Tax and Accounting Unique Content

Identity Theft and Filing Your Tax Return: Risks and Prevention

Identity theft has became a major problem in recent years. Cybercriminals are only becoming more effective at what they do whether they are acting alone or with major crime syndicates: in many cases, they only need a name to get started on stealing your assets and opening fraudulent accounts in your name. Additionally, too many organizations rely on Social Security numbers opposed to other personally-identifiable information (PII) to verify users’ identities. This is unfortunately what facilitates large-scale theft like the recent Equifax breach.

When it comes to filing your taxes, identity theft creates a whole other set of inconveniences. You may find that your tax refund has been denied or a hold placed on your return if someone already filed a tax return under your name and/or Social Security number. By getting to know the various types of identity theft scams and tactics related to tax filing, you can safeguard yourself ahead of time. Here are some things you should know about identity theft and your taxes.

1. Keep email communications with your tax professional as secure as possible.

Do you communicate with your tax professional via email? Refund theft is a major motivator for identity thieves and you may be at risk without even knowing it. Hackers have gotten very sophisticated when it comes to this: no longer content with just stealing your Social Security number, they can actually impersonate you by hacking into your email account and telling your tax professional that they now want your tax refund to go to another address or bank account. Or, they can impersonate your tax professional and ask you to verify information via email that they already have.

First, tell your tax professional to always notify you by phone in the event they receive such an email (or that you receive one that looks suspicious.) Any tax documents, like copies of your returns, need to have a strong password or other safeguard if you send or receive them via email. Encrypted documents should be as tough to crack as possible so don’t include the password in that email. You should also check in with your tax professional’s PII practices since tax offices are popular targets of identity thieves, even if they take care to shred documents.

Use a secure email account with actual end-to-end encryption such as ProtonMail. Enable two-factor authentification so that it gives hackers less of a chance of getting in, and don’t use a "pet password" for your email.

2. Report your identity theft to the IRS and take proper precautions if you think your information was compromised.

If you can confirm that your information was stolen in a breach, or suspect that it was, the IRS has a set of protocols for this. Breaches don’t always result in having your identity stolen, but if your account was indeed compromised or you received a notice from the IRS that your tax return was rejected due to a duplicate filing under the same Social Security number, you must file an identity theft affidavit. You can also apply for an IP PIN, an identity theft PIN number that will let you file your tax return without using your Social Security number.

In the meantime, you should also report the identity theft to the appropriate channels like the FTC, requesting a credit freeze from the credit bureaus to prevent new accounts from being opened in your name, and financial institutions to halt having your bank accounts and credit cards used fraudulently. 

3. Become familiar with the "dirty dozen" tax scams, including the fact that the IRS will never contact you by phone or email regarding taxes due.

Few things strike fear into peoples’ hearts more than hearing from the IRS and finding out that they owe a lot of money in taxes and need to take immediate action. However, if this is the case for your tax situation, you’re being scammed. These are referred to as the "dirty dozen" scams in tax professional circles.

Ignore any phone calls and voicemails that you receive from callers claiming to be the IRS and that you owe all this money in taxes. You should always do a reverse look-up on those numbers then report them to the FTC since they are scams. Less tech-savvy people tend to be hit harder by these scams a result.

In the event that you DO owe taxes, you will always get a written notice from the IRS that details a proper assessment made against your account and how much your bill is. This notice and/or bill will be sent to the last-known address they have on your file. In the event of actual collection issues for past-due accounts, you are also contacted via mail and given at least 30 days’ notice before your wages are garnished or assets seized. The IRS will never call or email you about it.

Because of this, you should also never open any attachments from emails that come from unfamiliar addresses claiming to be with the IRS or your state tax agency. They are direct phishing attempts to get your identity information.

4. Become aware of signs of tax-related identity theft.

If you haven’t had any of the telltale signs of identity theft such as noticing new accounts opened in your name or suspicious transactions on your credit cards, it doesn’t mean it hasn’t happened necessarily. If an identity thief fraudulently filed a tax return on your behalf, you may actually receive a refund check at your home address without filing your real tax return. You may also receive notices from the IRS that a tax return was already filed, or notices for adjustments to be made to your tax return based on the fraudulent one that was already submitted.

Keep an eye out on the mail for these signs of tax-related identity theft, then take proper actions with the IRS by requesting an IP PIN and certificate of identity theft.

The IRS, and some state tax agencies, are taking identity theft very seriously. However, it’s not enough to stop cybercriminals who are getting better and better at what they do while lawmakers can be slow to act on penalizing them while protecting taxpayers. By taking proper precautions with your PII and records containing it, as well as the means of contact you use like your email accounts and devices, you can help deter identity thieves from accessing your information. Always be wary of communications from parties you are unfamiliar with that claim the content and/or attachments are concerning your tax returns.

Casual Rental Income and Your Tax Return: Tax Treatment of Being an Airbnb Host

The gig economy isn’t going anywhere anytime soon: whether you’ve got an extra seat in your car for the night or a powerdrill you’d like to put to use, the whole world of app-driven side hustles has helped people pay their bills or even serve as stopgaps for career changes. And the tax authorities have certainly noticed as the IRS even launched a sharing economy tax center in recent years given how prevalent the gig (or sharing) economy has become.

