What’s Going on with the Employee Retention Credit?

The Infrastructure Investment and Jobs Act ended the employee retention credit three months early.

Key takeaways:

  • The ERC is a tax incentive created so that employers would retain more employees during the pandemic.
  • The credit was extended until the end of 2021, but the Infrastructure Investment and Jobs Act signed on November 15, 2021, ended the ERC early.
  • Wages paid after September 30, 2021, no longer qualify for the credit.
  • Businesses need to reevaluate payroll and may have to pay back any payroll taxes retained in anticipation of the credit for fourth-quarter wages.

The last couple of years brought several new laws that include changes to tax law and assistance programs for both individuals and employers. Running a business in this landscape demands paying close attention to what’s been passed, so you always stay compliant.

President Biden signed the Infrastructure Investment and Jobs Act into law on November 15, 2021. The legislation includes allocating funds to rebuild roads, bridges, water systems, and the internet, among other infrastructure priorities, and also aims to address climate change and transportation safety. In addition, the law eliminated the employee retention credit (ERC) for wages paid in Q4 of 2021. This means eligible employers get a lower credit for the year and may have to look back at payroll retroactively.

Here are the details of the ERC and what the new legislation means for businesses.

What is the ERC?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020 first introduced the ERC as a form of relief during the COVID-19 pandemic. The subsequent Consolidated Appropriations Act of 2021 (CAA) and the American Rescue Plan Act of 2021 (ARPA) expanded eligibility requirements and extended the ERC for qualified wages employers paid workers through the end of 2021.

The ERC was implemented as an incentive for employers to retain workers, as record numbers of businesses had to pause or stop operations, and many people were laid off. Employers were now able to receive both a Paycheck Protection Program (PPP) loan and the ERC, though they couldn’t pay qualified wages with funds from the PPP loan.

In 2020, the refundable credit was 50% of up to $10,000 in qualified wages paid per employee, with a maximum credit of $5,000 per employee for the year. 

In 2021, the credit was raised to 70% of qualified wages up to $10,000 paid per employee, and the maximum credit was increased to $7,000 per employee per quarter—reaching a max of $28,000 for the whole year. 

Eligible employers can claim the ERC retroactively to March 27, 2020, using Form 941-X, Amended Quarterly Payroll Tax Return, within three years after the initial return filing date. 

To qualify, businesses: 

  • Must have been partially or fully closed because of government pandemic restrictions; or …
  • Gross receipts were 50% less for the same quarter in 2019 for the 2020 credit and 20% less for 2021. If a business wasn’t operating in 2019, it could compare its gross receipts to the same quarter in 2020.

The CAA 2021 changes also opened up the credit to public colleges and universities, medical or hospital care organizations, and Congress-chartered organizations.

What are qualified wages?

There are different qualifying wage requirements for the last two years. For 2020, employers with 100 employees or fewer can claim wages for all employees, whether or not they are working. If there are more than 100 full-time workers, only wages for retained employees who aren’t working can be claimed. For 2021, these thresholds were increased to 500 full-time employees. 

However, note that the ERC can apply to full-time, part-time, seasonal, or other bases, as long as the employer meets the necessary qualifications.

What changed under the Infrastructure Investment and Jobs Act?

With the elimination of the ERC under the Infrastructure Investment and Jobs Act, any wages paid by an employer to employees after September 30, 2021, are not eligible. So, the ERC was essentially ended three months early. This means that the maximum credit per employee is $21,000 in 2021 or $7,000 per quarter for Q1 through Q3. 

There is an exception: if your business is a recovery startup, you may still be able to take the ERC for the last quarter of 2021. These businesses started operating after February 15, 2020, and have less than $1 million in average annual gross receipts for the prior three-year tax period.

What do the changes mean for employers?

This change may cause some confusion for employers, especially since the bill was signed in November and ends the ERC retroactively, beginning October 1, 2021. Business owners should ensure that they coordinate with payroll and make any necessary changes to Form 941. It’s possible that businesses will have to repay any payroll taxes retained to anticipate the credit.

It’s also important to plan for that $7,000 reduction in the credit per employee for the year, as the maximum credit per worker went from $28,000 to $21,000. This could hit some employers pretty hard.

Turn to Provident CPA & Business Advisors with questions

If the elimination of the ERC impacts you, it’s a good idea to meet with a tax professional who can guide you forward. You never want to miss any essential rule changes that could cost your business, now or in the future. 

Get in touch with Provident CPA & Business Advisors to talk to a tax expert about your obligations and options. 

How Do I Amend a Business Tax Return?

You may need to file a tax return amendment for a business if there is a mistake on the original that impacts what you owe or there is new applicable information.

Key takeaways:

  • The IRS allows taxpayers to submit amended tax returns to correct an error that impacts the taxes owed or update relevant info.
  • Steps for filing:
    1. Find the correct form to use, which will vary based on the business type.
    2. Gather and fill out all relevant information.
    3. Send the form to the right place!

Tax mistakes happen all the time, and it’s common for business owners to need to make changes down the road. You may have made an error on a business tax return or have new information to include after the fact, and you can file an amended return when necessary. Sometimes, doing this may result in a change in tax liability.

The IRS has some fact-checking mechanisms in place and can catch many mistakes on a return. The agency may then reach out and notify a taxpayer of the issue and next steps, including how to file an amended return.

Here is a walk-through of amended tax returns and how to file them as a business owner:

What is an amended tax return?

While you can’t change any details on an original income tax return once it’s filed, you can submit a tax return amendment afterward if a change must be made. The only exception to changing the originally filed return is if it was rejected, and you must address an issue to resend it.

