The year-end payroll gauntlet is fast approaching. With the holiday season in full-swing, taxes around the corner, and fourth quarter payroll requirements looming, there is a lot of pressure on business owners to complete these tasks smoothly and accurately (especially since even simple mistakes may accrue fines and fees). If you’re looking for a simple guide to walk you through your year-end payroll responsibilities, we’ve got you covered.
We’ve broken down the year-end payroll process into 10 easy steps. This way you can close out your payroll and ensure that you file all of the proper tax forms on-time. To make things even easier for you, we’ve also created a printable Year-End Payroll Checklist so you can mark your progress.
Small Business Year-End Payroll Checklist (PDF)
You can print the Year-End Checklist now and use it to follow along, or you can jump right in.
How To Complete Year-End Payroll
Year-end payroll is all about balancing your books, ensuring you’ve paid people the right amount of money, and double-checking that you’ve sent the right amount of taxes to the government. By the end of January, employees should have access to a W-2 or 1099, which is a record of payment received and taxes paid. You will also need to submit wage and tax information to the Social Security Administration (SSA) and the Internal Revenue Service (IRS).
Payroll is a year-long process: keeping your records updated as you go throughout the year will help with any end of the year accounting and paperwork management. Even if you outsource payroll, there is information you should verify and deadlines you shouldn’t miss. (Also, now is the perfect time to review your company’s payroll choices. Anything you/employees want to change before the new year?)
As always, the exact process for your payroll processing is dependent on your state and industry, so use these steps as a guide and verify with an accounting or bookkeeping professional.
Step 1: Verify All Employee & Company Information
As the year winds down, you will need to ensure that all of the information for your company and employees are correct. First, verify that your company name, tax IDs, and company tax information is updated and accurate. Next, make sure that your employee information is up-to-date. For employees, check the following:
Employee’s name is spelled correctly
Correct Social Security Number
Updated/accurate employee addresses
Lived-in/worked-in jurisdictions
If you find any discrepancies between recorded information and accurate information, update your files and/or let your payroll service provider know of any changes.
Step 2: Verify Wages, Taxes, & Benefits
After you’ve checked and made sure all your employee and company information is accurate, the next step is to run through and verify that your wage, tax, and benefit numbers match up with your payroll numbers. Here’s what you’ll need to verify:
Yearly PTO accrual
Worker status (active, terminated, on leave)
Filing status (exempt or non-exempt)
Number of exemptions
Year-to-date wages and taxes
Pre-tax amountsÂ
Most of the information above is on an employee’s W-4 form. Employees can change their tax information with the government at any time, so this is where you may find and remedy discrepancies. Bonus: Many payroll software programs have reporting features that will do this work for you.
Step 3: Order Your W-2s
If you run payroll yourself or if you do not have a payroll provider that manages your W-2s, you will need to order paper forms from the Internal Revenue Service. A W-2 is a tax and wage statement for your employees. Contractors will receive a 1099 form. You can also file these forms online on the IRS website. Paper forms take 10 business days to mail, so plan ahead and order these in December.
Step 4: Manage Paid Time-Off
What is your company’s paid-time-off (PTO) policy? Do you offer PTO as a lump sum at the start of the year or does your PTO accrue as the year progresses? Will your employee’s PTO reset in January? What happens to the unused time?
Some states have mandates on whether or not a company can clear PTO, so check with your accountant or bookkeeper about the laws in your state. If you pay-out accrued PTO, you will need to manage that payment with the last paycheck of the year and keep a record of that payment for tax purposes.
Step 5: Decide On Bonuses
If you are awarding bonuses, those payments must go out with the last paycheck of the year. You will need to keep a record of bonuses given for tax purposes.
Step 6: Update Your Compliance Posters
In November or December, it’s important to order your new labor law posters for the upcoming year. These posters are federally mandated and expected to be displayed in a conspicuous place where all employees can read them. Failure to post updated labor law posters could result in fines, fees, or even labor lawsuits.
Step 7: Update Payroll Information
Before you run your first payroll of the new year, you will need to update your payroll information. That includes checking for new tax rates, making adjustments to employee information, balancing PTO, and tweaking yearly deductions.
Step 8: Deliver W-2s/1099s To Employees
Your employees need their W-2/1099 forms documenting their pay and taxes for their own tax filings. You have a legal responsibility to deliver pay and tax information to employees by January 31st.
Step 9: File Your W-2s/1099s
File all W-2s and 1099s with the Social Security Administration by January 31st. (You may also need to file W-2s with your state or county, depending on location and local tax laws.) In addition to each W-2, you will send a W-3 form; this form is needed for each employee and is a summary of the information on the W-2.
Step 10: File Tax Forms 941, Form 940, and Form 944
Forms, glorious forms! You will need to pay your federal unemployment tax (FUTA) from the fourth quarter with Form 940. You must also file federal income taxes and FICA (social security and medicare taxes) through Form 941. The last form (Form 944) is an annual return of all paid payroll taxes. All are due by January 31st.
Payroll Year End FAQS
Still have questions about closing the books? Here are the most popular year-end payroll questions. Don’t see your question? Leave a comment below.
What does year-end payroll mean?
Year-end payroll is about checking that the numbers to ensure your payroll reports add up to the money you’ve given and withheld during the calendar year. This is the last opportunity before you file your taxes and year-end forms to reconcile any discrepancies, change or update information, or adjust payroll choices for the new year.
What year-end payroll forms do businesses need to file?
So many forms. The good news is that many of the payroll software options available offer tax and year-end payroll support, and many of these forms can be filed online. (Always check with your accountant or bookkeeper about your specific state and industry requirements.) Here are the most important year-end payroll forms you will need to file:
W-2 Form: This form reports wages and withholdings to the IRS
W-3 Form: This is a summary of the information in the W-2s. This goes with employee W-2s to the Social Security Administration.
1099 MISC: This is a statement of income for contractors.
Form 1096: If you’ve paid any contractors and given them a 1099 MISC, you will need to summarize that payment information and submit it to the IRS with this form.
Form 940:Â This is the form needed to pay your Federal Unemployment Tax (FUTA) liability to the government.
Form 941:Â This form is due quarterly and reports employee payroll taxes collected for each quarter. Payroll taxes include federal income taxes, social security and Medicare taxes.
Form 944:Â If your payroll taxes are less than $1000 annually, you may qualify to pay these taxes yearly instead of quarterly. Small businesses that qualify will fill out a Form 944 instead.
Form 1095-B: If you offer health insurance, you will need to send this form to the IRS and to your employee to document that health coverage.
When does year-end payroll have to be submitted?
All the forms related to year-end payroll reports are due by January 31st to their respective locations.
What year-end tax forms do employers have to provide their employees and contractors?
Employers need to send their employees a copy of their W-2 and contractors a copy of their 1099-MISC. This accounts for wages paid and taxes withheld.
When do employers need to complete their employee W-2s?
All W-2s need to be filed with the social security administration with copies sent to employees by January 31st.
When do employers need to complete their contactor 1099-MISCs?
All 1099-MISC forms must be sent to the IRS with copies sent to those who received nonemployee compensation by January 31st.
Get Started With Our Year-End Payroll Checklist
Small Business Year-End Payroll Checklist (PDF)
It’s understandable if all the steps above feel overwhelming. It’s best to think about year-end payroll like this: This is when you account for the wages and taxes you’ve paid and withheld throughout the year.
As you look to settle books and wrap up your fourth quarter taxes, you might find that you’re interested in outsourcing the task next year, if you don’t already. Some payroll software companies like Gusto and Intuit offer tax services as part of their payroll programs. Whether you’re running payroll yourself or outsourcing, use our Merchant Maverick Year-End Payroll Checklist to get started, and check out our other great payroll and tax resources for more help running your small business.
What Can I Write Off As A Small Business Tax Deduction?
Everything You Need To Know About Small Business Payroll
What Are Payroll Taxes? And How Do You Calculate Them?
Small Business Accounting: How To Close The Books At The End Of The Year
The post Small Business Payroll: Your Complete Year-End Payroll Guide appeared first on Merchant Maverick.
In the restaurant industry, business owners are constantly looking for areas where they can potentially cut overhead costs or increase their turnover rate even slightly to maximize their profits. But reaching that goal is often much easier said than done. Fortunately for these owners, technological advances in the industry might just have a practical solution. One of the more recent trends in the point of sale industry has been to offer self-ordering kiosks. What started as a novel or niche idea just a few years ago has now spread to a large number of the top restaurant POS companies, making it a feature that you may not even realize you can implement affordably.
There are different types of self-ordering kiosks as well. Some allow customers to walk through the entire purchasing experience on their own, punching in their order, walking through automated modifiers, and eventually paying. If you don’t want to lose the personal touch from your employees entirely, you can also add on-table kiosks that can simply ease the burden from a server by automating the payment process or allowing customers to browse a digital menu.
X Must-Have Features To Look For In A Good Kiosk POS
Even if your POS system does offer kiosk hardware and software, it doesn’t necessarily mean it will be a good fit for your business. You’ll want to make sure that it has all of the functionality you’re looking for to make it worth actually implementing. Here’s a few features that POS systems can offer in kiosk mode that you may want to check out.
Menu Building
Designing an eye-popping menu that highlights your unique or profitable items can be a difficult task. Having a kiosk can show customers appealing photos of each item and allow individuals to click on various menu options to either view a description or ingredients. This can lead to an increase in impulse sales and free up employees. It can also save you money on printing and laminating when physical menus get destroyed or when the menu simply changes. With most systems, menus can be updated quickly with a few button pushes.
Menu Prompts
Along that same vein, when a customer is filling out his or her order, the system can quickly and efficiently walk them through various options and areas for up-selling. These prompts and modifiers can be easily added in most POS software and can lead to a decrease in ordering errors and a potential uptick in sales.
Loyalty
How many times have you been making a purchase and, as you were ready to pay, a representative asks you if you want to enter your phone number or email address to receive promotions? By this point, most customers are usually ready to be done with their transaction and don’t feel like spelling out their information. An automated system can also make this process easier, letting customers enter their own information that is then automatically stored for future marketing. In some instances, you can also incentivize customers to sign up for loyalty by offering an immediate or future discount on a purchase.
Variety Of Payment Options
This is one of the most important aspects to consider. Today’s customers will look to pay in a variety of ways and a lack of options at your kiosk could turn them away. At a minimum, you will want a system that can process magstrip and EMV chip cards. However, many systems will also accept other methods like Google Wallet or Apple Pay. If your business also utilizes gift cards, you’ll want to make sure that your kiosks are set up to accept those as well.
Barcode Scanner
This is somewhat more of a niche item but, for convenience stores or quick-service cafes, it can be a life-saver. Having a scanner that hooks up to your kiosk directly can allow customers to purchase self-serve or ready-made items by ringing them up themselves and paying for them in a matter of seconds.
Kitchen Display System Support
If you’re operating a larger full-service restaurant with a busy kitchen, having your kiosk directly sync to your KDS is a necessity. This will allow your cooks to see exactly when the orders were placed and they can view any special instructions or modifications that customers put in themselves. It also eliminates a potentially time-consuming step for your employees who would otherwise have to take down the order and then go to a separate station to send it to the kitchen.
Customer Notifications
To increase the the efficiency of your restaurant, kiosks can alert customers that their orders are ready either on an individual screen or by sending a text or email directly to a mobile device if wait times are longer. This is also a useful way to gather customer information for future marketing campaigns.
Tip Prompts
It’s a simple feature but one that can make a huge impact to your business’s bottom line. Simply being given a prompt to add gratuity is proven to increase profits across the board and is a simple, non-intrusive way to, we’ll say gently nudge, customers to reward your employees for their exemplary service.
Surprising Ways Your Restaurant Can Benefit From A Self-Ordering Kiosk Set-Up
Reduce Labor Costs
Obviously kiosks, either at the table or standing alone, can do a lot of the work that would otherwise fall to employees. Not only can this reduce the sheer number of employees you might need, it can also improve the efficiency of your employees on hand by taking some of the busy work off their plate. Kiosks can also mitigate against issues like unexpected rushes or having an employee who calls in sick at the last minute.
Increase Check Sizes
It’s easy to program in modifiers and prompts within a kiosk that will walk customers through up-sells and add-ons. This can be done in an intuitive fashion and in a way that doesn’t come across as pushy and customers feel as if they have more onus in their decisions.
Increase Overall Efficiency
While the addition of kiosks may seem impersonal, it can dramatically streamline your operations. With customers given the ability to send their orders at their own time, it eliminates those common occurrences where a server has to come back because a table hasn’t made its decision yet or stalls at one particular group of customers who take a long time to complete an order. Servers also don’t need to then make a separate trip to another station to fire an order to the kitchen. Instead, your employees can focus on making sure customers have everything they need.
Increase Order Accuracy
Along these same lines, having customers inputting their orders directly obviously eliminates the potential for server errors and will increase the likelihood that food comes out exactly to a customer’s specifications. This makes for an overall happier experience for customers who are then more likely to leave a hefty tip.
Disadvantages & Concerns When Using Restaurant Kiosks
Impersonal
Many restaurants pride themselves on their customer service and hands-on approach to their customers. Cutting back on the amount of face-time your hand-picked employees get with these customers might be seen as damaging to a restaurant’s brand.
Potential Confusion
If you end up with a kiosk system that isn’t extremely intuitive or has an interface that customers struggle with even slightly, it could defeat the kiosk’s purpose entirely. Having a server or other employee that is having to routinely walk customers through the ordering process can instantly eliminate any cost-saving benefits the kiosk could provide.
Customer ReluctanceÂ
While the world in general seems to be trending toward automation more and more, there is still a large part of the populace that might be turned off by using kiosks to order as opposed to speaking to a human employee. A recent poll from Upserve found that 78% of customers said they would be less likely to frequent a restaurant that utilized self-serve kiosks. No doubt this current trend will take some getting used to for some customers.
Cost
While we’ve already discussed how kiosks may help your restaurant cut down on labor costs in the long term, you’ll likely need to do some math up front to determine if the investment is going to be worth it. In short, kiosks aren’t exactly cheap and, if not utilized correctly, they could end up being more trouble than they’re worth.
The 5 Best Kiosk POS Systems For Restaurants & How To Afford Them
Now let’s get to our bread and butter… telling you which point of sale systems might be the bet for you if you’re in the market for self-serving kiosks. The following systems are all among our favorites at Merchant Maverick and excel when it comes to providing kiosk functionality.
TouchBistro
TouchBistro is a hybrid system best-suited for small to mid-sized restaurants and other food-service businesses. In many ways, TouchBistro has always been on the cutting edge of POS technology with strong mobile ordering functionality and a sleek designed catered specifically to make the lives of servers easy. It also was early on the scene with an automated kiosk system.
TouchBistro’s system comes with customizable branding and an easy-to-use interface that can feature pictures and descriptions of your restaurant’s products. The kiosk supports all types of payments, including Apple Pay and Android Pay and syncs with TouchBistro’s Kitchen Display System as well for restaurants. As you would guess, the kiosk also walks customers through add-ons and combos and lays out prices and options in an easily digestible format.