Casual rental income such as being an Airbnb host or listing your home on VRBO is a hot-button issue that the IRS has been paying close attention to. Casual rental income stands out from the other well-known forms of gig work like driving for Uber or delivering food for Grubhub. Why? Driving, doing deliveries, and other forms of gig work are considered self-employment, whereas rental income entails a whole other set of rules. The rental income rules are then dissected into renting out your principal residence where you live, renting out a second or vacation home, or investment properties purchased specifically to earn rental income. Most Airbnb, VRBO, and Craigslist casual, short-term rentals fall under the "living in principal residence" guidelines most of the time.

Do I Need to Report Casual Rental Income Even if I’m a Renter?

Yes. If you are subletting your apartment regularly to travelers or other people who are giving you money for that extra room (or even your couch) then you need to report the income.

Good News if You Rented Out Your Primary Residence and Didn’t Like Being a Host for Long

Did you decide that being an Airbnb host just wasn’t for you after trying it out for a few days? There’s some good news: you don’t actually have to pay the tax on the rental income if you rented your primary residence out for 15 days or less. It doesn’t matter what platform you used or if you informally listed a room for rent for a few days on Craigslist or the newspaper: if you rent out your primary residence for 15 days or less during the tax year, this is tax-free income.

You may receive a 1099 form if you used a platform like Airbnb and received $600 or more. You would then report the income on your federal tax return, but then also claim an adjustment on your return which means it wasn’t actually taxed. If you receive a 1099 and don’t report the income, you may get a notice from the IRS so you should produce records that prove you meet the exception for renting less than 15 days. It doesn’t matter if you own or rent the property, so long as it is used as your primary residence you will qualify.

However, if you have a vacation home or rental property, then you would need to report all of the income regardless of how many days it’s rented out. The rest of this post assumes that you are using your primary residence given the large amount of Airbnb and VRBO users who have found themselves reliant on the income from casually renting out the homes they actually live in.

How to Report Your Casual Rental Income

For more good news, you can deduct some of the expenses associated with your income from being an Airbnb host or doing other short-term, casual rentals of your primary residence. The bad news is that you need to prorate these expenses according to how many days your home was used for this activity, and you also can’t deduct a loss resulting from these expenses. Your loss is limited to the casual rental income you received, so the income just gets canceled out to zero at best if your living and hosting expenses are high.

Additionally, you also must allocate the expenses based on the square footage or percentage of your home used for rental purposes. This is referred to as indirect expenses that affect the entire property, such as utilities, the mortgage, and real estate taxes. Direct expenses, like painting or cleaning a room that you specifically set aside from rental would be 100% deductible. Anything related to the collection or generation of rental income like advertising and property management is also 100% deductible, along with any amenities you purchase specifically for guests.

The following types of expenses are deductible:

  • Mortgage interest
  • Depreciation (the actual purchase price of your home)
  • Rent, if you’re a renter
  • Real estate taxes
  • Insurance
  • Utilities (heat, water, electric, gas, cable and Internet)
  • Cleaning and maintenance services
  • Management fees (if a friend or professional property manager is being paid to let people in and out if you are not home for your guests)
  • Advertising or featuring listings
  • Amenities (e.g. towels and linens for guests)
  • Fees the platform charges

If you are renting out a single room or area of your home that can be measured in square footage, you need to prorate by this area first. Using the IRS’ example of an 1,800 square foot home that uses a spare bedroom that is 12 x 15 feet (180 square feet, 10% of the home) that is the first number you will need. If your homeowners’ insurance is $500 per year, you start with a $50 deduction based on 10% of your home being rented out.

Next, since this is your primary residence being rented out, you need to prorate by the number of days that the room is for rent. Going back to the example the IRS provided, you use an app like Airbnb and have a paying guest for 73 days which is 20% of the year. 20% of your $50 prorated insurance deduction comes to $10. You unfortunately can’t deduct the $490 left over.

If you are renting out your entire home on a sublet basis or just to get some extra cash while you’re not at home, you would need to then just prorate the expenses by the number of days you are renting it out.

Pitfalls if You Own Your Home

Even if you meet the exception for renting out your home for less than 15 days, you need to apportion your mortgage interest and real estate taxes to those days that they were rented out if you deduct the interest and taxes on Schedule A.

Depreciation of your home, which is the actual principal, can also be extremely tricky to calculate without a tax professional’s help. If you sell the property before the depreciable life is over (which is 39 years for commercial property, which is what rental property is classed as- even if you live in it!) you may need to pay what is called a recapture tax at the time of sale. The recapture may or may not be worth the benefit of taking that deduction now.

Are You in the Vacation Rental Business?

Be careful with how much additional work you do for your guests beyond providing them a place to sleep. If you’re cooking meals for them, doing more than a cursory cleaning, or providing additional services then the IRS could classify this as being in the trade or business of vacation rentals or bed-and-breakfast. This would mean that you have to pay self-employment tax- Social Security and Medicare taxes that are 15.3% of your net income- and possibly apply for additional licenses and occupancy tax certificates where you live or rent out the property.

As home sharing becomes more ubiquitous over time, Congress may update the tax code for simplified treatment of sharing economy income and the IRS subsequently release more detailed guidelines. Nevertheless, be mindful of your expenses as well as how many days your home is used for casual rental, in order to avoid headaches at tax time.

Tax Treatment of Cryptocurrency Sales and Exchanges

Cryptocurrency, such as Bitcoin, Ethereum, Monero, and Litecoin among others, has picked up major traction in recent years to the point that it has become a major concern for tax and accounting professionals, the authorities, and cryptocurrency users themselves.

