Business Finance Articles

Accurate payroll accounting is important to businesses of all sizes.

Avoiding sloppy payroll accounting ensures accurate tax returns, reduced cost from accountant untangling and no omissions of valuable tax deductions.

Few businesses realize that the Internal Revenue Service makes an accuracy assessment by comparing payroll figure consistency on a variety of filed reports. No business escapes notice by the IRS.

The person with authority over business payroll matters is personally liable for accounting of wages and payroll deductions. This means that the boss who signs payroll tax returns is required to certify that payroll taxes are correctly calculated and remitted. Total gross wages are reported on payroll forms that are normally submitted quarterly.
Amounts on the payroll forms must match wages and payroll tax expense on the income tax return.

Businesses with workers must separately account for taxes withheld from wages and the payroll taxes paid as employer expenses.

The withheld amounts are not an expense for payroll taxes. These are merely part of the compensation paid to employees. You therefore have to account for withheld taxes as “wages” expense.

Your accounting system must record gross compensation paid to employees before any deductions. Most fringe benefits you provide employees are also recorded as gross wages expense. Tax laws permit excluding some benefits – notably health insurance paid according to certain rules. Accurate payroll accounting requires tracking types of withheld amounts and subsequent remittances.

Some deductions from wages reduce an employee’s compensation subject to income tax but do not reduce wages subject to Social Security and Medicare taxes. A prominent example is retirement plan contributions made by an employee. These are part of the business expense for “wages.” The only “retirement plan” expense of a business is contributions to retirement accounts by the company that are not withheld from wages.

Every year, accounting firms spend an extraordinary amount of time preparing income tax returns that show expenses for “wages” that match payroll tax reports. This process transpires because businesses fail to correctly account for tax withholding from employee pay in the “wages” expense category.

When amounts are withheld from wages, they are described as accrued by the business until they are later paid.

This same accrual for future remittance also occurs with the payroll tax expenses of the business.

Each employer pays contributions to Social Security and Medicare based upon wages. These are the tax amounts not withheld from worker compensation. They are payroll tax expenses of the business.
Unemployment tax is another employer expense not withheld from wages.
Even a business that uses cash-basis accounting is entitled to deduct un-remitted payroll taxes that accrued for prior pay dates. The payroll tax expense of the business is recorded when employees are paid.

Both withholdings from gross wages and the employer payroll taxes are simply payable in the future. But the wages and employer tax liability are accounted for as expenses on payday.

Tip income is an important area of concern for several types of businesses. Employers are responsible for including tips received by workers on their W-2 forms.

Workers must report to their employers the total tips received in a calendar month whenever the amount exceeds $20. Employers include reported tips in calculations for withholding of income tax as well as Social Security and Medicare taxes.

Box 1 on a W-2 for wages should include reported tips. In addition, Boxes 3 and 5 for Social Security wages and Medicare wages are applicable for reported tips.

Paychecks can possibly have insufficient wages to cover withholding requirements on tip income. Any required withholding that isn’t collected is reported in a special box on Form W-2. This figure should match the adjustment on an employer’s quarterly federal payroll reporting. Alternatively, workers may give their employers money from collected tips to cover calculated withholding amounts.

Food and beverage businesses have a special rule about tips. When reported tips are less than 8% of gross receipts, most food and beverage establishments must calculate the deficiency. This figure is then allocated among employees according to a formula based upon proportions of gross income or hours worked. Allocated tips are indicated in a special box on Form W-2. No withholding is required on allocated tips.

The IRS has escalated enforcement of tip-reporting rules. Businesses in industries where tipping of employees is common should ensure that compliance measures are executed for all income from tips.

Generosity is a beautiful thing. But that doesn’t mean you should give away money to business customers who aren’t even asking for a handout. This is exactly what you’re doing, though, if you charge less than the value people are willing to pay.

Business owners are always reluctant to raise prices. They worry that charging more will bring customer objections.

Whether you’re an independent freelancer with a few clients or a small business with several employees and many customers, your concern about hiking prices is unfounded.

If you are raising prices, start a smooth transition with specific communication to customers about what your business offers. Avoid vague generalizations about your business that create difficulty in raising prices.

For example, most photographers present themselves as specializing in weddings and social events. Their websites and showrooms display photos from these activities. The specialty justifies higher fees, which they still charge even for simply shooting a portrait.

Your attorney probably focuses on a particular legal area, such as complex real estate law or employment law. He or she will still prepare a simple last will and testament for you, but the hourly rate will be the same as what he or she justifies as a specialist.

Bookkeepers who promote themselves as catering primarily to doctors and similar professions also generally charge higher fees. They still accept business from other industries, but at a higher fee because they target specialized services.

