If all taxes were abolished tomorrow, you would still need a bookkeeper.

From about January to April, every finance professional's primary focus (or at least primary source of frustration) is taxes: getting ready for taxes, doing taxes, answering so (so) many questions about taxes. However, there is a whole lot more to bookkeeping than making sure your financials are tax-worthy.

If the world hit a big reset button tomorrow and taxes were simultaneously, globally eradicated, a lot of professions would go away. There would be no tax preparers, of course, but also significantly reduced need for financial advisors (why bother with tax shelters?), and payroll companies (can't I just hand my employees whatever I'd like to pay them?).

But you would still need a bookkeeper.

You would still need to track not only your income and expenses, but also who owed you money, and to whom you owed money. You would still have loans to track, and need to break out the amortized interest from the repayments. You would still need to know how much your assets were worth, and how much your company as a whole was worth.

There are so many things a good bookkeeper can do for you that are relevant not only at tax time, but throughout the year and over the whole life of your business.

Take some time, away from tax season, to take a look at your financials and discuss them with your bookkeeping professional. Getting the best possible tax return is important, but there's so much more you can be using your financial data for.


Weird Dog Habits

Your Accountant's Weird Habits - Explained

If you have a pet in your family, maybe you've seen those articles purporting to explain why your dog spins in a circle before lying down, or why your cat would rather drink from the faucet than a water dish. To many people, there is a creature even more alien and perplexing than any animal: the finance professional.

Your bookkeeper or tax professional might say or do things that don't make a lot of sense to you. Some of their actions might seem flat-out contradictory. But, as with any exotic species, there is a reason behind all of it.

I want to break down a few of the most commonly complained-about behaviors, along with the explanations behind them (with the assistance of cat pictures).

 

First annoying habit: My accountant keeps nagging me to get organized.

Your bookkeeper wants you to have a system for tracking open customer balances, or wants you to keep all your expense reports in one place. It's frustrating, because the whole reason you're paying them is for them to "keep up with that stuff".

So why do they do it?

For starters, good bookkeeping relies on complete information. (A balance sheet showing $1M in the bank doesn't mean much if there's a $995K liability that got left off.) Unless you have an in-house accounting staff, your bookkeeper is relying on you to get that information to them. A good organizational system ensures that all of the information is getting to who needs it.

Furthermore, most accountants charge based on time expended, and though good accounting can be had at a good value, it's still not cheap. Paying your accounting service to dig through files and hunt down info is a waste of their time and your money.

Accountant Cat 1
Accountant Cat is tired of looking for your payroll reports.

 

Speaking of "time", my accountant freaks out if I don't get certain information to them right away. What's the rush?

Certain items, particularly related to tax filings, can incur massive penalties if late. Your accountant needs the information in advance of those deadlines, to record it and check for accuracy. (Inaccurate filings can also, of course,  result in penalties.)

If your accountant is pestering you to get information to them quickly, it's because they are trying to keep you out of trouble and save you money.

Accountant Cat 2
Accountant Cat on April 10th, waiting on you for info.

 

Since we're already talking about taxes...Why does my accountant try to make me spend money I don't want to spend? For instance, why do I have to treat certain workers as W-2 employees, instead of paying them as contractors?

Because worker classification is a big deal. Not paying employees correctly can result in audits, fines, and even lawsuits. Your accountant is being a stickler about the rules because they don't want you to get sued.

Accountant Cat 3
Accountant Cat, finding out you're paying your 9-5 office assistant as a 1099 contractor.

 

Still talking taxes...Why does my accountant say I can't take this cool deduction I found? I saw online that I can expense my home office/car payment/pet kinkajou/etc.

Present blog excluded, internet advice is no substitute for real, professional guidance. Though you'll seeing many articles claiming that you can write off an entire car payment, or take a "home office" deduction, the actual guidelines surrounding those items have specific criteria which must be met. Unfortunately, small businesses, particularly those which are sole proprietorships, are frequent targets for audits. Taking excessive, unqualified deductions puts you at an even greater risk. If you trust your tax professional, trust that they will advise you of deductions for which you do qualify. (If you are not happy with your current tax professional, we can recommend some.)

Accountant Cat 4
Accountant Cat has some bad news about that great deduction you found...

 

So I have to spend extra on employees, but can't take any of the fun deductions. And now I'm being told that I need to watch my spending on meals, and look at ROI for things like advertising. Is my bookkeeper just a kill-joy?

No, they just don't want you to go broke. Going bankrupt isn't just bad for you; it also means you can't pay your vendors (like your bookkeeper). So they have a vested interest in keeping you solvent.

Because, no matter what your business, one thing we all have in common is that we like to get paid.

Accountant Cat 5
Accountant Cat could lighten up if you'd stick to a budget.