People started using cryptocurrency to save money on cash remittances outside the country (for example, a $200 cash transfer to the Philippines would cost about $12 through a money service business but "pennies" via Bitcoin) and small transactions like spotting a friend for coffee. Now, you can see cryptocurrency being accepted for a sandwich at the local deli and Overstock.com is reporting an average of $50,000 per week in sales from Bitcoin users alone thanks to their partnership with ShapeShift.

Cryptocurrency has gone beyond a novelty enjoyed by the tech-savvy to a full-blown alternative to using credit cards, bank accounts, and even actual cash to pay for purchases, remit money to friends and family, and make investments. With more sales transactions being completed with cryptocurrency instead of cash, this poses a major accounting challenge to both large and small retailers as well as tax consequences that are harder to spell out than typical cash and credit transactions.

In order to understand the tax impacts of cryptocurrency sales and exchanges, it’s best to become familiar with how cryptocurrency itself works.

How Does Cryptocurrency Work?

Cryptocurrency is an asset with value just like stocks, bonds, commodities, and precious metals. However, it is not actual cash that would go in a bank or perhaps a digital cash service like PayPal. Unlike the cash that would sit in one’s PayPal account from sales, services, or remittances from friends and family however, there is no central authority or server that rules over cryptocurrency transactions. There is no mint that constantly creates new cryptocoins, or authority you go to like a bank’s fraud prevention department. It is also not a trust-based system: i.e. you trust that the bank will not spend your money and that the cash in your PayPal account is also secure from the retailer taking more of that cash than they were authorized to.

Transactions are publicly available through a peer-to-peer means called a blockchain. The blockchain exists to prevent double-spending among the peers in the network. Each peer in the network knows what each transaction is in the blockchain, and checks it for validity and that it was not an attempt to double-spend. The consensus for transactions is among those peers: not a central authority. This is in contrast to a bank card, credit card, or centralized digital cash like PayPal where if you must dispute a transaction, you get one of the aforementioned parties involved. Whereas with cryptocurrency, if the peers do not reach consensus on the transactions, the entire system could collapse: this hasn’t happened yet despite the lack of central authority.

Cryptocurrency also earned the moniker from the "crypto" part coming from math securing the location and personally-identifiable information (PII) of each peer, although your real-world identity is known to the other peers. Monero and Dash offer additional privacy features that Bitcoin and the like do not, but in general, it is easier for a hacker to steal your PII from your bank account or credit card than the location of most cryptocurrency. In light of recent large-scale breaches like what went down with Equifax, more people are looking to cryptocurrency as a result.

The Current Consensus on Tax Treatment of Cryptocurrency

The IRS issued Notice 2014-21 when Bitcoins began to pick up steam. Since cryptocurrency is not actual currency, the regulations that apply to foreign currency do not apply to cryptocurrency sales and exchanges such as the way one would recognize a gain or loss on the sale from receiving foreign currency for goods or services. However, taxpayers must include these sales (and applicable exchanges) in their income.  IRS Publication 525 provides more in-depth guidance on what constitutes a taxable sale or exchange but in general, if you are accepting cryptocurrency on your website as payment for goods or services then you must include these sales in your income just as you would for physical and digital cash sales.

Because cryptocurrencies are traded on exchanges just like stocks and other financial assets, but are not actually stocks, the current guidelines from the IRS state that you must utilize the fair market value of the cryptocurrency on the date of the sale. The fair market value would need to be converted into US dollars using a reasonable method, such as the closing value on that date or the average trade price. For example, if you are selling your music on your website for $15 per album and you accept Bitcoin, you’d need to convert the Bitcoin sale to US dollars first. If the closing value of one Bitcoin is $3,901.95 on the day of the sale (as it is at the time of writing), your album would sell for 0.003844 Bitcoins. If you receive more or fewer Bitcoins given its dynamic nature, you’d recognize whatever the conversion totals out to be in US dollars.

Depending on which digital wallet that you use, the conversion may be automatically calculated for you at the time of each sale which would provide a reasonable calculation for tax and recordkeeping purposes.

If you "mine" digital currency of any type, you also must recognize it as taxable income using the same method for the date and time you mined each digital coin.

Making Purchases with Cryptocurrency

The same rules would apply for making purchases with cryptocurrency, such as if you are a freelancer making business purchases using Bitcoin or other cryptocurrencies. You can still take a deduction assuming all the other rules are met, but you need to convert that purchase into US dollars first with a reasonable method for determining the rate.

Crypto-Exchanges

While cryptocurrencies aren’t stocks or bonds, they are considered capital assets just like them. However, the more generous capital loss and gains provisions and tax rates do not apply to these exchanges. They are instead considered ordinary exchanges, which means that they are taxed at the same rate as the rest of your income.

Since cryptocurrencies aren’t considered securities however, this also means that more burden falls on the taxpayer to record basis and sale price, unlike the "covered transactions" shown on a 1099-B or combination statement from a securities broker.

As more of society embraces cryptocurrency, the IRS and other authorities will issue more definitive guidance on how to treat these transactions. Digital wallets and other means of recording crypto-transactions and exchanges will also become more sophisticated and make recordkeeping simpler, but until then, cryptocurrency users need to keep excellent records to make tax time go smoother.

Retail Accounting: Are your shipping costs too high?

The advent of online shopping has completely turned standard retail practices on its head. Stores that have thrived for decades have been forced to start selling their goods online and compete on the global marketplace. One challenge that many retail owners struggle with is how to charge the right amount for shipping without scaring away the consumer. Are your shipping costs too high?