A simple method to justify rate increases is to make them a regular part of business. This eliminates waiting for the right time to raise your prices. Instead, you simply schedule increases as a cost-of-living factor. You remove having to explain sudden price changes, but you have a simple reason if anyone asks.

An especially easy way to change prices is by providing variations, depending upon the type of purchase. Retail establishments do this all the time by giving discounts at particular times of the day or a bargain price but a small unit size. Service businesses can copy the approach by charging not only hourly rates but also weekly retainers or creating monthly contracts for limited services.

A corollary to this approach is offering tiered pricing. Charge more for the first hour of service. Give a 50% discount for buying three items or give the fifth one free.

Offer home delivery or setup for an extra fee. Allow customers to decide if they want to pay more for rush service. Your good customers want the best and are willing to pay extra for it.

Innovative businesses offer differential prices to members of a special buyers’ club. They provide discounts to visitors on the website or social media pages of the business.

This improves marketing exposure for selling new services or products.
Exposing customers to closely related items makes them purchase more. Your business increases revenue per person without really charging higher prices, because of the discount.

There is no such thing as a fair price for any product or service.

You can determine your value only by trying some of these price-raising approaches.

Generosity is a beautiful thing. But that doesn’t mean you should give away money to business customers who aren’t even asking for a handout. This is exactly what you’re doing, though, if you charge less than the value people are willing to pay.

Business owners are always reluctant to raise prices. They worry that charging more will bring customer objections.

Whether you’re an independent freelancer with a few clients or a small business with several employees and many customers, your concern about hiking prices is unfounded.

If you are raising prices, start a smooth transition with specific communication to customers about what your business offers. Avoid vague generalizations about your business that create difficulty in raising prices.

For example, most photographers present themselves as specializing in weddings and social events. Their websites and showrooms display photos from these activities. The specialty justifies higher fees, which they still charge even for simply shooting a portrait.

Your attorney probably focuses on a particular legal area, such as complex real estate law or employment law. He or she will still prepare a simple last will and testament for you, but the hourly rate will be the same as what he or she justifies as a specialist.

Bookkeepers who promote themselves as catering primarily to doctors and similar professions also generally charge higher fees. They still accept business from other industries, but at a higher fee because they target specialized services.

A simple method to justify rate increases is to make them a regular part of business. This eliminates waiting for the right time to raise your prices. Instead, you simply schedule increases as a cost-of-living factor. You remove having to explain sudden price changes, but you have a simple reason if anyone asks.

An especially easy way to change prices is by providing variations, depending upon the type of purchase. Retail establishments do this all the time by giving discounts at particular times of the day or a bargain price but a small unit size. Service businesses can copy the approach by charging not only hourly rates but also weekly retainers or creating monthly contracts for limited services.

A corollary to this approach is offering tiered pricing. Charge more for the first hour of service. Give a 50% discount for buying three items or give the fifth one free.

Offer home delivery or setup for an extra fee. Allow customers to decide if they want to pay more for rush service. Your good customers want the best and are willing to pay extra for it.

Innovative businesses offer differential prices to members of a special buyers’ club. They provide discounts to visitors on the website or social media pages of the business.

This improves marketing exposure for selling new services or products.
Exposing customers to closely related items makes them purchase more. Your business increases revenue per person without really charging higher prices, because of the discount.

There is no such thing as a fair price for any product or service.

You can determine your value only by trying some of these price-raising approaches.

The bookkeeping process for a small business gets about as much respect as the children’s table at a big family reunion. You know it’s there, but coordinating the details isn’t too important.

The excitement in business is conducting sales, creating marketing campaigns, implementing new technology, improving efficiencies, and expanding with new products or services. But bookkeeping is crucial. Business managers who give bookkeeping the attention it deserves are more likely to succeed in both good times and not-so-good economic environments.

Before assigning your bookkeeping process, evaluate the situation for your business. Maybe you or someone on your staff can handle the bookkeeping along with other tasks. But don’t stick just anyone with the assignment. Select a person with bookkeeping ability.

If you’re just getting started or you conduct business as an independent contractor, you might want to do the bookkeeping yourself. Take the responsibility seriously. Read a book or take a course on bookkeeping for nonaccountants. Then get a CPA to periodically check your work.

If you don’t understand double-entry bookkeeping and can’t determine whether to debit or credit an account, stay away from the bookkeeping and hire a professional.

Accurate bookkeeping gives clarity to your financial situation, allows for better planning, helps you avoid cash-flow problems, improves your ability to borrow or raise capital, and facilitates audit-proof tax preparation.