How You Use ROI Every Day

For those who don't know, ROI stands for "return on investment". Colloquially, you might think of it as "bang for your buck". Though it's frequently used to describe investment decisions, ROI is something you use in your daily life. You go to the gym because the payoff of improved health has greater value than the time you put into it. You're getting a good return on that time invested.

You might even use ROI to compare two options. Let's say your goal is to lose fat, and there are two classes open when you go to the gym. You could go to an hour-long spin class, or an hour-long yoga class. Doing your research, you find that spin class burns 50% more calories, so you choose to go to that one, as it offers a better ROI.

Looking at it from a financial perspective, there's a very simple formula to calculate ROI.

Return on Investment = (Gain from Investment - Cost of Investment) / Cost of Investment

Now, when it comes to ROI in small business, people tend to think of it primarily in terms of sales and marketing. Before you run an ad or hire a marketing firm, you should be looking at whether the income you're likely to gain outweighs the amount you're about to spend. (For a more in-depth look at mistakes owners make in their marketing budget, see our prior article, Living a Lie: The mistakes that make entrepreneurs go broke.) If you are paying a marketing firm $10,000 a year and your sales only increase by $3,000, you're not making a good return on your investment. Likewise, if you hire a salesperson at base $45K + commission, and he only makes $15,000 in sales, he's probably not in the right position at your company. These are the sorts of obvious examples people think of when it comes to ROI in their business.

However, any business decision really comes down to a matter of ROI, and that is true for hiring an accountant, as well. We're constantly fighting the stereotype of accounting as a necessary evil, and one way to do that is to look at all the benefits that come with good bookkeeping and CFO.

First, of course, are the tax savings. Accurate books not only help you avoid an audit and costly penalties, but also aid you in tracking and recording every deduction for which you're eligible.

Second is saving on expenses. A good CFO service should be locating areas of overspending and helping you restructure to lower or even eliminate certain costs. (Actually, we tend to recommend you eliminate those expenses which don't produce a good ROI. See? It really does all come back to that.)

Third, we like investigate means of increasing revenue. This could be by introducing a new product or service line, acquiring another business, re-examining current pricing strategies, or even by locating and collecting on aged receivables.

To look at how The Bookkeeper does this from an ROI perspective, we save or earn our average client enough in our first year with them to pay our fees for 23 months. That's an almost 100% return on investment.

Finally, there are the benefits which are harder to quantify, primarily opportunity costs. What do you save in energy and stress by hiring someone to take over certain tasks for you?

This week, I challenge you to take a close look at your business, find what's paying off, find what's not, and do something about it.


FLSA Compliance: Three Distinctions to Understand in Classifying Workers

The Fair Labor Standards Act has been in the news a great deal, lately.  Multiple class-action lawsuits have been filed on behalf of unemployees who believe they have not been fairly compensated.

Many of these lawsuits have ended in either large settlements, or employers paying hefty fines and back wages.

To ensure that your business is in compliance with FLSA guidelines, understand the following three distinctions in classifying those who work for your business.

Who is a contractor and who is an employee?

Some employers have tried to lower their wages and tax liabilities by hiring independent contractors in place of employees.  This is an option so long as you follow the criteria for contractors.

Per the IRS's "common law rules", there are three categories assessed when judging whether a worker counts as an independent contractor.

Behavioral Control.  For an independent contractor, the business does not direct or control how their work is completed.

Financial Control.  If the business controls financial or business aspects of the worker's job (such as purchasing equipment, advertising the worker's services, etc.), the worker is an employee.

Type of Relationship.  Whether a worker is an independent contractor or an employee is determined by such aspects as the duration/permanency of the relationship, contracts describing the relationship, benefits provided to the worker, and whether the work performed is "a key aspect of the regular business of the company".

In addition to the IRS classifications, the U.S. Department of Labor provides their own "six-factor realities test" to determine whether a worker might be considered an independent contractor.

1.  Is the work an integral part of the employer's business?  This is similar to the language in the IRS rules regarding type of relationship.

2.  Does the worker's managerial skills affect their opportunity for profit or loss?  In other words, is the worker managing the business of the services they provide (for better or for worse) or is the employer directing that?

3.  Compare the worker's relative investment to the employer's relative investment.  If the business is providing the supplies, equipment, training, etc., the worker is likely an employee.

4.  Does the work require specialized skills and initiative?  Independent contractors are frequently professionals with specific skills over or in addition to those of the company's regular employees.

5.  Is the relationship permanent or indefinite?  Though they may work for the company for a very long period, contractors typically operate on a project-based or monthly contract.

6.  What is the nature and degree of employer control?  This correlates with the "behavioral control" aspect of the IRS common law rules.

Incorrectly classifying employees as contractors shifts tax burden to the workers, a misattribution which might later be remedied in court.

Of course, even if you only hire employees and no independent contractors, you still need to know...

