The Importance of Classifying Workers

Recently, the IRS released a fact sheet to help remind small businesses of the importance of correctly classifying workers. Sometimes IRS lingo can be complicated, so we broke it down for you.

Let’s start with the question that’s probably going through your head – why does this matter?

When you classify your workers, this can help determine if you need to withhold income, social security and Medicare taxes. It also helps determine if you actually have to pay these taxes on employee wages. When it comes to independent contractors, businesses usually don’t have to withhold or pay taxes. If you’re not classifying correctly, you can get stuck with some harsh fines and penalties.

So how do you determine if the individual is an independent contractor or an employee? One general rule to follow is that your worker is an independent contractor if the business has the right to control only the result of the work, not how the work will be done. However, there are three categories that can help you make your determination.

Behavioral Control

A worker is considered an employee when the business gets to be bossy. Okay, maybe bossy isn’t the right word, but the business does have the right to direct and control the work being done. Behavioral control can be broken down into a few more distinct categories:

  • Type of instructions – This can include telling the employee where to work, when to do the work and how the work should be done.
  • Instruction complexity – The higher the complexity of the instructions given, the more likely it is the individual is an employee. When the instructions have less detail, this gives the worker more control to do the job how they see fit, which points towards the worker being an independent contractor.
  • Evaluation – How a business evaluates the work can help determine if the worker is an employee or contractor. If the details of how the work was done are evaluated, then the worker is likely an employee. However, if only the end product is being evaluated, it’s more likely you have a contractor.
  • Training – This one is fairly simple. Would you like someone else telling you how to do your job? If a worker is an employee, the business has the authority to do just that. For independent contractors, they are the experts and generally don’t require training from the hiring company.

Control over Finances

This category looks at what control the business has over the financial and business pieces of the worker’s job. Factors to consider include:

  • Equipment investment – Independent contractors are much more likely than employees to make significant investments in the equipment they are using to get the job done. Employees are often provided equipment from their employer, rather than investing in it on their own.
  • Expense reimbursement – Businesses generally reimburse expenses for their employees, not for independent contractors.
  • Availability – Independent contractors generally have the freedom to seek out more business opportunities, while employees work is usually contained to the one business.
  • Payment – This one is easy to understand. When you have employees, you usually guarantee them a regular wage. With independent contractors, a flat fee is usually agreed upon and paid on the completion of the work.

Relationship Elements

What the business or worker offers in the relationship can also determine classification. Some key elements to consider are:

  • Contracts – Written contracts which describe the relationship the parties plan to create are a fairly simple way to determine which type of worker the business has. However, it’s important to note that a contract stating the worker is a contractor or an employee isn’t enough on its own to classify the worker’s status.
  • Benefits – Insurance, retirement, vacation and sick pay are benefits provided to employees. It’s rare for these benefits to be given to independent contractors.
  • Forever or just a fling – The length of time of the relationship can help determine a worker’s status. When an employee is hired, the expectation is that the relationship is long term. For contractors, the relationship isn’t permanent. Instead, both parties enter the relationship with the assumption of a certain amount of time for the work to be completed.

When businesses wrongly classify their workers, they are still liable for the related taxes and payments for those workers, and may even face other sanctions. Correctly classifying your workers helps you avoid this, making it easier for you to run your business.

We know this stuff can be kind of confusing – and even scary. But don’t fear! We are here to help.. just ask!

 

Have Questions? We have Answers

In our line of work, we get a lot of questions on anything and everything related to owning and operating a business (and we’re happy to answer them, too)! While a lot of these questions are usually pretty easy to answer, sometimes we get a few that really make us think. Even then, we enjoy researching and finding the answers to help business owners be successful.

So, what questions do you have about your business? We would love to help you reach your dreams and goals.

In case you think your question might be too far out there, we promise it’s not. Check out some of these questions (and our answers) to get you started on finding the information you need to watch your business succeed.

“I have invoices coming out of my ears! What do I do with all of them?”