What really costs so much to ship goods

While many owners likely already know what makes shipping so expensive, I want to list the items here to distinguish them later and identify which ones we can cut back on to save money. In no particular order:

  • Vendor: Who you choose directly affects your rate. USPS costs less than FedEx or UPS but you sacrifice on customer service, speed, tracking and other options.
  • Ship to/from location: Where your customer is located relative to you is a major factor in shipping costs. Most consumers don’t keep this in mind when shopping online.
  • Speed: How soon the customer wants it is another major factor, as all vendors charge more for faster shipments.
  • Packaging: This is a cost retail owners incur and is mostly “silent” in nature–consumers don’t understand how much that cardboard box and those packing peanuts really cost.
  • Value of product (insurance): If you’re shipping anything of value then insurance is a must have.

So now that we listed them, which items should retail owners skimp on? There is nothing the shop owners can do about the location of themselves or their customers nor should they reduce any insurance purchased on the item. Without insurance the owners are forced to eat the cost of the product by shipping a new one to the buyer. Why do that when you can get insurance and pass on the charge?

The easiest method for retail owners to drive down shipping costs is to buy packaging in bulk. Storage could be an issue but for retailers that spend thousands each year to ship their goods must try to bring down the cost of packaging every way they can.

That leaves two options: Vendor and Speed. My advice here is to let your consumer decide who they want to send them the package and how fast they want to get it there. There is no reason to send an item via 3 day shipping at an extra cost if the buyer doesn’t need to have it right away. Many consumers can care less that UPS vs FedEx delivered their package as long as it saved them a couple bucks.

It takes extra work on your part to know the different rates for different speeds per vendor but if you find that one shipping company always is less over another then remove the more expensive option from you list. Sounds simple right? You would be surprised about the lack of research retailers do on shipping products across the country and if you’re not constantly trying to save your consumers money then guess what… someone else will!

How To Determine If You’re Charging Enough for Shipping

Most consumers don’t realize that the amount they pay for shipping isn’t dollar for dollar what actually goes into the cost of shipping the product. In fact, its at best a guess to what the retailer thinks the item will take to ship the item to the consumer’s local given the zip code. Sometimes it costs the retailer less than they charged and sometimes more. With enough volume this should even out but sometimes it doesn’t… and sometimes it doesn’t by a significant margin.

The first step you will want to take is to separate out your shipping revenue from your other sales. Your POS software will do this for you so that is likely already being done. Second, you’ll want to use the default Postage & Shipping expense account in QuickBooks to track the expenses you incur to ship your product. These numbers will not even out every month as the expenses you incur in one month will be used to ship the products in another.

Look at the moving average of expenses over the past 3, 6 and 12 months and compare that to the moving average of the shipping revenue received. Notice something off? If you’re constantly paying more for shipping than you’re bringing in every month then you know you are not charging your customers enough for shipping. Divide the net difference over that time period by the total packages you shipped–so if over a 12 month period you’re off by $100/month and you ship 100 items/month, then you should increase the cost of shipping to each of your customers by $1.

You will not want to raise prices significantly or too quickly as doing so could cause a negative reaction from your customers. Start with $1/shipment and see what happens over the next several months and hopefully the cost curve starts to bend down in your favor.

Your Customers Don’t Like To Pay For Shipping

Here is something you’ll already know: Your customers hate to pay for shipping. Don’t you? I know I do. Want to offer free shipping for your customers without having it break your bank? Force them to buy more! As a consumer, I would much rather spend $10 in products to get free shipping than spend $10 on shipping. Fortunately for you the cost to ship a product most likely does not increase at the same rate that consumers spend money.

To come up with a free shipping scenario, calculate the average purchase dollar amount your customers make and then go above that amount to offer free shipping once you account for your margin. For example: If an average customer of yours will purchase $50 worth of items with a 50% markup and it would normally cost $10 to ship those items, then offer free shipping on purchases of $75 or more. Your customers think they will be getting a deal by not paying for shipping, you’ll have broken even on the extra shipping costs and everyone will be happy!

Uniqueness of Product

Finally, don’t let the era of free shipping persuade you to take actions you don’t have to take. Retailers with a unique product don’t have to worry about losing customers due to increased shipping costs–your customers have no other option to get what they want. In that case charge what you must to recoup your shipping expenses and don’t let your customers dictate your reduced margin.

An example: I recently had to purchase a replacement piece to repair our dishwasher at home. The piece itself cost $2.50 and I couldn’t find it anywhere else but one place online. The cost to ship the product to me was $7.50; frankly they could have put the piece in a standard envelope with a stamp and I wouldn’t have minded. I was forced to pay the full $10 on a $2.50 part because I had no other option if I didn’t want to go out and buy a new dishwasher.

If you have a product your customers both need and want and you’re the only place they can get it… you win.

Final Thoughts

As a consumer, we all hate paying for things we don’t have to pay for–shipping is one of those items. Make your customer feel like you’re doing everything in your power to reduce their cost and they will reward you with more sales.

If you need help calculating your shipping costs or with any other retail tax or bookkeeping questions then contact us for a free consultation.

The 3 Stages Of Filing Small Business Taxes

For accountants, this is the time of year for reflection. We’re passed all of the filing deadlines and we have about 6-8 weeks until we start to hound our clients about W9 Forms and 1099s. I remind each of my clients about 10x per year about W9 forms and I’m hoping for an easy season. I also do this because it fits neatly into Stage 1 of 3 when it comes to filing small business tax returns.

You see filing correct small business tax returns is a lot more than entering in data from a spreadsheet or accounting software and into advanced tax software. Small business owners and tax accountants both must put in hour after hour of organization just to get the data the way they want before it even goes near the tax software (the first stage). Once the data is nice and neat then we can start entering in the data and filing the return (stage two). Finally, organization plays a big role in stage 3 as tax accountants have to be prepared to back up their determinations when representing clients before the IRS.

