News & Tech Tips

Hiring independent contractors? Make sure you’re doing it right

Many businesses turn to independent contractors to help manage costs, especially during times of staffing shortages and inflation. If you’re among them, ensuring these workers are properly classified for federal tax purposes is crucial. Misclassifying employees as independent contractors can result in expensive consequences if the IRS steps in and reclassifies them. It could lead to audits, back taxes, penalties, and even lawsuits.

Understanding worker classification

Tax law requirements for businesses differ for employees and independent contractors. And determining whether a worker is an employee or an independent contractor for federal income and employment tax purposes isn’t always straightforward. If a worker is classified as an employee, your business must:

  • Withhold federal income and payroll taxes,
  • Pay the employer’s share of FICA taxes,
  • Pay federal unemployment (FUTA) tax,
  • Potentially offer fringe benefits available to other employees, and
  • Comply with additional state tax requirements.

In contrast, if a worker qualifies as an independent contractor, these obligations generally don’t apply. Instead, the business simply issues Form 1099-NEC at year end (for payments of $600 or more). Independent contractors are more likely to have more than one client, use their own tools, invoice customers and receive payment under contract terms, and have an opportunity to earn profits or suffer losses on jobs.

Defining an employee

What defines an “employee”? Unfortunately, there’s no single standard.

Generally, the IRS and courts look at the degree of control an organization has over a worker. If the business has the right to direct and control how the work is done, the individual is more likely to be an employee. Employees generally have tools and equipment provided to them and don’t incur unreimbursed business expenses.

Some businesses that misclassify workers may qualify for relief under Section 530 of the tax code, but only if specific conditions are met. The requirements include treating all similar workers consistently and filing all related tax documents accordingly. Keep in mind, this relief doesn’t apply to all types of workers.

Why you should proceed cautiously with Form SS-8

Businesses can file Form SS-8 to request an IRS determination on a worker’s status. However, this move can backfire. The IRS often leans toward classifying workers as employees, and submitting this form may draw attention to broader classification issues — potentially triggering an employment tax audit.

In many cases, it’s wiser to consult with us to help ensure your contractor relationships are properly structured from the outset, minimizing risk and ensuring compliance. For example, you can use written contracts that clearly define the nature of the relationships. You can maintain documentation that supports the classifications, apply consistent treatment to similar workers, and take other steps.

When a worker files Form SS-8

Workers themselves can also submit Form SS-8 if they believe they’re misclassified — often in pursuit of employee benefits or to reduce self-employment tax. If this happens, the IRS will contact the business, provide a blank Form SS-8 and request it be completed. The IRS will then evaluate the situation and issue a classification decision.

Help avoid costly mistakes

Worker classification is a nuanced area of tax law. If you have questions or need guidance, reach out to us. We can help you accurately classify your workforce to avoid costly missteps.

Closing time: Mastering your monthly close with QuickBooks

The month-end close is a pain point for many small to midsize businesses. While internal accounting teams often aim to wrap up the close within three days, a recent survey found that half the respondents actually take six days or longer to close the books. What can your organization do to help streamline this process? Leveraging cloud-based technology tools like QuickBooks® can be a game changer.

Why closing the books matters

Closing the books — the process of finalizing all accounting records for a specific period — is more than a compliance chore. It provides insight into a company’s financial health by ensuring assets and liabilities are accurately posted, revenue and expenses are matched in the right periods, and any errors are quickly caught and corrected. A consistent, timely closing process can provide reliable data for:

  • Tracking profitability by product or department,
  • Maintaining cash flow visibility,
  • Budgeting and strategic planning,
  • Preparing tax returns and financial statements, and
  • Strengthening internal controls and preventing fraud.

Conversely, delays in closing the books can result in operational inefficiencies, misinformed business decisions, and overlooked growth opportunities.

