non-business versions of these payment types… but in real life, many do. It’s very hard to distinguish which payments were made using which method — in theory, a 1099-NEC would need to be issued to a vendor who was paid via a personal Venmo or PayPal method, but I’m not sure how this would be tracked. My recommendation (for many reasons) is to only use the business versions, and then the 1099-NEC is a non-issue (because Venmo and PayPal will issue a 1099-K instead).

I know, that’s all very confusing. Here’s a nice, simplified decision-tree provided by our friends over at Bookkeepers.com, courtesy of Bookkeeping Buds.

However, it’s easy to end up with issues like “what if I paid with my credit card, but used PayPal Friends & Family,” or “I use a practice management system that is funded with a bank account, so why do they issue a 1099-K,” or any number of confusing situations based on payment type. There’s simply no easy answer to these questions.

It’s so confusing, in fact, that my colleague Jennifer Dymond saw the need, and created an absolutely incredible resource at 1099problems.io which goes into detail about which payment methods are included on a 1099-K versus which ones you must issue 1099-NEC or 1099-MISC for yourself; it’s maintained regularly and updated as the proliferation of non-traditional payment methods continues. The first 1,099 people to subscribe using code DANCING1099 will receive 10% off their first order (offer expires March 31, 2024).

1099-MISC

Items such as rent payments, royalties, attorney settlements (as mentioned above, not payments for legal services), and medical healthcare payments will still be reported on Form 1099-MISC, though the form has been redesigned and the boxes renumbered.

Report prizes and awards of $600 or more that are not for services performed in Box 3. Include the fair market value of merchandise won. And be careful here, as it is easy to accidentally include these on Form 1099-NEC if the recipient also provided unrelated services.

Rent paid ($600 or more) (Box 1)
Royalties paid of at least $10 or more (Box 2)
Prizes and awards and certain other payments ($600 or more, see instructions for Form 1099-MISC, Box 3 for more information)
Backup withholding or federal income tax withheld (any amount) (Box 4)
Amounts paid specifically to physicians, physicians’ corporations, or other suppliers of health and medical services ($600 or more) (Box 6)
Direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (Box 7)
Gross proceeds paid to an attorney ($600 or more whether or not incorporated) (Box 10) – “made to an attorney in the course of your trade or business in connection with legal services, but not for the attorney’s services”; for example, a settlement agreement.

The deadline for providing this form to recipients is the same as above, January 31st. However, the deadline for filing 1099-MISC with the IRS is February 28 if filing on paper, and March 31 if filing electronically.

1099-K

It’s unlikely that anyone reading this will be in the position of issuing Form 1099-K to vendors — but you should know about this form, for a few reasons:
1) You are likely to receive one.
2) It’s the reason you don’t have to issue 1099-NEC to anyone you pay via credit card/debit card, a business PayPal account, a business Venmo account, or any “merchant service” system.
3) You may need to reconcile this form against the amount of sales income you report on your tax return.

Form 1099-K is for payments made in settlement of “reportable payment transactions”, which is any credit card, payment card or third-party network transaction. So if you receive payments in this way (unless you only accept checks, e-checks, ACH, or zelle/QuickPay, you probably do), then you’ll get a 1099-K for this total.

But because these amounts are reported to the IRS for you, you don’t need to issue 1099-NEC or 1099-MISC forms to vendors whom you paid using one of these methods. In that case, the recipient could end up having the same income reported to the IRS twice.

The rule used to be that this form was issued to anyone who had more than 200 transactions or $20,000 worth of transactions — but starting in 2024, that threshold will drop to only $600. (This implementation has been delayed twice already and AICPA is lobbying for a more reasonable threshold.) The IRS is now planning a phase-in of $5,000 for tax year 2024.

As a bookkeeper, accountant or tax preparer, it’s important to protect your small business clients by making sure all taxable income is being reported on their books/returns. If the 1099-K is for an amount that is lower than what’s on the income section of the Profit & Loss, it’s not likely to be an issue. But if it’s higher, you’ll need to do a reconciliation to show that the difference was due to non-taxable receipts such as sales taxes collected, tips collected, refunded sales, and the like.

1099-INT

This form is issued to anyone who lent your business money, and your business paid them at least $10 of interest in the past calendar year. It includes owners, partners, and shareholders.

Note: do not issue this form for accrued interest; it is only for actual payouts of interest in cash or trade.

The form is due to recipients by January 31 (February 1 in 2021), but isn’t due to the IRS until March 1 if filing on paper and March 31 if e-filing.

If not e-filing, you can use the IRS’s fill-in pdf Copy B for the recipient copy, but for the version that goes to the IRS, you have to order an official form with special scannable ink — they’re free, but they take a while to be mailed, so fill out your request early. Make sure to mark the year you are filing for, not the current year — an easy mistake to make.

