How to properly use a Petty Cash Fund.

petty cash fund, using petty cash

Do you have any cash around the office for quick lunches or buying supplies?

Most businesses can benefit from having a little cash in the office for small incidentals. The trick is to account for everything and keep it safe.

  • get a nice metal LOCKING cash box
  • put a pen and small notebook inside
  • decide on an amount to initially set up your fund. Depending on the size of your business, you may want $50 or $100 in there.
  • keep the box locked at all times, and put in a safe place, either an out of the way drawer or cabinet.
  • Keep your key in a safe place as well. You may want to give a trusted employee a duplicate key if someone else will need access, and you may want a duplicate key to keep elsewhere, in case your gets lost.

Now your petty cash fund is set up – and ready for use.

Make sure your petty cash fund is used for actual business expenses.  This is not for personal use.

As an aside, any business lunches should be documented as to date, persons attending, and business purpose.  A business is allowed to supply a meal for employees if they are in the business location and working.  These meals would be 100% deductible.  Other business lunches are 50% deductible.  You grabbing fast food while out servicing customers is not a business expense, and is not a deductible business expense.  Keep this in mind.

Things I’ve seen clients use petty cash for are a trip down the street for batteries or office supplies, window cleaning or snow shoveling, and a holiday lunch for the office.

Here’s the steps to take when using your petty cash.

  • when you take cash out, use a slip of paper and write down the date, the amount, the reason. For example, June 20, $10, cleaning supplies.
  • put the slip of paper and the receipt back in the cash box.
  • once a week (or month if you don’t use it often) count all your cash and receipts. If you initially put $50 in the box, your cash and receipts should add up to $50. If not, a big red flag pops up! Possibly someone took cash and didn’t put in a slip. Start asking. If it adds up, the system is working.
  • write a check to yourself, go to the bank and cash it. Put the money into your cash box. You have just replenished your petty cash fund.

Then you’re ready to go again!

As you keep using this process, it will get to be second nature to you.  And you will be able to back up each business transaction with a receipt.  Remember, if there’s no paper documentation, it didn’t happen.

Accounting Glossary

 

Do you ever read thru some accounting instructions and wish they’d explain what all the terms mean?

Well, here is an accounting glossary of some basic accounting terms and concepts that are applicable to most standard accounting systems.

standard accounting system

The basic accounting terms I’m listing here are the ones I think most small business owners would need to reference.

If you find a term you think I should add here, let me know by visiting my contact page!

Accounting Glossary Terms

Accounting – The process of recording, classifying, reporting, and interpreting financial data of an organization.

Account  – An accounting devise used to record and summarize increases and decreases in revenue, expense, asset, liability, and equity items.

Accounting equation – An expression stating the equality of assets and equity, stated as such: Assets = Liabiilites + Owner’s Equity.

Account Payable – A debt owed to a creditor for goods or services purchased on credit.

Account Receivable – An amount due from a debtor for good or services sold on credit.

Asset – A property or resource owned by an individual or organization.

Balance Sheet  – A basic accounting financial report showing the assets, liabilities, and owner equity if an organization on a specific date.

Bookkeeping  – The record making phase of accounting. Entering transactions into journals. Paying bills. Preparing sales invoices.

Budgeting  – The phase of accounting that deals with planning the activities of an enterprise and then comparing actual performance to those plans.

Business Transactions – An exchange of goods, services, money, or the right to collect money.

Capital Stock – Ownership equity in a corporation, the result of selling shares of corporate stock to its shareholders.

Chart of Accounts – A list of all accounts being used in a particular standard accounting system, in this order: assets, liabilities, equity, revenue, expenses. See a sample Chart of Accounts here.

Controller – The top accounting officer of a large enterprise. Would be responsible for the entire accounting function, and would report directly to the owners, or possibly to a VP of Finance.

Cost accounting – The part of basic accounting that focuses on collecting and controlling the costs of producing a certain product or service.

Cost of Goods Sold – The cost of producing a good to sell, or the cost of offering a service to your customer. It includes materials to make the goods, labor costs to manufacture the goods (not administrative labor), subcontracted services costs, and freight or postage costs to deliver – whatever specific costs you have to buy to make a good or provide the service.

Equity – A right, claim, or interest in a property. As it pertains to Owner’s Equity, it would be an interest in the organization.

Expense – Goods or services consumed in operating an enterprise.

Income Statement – A basic accounting financial statement showing revenues earned by a business, the expenses incurred in earning that revenue, and the corresponding net income or loss.

Invoice – An itemized statement of goods or services bought and sold.

Journal – Book of original entry in your standard accounting system, in which business transactions are first recorded, and from which transactions are posted to ledger accounts. (think checkbook)

Ledger – A group of accounts used by a business to record its transactions. (like summarizing your checkbook entries into separate lists by name or type of entry)

Liability – A debt owed by the organization.

Posting – The act of transcribing amounts from a journal to a ledger account.

Purchase order – A standard accounting system form. This business form is used by a purchasing department to place an order. It authorizes the supplier to ship the merchandise ordered.

Trial Balance – You probably won’t use this, but you may here it from your CPA. It is a list of your ledger accounts with the balance in each account, and the total of all debit and credit balances, which should equal zero. This is a Chart of Accounts with balances.