Whether you missed out on a tax break that you want to claim later or the tax return had a mistake, you can submit the appropriate form to amend. Taxpayers have three years from the date of the original return filing date, including extensions, or two years after the date they paid taxes, whichever is later. Note that the original filing date is considered the due date for that tax year, so filing early won’t impact it.

Amending a return may result in a higher or lower tax liability, so business owners should be prepared to pay a larger amount or get a credit, if applicable.

When to file an amended business tax return

You will be required to file an amended return if you made an error that will impact the tax you owe, you have new information that must be included, or the following business information changes:

  • Income
  • Deductions
  • Tax credits
  • Refund amount
  • Dependent information, if an individual return

When you don’t need to submit a tax return amendment

If there are mathematical errors on your tax return that you missed, or you forgot to include a tax form that should have been submitted, you likely don’t need to file an amended return. In both cases, the IRS usually steps in. In the event of an error, they should correct it or request a correction. And if you missed a form, they’ll mail it to you.

Steps for amending a tax return

So, how do you go about filing an amended tax return? Follow these three steps for a smooth process:

1. Find the right form to use

The IRS form you submit will depend on the type of business. Here is an overview of each:

  • Form 1040-X, Amended U.S. Individual Income Tax Return: This form is used by individuals, sole proprietors, and single-member LLCs.
  • Form 1065, U.S. Return of Partnership Income: Partnerships and multiple-member LLCs will send an amended Form 1065 and check the Amended Return box on Line G.
  • Form 1120S, U.S. Income Tax Return for an S Corporation: S corporations need to file an amended Form 1120S and check Amended Return on Line H.
  • Form 1120X, Amended U.S. Corporation Income Tax Return: C corporations will use Form 1120X to file an amended return and include any new applicable information.

Ensure you’re always using the most recent version of the appropriate form.

2. Gather your information

You’ll need a few things to amend your return. Aside from the IRS form, gather the return you’re amending, all forms, schedules, and worksheets submitted with it, and any notices from the IRS alerting you that adjustments are needed.

3. Send the form to the right place

If filing Form 1040X, send it to the address that appeared in the IRS notice or to the address provided in the form instructions. For Forms 1120S and 1120X, send the amended return to the same address where you filed the original return. Corporations can also file online using the IRS’s electronic filing system. Partnerships can mail their amended return to the indicated office per location on the Form 1065 instructions document.

Always make sure everything included on the amended tax return is accurate and up to date so that there are no further issues.

Are there implications of filing an amended return?

There are just a few considerations for business owners who need to amend their tax returns. If you made a mistake on your original tax return that led to owing more tax, you may be subject to more penalties or interest accrual—so it’s better to file an amended return as soon as possible

Some taxpayers worry that filing an amended return will prompt the IRS to look a bit closer at the business tax return. But that likely isn’t the case, especially if you submit everything as soon as you can and ensure accuracy and honesty. The IRS won’t proceed with a tax audit just because someone filed an amended return.

Get your questions answered by tax experts

Filing an amended tax return may seem daunting if you’ve never done it before. The Provident CPA and Business Advisors team can help assess your specific situation and take the right steps toward resolution. 

Contact us today to set up a consultation.

The Biggest Business Tax Impacts of COVID-19

The government responded to the pandemic with assistance programs, many of which impact taxes for businesses. Here is an overview of some of the major changes.

Key takeaways:

  • The COVID-19 pandemic introduced major tax overhauls and assistance programs, including the Child Tax Credit, the Paycheck Protection Program, crisis recovery loans, and employer tax credits.
  • After any crisis, tax policy is reevaluated, and the continuing pandemic could mean more changes are coming.

Since early 2020, the government has rolled out numerous tax changes to help support Americans during tough economic times. It’s estimated that hundreds of thousands of US businesses had to close because of COVID-19, and we’re still feeling the impacts of economic uncertainty as the pandemic continues into 2022.

Let’s walk through the biggest tax revisions that came about because of COVID-19 for individuals and businesses and how economic volatility may cause a reevaluation of tax policy.

The Child Tax Credit

The American Rescue Plan (ARP) expanded the Child Tax Credit, increasing it to a maximum of $2,000 to $3,600 for children five and under and $3,000 for children ages six to 17. It is now available to households with little or no income and is fully refundable under the ARP. Families can now receive up to half of their credit in advance in the last half of 2021.

Families can take the maximum credit if they have a modified adjusted gross income of $75,000 or less for single filers, $112,500 or less for heads of household, and $150,000 or less for joint filers and widows or widowers who qualify. The maximum amount of the credit is reduced by $50 for every $1,000 over the income thresholds.

The ARP created the largest Child Tax Credit ever available to provide families financial help during the pandemic. Right now, these changes only apply to 2021, but the current administration has expressed interest in extending them into 2022.

The Payment Protection Program

The Payment Protection Program (PPP) was created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. This program provided loan assistance to small businesses to encourage them to keep employees on the payroll. Funds could be used to cover payroll costs in addition to some operational expenses related to COVID-19.

The first-draw PPP loans were provided in 2020, and they could cover up to 2.5 times monthly payroll expenses with a maximum of $10 million. Second-draw loans have a maximum of $2 million. Loan funds are fully forgivable as long as a business uses the money for qualifying expenses.

In 2021, the ARP added $7.25 billion to the PPP, and that round of the program ended on May 31, 2021. However, current borrowers can still apply for loan forgiveness.

According to the Small Business Administration (SBA), there have been 11,453,936 PPP loans distributed and 9,087,832 forgiveness applications in 2020 and 2021. The program has paid out a total of $791,420,024,727. Millions of businesses have been able to stay afloat because of the PPP, but it is not clear if there will be any additional relief approved for the program in the future.

Business expenses that qualified businesses for PPP loan forgiveness are tax-deductible, and forgiven PPP loans aren’t considered taxable income. Eligible employers can also defer payroll taxes, even after loan forgiveness, but half of those deferred taxes from 2020 have to be paid by the end of 2021, and the other half by the end of 2022.