Small-business owners understand the expression that you have to spend money to make money. But that doesn’t mean you should spend unwisely.

Wasting money is a luxury in good economic times and a path to certain doom in a strained economy. Determining expenses to cut is an effort that too many small-business managers find excuses to avoid.

Following are five views on expense reduction in several categories to help you get started on improving cash flow:

Advertising

Carefully targeted advertising is often effective at attracting customers, but it’s not always a worthwhile expenditure. According to Lin Grensing-Pophal, author of Marketing With the End in Mind, more cost-efficient ways exist for small businesses to generate awareness of their products or services. An especially popular way to build sales is with social media.

Companies can build relationships and attract frequent visits to their social media pages by offering online coupons and loyal customer discount codes.

Another way that Grensing-Pophal says local companies are gaining exposure is with regional publications that are distributed only to local markets.

Shopping for Discounts

When economic conditions are constrained, less spending occurs. That means retailers are commonly discounting merchandise to keep inventory moving. Small businesses can take advantage by adding assets while prices are low.

An article in Entrepreneur magazine says that discount shopping for furniture and supplies can save businesses 60% off retail prices. For a business looking to replace equipment, plenty of used and refurbished options are available.

Paper

Circumstances today have never been better for going paperless. Computer storage space is cheap. Scanning software is also inexpensive. All you need is a data system for filing paperless information that is easily understood for simple retrieval of archived documents. Start by training your employees to save emails and all attachments to folders in your automated system. Eventually, you can send invoices and purchase orders via email instead of printing and mailing.

Worried about security and data backup? Consider using secure cloud computing services. Customer records, company manuals and memos stay online with encrypted security. Password-protected access to files is available at any location with an Internet connection.

Direct Deposit

Encourage employees to accept direct deposit of payroll. An article in 2009 on Inc.com states that companies can save an average of $176.55 per employee every year by using direct deposit. Even for a small company with 10 employees, that’s enough money to help meet an emergency expenditure. Offer employees a one-time bonus for signing up to use direct deposit.

Outsource

Don’t make staff additions when you can outsource the job to an independent contractor. Small businesses that use outside service providers save costs. Routine functions that are ideal for outsourcing include website administration, bookkeeping and payroll, and technical writing.

You don’t have to possess a high degree of financial expertise to manage a small business. But there are three critical areas you need to monitor:

Input Efficiency

The first aspect of business operations to examine is input efficiency. This is commonly measured by knowing how much cost you incur for everything you sell. It goes beyond calculating overall gross profit by deducting from sales revenue the direct costs to manufacture or acquire goods. The truly useful figures are gross profit for each product. Studying cost fluctuations for every one of your products permits you to know the cost to produce more of anything and recognize when to adjust your prices.

For a wholesale or retail business, the costs are more than just the outlays for each item. You have to allocate expenditures for warehousing, packaging and shipping as well as personnel costs for selling, receiving and customer relations. Facility operating costs are not necessarily equally proportioned among all products. Some items require more overhead.

This same input analysis applies to service businesses, where owners can measure the costs for each type of service offered. There are always subtle variances. The nature of some projects requires more selling time. A month of emails and phone calls to land big deals is more costly than just three days to procure simpler contracts. After adding travel expenses and some contract labor, sometimes the larger projects don’t provide any more profit than the smaller ones.

Output Efficiency

The second area to assess is output efficiency. For companies providing services, the recommended measurement is revenue per employee. A growing business naturally tends to add staff. Eventually, extra support personnel are supposed to help the frontline employees produce more revenue. Constant examination of revenue per employee is a simple way to make sure this is happening.

For product-oriented companies, management of inventory is crucial. Efficient businesses move inventory quickly. There’s nothing worse for a retail or wholesale business than having to mark down old inventory to get rid of it. Plus, holding inventory uses up capital that could be deployed for other purposes. Measuring inventory turnover requires accurate financial statements. Your accountant can help you maintain that accuracy and show you how to measure inventory turnover. A trend of slowing inventory turnover is generally a sign of trouble.

Cash-Flow Management

The final area to evaluate is cash-flow management. This involves calculation of the average number of days required to collect accounts receivable and the days that accounts payable are held. These measurements also require accurately rendered financial statements immediately after the end of each month.

Net income and bank balances are not reliable predictors of future cash. Aging trends for accounts receivable and accounts payable are proven indicators of financial health. A sound business doesn’t continue stretching delays for paying bills. Your accountant can help you with these cash-flow calculations that allow you to avoid a cash crisis.