Voucher – A business form on which a transaction is summarized, its correction verified, and its recording and payment approved. I think the most widely used voucher is a bill received for goods or services purchased. The bill would be compared to the purchase order, if applicable, verifying that the bill is correct, then the information would be entered into an accounting software system as a voucher, to be paid at a later date.

 

Hope that helps. If you still have questions on certain terms, send me an email, I’d be glad to explain.  When you run a small business, it’s important to understand the mechanics of accounting so you can run your business more profitably.

Having trouble finding the time (or the desire) to do your own bookkeeping?  Give me a call.  I provide bookkeeping and accounting services via my company, Small Business Accounting Solutions.  Spend your time growing your business and let me take care of the books.

What paperwork to keep, and for how long.

This is a question many small business owners ponder.  What to keep and for how long?

Documentation is a word we accountants use that means paper backup for each sale or expense that you report.  It could be a receipt from a store, an invoice copy, or an email receipt for a purchase.  Whatever the business transaction, you need documentation.  This is a very important piece of small business accounting.

If the IRS ever came calling, any expense without proper documentation could be denied. So, yeah, it’s important.

In a previous post, I discussed setting up files for your small business.  Check out that post here.  I talked about Current Files and Reference Files.  Current Files are things you work with every day, or at least weekly, like payroll information, quotes, purchases, deposits, sales invoices, etc.  Reference Files are for information you only need occasionally, things like loan paperwork, contracts, employee files, vendor files, etc.

It’s important to keep your business paperwork together, and in some kind of order where you can find it as you need it.  So whether you’re just starting a business or have been in business a while, an organized office will help you focus on your business.

small business accounting

 

The main thing to remember when thinking about what paperwork to keep and for how long is that you want to prepare accurate, well documented financial statements, and you want backup (documentation) for all revenue and expenses for your tax return.

That’s the point of a good office management system. When your office runs smoothly, and everything you need is at your disposal (meaning you don’t have to root around for days looking for something) you will feel freer to focus on actually running your business, not your desk.

This is also a good argument for using a bookkeeping service.  Letting someone who knows accounting handle your books will take that load off your shoulders and free you to spend more time bringing in revenue.  If you need help, give me a call.  Or check out my website here.

So here’s a list of what you should be keeping in your files, and how long to keep it.

 

Keep the following for 3 to 7 years:

**sales invoices, deposit slips and receipts

**copies of bills or receipts for purchases, as well as credit card statements. Remember that many receipts are made with heat transfer paper, and fade over time. Consider photocopying them for longevity.

**bank statements

**inventory counts

**basic accounting reports you print out for each month. You should be printing or storing a copy of your cash receipts journal, cash disbursement journal, payroll journal, sales journal, accounts payable and receivable journals, and your general ledger and financial statements.  If you aren’t sure what these journals are, you should definitely think about hiring a bookkeeping service.  Give me a call and let’s see how I can help your business be more profitable.

 

Keep the following as long as you are in business:

**tax returns – as well as any correspondence with your tax preparer, and any taxing authorities, too, be it the IRS or your state and local tax department.

**dealings with attorneys, and any legal documents or lawsuits.

**payroll information, including payroll taxes and W-2 forms – you never know when you’ll need something in there, trust me.

**employee benefit information

**loan agreements, lease agreements

**receipts and paperwork on any asset purchases , including furniture, computers, cars, buildings, or equipment, as well as any building improvements.

 

When setting up your office filing system, I suggest you keep your current year and last year paperwork somewhere within arms reach. I try to keep the current year in my desk or close by, and last year in a file drawer nearby. Get some file boxes and keep previous years in another file cabinet or a closet or storage room. You may need to access it but not often.

office management

 

With a firm idea of what small business accounting info to keep and for how long, you should be all set.  If you’re keeping paper files, be sure they’re in a secure location, preferably in a locked filing cabinet.  If you keep stored documents on your computer, make sure you back up often and have your computer set up with a strong antivirus and malware protection.

 

 

How to Calculate Payroll

how to calculate payroll

How to calculate payroll is the next step of how to do payroll.  This is where you actually see how to pay your employees.

If you didn’t start at the beginning of the payroll discussion, check out these pages:

Payroll

Employer Payroll Taxes

Employee Payroll Forms

 

This is a simplified example of small business payroll, for learning purposes, but you will easily learn from this example how the process of calculating payroll is done.

We’ve gone over all the taxes, and the difference between hourly and salary wages, gross pay and net pay. Let’s calculate a sample payroll.

Let’s say we’ve started a vending business, and we’ve hired two kids to fill the machines, Ricky and Dave.

What do we do first?

 

The first step in how to calculate payroll is gathering the necessary information.

  1. We have them fill out an Employment Application Form. This will tell us their full names, birth dates, home address, work history, if any, and someone to call in case of emergency. (also make sure if they are minors they have the right paperwork to be able to work)
  2. We need to have them fill out a Federal Form W-4, and a similar state form, which tells us how to calculate the amount to withhold when we file taxes. Also find out what locality they live in. Is it a city or a township, for example, then find out if there is a local tax.
  3. Have them fill out a Form I-9, from the Department of Immigration. This tells us they are legally allowed to work in the U.S.

