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2010
SBC Team

DIY or CPA?

Posted by SBC Team Jan 29, 2010
Which tax prep method makes sense for your small business?

By Reed Richardson

 


How do the costs/benefits break down among tax preparation choices?

 


This is a point of lively debate within the tax community. In the 2005 Form 1040 filing instructions, the IRS included a controversial table that compared time and cost estimates across the three filing categories (self-prepared without help, self-prepared with tax software, and prepared by tax professional). According to the IRS's estimates, no matter how simple or complicated an individual's tax situation, using tax-prep software not only cost more, it took several hours longer than preparing your taxes without help. Having a tax professional or accountant prepare the same non-business return, the IRS said, would save time, but the extra cost-on average, $155 more than doing it yourself-would no doubt be prohibitive to many taxpayers.

 


Soon after its publication, representatives from both the tax preparation software industry and the American Institute of Certified Public Accountants (AICPA) publicly disputed the IRS's time and cost estimates. A spokesman for Intuit, maker of the popular TurboTax software program, objected to the agency's assertions, saying the claims "fly in the face of logic." Similarly, the AICPA maintained that the IRS's estimates for the effectiveness of tax professionals "do not reflect marketplace reality."

 


And though a National Tax Journal article generally supported the IRS's controversial time and cost estimates when they appeared four years ago, it also noted that when demographic characteristics and tax complexity are factored in, "all groups appear, on average, to be using the cost preparation method that costs the least for them." In other words, most people do a pretty good job of understanding which method best fits their individual tax situation. (To see the IRS's tips on choosing a tax prep method, check out their online guide: www.irs.gov/individuals/article/0,,id=133088,00.html).

 


After encountering such strong pushback from the tax prep industry, the IRS backed off and since 2005, the contentious table has not reappeared. Instead, a shorter, less specific table that lumps all three types of filing methods-do-it-yourself, software, and tax professional-into one overall average has replaced it for the past several years. (You can find this table on page 98 of the 2009 Form 1040 instructions here: www.irs.gov/pub/irs-pdf/i1040gi.pdf).

 


For the 2009 tax year, the IRS estimates that the average individual return will take 17.3 hours to prepare and cost the taxpayer $225. Business 1040 returns, defined as those that include a Schedule C, C-EZ, E, or F, Form 2106 or 2106-EZ along with a 1040, will make up 31 percent of all individual tax returns and are anticipated to require an average of 31.9 hours to prepare and cost $434. Separate business tax returns, defined as those that file a Form 1065 (partnership), 1120S (S-Corporation) or 1120 (C-Corporation), will cost, on average, $551, $665, or $692, respectively, if you use a paid tax professional to file your 2009 taxes, according to a recent biennial survey conducted by the National Society of Accountants.

Doing it yourself vs. outsourcing to an accountant

 


So, who feels like going it alone is the best option when preparing our taxes? Increasingly, the answer is not many of us. The number of taxpayers preparing their own returns by hand dropped by roughly 75 percent between 1993 and 2006-from just over 40 to just under 10 percent of the population-according to a 2007 IRS Taxpayer Usage Study. And with thousands of pages of instructions and potentially dozens of different forms and schedules to be filled out (although, truth be told, only a handful are necessary for most individuals and businesses), the trend toward some kind of tax assistance is understandable.

 


For many, the fear of making a mistake and paying dearly for it in the form of an audit may just not seem worth the money saved. For others, spending hours flipping through obtusely written tax jargon is time better spent elsewhere. And then there's the worry that, as tax novices (how often do you read up on tax law changes, after all?), you might overlook a big deduction and inadvertently flush part of your small business's hard-earned money down the drain.

 


"If your taxes don't involve anything besides a W-2 and some 1099s, you probably don't need any kind of professional help to do your taxes," says Tom Ochsenschlager, vice president of the AICPA's taxation division. This is particularly true, he says, if you only plan on filing a Schedule C or Form 2106 with your individual 1040 return. In fact, even the most affordable tax-prep software products, which are now geared toward maximizing deductions for people with more sophisticated financial portfolios, real estate holdings, and small, home-based businesses, might be less cost-effective than doing your taxes yourself. Still, Ochsenschlager notes that mistakes happen on even the simplest of returns. "The IRS Inspector General recently released a study that found almost 250,000 people still take the wrong deduction," he notes. "Instead of itemizing, they take the standard deduction or vice versa, and it could end up costing them money." And missing just one significant deduction could easily equal or surpass the money your small business would have spent on a professional tax preparer.

 


Still, if you're adventurous enough and willing to hack through the tax instruction jungle, you might consider preparing your small business's tax return yourself. However, what you gain in money saved might be more than made up for in time lost, an important point to consider. And this challenge is not for the faint of heart, as the IRS estimates that just the record keeping and tax planning aspects alone could eat up the equivalent of several full working days.