Economic Injury Disaster Loans

The SBA also started providing Economic Injury Disaster Loans (EIDL) in response to the pandemic. These funds must be repaid but are low interest, fixed-rate 30-year loans. Funds can be used for operating expenses or to repay debt.

The max EIDL amount is $2 million, and payments are deferred for the first two years, though interest still accrues. Eligible businesses could apply for a loan until December 31, 2021.

The SBA reports that $308,540,747,105 in EIDL dollars and over 3.8 million applications have been approved.

This loan is not considered taxable income, so businesses don’t have to worry about a significant tax impact. They can typically also deduct loan interest on their taxes. 

Family and sick leave tax credits

COVID-19 also spurred additional tax credits for employers granting family and sick leave. If an employee can’t work because they’re ill with the coronavirus, they are entitled to 10 days of paid sick leave at their regular pay rate. Employees can also care for someone who gets sick or a child because of a school closure—up to two weeks at two-thirds their regular pay rate. The IRS says that up to 10 weeks of qualifying paid leave can be counted towards the family leave credit.

Eligible employers can receive a credit in the amount of the sick and family leave provided, in addition to any health insurance plan expenses and the employer’s Medicare share on the leave. Organizations could originally take a credit for the period of April 1, 2020, to December 31, 2020, and the credit is refundable and applied to employment taxes. Employers can request an advance of these credits as well.

The ARP then allowed eligible employers to take these credits for sick and family leave from April 1, 2021 through September 30, 2021.

Looking to the future

The government provided many tax breaks and incentives to help businesses and individuals during COVID-19. Some provisions have expired, but many have allowed people to stay afloat. Tax policy is often reevaluated in any global or financial crisis as priorities shift to meet the moment. 

The IRS experienced significant delays because of the pandemic, and deadlines were pushed back to help people prepare. It is unclear if those trends will continue into 2022 or whether some of these game-changing provisions will be extended with additional government relief packages.

As the Organization for Economic Co-operation and Development (OECD) states in a report, “The COVID-19 crisis has caused a significant deterioration in public finances, which calls for a rethink of tax and spending policies once the recovery is well underway.” The pandemic revealed many economic problems for countries around the globe, and many of those issues could be dealt with in new ways. 

Further, a Brookings Institution article states that the pandemic is an opportunity to renew the “social contract” and may mean that citizens will become more willing to pay taxes to improve government assistance. However, whether this conclusion or economic volatility will spur broader changes to the tax code in a fiercely divided Congress remains uncertain.

Questions about taxes during COVID-19?

Tax law changes frequently, and it’s not easy to know what tax breaks you qualify for and if you have to follow new requirements as a business owner. The Provident CPA and Business Advisors team is here to help. Reach out to us today to get assistance with tax minimization or business planning strategies.

A Guide to IRS Form 1099 — Non-Employment Income

Form 1099 is used to report non-employment income, like interest and contract work compensation. Learn more about the different types of income and who uses this form.

Key takeaways:

  • There are many types of income you must report to the IRS outside of employment income, including interest, dividends, real estate sales, retirement payouts, and contract payments.
  • Form 1099 is used to report this income to the IRS.
  • Common 1099s include 1099-INT, 1099-MISC, 1099-NEC, and 1099-R.
  • 1099 income must be included on tax returns.

Taxpayers may bring in income from several sources throughout the year aside from a regular employer—if they have one. An individual will likely receive IRS Form 1099 from whoever paid them, whether that’s a financial institution or a freelance client.

If you’re a business owner wondering if you need to file this form or a contractor who may receive one from a company, it’s important to understand the different types of income these forms are used for. There are several types of 1099s depending on what kind of compensation is being paid.

Here’s a look at what form 1099 is, different types of income, and an overview of the most common 1099s you may receive or have to file.

What is Form 1099 used for?

IRS Form 1099 reports income that is considered non-employment income. Taxpayers who receive compensation outside of their W-2 tax form, which employers distribute to summarize earnings and withholdings, usually receive a 1099 of some kind that lists what they earned from sources like contract work and investments.

In fact, there are many different types of income outside of employment income. Common examples are:

  • Dividends
  • Freelance and independent contract compensation
  • Interest
  • Unemployment benefits
  • Retirement plan payouts
  • Sales of stocks and other securities
  • Real estate sales
  • Prizes or awards

Whoever provided the compensation, whether a bank or a business, typically files the form with the IRS, and it’s up to the taxpayer receiving any income that applies to report it on their annual tax return.

Most common types of 1099s

There are actually numerous 1099s, each of which is based on the income type. Here are the most common forms you will likely come across:

  • 1099-B, Proceeds from Broker and Barter Exchange Transactions: This 1099 is filed by a broker if you sell stock.
  • 1099-DIV, Dividends and Distributions: Financial institutions file 1099-DIV if you receive dividends or other investment distributions over $10.
  • 1099-G, Certain Government Payments: Taxpayers receiving unemployment, grants, or tax refunds may get this form.
  • 1099-INT, Interest Income: If you receive over $10 in interest in your bank accounts, your institution will have to file this form.
  • 1099-K, Merchant Card and Third Party Network Payments: This 1099 is used by business owners if payments were received from payment card transactions and/or payments in settlement of third-party payment network transactions. It’s only issued if there were over $20,000 in payments and there were more than 200 of them.
  • 1099-MISC, Miscellaneous Income: Income of at least $600 made in rent, from certain contracts, to an attorney, and other sources must be reported on the 1099-MISC.
  • 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.: Any distributions from a retirement plan are reported on this 1099.
  • 1099-S, Proceeds from Real Estate Transactions: Income received from a sale or exchange of real estate is reported here.
  • 1099-NEC, Nonemployee Compensation: Since 2020, businesses must use this form to report non-employee compensation instead of the 1099-MISC. The 1099-NEC must be filed if a company pays a non-employee $600 or more in the applicable tax year. This is now the form that an independent contractor will receive.