Toast POS
Toast is an excellent POS company that is Android based and prides itself on usability and its outstanding customer service. The all-in-one system is ideal for pretty much any type of food-service establishment and has one of the better tableside ordering systems in the industry. The system is feature-rich but does charge extra for some of its services like loyalty and online ordering.
Toast’s kiosk system feature’s Toast’s trademark simple interface and offers convenient order notifications directly to phone or email, eliminating the need for buzzers. Like TouchBistro, you can also customize your screen, displaying your menu items. Toast comes with a convenient scanner integration as well for establishments with quick scan and go items and Toast kiosk also syncs directly to a KDS.
Upserve POS
Upserve is a cloud-based system that can handle any-sized food service establishment. Upserve features extensive menu building. It has a robust feature set, including strong inventory management and reporting and a simple, customizable interface. It also has strong tableside ordering functionality and a convenient Upserve Live function that allows managers to check on sales in real time from anywhere on an iPhone.
Upserve makes Bite Kiosk available and come with a unique algorithm that takes user data to help predict future customer behavior, allowing it to make suggestions and up-sell items automatically. It integrates seamlessly with Upserve, allowing for easy menu and pricing updates. It also syncs with Upserve’s loyalty program and, when purchasing, there are discounts for orders of 10 or more units.
Revel Systems
Revel is an extremely robust hybrid system that can fit with nearly any sized restaurant or retail establishment. The iOS based system has an extremely generous back end with inventory that can handle more than 500,000 SKUs and a wide variety of reports. It offers a wide variety of ordering options and has its own delivery management system plus a impressive array of integrations.
Revel also is available with an intuitive kiosk mode. You can easily sync your loyalty program to the kiosk, allowing customers to easily look up past orders or simply make a repeat order. It also comes with the ability to take gift cards as payment. Orders are directly sent to Revel’s KDS. The interface also make it easy to browse menu items or retail inventory.
Lightspeed Restaurant
Lightspeed Restaurant is a cloud-based system designed specifically for small to mid-sized establishments but with the capacity to handle larger businesses as well. Lightspeed has a slick interface and syncs with things like mobile ordering and ecommerce plus an excellent employee management system. It also offers a convenient pricing structure, making sure you aren’t charged for features you aren’t using.
Lightspeed makes it easy to switch on its kiosk mode and conveniently walks customers through the ordering process with potential ares for up-selling and modifiers. The menu automatically syncs up with kiosk mode, making changes simple. You can also create your own payment methods, allowing customers to either pay up front or wait until after their meal.
How Small Businesses Can Afford to Invest In Kiosk POS Systems
Whether you’re interested in large, standalone kiosks or individual table kiosks, the cost can add up quickly. There are a few payment options and most companies will allow you to lease their hardware which can bring down the initial price. However, the long-term cost of leasing these systems is almost never a good idea. Buying the hardware outright ultimately saves you money but that still doesn’t solve the problem of needing cash initially when things might be tight. Fortunately, you have some options.
As a small business owner, you have some flexibility when it comes to receiving a loan. You can apply for an alternative small business loan, which can provide you with cash quickly and can be a good option if you have less than stellar credit or aren’t bringing in much money. These loans can get you the cash you need but can also have somewhat high interest rates.
There are other small business loans that you can look into as well each with slightly different terms. Loans for fledgling restaurateurs are sometimes difficult to land as the industry is viewed as risky. However, if you have a well-designed business plan, the right documents in order, and a good sense of your finances, you can dramatically increase your chances at approval. And, if you’ve run the numbers correctly and can bring down your costs by implementing kiosks, you may be able to pay off the loan quickly.
Are You Ready To Make The Jump To A Restaurant Kiosk POS System?
So hopefully you have a good sense of what kiosk systems are and what potential benefits they could provide for your business. If used properly, self-ordering systems can dramatically bring down your labor costs, increase efficiency and keep your customers happy by speeding up orders and cutting down on errors. It’s also a trend that may become the norm in the restaurant industry sooner than later.
However, that doesn’t mean that there aren’t inherent risks in making that switch. Upfront costs need to be a heavy consideration along with your customer base and your restaurant’s brand. If you rely heavily on your servers for their unique brand of customer service or have a clientele that may be wary of a more automated ordering process, it may not be worth the risk.
As a final thought, keep in mind that, if don’t immediately have the cash on hand to purchase a handful of self-ordering kiosks, you have options there as well with numerous small business loans that may be at your disposal. As with anything, do your research, crunch your numbers, and don’t hesitate to ask questions when making this important decision.
The post Why You Should Consider A Self-Ordering Kiosk For Your Restaurant (Plus The 5 Best Kiosk POS Systems & How You Can Afford Them) appeared first on Merchant Maverick.
It’s certainly not uncommon for nonprofits to struggle with funding, but grants can help alleviate woes in that department. In fact, grants are one of the best tools nonprofits can employ to build their funding profiles. It’s hard to argue with free money!
However, it isn’t always easy to find a grant that matches up with your organization’s specific mission. Don’t waste your time trying to sort the wheat from the chaff. At Merchant Maverick, we’ve spent hours researching nonprofit grants so you don’t have to. Hopefully, this post will provide a huge jump-start to your grant-hunting process.
Read on through to find out where to look for your next nonprofit grant!
How To Find Grants For Your Nonprofit
Nonprofit grants aren’t exactly quick to spot, but there are still plenty around if you know where to look. This list primarily covers online sources, but it doesn’t hurt to ask around with those you know in-person.
Note that in some cases, grants are specific to only certain industries. This means that your organization won’t qualify for every grant out there. However, with the right amount of research and dedication, you still should be able to find someone willing to help you out!
All told, you’ll want to find grant organizations that align with your mission and care about the public you serve. Additionally, it may be helpful to focus on local funders (or if you find a funder outside your area, it may help if they’ve already funded organizations within your local community).
When it comes to grants, keep a realistic mindset. Grants may be able to help out a bit when it comes to funding, but don’t expect grants to singularly solve your organization’s funding situation. On top of that, grants aren’t always easy to land. In many cases, you’ll be competing against numerous other organizations for a limited number of slots.
7 Places To Look For For Nonprofit Grants
We’ve combed through the web to come up with seven of our favorite places to find nonprofit grants. Check out our selection below:
1) Grants.gov
This federally-run online database is a great option for US-based nonprofits. There are many wide-ranging grants listed in the Grants.gov database. Grants here focus on a variety of categories, including health, education, income security, nutrition, and more.
Grants.gov is free to use and also offers an app for both the iOS and Google Play app stores. You can additionally sign up for the service’s daily or weekly mailing list to get frequent updates on government grants.
2) Local Resources
Many state and city governments offer grants for local nonprofits. To track down these grants, you should start by looking on your local government’s website. If that fails, it doesn’t hurt to reach out to the appropriate government branch for your organization’s industry to see if they offer grants.
Additionally, you may be able to find local associations made up of grant funders. Finding such an association could be quite beneficial because these funders may be more eager to work with nearby organizations.
Sometimes, local governments or funder associations will only have grants available in a select few industries, while others may have a wider range. The grants that are available to you will depend on your location.
3) Candid
Recently founded after the Foundation Center and GuideStar merged, Candid offers a free database with access to over 100,000 US-based funders through its Foundation Directory Online Quick Start. If you need deeper coverage, Candid also provides paid plans that include more in-depth funder profiles, as wells as recipient details and info on key decision-makers.
Like Grants.org, Candid offers an email news digest. You can sign-up on Candid’s website and get several newsletters delivered to your email inbox weekly.
4) Grant Gopher
Grant Gopher is another grantmaker database. Its free plan allows for basic searching of US-located funders, while paid plans allow for more robust search tools and email alerts.
This service is overall simple and easy-to-use. However, do note that you’ll need to register for a (free) account before you start searching the Gran Gopher database.
5) GrantWatch
Our third general grantmaker aggregation engine on this list, GrantWatch allows users to search for funders that match with their needs. Unlike the above two aggregators, however, this database requires a paid plan to do even a basic search (pricing starts at $18 a week with discounts if you pay monthly, quarterly, or annually).
This service digs up grants that fit community-based and faith-based organizations, hospitals, government agencies, research institutions, schools, and universities. There are also some grants available for small businesses and individuals.
6) Google
Using Google — or your favorite search engine — could be another great way to find grants in your industry. By simply searching for your industry’s name plus “grants” (and possibly also your local city’s or state’s name), you may be able to find a plethora of grants that aren’t easily accessible in the other databases listed here.
It’s also worth noting that Google enables you to receive email alerts about the search topic of your choosing. All you need to do is head over to Google Alerts, plug your desired search string into the text box, and press “Create Alert”. You can choose to receive alerts as-they-happen, up to once a day, or up to once a week.
7) Your Board Members
It never hurts to ask your board members if they know of any available grants. It’s possible some may be connected with an appropriate funding source and could make an introduction.
To start this process, you’ll want to attend a board meeting and inform the members that you’re looking for grants that closely match up with your organization’s mission. Be sure to inquire if they have any potential contacts, from family foundations to corporate foundations to other funders that could help the organization out.
Final Thoughts
Hopefully, this list can get you started on the search for your nonprofit’s next grant. As mentioned above, finding the perfect grant may not solve your organization’s funding situation, but it can still help out your bottom line. By utilizing the above tools, you should be able to come up with at least a few solutions for your organization to target.
Comment below if you know of more grant-finding resources worth sharing. Or, if you want to learn more about grants, check out this article on startup grants, or this one on small business grants.
The post Find The Next Grant For Your Nonprofit Through One Of These 7 Resources appeared first on Merchant Maverick.
It’s that time of year again — time for holiday parties, sparking lights and decorations, and gifts under the tree. As a small business owner, the holidays can add even more to your already full plate (and no, we’re not talking about your big family dinner). One of the most wonderful times of the year can quickly become one of the most dreaded for small business owners and entrepreneurs because of one little phrase: year-end accounting.
Despite being a hassle, though, year-end accounting serves several important functions. The year-end accounting process helps you prepare for tax time. You’ll also run critical financial reports that give you a clear picture of the financial health of your business. This helps you determine any action you need to take in the future to stay on track, boost your profits, or hit other company-wide goals.
Every business owner needs to do their year-end accounting. The good news, however, is that there are steps you can take to simplify the process. Some of these steps can be done at the end of your company’s calendar or fiscal year, while other steps are performed on an ongoing basis. Integrate these tips into your accounting workflow to save time, avoid overlooking errors, and be prepared for your year-end accounting process.
Use Accounting Software
If your business isn’t already using accounting software, what are you waiting for? Today’s accounting software allows you to keep your transactions organized and automates processes such as reconciling bank accounts or sending payment reminders. Depending on the software you choose, you’ll have access to a variety of accounting features that can help you throughout the year … and at the end of the year. This includes invoicing, estimates, expense tracking, inventory management, and time tracking. Your accounting software also allows you to run important financial reports needed for year-end accounting. If you’re new to accounting, don’t worry — most software is easy enough for anyone to use, even if you didn’t major in accounting! (If you don’t believe us, check out our top easy accounting programs.)
The software you choose should fit the needs of your business. For example, if you operate a small business with a handful of clients and only need basic features like invoicing and reporting, free accounting software may work for you. If you have a larger business with more extensive accounting needs, there are plenty of paid options available that offer additional features at an affordable price.
As the end of the year approaches, selecting and learning how to use your new accounting software can be a burden to a busy business owner. If your end-of-year to-do list is too long to add a new task, take some time to at least explore your options so you can have a fresh start for the new year.
Regularly Invoice Customers
Regularly invoicing your customers is necessary for a number of reasons. Not only does this help improve the cash flow of your business, but it also saves time with year-end accounting. In other words, don’t wait until the last minute to invoice your customers — make life (and year-end accounting) easier by invoicing your customers throughout the year.
The same holds true for invoice reminders. Your customers and clients get busy, too, and can easily overlook an invoice. Sending out payment reminders helps you get paid faster, improving your cash flow and reducing the number of unpaid invoices you have to deal with at the end of the year.
Your invoicing software or accounting software makes it easy to send invoices and payment reminders, as well as receive payments from your customers. Of course, features vary based on the software your business uses, but many programs offer recurring invoices and automated payment reminders that help you get paid faster with less work on your end.
Keep Track Of Your Income & Expenses Throughout The Year
For a business owner, there are few things more stressful than shuffling through receipts, invoices, and bank statements to get your finances in order. Not only does waiting until the last minute create more work for you (or your bookkeeper), but rushing through makes it easier to miss errors that can affect everything from your financial statements to filing your taxes. Don’t wait to track your income and expenses. Simplify your year-end accounting by tracking income and expenses throughout the year.
You can track your income and expenses through your accounting software. At a minimum, you should include the date of the payment, the amount of the payment, and the payor or payee. For further organization, you may even break down your income streams and expenses into categories if this is an option in your accounting software.
Like many of the other steps in this article, the benefit of tracking your income and expenses is two-fold: it simplifies your year-end accounting and also allows you (or your accountant) to more easily find tax-deductible expenses.
Reconcile Your Bank Accounts Every Month
Accounting is all about balance, and reconciling your bank accounts can help ensure you maintain that balance. To put it simply, reconciling your accounts means that you compare documentation (such as invoices or bills) to ensure they match the transactions in your bank accounts. Sound difficult? Not to worry — your accounting software can come to your rescue again.
Sure, you could sit down and manually compare your bank statements with your bills, receipts, and invoices … or you could let the software do the work for you. Many programs offer a reconciliation feature that lets you securely connect to your business bank accounts. The information is compared to transactions that have been input into your software. If the numbers don’t match up, you know that there’s an error somewhere in your accounting — maybe you forgot to enter an expense, for example. Bank reconciliation goes beyond just user error; it is also a way to detect bank errors or even fraudulent activity.
Reconciling your bank accounts should be a regular bookkeeping task that your business performs at least once per month. Balancing the books and detecting errors on a regular basis is far easier and less time-consuming than waiting until it’s time to do your year-end accounting. Plus, if you notice an error at the end of the yar, it may be too late to set it right.
Separate All Personal & Business Expenses
In a perfect world, all small business owners would have their personal and business expenses separated by using different bank accounts. Unfortunately, this isn’t the case for all businesses. If you use one bank account for personal and business expenses, those will need to be separated as part of your year-end accounting process.
Why separate your expenses? Two words: IRS audits. If the IRS has reason to believe that you’re writing off personal expenses as part of your business, you could be audited. And if you don’t have your finances in order, you’ll find it more difficult to get through this audit, potentially paying more money due to poor record-keeping.
Fortunately, some accounting software provides easy, hassle-free options for separating your expenses. If you don’t have separate bank accounts, look for a program that offers this feature, such as Wave. You should also consider opening a business bank account for improved organization heading into the new year.