Another note: I have had clients reach out confused by the language “You are not required to file Form 1099-INT for interest on an obligation issued by an individual”. This means if the loan were TO an individual rather than FROM one, and the individual paid interest to the company. (This is not usually the case.) In that situation, the individual would not have to issue the company a 1099-INT (although the company would still have to declare the interest income).

1099-DIV

This form is issued to a shareholder of a C-Corporation for dividends or other distributions paid in the past calendar year.

Most folks don’t think this applies to them — but if you own a business that is taxed as a C-Corp, and you took money out that wasn’t W-2 or loan repayments, then you may have issued yourself dividends. (And if it was for a loan repayment, did you pay the required amount of interest? If so, see the “1099-INT” section above.)

The form is due to recipients by January 31 (February 1 in 2021), but isn’t due to the IRS until March 1 if filing on paper and March 31 if e-filing.

1098

This form is to report mortgage interest and real estate taxes. You may not think it applies to you, but if you do the bookkeeping for or are a member of a housing cooperative, you may find that it does. This needs to be issued to housing co-op members for their allocated portion of mortgage interest and real estate taxes paid by the cooperative, so they can deduct them on their personal tax return, Form 1040, Schedule A. If not e-filing, you can use the IRS’s fill-in pdf Copy B for the recipient copy, but for the version that goes to the IRS, you have to order an official form with special scannable ink — they’re free, but they take a while to be mailed, so fill out your request early. Make sure to mark the year you are filing for, not the current year — an easy mistake to make.

Frequently Asked Questions

What do I do if the vendor will not give me their Tax ID Number, which I need to file the 1099?

First off, it’s the business’ responsibility to obtain this number. That’s why I recommend getting the W-9 from the vendor before giving them their first payment. But in the case where it’s 1099-time and you still don’t have that TIN for some reason, respectfully let the vendor know that not having their info will not prevent you from filing the 1099. It just means the IRS will receive it with “REFUSED” written in the field where the number should be (or if you use an e-filing program, you will check the box that the number is unavailable). This will almost always trigger an audit for both the business and the recipient, which no one wants. Presented with this information, I find that most non-compliant vendors are suddenly able to fill out that W-9 form after all.

Do I really have to send one to my landlord? They get angry when I bring it up.

If your landlord is not incorporated, yes, you do. If it makes them mad, then consider why… are they trying to avoid declaring it as taxable income? Is that the type of person you want to rent from?

What if you forgot to issue a 1099 to someone?

It’s never too late! Since the statute of limitations never starts if you don’t file a return, penalties and interest can continue to accrue forever. If you noticed that you forgot to file a 1099, even for a prior year, reach out to the recipient in question and make sure they declared and paid taxes on the income you inadvertently forgot to remind them about — and hopefully they have. In this case, no amended return will be required on their end, and the form’s arrival will not come as an unwelcome surprise. If not, then that’s a bigger concern. It is the responsibility of each recipient of income to declare it on their return, regardless of having received the 1099. Not getting the form does not exempt a taxpayer from declaring the income they earned. So, the business owner needs to evaluate the risk involved to their company in knowingly refusing to comply with tax law, versus the recipient’s desire to evade taxes.

What do you do if you receive a 1099 that is incorrect or unnecessary?

If you receive a 1099 that has incorrect information on it, simply reach out to the issuer to ask for a corrected 1099. Do this as soon as possible, as it will help them to fix it before it is submitted to the IRS.

If they will not correct the total, then declare the full amount on your tax return, but “back out” the incorrect amount as a negative, with an explanation to the IRS for why this amount was inaccurate. If you receive an audit notice, provide the IRS with the documentation showing why your calculation is correct, and the support showing you reached out to the issuer when you realized the form was not right.

If you should not have received a 1099 at all, follow the same advice as above. A good example of this would be if you received a 1099-K for credit card payments, but also received a 1099-NEC from the company that paid you (this is quite common… it is extremely challenging in most bookkeeping software to distinguish how a bill was paid in most reports). In this case, if the customer will not void the 1099 form for some reason, simply declare the full amount on your business’ tax return and “back out” the amount that was double-issued, with the explanation that it was already declared in income via 1099-K or some similar wording.

However, if the reason you should not have received the 1099 was that you are taxed as a corporation, and you’ve already declared this income on your tax return, then you can ignore the form — it will have no effect on anything and was just a waste of time on the part of the issuer.

How do I run the 1099 report in QuickBooks? Won’t it tell me who needs a form from my company?