Which employees qualify for exempt status?

"Exempt" employees are, essentially, those to whom you do not have to pay overtime.  (Specifically, they are legally classified as being excluded from the FLSA overtime rules.)  Non-exempt employees must be paid overtime in any period in which it is earned.  As might be surmised from the topic of this article, knowing the distinction is important.

Certain professions are essentially exempt by definition.  These are typically the classic "learned professions", such as doctors, lawyers, teachers, clergy, etc.  However, they can also include high-level administrative positions.  This does not mean that you can sit a secretary at the front desk for 60 hours a week and not pay him or her overtime wages.  To be considered high-level, administrative employees must be intensely involved in the running of the business, or in assisting executives to do so.  Think of a character like Pepper Potts from "Iron Man", who helps keep Stark Industries running by managing every aspect of Tony Starks's life.  She would qualify for exempt status.  (If you're not a fan of superhero movies, think of Emily Blunt's character in "The Devil Wears Prada".)

Excluding those jobs which are already considered exempt, there are three "tests" a position must pass to be considered exempt from overtime.

1.  The salary level test.  An employee must be compensated gross wages of $455 weekly ($23,600 annually) to be exempt.

2.  The salary basis test.  For any week in which any amount of work is performed, the employee is guaranteed a minimum amount.  (Typically, the weekly figure is calculated by dividing a contractually-guaranteed annual salary.)

3.  The duties test.  This is actually three tests in one, and is designed to protect employees from being labelled "managers" in order to deprive them of overtime wages.  For someone to be accurately considered an exempt supervisor:

a.)  He or she must supervise two or more other employees.

b.)  Management must be their primary duty.

c.)  He or she must have genuine input into the job status (hiring, firing, promoting, etc.) of other employees.

To give an example, a store cannot put someone in a "keyholder" position (where they might just be the "Manager on Duty" available to customers, but with no genuine managerial authority over other employees, and the majority of their duties not specific to managers) and then work them over 40 hours a week without overtime.

What if the worker in question is not a contractor nor an employee?  What if it's just a young person hanging around to learn the ropes?

For our third and final category, we are discussing...

When should interns be paid?

There have been several high-profile lawsuits recently regarding wage theft of unpaid interns.  Young people hoping to get a "foot in the door" in their industry of choice were instead worked ragged with no compensation.

Fortunately, the U.S. Department of Labor has provided a clear six-part set of standards to determine whether an unpaid internship is valid under the Fair Labor Standards Act.

1.  The internship must provide similar vocational training to an educational environment.  The internship should resemble an educational training program more than it does a job.

2.  The intern should be the primary beneficiary in the relationship.  In other words, the intern should receive more education and experience from the employer than the employer receives work out of the intern.

3.  If the intern is performing work for which the employer would have otherwise hired additional staff or required staff to work additional hours, the internship should be paid.  Again, the employer can't use an unpaid internship to get work performed without compensation.

4.  There should be no immediate benefit to the employer and the internship should be to the intern's interest.  The employer might even be temporarily inconvenienced by the internship.  However, under the ideals of an unpaid internship, it is presumed that the employer might recover long-term benefit from later hiring the intern as a well-trained employee, already familiar with company culture and procedures.

5.  An unpaid internship can come with no job guarantee.  This prevents employers from stringing along an intern for free work with the lure of future employment.

6.  Both parties understand that no wages will be paid.  An intern must be made aware from the beginning (before their first day at the internship) that this is not a paid position.


5 Things Business Owners Don't Realize They Need

We've all heard, "You don't know what you don't know."  This is particularly true in business, where it can be easy to develop tunnel vision and focus on your own expertise at the expense of the company.

Accepting the premise that you don't know what you don't know, we can extrapolate that you can't get what you don't realize you need.  Everyone knows they need sales avenues, customers, etc.  But there are other business essentials which, though not as well-known, are utterly necessary.  Here are five things businesses need (which you might not have thought of yet).

1. General Liability Insurance

It's no wonder that no one likes to think about getting insurance for their business.  Buying personal insurance, for your house, car, or health is enough of a hassle.  Getting quotes and comparing premiums and benefits for your business?  That's just piling on.

However, general liability insurance for your business is an absolute essential.  You can hope to never need it (I'm sure you're never planning to get sued) but, in the eventuality that you do, you will be grateful for it.  Depending on the nature of your business, Commercial Property Insurance might be a recommendation, as well.

2.  Workers' Compensation Coverage

Even more insurance!  Laws vary by state but, in North Carolina, you are required to carry Workers' Comp if you have three or more employees, or if you have at least one employee and your business works with radiation.  (If your business works with radiation, you'll definitely want those general liability and commercial property insurance policies, as well.)

Many employers try to avoid purchasing workers' compensation policies, but it is not a wise choice.  Not carrying coverage opens you up to charges of fraud, huge fines and, in some cases, even jail time.