To make it nice and neat, the 3 Stages of Filing Small Business Taxes are:

      Stage One: Getting your bookkeeping in order and maintaining it monthly
      Stage Two: Preparing your tax return correctly
      Stage Three: Representing you in front of the IRS in case of an audit

In fairness, each of these 3 stages can and should be broken down into 100 smaller steps. What makes working on each stage easier is if you keep all 3 stages in mind each stage of the way.

For example:

You went to lunch with a potential new client and you picked up the $100 meal tab at the hot new restaurant in town (it was delicious by the way). Do you know how this effects all 3 stages?

Stage One: This expense should obviously go into a Meals and Entertainment Expense (50%) category. I like to put 50% at the end of the expense for my own benefit or for the future tax accountant so there is no confusion (Not all meals go into the 50% category… do you know which don’t?). Make sure you write the name of the person you had lunch with, their company and what you discussed at the meal.

Stage 2: The expense goes into the Meals and Entertainment Expense (50%) on the corresponding Schedule C, 1065 or 1120/1120s. Stage 3: If you get audited you have sufficient documentation to back up the expense. Keep this receipt with your other tax documents for the year.

What are some other ways you can make your life easier come tax time? Here are just a few:

  • Reconcile your bank and credit cards on a monthly basis. Hire a professional bookkeeper to help out and you’ll save prep time from your (much more expensive) tax preparer. Additionally, some tax preparers provide discounted monthly bookkeeping fees if they also prepare the tax return. Do I? Yes!
  • Keep your records organized throughout the year. If you have a lot of receipts, keep them in separate folders organized by month or by statement. Use staples over paper clips as they will help you maintain all of your records without potential slip-ups.
  • Write the date paid, date mailed and check number to any and all invoices. This allows you to keep track of who hasn’t been paid and you’ll know for easy reference if you’ve mailed that pesky vendor who keeps calling about whether you’ve mailed his check or not.

These all seem like pretty simple and easy to do tasks and in fact they are. But so many small business owners just keep their receipts in a shoe box, grocery bag or, worst of all, nowhere (aka everywhere). Use your smartphone and the latest technology to your advantage–take a photo and upload quickly and easily to Google Drive or Dropbox (they’re free!). Organize by month and rename the receipt to the day it was taken (vendor name would be nice too but I’ll take what I can get) and you’re good to go.

And look, if you ever need any help working on any of the organization above, please contact us to set up a free consultation. We can help you organize your office so that you’re spending less time dealing with receipts and more time making money (or having fun, whichever is your goal).

An Easy Way For Small Business Owners To Save Money

Most small business owners already have a credit card they use for multiple transactions a month but if you don’t it could be costing you hundreds of dollars a year. Even if you already use a credit card you might not be using it to your greatest benefit! In this article I am going to discuss how you will have more money in your pocket each year by paying your vendors on your credit cards.

If you currently pay all of your vendors by check or debit card when you can be paying them by credit card you’re throwing money away.

Extra Cashback

The benefit that likely already has come to your mind is the extra cash back, points, or miles you would receive from your credit card from the extra charges. Don’t underestimate how paying an extra $1000 a month on your credit card over a check can help your bottom line. At $12,000 a year on a 2% cash back rewards card that relates to $240 in missed cash.

In addition, with the extra purchases on your credit card, upgrading to a higher cash back for a set yearly fee could become profitable. You can find many credit cards that offer 1% cash back on all purchases without a yearly fee, but 2% cash back if you’re willing to pay a $60 yearly fee (Capital One’s Spark comes to mind). This becomes an easy upgrade decision with the extra purchases on your card and it usually comes with a higher credit limit. Not only would you be able to double your rewards on your current purchases, it would come at no cost to you because of the additional payments!

Reduced Filing Expenses

Every year, business owners are required to file 1099-Misc forms for combined payments made to all unincorporated vendors over $600–with a few exceptions. One of the exceptions is that payments made via Credit Card or Paypal do not have to be reported each year–the credit card company and Paypal are required to do that work on your behalf. However, you are required to still file 1099-Misc forms for Debit Card and any other payments taken directly from your bank account.

The cost of filing 1099-Misc forms comes out to around $5/person if you use the QuickBooks filing options. This doesn’t include the cost of labor to prepare/verify these forms, the cost of printing and mailing the forms to your vendors and contractors or the time it takes for you to gather each individual’s W9 form.

On that note, don’t let your busy schedule prevent you from getting W9 forms throughout the year before you pay vendors. If your vendor refuses to fill out the form then you are required to withhold 28% of their pay. Failure to do so on your end could make you liable for their unpaid taxes.

Use Intuit Payment Network or Paypal To Pay By Credit Card

Before sending a check or paying by Debit Card, ask your vendor if he accepts payment by Paypal or Credit Card. If he uses QuickBooks, perhaps he has an account on the Intuit Payment Network (IPN); sometimes there will be a link to pay on the invoice. Definitely use either Paypal or the IPN if you have that opportunity as both will let you pay by credit card.

Drawback: Negative Vendor Feedback

In the cases where you can use your credit card, your vendors may not be as happy as you are. For starters, they will undoubtedly receive less than their invoice–the amount the credit card processor or Paypal charges to send the payment. This could be up to 3% of the total transaction and is the reason why some vendors stipulate that they will charge an additional fee if payment is made by credit card. If you have a vendor that has those terms, then do not use a credit card as the extra cost to the vendor is not worth the future savings from using the card.