Most bookkeeping professionals don’t use the 1099 report that QuickBooks generates — it’s too prone to user error when setting up the vendors, accounts, and dollar-thresholds. Instead we use a program like Keeper to help us identify potential 1099 vendors and transactions, or in QuickBooks, we run the detail of the cash accounts and filter by transaction type – Check, Expense, Bill Payment… then sort by Name. The problem may be that there is not a name in there, or it is not a Vendor Name: another great reason to make sure you’re setting up bank rules and being careful about data entry to include vendor information on all transactions.

How does PayPal work?

Oh my goodness, is this ever complicated.

If you pay a business using your personal bank or Paypal account, or pay through “Friends & Family” PayPal you do need to send a 1099 (if over $600), because PayPal thinks this was a personal transaction — because, as I mentioned at the top of this post, personal transactions do not require 1099 forms. If you had used “Business” PayPal, then PayPal would send the 1099-K and there would be no reason to issue a 1099-NEC.

A colleague of mine recently called PayPal support about this and here was their response:
If the transaction detail says “money sent”, those qualify as Friends & Family transactions. However, if the transaction says “invoice paid” or “payment”, then it is a business payment — even if it’s within a personal Paypal account.

What about Venmo?

According to Venmo’s term of service, using it for business is a violation, and they can seize whatever money you have sitting in your Venmo account if they catch you using it for business.

However, we know sometimes this is the best way to collect money from folks, or that customers will send you Venmo funds without thinking about it, or that you’ll do the same with your vendors.

Venmo is considered a “peer-to-peer transfer service”, and not a third-party network. Therefore, treat these like cash payments from a business and send a 1099 form to your vendor.

(Side note: Venmo is starting to accept applications from a number of businesses for a new “Business Venmo”, but it’s brand new and very limited. Be careful with this. The problem with Venmo, PayPal, Bento, and other similar companies like that is that they don’t act like they’re banks — and their staff doesn’t realize that banking is actually the primary function of the company they work for — they don’t get the same kind of intensive training that bankers do. I recommend avoiding Venmo for business payments as much as possible.)

What about the states?

Okay, this gets pretty overwhelming pretty fast, so I am linking to a site that has all the states’ rules in one place — https://www.taxbandits.com/state-filing-requirements/

The short version here is that not all states have the same rules. Some allow the IRS filing of certain information returns to substitute for state filing requirements, and some don’t. Some require e-filing and some allow physical mailings. Many states participate in the Combined Federal/State Filing Program. The IRS will automatically forward 1099 information to participating states, eliminating the need to file separately with these states.

So please, do your homework when it comes to state filings.

Where can I find more info on due dates, penalties, and real-life scenarios?

Check out my colleague Mark Kohler’s excellent blog post. His charts for deadlines and penalties are very handy.

Another colleague, Questian Telka, and I worked together on a video series on what a W-9 is, and how to prepare a W-9 for each type of entity; and she followed it up with another video on whether or not you need to issue a 1099.

And as I mentioned earlier, yet another trusted colleague, Jennifer Dymond saw the need for a resource that details which payment methods are included on a 1099-K versus which ones you must issue 1099-NEC or 1099-MISC for yourself, and created 1099problems.io to help navigate these complexities. It’s updated regularly, as the proliferation of non-traditional payment methods continues. The first 1,099 people to subscribe using code DANCING1099 will receive 10% off their first order (offer expires March 31, 2024).

And there you have it! Simple, see?

**many thanks to The Bookkeeping Buds for editing assistance**

IRS, Tips

IRS Sent 8955-SSA Penalty Notices In Error

September 27, 2023 Nancy McClelland Leave a comment

We received a few frantic calls and emails in the past month from clients who opened their mail to find a penalty notice from the IRS for their 2022 Form 8955-SSA — some for tens of thousands of dollars.

As background, Form 8955-SSA, also known as the “Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits,” is an report that retirement plan sponsors (the entity that established the plan for a company and its employees — usually the employer itself, or a union) must file with the IRS to report information about certain participants (typically former employees) who have vested benefits that have been deferred according to the plan. It’s a required annual filing with the IRS for those who file Form 5500 and has the same filing deadline (July 31, 2023 for 2022 plans — October 15, 2023 on extension).

But most businesses contract this work out to a plan administrator, a service provider that has expertise in managing 401k plans. So you can only imagine how terrifying it must have been for a bunch of business owners to get these notices — meaning that presumably, their trusted outsourcing agency was not doing their job. (Or… let’s be honest — more likely, very few of the small businesses had any clue what the notice was for, apart from the fact that a-it was from the IRS, b-said they’d done something wrong, and c-they owed money. Scary stuff.)

Thankfully, it turns out that these notices were the result of an IRS glitch in the program that receives and processes these forms. The IRS acknowledged the error, fixed the issue, and updated its records to “reflect the accurate filing status of the affected plan sponsors”.