When you have a large amount of invoices to deal with, it’s easy to get overwhelmed and lose track of what needs to get done. When invoices aren’t being properly managed, your business can see some serious negative side effects, such as fraud. Following this list of tasks can help you make sure you’re keeping everything in check. Looking to an automated system, such as QuickBooks, is also a great way to keep your invoices at a manageable level.

“Where in the world did all of my cash go?”

This question is more common than you may think. While your business may be profitable, you can still be running out of cash, which might be a concern. Financial struggles can be hard, but our professionals are available to help. Check out this blog – and then, let’s talk!

“Why don’t I have enough time to do everything that needs to get done?”

We get it: owning and operating a business means you have a lot on your plate. From accounting and finance, to human resources to the day-to-day operations, you probably don’t have enough time to do it all yourself. The good news is you don’t have to! Consider your team of employees. What can you delegate to take some of the burden off your shoulders and free up some time? Another option is outsourcing. When you outsource some of your business activities, such as your accounting processes, you free up time to focus on why you got into business in the first place.

“What is this accrual accounting thing I hear so much about? Am I doing it?”

Knowing the specific ins and outs of accounting can be a confusing, daunting task. What it comes to what method of accounting you are using, the water may get even muddier. Maybe you’ve heard of cash based accounting and accrual accounting, but you really have no idea where to begin. We’ve written multiple blogs on how to tell the difference and how to select what fits your business and set up your books. Check them out!

“Taxes terrify me. Where do I even begin?”

Taxes are a complex issue, and questions regarding this topic are common. Whether you want to know more about R&D tax credits, employer vehicles and mileage, how to track your taxes or even all those pesky (yet necessary) forms, we’ve got you covered. Check out our tax archive for answers to all your most pressing questions. If you can’t find the answer, let us know.

Remember, although we numbers nerds really like our financial lingo, we promise to answer your questions in a way you will understand, not just a bunch of accountant talk. After all, we want to see your business succeed!

Setting up for Success: Part 2

Welcome to our “Setting up for Success: Part 2” blog post. Part one focused on selecting a basis for your accounting and determining what information you need to track in your business.

Now that you understand what you need to track, how do you track this important information?

You can start by developing your chart of accounts. We know what you’re thinking: “develop my what?!”

Your chart of accounts is a listing of accounts that are needed to prepare financial statements and reports. A typical structure looks like this:

1000-1999 Assets

            2000-2999 Liabilities 

            3000-3999 Equity

            4000-4999 Sales

            5000-5999 Cost of Goods Sold (COGS)

            6000-6999 Operating Expenses (General and Administrative)

            7000-7999 Other Income and Expense

            8000-8999 Income Tax Expense

Account numbered 1000-3999 are used in preparing the balance sheet, while numbers 4000-8999 are used in preparing the income statement, which focuses on profit and loss. Of course, the number of individual accounts within each category will depend on the specific needs of your business.

A good rule to keep practice is to try to use the least number of accounts to attain the financial information you need, and structure it for growth.

What do we mean by growth? Let’s take a closer look at the assets section:

1000 Petty Cash

            1005 Checking

            1010 Savings

            1100 Accounts Receivable

            1200 Inventory

            1300 Prepaid Expenses

            1400 Fixed Assets

            1450 Accumulated Depreciation

You probably noticed the account numbers aren’t in sequential order. This allows for room for growth in your business.

You can also use the chart of accounts to track different jobs, departments, segments, etc. For example, maybe your business has locations across the Midwest in Fargo, Minneapolis and Sioux Falls. You want to be able to see how profitable you are at each location. You can track each location by assigning a division number, such as 01-Fargo, 02-Minneapolis, 03-Sioux Falls, and then attaching each division number to each of the accounts, like this:

            4000-01 Sales

            4000-02 Sales

            4000-03 Sales

            5000-01 COGS

            5000-02 COGS

            5000-03 COGS

Now that you know what information you need and how to track it, you can select an accounting system to help you track and keep information in order.