Best practices for QuickBooks users

Using QuickBooks’ features, you can speed up the closing process without compromising financial reporting quality. Establishing a structured, repeatable workflow is key. Rather than improvising each month, create a standardized closing checklist that includes these nine steps:

  1. Reconcile bank and credit card accounts. Every reliable close begins with accurate account reconciliations to help prevent duplicate, missing and fraudulent transactions. However, this step can be time consuming and frustrating, especially for businesses with significant transaction volume. QuickBooks can streamline reconciliation by importing and categorizing transactions automatically through its bank feed feature. Configuring bank rules further reduces manual coding and improves consistency.
  2. Review open receivables and payables. Unpaid invoices and overdue bills distort cash flows, profitability, and amounts reported on your balance sheet. QuickBooks can generate aging summaries for accounts receivable and accounts payable. Review the receivables summary for overdue invoices, then follow up with customers and determine whether any accounts are uncollectible. Similarly, scrutinize the payables summary to verify all bills have been received and posted, and check for duplicate entries. Understanding what you owe and when helps maintain strong supplier relationships and avoids surprises in future periods.
  3. Conduct physical inventory counts. For businesses with inventory, errors in stock levels can lead to misstatements in the cost of goods sold and gross profits. Performing a physical inventory count at month end — and reconciling it to QuickBooks data — is a best practice that ensures inventory valuation remains accurate. QuickBooks’ built-in inventory tools or integrations with third-party platforms can provide real-time visibility into stock levels and streamline this process.
  4. Record fixed assets and depreciation. Any major purchases made during the month that qualify as fixed assets — such as equipment, furniture, vehicles, and leasehold improvements — must be capitalized on the balance sheet, not immediately expensed on the income statement. Set up depreciation schedules based on the acquired assets’ useful lives. Also, remove any sold or retired assets from the books. While QuickBooks doesn’t automate depreciation, you can track depreciation schedules in spreadsheets or integrate third-party tools.
  5. Post prepaid expenses and accruals. Accrual accounting requires that revenue and expenses be recorded when earned or incurred, not when cash changes hands. This requires journal entries for prepaid assets and accrued expenses. QuickBooks allows you to create custom journal entries and automate recurring items to reduce manual effort. Recording these entries monthly helps produce a more accurate, complete picture of the business’s interim financial performance.
  6. Verify payroll and benefits. Even when using a third-party payroll provider, it’s essential to reconcile payroll-related entries each month. This includes verifying gross wages, employer-paid taxes and benefit contributions. QuickBooks Payroll can automate much of this process, but comparing payroll reports to general ledger entries is prudent to confirm accuracy and catch any inconsistencies early.
  7. Analyze preliminary financial reports. With QuickBooks, you can quickly run a preliminary profit and loss statement, balance sheet, and statement of cash flows. Compare these reports to prior periods, internal budgets or forecasts, and/or industry benchmarks to identify anomalies. Investigate unusual fluctuations for coding errors, missing transactions, or unexpected balances, then make any necessary corrections. Keeping up with adjusting entries every month facilitates year-end financial reporting and tax preparation.
  8. Lock the books. Once you’ve made all necessary adjustments and entries, QuickBooks allows you to “close the books” with a password to prevent changes after the period ends. This functionality, accessed through the settings menu, prevents backdating or editing past transactions, thereby maintaining the integrity of finalized records.
  9. Document the closing process. The final element of a well-run close is documentation. Save the month-end checklist, supporting reconciliations, journal entries and exception notes in a shared folder or attach them directly to QuickBooks transactions. This adds transparency and ensures continuity if there’s turnover in your accounting department.

Crossing the finish line with confidence

The month-end close doesn’t have to be a source of stress. By leveraging QuickBooks’ functionality and implementing a structured closing process, your business can significantly reduce the time and effort required to close the books while improving accuracy and insight. Contact us to help set up efficient, reliable closing procedures for your business.

Old invoices, new rules: Tap into the power of the AR aging report

For many businesses, accounts receivable (AR) are more than just a line item on the balance sheet. This account provides a key indicator of potential cash flow, customer relationships and overall financial health. So proactive AR management is critical. The AR aging report has long been a cornerstone of expediting collections and reducing credit risk, but it’s taken on greater significance with the implementation of new accounting rules for recognizing credit losses.

Digging deeper into receivables

The AR aging report provides a structured breakdown of all outstanding customer invoices. Rather than simply listing balances owed, it categorizes AR based on how long each invoice has remained unpaid. The following time-based “aging buckets” are typically used:

  • 0 to 30 days (current),
  • 31 to 60 days,
  • 61 to 90 days, and
  • Over 90 days.