 

Revisit our page on employer payroll taxes if you need a refresher.

 

Okay. So we have all the necessary forms, and information we need to calculate payroll on these two.

The next step in how to calculate payroll is to decide how much and and how often to pay them.

Be aware of the Federal and State Minimum Wage, and make sure you pay them at least the minimum required. Go to the website for your state or the Department of Labor to find the latest.

 

Let’s pay them $8.50 per hour, and let’s pay them bi-weekly. That’s every two weeks.

We could pay them weekly, biweekly, semi-monthly (twice a month for example), or monthly.

Let’s say each boy worked 6 hours each week filling our vending machines. And we’re paying them every 2 weeks.

 

To calculate Gross Wages for each boy we calculate it by multiplying the hours by the hourly wage.  In this case that’s $8 x 12 hours.

sample payroll gross pay

 

The next step in calculating payroll is employee payroll taxes.

So what taxes do we need to withhold from each boy’s wage?

  • Social Security Tax of 6.2%
  • Medicare Tax of 1.45%
  • Federal Withholding Tax – use the Federal Withholding Tables
  • State Withholding Tax – use State Withholding Tables
  • Local Withholding Tax – calculate based on percentage for that locality.

For the withholding tables, go online at IRS.gov and your state website and search for ‘tax tables’.

For this example, let’s say we’re operating in Toledo, Ohio. The local tax for Toledo, Ohio is 2.25% of gross wages.
To look up Federal Withholding in the federal tax tables, we need to know the gross wage, whether the employee is single or married, and the number of exemptions claimed. We also need to know the frequency of payment.

We’re paying them biweekly. And we know the gross wages from the calculation above, and we can find the other two tidbits on the employee’s Form W-4 that we had them fill out.

Both boys are single, and are claiming “0” exemptions.

So, look at the Federal Withholding Table for Single – Biweekly. Go down the column on the left, and look for the wage spread that includes $96, then slide over to the column that shows “0” exemptions. This is your federal withholding for that pay.

Then look at the Ohio Withholding Tax Table for “bi-weekly”. Find the wage spread down the right, then slide over to find “0” exemptions. That is your Ohio withholding tax for that pay.

 

how to calculate payroll taxes

Notice that the Net Pay is the Gross Wages less all the payroll taxes.

We would now write the boys checks for $85.86 each.

That’s how you calculate payroll.

However, that’s not the end of the process.  You then have to remit the taxes that you’ve withheld to the proper authorities.  You send the Social Security and Medicare tax x 2 (1 for the employee and 1 for the employer), along with the Federal Withholding taxes to the IRS, and you send the state and local withholding taxes to your state tax department, and you local tax office.  You do this on a monthly or quarterly basis, depending on the size of your payroll.  The taxing authorities will tell you which category you fall in.

 

 

If this all sounds a bit too much for you, send me an email.  I provide payroll services as well as accounting services.

Employee Payroll Forms

 

If you’ve decided to hire employees, you’ll need employee payroll forms.  But which do you need?

Payroll Forms are the forms you have your employees fill out upon hire. These forms are to prove eligibility for employment, to set up their employee payroll taxes and to set up their employee benefits.  This is the next step in learning how to do payroll.

 

Employment Application Form

The first payroll form you need is an Employee Application Form. This form can be purchased or downloaded, and contains an employee’s personal information, employment information, and references.

 

Form W-4

Available at the IRS website, the IRS Form W-4 tells you how much federal withholding tax the employee wants taken out of their pay. This employee payroll tax is based on wage and number of exemptions. On this form your employee will mark Single or Married, and then fill in the number of exemptions they have.

For example, most Single people enter S for Single, and 0 for no exemptions, or 1 for one exemption. Single-0 is the highest level of withholding. Single-1 would be a little less tax withheld. If they are unmarried with children, the number of exemptions would increase by number of children. Beware when you see Single-8. Question that. Keep this form in your employee’s file.

 

Form I-9, Employment Eligibility Verification

This payroll form is available at the website for the U.S. Citizenship and Immigration Services. This form is required to show proof that the employee is authorized to work in the U.S. Make sure you read this form before handing it to someone to fill out. The employee fills out the first section and signs, then you fill in your company info and sign.

You will need copies of documentation, such as a driver’s license and social security card along with the completed form. There is a complete list of acceptable identification with the form. This form is not to mail anywhere, keep it in your files. There is a penalty if they come knocking and you don’t have the form.

 

State Withholding Forms

This employee payroll form will vary by state. In Ohio, we use a Form IT-4, Employee’s Withholding Exemption Certificate. Go online for your state, and find the area on the site for Employers. You should find a comparable form that the employee will fill out and tell you how much state tax to withhold.

Actually, they enter how many exemptions they want to claim. You will be looking on a tax table provided by your state under that number of exemptions to find out how much tax to withhold. More on this later.

You should also find Withholding Tax Tables on that website, too. Print out a copy.

 

Benefits Application Forms

Your benefit providers, such as your medical or dental insurance provider, disability insurance provider, life insurance provider, or the firm that handles your 401k-retirement plan, will give these payroll forms to you. If you don’t have any of these benefits yet, don’t worry about it until you do.