There are many different uses for the 1099. The important thing to remember is that if you paid someone at least $600 in a tax year who isn’t your employee, you’ll likely have to file a 1099. If you are a freelancer or contractor and received payments of $600 or more, you should receive a 1099 from whoever paid you to include with your tax return. Any income you receive from your investments also must be reported via a 1099.  

Make sure to keep good tax records throughout the year to verify that all 1099 information is up to date and accurate. Otherwise, there could be issues and discrepancies with the IRS. Every 1099 you receive must be reported on your tax return. 

Also, remember that any income you receive from the same party that is at least $600 or interest payments over $10 needs to be reported to the IRS, even if the payer doesn’t file or send a Form 1099 by the deadline. Payers usually need to mail 1099s by January 31.

Where to get your tax form questions answered

Tax time can be stressful for any business owner. When you need assistance knowing which tax forms you need to file or how to report all income, work with a tax expert who knows the guidelines you must follow.

The team at Provident CPA and Business Advisors is here to help. We provide tax-minimization services, so you’re never paying more than you are legally required. We also help business owners with growth and profit improvement services through proactive management systems. 

Contact Provident CPA and Business Advisors today to learn more.

Do I Need Business Accounting Software?

Accounting software helps you gather business insights and run reports efficiently. Learn how to find the right option for your needs.

Key takeaways:

  • The benefits of accounting software include automation, data management, cost savings, report generation, and more.
  • Steps to find the right software:
    1. Outline your goals
    2. Create a budget
    3. Run comparisons
    4. Watch or schedule demos
    5. Talk to an expert

Tax time can be one of the most stressful seasons for business owners. Without a dedicated accounting team member, it may be challenging to aggregate documents, follow every rule, and get things in on time. What’s more, taxes require consistent attention throughout the year, so reports are easy to run and understand, and you aren’t left scrambling to get tax paperwork in order.

A solution many businesses turn to is software integration. A good accounting software program can help you get your time back and stay on top of taxes. Here are the benefits of integrating this technology and a few ways to find the right platform.

The benefits of business accounting software 

New technology may take time to learn. But modern software solutions are simple to master, and accounting platforms immediately take on a lot of time-consuming tasks so that you can focus on other aspects of your business. 

Let’s break down the main benefits of accounting software:

  • Automation: Accounting and bookkeeping processes can be done automatically, saving lots of time on calculations and data entry. 
  • Cost savings: Instead of paying a staff accountant or a contractor to do this work for you, you can save considerable money by allowing software to manage simple tasks.
  • Instant report generation: Manually creating financial documents and reports can take significant time, and it must be done regularly and accurately. Software generates many of these assessments instantly and helps you make them look professional for investors and other third parties.
  • Data management: Financial information exists in numerous locations. With accounting software, you can consolidate and manage data quickly.
  • Easier payroll: Some accounting software platforms can also handle payroll, especially when a business is just starting. Automate tasks like employee payments and calculating paycheck withdrawals. The software also helps keep more accurate payroll tax data.
  • Tax accuracy: Tracking financial data efficiently and utilizing automation helps streamline tax preparation and filing. And you can typically rest assured that everything is accurate. Many software solutions can generate tax reports in seconds. 
  • Better insights: The only way to know how a business is performing is to gather and analyze data. Accounting software helps you view important insights consistently, so you always know what’s going on and which areas need support.

If you’re struggling with bookkeeping and accounting, software integration can be a game-changer. After you’ve decided to automate, it’s time to find the best solution for your needs. 

How to find the best accounting software

As with anything new you bring into the business, there will be a period of trial and error, and you may have to try more than one platform to find one that works best for you. Here are a few steps to getting started:

1. Outline your goals

Not all businesses need the same features in accounting software, so identify your needs to get started. What has been your biggest pain point? Which features aren’t necessary, at least for now? Create a clear list of goals for a new solution. For instance, maybe you don’t need any help with payroll but struggle to generate balance sheets consistently.

2. Create a budget

One of the most important factors will be the cost. Determine what you’re already paying for bookkeeping, if anything. Evaluate cash flow to see how much you could realistically spend each month on a software subscription. The great thing about software as a service (SaaS) platforms is that you can start small and scale up when your business grows. And most solutions are relatively inexpensive.

3. Run comparisons

There are numerous accounting software options out there. Make sure you compare options as you prioritize features and factors. For instance, maybe one platform seems to have much better customer support than another company. Or, one software allows for easier add-ons if you want to try new tools later on.

4. Watch or schedule demos

You may have no real idea how a program works until you see it in action. Many providers will meet with you one-on-one to answer any questions and give a demo; others offer online demos. Numerous brands also have online training videos you can watch at your convenience. Make sure to get to know the interface a little bit before making a decision.

5. Talk to an expert

If you’re overwhelmed by all your options for accounting software, consult with a tax expert or business advisor. Professionals know which platforms may work best for you and what to avoid.

Ultimately, an accounting software platform will make life far easier as a business owner. And remember that going with a monthly subscription for a SaaS platform will provide more flexibility without a purchase or long-term agreement.

The Provident CPA and Business Advisors team helps business owners with strategies and tax minimization, helping them grow while paying the least amount of tax legally possible. Reach out to our team to learn more about our services.

Business Cash Flow Analysis: The Essentials

A cash flow analysis shows the inflows and outflows to and from your business at a given time. It’s a crucial step in proper cash flow management.

