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How Do Partnerships Pay FICA? January 2, 2010

Posted by Julie Duriga, CPA in Uncategorized.
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Partnerships don’t pay FICA tax for their partners.  If a partnership employs people, then, of course, the partnership must pay FICA taxes on their employees.  Partners in the partnership must pay their own FICA taxes as well as their own income taxes.  Some partnerships do run payroll on their own officers but the IRS doesn’t really care for this.  It may come back to the haunt the officers at a later date.

When partners take a draw, distribution or a guaranteed payment, they must take out a gross amount of say 1000.00.  From this, they must set aside 200-300 (depending on your personal situation) to pay their own estimated quarterlies.  Partners in the partnership must submit their own 1040-ES to the IRS on a quarterly basis for their taxes. 

FICA and income tax is a different tax.  When you send the IRS one chunk of cash, the IRS puts this in your account and the amounts that are figured out when you file your personal 1040.  Remember the profits inside the partnership are subject to your income tax rate even if you did not bring those profits home with you. 

Guaranteed payments taken as “take home pay” is subject to both your income tax rate and to FICA taxes.  Partnerships are similar to sole proprietorship because the partners have to pay the full 15.30% of social security/medicare tax.  FICA=Social Security/Medicare Tax.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

Requirements For Officer Compensation…. December 13, 2009

Posted by Julie Duriga, CPA in Uncategorized.
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This was a question that a blog reader asked me.  It is so useful when readers ask questions because it gives me material to write about.  So keep your questions coming.

I usually suggest that active officers run payroll on themselves at a minimum once a quarter.  Even if the business can only afford to pay the officers through payroll $500.00 per quarter, that is better than nothing.  This makes the business look more like a “going concern” (a real business that is sustainable) to the IRS than if there is an absence of payroll inside the corporation for its active officers.  The IRS starts to wonder why would the officers stay in this business if the business can’t afford to pay its own officers after a period of time. 

The only requirement that I know of is that officers must be compensated by giving them a reasonable salary for your industry.  If your S Corporation is a restaurant, then the business must compensate the officers who work inside the restaurant a reasonable salary for the restaurant industry.

What is an active officer?  This is an officer who works inside the corporation.  An officer who reviews the financials on a weekly basis or an officer who actively generates sales calls or an officer who does the dishes is considered active.  If the business has officers who show up every now and then for board meetings or who stops by occasionally to check on their investment is not considered active.

In my state of North Carolina, the power of the payroll law rests with the employer.  The employer can really do whatever they want to do with their employees as far as paying frequency.   I don’t know of any employer that pays its employees less than once a month.   Check with your state department of revenue for your state’s payroll laws.

Officers can be compensated on a different schedule than its employees.  Sometimes when there is no money, the employees get paid first and the officers just have to wait.  Of course, it is easier to run payroll all at the same time, but sometimes this is not possible.

 In conclusion, the officers can be compensated whenever the Corporation deems appropriate.  At at minimum, the compensation should occur at least once a quarter.  The IRS requires that active officers be compensated a fair and reasonable salary.  Employees and officers can be compensated on the same schedule if the funds permit this.  Be careful of paying your officers with fringe benefits.  Fringe benefits to S Corporation officers are usually considered compensation by the IRS and have to be added to the W-2 as taxable wages.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

Do I Pay My Income Tax Bill From My Business? December 6, 2009

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Of course, income taxes are different than unemployment taxes and from the employer’s portion of the social security tax.  Those taxes are deductible.

Income taxes are held from your own income and need to be paid from your salary bucket inside your business.  If your paycheck says that you took home 700.00, then 300.00 is really taxes.  In t heory your paycheck should be 1,000.00 to cover taxes which is normally around 300.00 to be safe.  To be safe means you are not stuck with an enormous tax bill at the end of the year.

If you are a sole proprietor or a partnership then your taxes are paid from the guaranteed payments or from your owner’s draw.  This draw can take place through a physical check written from your business or through a bank transfer from your business account to your personal account.  It is then your responsibility to remit quarterly your income taxes and your social security taxes to the IRS and to the state agencies.  Those taxes are paid from the money that was transferred to your business account.  Some business gross up their partner’s draws and guaranteed payments to cove the cost of the taxes.  Instead of bringing home $1,000.00, they might bring home $1,300.00 to cover the taxes.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

My Company Isn’t Profitable…Do I Have To Pay Taxes? November 28, 2009

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My Company Isn’t Profitable…Do I Have To Pay Taxes?

No!  If your company isn’t profitable you do not have to pay income taxes.  If you have employees or you are an employee, you will have to pay social security/medicare taxes.

I believe the IRS doesn’t really start looking closely at your business until after three unprofitable years.  If you have been unprofitable for three years, the IRS starts to wonder why are you still in this business?  Is this a business or a hobby?  Then you start to get into the whole concept of hobby losses. 