Count Your Inventory At The Beginning Of The Year
While your accounting software may have an inventory tracking feature, you should never skip over manually counting your inventory. By counting your inventory, you can verify that the data in your software is correct. Your inventory at the beginning of the year should match the closing inventory from the previous year. Counting your inventory is also a way to calculate the cost of goods sold, and is required for several tax forms.
There may be discrepancies in your accounting software and your manual count. This isn’t uncommon and could be due to a number of reasons, such as broken products or items that were stolen. Identifying these discrepancies keeps your books accurate and prevents interruptions to your business, such as unexpectedly running out of stock.
You may also find that you need to clear out some stock as you head into a new year. Products that are obsolete or aren’t selling, for example, can be sold at a reduced price or even donated, which may qualify as an additional tax deduction. Need more year-end sales advice? Check out our top holiday sales tips.
One thing to note is that your inventory should be counted on a day that your business is closed. Products should not be shipped or sold until the inventory is counted and reconciled in your accounting software to ensure accurate counts.
Run Year-End Reports
Running financial reports is a critical step in year-end accounting. These reports give you a clear picture of how your business is doing financially. These reports are also used when filing your tax return. In addition to showing how your business performed through the year, you can also use these reports to set budgets and goals for the year ahead.
There are a few reports that you should always run at the end of each year. These include:
Profit & Loss Statement: A summary of costs, expenses, and revenues that show whether the business operated at a profit or a loss.
Balance Sheet:Â Summarizes the company’s assets, liabilities, and equity.
Expense Report:Â A report that tracks expenses necessary for business operations, including reimbursable travel expenses of employees.
Mileage Log:Â A report that reflects the beginning and ending mileage on a vehicle used for business purposes.
Payroll Summary:Â Summarizes data for paid employees, including wages, taxes, and deductions.
Sales Tax Summary:Â A summary of the sales tax you have collected, as well as sales tax you have paid toward your expenses.
You may opt to run additional reports to have a more comprehensive view of the financial state of your business, such as a Statement of Cash Flows or Sales By Item. You should also consult with your accountant to find out about other reports that may be required for filing your tax return.
Most accounting software allows you to easily run at least basic reports, such as P&L Statements and Balance Sheets. For more advanced reporting, a software upgrade may be required. Always make sure to check each report for accuracy. Once you’ve confirmed that your reports are accurate, it’s time to analyze your business performance. Did you meet your financial goals? Are there areas for improvement? Use this data to set a budget and financial goals for your business for the year ahead.
Take Care Of Year-End Payroll
As the end of the year approaches, you can tackle year-end payroll tasks. While some tasks are better reserved for the month of December, you can actually get a jump on completing these tasks by starting in October or November.
To get started, first verify that your company information, such as tax ID numbers and mailing address, are accurate. Next, verify the information of your employees and contractors. This includes taxes, wages, Social Security number or Tax ID, filing status, and mailing address. If information is incorrect, an employee or contractor should review and submit an updated W-9 or W-4.
Also make sure that you prepare in advance for payroll periods that fall during the holidays so there isn’t a delay in payments. In December, you can also run payroll for employee bonuses and make any necessary adjustments.
The Payroll Summary that was mentioned in the previous section should be used to verify that all information is correct. Once you’ve confirmed that all employee information and payroll summary data is correct, you can gather the documents you need to send out 1099-MISC forms and/or W-2s in January. If your payroll processor or accountant will be sending out these tax forms, make sure that everything is in order and you have all required documentation in order to have the forms prepared and mailed out prior to the deadline.
Lock Your Closing Periods
Once you’ve completed your year-end accounting, it’s time to lock your closing periods — or close the books. Once you’ve locked your closing periods, you will be unable to add or make changes, so make sure that you’ve completed all of the necessary steps of year-end accounting before closing your books. Many accounting programs allow you to lock closing periods quite easily just by selecting a date.
If you did find that you made an error, all hope isn’t completely lost. Some software, such as QuickBooks Pro, allows you to set a password that can be used to add, remove, or update transactions.
Start Fresh In The New Year
This all may seem a bit overwhelming, but it’s worth it to have a fresh start for the new year. You’ll be ready for tax time, have new goals in mind for your business, and have a better understanding of your company’s current financial situation.
While some of these steps may be time-consuming (I’m looking at you, inventory counting), knowing what needs to be done and tackling tasks throughout the year will save time and help ease the stress that comes with year-end accounting. Good luck!
The post Simplify Your Small Businessâs Year-End Accounting With These 9 Easy Tips appeared first on Merchant Maverick.
You’ve done it. You’ve come up with a business idea, you’ve drafted your business plan, and you’ve started estimating costs and seeking funding to get your small business off the ground.
Or maybe you’re further along in the process. You’ve launched your business, and you’re working hard to ensure it’s a success. Good for you!
But wait … are you sure you’ve thought about all the key components of running a profitable business? For example, have you thought about how you’re going to do the accounting for your new business? If your doors are already open, do you have an accounting system in place?
If your answer is no, this article is for you. While it’s important to create a business plan, shop around for vendors and suppliers, and deliver exceptional products or services to customers, few things are more important than accounting for your business. Without good accounting, you’re putting your business at risk of failure by not keeping a close watch on your financials.
As a new business owner, you already have a lot of expenses that can pile up quickly. Adding an accountant to the mix just isn’t feasible for most businesses in their beginning stages. Fortunately, there are options available that make accounting simple … and are easy on the wallet. In this post, we’re going to talk about small business accounting. We’ll start off with the basics, then take a step-by-step look at how to use accounting in your business. We’ll explore accounting software options, the financial statements your business needs, and the tax deductions that can save you money come tax time.
Whether you’re a new business owner or haven’t gotten off the ground yet, whether you know a little about accounting or you’re completely in the dark, you’re in the right place. Welcome to Accounting 101.
What Is Accounting?
Merriam-Webster defines accounting as:
The system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.
In other words, accounting is a process used by business owners and entrepreneurs to keep track of the financial transactions of a business, from purchasing supplies and inventory to the revenue that the business makes. Accounting allows you to analyze the financial health of your business to determine where money is being spent, how money is being made, and how these numbers affect the business.
The Basics Of Accounting
Whether you’ve dabbled in accounting in the past or you’re brand new to it, every business owner should have an understanding of the basics of accounting. These concepts may be very new to you or seem confusing at first. However, take the time to learn them so that you can tackle your company’s finances head-on and reap the benefits of good accounting.
The Accounting Equation
We can’t discuss the fundamentals of accounting without first discussing the accounting equation. Knowing and understanding this principle is essential for double-entry accounting, which we’ll discuss a little later. For now, though, let’s familiarize ourselves with this basic equation.
The accounting equation states that:
Assets
=
Liabilities
+
Owner’s Equity
Now, let’s break down each of these terms to ensure that you have a full understanding of the accounting equation.
Assets: Assets are everything that your business owns. This includes the cash in your business bank accounts, commercial real estate, equipment, inventory, and accounts receivable.
Liabilities: Liabilities include everything that your business owes. This includes accounts payable, loans, and other debts.
Owner’s Equity: Owner’s Equity (also known as shareholder’s capital) includes all investments of capital by the owners of the business.
The accounting equation keeps everything in balance. Each side must be balanced. If each side isn’t balanced, there is an error that must be found and corrected.
The Importance Of Double-Entry Accounting
Many businesses use what is known as double-entry accounting. Double-entry accounting simply means that transactions are recorded to two or more accounts. This system of accounting provides more accuracy and helps keep your books balanced. The accounting equation we discussed earlier is the foundation of double-entry accounting.
Double-entry accounting gives you a better view of your business finances. Single-entry accounting only uses income and expenses, whereas liabilities and assets are recorded using double-entry accounting. Not only does double-entry accounting give you a better understanding of the net worth of your business, but it offers additional benefits. Double-entry accounting makes it easier to spot errors and also comes in handy when it’s time to run financial reports.
This is a very basic overview of double-entry accounting. To learn more about how it works and why your business should use double-entry accounting, check out our post, What Is Double-Entry Accounting (And Do You Need It)?
Debits & Credits
In double-entry accounting, transactions are recorded as debits or credits.
You’re probably already familiar with debits and credits if you use a debit card from your bank or a credit card. That said, you’ll need to forget everything you think you know when learning accounting, because these concepts are completely different.
If this sounds like a foreign language to you, don’t worry. Let’s break it down so it’s easier to understand.
Debits: A debit increases assets and expenses and decreases liabilities.
Credits: A credit decreases assets and expenses and increases liabilities.
Total debits must equal total credits or there is an error that needs to be found and corrected. Remember, it’s all about balance.
Let’s take a look at an example. Say your business has purchased a piece of equipment at a cost of $15,000. You borrowed the money to purchase the equipment. Because you gained an asset, this is recorded as a debit of $15,000. However, you have to pay back the money you borrowed, which creates a liability. Therefore, you will record a credit of $15,000 under accounts payable (liabilities).
Account
Debits
Credits
Equipment
15,000
Accounts Payable
15,000
Totals Debits = $15,000 Total Credits = $15,000 â
Both sides are equal and balanced.
Debits and credits are not used in single-entry accounting. While it may seem easier to simply skip this and forego double-entry accounting, remember the benefits that we discussed earlier. Using double-entry accounting gives your business a clearer, more complete view of your finances. And before you get too worried, most accounting software handles the double-entry accounting for you behind the scenes, so you won’t have to do everything manually.
Ultimately, understanding these concepts may be difficult, but you’ll find that the benefits of balanced books are well worth the effort.
Journal Entries
An important piece of the accounting pie is the general journal. This is where all business transactions are recorded in order by date. Each journal entry should include four things. Those are:
The date of the transaction
The account(s) and amount(s) credited
The account(s) and amount(s) debited
A memo describing the transaction
When recording a journal entry, debits are recorded in the left column, while credits are recorded in the right column. Each side will be balanced, meaning that the total amount of debits on the left should equal the total credits on the right. Let’s look at a quick example.
You purchase $500 worth of inventory for your business. This inventory was purchased with cash. You have inventory (an asset) in your possession, so $500 is recorded in the left column of the journal since this is a debit. Because you paid with cash, your cash account is decreased by $500. Therefore, a credit in the amount of $500 is posted in the right column.
The Chart Of Accounts
Another key accounting concept to remember is the chart of accounts. A chart of accounts lets you see exactly where your company’s money is going. While it may seem confusing initially, understanding how a chart of accounts is organized helps the numbers make sense.
While we won’t dive too deeply into this concept, you should walk away from this article with a basic understanding of what a chart of accounts is. Typically, a chart of accounts is divided into five sections: assets, liabilities, equity, income, and expenses. These categories are further divided into accounts, such as utilities, advertising, accounts payable, cash, and materials and supplies.
Here’s an example of what a chart of accounts looks like:
Your chart of accounts is important for a number of reasons. In addition to breaking down your expenses, your chart of accounts helps you have a clear picture of where your money is going to and coming from. Your chart of accounts also helps you track inventory and can be extremely beneficial come tax time. If you remember our journal entry example from earlier we spent $500 cash on inventory, you’ll see this reflected in the chart of accounts above where the “cash on hands” account reads -$500.
To learn more about this accounting concept, check out our post, How To Set Up A Chart Of Accounts.
Now, let’s pause, take a breath, and let all of this information sink in. Understanding these concepts and key accounting terms certainly helps you dive into your company’s accounting with more confidence. Rest assured, however, that you don’t have to know everything about accounting to balance your own books. Gone are the old days of paper journals and ledgers and manually writing down every transaction. Today, there are lots of accounting software options available. While you do have to learn how to use your chosen software and may still have to do some tasks manually, accounting software does a lot of the heavy lifting for you, from automatically posting transactions from your business bank accounts to calculating depreciation on assets to sending out recurring invoices.
How To Do Small Business Accounting
With an understanding of basic accounting concepts under your belt, it’s time to put that knowledge into practice. From the first steps you need to take before launching your business to picking the right software for your business to hiring an accountant, we’ll cover it all in this section.
Set Up Your Business Entity
Before you start your business, you must set up your business entity. This determines your legal structure and influences how you file and pay taxes, your personal liability for the debts and liabilities of the business, how you can raise money for your business, and various requirements that your business must meet. Consider the needs of your business and future goals when selecting your legal structure. The main business entities include:
Sole Proprietorships:Â A sole proprietorship is an unincorporated business that is owned and operated by one person. This is the easiest entity to set up and does not require formal registration. Business profits or losses are reported on the owner’s personal income tax return. A sole proprietor is held liable for the debts and obligations of the business.
Partnerships:Â Partnerships are legal structures for businesses with two or more owners. Formal registration is not required to form a partnership, although there should be an agreement between partners. Business profits and losses are passed through to the owners and filed on their personal income tax returns. The owners in a partnership may be responsible for the debts and obligations of the business based upon the type of partnership that has been formed.
Corporations:Â Corporations are the most expensive and complicated of all legal entities. Corporations have regulations that other legal structures don’t have, such as establishing bylaws and holding meetings. Corporations may also be subject to corporate tax rates and may face double taxation. However, there is limited liability on the owners, and corporations also have more opportunities for raising large amounts of capital through the sale of stock.
Limited Liability Company:Â A limited liability company (or LLC) combines the benefits of multiple entities. Owners of LLCs have limited liability, so personal assets aren’t at risk if the business goes under. The owners of the LLC can also determine how business revenue is taxed.
Check out our post, Types of Business Structures: The Complete Guide, to learn more about the different business entities, and consider speaking to an attorney to determine which choice is best for your business.
In addition to setting up your business entity, there are a few other steps you need to take in these early stages. The first is selecting a name for your business. As a sole proprietor, you aren’t required to register your business if you’re using your own name. However, some small business owners opt to file a Doing Business As, or DBA. A DBA is a fictitious name that is registered with the county or state where the business will operate. If you select another legal structure, such as an LLC or corporation, you’ll register your business name when you file other paperwork with state and local authorities.
The next step is obtaining any licenses and permits required to legally operate your business. Your local chamber of commerce or Small Business Administration office can help you find out what your business needs and how to obtain these licenses and permits.
If you plan to hire employees for your business, you will need to obtain an Employer Identification Number (EIN). This is available at no cost by registering with the Internal Revenue Service.
Other steps that you may need to take before opening your business may include purchasing business insurance, hiring employees, buying or leasing commercial space, and advertising your business to bring in customers.
Open A Business Bank Account
When you start your own business, you need a business bank account. This should always be one of the first steps you take before launching your business. However, if you’ve already gotten your business off the ground and don’t have a separate account, it isn’t too late to head to your local branch to open a business account.
There are a few reasons why opening a separate bank account is so important for your business. First of all, it simplifies bookkeeping and filing taxes. You won’t have to pick apart every transaction to determine which ones were personal and which were for business purposes.
Speaking of taxes, keeping a separate business bank account could prove to be extremely helpful in the event that you’re audited by the IRS. Sloppy bookkeeping and jumbled expenses could very easily turn a simple audit into a drawn-out nightmare.