There are two options for tracking your information: manually or electronically (think desktop or cloud based). While there is no right or wrong way, computerized accounting is usually more efficient, which is leading to manual accounting becoming a dinosaur in today’s accounting world. Cloud based accounting also gives you the freedom to access your information anytime, anywhere. Who doesn’t love simplicity and accessibility?

It’s important, as always, to remember that each business is different, so accounting systems usually aren’t one size fits all. Doing your research and truly understanding your business’ needs can help you select a system that gives you the best possible results.

If all of this seems overwhelming, fear not. We have the resources and talent to help you design an accounting system that can set your business up for success.

Setting up for Success: Part 1

You’ve decided to start a new business – how exciting! There are many important things to consider when getting everything set up, such as your human resources policies (your employees matter!) and software and solutions (you want everything organized and running smoothly). Another important component you need to consider is your accounting – after all, these numbers lay the foundation for your business and essentially tell your story.

Accounting is an important part of your business, and getting it right the first time is crucial. So where do you even begin?

First, it’s important to understand your business and industry. This understanding can help you answer some important questions for designing your accounting system. Some of the questions that may come up include:

  • “What basis of accounting should I be using?”
  • “What information should I be tracking in order to make informed decisions?”
  • “I know what I want to track, but how do I track it?”

Let’s start with the first question: selecting your basis of accounting. Your basis of accounting is essentially a framework used to record your transactions. There are a few different types to choose from, with the following being the most common.

  • U.S. GAAP (United States Generally Accepted Accounting Principles) – Try saying that one ten times fast. This is an accrual based framework in which revenues and expenses are recorded when they are earned and incurred, respectively. This is the most commonly recommended type.
  • Cash Basis – In this framework, revenues and expenses are recorded when cash is received or paid, respectively. Cash basis presents two different methods of accounting: pure and modified. The difference comes in that under modified cash bases, some transactions follow U.S. GAAP. Check out this blog to learn more about cash versus accrual methods.
  • Income Tax Basis – This is a framework in which revenue and expense recording depends on tax regulations. This helps eliminate the need for converting from one basis of accounting to another for tax return purposes.
  • Regulatory – In this framework, a regulatory agency prescribes the best method.

Now that we’ve looked at the different basis types available, it’s time to determine what information you should be tracking. The key here is to capture all of your business transactions in the simplest, and most efficient, way possible. This includes both cash and noncash transactions.

Depending on your specific business or industry, you might need to consider tracking your transactions in greater detail. Here are some areas to consider tracking:

  • Should you be tracking direct and indirect costs related to construction or manufacturing contracts so you can see the profitability?
  • What sales tax jurisdictions do you need to track for sales tax reporting?
  • Do you need to track certain items for tax return purposes?
  • If you do business in multiple states, should you be tracking transactions by state for tax purposes?
  • Do you have different departments or divisions that you need to track in order to view profitability?

Once you decide what information you should be tracking, you can select an accounting solution, and start designing your accounting system.

Stay tuned for the second part of this blog, where we go in depth about how you track your information. Although we’ve shared similar posts about these topics in the past, we think a refresh and reminder is important. If you need help in the meantime, just ask!

Small Business Loans 101

Guest Blog By: Matt Gruchalla and Shelly Kegley of Bell Bank

In today’s banking environment, securing a small business loan takes more organization than one may anticipate. There also seems to be a correlation between how organized a borrower is, and success in getting approved for a small business loan.