If you engage a firm to provide these benefits, and they talk to you about a Sec. 125 cafeteria plan, say for disability or sick pay benefits or a medical savings plan, think twice about it. A cafeteria plan is a benefits plan that is set up with the IRS to be a pre-tax deduction for your employees.

It requires a year-end tax return, and has to be monitored by someone who knows what they’re doing, which means you pay fees to a firm to handle this. Some people feel these plans are great for the employee. But you need to weigh the costs of setting up and maintaining the plan against the small tax benefits to the employees.

 

Since you’re collecting all these forms for each employee, now is the time to set up employee files.

 

Payroll Forms to keep in your Employee Files

 

Employee Files

This is an important step in learning how to do payroll. These files are very important, both from a tax standpoint, and a legal standpoint.

  • employment application form
  • payroll tax withholding forms
  • employee benefit application forms
  • non-compete agreements
  • testing results

Keep these files up to date.

Regarding benefits, you may want to print out information on your company and keep these in a folder to give new employees.  Things like:

  • vacation/sick pay rules
  • hours of operation
  • medical/dental/life insurance information
  • 401k pension plan info
  • any disability insurance
  • credit union affiliation

Give your employees one of these packets when you hire them. Sort of a ‘welcome to the firm’ packet.

In the next blog post in this series of how to do payroll, I’ll talk about actually calculating some payroll.

Employer Payroll Taxes

In this blog post, I’m going to show you how to enroll your small business with the proper taxing authorities.

 

For each payroll, whether that’s weekly, biweekly, semi-monthly (twice a month) or monthly, the employer payroll taxes will have to be paid, but first, you have to enroll your business with the proper taxing authorities.

I’m going to tell you how to do this, but let me first tell you about something else you need to have when you have employees.

 

Let’s say you plan on hiring employees for your small business. Of course there are certain rules you must follow, like don’t discriminate in hiring, pay at least the Federal or State minimum wage, allow your employees Family and Medical Leave (FMLA) without firing them, keep them safe in the workplace (OSHA), etc. Most of these you should be aware of if you’ve ever been an employee, which I’m assuming is most of us. But there are certain of these rules that must be posted in your place of business where all the employees can see them.

 

how to do payroll

Department of Labor Requires Labor Posters to be displayed

 

In learning how to do payroll, there are certain things every small business owner needs to do. When you have employees, there are certain posters you need to display in an open area that your employees frequent. This is the law. A break room or lunchroom is perfect, or even the copy/mail room will work. Anywhere your employees will all have access to.

These posters vary a bit by industry and state. You can find out exactly which posters you will need to display at this website. You can buy these posters from an office supply store. But, if you want to save some money, they can be downloaded and printed for free from the web.

 

how to do payroll labor poster

 

Some of the basic posters are as follows:

Federal:

Equal Employment Opportunity
Fair Labor Standards Act
Family and Medical Leave Act (FMLA)
Occupational Safety and Health Act (OSHA)
U.S. Employment & Reemployment Rights Act (USERRA)

State:

Unemployment Compensation
Workers Compensation
Minimum Wage
Minor Labor Laws
Public Employee Risk Reduction
Workplace Domestic Violence
Fair Employment Practices Law

Again, you don’t have to pay for these posters. They can be downloaded for free. Print them and display them and stay in compliance.  And that link is not an affiliate link, it’s provided for your reference only.  If you have employees, you need these. And it wouldn’t hurt to read them, too.

Okay.

So, the next step in how to do payroll is to enroll your small business with the right taxing authorities.  Remember, you are responsible for abiding by these regulations whether you do payroll for yourself or have a payroll services firm or bookkeeper do it for you.  So be aware.

 

Enrolling your small business for Employer Payroll Taxes

 

Employer payroll tax enrollment with the correct taxing authorities is one of the first steps in learning how to do payroll.

 

Enroll with the IRS and your State and Locality

Before you hire your first employee, you need to get a Federal Employer Identification Number (EIN). You can do this at the IRS website (www.irs.gov). It doesn’t matter whether your small business is a corporation, partnership, sole proprietorship, or LLC, you need an EIN if you have employees and are going to pay any employer payroll taxes.

Also, while you’re on the IRS website, search for EFTPS, the Electronic Federal Tax Payment System, and sign up for making your federal tax payments. You can make them at a bank, online, or over the phone, whatever is best for you.

As you’re going thru this process, print out the forms you fill out and the confirmations along the way, and start a Payroll folder. This will become a part of your Reference Files.

 

Next, you will have to enroll your small business for these other employer payroll taxes, state employment taxes, as well as your local employment taxes. Go online to your state and city/township/county website and look for a tab for Businesses or Employers, and follow the instructions there for employer payroll taxes.

 

For example, let’s say you’re in Ohio. Go to the Ohio Department of Taxation website. Click on Businesses. From there click on Ohio Taxes. On that page see a line item for Employer Withholding. Click on that, and the next page has a line item for General Information. Click on that and you get a lot of information on how to do payroll in your state.