Finally, if you plan to apply for any type of business funding, such as loans or lines of credit, a lender typically only deposits funds into a business bank account. By opening a business bank account, you also establish a relationship with a bank, which could provide you with low-interest funding further down the road.
Choose Your Accounting Method
Now, if accounting didn’t seem confusing enough, we’re about to throw another curveball your way. There are actually two different methods of accounting. Before you get frustrated, though, just know that the two types are very easy to understand and differentiate from each other.
The first (and most common) method is accrual accounting. Accrual accounting recognizes revenue and expenses or sales or bills are incurred, not when the cash switches hands. With this type of accounting, accounts payable and accounts receivable are recorded.
Accounts Payable: Expenses that you owe but haven’t yet paid (think bills).
Accounts Receivable: Revenue that your customers owe but haven’t yet paid (think invoices).
Let’s take a look at an easy example. Let’s say that you’ve received $5,000 in payments from your customers and $1,000 in outstanding invoices. You also have paid bills totaling $500 and $100 in unpaid bills.
Using the accrual method, your total profit for this time period would be $5,400. You would add the revenue you have received ($5,000) plus your accounts receivable ($1,000). Then, you would subtract your expenses ($500) and your accounts payable ($100) because your accounts receivable (unpaid invoices) and accounts payable (unpaid bills) are already recognized as part of your profit/loss.
The benefit of using the accrual accounting method is that it gives you a clear view of your income and expenses. On the flip side, though, it doesn’t give you a clear picture of the cash flow of your business. While your books may show that you have earned a bigger profit, you might not have as much available cash because of unpaid invoices.
The other method that you may use for your business is cash basis accounting (or simply cash accounting). Cash basis accounting recognizes revenue and expenses when cash changes hands. This method does not use accounts receivable or accounts payable. Instead, only revenue that has been received and expenses that have been paid are calculated.
Let’s go back to the previous example. Remember, we have $5,000 in revenue, $1,000 that we haven’t yet received, $500 in expenses, and $100 that we owe. Using the cash method, your total profit would be $4,500. You would simply subtract your expenses that have been paid ($500) from the revenue that your business has received ($5,000) because cash basis accounting does not include your accounts receivable (unpaid invoices) or accounts payable (unpaid bills).
The benefit of using the cash basis accounting method is that you can more easily track your cash flow at any time. However, you won’t get the longer-term overview of your revenue and expenses through the accrual method and most accountants do not recommend this form of accounting.
There are some other differences between the two methods of accounting, such as how income is reported for tax purposes, but this is just a basic overview. If you want to learn more to help you decide which method is right for your business, check out our post, Cash VS Accrual Method: Which Is Better For Your Business?
Find The Right Accounting Software
Our modern, tech-filled world makes it easier than ever to operate a business. This includes accounting software that eliminates the tedious tack of paper accounting. While this software doesn’t do all the work for you, it does keep your financial information organized in one spot, automates some tasks, and simplifies the accounting process. In other words, you don’t have to have a degree in accounting to do your own books if you have the right accounting software. If you don’t have the funds to hire a bookkeeper or accountant for your business (and most new businesses don’t), accounting software is a cost-effective way to keep your finances on track.
So, how do you know which software is best for your business? There are a few considerations to keep in mind:
Price:Â Before searching for accounting software, have a budget in mind. What can your business comfortably afford? In some cases, you may not be able to afford anything — and that’s okay! There is free accounting software available. However, free software may come with lots of ads, fewer features, or allow for no more than one user. If you have complex accounting needs, multiple users, or have other specific needs, there are options available at all price points.
Features:Â Consider the needs of your business when choosing accounting software. If you’re running a larger business, for example, or need software specific to your industry, free software with basic features won’t be a good fit. You may want the whole gambit: invoicing, contact management, accounts, payable, time tracking, project management, and more. However, if you run a smaller business, have only a few clients, and don’t need a ton of added features, a basic and easy-to-use program is a good choice.
Online & Offline Options:Â Most business owners and entrepreneurs these days use online accounting solutions. There are many benefits, including no installations required, automatic updates, integration with apps, and access from multiple devices, such as your smartphone. However, there are also desktop-based options that may work for you, such as in locations that don’t have fast and reliable internet connections.
Your Accounting Skills: Before choosing accounting software, keep in mind your accounting skills. If you’re new to the game, look for software designed with the beginner in mind that offers an easy-to-use interface and has great customer service. If you have some experience in accounting, you can certainly dive right into one of the more complex programs.
Add-Ons:Â Some accounting software offers additional add-ons for an extra fee. Payment processing, for example, may be an additional feature that benefits your business. Again, consider the needs of your company and shop around your options for software that best fits these needs.
Not sure where to start? Compare some of the top options available to your business.
Stay On Top Of Bookkeeping
Accounting software certainly simplifies accounting and bookkeeping tasks, but it’s important to remember that it doesn’t do all the work for you. You will still have to keep on top of certain bookkeeping tasks. The specifics of your bookkeeping requirements vary based on the needs of your business, but some common bookkeeping tasks you may have to perform include:
Creating and sending invoices to customers
Reconciling bank statements
Reviewing expenses and income
Reviewing aged receivables
Sending payment reminders or setting up automated reminders
Analyzing and updating inventory
Reviewing and paying invoices to your suppliers and vendors
Scanning receipts
Running and reviewing financial statements
Run Financial Statements
Running and reviewing financial statements is made easier with accounting software. Financial statements not only help you stay on top of your business finances but also help when filing your taxes and may be required if you apply for a loan or other funding.
Let’s discuss some of the most common financial statements you need to run for your business.
Balance Sheet:Â A balance sheet reports assets, liabilities, and equity for a set period of time. This report provides an overview of owner investments, what the company owes, and what the company owns. The balance sheet uses the accounting equation we discussed earlier and is used in conjunction with other reports to analyze the financial health of the business. The balance sheet can also be used to calculate ratios, such as the debt-to-equity ratio.
Profit & Loss Statement:Â A profit and loss statement (also known as P&L or income statement) shows the profit or loss of a business over a specific period of time, such as quarterly or annually. The cost of doing business — including cost of goods sold and operating expenses — are deducted from the revenue (or top line) of the business. The difference between the two is known as the net income, or the bottom line, and shows whether the business had a profit or a loss.
General Ledger:Â The general ledger contains every financial transaction that occurs within a company. Transactions are broken down into accounts, which include assets, liabilities, equity, income, and expenses. The chart of accounts that we discussed earlier is typically the first page of the general ledger.
Statement Of Cash Flows:Â A statement of cash flows (or simply cash flow statement) shows how money comes into and goes out of the business. Cash inflows from operations, financing, and investments are recorded on this statement. Cash outflows are also recorded. This includes investments and expenditures for business activities. A statement of cash flow gives you a view of the financial health of your business, helps you analyze how your money is made and spent, and helps you plan for the future to ensure you have cash available to keep your business in operations.
These are just a few of the financial statements that you can run using accounting software. While these are the major reports that every business should run, the software you select may also offer additional reports that are important for your business like job costing reports, annual budgets, reports of sales by product, and other financial documents.
Don’t Forget Tax Deductions
It’s time to discuss the moment that most small business owners dread: filing and paying taxes. With good accounting, though, filing your taxes (or getting through an IRS audit) won’t be quite so painful.
The rates and requirements for filing taxes are based on the legal structure of your business. For example, a sole proprietor simply files the business income or loss on their personal tax return, while certain corporations may face double taxation wherein tax is paid on the income of the business and on the dividends received by the owners.
While filing your taxes can be scary, especially if your business made a profit, you can ease your tax burden by taking advantage of the tax deductions available to small business owners. This can include:
Furniture & expenses
Employee benefits
Travel expenses
Loan interest
Insurance premiums
Marketing & advertising expenses
Salaries & wages
Vehicle expenses
These aren’t all of the tax deductions available to small business owners. Working with an accountant or tax professional can ensure you take advantage of all the deductions available to your business.
Know When To Hire An Accountant
While it is possible to handle much of your own accounting for your small business, there comes a time when many businesses need to enlist the help of an accountant. There are a number of reasons that business owners choose to hire an accountant. As the business grows, you may become too busy to handle the financial side of things and would prefer to focus on other activities within the business. An accountant is also extremely beneficial to have on board when it’s time to file your taxes. If you plan to acquire or sell a business, an accountant can provide advice and help determine if the transaction is a smart financial move. When you want to expand your business, an accountant can give advice and help you create a business plan.
There are several situations where hiring an accountant is in the best interest of your business. Even though this is an additional expense, it is often a critical move if you want to grow a successful and profitable small business. Learn more about when you should hire an accountant for your business.
The Benefits Of Good Accounting
We’ve established that every small business should have an accounting system in place. But why is it important to have good accounting? At the risk of sounding melodramatic, the success of your business depends on it — quite literally. Here are the benefits of good accounting:
Budgeting & Planning:Â Good accounting can help you set company budgets for your business and plan for upcoming projects.
Financial Health:Â As previously mentioned, having your numbers organized allows you to assess the financial health of your business to determine what you’re doing right … and what needs to be changed.
Track Payments: Without good accounting and bookkeeping, it’s difficult to keep up with customers that haven’t yet paid you for your products or services. By staying on top of your accounting and bookkeeping, you can easily send out invoices, payment reminders, and even collect payments.
Tax Time Benefits:Â Keeping accurate records makes it easier to file your taxes or go through an audit by the IRS.
Funding Opportunities:Â If you seek capital from investors or lenders, having accurate financial statements is critical to securing funding — and some lenders (like Fundbox) even require that you use accounting software to be approved.
Major Purchases:Â If you’re considering a major purchase to grow your business, the numbers can help you determine if it’s the right time to make the purchase, or if it makes more sense financially to hold off on spending the funds.
Cash Flow:Â Good accounting lets you assess the cash flow of your business to determine where you need to make changes to boost profitability.
Revenue Forecasts:Â With the right financial reports, you can more accurately forecast future revenues of your business.
Maximize Business Growth:Â Accounting allows you to track the growth of your business, allowing you to make important decisions and changes to help maximize growth.
The Bottom Line
Every business is different, but one thing should remain constant: good accounting. Whether you’re a sole proprietor running a business from your home office or you visualize running a large international corporation, all business owners and entrepreneurs should make accounting a priority. With so many great software programs and tools at your disposal, it’s easier and more affordable than ever to track your company’s finances. Take a look at the Best Accounting Software For Small Businesses to start your journey on finding the perfect accounting software.
Ready to learn more about accounting? Check out our eBook, The Beginners Guide To Accounting. It’s free to download and is a must-read for any business owner or entrepreneur that’s ready to master the basics of accounting.
The post Accounting 101: Understanding Small Business Accounting appeared first on Merchant Maverick.
Nonprofit organizations are responsible for doing so many amazing things, from combatting hunger and homelessness, to helping sick children and animals. But no one said saving the world was easy. While there are multiple steps to registering a business, you have to jump through even more hoops if you want to register a nonprofit business. Still, officially registering as a nonprofit is important because it legitimizes your organization and provides it with some distinct advantages. In particular, nonprofits registered as 501(c)(3) organizations have a tax-exempt status, which means they do not have to pay federal or state income tax.
Whether you want to start a nonprofit or have already begun your nonprofit, it’s important to make sure your organization is properly registered, compliant, and set up for success. Read on for an actionable, step-by-step guide to help you make your nonprofit official.
Why Register As A Nonprofit?
It is possible to informally operate as a nonprofit organization without officially registering as a nonprofit. However, until you make it official, you are basically turning away free money, as well as other benefits.
Here are the main reasons to register your nonprofit:
Legal Protections: Nonprofit corporations have limited liability protection, which protects directors and members from being held personally responsible for the organization’s debts or liabilities. The nonprofit is considered a separate entity that can enter into contracts, sue or be sued, take out business loans, etc., without anyone who works for the nonprofit being held personally liable.
Tax Benefits: Once you have your federal and state tax-exempt status, your organization will be exempt from paying income tax. There are also tax benefits for donors, who can deduct donations made to 501(c)(3) organizations on their taxes.
Access To Grants: Many business grants are only available to organizations registered as nonprofits.
Access To Discounts: With proof of your nonprofit status, your organization is eligible for various discounts, such as USPS nonprofit discounts and credit card processing discounts for nonprofits.
Crowdfunding Eligibility: 501(c)(3) status lets you raise money through certain nonprofit crowdfunding platforms, such as CrowdRise. Some crowdfunding platforms will also eliminate platform fees for registered nonprofit entities.
Credibility: An official nonprofit status lets people know your organization is legit and not just a bunch of yahoos or even scammers. Obtaining your nonprofit status is likely to attract more donors and larger donations.
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The 8 Steps You Need To Take To Get Started
The process to execute some of these steps varies somewhat from state to state. For example, in some states, you will need to apply for both federal and state tax-exempt status. But wherever you live, you will need to follow all of the below 8 steps.
1. Select A Name
Though you may have a working name for your organization, to make your nonprofit official, you will have to make sure that name is available and hasn’t already been trademarked. After you choose your name, check with your Secretary of State office as well as the U.S. Department of Commerce website to ensure that it is available. You can normally pay a nominal fee to reserve your name until you file your articles of incorporation.
2. Form Your Board Of Directors
Generally, you should form your board of directors before incorporating. Some, but not all states require that you list your board members’ names in the incorporation documents. You’ll also need to list at least three directors when you file for your 501(c)(3) tax-exempt status. These members should ideally be unrelated (by blood or marriage). Â
3. File Articles Of Incorporation
This is the documentation that forms an official corporation for your nonprofit and will be filed with your secretary of state. It includes information such as your organization’s name, location, board of directors, and purpose (what your nonprofit is being created to do/provide). Although incorporating your nonprofit does not make it tax-exempt, you will need to include certain language in the articles of incorporation for when you apply for tax-exempt status later—your state’s nonprofit formation packet should include the required information.
Some states also require you to publish a notice of incorporation with your local newspaper.
4. Write Bylaws
After your articles of incorporation have been approved, you can write your bylaws. These are your nonprofit’s internal rules and guidelines for procedures such as holding issues, voting, and electing officers. You will need to include a copy of your bylaws in your 501(c)(3) application.
5. Hold First Board Meeting
At your first board meeting, you will make your articles of incorporation part of the official record, adopt your bylaws, and elect officers. Someone will need to take minutes, which you will keep on file. It’s recommended that you hold this initial board meetingbefore you file for federal tax-exempt status. In a later meeting, you can record the receipt of federal and state tax exemptions.
6. File For EIN
The final thing you need to do before filing for your 501(c)(3) status is to apply for an Employer Identification Number (EIN). You need to do this even if you don’t have employees yet, as it is required by the IRS to obtain your tax-exempt status. The IRS uses your EIN to track your organization’s financial activities. You’ll also need an EIN later on when you open a business bank account and hire employees.
To obtain an EIN, file Form SS-4 with the IRS.