Most vendors on the other hand (including us), price the credit card processing fees into their rates and consider it a cost of business. We benefit from knowing that you paid your bill on time and the fact that we don’t have to wait 60 days to receive a check. We also don’t have to drive to the bank to cash it and then wait for it to clear before using it. This doesn’t include the extra headache that is created when a check bounces.

For businesses that only receive a few checks a month we recognize the cost of the payment processor actually saves us time each month–time that could be spent working on clients.

If you would like more information on how you can save money as a small business owner or you are interested in any of the other services that we provide, please contact us!

How To Pay Your 1040 Federal Estimated Taxes Online

While many new businesses do all the right things their first year, when it comes time to pay their estimated (ES) taxes their second year (ES taxes are not required for businesses in their first year) I have seen it become a significant task time and time again. Whether the small business owner forgets to save money to pay the taxes or just don’t know where to go, I hope this article helps you out with the process.

Lets start with your Federal taxes and do the Virginia ES taxes in a later post. New business owners should create an account on EFTPS.gov as soon as possible. If you wait until the last minute you won’t be able to pay your ES taxes for that quarter through this method, as you have to apply for a PIN number which comes via snail mail and takes a week.

Keep reading for how to use the EFTPS.gov website.

What if you don’t have an EFTPS.gov account?

If you don’t have an account through EFTPS.gov and need to pay your ES taxes, then use a 3rd party site like PayUSATax.com. I’ve done this before and it is pretty simple–the drawback to using this site is the fees associated with it. If you use a credit card, you’ll be charged a 1.87% “Convenience Fee” and on a 4-5 figure ES tax payment, that percentage can add up quickly ($187 on a $10,000 ES tax payment). In contrast, you can use your debit card but will only be charged $2.79 total. Not bad right?

One problem: Most banks won’t let you make a payment on your debit card for over a few thousand dollars. So if you do have a large tax bill you must create an account with EFTPS.gov above right away to avoid paying a ridiculously large fee.

Creating an account on the EFTPS.gov website

For most single-entity small businesses owners (1040 Schedule C Tax Filers) who find themselves new to ES Tax Payments, they should create an account using their Individual SSN and not their Business EIN. Why? Your ES Tax Payments technically come from you the “individual” and not your small business; they go on the back page of your 1040 and not your Schedule C or Schedule SE.

You’ll want to follow the instructions on the page and set up your bank account when you create your account before the IRS sends you your PIN. However take note: You will not be allowed to edit your bank account information without receiving a new PIN–which will take another week. I recommend small business owners make the payments out of their personal bank accounts and not their business accounts, as that account is less likely to change over the course of your business than your official business accounts. If you decide to add both a business bank and a personal bank account then that is an option too–its just that you’ll have 2 PINs instead of one. Keep track of your login information and remember which account your PIN is going to as you won’t want to make the mistake of overdrawing your account on a large payment.

Paying the Federal ES Payments Online

Go to EFTPS.gov and click “Make Payment.” You will be taken to a login screen where you will want to login with your SSN (as an individual) using the PIN created and internet password.

Select the tax form “1040 US Individual Income Tax Return” option then click “Next.” Then choose the first option on the list “Estimated 1040ES” and “Next” again. Next up is pretty simple, you enter your payment amount, the tax year and the settlement date. Take note you cannot make a payment for the same day as your settlement payment so if you go on the 15th of the month and try to make a payment, the earliest you can make it for is the 16th–1 day late.

Choose “Next” again and you’ll be taken to a screen that will allow you to review your information before you make the payment. Once its ready select “Make Payment” and you’ll be done. Please print or save an pdf on the next page for your records and submit with your tax return. It will save you a lot of time next year when you need to know how much you’ve paid your ES taxes for the prior year.

Note: There is no pay by credit card option. To pay by credit card you have to use a 3rd party site.

ES Tax Late Filing Penalty

If you are late in filing your ES tax payments, then your accountant will file Part 4 on Form 2210 or you can choose to have the IRS figure your penalty for you. You’ll be using a formula similar to this one from the worksheet on Page 6:

Amount of your ES Payment * Number of Days Late / 365 * 3% interest.

So if you had a $5000 ES tax payment due and you filed it 2 days late, your penalty would be:

$5000 * 2/365 * .03 = $0.82

That does not seem like a lot but it will add up with a larger ES Tax payment and even more if you’re late for weeks/months rather than days (the penalty hits almost $25 if you’re 2 months late or over $113 if you’re 9 months late).

Final Thoughts On Paying your ES Taxes

Every month you MUST save money toward your ES Taxes or the IRS will hit you with a penalty each quarter. The IRS does not care that you have rent due or that you need to feed yourself (which unfortunately is the case for many new small business owners); their reasoning is if you had a full time job that money would be taken out of your check and you wouldn’t see it anyway.

In addition, the stress from not saving the money in the first place could negatively impact your ability to perform at the level your business needs you to. In a pinch you could pay your ES taxes with your credit card outside of EFTPS.gov, but you’ll be paying the huge transaction fees for this “convenience.”

That is it for now and perhaps later on (maybe by the next quarter’s ES payment in January) I’ll cover how to pay ES taxes in Virginia.

Welcome to Lipsey and Associates

Welcome to Lipsey and Associates! Formerly Jeff Lipsey Bookkeeping, LLC we’ve recently changed the name to reflect how much more we can do for your business than just bookkeeping. Over the past several months we’ve worked hard to also include:

-Business Development and Consulting
-Tax Representation
-Tax Preparation

The new name also reflects our ability to connect with other local professionals to help meet your needs.

