Part 3 of 3: Paying People and Bringing It All Together
In Part 1 we covered the basic setup of a business and some bare-bones basics of the things you need to track. We took it further in part 2 when we examined a few of the ways money moves in and out of your business, and what you’ll need to plan ahead for.
In Part 3, we’re going to take a closer look at what’s involved with paying people (employees and non-employees), and what kind of decisions you need to make to bring it all together.
Step 1: Will You Need Payroll?
If you are the only person working in your business then payroll isn’t necessary, but that changes when you bring on your first employee. At that point, you’ll need to setup a proper payroll, including proper hours and tax tracking.
The good news is that most bookkeeping software has this function built in, and it’s easy to use.
If you’ve never run payroll before, however, it can be a bit intimidating at first. So, it’s best to start the learning process as soon as possible, if you don’t plan on hiring a bookkeeper or payroll service to handle it for you.
Step 2: Do You Need 1099s?
If you plan on using subcontractors instead of employees, you’ll need to issue 1099 forms at the end of the year to each recipient and to the federal and state governments. There are very distinct regulations that differentiate a subcontractor from an employee. Again, understanding who can be paid as a subcontractor and who must be designated and employee will protect you from a mistake that could be quite costly in the event of an error in judgement. Consult with an accountant or attorney about your role as an employer.
Most of the information you need for issuing and filing 1099 forms can be found at the IRS website along with downloadable PDFs to make the process quick and easy.
HOT TIP: My own hard and fast rule regarding subcontractors is: You must complete the W9 form and return it to me complete and signed BEFORE you get ANY money. I tell all my clients to follow this rule – NO EXCEPTIONS.
Once someone has been paid, it’s very hard to get that form and you must have the form to determine 1099 or no 1099 and if it’s yes to a 1099, you must have the information disclosed on the form to prepare the 1099 forms at year end. Trying to get in touch with people after the fact is a time waster and might even cause you to file your forms late, which then institutes a penalty from the IRS.
Step 3: Who’s Doing Your Taxes?
Finding a good tax accountant can be a bit time consuming, but it’s worth the search. You need to make sure you’ve hired one before tax season begins, though, or you may be out of luck. Once tax season starts, most accountants don’t even answer the phone let alone take on new clients.
Do not do your own taxes, especially if you’re just starting out in business. Not only does it take a huge amount of time, but tax law changes every year and will drastically impact things like how much you can claim, what can be claimed and what can’t. Just knowing which forms to use and which numbers go where can be daunting in itself, especially since the forms themselves can change from year to year.
Another good reason to use an accountant for your taxes is to save you money on your taxes. An accountant will ask questions that may reveal tax deductions or business expenses that you may overlook when doing your taxes yourself.
So, remember: you need an accountant, and you need one well before tax season.
Step 4: It’s Time for Bookkeeping Software instead of a spreadsheet?
In Part 1 you used whatever was at hand to start keeping track of money moving in and out of your business.
Now it’s time to choose a proper bookkeeping system and start working with it.
There are several to choose from; a few of the most popular ones being Freshbooks, QuickBooks, and Sage 50 (Simply Accounting).
The first step in deciding which one will work for you is to look at the specific features of each and make sure that they can do everything you need them to. Consider questions like:
- Does the system offer payroll?
- Can you track multiple bank accounts?
- Does it create invoices and track your receivables?
Some software is better designed for service companies, while others are more focused on retail sales that require inventory tracking. QuickBooks Online can handle most things, for instance, but if you need to do job costing then you might need to get a specific desktop version which offers that option.
We’ve covered a lot in these three sections, and there’s even more to cover, but this might be a good time for a sanity check, right??? Running a business can be HARD, but it’s rewarding and it’s awesome when you have all the right people on your side!
Do you need clarification or more information about something in this series? Is there something that wasn’t covered that you have questions on? Click here to Drop Me a Line (email) and I’ll be happy to answer your questions!