Businesses employ independent contractors all the time, in multiple capacities. Perhaps you hired a freelance designer to create marketing materials for your business this year, or maybe you brought in an independent consultant to develop strategies to improve your operations. If you used a contractor or vendor this year and paid them $600 or more, you need to be prepared to issue them a 1099 tax form by January 31.
1099’s can be complicated and confusing, dreaded by employers and contractors alike. Even if you have experience with issuing or filing 1099s, you may have missed recent changes in tax laws that might affect you this year. Unfortunately, the consequences of failing to use 1099s properly can include fines and penalties, so understanding these complexities is essential. Here are some steps and considerations to keep in mind as you, the employer, prepare for the end of the year.
The first step is to figure out which 1099 form your contractor will need. As of 2021, there are 20 varieties of 1099 forms, but the 1099-NEC (non-employment compensation) form and 1099-MISC form historically have been the ones most commonly used for contract employees who were paid $600 or more during the year.
Use the Proper 1099 Form
Why is this important to know? Until 2020, the 1099-MISC form was used to report payments to independent contractors and vendors for services rendered, but differing due dates created loopholes in the system that were being abused. As a result, beginning in 2021, the 1099-NEC was reinstated to report all payments to non-employed individuals. This covers nearly all contract/freelance work, with a few rare exceptions that may still require a 1099-MISC form.
Always consult a tax professional if you have any questions or uncertainties about which 1099 form you need to issue to your particular contractors and vendors.
Accurate Compensation Records
The next step is to ensure you have all the information needed before issuing 1099 forms to your contractors. Some important questions to consider are, do you have an accurate account of which contractors and/or vendors you used this year, and how much you paid each of them? Implementing a system at the beginning of the year to keep an accurate account of who you are contracting and how much you are paying them will keep you organized and on track when it comes time to issue 1099 forms.
Update Contact Information
Do you have up-to-date and accurate ways of contacting them? Sometimes contractors and vendors move locations or change their contact information. Fall is the perfect time to start making sure you have their up-to-date details, so your 1099 forms get to where they need to be on time (keep in mind that January 31 is the deadline for mailing 1099s to most taxpayers.)
This feels like the right time to re-emphasize the importance of implementing a system and process to keep an accurate account of all these details as early as possible. In today’s paperless, digitalized world, we love software like GUSTO that has digital payroll options for managing your contract employees Additionally, we use Track 1099 when it comes time to e-file on behalf of clients. Still, whether you choose to use the latest software or hire outside professional accounting help, the most important thing is that you have a process in place to ensure you don’t forget about your contract employees and vendors.
At System Six, we pride ourselves on staying up to date with the latest tools and technologies to help clients keep their books clean and organized all year long, setting them up for success during tax season and beyond. So, we focused year round on 1099s (collecting vendor information throughout the year, for example), but now that it’s approaching year end, it’s your turn as well to prioritize 1099s!
Does the process of preparing to issue 1099s to your contracted employees confuse or frustrate you? Are you feeling overwhelmed about your 1099s? We’d love to chat. Please reach out.
One of our least favorite tasks is having to make changes in our critical professional relationships. Whether it’s shopping around for a new dentist, doctor, or accountant, the search and subsequent transfer of years of paperwork and documentation can be overwhelming.
However, there are numerous reasons why you may find yourself needing a new CPA as your business evolves and grows. While you may not be able to skip the tedious process of shopping for a CPA that meets your unique needs, you can save yourself time and overwhelm by beginning that search early.
Why You Might Need to Switch CPAs
There are multiple reasons why you might change CPAs. How do you know if it’s time for you to begin that search?
You’ve had a bad experience.
CPAs are part of the service industry, and you are the customer. You wouldn’t continue to go to a store or restaurant where the employees mistreated you. If a CPA is rude or inexperienced, you do not have to stay with them.
They can’t answer your questions.
Your CPA should be able to answer any questions you have without making you feel embarrassed or rushed. Look for a patient CPA who invests in helping you understand the whole process. This professional relationship is built on trust. If you are struggling to communicate with and trust your current CPA, it might be a good time to start shopping around for someone who can better meet your needs.
You need a CPA with specific expertise.