Key takeaways:

  • Cash flow is the money moving in and out of a business.
  • Poor cash flow management is the leading cause of small business failures.
  • A cash flow analysis evaluates what is coming in versus what is going out, which results in positive or negative cash flow.
  • Tips for cash flow management:
    1. Reassess bookkeeping practices
    2. Use software
    3. Look to cut costs first
    4. Don’t confuse cash flow and profit

Cash can make or break a business. In fact, poor cash-flow management results in 82% of small business failures, making it the number-one cause. This is why startups and all small businesses, in particular, benefit the most from detailed cash flow analyses to get a sense of likely growth or problems that need to be addressed. In addition, companies experiencing a major transition or expansion should keep an extra-close eye on cash flow.

Here’s are the essentials of conducting a cash flow analysis that helps create a stable, prosperous future.

What is cash flow?

Cash flow is simply the money that moves in and out of a business. It measures all monthly expenses and business costs against revenue coming in. Positive cash flow occurs when more money is coming in than going out, meaning liquid assets are increasing. Negative cash flow is when expenses exceed income.

A cash flow statement is a crucial document that outlines a business’s cash situation over a set period. It lists all inflows from business operations and investments, and outflows that cover business activities. Note that a cash flow statement doesn’t always show all expenses since not all costs are paid immediately. Transactions are recorded as cash outflows when they actually occur.

How to conduct a cash flow analysis

The basic way to perform a cash flow analysis is to look at revenue and expenses over a set period you want to examine. To assess the upcoming month, you would evaluate unpaid purchases for that month and the total sales and other revenue expected to come in. If you see that you’ll have to pay more than is projected to make, you have a cash flow problem. It is a best practice to perform a cash flow analysis each month.

A few business components are involved in this effort, including accounts receivable, accounts payable, inventory, and credit agreements. Each of these elements should be examined in the overall picture, and analysis can be performed on them separately. Doing this helps you uncover what’s going on with a problem area.

For example, taking a close look at accounts receivable will tell you which clients pay on time and which are usually delayed. Knowing when that revenue is likely to come in helps you plan more efficiently against expenses.

Tips for better cash flow management

Regularly conducting analysis won’t solve a cash flow problem on its own. It simply shows business owners what’s going on and what is likely to happen in the near future. However, this assessment is the first step in uncovering an issue and improving practices to address it. So, it is a critical financial practice.

Here are a few tips to getting a handle on cash flow:

1. Reassess bookkeeping practices

Businesses must keep financial records organized. Otherwise, it’s hard to stay current with reports and statements that guide decision-making. These documents are also crucial when obtaining capital from investors or lenders. Reevaluate your bookkeeping practices. Make sure you’re dedicating enough time to these tasks and are updating the information regularly.

2. Use software

You may not have the time or organizational skills to manage everything manually. Instead, try out an accounting software platform that helps manage cash flow statements using automation. It’s much easier to keep everything up to date and generate reports with a good, dedicated program.

3. Look to cut costs first

When there’s a problem with cash flow, the first place to address the discrepancy should be in your expenses. Look closely to see if there’s anything you can cut, at least for now. Research to see if you could get the same services for a lower price. Reach out to vendors and negotiate. There are many steps you can take to lower expenses.

4. Don’t confuse cash flow and profit

Some months, a cash flow analysis may show that you have positive cash flow, which is good. But this doesn’t necessarily mean that the business is profitable. Profit is the overall amount of money you have left after paying expenses, whereas cash flow measures the net flow of cash in and out of your business at a given time. So, you can still be profitable overall and experience negative cash flow in a given month, for instance. 

A cash flow analysis is essential to determine what’s going in and out of your business so you can keep things trending positive and meet your obligations. This analysis works in conjunction with other financial reports to give you a holistic view of business performance to make informed decisions. 

Remember, cash crunches are the number-one small-business killer. So, it’s crucial to conduct a reasonably simple cash flow analysis regularly and diligently.

The Provident CPA and Business Advisors team helps business owners with strategies and tax minimization, helping them grow while paying the least amount of tax legally possible. Reach out to our team to learn more about our services.

How to Define Your Company Values (and Why They Are Critical)

Core values help companies make better decisions, practice transparency, and align teams around a shared vision.

Key takeaways:

  • Company values are principles and ideologies that drive decisions and uncover and reflect the business’s identity.
  • Values are crucial because they contribute to better company culture, goal achievement, and brand reputation.
  • Tips for defining company values:
    1. Think about the long term
    2. Make sure they won’t crumble under competition
    3. Ask for feedback
    4. Consider the hiring process
    5. Be as specific as possible
    6. Use phrases
    7. Socialize your core values

Every business starts for a reason, and it’s not just to make money. Maybe its rationale is to provide a crucial service to a community in need or use years of experience and expertise to help other organizations solve a problem. This is the core purpose of the business, which enables owners to set the foundation for what’s to come. 

Digging into these ideas will help you define your core values—those basic principles about why you exist, what’s most important to you and your employees, and how the business fulfills its purpose. Having a solid grasp on these values helps you create and meet your goals and continue growing effectively and confidently. 

What are an organization’s values?

Core values are the lifeblood of your business. They represent why you started the company in the first place and help you define its basic identity. They serve as fundamental principles that guide decisions and goals.

Company (or core) values aren’t dry concepts like a business model or desired revenue. They are beliefs and ideologies. Examples include:

  • Integrity
  • Accountability
  • Reliability
  • Diversity
  • Dedication
  • Efficiency
  • Passion
  • Enthusiasm
  • Loyalty
  • Respect
  • Community

These words can be combined and turned into phrases for a more specific impact. Identifying core values means reckoning with purpose and determining what you want to guide the business and its individual departments and employees. 

Why are company values important?

