By Steven Strauss
Question:
The thing I hate most about running a business are the taxes, and yet I prefer not to incur the cost and hire a CPA to help me and instead rely on some of the great software that is out there. But even so, keeping up with all of the rules is tough. Can you help?
Answer:
There are two parts to running any business – the fun stuff and the tough stuff.
The thing is, you don’t get to do the fun stuff unless you master the tough stuff. That’s the deal; doing some uncomfortable, unpleasant things is the price of entry into this game we call entrepreneurship.
You know what the fun stuff is: It is those things that got you to start your own business in the first place – the caterer loves to cook and experiment with new recipes, the antiques dealer loves to find and share hidden treasures. But they will never be able to pursue their passions permanently if they don’t learn about those parts of their business that are not so engrossing – the law, taxes, insurance, hiring and firing, and everything else that goes into actually running a business. If you don’t handle these sorts of business details, you won’t be around long enough to profit from your proficiencies.
So I get that taxes are probably not your bag. That’s true for most of us. Oh well. Like my sweet mom used to say, “Sometimes Stevie, you have to do things in life that you don’t want to do.” “Like learn about taxes, mom?” “Yes, exactly, like learning about taxes.”
While most small business people understand income, expenses, and ordinary and necessary business deductions, I find that one area that often trips them up is W-2 and 1099 reporting requirements. Additionally, tax changes because of Obamacare are confusing not a few people now too, so let’s drill down on those two specific trouble spots:
1099 and W-2 Reporting Requirements: When people work for you, they can either be an employee or an independent contractor. You have different reporting requirements for each.
With employees, you need to report the amount of money you pay them each year. You do this using Form W-2. A W-2 is also known as a Wage and Tax Statement. It is a six-part form that breaks down how much the worker was paid and how much was withheld for taxes. All business with employees must fill out and file this form with the feds and also send duplicate copies to each employee.
You have the same requirement for any independent contractor to whom you paid $600 or more during the year, only here you use a Form 1099.
Your 1099 and W-2 reporting can done either physically by using paper forms or electronically, using a Web e-filing service. Regardless, the important thing to know is that with either, the reporting requirements deadline is fast approaching there are fines if you miss it:
January 31st is the deadline for sending workers their copy of the W-2 or 1099, whichever is applicable. (This means all forms must be postmarked by this date.) After that, if you are filing by paper, you need to have your forms in to the IRS by February 28. If you use an e-filing service, the deadline is April 1.
Additionally, there are many different versions of both the W-2 and the 1099 and so, needless to say, this all can get a bit complicated. If you need to learn more about your reporting requirements, or if you need paper forms, or an e-filing service, I recommend you check out the Tax Resource Center from Greatland Corporation (Note: some of the information in this article comes from Greatland, and I do some work with them.)
OK, you had your spinach. Permission granted to go have a cookie now.
Got a question? Visit Steve at TheSelfEmployed, or shoot him an email at sstrauss@MrAllBiz.com.