The biggest headache confronting most small-business owners is payroll. An incorporated enterprise must prepare paychecks even if the owner is the only worker. That also applies to an S corporation or LLC that’s federally taxed as a corporation.

Payroll calculations are complex and tedious. Computing payroll taxes, determining employee deductions, writing checks and remitting tax payments are time-consuming tasks. Consequently, business owners are inclined to hire payroll services. But an increasing number of businesses are embracing one of the many do-it-yourself computer applications for payroll.

These platforms allow businesses to save the cost of outsourcing payroll. However, payroll software is not a once-in-a-lifetime expense. These programs require constant updates to the embedded payroll tax tables because the Internal Revenue Service frequently revises them. Subscription to an online update is needed. This is not free.

More important, payroll software isn’t a completely automated process. It’s easy to use only if you have bookkeeping experience.

Manual data input is required for every new employee and each pay date. Someone must generate quarterly payroll reports and annual forms such as W-2s.

A payroll system that integrates with the general accounting program is best.

Stand-alone applications sometimes promise to interface with popular accounting programs. But interfaces are cumbersome to operate and often unreliable.

Although a business owner spends a lot of time determining how to earn money, the bottom line is equally affected by limiting how much money is spent.

Fortunately, saving money is easier than earning it. The best way to start is by examining money-saving strategies in three areas where wise spending improves business.

Make the Right Employee Assignments

For many businesses, the largest expense is payroll. You can’t make much of an impact on your bottom line by pinching pennies on office supplies and telephone expenses. The first step in confronting payroll costs is to simply get a person with the right skills for each job. For example, place individuals with “people skills” in capacities where they maintain contact with customers or suppliers. Workers who can’t write a properly structured email must have assignments away from the public.

You have a problem if your business has grown to the point of requiring more employees in customer-contact capacities but lacks enough staff with people skills. An unfortunate fact of business is that sometimes the individuals who got you here today are not the same folks who can carry you to the next level. Don’t be afraid to make changes. Chances are that employees are well aware of their unsuitability for new tasks you’ve assigned to them.

Paying for productivity you’re not receiving runs counter to the long-term interests of both employer and worker. It causes poor business results that lead to everyone becoming part of a failure. In fact, most employees who are in over their heads will depart for more satisfying positions. If you continue hiring the wrong person for a job, the cycle repeats itself.

Employee turnover is costly. Interviews, orientation and training consume precious time. Find the right person for every job with a well-crafted ad that describes the position in clear bullet points. Address every point with the individual you hire for or assign to the job. If there’s any mismatch between skills and duties, find a different person.

Involve Employees in Their Benefits

Next on the expense hit list is employee benefits. The purpose of benefits is to attract and retain better employees. To achieve this purpose, inform employees how much is spent for their benefits.

This is particularly relevant for health insurance. By informing employees about the cost, they can provide input about coverage that’s important to them. You can then tailor a policy to meet their objectives and reduce cost by eliminating benefits that aren’t important to them.

You also want to capture a tax credit currently available for providing health insurance. Remember to discuss with your accountant the details needed to calculate this tax credit.

Don’t Waste Marketing Dollars

There’s seemingly no end to the number of ways a business can waste money on marketing. Small businesses need to have value from their marketing expenditures.
Target your expenditures to those areas that get noticed by the most people.

Wasteful marketing costs limit your ability to budget for effective measures. Most marketing firms advise small businesses to steer away from spending on sponsorships, onetime mailings and holiday cards.

The Internal Revenue Service (IRS) audited 1.11% of all tax returns filed in the last government fiscal year. However, business returns with gross receipts of $25,000 or more were audited twice as frequently as the overall rate.

An IRS audit requires a time-consuming and frustrating process of collecting detailed business records. There’s no perfect method for avoiding an audit, but you can execute measures to limit the possibility.

One important way is to exercise care in choosing your tax-return preparer. The IRS has new tax-return preparer regulations. This permits easy identification of preparers who frequently compile returns that fail IRS audits. That increases the audit potential for every return of such preparers.

Carefully gather complete tax information. The IRS compares figures on your tax return to W-2s, 1099s and other reporting by payers of income to you. Make sure your tax return matches these information reports.

Don’t estimate any figures. Don’t use rounded-off amounts. Take the deductions you are entitled to report, but be prepared to justify them with accurate records. The IRS uses a discriminant function system score to select returns for audit. This compares amounts you claim for specific deductions to the statistical averages for your income level. Any large deduction relative to your income might require response to an IRS audit with proof of the amount.

Last, make sure your state income tax return is accurate. If you’re audited by a state and owe additional tax, an IRS audit is likely to follow. The IRS maintains information-sharing agreements with every state.