The IRS believes the problem originated with organizations using the Department of Labor’s EFAST2 system to file their Form 8500 Annual Return/Report of Employee Benefit Plan before the July 31 deadline, rather than electronically through the IRS’s Filing Information Returns Electronically (FIRE) system.

If you received a CP 283-C penalty notice dated before September 1, 2023, and you are sure that you filed your 2022 Form 8955-SSA on time and completely, you do not need to take any action. You can ignore the notice and rest assured that your filing is in good order. The IRS will not impose any penalties or interest on your account.

However, if you want to verify your filing status, you have a couple options.
1) First off, contact your plan administrator or service provider for confirmation of your filing.
2) You can also request a transcript of your filing from the IRS to double-check the assurance of your provider.

The IRS released a bulletin addressing the mistake and asked readers to contact them at 877-829-5500 with any questions.

At retirement age, the Social Security Administration informs affected individuals that they may be eligible for benefits under previous employers’ retirement plans based on information reported to the IRS on Form 8955-A, explained Allison Wielobob, Chief Legal Officer of the American Retirement Association, so it’s essential that this information is filed accurately and timely.

Take a deep breath. We all make mistakes. Even the IRS.

Education, Tips

Urge Congress To Delay FinCEN “BOI” Reporting Burden for Small Businesses

August 24, 2023 Nancy McClelland Leave a comment

The past few months, we’ve been keeping an eye on a new reporting requirement that will create a massive burden on small business owners. Starting in 2024, millions of small businesses will be required — as part of an anti-money-laundering initiative — to file a “beneficial ownership information” (BOI) report with the Financial Crimes Enforcement Network (FinCEN, a branch of the U.S. Department of Treasury). Failure to comply can cause the company and those responsible steep fines — $500 per day up to $10,000 — and even possible jail time.

And yet, the vast majority of small business owners know nothing about this new rule, and just a few months before year-end, guidance is still forthcoming. Too many questions remain regarding how it will affect the targeted small business owners — those who run a business that had to file a document with the Secretary of State to create the company (C-Corps, S-Corps, and LLCs, most commonly).

The super-surprising part here is that exemptions are only designed for larger companies — not small businesses. Corporations or LLCs with more than 20 full-time employees, more than $5 million in gross receipts, and an operating presence at a physical office in the USA — as well as those already regulated by the federal or state government — qualify for a “large operating company” exemption.

The National Federation of Independent Businesses has prepared a handy fact sheet available to the public that includes a great summary of the information that owners will need to provide:

The NFIB Government Relations Director Jeff Brabant comments, “anyone who has a 25% or greater stake in the company or senior officer will have to register a copy of their driver’s license and business information. This is a daunting task and probably the biggest regulation that no one is talking about right now.”

“NFIB is pushing for a full repeal of this legislation,” said Brabant. “We feel it’s unnecessary; however, administratively there is a chance that FinCEN delays it, and there’s also a chance that Congress delays it for one year. The statute allowed for up to two years for reporting for companies once this is passed on January 1; however, FinCEN chose one year. So FinCEN can choose to delay it another year and that’s something we hope they do.”

In today’s AICPA Town Hall, they issued a call to action, asking small business owners — CPA firms especially — to contact their representatives by September 15th and request a delay of the implementation. They’ve provided a Word Doc template with background and speaking points for your email or phone call, and have encouraged members to share it widely.

From the AICPA:

Two bills have been introduced in U.S. Congress to delay this rule – H.R. 4035 and S. 2623, both titled the Protecting Small Business Information Act of 2023. These identical bills introduced in the U.S. House by Representative Patrick McHenry and introduced in the U.S. Senate by Senator Mike Rounds would delay the start date of the rule providing additional time for small businesses to learn about and better understand their new reporting requirements. We want to obtain as many cosponsors in both the U.S. House and U.S. Senate as possible, to keep these bills moving. We are asking you to reach out to your House of Representatives Member to ask them to cosponsor H.R. 4035, and to also reach out to your two United States Senators to ask them to cosponsor S. 2623.

· You can find your House of Representatives Member at https://www.house.gov/
· You can find your two U.S. Senators at: https://www.senate.gov/senators/senators-contact.htm

In addition to the Word Doc and Town Hall presentation, the AICPA has created a Beneficial Ownership Information resource page, and an FAQ for CPA firm practitioners — many of whom are struggling with how to help their small business clients implement yet one more set of compliance requirements.

Wolters Kluwer has also created a free set of resources for those who may be affected by the new legislation, which you can access here, including an on-demand webinar where you can learn more.

Accounting Services for Small Businesses