If you are unprofitable for three years, start looking at your numbers…your gross profit, your percentage of payroll to revenue (if your payroll is 60K and your revenue is 100K, that means your payroll is 60% of your revenue…that is too high, your staff needs direction or they don’t have enough to do or something).  Maybe you need a new business or a new way to operate your business?

Your salary is deductible if you are an S Coporation or a C Corporation.  Your guaranteed payments or draws are deductible to the partnership.    Your draws inside your sole proprietorship are NOT deductible.  If you are an LLC, check out my blog on the whole LLC scene.  This means that your profits will be lower…which is good for tax purposes…to report lower profits…the lower the profits the lower your tax bill.  Lower profits is bad for bank loans though.  Do you want a bank loan or do you want to pay less in taxes…you can’t have both.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

Do I Pay Taxes In My LLC If I Wasn’t Paid? November 16, 2009

Posted by Julie Duriga, CPA in Uncategorized.
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j0439255A better way to ask this question is “Was I profitable?”  rather than “did I get paid in my small business?”  The short answer to this question is if you were profitable, then yes you will be taxed on those profits!  The government doesn’t really care if you brought those profits home via payroll or owners’ draw or if you left them in your business, it is still considered taxable income to you, if you are profitable. 

Depending on your filing status of your LLC, this determines the degree to which your profits will be taxed.  If you are partnership or sole proprietor, then your 100% of your profits will be taxed for social security and medicare.  If you are an S Corporation underneath your LLC, then your business profits will be taxed at your regular income tax rate.

The answer to your question is: you pay taxes if you were profitable.  Your income statement or profit and loss statement will let you know if you were profitable.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

Accounting Is Sexy! October 30, 2009

Posted by Julie Duriga, CPA in Uncategorized.
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Japanese Tearoom 2Yes!  It is true accounting is sexy.  Sometimes the numbers need to be lured out from their secret hiding places as they wait to be invited into your life.  Sometimes the numbers need to be played and manipulated in order to get what you want from them.  Sometimes the numbers are aggressive and loud as they beg you to pay attention to them.  Your numbers sometimes wait for you to massage them and run them through your fingers.  Sometimes when you interact with your numbers the results can be heartbreaking and other times the numbers will bring a feeling of elation. 

Your numbers can bring you direction, focus and clarity if they are appreciated and respected.

In addition to being sexy, your numbers can bring you the feeling of control and power.

Pay attention to your numbers and they will guide you through confusion, uncertainty and bring the satisfaction of helping you make decisions with a solid sense of fact.

 Visit www.UniversityForBusiness.com for other tools to help you love your numbers.

What Would You Like To Know? June 12, 2009

Posted by Julie Duriga, CPA in Uncategorized.
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I ran into my business coach this morning and he wanted me to ask small business owners what they would like to know about.  I have been writing about what I think  you need to know about in terms of accounting and taxation in your small business.  Tell me about what areas you struggle with in the accounting area.   What do you need to know?  What would you like to learn more about?

I would love to hear from you so I can write about what you would like to know.

Thanks in advance for your time and your contribution!

Put My Taxes In Buckets, Please… June 10, 2009

Posted by Julie Duriga, CPA in Uncategorized.
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Small Business Tax BucketsAs a small business owner, it is important to understand the differences between the different kinds of taxes that the Internal Revenue Service imposes on business owners.     Taxes don’t fall into one bucket.  There are different buckets for different taxes and it is important to understand the different buckets.

  • The first bucket is the income tax bucket.  Income taxes are paid based on income…makes sense doesn’t it?  Income tax is determined based on your income but also many other factors.  Income tax comes from your income but is offset by many other factors in your life.   Some examples of helpful tax deductions that will reduce your income tax are children, student loan interest, moving expenses (under certain circumstances), Health Savings Account contributions and health insurance if self employed.

 

  • The Second Bucket is “Self-Employment Taxes”  This is the biggie!  This catches first time small business filers by surprise.  The self employment tax is calculated on profits of your small business.  Profits are important to understand because your business may have profits but your business bank account may be hovering at slightly above zero dollars. Your self employment tax bill will start ticking when you have $300.00 or so in profits.  Your business will pay taxes on profits whether you bring those profits home or not.   Just because you have no money in the bank, profits are still taxable. 

 

  • Two Buckets Within A Bucket?  Yes!  Within the SE tax there are two buckets.  One bucket inside the SE tax is Social Security and the other bucket is the Medicare tax.

 

  • This SE tax (self employment tax) is 15.3% of the first $106,800 (limit for 2009) and 2.9% on all profits.    This probably doesn’t make much sense, so here is an example.

 

  • GIVE ME AN EXAMPLE!  Becky Bookstore decides to open a bookstore because that is her last name and because she loves books.  Her first year in business, her income statement reveals that she has made $150,000 in profits.  She will be taxed as follows for the self employment tax:

 

  • $106,800 of the $150,000 will receive 15.3% in taxes which equals $16,340.  The $106,800 is a random amount determined and is changed every year by some mysterious government calculation.  For 2010, the limit will be different than the current $106,800.

