Download this form at IRS.gov
2014 has begun, and for me, and most other accountants, that means the start of busy season. This is because we are assisting our business clients with year-end issues – and sometimes “assisting” turns to “fussing at”. With a smile, of course.
So, what do I need to fuss about the most? Here are two things (out of many) that an accountant wants you to know and do regarding year-end business issues.
1099s
What I am referring to here is Form 1099-MISC. This form is an information return that you as the business owner are required to give to certain vendors. The rules change from year to year, but for now, here’s who gets one:
Issue a 1099-MISC to anyone who meets all four of these criteria:
-is a non-corporate entity (or a lawyer, whether or not they are incorporated)
-you paid $600 or more to during 2013 in the course of your business
-you paid by cash or check (not credit card)
-you paid them for rent or for services
In order to issue someone a 1099, you will need to have them fill out a Form W-9 (pdf link) and return it to you. The W-9 will tell you if the entity is incorporated or not, their tax ID number, and their address – all of which will be needed to issue the 1099.
The IRS has really begun cracking down on businesses to make sure that they issue 1099s properly, and they have various methods of enforcement. For example, say you pay $1,000 to a blog designer for services, and then deduct that as a business expense, but fail to issue a 1099. Under audit, the IRS could make you pay the taxes due on that $1,000 (in effect, you would not be allowed to deduct it, and it would be as if you used that money personally and gave the designer a gift), and you would get dinged for not answering questions on your tax return properly.
On every business tax return – Schedule C included – there are two questions. The first asks if you made payments that required a 1099. The second says, “if yes to the first, then did you issue them?” There are penalties for the business owner (and the tax preparer as well) if these questions aren’t answered correctly.
What I recommend to my clients before they pay a vendor that they think should get a 1099, is that they get a W-9 from that vendor. The vendor is much more likely to fill out the W-9 and give it back to you while you are standing there with their check in your hand.
Reconcile your bank statements
Now, don’t even tell me you never reconcile your bank statements, because I will pass out right here. I will. I think everyone should reconcile their bank statements, but ESPECIALLY business owners. It is just good business practice.
In fact, our firm will not even start working on a tax return until the bank statements are reconciled. Here’s why:
1. You catch mistakes
Say you accidentally recorded an expense as $100, but the expense was really $200, and that is how it cleared the bank. If you didn’t reconcile your bank statements, you would never catch that, and you’d be paying taxes on that extra $100 that you lost as an expense.
It works the other way around too – I’ve seen where the bank has made a mistake with clearing a check (like, the check cleared for $150 when it should have just been $120). If you don’t catch that by reconciling every month, you’d never get that extra money back in your account. Most banks only give you 60 days to dispute a transaction.
2. It can catch fraud
Many business owners first become aware of fraudulent activity, whether by an employee or an outside person, because items cleared the bank account that were not a part of the books and records.
3. It can save you money
One thing that the IRS looks at under audit is your bank statements. They want to know what every deposit is and if you treated it properly on your tax return. Reconciling your bank account makes sure that you have properly accounted for every deposit, whether it is income, a loan, or capital that you contribute to your company.
If you miss something, say a deposit that should have been counted as income, it could cost you big money. Best case scenario is that you catch it – then you are just paying to amend a tax return. Worst case scenario is that the IRS catches it – then you’ve got penalties and interest.
Do you have 1099s to issue? Is there anything that you do as a part of your year-end procedures? Are you guilty of not reconciling your bank statements?
Kim is a licensed CPA, working at Loggins, Kern & McCombs, CPAs. If you have a tax question that you would like to submit, please click here. Whatever advice you receive, please remember to consult with your own tax professional as issues vary depending on your situation.
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Great tips, Kim. I’m looking forward to your posts this tax season (and after too!) I imagine you do an awful lot of fussing at small business owners. I’m in the process of getting all my things organized so I can sit down with my accountant. I only have a couple of 1099s to complete and I try very hard to keep up with reconciling my bank statements. Otherwise it’s just such a huge pain to try to do it all at once.
You are right — Ideally, we would all keep up with stuff as it happens, and then that makes it much easier at year end. But, it doesn’t always work out that way. Please feel free to send a comment if there is something specific you’d like a tip on. Thanks!
I have never even heard of 1099s. Further proof that I need to do a lot more research if I ever intend to take freelancing to the next level.
The whole purpose of the 1099-MISC is because the IRS doesn’t trust the person that you are paying to report their income. It unfortunately is just another burden on the small business person.
I’ve never owned a business, so I’ve never had to worry about 1099s other than the ones I might receive from various accounts. Good tips on handling bank statements and why it’s important.
Thanks, Bryce for the feedback! And, thanks for reconciling! 🙂
It’s interesting to see some of these things from the other side of the situation. This is our first time needing to issue 1099’s and we’re having our tax person do them as it really didn’t cost much at all. I figure that way they’re done and they’ll get them out on time. We do reconcile our activity/statements, though last year we were probably only doing it once a quarter. We’ve grown to the point that we need to do that more regularly now and have begun scheduling sessions with my wife and I going over them once a month so it doesn’t get away from us.
Truthfully, your tax person can do it much more efficiently than you can because he or she probably is doing a ton of them. It’s one of those expenses where it works out better to pay someone else to do it. It’s probably good too, to go over your financials with your wife every month so that you can see the profitability of the various income streams. It may show you that you should spend more time on one area over another.