7. File For Tax-Exempt Status
After you have your directors, incorporated status, bylaws, and EIN, it’s finally time to file for your federal tax-exempt status with the IRS. For nonprofits in most states, you only need to do this at the federal level, but some states require you to file for tax-exempt status at the state level too. For example, nonprofits in California must also apply for tax exemption with the California Franchise Tax Board after obtaining tax-exempt status from the IRS.
To apply for your federal tax-exempt status under section 501(c)(3) of the Internal Revenue Code, you will need to file Form 1023 with the IRS. If your organization has gross receipts of less than $50K and less than $250K in assets, you can file the 3-page 1023-EZ application (vs. the 26-page standard 1023).
Some information you’ll need to include in your 1023 application:
Your budget, including any balance sheets or other financial information
The names of your directors
Copy of your articles of incorporation
Copy of your bylaws
Dissolution clause (usually included in articles of incorporation or bylaws)
Conflict of interest clause (usually included in articles of incorporation or bylaws)
Statement of exempt purpose (usually included in articles of incorporation or bylaws)
In order to ensure that your application meets all state and federal requirements, it’s a good idea to consult with a lawyer or someone familiar with tax-exempt law. Including attachments, a 501(c)(3) application package can easily exceed 50 pages.
Note that even after your organization receives its letter of determination from the IRS with its tax-exempt status, each year you will have to submit Form 990 in order to maintain your 501(c)(3) status. This document provides financial information about your organization to both the IRS and to the public.
8. Obtain Business Licenses & Permits
Once you have your tax-exempt status, you’re almost ready to start raising funds. But first, you’ll need to make sure you’re in compliance with all business licenses and permits applicable to your state and your organization’s activities. For example, you may need a sales permit or a zoning permit. Check with your local department of consumer affairs to find out what kind of licenses and permits you need to operate as a charitable organization in your particular state. Some cities may require a city business permit as well.
Registering As A Nonprofit: FAQs
How long does it take to register a nonprofit?
The IRS estimates it will take 100 hours to fill out Form 1023. The application process typically takes between 3-6 months, though it could take as long as a year, depending on whether the IRS has follow-up questions and how quickly you provide the answers.
How much does registering a nonprofit cost?
To file for 501(c)(3) status, you will pay either $600 to file Form 1023, or $275 to file Form 1023-EZ.
The costs of incorporating and obtaining the necessary permits to operate as a nonprofit vary from state to state; however, they usually do not exceed $100-$200.
Is the registration process different in each state?
Yes, somewhat. Check with your state to see if you need to complete any extra steps, such as publishing your nonprofit’s articles of incorporation or filing for state-level tax exemption.
Can any organization register as a nonprofit?
No. Your organization must meet the IRS’s definition of a public charity (the most common type of 501(c)(3) organization), private foundation, or private operating foundation. Be sure to read up on the IRS’ exemption requirements for 501(c)(3) organizations before you apply.
Can I register my business as a nonprofit to dodge taxes or get rich?
No. The IRS has strict regulations in place to make sure that businesses cannot use misuse their 501(c)(3) status for personal gain or to avoid paying taxes. All of your organization’s financial information, including salaries and use of income, will be closely and regularly scrutinized to look out for possible fraud and conflicts of interest. For example, if your nonprofit brings in $500K a year, you will not be able to get away with paying yourself a $200K salary.
Should I hire a lawyer to help with the registration process?
Yes, it is a good idea for first-timers to consult with a legal professional at some point to ensure compliance with all state and federal requirements, particularly when filling out the incorporation paperwork and when preparing the 501(c)(3) forms.
Final Thoughts
Whether they benefit schools, the environment, public safety, or another cause, nonprofit organizations do a lot of good in this world. But if a nonprofit is not officially registered, then it can only make a limited impact. When a charitable organization is incorporated as a nonprofit corporation and obtains a 501(c)(3) status from the IRS, the organization does not have to pay income taxes on the money it brings in, and the organization becomes eligible for other funding opportunities, including government grants and charitable crowdfunding platforms. Additionally, donors are more motivated to donate to IRS-registered nonprofits because any contributions they make to these organizations are tax-deductible.
There is some work involved in registering a nonprofit and maintaining nonprofit status, but your charity and your cause will ultimately benefit from your diligence. If you’re not sure your nonprofit qualifies for 501(c)(3) status, the IRS has information you can review on the various types of tax-exempt/nonprofit organizations, including 501(c)(3) and others. If you think maybe a nonprofit structure is not right for your organization after all, I recommend reading our article on the different types of business structures.
The post The Step-By-Step Guide To Registering Your 501(c)(3) Nonprofit Organization appeared first on Merchant Maverick.
Itâs hard to overstate the significance of the impact that eCommerce has had on the quality of our lives here in the early 21st Century. While in the past, consumers were limited to the choices provided by their local retailers and the closest big-box store, today anyone with a computer, an internet connection, and a credit card can obtain nearly any product or service they want from just about anywhere in the world. Unfortunately, it also makes it much easier for criminals to steal goods and services if they have access to these same tools.
Online payment fraud is simply any false or illegal transaction committed via the internet. It deprives the victim of goods, services, funds, or sensitive information â often without them being aware that this has happened to them until much later. In many cases, there will actually be two victims: the consumer whose information was stolen, and you, the merchant. Online fraud can involve not only fraudulent transactions, but also lost or stolen merchandise, or falsified requests for a refund. Fraud can be committed through email, instant messaging, or online auction sites. It can also occur through text messaging or even phone calls.
One common misconception among small business owners that weâd like to clear up right now is that they arenât as lucrative a target for cybercriminals as the larger retailers, and therefore donât need to be as thorough in protecting themselves from fraudulent activity. Unfortunately, this âit will never happen to meâ attitude can make it far more likely that itwillhappen to you sooner or later.
The truth is that large businesses are a âhard target,â because they have the resources to fully defend themselves against fraud. Smaller companies lack these resources, and thus often present a much easier target to cyberthieves. A cybercriminal knows that he or she can make more money by exploiting several inadequately protected smaller businesses than by wasting time trying to break into a fully-defended larger business. Fortunately, there are many tools available to even the smallest companies that can dramatically lessen the likelihood that youâll become a victim of online fraud.
In this article, weâll discuss the various types of online payment fraud, whether itâs committed via credit card, debit card, eCheck/ACH, or any other payment method. Weâll also present some sobering statistics about the growth of online fraud in recent years. Weâll discuss the importance of having a strategy to deal with fraud, and describe the many âred flagsâ that can indicate a fraudulent payment. Finally, weâll explain the numerous tools available to you that will help to protect your business from fraud. While the risk of becoming a cybercrime victim can never be completely eliminated, the use of all of these tools can protect your business and dramatically reduce the chance that youâll experience a loss due to online payment fraud.
What Is Credit Card Fraud? Eight Types You Need To Beware Of
Credit cards are usually the easiest and most convenient way for consumers to pay for their online purchases, so itâs no surprise that the majority of incidences of online fraud involve credit cards. However, other payment methods (including debit cards, eCheck/ACH payments, etc.) are just as susceptible to being used fraudulently if the consumerâs account information is compromised. Hereâs a brief rundown of the eight most-commonly recognized types of online payment fraud:
Account Takeover Fraud (Phishing)
Youâve probably already heard of phishing (more formally known as account takeover fraud). This is when a hacker obtains a victimâs online account information and uses it to make a fraudulent purchase. Unfortunately, phishing attacks often work by convincing the victim to voluntarily disclose this information. While a hacker might not break into your credit card account directly, they can sometimes get into other accounts for major online shopping sites and gain access to your stored payment method information.
Card Testing Fraud
Sometimes thieves will âtestâ stolen credit card information by attempting to make a small, insignificant purchase. If the transaction is approved, they go on to make larger, more lucrative purchases with the valid card information. Sometimes thieves will file chargebacks on each of these purchases. At around $15-25 per chargeback investigation, this can quickly get very expensive for merchants, with the cost in chargeback fees vastly exceeding the value of the stolen merchandise.
âFriendlyâ Fraud
Sometimes, a cybercriminal doesnât have to steal someone elseâs credit card information to commit fraud. With âfriendlyâ fraud, a thief will use their personal credit card to make a purchase, then file a chargeback, claiming that the goods were never delivered. They get the goods for free after the issuing bank refunds their money, and youâre out the cost of the products and a chargeback fee.
A common scheme is for a thief to order a pizza, then file a chargeback after itâs been delivered. In this case, the thief has literally eaten the evidence! Unfortunately, âfriendlyâ fraud is becoming more common as thieves have learned to take advantage of consumer-friendly policies in the processing industry. (And it’s not just thieves who commit friendly fraud — unhappy customers do too!)
Merchant Identity Fraud
Sometimes, the merchant is the criminal. Merchant identity fraud occurs when hackers present themselves as a legitimate business. They then solicit funds from unknowing victims or offer goods or services that are never delivered. While merchant services providers have gotten better at sniffing out this sort of activity, itâs still possible for a cybercriminal to sign up with a legitimate payment processing service and collect money from unknowing victims. If the hackers cannot be identified and held responsible, the merchant services provider will end up being held liable for the losses. This is one reason why a prospective merchant services provider will go to great lengths to investigate the nature of your business before approving you for an account.
Refund Fraud
Sometimes cyber thieves donât want a particular product â they just want cash. Buying something online with stolen credit card information and then returning it for a refund thatâs issued to the thief is an easy and increasingly popular way to score some quick cash at someone elseâs expense.
True Fraud
True fraud is more commonly known as identity theft, and itâs probably the form of online fraud that youâre most familiar with. This type of fraud involves the classic scenario where a hacker illegally obtains a victimâs online account information (i.e., username and password) or their credit card information, and then uses that information to make purchases. They get the goods, and the victim gets the bill. Because issuing banks have made it relatively easy for victims of this type of fraud to dispute transactions they didnât make, liability for the illicit purchase usually falls on you, the merchant.
Website Redirection
This form of fraud is also known as âpagejacking.â Sophisticated hackers are able to redirect traffic from your website onto a similar site that theyâve set up, where theyâre able to obtain personal information or credit card data from unsuspecting customers.
Wire Transfer Fraud
This form of fraud involves the use of the banksâ wire transfer services for fraudulent purposes. A cybercriminal will pose as a legitimate business or government agency, then contact a victim and attempt to induce them to send money to a fraudulent address. These types of solicitations usually occur over the telephone, but can also occur online through email. Common scams of this nature typically involve telling the victim that they have won a large sum of money, but need to pay a âfeeâ to have it released.
The State Of eCommerce Fraud
Ever since eCommerce began in the 1990s, online fraud has been a problem. Online merchants can never have access to a customerâs physical credit or debit card, relying instead on account information such as card numbers, expiration dates, and CVV codes to authenticate transactions. While this information is sufficient to confirm the authenticity of an account, itâs never enough to firmly identify that the customer making the purchase is indeed the true owner of that account. Although many steps have been taken over the years to improve the security of online transactions, a 100% foolproof solution has yet to emerge.
In 2015, credit and debit cards with EMV (Eurocard, Mastercard, and Visa) or âchipâ technology were introduced in the United States. Although the transition from the older magstripe technology to EMV hasnât been very smooth, it has resulted in a dramatic decrease in card-present fraud due to the encryption features available with EMV. Retail credit card fraud rates dropped a whopping 82% between 2015 and 2018, and continue to be very low.
Unfortunately, the drop-off in card-present fraud has resulted in a dramatic increase in card-not-present fraud since EMV cards were introduced. Put simply, criminals whoâve been shut out of opportunities to commit retail fraud are now setting their sights on the lucrative (and still relatively vulnerable) eCommerce market instead. In 2016 alone, online fraud rates rose 33%. In 2017 and 2018, they rose an additional 30% per year.
According to LexisNexis, online fraud cost the eCommerce community 2.38% of total revenue in 2018 alone, and this rate continues to rise. Online fraud is expensive on both a per-transaction basis and as a percentage of total revenue. As of this year, the average online fraud incident costs a merchant $408 in lost goods or services. In comparison, the average legitimate online transaction is only $213. However, the cost of fraud far exceeds just the value of the stolen merchandise or services. On average, a merchant will suffer a loss of over $1100 per incident of fraud due to chargeback fees and other expenses incurred in fighting the chargeback.
Why Not Having A Strategy To Deal With Credit Card Fraud Could Put You Out Of Business
Itâs far too easy for merchants to stoically accept that an occasional fraudulent transaction is just part of the âcost of doing business.â However, the statistics above show that total losses due to fraud can far exceed the cost of the fraudulent transaction itself. Chargeback fees, expenses incurred in investigating and fighting the chargeback, lost shipping costs, and other expenses can add up to far more than just the amount of a fraudulent order.
As a merchant, you should also consider that a single incident of fraud can lead to further fraudulent transactions. Once a cybercriminal does a âtest runâ and determines that youâre relatively unprotected, you can and should anticipate that youâll be subject to many follow-on attempts to defraud your business. If you suffer a fraudulent transaction â even a very small one â itâs imperative that you identify the shortcoming in your security procedures that led to the incident and immediately take steps to strengthen your defenses before the cybercriminals try again.
Suffering from fraud can also lead to the loss of your merchant account, and with it the ability to accept credit and debit cards. Fraudulent transactions inevitably lead to chargebacks, and too many chargebacks over time may cause your provider to close your merchant account â often without prior warning. If this happens, you might be able to get a high-risk merchant account from a different provider, but these accounts are much more expensive than traditional low-risk accounts. If all of your sales are online, however, being without the capability to accept credit or debit cards for a significant length of time can quickly put you out of business altogether.
Six Red Flags That Can Signal Online Credit Card Fraud
Any online transaction can potentially be fraudulent, but some transactions should raise your suspicions more than others. Unusual transactions should be scrutinized more carefully than others before being approved and processed. While not constituting conclusive proof of fraud, the following âred flagsâ indicate a higher probability of fraud and should merit further investigation:
Different shipping and billing addresses. Obviously, there are any number of legitimate reasons why a customer would want to ship an order to a different address. However, fraudsters almost always ship orders to somewhere other than their victimâs billing address. Itâs in your best interest to verify the shipping address â just in case.
Multiple orders of the same item. Itâs not out of the ordinary for a customer to order multiple quantities of an item. However, if you see an order for an unusually large number of the same item from an individual customer (not a B2B order), you might want to check it out before you ship anything.
Abnormally large orders. If an order represents a much larger ticket size than what your business normally averages, you should probably confirm that itâs legitimate before processing the transaction and shipping the goods. This not only protects you from fraud, but might also save you from having your merchant account shut down or the transaction held by your processor due to the unusually large ticket size.
Multiple orders to the same shipping address with different payment cards. Again, we have to emphasize that there are plenty of legitimate reasons why a customer might want to do this instead of just putting all orders on the same card. However, itâs a hallmark of fraudulent activity and you should definitely make an inquiry with the customer before processing the orders.
Unexpected international orders. If your business normally only processes orders in your home country, a sudden order that needs to be shipped to a foreign country should get your attention and warrant further inquiry before approval. As weâll see below, some countries have significantly higher rates of online fraud than others.