You need to enroll your small business for withholding taxes, as well as unemployment taxes and workers compensation. Each state and locality is different. What happens here in Ohio may not happen in Oregon. I encourage you to visit the websites for your State and Locality, and look for a tab for Businesses or Employers to seek out specific information for your location.

The next step in how to do payroll is actually hiring employees. There are certain forms you should have filled out for these employer payroll taxes.  So my next blog post will be about employment forms.

Payroll

If you’re thinking of adding employees to your small business, it may seem like a daunting task, with the myriad of regulations out there.  Let me try to explain the payroll process for you.  Here’s what I’m going to cover:

  • gross wages and net wages
  • employee vs independent contractor
  • Employee payroll taxes
  • benefit deductions

Employee payroll taxes are federal and state taxes that the employee pays. These are deducted from your employee’s wages each pay.

But when we’re talking about how to do payroll, and trying to calculate payroll, there are many pieces to this puzzle, not just taxes. Gross wages, employee payroll taxes, employee benefit withholdings, and net pay are the main pieces or parts of an employee’s pay, and we want to discuss them here.

 

Payroll by section

In order to fully explain the “how to calculate” part of how to do payroll, I will explain the different sections or parts of your small business payroll.

 

You have:

**Gross Wages (hours worked x hourly wage)

**Federal Taxes (federal withholding, social security, medicare)

**State and Local Taxes (vary by locality – state, city, school tax, etc.)

**Benefits withholding (employee’s share of medical/dental benefits)

**401(k) contributions (employee contributions to a pension plan)

**Child Support withholding (payments to your local child support agency)

**Net Pay (what’s left!)

 

Whew! That may seem like a lot, but once you get the hang of it, it’s not that hard, really!

Now let’s go thru each of those parts.

 

Gross Wages

Think of gross wages as meaning ‘without any deductions’.

Gross wages can be broken down into many subcategories, like hourly, overtime, vacation, sick, salary, commission, etc.

 

Hourly vs Salary vs Commissions

If an employee is Hourly, the get paid a set hourly wage, for example, $10 per hour, and they get paid for the number of hours they work. You must abide by the federal and state minimum wage laws, so make sure to go online to the Department of Labor website for up to date minimums.

If an employee is Salary, they get paid a set amount each pay period. A salary is usually stated in an annual form, such as $30,000 per year.

To figure out a weekly pay on an annual salary, take the salary divided by 52 weeks/year. For $30,000, that calculation would be $30,000 / 52 = $2500.

To figure out a bi-weekly pay (every other week) take $30,000 / 26 (52 weeks divided by 2).

To figure out a semi-monthly pay (15th and 30th) take $30,000 / 24 pays/year (twice each month).

If an employee gets paid on Commission, that means they earn a percentage of the sales they bring in. Insurance, Auto and Real Estate industries pay this way, among others. Commissions are usually paid monthly, after you’ve had a chance to calculate your sales, and then calculate the employee’s percentage.

 

Independent Contractor vs Employee

A word of caution here. Many times small business employers want to pay an employee as an independent contractor, thinking they can sidestep the whole employee payroll taxes issue all together.

The IRS has 3 categories of information they use in determining if a worker is an employee or an independent contractor.

1. Behavioral – who controls what the worker does and how the worker does it? If you control when they work and what they do and how they do it, they’re an employee.

2. Financial – how is the worker paid? Are expenses reimbursed? Who provides the tools or supplies needed to do the job? If you pay them by hour on a regular basis, reimburse them for expenses incurred, and supply all the tools and supplies, they are an employee.

3. Type of Relationship – Is there a contract? Are there benefits (pension, insurance)? Will the relationship continue? Is the work performed an integral part of the business? If you’re answering yes, you have an employee.

If you treat an employee like an independent contractor, you could, if caught by the IRS, be liable for back employment taxes. Don’t chance it. Do your small business payroll by the books, and you will sleep well at night.

 

Employee Payroll Taxes – Federal Taxes

There are 3:

Federal Withholding Tax

This employee payroll tax is based on the gross wage and the number of dependents (exemptions) that an employee claims on their Form W-4. There are tax tables online at http://www.IRS.gov, but they are also in the IRS Circular E (booklet). You will get this booklet full of information on how to do payroll from the IRS when you get your EIN.

If an employee makes a large wage, you may have to calculate the withholding, as the tables only go up to a certain level, then the percentages take over.

 

Social Security Tax

This employee payroll tax has two parts, the employee portion, and the employer portion. You each pay 6.2% of the gross wage. The employee pays their share out of each paycheck. You the employer then add your percentage to the employee’s percentage, then pay that to the IRS on a regular basis.

 

Medicare Tax

This tax also has two parts, employee and employer, the same as above, only the percentage is 1.45% of gross wages.

 

ASIDE: 941 Tax Deposits

Quite simply, each pay period when you do payroll you add all the federal withholding taxes for all your employees, add to it all the employee’s share of Social Security tax and Medicare tax, and then add to that all the employer’s share of Social Security and Medicare tax. This amount is deposited to the IRS. It is called a 941 Deposit.