 


Doing Your Taxes Digitally-The tax-prep software method

Computer-aided tax preparation, nonexistent 20 years ago, is now growing by leaps and bounds. Since 1993, the share of people using software to self-prepare their individual taxes has more than tripled and, increasingly, small businesses are taking the same route as these software companies have expanded their product platforms upmarket. These software programs' "plug and play" nature attracts Americans unwilling to try and decipher page after page of arcane tax instruction and uncomfortable with sharing their finances with an outside tax preparer or accountant. And whether or not the process actually takes longer than doing it by hand is almost beside the point-for them, the fact that it makes the process much less painful and ensures a more accurate return are the primary selling points.

 


If you're a small business with only a few employees and a relatively straightforward organizational structure, tax-prep software probably represents a fairly low-cost and highly effective alternative to doing it yourself or hiring an accountant. What's more, the level of customer service you can now expect to get has increased dramatically over the years as most major tax-prep software products now provide some form of free tax guidance via email and instant messaging chats, or live phone consultations. Additionally, these tax-prep software products offer the ability to save your tax data from year to year.

 


For some taxpayers, though, the tax-prep software model presents some drawbacks. That these software companies often archive your small business's tax data online, for example, raises privacy concerns among some people, despite the fact that this information is more likely to be compromised by someone rooting through your trash (or your accountant's) than hacking into a tax-prep software company's database. As more and more tax-prep software companies coax consumers (through lower prices) into switching from the traditional "disc-in-a-box" model to the online versions of their products, these worries have only increased in some quarters. And even using the "box" version of a tax-prep software product can lead to your tax data ending up on a remote server somewhere if you e-file your return rather than print it out-something else to keep in mind.
SBC Team

Managing Your Payroll

Posted by SBC Team Jan 22, 2010
Why it pays to think about how often you pay your small business's employees

By Reed Richardson

For many start-ups and even some established small businesses, just being able to pay the bills and generate a little extra profit is a big enough challenge. As a result, seemingly innocuous questions like when and how often to pay out that money in salary-to owners, partners, and employees-often doesn't get much thought. But it should, because a company with a poorly executed pay system can easily run into legal trouble as well as send frustrated workers heading for the exits.

 


Even if your company is small now, think big

"Payroll is all about setting expectations," explains Bryan Dear, a former CPA who owns The Payroll Department, Inc., a payroll processing company located in Durango, Colorado. "So why not set it up in the right way from the start, so you won't have go through a painful transition to something else later on?" To that end, Dear recommends settling on a payroll system that is both simple and routine, yet flexible enough to adapt and grow as your small business does. "We find that paying every two weeks seems to work well for most of our smaller business clients," notes Dear. And he's someone who follows his own advice-his own company's payroll system is biweekly as well.

 


Putting some forethought into your small business's pay periods can become particularly important if you ever anticipate having a mix of exempt and non-exempt employees working at your company. That's because many states have different pay rules regarding salaried versus hourly workers, especially when it comes to tracking and paying overtime. Also, many states have specific rules dictating the maximum "holdback" period, or how long a business can wait to pay its employees after the pay period has ended.

 


For entrepreneurs just starting out or if your small business still handles payroll internally, it would be worthwhile to check out the U.S. Chamber of Commerce's payroll guidelines[1] and state-by-state payroll toolkit[2] to get a sense of the pay period and holdback rules in your state. In New York, for example, the state mandates that hourly workers must be paid weekly, most other salaried employees at least semi-monthly, and salespeople no less than once a month. Illinois requires employers to pay at least biweekly or semimonthly and limits the holdback period to 13 days. Florida, though, leaves decisions about pay and holdback periods completely up to the business's discretion for all types of employees.

 


Pick a day or pick a number

Perhaps the most fundamental decision regarding your small business's pay periods involves whether or not to follow a weekly or monthly calendar. A weekly pay calendar means that your company's pay periods will always begin and end on the same days of the week and that payday will likewise always be on the same day of the week, usually five to seven days after the pay period ended. A typical biweekly pay schedule might begin on a Monday and end 14 days later on a Sunday, with the eventual payday for those two weeks of work falling on the Friday five days after that. These workweek-based pay periods offer the benefit of making paydays very predictable for both the employees and the small business owner. More importantly, if your small business also includes hourly workers, a workweek-based pay calendar makes it much easier to track hours in easy, repeatable amounts because your company's pay period will always align with the traditional workweek, unlike semimonthly or monthly pay periods, which can begin and end of any day of the week.

 


Monthly or semimonthly pay periods work fine for a staff of all salaried employees, but if you have to account for overtime a pay period that ends mid-week can make life difficult. And precisely because a pay period will occasionally end on a Thursday or Friday, Dear notes on his company blog[3] that businesses would be wise to stretch out their paydays a few extra days to account for federal holidays and the resulting three or four-day weekends. "If you do choose semimonthly," he writes, "consider a delay of seven days between the period end date and the check date to give your organization enough time to process your payroll."