Velocity attacks. A velocity attack occurs when a hacker makes multiple attempts to run different credit card numbers in rapid succession. Often using bots, the idea is to keep trying until a number is found that works. While this is obviously fraudulent, a customer whoâs having a hard time typing in their credit card number correctly can resemble a velocity attack.
How To Prevent Credit Card Fraud: 19 Tools For Detecting & Preventing Fraudulent Transactions
If the above information has you convinced that thereâs nothing you can do to prevent online fraud from impacting your business, donât worry. There are plenty of tools â both manual and automatic â that can flag suspicious transactions for you and lower the risk of a fraudulent transaction slipping through. While itâs not possible to ensure 100% total protection, using all of the tools described below will give you the best level of protection available today. Be aware, however, that this list is not inclusive. Processors are continually working to develop new anti-fraud tools, and your provider might have other services available to help secure your account than just the ones listed below.
Use a verified merchant services provider. Although all providers claim to offer a complete suite of automated tools and features to protect against fraud, some are more effective than others. Look for good reviews (like ours!) and watch out for complaints from other merchants regarding poor account security. Youâll also want to determine whether a prospective provider offers anti-fraud tools as a standard account feature, or if theyâre only available as an optional add-on. While itâs definitely worth paying a little extra for additional security, we generally prefer to see providers offer fraud protection without charging extra for it.
Use manual (human) screening. Both you and your employees should understand how to spot suspicious buying activity that raises one of the âred flagsâ weâve discussed above. In most cases, itâs a better idea to contact the customer directly to verify the order, rather than blocking it automatically and potentially alienating a legitimate shopper.
Use the Address Verification Service (AVS). An AVS mismatch is a strong indicator that the order is fraudulent, as a hacker using stolen payment information is unlikely to know the actual card ownerâs physical address. Most merchant services providers mandate the use of AVS for all eCommerce transactions, so this tool is already part of your merchant account.
Confirm the buyerâs location. Geolocation and IP address verification tools can confirm with reasonable certainty that the customerâs IP address matches the billing and shipping addresses provided. This method of detecting fraud will not be 100% effective if a legitimate customer is placing an order while traveling, but can often catch suspicious transactions in most other circumstances. Unfortunately, some countries have significantly higher rates of online fraud than others. The âusual suspectsâ include countries such as Russia, Nigeria, Pakistan, and Indonesia. However, other countries such as Romania, Bulgaria, and even Israel also have high rates of online fraud. Note that âproxy piercingâ technology provides some defense against hackers who intentionally mask their IP address using tools available on the Dark Web.
Use CVV (and CVC) checks. Card Verification Values (CVV) and Card Verification Codes (CVC) are three- or four-digit codes that are printed on the back of all credit and debit cards. Whenever possible, youâll want to obtain and match the cardholderâs code against the value submitted with an order. Unless the card in question has been physically stolen, itâs unlikely that a hacker will have access to this information. As with AVS, many merchant services providers will require the use of CVV/CVC checks before accepting any online transaction.
Use Verified by Visa and 3D Secure. These anti-fraud tools allow customers to create a unique Personal Identification Number (PIN) to authenticate their identity when placing an online order. For more information on these two programs, see our article, What Are Verified By Visa And 3D Secure?.
Use device fingerprinting. Device fingerprinting looks at a computer deviceâs operating system, unique device identification number, and other available information to see if that device has been used to make fraudulent transactions in the past. Device fingerprinting tools are usually available via third-party providers, such as ThreatMatrix.
Use tokenization and encryption. These security measures are now standard features of most modern payment gateways. Both methods protect your customersâ credit card data from being stolen during a legitimate online transaction. The use of tokenization and encryption is an essential step in keeping your merchant account PCI compliant.
Use velocity attack protection tools. As weâve noted above, velocity attacks involve repeated attempts to place an order with different credit card numbers, often with the use of a bot. These types of attacks can be detected and blocked by IP address using payment gateway security tools.
Use biometric identity verification tools. As you might imagine, biometric tools, such as fingerprint readers, are not ordinarily available to eCommerce merchants. However, they can be set up if you allow users to pay on your site using digital wallets, such as Apple Pay on the Web or Google Pay. In this case, the userâs device becomes the biometric tool, using a built-in fingerprint reader or Face ID technology to authenticate the consumerâs identity.
Set flexible refund policies. Buyers are more likely to file a chargeback if they canât return an item due to an overly strict refund policy (i.e., the allowed refund window is too short). You can cut down on âfriendlyâ fraud by giving your legitimate customers a reasonable amount of time to complete a return.
Emphasize order fulfillment. Ensure that all orders ship promptly and verify that theyâve been delivered. Delivery tracking can provide proof that the goods were delivered and received, helping to protect against âfriendlyâ fraud.
Ensure high-quality customer service. Quite frankly, offering poor customer service will increase your risk of fraud as customers become frustrated with doing business with you. Strive to provide the best possible customer service during business hours, and, if you have the resources, offer 24/7 customer service via both telephone and email. After-hours customer service can be outsourced (just in case you like to be able to sleep at night).
Provide high-quality employee training. Employee training goes hand-in-hand with manually screening all orders (see above). You must ensure that all employees who handle orders are adequately trained to spot signs of fraud and know what to do if they see something suspicious. This training needs to be an ongoing process, with frequent refreshers to remind employees of what to look for and to update them on the latest developments in anti-fraud procedures.
Ensure that your merchant account is PCI-compliant. This one is not optional. You must maintain PCI compliance standards to safeguard your customersâ credit card data. Being out of compliance will increase the risk of a data breach, which in turn will result in more incidents of fraud as hackers exploit the data theyâve stolen. Even if you donât suffer a data breach, your merchant account provider will penalize you with a PCI non-compliance fee (on top of whatever theyâre charging you for PCI compliance) for every month that your account is out of compliance. Note that following the proper PCI compliance steps will not completely eliminate the chance of a fraudulent transaction. However, it serves as a strong defense when an incident occurs. The most critical steps in PCI compliance include configuring and using a firewall to secure your website, performing frequent antivirus scans, following good password security measures, and using SSL certificates (i.e., âhttps:â) for your site.
Analyze actual incidents of fraud. If you experience an actual fraudulent transaction, youâll want to go back and determine how it happened and what you can do to make it less likely that it will happen again in the future. If you uncover any weaknesses in your defenses, youâll obviously want to make some changes.
Practice good chargeback mitigation strategies. Chargebacks and fraud are two separate subjects, but they tend to go hand-in-hand in many cases. Youâll want to implement the commonly recognized best practices to prevent chargebacks and successfully defend against them. See our article, The Complete Guide To Preventing And Winning Chargebacks, for more information.
Upgrade to the latest in payment technology. If your business also makes retail sales, youâll want to use EMV-compliant equipment exclusively for accepting credit and debit cards. EMV has been the default standard in the United States for card-present transactions, although there are still many businesses that havenât adopted it and are putting themselves at risk for fraud. NFC payment methods (such as Apple Pay and Google Pay) should also be added, if you havenât done so already. NFC is more convenient for consumers and even more secure than either magstripe or EMV payment methods.
Use multiple fraud detection tools. Itâs essential that you donât rely exclusively on any one tool weâve discussed above. Instead, use a layered approach that incorporates firewalls, good password security measures, use of AVS, and CVV/CVC checks to protect your business. Automated fraud scoring tools, such as IP geolocation, AVS, CVV, and device fingerprinting tools can be used together to determine a fraud probability score. You can then set your payment gateway to automatically flag or decline transactions that score high enough to raise a reasonable suspicion of being fraudulent. Also, be sure to re-screen orders that are modified by the customer after being placed, but before the goods have been shipped. At the same time, donât be too trigger-happy when it comes to blocking transactions. Frequently screening out legitimate transactions will frustrate your customers and cost you their business. In an era where anyone can post their opinion of a business online, this could really hurt you in the long run.
The Final Word On Credit Card Fraud Detection
As youâve probably gathered from all the information weâve presented so far, payment fraud is a real and growing threat to your online business. While itâs not possible at this time to build a completely foolproof defense against it, you can minimize your chances of letting a fraudulent transaction slip through by following common-sense practices and implementing the anti-fraud tools weâve discussed above.
Protecting your business from fraud is an ongoing process, as fraudsters are constantly finding new ways to get around the latest anti-fraud measures. They arenât going to give up just because one particular avenue of attack has closed on them, and neither should you. Securing your account is a never-ending effort that will require coordination between you, your employees, and your merchant account provider.
Many of the tools weâve discussed above can be implemented by you as the business owner without the help of other parties. At the same time, a lot of the newer anti-fraud measures available today will require installation and configuration by your merchant services provider or gateway provider.
One thing weâve noted over the course of reviewing dozens of merchant services providers is that they all take payment security and anti-fraud measures very seriously. This includes even the worst providers on the market (of which there are quite a few). The difference is that a low-quality provider will often offer you only the most basic anti-fraud tools, and theyâll usually charge you extra for them. Protecting your account from fraud is extremely important, but you shouldn’t have to pay an unreasonable amount of money for anti-fraud tools â especially when other providers include the same tools as a standard feature with your account.
In evaluating a potential merchant services provider, look carefully at what types of anti-fraud tools they offer, and whether these come with your account. The best providers will include a full range of essential anti-fraud tools with your account, although more specialized services might be offered as an optional add-on for a reasonable fee. Paying a little extra to secure your account against payment fraud is a worthwhile investment, especially considering the potential costs of suffering a data breach or a fraudulent transaction that slips through your defenses. For some recommendations of great merchant services providers that specialize in serving the eCommerce community, check out our article, The Best Online Credit Card Payment Processing Companies.
The post How To Detect (And Prevent) Online Credit Card Fraud â And Why You Need A Solid Strategy To Manage Fraud For Your eCommerce Business To Succeed appeared first on Merchant Maverick.
A business cooperative, also called a “worker cooperative” or just a “co-op,” is a type of business that offers some special advantages—namely, the advantages of group ownership. Though it has some commonalities with other business types, including business partnerships and traditional corporations, a business co-op is its own animal with its own unique legal structure. A cooperative is not the most conventional business type and can only work for certain types of businesses. Read on to learn more about whether this unique business model could work for your new or existing business.
What Is A Business Cooperative & How Does It Work?
Essentially, a business cooperative is an employee-owned business. Every member of the cooperative has an equal voice, regardless of how many shares they own. Profits and earnings are divided equally among the members (also called “member-owners”). However, it’s important to know that there are different types of co-ops with different goals, and that there are other business types that resemble co-ops.
How Business Co-ops Differ From Consumer Co-ops
A business cooperative is not to be confused with a consumer cooperative, though the legal structure may be the same. With a consumer co-op, members of the co-op are also consumers of the co-ops good or services, paying into the co-op or sometimes volunteering their labor (usually part-time) in exchange for membership.
Why join a consumer co-op? Membership typically gets you a free service or lower prices for a service. For example, a food co-op typically offers high-quality food at much lower prices than you’d pay at, say, Whole Foods. A parent joins a preschool co-op so that their children can attend the school for free or at a discounted rate. Consumer co-ops typically not-for-profit, community-based services. They may or may not be incorporated as businesses.
Business cooperatives, on the other hand, serve workers. The member-owners of a business cooperative are typically full-time corporate employees.
While business co-ops are democratic by nature and often have a socially conscious business ethos, the main goal of a business co-op is not to provide a community service, but to make a profit. Typically a percentage of profits are distributed equally among owners, while the rest is reinvested in the company. There are co-op businesses in retail, agriculture, healthcare, manufacturing, and other industries. Business cooperatives are incorporated and do business as cooperative corporations.
Business Cooperatives VS Other Business Structures
A cooperative corporation is also not to be confused with a regular corporation (C corp). Though many corporations are partly owned by shareholders who also work for the company, a cooperative, by contrast, is 100% owned by its employees, with no owner having any more control or ownership of the company than any other owner. Unlike a traditional corporation, a cooperative corporation has no executives who hold the majority of shares (among other differences).
Co-ops are also different from business partnerships, which have different liability structures and tax structures, and can involve unequal ownership arrangements. Learn more about the different types of business structures if you’re not sure which one is right for your company. Depending on your goals, a more appropriate business structure might be a partnership or even a limited liability company (LLC), which has a lot of the same benefits of a co-op but with fewer restrictions.
Other business types may borrow some features of co-ops without being true co-ops. For example, Costco and Sam’s Club resemble co-ops in that members pay a fee in order to shop there; however, these businesses are not true co-ops because they are not member-owned.
Business Cooperatives On A Large Scale
Very large business co-ops can operate much like franchises—in that members pay to use the company name and resources, but each individual business location is more or less independently managed. ACE Hardware, whose shares are all owned by individual ACE Hardware store owners, is an example of a retail cooperative. In exchange for purchasing shares of company stock, approved ACE outlets become part owners of the company and can use the ACE name, products, and distribution channels.
A business cooperative can also function sort of like a union, in that its democratically-elected leaders can exert collective bargaining power in their industry if the co-op is large enough. Land O’Lakes Inc., owned by dairy farmers, is an example of a large-scale agricultural business cooperative. Due to its large size and purchasing power, Land O’Lakes has a lot of negotiating power from its suppliers (of trucks, farming equipment, etc.), which it uses to lower its cost of production.
But not all business cooperatives are nationwide brands; most are actually small businesses. A new co-op might only have a handful of employees. There are still benefits to forming business cooperative, even on a very small scale.
The Advantages Of Owning A Business Cooperative
Incorporating your business as a co-op can provide great benefits and establish your organization as a really special entity where workers love their job — with low operating costs to boot. Read on to learn about the benefits of owning a business cooperative.
Invested Employees
Because employees are directly impacted by the company’s performance and share in the company’s successes and losses, they are more invested in the company they work for. Employees are more likely to pour their hearts and souls into a company when they are also owners. Having an equal voice in the company, as co-op owners do, can also inspire more motivated workers. In addition to their labor, employees invest their money into the company, which helps fund the business.
Funding Opportunities
Cooperatives may be eligible to receive certain business grants from the federal government and other entities.
Reduced Liability
Equal distribution of ownership in a cooperative also means equal distribution of liability. In contrast to partnerships where all partners are fully liable for both their own and their partners’ actions, each owner of a cooperative has only limited liability for company debts, obligations, etc. The liability of the co-op’s members is limited only to the extent of their investment in the co-op, provided that they were not engaged in illegal or negligent activities. (LLCs, which can also have multiple owners, also have limited-liability benefits.)
Lower Overhead
Owner-employees are more motivated to keep costs down, because lower costs ultimately increase the company’s profitability. By leveraging their large size, co-ops may also be able to obtain lower-cost goods and services from suppliers, resulting in an overall lower cost of production.
Tax Advantages
Earnings are taxed twice in a traditional corporation—the corporation pays tax on their net earnings and then the shareholders pay taxes on their individual dividends. The federal tax structure of a cooperative—subchapter T of the U.S. tax code—is such that these entities are not taxed on the surplus earnings/dividends they redistribute to members. Co-op owners are only taxed once on their personal co-op income, and not at the co-op level. Thus, a cooperative has a reduced tax burden compared to regular corporations.