Other than a name change, however, it is business as usual around the office. We are still using our old email address but we prefer you upgrade to the new one as soon as possible.

So with that welcome and wish us success going forward!

Restaurants: An Industry Where Percentages Matter

Restaurants: An Industry Where Percentages MatterIn a conversation with a new contact last week, we discussed that in new businesses, trying to set “ideal” percentages is pretty much meaningless. In one industry where that is not the case however is the restaurant industry.

If you check my Linked-In and About Me pages, you’ll notice I mention I was both a manager and then general manager of a local successful restaurant. About halfway into my stay at the company, the owners made a shift to focus on the “best” percentages–and the results were phenomenal.

If you are getting ready to open a restaurant then a focus on Fixed Costs (Rent, Utilities, Permits, etc) as a percentage of potential sales (10-15%) is important. Restaurants with low fixed costs are able to charge a lower base price for all meals than their competitors while also maintaining profitability. In my opinion, there are 3 major percentages (cost/sales) that already-established restaurants should focus on to increase profitability: Food Cost (25-30%), Labor Cost (25-30%), and Variable Costs (10-15%).

In a restaurant with gross sales of $100,000 a month (a small to mid-size restaurant), a 1% reduction in costs is an extra $12,000 of profit each year.

Variable Costs

These expenses are not glamorous to think about but every restaurant must go through. They involve: Reducing paper usage, limiting your linens expenses and choosing the right cleaning products. When I read an article about a NY Restaurant with Zero Waste I am breath taken–their variable costs percentages must be phenomenal!

In the end, the best way to reduce these expenses is to remain vigilant with your staff, constantly search for savings with your vendors and install the most efficient fixtures that you can afford. As a restaurant owner, I would estimate your variable costs should be around 15% of your sales.

Labor Cost

Restaurants and the cost of their labor will likely always be a contentious issue. I never could just look at the labor cost as a figure of dollars and cents because for every $1 of labor you cut, you essentially reducing the salary of one of your workers by $1. Restaurant owners cite high labor cost as a main reason to not pay their employees more, when it is typically the lowest paid workers who are doing the most strenuous of tasks.

On the other hand, it is very important for owners and managers to make sure their workforce is efficient. Restaurant owners must be willing to adequately train their staff and treat them with the respect they deserve. Your staff has just as much power to influence your sales as your menu, so if you treat them well they will return the favor by selling more to your current clientele.

Don’t be afraid to pay your employees well and expect a lot out of them. Instituting and maintaining a well-paid and well-rested staff will reduce employee turnover and create goodwill with your customers.

What do I mean by well paid and well rested? Don’t pay minimum wage and make sure your wages are above average for your area. Give your employees sick days and vacation days, even if they’re only in small amounts.

As a restaurant owner, you should expect to pay around 25-30% of sales in labor costs. If you’re too low and you’re still unprofitable then expect to reduce costs in other areas; if you’re too high then wait to see if we have to raise prices then redetermine. The last thing you want to do is lay off or reduce hours, but if you notice an inefficiency then don’t be afraid to act either.

Food Cost

Every restaurant can improve their food cost percentage even if you think your restaurant already does pretty well. The first step in reducing your food costs is to determine exactly how much each item on the menu costs to make per unit. It is not an easy task to find out exactly how much each item costs but that is the only way to really reduce your food costs significantly (you have to know what your costs are first before you can change anything). If you have different portion sizes and prices for lunch and dinner then you should have separate numbers for each.

When you break down the cost of each item, keep a spreadsheet with the ingredient, portion size, and cost per ingredient for every one of your items on the menu from appetizers, main courses and yes, even drinks (especially alcoholic drinks). Then add up the cost of each menu item and then factor in a waste percentage of 10% (multiply the cost by 1.1)–this way you can account for all the times you mess up an order and have to remake it. If your error rate is less than 10% then awesome as that will only increase your profitability but it is best to error on the side of caution when setting your prices.

The next step is to divide the new cost by the price of the item on your menu; in an ideal world your percentage would be 30% or lower if you’re not a fast-food franchise. Create a new menu with your prices compared to the food cost percentage. You will probably be surprised that some items you’re selling on the menu you are making a lot of money on (food cost of 20%) and others not so much (food cost of 40% or more).

If you’re really good at tracking your sales, you can see how often each item on your menu is ordered; customers are not dumb and they know when they are getting a great deal compared to when a menu item is too highly priced. The goal is to have the average of all items to be 30% or lower so don’t go raising your prices… yet. Look at your higher food cost items to see what is the cost driver: Is it waste? Is it delivery cost? Expensive item? Before raising your prices find out if it makes sense to change the dish to make it less expensive without sacrificing the quality.

I have three examples where I significantly reduced food cost percentages while at the restaurant and I did so by 1) raising prices, 2) reducing waste and 3) reducing delivery charges.

1) Raising Prices – We were always hesitant about raising prices, as we were already viewed at having expensive (yet high quality) food for our area. There was one item I was adamant about raising prices on and that was one of our fish options. We dealt with a lot of seafood and many consumers can’t tell the difference between them (one of the many reasons seafood fraud is so rampant today), so they would typically go for the item with the lowest price. Unfortunately, this was also our lowest-margin fish option so every time they chose this item we lost money (compared to if they ordered something else). When changing prices, never raise the price of the most expensive dish (of a comparable nature) on the menu and never lower a price below the least expensive dish on the menu–but feel free to move around in between. Consumers might notice that you raised a price on one dish by as much as 15%, but as long as you kept the other prices the same they are likely to forgive you; that is exactly what happened in our case.