This is either monthly (you pay the IRS each month) or semi-monthly (you pay the IRS on a set date after your pay date. This is all explained in the Circular E you will receive from the IRS. For example, though, if you do payroll on Friday, you must make your 941 tax deposit by the following Wednesday. You can pay this tax at a bank, online, or over the phone. This is called EFTPS, the Electronic Federal Tax Payment System. You have to sign up for this, so go online to http://www.IRS.gov, then search for EFTPS.

 

Employee Payroll Taxes – State and Local Taxes

Each state will have the following employee payroll taxes or variations of such:

 

State Withholding Tax

This employee payroll tax is the state version of the federal withholding tax. Again, the employee designates how many dependent exemptions they will claim, and you use a tax table to figure the correct withholding, based on the gross wage and number of exemptions.

You will pay this to your state either monthly or quarterly, based on the size of your payroll.
Local Withholding Tax

This employee payroll tax is a local tax that the employee pays based on their gross wages. This could be an employment tax (because they work there) or a residential tax (because they live there). An employee could be hit twice if they live in a city with a residential tax, and work in a different city with an employment tax.

This is paid monthly or quarterly, again depending on the size of your payroll.

 

School District Tax

This employee payroll tax is a local tax for the benefit of the local school district, and is voted into passage by the residents. This will be a percentage of the employee’s gross wages. You should be able to find this thru your State website. I know Ohio School District Taxes can be located thru the Ohio Dept of Taxation website. This is paid, yep, monthly or quarterly, based on the size of your payroll.

 

Employee benefits withholding

Benefit withholding is similar to an employee payroll tax in that you are required to withhold a certain amount from the employee’s pay, and remit that amount to an outside party.

The benefits that most employers provide are medical insurance, dental or eyeglass insurance, life insurance, and some sort of disability insurance.

To start such a program, you need to call around to different insurance agents, and get some quotes.

You do have some options regarding payment.

You can:

Provide employer-paid coverage (you pay it all) Provide partially paid coverage, and ask the employee to pay a set amount per month Provide the medical coverage for the employee, but have them pay dependent coverage Provide medical coverage, but ask the employee to pay any other coverage they want.

401(k) Contributions withholding

401(k) plans are retirement plans that the employee contributes part of their wages to each payroll. The employee specifies what percent of their wages they want to contribute, usually anywhere from 1% to 10%.

You as the employer then subtract (withhold) from the employee’s gross wages that percentage, say 5%, then you cut a check for that amount and send it to the company you wrote your plan with (your plan administrator).

This is the essence of “withholding”. You withhold from the employee’s gross pay, then you send that money somewhere else, be it the IRS, the state or locality, or your benefits administrator.

 

Child Support withholding

 

Child Support wihholding is a highly regulated area now. This is not an employee payroll tax but it is a regulated withholding. Usually the county Child Support Enforcement Agency (CSEA) will send you a notice in the mail. They will tell you how much to withhold for your employee based on the amount due and how often you pay your employees.

This money should be sent in to the CSEA the day you do payroll. You are allowed to withhold a small fee, I think it’s either $2 or $5 per pay (the notice will tell you) to cover your costs in this process. I never did, but it’s up to you.

 

Net Pay

Net pay is what’s left after you deduct all these deductions from the employee’s gross wages.

This is the amount that goes on the employee’s pay check.
So you take Gross Wages, minus all the employee payroll taxes – Federal Withholding Tax, Social Security and Medicare Taxes, and State and Local Withholding Taxes – and minus any Benefits withholding, 401(k) Contributions, or Child Support withholding.

That’s Net Pay.

 

The next discussion will be on Employer Payroll Taxes, like social security and unemployment taxes.

Small Business Taxes

Whether you do your own taxes or take them to a tax preparer, this year vow to be more prepared.  A little work throughout the year makes it easier.

I used to work in a small CPA office, and I remember many occasions where I was handed a box full of receipts and check stubs and bank statements.  It’s great detective work, and just some basic bookkeeping to put together all those deposits and checks and prepare financial statements from them, but it takes time, and time costs money – yours!

I am an Accountant with over 20 years experience, and I’ve worked with many different types of businesses.   So here’s some things you can do all year to keep organized.

Tips on Small Business Taxes

Keep Track of your Sales
Keep all your deposit slips and the backup for them.  This includes your sales invoices, the customer’s check stub, etc.  Keep them in a file folder or box, labeled for the appropriate year. And no, this is not what you hand to your tax preparer. This is just for documentation. You need to document all your sales.  If you don’t use accounting software, start a cash receipts journal.  See below.

Keep all Business Receipts
Keep all receipts for anything purchased for your business.  Keep them in a folder labeled for the appropriate year.  This is for documentation. If your small business taxes are ever audited you need to provide proof for all your deductions.  So keep those receipts! And, no, a credit card statement is not enough.  You need an actual receipt of purchase that shows the items/services purchased.   If you don’t use accounting software, start a cash disbursements journal.  See below.

Did you purchase any assets?
Assets need to be added to your Balance Sheet, and will be depreciated (which is an expense for your business -yeah!) so you need to keep the receipts and make sure you let your CPA know what you purchased during the year.

Did you sell any assets?
Any assets sold will need to be taken off the Balance Sheet on your small business tax return, and off your depreciation schedule. Your tax preparer will calculate a gain or loss on the sale, so keep documentation for the sale, and let them know what was sold during the year.