If you are in a highly regulated industry, such as insurance, medical services, or newer industries such as cannabis or cryptocurrency, you will need a particular CPA who is experienced and equipped to help you. Most US states have very specific tax codes and regulations at state level, in addition to the millions of rules at the federal level! If your company operates in several states, you need a CPA versed in national tax codes, as well as state laws. Make sure your CPA understands and is prepared to help you navigate these complexities.
They need to be able to grow with you.
Does your CPA use the same technology as you? Do you share visions of innovation? Are they planning on retiring in a year or two? These are all critical questions to consider as you look for the right CPA. It might not be worth starting a new professional relationship with someone on the brink of retirement or with someone who still works with paper-and-pen systems when all your files and data are digital. Keep the big picture in mind as you prepare questions for a prospective new CPA.
When to Secure Your CPA
Unfortunately, if you wait until January or February to secure a new CPA, you may be too late. Many CPA firms book up by January, and by waiting too long, you run the risk that your preferred firms will not have the capacity to serve you in time for the upcoming tax season.
If you need a new tax-preparing CPA, you need to start shopping around in the fall.
Ask for recommendations from respected friends and your professional network (certainly, ask us!). Then follow up with firms individually for a one-on-one meeting. Don’t be afraid to ask questions or present specific scenarios to gauge how well you would collaborate. Starting this process in the fall provides ample time to vet your options and onboard your company before the crunch of tax season.
Switching to a new CPA may feel like a daunting task, but you can set yourself up for success by beginning early and advocating for your company’s needs.
Is it just us, or does time seem to accelerate as we move into the fall season? It’s like the time between summer ending and the beginning of the holiday season turns into a busy blur, and before we know it, we find ourselves at the end of the year in a mad rush to get ready for tax season.
Fortunately, we know there are small, practical steps you can start taking this fall to have your business ready for the end of the year, so you don’t find yourself scrambling in January. That’s why for the rest of the year, we’re going to be focusing on “Getting Ready for Year-End,” sharing our most constructive ideas on how you can best support your CPA, bookkeeper, and business before the next tax season.
Separating Personal Expenses
Your greatest priority before the end of the year is to have clean books by January before processing documents for taxes. Separating your personal expenses from business expenses is a great place to begin, as it can be a time-consuming job – especially if you get a late start!
Many business owners have separate cards for their business and personal expenses, but sometimes the wrong card gets used. Sometimes larger personal purchases are put on the business card because it’s the one that gives back the most points or discounts with certain vendors. These switch-ups may not happen frequently, but that makes them easy to miss or lose track of.
Where to Begin
As you go through your books to separate the personal expenses from the business expenses, start large and work towards small. Identify the substantial expenses first, like travel and purchases of equipment or assets. Once those are appropriately categorized, move on to the smaller expenses, like meals and office supplies. Just like breaking household chores down room by room makes the work seem less overwhelming, breaking up this expense categorization into different sections makes a potentially overwhelming task much more manageable.
Home Office Deductions
If you are one of many business owners working out of a home office, you can deduct a percentage of your home utilities based on the square footage of your office compared to your house. This is another tedious task that can be easy to forget until your CPA is asking for the numbers in the middle of tax season. As you sort out your personal expenses, take the time now to figure out these square footage percentages before the end of the year. Your CPA or bookkeeper will thank you!
The best way to ensure you don’t miss essential deductions, big or small, is to make personal expenses clean up a monthly rhythm. Much like the dust piles up when you let too much time pass between sweeping your house, your books get “muddier” and more confusing the longer you let them pile up without separating them. Unfortunately, the muddier the books get, the greater the chance is that you’re going to make a costly error.
At the very least, we recommend making a fall month like October your yearly reminder to comb through your books. Avoiding the mistake of waiting until January will save you time, peace of mind and ultimately, dollars.
Last month, System Six founder, Jeremy Allen, was featured as the inaugural guest for Accounting Leaders Podcast. Hosted by Karbon Founder & Director Stuart McLeod, the Accounting Leaders Podcast curates the best resources in the industry through conversations with accounting’s most significant innovators.
Jeremy and Stuart talk about small-town living, from the culinary limits of the midwest to the blessing of living near family in a slower, tighter-knit community. Jeremy’s recent move from Seattle, WA to Holland, MI, opts for colder, snowier winters but relatively easy access to big cities like Chicago and idyllic towns like Traverse City. While COVID may have changed the work-home balance for many individuals, nothing radically shifted in the operations of System Six. System Six has always been a remote firm with team members across more than a dozen states. While other industries struggled with the forced pivot to cloud-based systems, virtual meetings, and communications logs, System Six carried on with business as usual.