 


Yet despite the somewhat limited appeal of a month-based pay schedule, it still has some advantage over a workweek-based system. For one, a semimonthly pay period means your company will never face a situation where payday comes a day or two before the 1st of the month, as can occasionally happen if you pay biweekly. For small companies with very volatile cash flow, having payroll, vendor bills, and overhead payments all going out around the same time can make for at least one or two close calls during the year.

 


Likewise, a small business using a month-based pay system will never encounter the unique problem facing some companies at the end of 2009-what to do when their weekly pay schedule falls on the yearly calendar in such a way as to create an extra-27th or 53rd-pay period. Thanks to the difficult economic times, many workweek-based companies might be tempted to simply skip this pay period, but, as one might imagine, such a decision needs to be accompanied by a careful explanation of why and how this will work or else employees could grow angry or feel cheated. Or, to avoid this dilemma, companies could pay the extra check as gesture of goodwill, even though it might tangle their 2009 finances a bit.

 


When does it make sense to outsource payroll?

Entrepreneurs often find themselves wearing a lot of different hats while running their small businesses and for companies just starting out it's not uncommon for the owner to also play the roles of bookkeeper and paymaster as well. But as a company grows, it can be increasingly difficult to carve out time to handle administrative tasks like totaling up employee hours and cutting checks. And though employees of small businesses tend to pitch in wherever they're needed and be more forgiving about mistakes, it only takes a few missed paydays to burn through whatever sense of willing sacrifice those workers bring to work each day. So, a small business owner would be wise to recognize-ahead of time-signs that they might be ready to handoff payroll to an outside firm.

 


"Within its first two or three years, a small business will usually get some kind of tax notice," Dear points out. And even if that letter from the IRS isn't an audit notification, he explains "That's the point when many of my small business clients have decided ‘I'm just not going to do this anymore.'"

 


Another common tipping point indirectly involves recruiting and hiring. If you find your company is having an increasingly difficult time attracting new talent because it lacks many of the health and retirement benefits found at larger businesses, this might be a subtle signal that your in-house payroll system is out-of-date or overmatched. While it's true that many do-it-yourself payroll software programs can handle more complicated paycheck deductions like health care premiums, cafeteria plans, vacation time, and 401(k)s, adding a simple thing like direct deposit for your employees can still prove difficult without outside help. But if you think that outside help could be your tax preparer or accountant, you might think again.

 


"In my experience, most CPAs don't want to deal with payroll," explains Dear, adding "and even if they do, they aren't able to do direct deposit." Fortunately, there is now a plethora of outsourcing options-from large banks and business service conglomerates to small payroll processing firms-that can quickly and easily accommodate your payroll needs for a reasonable fee. And come tax time, these outside payroll processors can really pay dividends, as they're more up to speed with the latest changes in tax law and make far fewer filing mistakes than business owners who go it alone. In the end, how and when you pay your employees is about more than just paychecks, Dear says. "It's also about eliminating one additional issue for you to worry about, so you can focus more on running your business."

 

# http://www.uschambersmallbusinessnation.com/toolkits/guide/P05_4111
# http://www.uschambersmallbusinessnation.com/toolkits/guide/P05_4109
# http://blog.payrolldept.biz/2009/04/13/picking-a-pay-period-and-check-date/

Which version is right for your small business?

 

By Reed Richardson

 


For those small business owners who choose to do their own taxes this year, there are more software choices than ever to help them file. Indeed, tax prep software companies, like banks and credit card companies before them, are now increasingly targeting small businesses. And recognizing that many small business owners seamlessly blend their personal and professional lives, some software companies are now bundling their individual and small business tax return products together to save you time and money as well.

 


But sorting through the many different product tiers, price structures, and claims can be confusing, so here's a quick rundown of what three popular tax prep software companies are offering this year.

 


Lay of the land

Pricing for most tax prep software generally follows some tried and true conventions. For the most part, purchasing an online or downloadable product amounts to buying the ability to prepare and file a federal tax return. If you would like to electronically file that federal return-and shorten the turnaround on getting back an expected refund to as little as eight days-tax prep software companies now typically include one free efile as part of each version's standard price as well. However, if based on where your small business is located you are required to file a state tax return, you might be required to pay an additional flat fee of between $8 and $30 per state to file. And to electronically file those state tax returns you'll likely trigger yet another fee.

 


As pricing has become more competitive, tax prep software companies have tried to differentiate themselves by touting more qualitative benefits. One popular way involves offering maximum refund and/or accuracy guarantees. By now, though, almost all major tax prep software products come with one, if not both, of these guarantees, making them more like industry best practices than something that sets them apart from one another.