The Disadvantages Of Owning A Business Cooperative
A cooperative business model is also not without its downsides. Before you decide to incorporate as a cooperative, make sure you are okay with the following caveats of forming a co-op:
Legal Restrictions
Depending on where you live and work, you may not be allowed to incorporate your business as a co-op. Every state has a co-op law, but they are all different. Some states have very restrictive co-op laws, only allowing co-ops in certain industries, such as agriculture, to incorporate. Other states allow co-op businesses in almost any industry. If your state allows you to form a co-op business, you will still have to adhere to your state’s co-op laws. Before you get yourself in some legal challenges, make sure you are following your state’s business cooperative laws.
Not As Profitable For Founders
Because a cooperative’s earnings and profits are distributed equally among all employees, this type of business is not nearly as profitable for the company’s founders. This doesn’t mean that all cooperative employees are paid equal wages, but in a conventional business structure where the owners/founders have the majority of control and ownership in a company, those owners stand to take a much bigger chunk of the profits. Then again, if you’re considering forming a co-op, there is a good chance that personal profit is not your primary goal.
Funding Challenges
Finding startup loans and other types of funding through traditional lenders may be difficult due to a cooperative’s financial and liability structure. Co-ops also struggle to attract large investors, since a large investor will not have any more control in the company than a small investor. During the startup phase and sometimes beyond, co-ops may have to get creative with other funding sources, such as launching a crowdfunding campaign or applying for small business grants.
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Slow Decision-Making
Have you ever tried to make a decision as a large group? It can be pretty challenging! By the time the entire group decides where to eat, you are out of your mind with hunger. The process to make big decisions as a cooperative, where everyone gets an equal vote in all company decisions, can be equally time-consuming and frustrating.
How To Form Your Co-op
The following are the main steps you need to take to form a business co-op. However, the steps to register your business as a co-op vary somewhat from state to state; check with your state’s Secretary of State or State Corporation Commissioner for more information regarding your stateâs specific co-op laws.
1. File Articles of Incorporation
The articles of incorporation is a document that makes your co-op an official business. This document includes your company’s name, location, purpose, financial structure, and the names of your charter members (incorporators/founders). Your incorporators must file the articles of incorporation with your state business entity registration office.
2. Obtain Business Permits & Licenses
You will need to obtain all local, state, and federal permits and licenses before you can operate as a legal business. These requirements will vary based on your industry and location.
3. Create Bylaws
Once your articles of incorporation have been approved by the state, you can write your bylaws. These are all of the rules and procedures for your cooperative and include membership requirements and duties, as well as general operational procedures for your co-op. Your bylaws must comply with state law, so you may need to consult with an attorney at this time if you haven’t already.
4. Hold Charter Meeting
During this meeting, charter members will adopt the bylaws and elect a board of directors (if the board wasn’t already established in the articles of incorporation).
5. Recruit More Members
To make your co-op a success, it needs to grow its membership. These are the employees and co-owners of your company who will supply the capital and labor. The application members use to join the company needs to include names and signatures from the board of directors, as well as a description of the member rights and benefits.
6. File With The IRS
Even though you are exempt from certain taxes as a cooperative, you will still need to file with the IRS (before the end of your fiscal tax year) to validate your organization’s tax-exempt status. In particular, most cooperatives will need to file Form 1120-C to report income, gains, losses, deductions, credits, and to determine your income tax liability. Any cooperative with employees needs need an Employer Identification Number (EIN) to file taxes, so be sure to sign up for one before tax-time if you haven’t already.
7. Obtain Additional Financing
Depending on your financial needs, you may need to obtain additional financing at some point, especially if contributions from co-op members are not sufficient to cover all your initial startup expenses. As mentioned, crowdfunding and startup business grants are a couple of potential ways co-op startups get capital, and certain online lenders might be willing to extend you a startup loan as well.
Note that if you are converting an established company to a co-op, this process will look different. In addition to incorporating as a cooperative, writing bylaws, etc., you will also need to buy out the original owners/founders and then redistribute that money to the co-op.
Final Thoughts
A business cooperative can be the perfect business structure for certain organizations, particularly those with a democratic business ethos. A strong corporate culture and reduced costs are just two of the many benefits that cooperative businesses enjoy. However, co-ops are also limited in certain ways, and are not appropriate for every business type.
Don’t think a co-op is right for you? Take a look at our business structures explainer to learn about other business structures and their pros and cons.
The post Should You Form A Business Cooperative? Consider These 9 Advantages And Disadvantages Before Getting Started appeared first on Merchant Maverick.
Most people don’t like the idea of taxes in general, not to mention the excruciating minutia of what goes into calculating how much to pay the government and when. And if you do like those things, then you are probably an accountant or a payroll tax expert already. God bless you, you don’t need this article. However, if you are a small business owner who is entering the world of payroll, understanding payroll taxes can feel daunting. It’s true: there’s plenty to learn and making a mistake can result in costly fees. Using payroll software might take the guess-work out of the process and do the calculations for you, but it’s still important to have a rudimentary understanding of payroll taxes, especially if employees have questions about their paychecks.
In this post, we’ll cover what payroll taxes are, who’s responsibility it is to pay them and when, how to calculate them, and more.
What Are Payroll Taxes?
Payroll taxes are the money an employer withholds from an employee’s earnings to pay taxes to the state and federal governments. How much an employer takes out and sends to the government is based on the employee’s salary and wages, and it is the employer’s responsibility to manage these taxes. There’s only one exception: 1099 contractors are in charge of their own taxes! Contractors, freelancers, and small business owners pay a self-employment tax which is the equivalent of employee/employer payroll taxes.
Payroll taxes make up a substantial part of government revenue and are the second-leading money generator for the United States. (And we can often look to payroll in America as indicators of how our economy is growing or receding, too, as payments reflect growing trends in hiring and stagnation.) When an employer runs payroll, the process involves calculating the employee’s net pay. Net pay is the take-home paycheck employee’s receive on payday, and how you calculate that net has to do with how much state and federal taxes you, as the manager of the payroll, take out, collect, and pay to the appropriate agencies. It’s a detail-oriented process that has multiple opportunities for missteps and steep penalties for mistakes.
Bear in mind that when someone says “payroll tax,” they are lumping together all of the various taxes paid out of a person’s paycheck for services, but in the next section I’m going to breakdown where those payroll taxes go.
Types Of Payroll Taxes
When an employer removes taxes from an employee’s paycheck, that money is earmarked for state and federal services. Here’s how payroll taxes breakdown individually:
Federal Income Tax Withholding:Â Federal income tax is based on income level and the rates are progressive, meaning that as you make more income, your rates move, and your income tax increases as you travel up the tax brackets. There are currently seven tax brackets that tax income at: 10%, 12%, 22%, 24%, 32%, 35% and 37% as income increases.
Social Security Tax:Â This tax is also called the Old Age, Survivors, and Disability insurance, and it’s a flat-rate tax of 12.4% of taxable income. Both the employee and the employer are responsible for paying half (6.2%) of the social security tax.
Federal and State Unemployment Taxes: The Federal Unemployment Tax is a mandatory tax paid quarterly versus monthly. State requirements differ widely.
Medicare Tax:Â This tax is also a flat rate of 2.9% with the employer and the employee splitting the cost at 1.45% each.
State Income Tax Withholding:Â There are currently seven states that do not have a state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming) but for everyone else, income taxes work similarly to federal income tax withholdings. The tax rates are very specific to each state, so check the withholding tables on the state government website where your business is located.
Local Taxes:Â Local taxes are very specific to city and state. Most states have a state unemployment tax that is accounted for in this local taxes section. These taxes are based on local tax laws and the tax rates vary, so small business owners need to check/verify those taxes through the state’s tax department.
Payroll Tax VS Income Tax
Payroll Taxes
Income Taxes
Payroll taxes include FICA taxes (social security and medicare) and local taxes withheld, and the additional percentages provided by the employer.
VS
Income tax specifically refers to the federal, state, and local income tax rates
So, running taxes for your payroll involves collecting both payroll taxes and federal/state income taxes. When people say “payroll taxes” they are providing an umbrella term for all collected tax, but the term “payroll tax” refers to FICA taxes (social security and medicare) and local taxes withheld from an employee’s paycheck, plus the additional percentages provided by the employer. Income tax specifically refers to the federal, state, and local income tax rates. Even though the two are joined together in one lump, payroll taxes are specifically earmarked for certain programs. Income tax, on the other hand, is delivered to its respective federal or state governments and is used to manage the budget.
Who Pays Payroll Tax?
The burden of managing payroll and sending payroll tax payments is on the company, and the burden for paying those taxes falls on both the employee and the employer. Each state has different regulations and requirements for how state income tax is paid to the government, and the federal government collects payroll taxes quarterly.
Employer Tax Responsibilities
Okay. You are a small business owner and it’s time for payroll. What tax responsibilities do you have?
Social Security: You will pay your half of the 6.2% and you will withhold 6.2% from wages for your employee’s portion.
Medicare:Â You will pay your half of the 1.45% and you will withhold 1.45% from wages for your employee’s portion.
Federal Unemployment Tax:Â This tax is employer-paid and the current rate is 6% on the first $7,000 earned by an employee.
Self-Employment Taxes
If you are self-employed or working under contract, you are the employer and the employee and it’s your responsibility to pay for both sides of the payroll taxes. That means that contractors need to withhold the full 12.4% for social security and 2.9% for Medicare, and withhold their own state and federal income taxes (saving 15-20% of each check to cover these taxes is the recommended practice). Some states also charge additional taxes for small businesses that become the responsibility of a contractor, as well. When contractors file their taxes, they will pay their portion of these taxes then.
When Are Payroll Taxes Due?
Once you have collected the payroll taxes for your small business, they are due on either a monthly or semi-weekly deposit. Semi-weekly deposits are primarily required just for large businesses with a large payroll tax revenue, so it is most probable that you will deposit your withholdings monthly. Payroll taxes are due on the 15th of every month (unless that falls on a weekend, then the next available Monday).
If you are self-employed, you most likely will file estimated quarterly taxes (although some states accept yearly payments if you make under a certain amount). Check your state’s specific rules and tax brackets for the most accurate information.
How To Calculate Payroll Taxes
Calculation of payroll taxes uses all the great basic math skills: multiplication, addition, percentages. Be aware that if you make a mistake or are late processing a payment, the government likes to slap fees around. (I mean, no doubt, fees are a source of revenue for the government, too.) While you can do payroll calculations by hand (and many do, including an adorable 80-year-old woman on Facebook who chastised me for suggesting someone run payroll using anything other than their head, a pencil, some paper, and the numbers), there are many great payroll software options that can do this part for you: Gusto, Square, Paychex, and ADP are all reputable companies that you can use to outsource payroll.
However, maybe you really want to tighten the budget and only have a few employees and you’re not gonna let me convince you to give the computers their chance at this one. Okay. Pencil. Paper. Calculator. Spreadsheet with equations, maybe?
You’ll need to know how many times you are paying/withholding taxes from your employees before you can run payroll, so determine whether you are running payroll, weekly, biweekly, or monthly. Then you will need to decide if you’d like to pull taxes using the wage bracket system (recommended by most tax experts for small businesses) or the percentage method (not recommended for small businesses attempting payroll on their own).
When you onboard employees, you will have them fill out a W-4. You will use that W-4 to note the employee’s withholdings and whether they are filing single/jointly/head of household. This is the data you need to calculate federal income taxes. The following image is from the IRS Publication 15 for the 2019 tax season and gives the step by step numbers for calculating the federal income tax withholdings through either method.
After you withhold the money for federal income taxes and any additional pre-tax deductions (retirement, worker’s compensation, healthcare), then you calculate the FICA (social security and Medicare) taxes. To calculate the social security tax, you will take your employee’s gross pay (the amount your employee receives before payroll taxes are removed for that pay period) and multiply it by .062 — the product is the amount of money to be withheld from the paycheck and matched by the employer.
You would do the same thing for the employee’s portion of Medicare by taking the gross pay for the pay period and multiplying it by .0145%. The product is the amount you’ll withhold and match for Medicare.
All state and local taxes are calculated on a state-by-state basis.
How To Report & Pay Payroll Taxes
When you run payroll, calculating the taxes and discovering your employee’s net pay (aka their take-home pay or the amount they make after payroll taxes are removed) is only the first part of the process. After you’ve run your payroll numbers, you face the important task of getting those taxes into the right hands and accounting for your payroll to the government. As a small business owner, it is your responsibility to:
Withhold all payroll taxes and submit them on time (the 15th of every month, or next available business day) to state and federal agencies.
Report income, withholdings, matching of payroll taxes to the government quarterly.
Keep records of yearly payroll for state and federal reporting agencies.
Send W-2s and 10-99s to employees and contractors listed with the correct amounts of their gross/net pay and tax withholdings.
When you have the monthly deposit to submit, you must submit the funds electronically (barring special circumstances allotted to small businesses only) using one of the following methods: via a third-party (through a software/payroll service like ADP, Gusto, or Paychex); through your bank’s Automated Clearing House (ACH) network; or by the Treasury Department’s free Electronic Federal Tax Payment System online/over the phone.
Some small businesses, especially those with low liability, can opt-in to a yearly payroll payment. This requires filling out a Form 944. Check the government’s website to check for current eligibility requirements.
Your Federal Unemployment Taxes are due to the government quarterly. Form 941 is your guide to reporting income, withholdings, and payroll taxes to the government, and the tax forms are due on the last day of the month after the end of the quarter. For example, quarter one ends March 31 and the report is due by April 30. And at the end of the tax year, you have until January 31 to deliver the necessary tax forms to your employees, former employees, and contractors, so they can file their taxes correctly.
If you are self-employed, you’ll need to gather your 1099-MISCs and file a Schedule C when you file your taxes (due April 15).
For both small business owners and the self-employed, it is imperative to maintain impeccable records of your state and federal payroll taxes, whether by hand in a notebook, in an old spreadsheet document, or by using online software.
Payroll Tax Penalties
Alright, here’s the big scary number: 100%. If you fail to withhold the proper amount from your employees, you the employer are 100% liable and will need to furnish the missing monies from your own pocket in addition to any legal penalties and fees you face. Look, people get real serious when you don’t give them the correct money owed. Also, these funds go toward employee services, so sometimes your employees can’t access these services if the account is behind. Employer error is costly because tax laws say that the onus for accuracy is on you, the business owner. And if you can’t pay those fees? That trickles down into every aspect of your business in a cycle: higher consumer costs, decreased employee wages, a hiring freeze. Not to mention that it erodes the trust between an employer and an employee.
If you don’t pay your payroll taxes on time, every month, you incur a 2% penalty for 1-5 days late; 5% penalty for 6-15 days late; 10% for 16+ days late or within 10 days of first hearing from the IRS. The maximum is 15%.
Also, the government doesn’t care if you outsource these jobs — if a third-party isn’t paying on-time (your payroll service or your bookkeeper), you still hired them and will receive the penalty all the same.