Core values aren’t just nice additions to an “About Us” web page. They help accomplish many tasks that can make or break the business. Key areas where company values come into play include:

  • Leadership decision-making
  • Company culture
  • Customer service and satisfaction
  • Employee engagement and morale
  • Brand reputation and transparency
  • Behavior norm-setting
  • Recruitment and employee retention
  • Target setting and planning

Having clear values helps everyone stay on the same page when solving problems or interacting with the public. Employees understand what’s most important to the company, and they thus feel a stronger personal connection to the business’s purpose and identity. 

How to define your company values

Identifying your purpose and how you fulfill it may seem straightforward, but it can be hard to come up with a succinct way to say these things. Core values should be simple for people to understand and meld with the business’s actions and priorities. Here are some tips: 

1. Think about the long term

New businesses often define their core values explicitly according to their current goals. But remember that for startups, these objectives may look a lot different once the company is more established. It’s hard to think about much else aside from growing right now and getting new customers. But push beyond those immediate goals to uncover the why and how behind the business.

2. Make sure they won’t crumble under competition

When you come up with a value, think about whether it would hold up if the competition suddenly heats up and you have to make some pivots. If you believe a value could change in different circumstances, it shouldn’t be one of your core values. These principles should stay strong no matter what the climate looks like.

3. Ask for feedback

You don’t have to define values on your own: ask employees and colleagues who have a stake in the company’s success. What comes to mind when they think about the purpose of the business and how its people behave? What guides team members to perform well? What do they think customers need to understand? 

4. Consider the hiring process

Values should help you make hiring decisions. This means looking for candidates who share the organization’s values and are excited about its mission. These principles should help you hire better cultural fits; they serve as a filter. So, explicitly think about whether they align with and aid the recruiting process. 

5. Be as specific as possible

Some values may sound abstract since they are not always measurable items. Sure, every business wants to come off as “honest” and “dedicated.” But can you actually delineate how you’re going to be those things? Be as specific as you can about why a value is vital to the business and how you and your team will express and live by each principle. Think about the daily practices and habits that will lead to these values becoming a reality.

6. Use phrases

Core values don’t have to be one word, like the examples above. They can also be short phrases that better explain your principles. You can combine words into one value when it makes sense, like “creative and driven.” You can then explain that your team is “continually motivated to come up with innovative ideas to serve modern clients.” Remember that you should be able to provide a short description under each value to dig into what a concept means.

7. Socialize your core values

Once you know who you are and what your values are, it’s time to put them into practice. Socializing your values means that the team acts on and discusses them. They’re brought up to motivate employees and inspire customers. Consider implementing a rewards system that provides positive reinforcement for people who prioritize and exemplify the values.

Identifying your core values is a necessary step to knowing why your business exists, its foundational principles, and how you serve clients or customers. They align teams and help you make decisions, both short and long-term. When you feel like your goals are getting off track, you can revisit your values to reassess and make changes as needed. 

Sometimes, you may need a little help defining your core values and aligning them to your business model. Provident CPA and Business Advisors can review your systems and help you establish the right practices to meet your desired outcomes. We utilize the Entrepreneurial Operating System (EOS) to help our clients nail down their six key components of the business: Vision, People, Data, Issues, Processes, and Traction. 

Contact Provident today to learn more.

8 Most Important Small Business KPIs

It’s impossible to grow without the facts. Learn what essential business data you need to be tracking and how to do it.

Key takeaways:

  • Eight most important KPIs for small businesses:
    1. Customer acquisition cost
    2. Conversion rate
    3. Employee retention rate
    4. Operating cash flow
    5. Net income
    6. Website traffic
    7. Social media engagement
    8. Accountability
  • Tools for tracking these KPIs include social platforms, Google Analytics, and financial software.

A key performance indicator (KPI) is not a number that exists in a vacuum. It’s a metric that tells you how your business is specifically performing against goals and objectives. It measures success and helps you predict the future. KPIs reveal the health of a business so that owners can pivot when necessary.

Without these metrics, businesses can’t know if their strategies are working. KPIs can be linked to the organization as a whole, specific departments, or individuals within the company to determine weak spots, helping business leaders make better decisions and set better goals next time. They also show real-time information about a campaign’s effectiveness or interactions with customers.

So, what small business KPIs should you be tracking? 

8 most important KPIs to track

Every business is different, and the KPIs that are prioritized against current goals will vary from company to company. To start, make sure that all of your objectives are measurable and you know the specific timeline you want to assess. Also, remember that not all crucial KPIs will be strictly related to finances; they may also involve marketing campaigns or customer engagement.

Let’s take a look at the most important KPIs that most small businesses generally need to start tracking:

1. Customer acquisition cost

You should know how much it costs to obtain a new customer. Determine every expense that goes into getting a new sale and divide the sum by the number of new customers acquired. You also need to know the exact period you’re measuring. This is an essential KPI because it helps you understand if sales and marketing tactics are working and are worth all the cost and effort.

2. Conversion rate

Getting people to convert is an integral part of growing a business, and conversion rate is a crucial marketing KPI. It tells you how successful you are at getting people to take the action you want them to take, whether it’s buying something, signing up for a newsletter, or submitting their lead information. Measure conversion rate by taking total conversions and dividing it by total visitors or prospects. 

3. Employee retention rate

If you have employees, it’s vital to track how frequently people leave. The employee retention rate can tell you whether you have a healthy culture, an appropriate workload, or issues that must be dealt with to keep workers satisfied and engaged. Simply divide the number of employees that stayed during a specific period by the number you had on the first day of that period.

4. Operating cash flow

You need to know if you’re going to generate enough revenue to pay all expenses and have some left to grow operations. This measurement is operating cash flow, and you can calculate it by adding operating income and depreciation and then subtracting taxes and changes in working capital.