“For the first seven years, we had to convince people why the Cloud was good, but COVID accelerated that,” says Jeremy. Remote, streamlined technologies are not just a slick option; they are essential to day-to-day business. Offering a work-from-home option for employees used to make System Six stand out among the crowd. High-class talent sought out the rare opportunity to provide quality CAS from the comfort of their homes. But the shift to at-home work for the entire industry means that System Six no longer offers something exclusive. Stuart points out that this shift, paired with the scarcity and challenge of finding and retaining talent, could pose problems for System Six’s growth in the future. Jeremy acknowledges that, in this case, company culture will probably emerge as their unique differentiator.
Growth and innovation have always been in the DNA of System Six. Jeremy founded the business with neither experience as a bookkeeper or training in accounting. What he was keenly aware of, however, was the day-to-day frustrations of navigating finances as a small business owner. Having launched several businesses before System Six, Jeremy found processes for payroll to be antiquated and lacking in technology advances of parallel industries. While accountants were helpful during tax season, they weren’t always supportive throughout the year and lacked the patience and expertise to provide holistic advisory services. Without someone “in the books” from week to week, financial records would become muddy, late, or disorganized, and only the business owner was left to clean up the mess. Amid his own frustrations birthed his most successful business.
His experience not only resonated with other small business owners but non-profits, churches, financial firms, and high-net-worth individuals. He quickly realized that managing the minutia of receipts and payroll brought immense relief. Their services were both systematic and highly “sticky.” While System Six loves innovation and technology, “slow and steady wins the race” for Jeremy Allen. Stuart asks about the future of System Six, and Jeremy shares exciting opportunities for acquisition or acquiring another business. “It’s always nice to get asked to prom,” jokes Jeremy. Entertaining invitations for mergers is flattering, but the fit has to be more than financial. For Jeremy, the highest priority will always be if a suitor is right for the employees, families, vision, and mission of System Six.
Whether you are an international non-profit organization operating with a staff of hundreds or a small local church with under a hundred members – when your organization is running on the donations and good faith of others, good stewardship matters.
Transparency Builds Trust.
We believe good stewardship begins with trust. As a non-profit, your organization functions not just as a business but as a community venture. By trusting you with their financial gifts, resources, and time, your donors have a personal stake in your organization’s success. When they have questions about where funds and resources are being allocated, there should be clear and open transparency, just as there would be in any partnership.
This is where accurate bookkeeping comes in. Messy, unpredictable books mean that money could be unaccounted for. Even if it is unintentional, unorganized bookkeeping can and will lead to mistrust in leadership.
Successful non-profits know that when it comes to finances, they are operating as a partnership with their donors. Trust is essential for this relationship between organizational leadership and financial partners to stay healthy and grow.
Vision Requires Resources.
Every non-profit organization begins as a vision, but a vision needs resources to come to life. An organization must have practical tools such as money and manpower to operate. As a non-profit, you often must rely on monetary donations and volunteers with particular skill sets to execute your goals.
You’ll earn the trust of your financial partners and volunteers by wisely managing the resources at your disposal, ensuring they are not expended too slowly or quickly. This doesn’t just pertain to your budget – wisely managing your organization’s resources also means valuing your staff and volunteers’ time.
A vision isn’t a static thing – it stretches, shifts, and grows along with your organization’s resources. Accessibility to accurate books is imperative as your vision and goals evolve and adjust over time. This transparency not only builds trust, it also honors the givers by caring wisely for the resources they give you, allowing you to earn the right to ask them for more.
Information is Empowering.
Budgeting, like many other disciplines, sometimes gets a bad rap for its “restrictive” lens. We tend to think of budgeting as what we can’t do, rather than important, empowering information that frees us to do more of what we value most.
We believe that good stewardship and accounting of finances is the opposite of limiting – it’s actually freeing.
Wisely stewarding your resources through accurate bookkeeping allows you to celebrate and give more readily because you know exactly how much money you have and from where.
The same is true when it comes to your partnerships with donors and volunteers. Good stewardship shows that you honor their investment in your organization’s vision, whether with time or money or both and that you value a partnership built on transparency in trust. When your donors feel honored and like valued team members with a common mission, their commitment to your organization will grow.