Now let's move away from insurance and segue into something else that can protect you from being sued by employees or the government...

3.  A Good Payroll Provider

Unless your business is large enough for an in-house full-scale accounting department (in which case, we're flattered you're reading our blog), you need to be outsourcing your payroll.  Running payroll manually is intensely time-consuming, and very risky.  If you do not have a payroll expert on your staff, you are taking a big gamble with your tax withholdings and filings.  According to the IRS, 40% or small businesses pay an average of $845 per year for late or incorrect filings or payments.  (That's over a third of small businesses.)

Furthermore, outsourced payroll services have become ridiculously inexpensive and painless.  We at The Bookkeeper are huge fans of Gusto Payroll, and frequently recommend them to clients.  Their customer service is excellent, the interface is user-friendly (even for avowed Luddites), and packages start at less than $40 a month.  And Gusto is one of many simple, affordable payroll solutions.

Please, do not take on the headache and risk of penalities associated with payroll, without researching your provider options first.

And while we're on the subject of taxes...

4.  Sales & Use Tax

Who has to file sales and use tax?  According to the North Carolina Department of Revenue, "Every person engaged in the business of selling tangible personal property at retail, selling certain digital property at retail, renting or leasing taxable tangible personal property in this State, operating a laundry, dry cleaning plant or similar business, or operating a hotel, motel or similar business in this State must register with the Department and obtain a Certificate of Registration. This includes a person who sells tangible personal property and certain digital property, or provides a taxable service at a specialty market, flea market, fair, festival, sporting event, or another event or function."

Needless to say, there are many, many people who should be paying sales tax who aren't.  So if you are selling a tangible good, even if it's just from a booth at the fairgrounds on Saturdays, you should be filing sales and use tax.  And if you do not know to do so, contact someone who does.  If you are caught not paying sales tax, you may be assessed penaltyand interest.  The risk is simply not worth it.

Now that we've bummed everyone else by talking about insurance and taxes for four entries, let's move on to what's surely going to be the most controversial item on this list...

5.  A Website

In 2016, in order to maintain credibility, your business needs a website.  (No, a Facebook page doesn't count, though it's better than no web presence at all.)  A website (preferably with a unique, personally-owned URL, and not through a "freebie" site-building service) shows your customers and potential customers that you a legitimate, solid company.  Your website is the first place people will go to look for information about your business.  Not having any sort of web presence at all can read as very suspicious.

Furthermore, you are doing yourself a huge marketing disservice by not having a website.  Web marketing provides the absolute most "bang for your buck" out of any form of advertising.  Even if you have a successful business without a website, you could be reaching so many more potential customers and be more available to current customers.

Are there any other little-known business essentials you would add to this list?  Let us know, and we'll amend accordingly.


Resolutions for Your Books

The clock has struck midnight, and rung in a new year.  And you only have 105 days to get in shape.

Your books, that is.  April 15th is coming up fast, and you want your books to be looking goodwhen the big day rolls around.  Fortunately, there are many ways in which getting your books healthy is a lot like getting yourself healthy.  So, to help you keep a resolution for good accounting in the new year, we'll be comparing it to the most consistently popular New Year's resolution.

How to Clean Up Your Books in the New Year

1.  Make a plan.  A common first step to those seeking to lose weight is to get a gym membership.  Likewise, those who are serious about cleaning up their books should invest in some good accounting software.  It is also imperative that, if you haven't yet, you set up a chart of accounts and have separate bank accounts and credit cards for your personal and business finances.

2.  Smaller, frequent efforts are more beneficial than larger, infrequent efforts.  Going to the gym once a week for four hours isn't going to help you as much as going three times a week for one hour.  In fact, you're expending more energy for less results.  Bank reconciliations are similar.  Doing your reconciliations on a monthly basis is a huge, exhausting chore.  Doing reconciliations weekly or even daily is an easy, manageable routine which keeps your books in better shape.

3.  Follow your document "diet".  Yes, we'll go ahead and admit this point is a bit of a stretch.  (Extended metaphors are hard, guys.)  Would it help to say that receipts are the organic granola of accounting?  Anyway, just like a lot of people track their calories while attempting to lose or maintain weight, you should be tracking your purchases as well.  When tax-time arrives, those documents are a great asset for itemizing deductions.

4.  If it's too much to do alone, get help. Personal trainers make their living showing people how to work out, but they still can't do the exercise for them.  That's just one (of many) ways in which accountants are cooler than personal trainers.  A good accountant can do project work and help you get your books in order.  However, many business owners prefer to avoid the work entirely, entrusting an expert with keeping their books long-term.

Imagine how easy it would be to get in shape if you could just pay a trainer to go work out for you.  Just shows how much easier it is to take care of your financials.