Financing for a New Business

It is important to plan well in advance for starting a business so the business owners are financially well positioned for success. This gives the bank an idea of the owner’s capacity to support the business if additional cash injections are needed at any point. Some items to consider prior to starting a business include:

  • Personal credit – The owner’s credit report should be free of anything derogatory, and reflect that all accounts have been paid as agreed. Revolving debt and credit card balances should be minimal. Assuming the owner’s personal accounts have been handled as agreed, personal credit scores should be acceptable.
  • Personal income tax returns – Typically, lenders require three years of personal income tax returns, as well as income tax returns for any business ventures the owners have been involved with.
  • Personal financial statement – This is a detail of the owner’s assets and liabilities. Potential lenders will look closely at owner’s cash, liquid investment balances and equity in homes or other real estate, as these can be sources for initial or ongoing business capitalization.
  • Outside investors or loan guarantors – If a business owner feels they may not be financially positioned to start a business, a good option may be to consider outside investors or loan guarantors.
  • Business plan – A great business plan includes a market analysis that’s backed by real data. The business plan should explain why there’s a need for the product or service that the potential business will sell, as well as what differentiates them from their competitors. The business plan should include a summary of the background and experience of the owners and key employees. Obstacles and success barriers should be discussed and mitigated.
    • A business plan shouldn’t be lengthy or redundant. Keep it clear and concise! SCORE and the Small Business Development Center are two outstanding resources available in the FM area to contact if you need assistance with completing your business plan.
    • Projections are a key component of a business plan, and shouldn’t be overly optimistic. The assumptions used to formulate the projections need to be explained so the lender understands how they were determined. The projections should include a “day one” balance sheet, along with year-end balance sheets for the first three years. Income statement projections should include monthly projections for the first year and annual projections for the next two years.
  • Sources and uses summary – This gives the lender an idea of what the loan funds will be used for, and will detail the equity that will be contributed by the owners. There isn’t a hard and fast rule for the amount of equity needed but typically 20% to 25% is normal.

Financing for an Existing Business

Securing financing for an existing business is normally an easier process because a lender can rely on a proven history rather than on projections. A projection may be needed if the financing request materially changes the business operations; however, these projections may be easier to complete since the business owner will have a better understanding of their business and industry.

From the business a lender will require:

  • Three years of business financial statements
  • Most current year to date financial statements
  • Three years of business income tax returns

From the business owners a lender will require:

  • Three years of personal income tax returns
  • A current personal financial statement

Obtaining a small business loan may seem daunting, but an organized, financially healthy borrower will have a much easier time securing a small business loan. Taking the time to prepare a well thought out business plan, and becoming financially healthy, will make the financing process go more smoothly.

When it Comes to Accounting, Communication is Key

By: Kristie Rants, Eide Bailly LLP

We get it: the thought of sitting down and talking with your accountant might be a little scary. After all, all they do all day is sit and stare at numbers and do math, and their jargon and lingo is hard, if not impossible, to understand, right?

Not exactly.

While the thought of having conversations with your accountant might be intimidating, it really shouldn’t be. More often than not, your friendly number cruncher wants to talk to you, too (and we promise to use words that make sense)!

To help the conversation go smoothly, we came up with some tips to help you have successful conversations with your accountant.

Communication is key

  • First and foremost: figure out the best method for communicating with your accountant. Whether it’s in person, email or even Skype, agree on what works best for both of you.
  • Decide on frequency for communicating. Some businesses may need to have meetings weekly, while others may be on a monthly schedule. This is usually driven by business needs.
  • Make sure you’re both on the same page. It’s important that your accountant understands your business, just as you should be able to understand what they’re talking about. If you are unsure about the topic being discussed, don’t nod your head – ask more questions!
  • Establish a relationship. Create an environment where both you and your accountant are comfortable with each other. When you have a solid relationship with your accountant, it’s often easier to ask whatever is on your mind, no matter how basic it may seem.

 

Be prepared

  • Come prepared to each meeting. Make sure you have organized and complete information to share. If you’re not sure what exactly to bring, ask your accountant. He or she can give you a list of documents and information that might be needed.
  • Be prepared to share any changes occurring in your business. This keeps your accountant in the know and decreases the likelihood of any unwanted surprises in the future.
  • Ask questions throughout the year and as they arise rather than holding them all in. It’s easier to remember and examine information right away, rather than waiting six months down the road.
  • If your accountant sends out newsletters, articles, etc., read them! These often contain current and important information that can impact your business. If your accountant thinks it’s important, you should give it a read as well.