Did you pay any non-incorporated vendors or freelancers or attorneys or subcontractors more than $600 during the year?
Keep track of your vendors and how much you pay them.  Current law requires you to send a Form 1099 (like a W-2 but for non-employees) to anyone you paid more than $600 during the year. However, currently you can exclude any corporations, except attorneys (they get one anyway).

Did you give out any Donations this year?
The proper tax term is Charitable Contributions, and only money paid to a “qualified organization” is recognized and deductible on your small business tax return per the IRS. Contact the IRS Website for more info if you’re not sure about the organization you helped out. Also, gifts over $250 should be recognized with a letter from the organization, so make sure you have one as documentation for your gift.

Do you have employees?
If you have employees, make sure you keep records of all amounts paid to your employees, including wages and any fringe benefits.  If you have a service doing payroll for you, you still need to keep records.  Also keep record of the small business payroll taxes you’ve paid each quarter.

Did you deposit any personal funds into the business, or take any business funds out for personal use?
If you did, keep track of these funds.  Depending on your business structure, these need to be recorded as equity transactions or shareholder loans or dividends.

If you’re an S-Corp, do you pay yourself a wage?
If not, you should.  The IRS targets S-Corp owners to look for this.  You need to pay yourself a ‘reasonable’ wage.

small business taxes, bookkeeping service

Do you have a manual accounting system?

Maybe your business is small, or you’re just starting out.  Or you don’t have the time to deal with accounting software.  You can make your small business taxes process easier by using a Cash Disbursements Journal and a Cash Receipts Journal.

These are great tools to keep track of all your sales and expenses month by month. If you use these tools, all you have to do is add up the totals for each month and give these to your tax preparer instead of that box of stuff.

If you’re not sure how to get started, I have an ebook and an ecourse on this topic.  It will walk you thru the process of setting up your own system to track your receipts and disbursements.  For info on the ebook or ecourse, click here.

So, to make this tax season easier, keep documentation for sales, expenses, assets purchased/disposed of, and owner transactions.  Also, if you’re not using accounting software, start using cash journals to track your sales and expenses.  At year end, you’ll be glad you did.

Computerized Accounts Payable

When your business gets larger, or if you’re more of a Techie type, it might make sense to step up to an accounting software package.

It’s relatively easy to set up a computerized accounts payable system, and it automatically does all the posting to journals and ledgers for you.

There are plenty of simple accounting software packages out there, from QuickBooks to Peachtree to Zero and more. You can easily purchase and install one of these packages on your computer for your business.

computerized accounts payable

Who should use a simple accounting software package for their small business?

If your business is on the large size, or you have several employees, or you need to track more information than the manual worksheets and journals give you, a computerized system will definitely help you out.

Using a computerized accounts payable system will help you stay organized and keep track of more small business accounting info than using a manual system.

A computerized accounts payable system will:

**hold all your vendor information, so you don’t have to enter that information when writing checks

**enable you to pay bills and print out checks right on the computer

**post your check to the correct account in your chart of accounts, all you do is enter the account, i.e. Telephone Expense.

**track all payments to each vendor, so you can pull this information up at any time.

**tell you what bills are due on any given day.

 

How does computerized accounts payable work?

The exact specifics depend on the brand of simple accounting software you decide to use, but I’m going to give some general guidelines here.

The first thing you need to do is “set up” your computerized Accounts Payable system.

How?

First, you need to set up your Chart of Accounts. The software package should have a few options for you, based on your type of business. If not, check out my sample Chart of Accounts, which you can use as a starting point.

Now you need to set up your Vendors. Gather up all your bills from last month. Under the Vendors section, there should be an Add feature. Add your vendors one at a time, inputting the name, remit to address, phone and fax numbers, email and website info, and any account number or contact info you may have.

NOTE: if the vendor is not a corporation, you may want to collect their Federal ID Number (or Social Security Number – be sure to keep it safe!  I would suggest not putting it into the software) because you will need this information at year end for your CPA to file 1099 Forms. These are like a self-employed Form W-2.

Now that you have the initial information in the computer, you can enter your bills.

A computerized accounts payable system makes use of vouchers and checks to post and pay bills.

What is a Voucher?

Remember, a bill is a Liability (something you owe). When you enter your bills into the computer, you will enter them onto what is called a Voucher. What is that? When you think of the term voucher, you think of a promise to pay, right? That’s what we mean, here. You will pay this “voucher” at a later date – the due date of the bill.

So you will enter your bills, and the computer will automatically post them to a liability account titled Vendor Payables, and it will enter them in the correct account in your Chart of Accounts based on what you entered on the Voucher, like Telephone Expense or Office Supplies Expense.

Then when you pay the bills and print out checks, the computer automatically takes that amount out of the Vendors Payable account and out of your Checking Account.

This is all done behind the scenes, so to speak. You don’t have to worry about it, trust me, your computerized accounts payable system takes care of it. I just want you to know what is happening behind your screen, so you will understand the process.

Entering a Bill

On your computer, you should have a section titled Vendors, and you should have an option to Enter a Bill.