This breakdown helps management evaluate trends in customer payment behavior, identify chronic late payers, and assess how credit policies are performing. The information can be used to prioritize collection efforts and determine when receivables should be written off. Management also might use it to modify overall credit practices (for instance, offering early-bird discounts or electronic payment methods to encourage faster payments) or tighten credit policies for certain slow-paying accounts.

Optimizing cash flows

By revealing how long invoices have been unpaid and identifying customer payment trends, the AR aging report helps businesses forecast future cash receipts. This can help management more accurately:

  • Budget operating expenses,
  • Determine the need for short-term borrowing or credit lines, and
  • Plan investments or capital expenditures.

For instance, if a business sees that 40% of its receivables are older than 60 days, management can anticipate cash shortages in the next cycle and act preemptively. They may decide to delay certain discretionary expenditures or reevaluate vendor payment terms to maintain liquidity.

Using aging buckets to estimate write-offs

Starting in 2023, private entities that follow U.S. Generally Accepted Accounting Principles (GAAP) are required to implement new accounting rules for reporting credit losses on financial assets, including trade receivables. (The rules went into effect for most public companies in 2021.) The updated guidance requires companies to estimate an allowance for credit losses based on current expected credit losses (CECL) at each reporting date. The net amount reported on the balance sheet equals the amount expected to be collected. The CECL model essentially requires companies to estimate write-offs sooner than in the past.

Under prior accounting rules, a credit loss wasn’t recognized until it was probable the loss had been incurred, regardless of whether an expectation of credit loss existed beforehand. Under the CECL model, a loss allowance must be estimated based on historical information, current conditions, and reasonable and supportable forecasts. This estimate is often derived using historical default rates from aging buckets and adjusted for current and forecasted economic conditions. AR aging reports provide the historical and current data necessary to project the probability of default for various customer segments and invoice-age groups.

Estimated credit losses are recorded on the income statement as bad debt expense, directly reducing net income. Financial statement footnotes may also include detailed aging data and descriptions of how the loss estimate was developed, particularly if receivables represent a significant portion of the company’s assets.

It’s important to note that the Financial Accounting Standards Board is currently working on proposed guidance that, if approved, would allow private entities to use simpler assumptions to estimate credit losses on short-term receivables. However, regardless of whether the proposed simplification measures are approved, the AR aging report remains an essential tool. It helps quantify expected losses with or without complex forecasting.

A strategic management tool

QuickBooks® and many other accounting software platforms can generate real-time, customizable AR aging reports that integrate with customer relationship management systems for seamless tracking and follow-up.

If you’re unsure whether your current processes are CECL-compliant or you need assistance leveraging aging data to strengthen collections, credit policies, and budgeting decisions, we’re here to help. Contact us to maximize the potential of your receivables data.

Still have tax questions? You’re not alone

Even after your 2024 federal return is submitted, a few nagging questions often remain. Below are quick answers to five of the most common questions we hear each spring.

1. When will my refund show up?

Use the IRS’s “Where’s My Refund?” tracker at IRS.gov. Have these three details ready:

  • Social Security number,
  • Filing status, and
  • Exact refund amount.

Enter them, and the tool will tell you whether your refund is received, approved or on the way.

2. Which tax records can I toss?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return.

So you can generally get rid of most records related to tax returns for 2021 and earlier years. (If you filed an extension for your 2021 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You should hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed legitimate returns. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years to be on the safe side.)

3. I missed a credit or deduction. Can I still get a refund?

Yes. You can generally file Form 1040-X (amended return) within:

  • Three years of the original filing date, or
  • Two years of paying the tax — whichever is later.

In a few instances, you have more time. For instance, you have up to seven years from the due date of the return to claim a bad debt deduction.

4. What if the IRS contacts me about the tax return?

It’s possible the IRS could have a problem with your return. If so, the tax agency will only contact you by mail, not phone, email, or text. Be cautious about scams!

If the IRS needs additional information or adjusts your return, it will send a letter explaining the issue. Contact us about how to proceed if we prepared your tax return.

5. What if I move after filing?

You can notify the IRS of your new address by filling out Form 8822. That way, you won’t miss important correspondence.

Year-round support

Questions about tax returns don’t stop after April 15 — and neither do we. Reach out anytime for guidance.