 

  • The remaining $43,200 ($150,000-$106,800)  is subject to the 2.9% of Medicare taxes which equals $1,252.80

 

  • This gives Becky Bookstore a tax bill of $17,592.80

 

“Yeah, but one half of my self-employment tax is deductible…”  It is true it is deductible for reducing the amount of income tax you might have to pay.   The amount you pay in self employment tax IS deductible but Becky Bookstore still owes the full amount of self employment tax but her income tax will be reduced. 

“I did not pay this much in taxes when I had a job…”     Yes, this is true, because your employer carried one half of the self employment bucket for you.  When  you were employed the SE tax reduced your check by only 7.65% .  When it is taken from your check, it is sneaky and you don’t notice it as much as when you have to write  a check.  Now, that you are self employed, you must carry the full weight of the self employment tax bucket.

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!

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Eight Vocabulary Words Every Small Business Owner Needs To Know May 27, 2009

Posted by Julie Duriga, CPA in accounting, Income Statement, profit, Small Business.
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Words To Grow Your Business 

Tomorrow I am speaking at the annual Mountain BizWorks Women In Business Conference.   My break out session is going to be a great review for small business owners.  I will to reconnect the business owners with their income statement and the terms needed to understand this statement.  I  realized yesterday that I needed to jot down some topics to talk about at the conference.   I  also realized that I needed to start a blog.  So, here I am a new blogger, writing my first blog and while drafting some discussion topics for the conference tomorrow.

  • Income or Profit and Loss Statement-This statement shows how much revenue you have generated and how much in expenses you have generated.  It also gives us important historical information but we can use our income statement to make decisive and informed decisions.  We can count on our numbers to tell us a story, sometimes it is a story we want to hear and sometimes the story can be uncomfortable.

 

  • Revenue-This number represents what you have earned selling your goods or services.  Revenue is the dollar amount that you have actively earned during the normal course of your business.   If you receive a loan, this is NOT revenue.  If you receive cash at the time you have completed your sale, then your cash in the bank and revenue would most likely be the same.   If you invoice your customers, then your revenue versus what you have in your bank account could be dramatically different.

 

  • Cost of Goods Sold-This number represents what the cost of the goods or services that you have sold cost you.   If I sell a dress for $20.00 (this is my revenue) and I paid $5.00 for this dress, my cost of goods sold is $5.00.   Measuring cost of goods sold for those of us in the service business is a little tricky.  If we are selling other people’s time, we should classify that person’s time as cost of goods sold.  Manufacturing cost of goods sold is complex, bigger than the scope of this blog, but certainly worth a blog entry of its own.

 

  • Gross Profit-This calculation is simply found by subtracting our cost of goods sold from our revenue.  Hopefully, we have more revenue than our cost of goods sold.   Gross profit is represented as a dollar figure.  Looking at the dress example above, our gross profit is $15.00.

 

  • Gross Profit Margin-This calculation is a percentage figure.  Again, referring to our dress example above, our gross profit margin is 75%.  We arrive at this figure as follows: Gross Profit/Revenue.  Try it yourself and see if you get the same answer.  Two calculations are necessary.  First, figure the gross profit and then you can figure out your gross profit margin.  This is one of the most important figures in your business.  Your gross profit margin might reveal that you need to raise your prices or find a new supplier or that everything is just fine.  Of course, the higher the gross profit margin, the better you are doing financially

 

  • Expenses-These are cash outlays that are required  to operate your business.   In business,  expenses are any cash outlay that contribute to the continuation of the business.  Rent, utilities and advertising are examples of expenses.  Equipment that you purchase is not considered an expense.    If you are paying back loans, the principal payment is not an expense but the interest portion is an expense. 

 

  • Net Profit or Net Income-This is also known as your bottom line.  This is simple addition and subtraction.  Your net income or net profit is found by subtracting all of our expenses from our revenue.   Our net profit is what is left over after all of our expenses have been accounted for.  If we had $100.00 in dress sales and $50.00 in expenses, we are left with $50.00 in net income.

 

  • Net Profit Margin-Like our gross profit margin figure, this is one of the most important figures of your business.  The higher the net profit margin, the better.  In our example above we have a 50% net profit ($50.00/$100.00).

These eight vocabulary words will help you understand your income statement with a new empowered approach.  I want to help you love your numbers and I want you to have a relationship with your numbers.  I want you to make all of your business decisions only after reviewing your numbers.   Your numbers need you! 

Visit us at our website to get your free E-Book titled “How Do I Pay Myself? The Entrepreneur’s Guide to Building a Business AND Bringing Home the Dough.”  www.UniversityForBusiness.com

We also offer a really cool twenty minute video about how running your business affects your bottom line. We use islands, cars and bridges to demonstrate the movement of profits and losses between your personal and business bank accounts. This immediate download is avaialble for only $6.99. Twenty minutes with a CPA for only $6.99, what a deal!