5. Net income

Net income is how much money you have after paying all expenses. This is your net profit, the money you have when all is said and done. Of course, you always want this number to be high, but if it fluctuates, you can discover what may be causing profit losses. Net income is simple: subtract expenses from revenue.

6. Website traffic

Most small businesses now have a website, so it’s simple to find them online, or they offer an e-commerce option. If you have a website, it’s important to put a process in place to track the traffic numbers. Using website tools like WordPress and Google Analytics gives you instant access to stats like these, and you can see your visitor numbers on a daily, weekly, monthly, and annual basis.

7. Social media engagement

You also may be trying to build up a social media following for your business. Social is a cost-effective way to reach people, and 71% of small- to mid-sized businesses use these platforms in their marketing strategy. Social metrics to track include engagement numbers for each post, follower count, impressions, clicks, likes, shares, comments, reach, and more. Opening a business account on Facebook, Instagram, or Twitter grants access to these analytics.

8. Accountability

One KPI that is too easy for businesses to overlook is accountability. What does this mean, exactly? Your team needs to be held accountable so that tasks are getting done and roles are clear. An accountability chart implemented under the Entrepreneurial Operating System® (EOS®) helps you outline what needs to be done, who will do it, and how that person or team will be held accountable. The Traction component of the EOS is concerned with ensuring discipline and accountability exist, so you become better at executing actions that help you reach your goals.

Tools for tracking KPIs

Knowing what to track is just the first step. How do you start monitoring and learning from data? 

Again, for platforms like social media and your website, you can use built-in tools for businesses that tell you data like engagement, conversions, clicks, and interactions. 

For financial KPIs, consider using cloud-based accounting software that enables you to view the numbers in a simple dashboard whenever you log in. You can decide which metrics you want to track at a given time and run reports. QuickBooks is one example of software that helps business owners keep tabs on essential financial data.

Provident CPA and Business Advisors can help you stay on track

Sometimes, all you need is some guidance from experts. Provident CPA & Business Advisors helps small businesses create the right model and stay on track. We use the six components of the EOS to help our clients clarify their goals and achieve their vision while providing essential tax services and strategies.

Contact our team today to learn more.

How to Hire Your Business’s First Employee

As a business owner, getting extra help is a crucial step towards growth. Here’s what you need to do when hiring your first employee.

Key takeaways:

  • Decide between a regular employee vs. contractor
  • Get tax ID numbers
  • Register with the labor department
  • Gather the right forms
  • Set up a payroll system
  • Create a benefits strategy
  • Learn record-keeping best practices
  • Notify the new hire reporting agency
  • Post required notices
  • Create an employee handbook

It’s a great moment when you can finally hire your first employee. You’ve spent lots of time and energy building your business, and you can now afford to delegate tasks and keep growing. But aside from the resume review and interview processes, there are many steps to ensuring you’re prepared to hire and pay workers.

Do it right by following all government guidelines. Here is an overview of steps to take when hiring your business’s first employee. 

Decide what kind of employee you need

A good first step is figuring out exactly how much you can pay someone and whether you can provide benefits. Full-time and even part-time employees will be pricier, while independent contractors will work with you on contract and may be more affordable. You can work with them on a project-by-project basis, so you’re only paying for work when you need it—and not paying things like benefits and Medicare and Social Security taxes. 

However, contractors will be less under your control, and you may be only one of many clients they work with. Regular employees are a good idea when you need daily tasks covered and are looking to build longer-term relationships.

Whatever avenue you choose, remember each worker classification is treated differently for tax purposes. Avoid misclassifying an employee as an independent contractor with the IRS and make sure you issue W-2 tax forms for regular employees and 1099s for contractors each year.  

Get their tax identification numbers

All employers need to apply to get an employer identification number (EIN) from the IRS. You’ll use this number to identify your business on tax documents, including employee tax forms and the tax return. It’s simple to get an EIN. The IRS now has an online application portal, and you will receive an EIN upon verification.

In addition to the EIN, you may need to get tax IDs for your state, so check your local laws.

Register your business with the labor department

Each state has its own labor department where you’ll need to register your business. And if you have enough employees, you’ll have to start paying state unemployment compensation taxes. These taxes fund the state’s unemployment program to pay people when they’re out of a job.  

Make sure new employees fill out the right forms

Full- or part-time employees must complete a W-4 tax form (Employee’s Withholding Certificate) and return it to you. This form ensures you withhold the right amount of taxes from their compensation.

They also need to complete Form I-9, Employment Eligibility Verification, which verifies their identity and authorization to work in the United States. You don’t file this form but keep it in your records for at least three years.

Set up payroll procedures

You’ll then need to make sure you set up pay periods, which are usually weekly, biweekly, or monthly. It’s a good practice to enable employees to get direct deposits each pay period, so you don’t have to issue checks. This means you’ll need workers to fill out documentation providing their bank information. 

It’s also essential to withhold tax from each paycheck and submit these numbers to the IRS. You can either decide to incorporate an in-house or external service for payroll administration, but it will need to be managed carefully on a regular basis. The IRS Publication 15, Circular E, Employer’s Tax Guide, outlines all the details employers must know when setting up a payroll system. You’ll also need to report payroll taxes quarterly and annually.

As an employer, you must also file IRS Form 940 each year to report federal unemployment tax if you paid $1,500 or more in wages in any quarter in a year when an employee worked for you for any 20 or more weeks.

Create a benefits strategy

It’s hard to be a competitive employer without offering certain benefits, like health and dental insurance and paid time off. Think through exactly what you want to provide, even if you will only have one employee for a while. Then, create a plan for requesting days off and managing their vacation and sick days. 