Click there, and you should have a Voucher open on your screen. Take your first bill, and enter the required information – vendor name (you should have a drop down list to choose from) – date of the bill – amount of the bill – due date – account (you should have a drop down list here too, your Chart of Accounts, to choose from).

That’s it. Go on to your next bill.

On the software main page, there should be a list of reminders, one of which is Bills that are due. You can also run a Vouchers Due report, or Bills Due, that will list them all out for you at any time.

In the Vendors section, there should be an option to Pay a Bill. You can pick one bill or choose all that are due, and print the checks all at once.

When I enter my bills, I keep a “Bills Due” file folder in my current files, and then when I pay them, I have a “Paid Bills” file folder (several, actually!) in my reference files.

Accounting File Management

Keep these paid bills for 3 to 7 years to back up your deductions on your tax returns.

So that is all there is to a computerized accounts payable system. Take your bills, enter them into the software (a Voucher), then pay the bills by printing out your checks. You can track what bills are due when by pulling up a report on your screen.

If this all sounds like a bit more than you can handle, what with all the other hats you’re wearing as a small business owner, you may think about hiring a bookkeeping service.  And don’t think that means your books will be taken out of your hands.  With QuickBooks, there’s an ‘accountant’s copy’ that can be shared between you and your bookkeeping service.  So you can do as much or as little as you want to, and then hand it over to an accountant to go over and make corrections, or actually enter bills and deposits for you.  Then they will send it back to you so you will have the updated version of your books.

Check out my website for more information on me and my services.  Let me do what I’m passionate about, and free you to do more of what you’re passionate about.  I’m sure you’d rather concentrate on sales and your customers than paying bills.

Manual Accounting

Also called Doing it By Hand.

Manual Accounting must seem like a dinosaur in this computer age we live in. But for some small businesses there’s just not enough accounting activity to warrant buying a software package, learning to use it, and then just writing a few checks and making a few deposits each month.

 

small business

 

If you prefer using the computer, that’s fine. But if your business is very small or you are a pen and paper person, you do have options.

First, think about what you need your accounting system to do for you.

**How many checks will you write each month?

**How many deposits will you make each month?

**Do you need to bill customers and track their payments?

**Will you have employees? How many?

**How many products will you make or sell?

 

If your answer to these questions is not that many, you can probably get by with a manual accounting system.

And what do I mean by a manual accounting system?  A manual accounting system is a set of journals and a ledger.  Journals and ledgers can be a pack of 4 column accounting paper or an Excel spreadsheet. A journal keeps track of similar business transactions, and a ledger is where you post those transactions by account.  More on that in a sec.

You could also get yourself a nice desktop checkbook system, like One-Write. There’s a ledger attached to the checkbook, and you can post your expenses at the same time you write the check. You can even write payroll checks on this system. You can also bill customers and send out statements with a Manual System too.

Manual Accounting – Some Basic Accounting Procedures

With a manual system, you’re probably doing this all by yourself, and taking everything to your CPA at year end so they can do your taxes.

Please don’t take him or her a shoebox full of receipts and checkstubs. OMG. Believe me, I’ve been on the receiving end of those shoeboxes a few times. True, the thrill of the hunt applies as you’re sifting thru all that small business accounting info. But it takes a lot of time and you know what that means…a higher fee.

Instead…plan ahead!

Get yourself something like a One-Write System, or a packet of ledger paper, even, and at the end of the year you’ll have 12 months of Cash Disbursement Journals, and 12 months of Cash Receipts Journals.

Your tax preparer will love you!

Now let’s talk about those journals.

 **Cash Disbursements Journal

This is an accounting term for a list of all your checks written.

Here’s how it works. You write a check.  You then write the amount of the check in the appropriate column for that particular expense. You would head your columns with whatever expenses you use most, including one for miscellaneous.
Get more info on Cash Disbursement Journals here.

manual accounting cash journal

**Cash Receipts Journal

Cash Receipts Journal is an accounting term for a list of your deposits.

With a Manual Accounting System, you do the same for your deposits as you did for your checks. You can buy a desktop receipts journal with corresponding deposit slips and customer statements. As you prepare a deposit slip your carbon will enter the deposit information onto your customer’s record. That enables you to send out customer statements each month as a reminder of what is owed yet.

But maybe you don’t work with specific customers, maybe you sell your handmade items to a shop, for example.
Get more info on Cash Receipt Journals here.

manual accounting journal

You can get a columnar pad of 7 or 13 column accounting paper, and use one sheet for each month. Write the amount of the deposit, then list each individual deposit. Use your columns to represent each product or each outlet or each customer, whatever suits your business, then write the amounts in the appropriate columns.

At the end of the month, total each column.

You now have a completed Cash Receipts Journal showing total revenue for the month, and a break down of your revenue by product or customer.

Pretty nifty, huh?

With a Manual Accounting System, you will have to track your bills by hand. I suggest using an expandable file folder, or a group of file folders, one for each day of the month. Or you could also specify a day of the week to take care of paperwork and pay bills.

Put bills and other things you need to tend to into the folder for the day you need to pay it or take care of it.

For the next step, using a ledger, click the link below.

Accounting Basics – the General Ledger

For a discussion of computerized accounts payable, check out the next blog post.