Accountants wear many hats

  • Your accountant likely has access to many resources to help you with any phase of your business. Your accountant can do all sorts of tax planning, whether you’re interested in putting away additional money in a retirement plan or wondering what your options are for depreciating equipment. Maybe a cost segregation study to accelerate depreciation or a 179d study makes sense for you!
  • Accountants can even help train you or your staff. Ask them if they offer an on-site service. Sometimes a few hours of training makes all of the difference. (Shameless plug: our accounting coach services do just that)!
  • Consider what stage your business is in. If you’re thinking about selling (or buying) or even retiring, your accountant can likely help you or introduce you to someone who can get you on the right track for a successful transition. They have the expertise to help you succeed.

The moral of the story…

Communicating with accountants can seem intimidating and confusing. Using these tips can help you have successful conversations. If you’re still intimidated, reach out. We promise to help you understand the accounting side of your business so you can get back to doing what you love.

Preparing for Month End

It’s the end of the month, which means it’s time to see how your business did. All you have to do is run the magical reports out of your accounting system, and you get to see how much money you made, right? Probably not. Technology has made things a lot easier and gives us quicker access to our information, but there are still certain items that need to be taken care of, or at least looked at, when each month ends.

Every organization should strive to be able to produce timely and accurate financial information within a reasonable period of time after a month has ended. This information is vital to understanding your business and allows you to make informed decisions—that’s what you want, right? The best way to do this is to create a monthly close process. The process should be thoughtful, documented and communicated to all parties involved.

How to Create a Monthly Close Process

  1. Record daily transactions. It might seem straight-forward, but accurately recording day-to-day transactions is the basis for all financial reports. Ideally these transactions should be recorded when they happen, which incorporates much of the work into the daily operations instead of waiting until the end of the month. Recording these transactions daily also allows you to see some very important information throughout the month, such as who owes you money or who you owe money to. A little extra daily work amounts to saved time at month-end.
  2. Record monthly journal entries. Some entries don’t fall into the daily transactions category. These transactions, such as recording accrued expenses, amortization or depreciation expenses, are often only recorded once a month to present accurate monthly financial statements. Let your system work for you—set up it up to help remind you and automate some of these recurring entries.
  3. Reconcile balance sheet accounts. The first account you should reconcile is the cash account. What exactly is reconciling? Well, it’s the process of making sure you’ve captured all transactions. Nearly every accounting system has a built-in reconciliation feature, and going through this exercise is the easiest way to uncover any missing transactions since cash is a part of most transactions. Once cash is reconciled and any missing transactions are recorded, you can move on to reconciling other balance sheet accounts, like credit cards, accounts receivable and accounts payable.
  4. Review revenue and expense accounts. This step is often overlooked by business owners because they generally feel they’re watching them enough during the month. Why look at it again at month-end? We’re not saying that you need to go through every revenue or expense transaction, but take a quick look through the balances in the revenue and expense accounts and assess if they look reasonable or not. This can help make sure things have been recorded in the right period, or on the right date.
  5. Prepare financial statements and have management review. Now that you’ve recorded all the transactions and made sure everything looks good, you’re ready to put together the financial statements. Most of the time, you can run a basic financial statement directly out of your accounting system. Consider running a balance sheet, income statement, accounts receivable aging, and accounts payable aging. After this, it’s important to have them reviewed and approved by management: the owner, the CFO or the Director of Finance.
  6. Close the accounting system. You’ve made it to the final step—yes! After the financial statements are approved, it’s important to close the month in the accounting software. This prevents future transactions from accidentally being recorded in this month, and keeps people from accidentally changing a transaction.

Following these steps will get you on the way to your goal: Generating accurate and timely financial records. It puts the right information into your hands and allows you to make informed business decisions. If this sounds too intimidating, we’re happy to help. We have the expertise and technology to help ease the headaches. Plus, we’re accounting nerds (really, we love numbers) and think this is fun!