Episode #36 – Questions and Answers
Welcome to episode 36 (I don’t believe we’ve made it this far, but we have, so thank you all!) --- Today, as promised, this will be the first ‘Answering listeners questions’ episode. But before we begin, remember to check out the YouTube channel – YouTube.com@bookkeepermensch. And also sign up for our SubStack newsletter by following the link below the description of this episode. So, let’s get right to your questions. I’m Paul Rosenblum.
In the first ‘Text feature’ question, a listener from New Mexico asks:
“Is it more advantageous to be a 1099 contractor or W2 employee? I am retiring from military and have the option for my next career.”
Remember, in episodes 5 and 6, I spoke about 1099’s vs a W2 situation. In summary, if you hire someone as a business owner and provide a job description or any kind of supervision, including a time clock, or reporting back to you at the end of the day about progress on a project, then that is a W2 employee situation. As a 1099 subcontractor, there is no job description – the person or company is being hired as an expert to get a project or a job done, but with no supervision, such as a plumber or an electrician. As long as it gets done, all is good. It’s not up to the hired person to decide to get paid as an employee or a 1099 contractor. It’s what they are being hired for, and what supervision they will have during their time there. So, if the question is what choice you make in how you are paid, again, it’s not your choice, it’s the IRS’s and the state labor commissions rules which take effect. If, however, the question is now that you are retired from the miltiary, looking forward financially, what kind of position are you looking for? W2 employees pay income taxes according to the gross amount of money that they earn. The IRS determines the federal taxes, and the state determines the local taxes. Self-employed or 1099 subcontractors pay income tax based on the total amount of what they earn, MINUS all the allowable deductible expenses for the business. So, depending on the field that you are in, there could be a substantial difference between the gross revenue and the taxable income after all allowable expenses are deducted. I have always liked self-employment, because it feels like one has more control of their overall income and tax liability for each calendar year.
I have also received several responses from people who are interested in an online basic bookkeeping course. I will keep you informed of the progress, but I am starting to work on this. Please email me with any suggestions for course modules. This would be not just for people who want to become bookkeepers, but also for business owners who need to be able to read and understand their own books.
Ok – next question: From Megan – She had a situation at a client where she went to the client’s office, and started working on the books by logging into QuickBooks desktop. She started reconciling the bank account and found that transactions that she knew existed were not showing up, and she couldn’t find them anywhere in the database. She emailed me and asked me what my ideas were. After talking for a little while, I remembered years ago I had a situation very similar to hers. I remembered that QuickBooks desktop can be installed on several computers with the same license, a new file can be created with the name of the company, and information can be entered. However, if there is no network or shared file, you end up with two files, not connected to each other. So, the next time she went to the office, she discovered that the computer in the owner’s office had the correct file that had everything entered, and not the one in the main room of the office. Case solved. Using QBox can solve that problem, even if you are both logging in from the same location because the login is your email address.
And Sarah (with an h) – no question here, but thanks so much for the email letting me know that you resonate with my backstory and am enjoying this podcast.
And Bobby -- after Part 1 of the Chart of Accounts (The Sequel), she wrote :
“You stated that you categorized a computer as a fixed asset even though the cost was less than $2500. I was under the impression that anything under $2500 we should go ahead and expense. Should this purchase not be placed as an expense? Would the CPA who completes the taxes have a preference?”
Great question! And this is a conversation that comes up all the time. The traditional definition of an asset:
“An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.
Assets are reported on a company's balance sheet. They're classified as current, fixed, financial, and intangible. They are bought or created to increase a firm's value or benefit the firm's operations. (that is from Investopedia.com)
Notice that there is no minimum value on assets. So, very technically, pens and pencils could be considered a Fixed Asset of a company. However, one has to look at the practicality of that practice. That’s a lot of extra work for the tax preparer at the end of the year to depreciate all or part of each of those assets to make those values deductible for the business for that calendar year. Also, with QuickBooks desktop not being made any longer for new subscribers, the only QB online software that allows for unlimited accounts in the chart is the Advanced edition, which the last time I looked, it was around $200 a month. The other editions are limited to 250 accounts on the chart and with that number, you would run out quickly if you are counting most office supplies as separate assets on the balance sheet. You would also have a multi-page balance sheet, which is not the greatest idea for banks or potential investors. I, for one, ask my clients questions when they purchase certain things that I think might be assets. Assets are expected to have a life expectancy of 1 year or more. And I make decisions based on the answers that the clients give me. There are accountants and tax preparers who always tell me … “If it’s under $1500 or $2,000, enter it as an expense, and not an asset”. This comes up several times a year for me.
Episode 28, talking about Partnerships was prompted when a client of mine asked ... “At the end of the year, why don’t we have the amount of profit that we are showing on our taxes in our bank account?” I explain in detail in that episode why, but remember, when partners take out distributions, the amount of money doesn’t show up on the profit and loss report. Distributions are in the balance sheet. So, the profit stays higher, even after you take your distributions out of your bank account. Also, one has to be careful not to take out more distributions in a calendar year than your profit is! If you do that, you will have very little money in the bank at the end of the year, and part of your distributions will have to pay your taxes for that year.
A question from Madison (a bookkeeper) –
“When it was time to process our 941, there was an overpayment, and I can’t for the life of me figure out how it happened. I pay the liabilities every payroll which is generated by QuickBooks. Going forward I will double check the payroll summary before making the tax liability payment but how should I correct the discrepancy?”
Obviously, without looking at her screen and doing some investigation, here are my thoughts on that --
1. Make sure that you have the latest payroll software taxes update from Intuit installed. The IRS does change rules mid-year or quarterly and does adjust the 941 amounts. I have seen this even with third parties such as ADP and Paychex -- a 941 overpayment refund comes in.
2. For now, I'd just take the deposit as it comes into the bank and put it in 'Payroll Taxes Expenses'. At the end of the year, all the taxes should tie up, but at least you know where to find the overpayment.
Keep your comments and questions coming! Don’t be shy! Use the text feature or email at Bookkeepermensch@gmail or leave me voicemail at the website at bookkeepermensch.com.
One of the more common questions that I have always gotten from clients is about travel. What travel is deductible for a business? If you travel to a convention, or a seminar or a podcast show in London (they had one recently), those are 100% tax deductible. Keep in mind, however, that you must keep receipts, and have some notes about schedules when you were there, just in case you are ever audited. At an audit, most of the time they will ask for calendar entries for travel schedule and not just receipts.
I have a client who goes abroad on a semi-regular basis. The trips are mixed – work and pleasure. They are trying to expand their business and, in the process, might have met her future husband! I enter in the books 100% of the expenses to that particular country and then their CPA adjust that to around 50% deductible at the end of the year. And I KNOW that this particular client has all the receipts, for sure!
If you have a personal computer and decide to start your own business, can you use that computer for business? This is another question that comes up all the time. YES. You can take the estimated value of that computer at the time that you start your business and enter it as a Fixed Asset. Then in one or more years, it can be depreciated as a deductible expense.
When the questions start adding up again, I’ll do another episode like this – let me know what you think!
Next time, a suggestion from a listener (Thanks Trish) – I would LOVE it if you did a podcast on what advice you would give those of us just starting out.
She wrote more, but that was the main part. Yes, I have to go back in my memory banks to remember how I did it in 1996. But it was a different world back then, for sure.
Be in your ear and in your heads soon --- I’m Paul Rosenblum