There are other ways you can be penalized, too, like if you miscategorize employees or you make an error on your reporting. There are too many potential errors to explain them all, so it’s important small business owners meet with tax attorneys or other tax experts for a full understanding of the myriad ways things can go off the rails.
Payroll Tax Deductions
But hey…those Statutory Payroll Tax Deductions (all the things we just talked about above: federal and state income tax, social security, Medicare, unemployment taxes) are not the only payroll tax deductions you’ll need to make as you process payroll. In addition to the mandatory deductions, you also have Voluntary Payroll Tax Deductions. These are things like health care, retirement benefits, worker’s compensation, or any other pre-tax deductions. As a small business owner, you might offer some of these programs and benefits but some of the cost can (and does) trickle down to employees.
Final Thoughts
Nothing concludes this post better than this: payroll taxes are complicated. But, they don’t have to be.
If you have a handful of employees, and you want to calculate payroll taxes yourself, then yes you can! You now know the basics of which payroll taxes you are responsible for, how to calculate them, and how and when to pay them. People have been processing payroll manually for longer than they haven’t been.
Or, you can opt for payroll software to help handle the calculation for you. Even if you do have a software program or an online program helping you, it’s great to know what those numbers mean and where that money is going. There are also free online calculators to use in lieu of a software program, or a regular calculator, or an abacus. All in all, these payroll taxes — while they may be an added stressor to the laundry list of small business owner responsibilities — are what pay into great social programs and protections. The most important thing to remember is that rates and guidelines can change yearly depending on inflation and tax laws, so keep up with current literature on the tax brackets from the IRS Forms. Know your state’s laws, file accurately and promptly, pay on time, and report on time. And if you want someone else to do it for you, check out our reviews of some of the leading payroll service vendors out there: Gusto, Square, ADP, Paychex.
The post What Are Payroll Taxes? And How Do You Calculate Them? appeared first on Merchant Maverick.
If you’re intrigued by the thought of making money by flipping houses, you aren’t alone. Flip through the TV channels (pun intended), and you’ll see home improvements that lead to a five- or six-figure payday. You may have even received an email promising frozen cocktails on the beach while raking in the dough … all because of house flipping.
What these TV shows and emails don’t tell you is that there is a lot of hard work involved in starting a house flipping business. I know, I know. The idea of a burgeoning bank account without having to do much work is appealing, but it isn’t the reality of the industry. That said, don’t be entirely discouraged — you can build a successful business that centers on flipping houses for a profit. You simply have to be prepared to put in the hard work — just as you would with any other business.
In this guide, we’re going to look at how to start your own house flipping business, step-by-step. While this isn’t a get-rich-quick scheme or even a guarantee of profitability, understanding the industry and what it takes to open and operate your business can increase your chances for success. Whether you’re brand new to house flipping and toying with the idea of becoming an entrepreneur, or you’re ready to hit the ground running, this guide is a must-read before you get started.
Why Start A House Flipping Business?
If you’re reading this, you probably already have at least some idea of what a house flipping business does, but let’s briefly review what this type of business entails. A house flipper buys a property at a low cost. This property could be distressed and in need of repairs, a foreclosure, an older home that needs to be updated, or a house that is located in an up-and-coming neighborhood. Once the home is purchased, it is renovated and resold to another buyer at a higher price.
So, why are people jumping into this industry? One reason that many people choose to flip houses is the potential for profits. If a property is purchased and renovated at a price that’s low enough and resold at a much higher price, you have the potential to pocket thousands of dollars per house. For example, let’s say you purchase a house for $120,000. After putting $20,000 into the house to replace floors, cabinets, counter tops, and make other cosmetic repairs, you are able to resell the house for $150,000. You have only invested $140,000 in the house, so you make $10,000 on this flip. Of course, there are circumstances where a flip doesn’t work out exactly as planned (which we’ll cover a little later), but there is the potential for big profits with a house flipping business.
A house flipping business may also be a great opportunity if you’re somehow already familiar with the industry. Maybe you have experience as a real estate agent or contractor, and you’re familiar with how the business works. You might have even flipped a house or two to make extra cash in the past, but now want to make it a full-time career. If you have experience — whether it’s selling properties or fixing them up — you can put these skills to work for your own house flipping business.
Finally, right now may be the perfect time for you to flip houses. We all remember the housing crisis of 2008, but more than 10 years later, the real estate market is hot again. Housing prices are on the rise, and investors are grabbing up properties to flip. According to Realtor.com, mid-sized cities in the South and Midwest with strong economies, growing populations, and an abundance of older properties in need of rehab are prime markets for flipping. If you live in these areas, house flipping may be the right business opportunity for you.
No matter what your reasoning, you must be prepared to work hard to make your business a success. From finding and securing financing to marketing and reselling your properties, you’ll need to be fully involved every step of the way (at least at first) and be prepared to encounter bumps in the road on your path to building a business.
6 Steps To Starting Your Own House Flipping Business
Whether you’ve already set your mind on flipping houses or you’re still on the fence, it’s important to understand what this business requires to be a success. We’ve outlined six steps to starting your own house flipping business to help you determine if this business is right for you. If so, these tips can help you get you on the right track. Let’s jump right in.
#1 Write Your Business Plan
Every business should have a business plan, and a house flipping business is no exception. A business plan is important for a few reasons. The first is that it acts as a road map for your business. It outlines the purpose of your business, evaluates the industry and your competition, projects profitability, and states the goals of your business.
In addition to outlining your goals and how you’ll achieve them, a business plan is also necessary in most cases to obtain funding. Flipping houses requires capital — capital that you obtain from traditional lenders, investors, or other sources. Your business plan shows that you know what you’re doing, you’re familiar with the industry and your competition, and you have a good chance for success, all of which add up to a lower risk investment for lenders.
There are several ways to write a business plan. A traditional business plan spans several pages and is more complex, containing in-depth analyses of your market and competition, financial projections over the next three to five years, your business strategy, and information about the members of your team. However, more businesses are scaling back on these lengthy documents and opting to create a one-page business plan. A one-page business plan is a condensed version of the traditional plan, offering information such as your objectives, a financial summary, and your industry experience. Learn more about whether a one-page business plan is right for your business.
No matter which plan you choose, there should always be a few things you include about your house flipping business, such as basic timelines, projected budgets, your market, and the types of properties you plan to flip.
#2 Set Up Your Business
Once you’ve written your business plan, it’s time to set up your business. At a minimum, this includes choosing your legal structure, registering your business name, setting up a business bank account, and acquiring any required licenses or permits. Taking these steps allows you to legally operate your business, determines how you pay taxes, and gives you credibility with lenders and investors.
The first step is to choose your legal structure. As a quick summary, a legal structure for a business may take the form of one of the following:
Sole Proprietorship:Â A sole proprietorship is the easiest and cheapest to set up. It does not require registration. Sole proprietors are taxed at the personal tax rate and file business earnings or losses on personal tax returns. This structure does not offer liability protections.
Partnerships:Â A partnership is a structure for a business with two or more owners. Partners are taxed at the personal tax rate and file earnings or losses on personal tax returns. Limited partners have liability protections, whereas general partners do not.
Corporations:Â A corporation is the most expensive to form and has the most requirements, such as annual meetings and a board of directors. Depending on the type of corporation, taxes may have to be filed using the corporate tax rate. Corporations can raise money through the sale of stock. There are also liability protections in place for owners.
Limited Liability Company (LLC): An LLC offers features of several legal structures. There are no requirements, and owners can choose how they are taxed. There are liability protections under an LLC.
This is just a brief summary of each type of legal structure. To learn more and to help determine which is right for you, check out our in-depth guide on choosing your business structure.
Once you’ve determined your legal structure, you’ll need to register your business name with the state in which you’ll operate. Depending on the legal structure you select, additional fees and or paperwork may be required.
Next, you’ll need to find out the types of licenses you need to operate your business. If you’re operating in an office outside of your home, for example, you’ll need a general business license and business insurance. As a house flipper, you’ll also need permits and insurance on each house that you flip, so it’s best to establish a relationship with an insurance agency early in the game. Some house flippers opt to get their real estate license. While this isn’t a requirement for flipping houses, it can certainly help you along the way.
Finally, you’ll need to set up your business bank account. This is necessary for keeping your business and personal finances separate, which especially comes in handy when tax time rolls around. If you seek business funding, this account will also be where your funds are deposited.
#3 Know How To Find & Secure Funding
You’ve taken all the steps of setting up your business and your new bank account. Unfortunately, your new business bank account is probably looking pretty empty … and in most cases, there certainly isn’t enough cash to buy and flip a property. The good news, though, is that this isn’t uncommon for new house flippers — or new business owners in general. It’s rare to find someone with their own cash to start and fund their own business, so that’s why new business owners turn to lenders or investors to get capital they need to start and operate their businesses.
There are a few funding options for flipping houses. The type you select is based on a number of factors, including time in business and your credit history. Not all funding will be right for your business. For example, if you have a low credit score, hard money loans may be an option for you. Hard money lenders base lending on the deal itself — not your personal or business credit or lack thereof — but are usually very short-term and have high fees.
Once you’ve been in business for at least a few months, you may need a flexible funding option to purchase properties, pay for renovations, or cover operating costs. In this situation, you may qualify for a business line of credit. Even if you have a low personal credit score, you may still qualify with lenders that consider the performance of your business over credit history.
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If you own your own home, you could use a home equity loan or home equity line of credit (HELOC) to fund your flips. If you have equity in your home, a low debt-to-income ratio, and a good personal credit score, you could qualify for one of those options, which come with low rates and favorable terms. If you have a retirement account, you could also consider a Rollovers as Business Startups plan (ROBS), which allows you to leverage your retirement funds without penalties.
For unexpected expenses or operational costs, consider applying for a business credit card. You can also get creative by bringing on a business partner or launching a crowdfunding campaign. Whether you’re new to the game, have some experience, or have credit challenges, there are options available to you. You just have to connect with lenders to find them.
No matter what type of funding you seek for your business, there are a few things to keep in mind. First, understand that borrowers with the highest credit scores typically qualify for more options that are also more affordable. So, one of the first things you want to do prior to submitting your application is pull your free credit score, access your credit report, and dispute any errors. You can also take steps to boost your credit score.
Once you apply for funding, make sure that you fully understand the terms, fees, and interest rates associated with your financial product. Don’t be afraid to shop around your options if you aren’t happy with a lender’s offer.
If you do secure funding, make sure to always pay as agreed and meet all conditions put in place by the lender. By doing so, you can not only raise your credit score, but you can also establish lasting relationships with lenders and investors that will serve you well as you build your business.
Unsure of which funding option to choose? Learn more about the best loan products for your house flipping business.
#4 Connect With Contractors & Other Professionals
In addition to lenders, you’ll also need to establish relationships with contractors and other professionals that will help contribute to the success of your business. Even if you plan to get hands-on with the renovation of your properties, you’ll still need a team of contractors to help with the work, particularly when distressed properties are involved. Not only will a contractor complete the work required to flip a house for profit, but a good contractor will know about licenses, permits, and other local requirements. You can also discuss your timelines and budgets with your contractors so you don’t have extended timelines or unnecessary expenses cutting into your profits.
When seeking contractors, don’t be afraid to ask for references or a portfolio. Also, don’t forget to shop around your options to find a reputable contractor that works with your budget. If you’re new to the industry, developing a working relationship with a reputable contractor can even help you score hard money loans from investors.
Another professional that you need on your team is a real estate agent. If you opt not to get your real estate license, a realtor has access to resources that will be essential for your business. This includes access to properties on the multiple listing service (MLS), as well as prospective homeowners that could be interested in purchasing your properties. A realtor can also help market and sell your renovated properties.
Someone else to keep on your speed dial is an attorney, and not just any attorney — one that specializes in real estate. There are some legalities of flipping houses that you don’t want to overlook, so it’s wise to have a real estate attorney on your team. An attorney is especially critical during your first flip. Overlooking important legal details, errors in contracts, and other issues could not only derail your deal but could also damage your reputation in the industry.
Over time, there may be additional professionals you’d like to have in your corner, such as an accountant and investors. For now, though, focus on finding the right contractors, attorneys, and realtors for your house flipping team.
#5 Understand The Importance Of Market Research
Knowing your market is key to maximizing profits as a house flipper. Buying the wrong property in the wrong neighborhood could result in a low profit that’s not worth the time invested in the property, or worse, a loss.
Working with a realtor can really help when it comes to knowing your market. Realtors have the inside scoop on the hottest neighborhoods, information on recently sold properties, and other data that can help you find the right homes for flipping. You can also take advantage of the vast amount of information you can find on the internet, where you can do a lot of your market research for free.
With market research, you’ll soon learn where buyers are buying, how much they’re paying, and what they’re looking for. While there are some variances depending on where you live, there are a few markets that are always hot, including neighborhoods with great schools, neighborhoods with homes that are at least 20 years old, areas with low crime rates, and houses that are close to amenities. Once you understand the market, you can begin further narrowing down the areas you wish to target and begin preparing for the next step: buying and flipping a property!
#6 Buy, Renovate, & Sell Your First Property
You’ve set up your business. You’ve connected with a team of reputable professionals. You’ve found and secured funding, or are at least aware of a few potential options. You know your market, you’ve researched recent selling prices, and there are properties on your radar. Now, it’s time to pick a property, buy it for the right price, renovate it, and then flip it for a profit.
This is where your team will really come in handy. For instance, your realtor may have information on properties before they hit the market, giving you an early edge over other flippers and buyers. Your attorney can help with the paperwork and walk you through the steps of purchasing and flipping a house — think, walk-throughs, insurance requirements, and negotiating contracts.
Once you’ve purchased the property, it’s time to start your renovations. Work through your budget and timeline with your contractors, and put the research you did earlier to good use. Look at comparable properties when determining what renovations need to be completed. For example, if recently sold houses in the same neighborhood have updated granite counter tops, add granite counter tops to your “to-do” list. Finally, be prepared for the unexpected. Deadlines may be missed, or there may be additional expenses that weren’t accounted for in the budget. It happens to even the most experienced flippers — the key is learning to roll with the punches.
After the renovations are complete, it’s time to put your house on the market. Your realtor will be a valuable asset by listing the property and helping you market it to buyers. Then, once a buyer is interested, work with your attorney to make sure all of the i’s are dotted and t’s are crossed. Once the property is sold, any amount that exceeds what you’ve put into the house is pure profit.
Final Thoughts
Let’s make one thing clear: flipping houses isn’t easy, no matter how simple it looks on TV. But if you’re ready to put in the work, you’ll find that house flipping is extremely rewarding. As you flip your first few houses and begin to find your groove, you’ll find that the process gets easier, just as it does with any other business.
You don’t have to go at it completely alone, though. We have a load of great small business resources right here, so check them out and get ready to build your business. Good luck!
The post Your Step-By-Step Guide To Starting A Successful House Flipping Business appeared first on Merchant Maverick.