What happened was the demand for that dish did reduce so we only saw a minor increase in sales from the increase in price. However, the cost/dish was now below 30% and the individuals who found it too expensive to purchase that dish went on instead to purchase other, more higher-margin items, on our menu. It didn’t matter which option they chose, we were guaranteed to make our money on it.

Note: Raising your highest-priced dish even higher is how you can alienate your customers.

2) Reducing Waste – Bars and restaurants who serve fries at their restaurants literally sell them by the ton on a monthly basis. Most bars buy them pre-packaged and frozen, so their waste is already quite low (that is also why most fries taste the same). For the restaurants who still take the time each day to peel each potato by hand (a worthwhile investment), be mindful of both the size of the potato and how they are peeled. I have an excellent example on this: One of my first changes as a GM was I changed the way our workers peeled the potatoes.

What seems now like an obviously bad practice, the cooks used to peel potatoes using paring knifes. The reason? Our potatoes were pretty massive, weighing nearly a pound each and frankly they could cut through 2 to 3 times as many potatoes in the same amount of time than if they used a potato peeler. At this point I did an experiment: Use potato peelers for a week to see how much we save on waste from cutting potatoes.

The result? The cooks cut as much as 35% fewer potatoes while not taking that much longer each morning. In fact, I calculated I could have hired an additional employee to cut potatoes all day every day and it would still have saved money from the old method. Food costs were significantly reduced on a magnitude of $10,000 or more each year just from that one change alone.

3) Delivery Method – This was probably my most difficult change that I made and it involved getting two of our vendors to work together. We purchased a lot of fish every day and all of it fresh. We wanted to use the most sustainable fish we could, which involved us paying over $1.20/pound of overnight shipping using FedEx from the North Atlantic coast. Our vendor would cut up and package our fish and put it on the truck for overnight delivery. No offense to FedEx here, but that is not how food should arrive at a restaurant kitchen!

We used a couple of different vendors to get our fish, and they all worked out of the same area and drove the same routes every day. Even though these guys were competitors they all knew each other and worked well with each other, and that is how we were able to reduce our food costs. Every night, the vendor that packed the boxes for overnight delivery instead put them on a freight train to take them half way down the coast. Our other vendor, which frequented the same area, would then pick up the fish from the train and deliver the fish to our door.

The result: While we were paying $1.20/pound to FedEx every day, we instead paid the freight train $0.15/pound, we paid our first vendor an additional $0.35/pound for their trouble, and an additional $0.25/pound to the second vendor. So everyone involved increased profitability (sorry FedEx) for a total savings of $0.50/pound (about 3% on that dish alone). That doesn’t sound like a lot but when you sell thousands of pounds of fish each year, those savings are pure profit

Conclusion

You’ve made it with me this far so you will see that I have estimated return of sales for the owner of between 10-15%. Many restaurant owners and shareholders strive for 20% of sales for profit which is an excellent goal.

It does take effort to come up with solutions to reduce costs but the changes you make will add up to a lot of money when you have a lot of volume over the period of several years. But the first step in making these changes is to find out what your exact percentages are and then identifying where you need to improve. If you could save $100,000 over a 10 year period by making a few changes now, why wouldn’t you?

Why It Doesn’t Make Sense To Do Your Own Payroll

Payroll Can Be A Big Weight!Are you ready to hire your first employee? Maybe you already have a few employees on your payroll but you’re thinking of bringing the operation in house to save money each month. I’m here to tell you that you may be better served to keep it out of your hands.

Most small business owners cite cost as the biggest reason to bring payroll back under your roof rather than keeping it with one of the many payroll providers that exist. Starting at around $50/month, the costs can add up quickly over the course of the year but before you switch consider what those costs pay for. Below are just some of the options that some payroll operators provide to assist your needs:

  1. Monthly and quarterly payroll returns
  2. Cutting and mailing paychecks, as well as tracking and paying any payroll “trust fund” expenses
  3. Managing your retirement accounts, health care, vacation, sick days
  4. Paying 1099 Vendors
  5. Filing W2s each year
  6. And dozens more features!

So how much is too much for a payroll service? It depends on your business structure and the number of employees. Keep in mind that just #1 above will easily take you about an hour (or more) of your time each month, depending on how familiar you are with your state’s filing requirements. If you’re an employer in the DC metro area then it absolutely makes sense to go the payroll provider route because they keep track all of your employees’ residences and the filing requirements in each state.

There are many payroll providers in the DC metro area and most of them are pretty similar, give or take a few features. When searching, I’d look for the following features:

  • Automatic payroll form submission
  • Direct deposit and automated payments
  • Trust fund, health care, and retirement account set-up

I’m definitely a numbers guy and, when you start to think about the cost of each check, envelope, stamp and transaction fee in addition to the hourly time dump that comes with filing payroll returns, it is a no-brainer to have someone else handle those payroll returns for you.

QuickBooks Online users looking for more hands-on control should look at the Intuit Payroll options that connect directly to their online account. You’ve got to set it up initially yourself but once you’ve set it up all it takes is a click of the button each pay period to get your checks out. The handy reminders each period to pay your employees are big help too! Intuit has several payroll options but I prefer the Intuit Payroll Full Service produce for the most benefit, but you could get by with the “Enhanced Version” too. Try it for the first 30 days and see what you think!