Some benefits are required, which include:

  • Leave benefits included in the Family and Medical Leave Act (FMLA): Eligible employees can take unpaid, job-protected family or medical leave.
  • Social Security and Medicare taxes: You must pay the same rate as your employees.
  • Workers’ Compensation: You have the option of getting workers’ comp through the state, on a self-insured basis, or a third-party commercial carrier.
  • Unemployment insurance: Some state workforce agencies require that you register with them to get unemployment insurance.
  • Disability insurance is required in California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico.

Implement record-keeping best practices

Start a thorough process for keeping personnel files. Employment documents contain sensitive information, including applications, offer letters, tax forms, benefits information, and other paperwork. Make sure these records are stored securely. Medical records and I-9 Forms should be kept separately in a cabinet that can be locked.

According to the Equal Employment Opportunity Commission (EEOC), employers must keep all personnel records for one year, and they must be kept for a year following the date someone was terminated. You must also keep payroll records for three years, and any documentation about why employees of the opposite sex are paid different wages needs to be kept for at least two years under the Fair Labor Standards Act (FLSA).

Notify your new hire reporting agency

Each state has a new hire reporting system where owners report each person they hire within 20 days. This is done so child support agencies can find parents who owe child support in the National Directory of New Hires.

Post required notices

The U.S. Department of Labor (DOL) and each state’s labor department require that employers post certain notices about employees’ rights in the workplace. The DOL website now has a tool where you can enter your information and discover exactly which posters are required

Create an employee handbook

A comprehensive employee handbook can be a great way to keep everything organized and outlined. It lists all employer policies, so workers have somewhere to go with many common questions. The handbook should also communicate important company information, including values, and outlines expectations and standards for employees and leadership. This resource may also help legally protect employers from discrimination or unfair treatment claims.

Get business help from Provident CPA and Business Advisors

Running a business involves lots of moving parts, and things get more complicated when you hire your first employee. When you have questions about the tax implications of hiring a regular employee or independent contractor, or you need assistance with your business model, the team at Provident CPA and Business Advisors can help. Contact us today to learn more about our services.

Do I Have to File Multiple State Tax Returns?

Working in more than one state? You might need to file multiple tax returns.

Key takeaways:

  • You need to file multiple state tax returns if you live in one state and work in another, moved states and employers, or received income property from a place you own in another state.
  • A non-resident is someone who received income from a state but didn’t live there.
  • Two states may have reciprocity agreements, which allow you not to file more than one return.
  • However, even if the state you worked in doesn’t have an income tax, you still need to report the income on your home state return.

Many Americans are working remotely now, at least part of the time, and that means some have tax questions about working in more than one state. Other individuals work in one state regularly and live in another. Depending on your situation and your state’s tax laws, you may need to file more than one state tax return. Note that this situation doesn’t impact federal tax returns, only state returns.

Let’s walk through when you would file multiple tax returns and key considerations when working in various locations. 

When to file multiple state tax returns

Taxes can get complicated quickly if you have multiple streams of income coming in or if you have to report business expenses on your tax return. Things get even more complex when you have worked in more than one state, though you may not always have to deal with multiple returns. 

There are a few scenarios that require filing more than one state tax return:

  • You moved during the applicable tax year: If you worked in two different states in a year because of a move and both states withheld income taxes, you must file two separate returns. Even if you worked remotely, you would still be considered a part-year resident in each.
  • You work in a different state than where you live: Earning income in one state and residing in another may mean you need to file two tax returns, though you won’t have to pay taxes in both states unless you actually earned income in both. Reference the section below on reciprocity agreements, as well.
  • You own income-generating property in another state: If you own a property in another state and received income from this property, you may need to file a separate state tax return for that income. 
  • You’re self-employed/own a business: Owning a business and working in more than one state means you’ll have to file multiple tax returns and may need to pay state income taxes in more than one place.

Note that if you work remotely for a company located in a different state than you, you usually don’t need to file two returns—only in the state where you worked.

What is a non-resident?

So, if your situation sounds like one of those above, you may need to file multiple state returns. In these cases, most states require you to file a “non-resident” state tax return where you worked but didn’t live that year. A non-resident is someone who received income from within a state but did not live there at all during the specific tax year. 

However, each state has its own laws about determining residency status. Some require that you be physically present in the state for a certain number of days to be considered a resident. Others require that non-residents who earn income in a state file a separate schedule to report income there.

Reciprocity agreements

Make sure you check the reciprocity tax agreements for the states you’re living and working in. These agreements allow residents of other states to work there without having to file a non-resident tax return. States located next to one another often have these arrangements since people can cross over and work in the neighboring state more easily. The agreement basically says that you don’t have to file both returns as long as your employer withholds income tax in that other state.

Note that it might be a good idea to file a state tax return in the place where you worked, even if you don’t have to pay taxes there. This ensures you’ll get a refund if your employer withheld taxes from your income regardless of the reciprocity agreement.

You should never have to pay taxes twice on the same income, even if you work and live in states without reciprocity agreements. However, if you do, your home state will likely be able to provide a tax credit or adjustment for taxes you paid in other states.

What if my state doesn’t impose income tax?

It could also be the case that you work in a state without income tax. This list includes these nine states:

  • Alaska
  • Florida 
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Note that New Hampshire and Wyoming don’t tax earned income, but they do tax investment income. So even though you don’t have to pay income tax in these states, you still must report your earned income on your tax return for the home state and a federal tax return.

Consult with a tax expert about your state returns

Because we’re talking about state taxes here, remember that each state has its own set of tax laws. But generally, taxpayers have to file multiple state tax returns if they worked in more than one state. Reciprocity agreements may help you limit the returns you have to file, and you should never be paying state taxes twice on the same income. Working in multiple states doesn’t impact your federal tax return.

The Provident CPA and Business Advisors team helps taxpayers and small business owners pay the least amount of tax legally possible while devising comprehensive strategies. Reach out to our team today to get started.