 

Likewise, when it comes to ease of use, nearly every tax prep software product now easily imports data from bookkeeping programs like QuickBooks and Microsoft Money, a handy feature that can significantly shorten time spent on tax preparation and avoid simple mistakes arising from data entry errors. Offering multiple platforms of customer support-phone, email, and live chat-and various kinds of after-you-file "audit support" have now become commonplace as well for most major tax prep software companies, although H&R Block, which allows its software customers to consult a dedicated tax preparer from one of the company's storefront locations for an additional price, can be an attractive choice for those looking for a more personal touch.

 


One final caveat: it's important to keep in mind that tax prep software has its limitations. Even TurboTax's top-tier Business version states quite plainly that it works best for a small business that "has revenue of less than $250,000 and fewer than five employees." More affordable but less well-known tax prep software companies tend to offer less comprehensive business platforms, if they offer one at all. As a result, entrepreneurs that experienced even modest growth this past year might find that their company has unexpectedly vaulted beyond the point where any level of do-it-yourself tax software makes sense.

 


Intuit's TurboTax

As the best-selling and most well-known tax prep software brand, Intuit's TurboTax products also come highly rated, with last year's versions having earned "Editor's Choice" awards from tech publications CNET and PC Magazine. This year, TurboTax rolls out five different software versions, two of which focus on small businesses. The first, TurboTax's Home & Business version, is, as it sounds, focused on those entrepreneurs who run a side business out of their home or are full-time sole proprietors or single-owner LLCs and would likely file their personal and business taxes together. The more robust Business version is TurboTax's top-of-the-line product and it includes a suite of corporate forms geared toward small businesses partnerships, multi-member LLCs, as well as S and C Corporations.

 


TurboTax's business software stands at the high end of the market, with costs ranging from $75 for a typical sole proprietorship up to $160 for a C Corporation that files at least one federal and state tax return electronically. Also of note, the latter scenario doesn't include the cost for the small business owner to file their personal federal and state taxes, which would necessitate buying an individual TurboTax suite like Premier, adding another $86 to the bill.

 


The higher cost of TurboTax software brings with it some greater flexibility, however. Along with free audit support for all products, with TurboTax Home & Business, for example, you can enjoy the freedom of preparing and filing your taxes completely online instead of having to use a downloadable or CD version. (TurboTax's Business edition is download or CD only, however.) In addition, all TurboTax business software packages let you file five different federal returns from just one software purchase, a big plus if you're an entrepreneur with multiple ventures.

 

 


TurboTax Home & Business version: http://turbotax.intuit.com/personal-taxes/online/home-and-business.jsp

 

TurboTax Business version: http://turbotax.intuit.com/small-business-taxes/business.jsp

 

 

H&R Block At Home

In an attempt to emphasize H&R Block's unique two-pronged approach to tax preparation, the company's previous "TaxCut" software products have been renamed "At Home" this year. (Its storefront operations were also rebranded, as H&R Block "Offices.") For the 2009 tax year, H&R Block offers four At Home software tiers, two of which, Premium and Premium & Business, would be of use to small business owners. Premium, which is offered in both online and downloadable versions, is limited to small rental property owners or the self-employed who don't file any business forms beyond a 1040 Schedule C, however. At Home Premium & Business, on the other hand, is only downloadable in a Windows version and encompasses all other small business structures from limited partnerships to multiple-owner LLCs to S and C Corporations. And to encourage established tax prep software users to switch H&R Block, the company claims its At Home platforms are now set up to quickly import previous tax year data from its rival TurboTax's programs.

 


Price shopping between TurboTax and At Home can be difficult, though. At $49.95, H&R Block's Premium version is more comparable in price and amenities to TurboTax's Premier version ($49.95) than it is to TurboTax's Home & Business suite ($74.95). The Premium & Business version, however, costs only five dollars more ($79.95) but offers small business owners the ability to efile up to five free federal business returns (even for C Corporations) as well as one federal and state 1040. The price difference becomes particularly stark for owners of C Corporations, who would pay only $120 when using At Home Premium & Business to file both their federal and state personal and business tax returns electronically, a price less than half of the $246 needed to accomplish the same tasks using comparable TurboTax products.

 


For self-employed entrepreneurs that would only file 1040s and Schedule Cs and who seek the security of having the critical eye of a tax professional on their side, H&R Block also offers its $99.95 "Best of Both" package. With this package, customers prepare their taxes using the company's software, but a dedicated H&R Block tax preparer is also available to answer questions during the process and review all tax forms before they're filed. State returns are extra, however, and run $29.95 each.

 


H&R Block Premium version: http://www.hrblock.com/taxes/products/32.html

 

H&R Block Premium & Business version: http://www.hrblock.com/taxes/products/38.html

 

H&R Block Best of Both program: http://www.hrblock.com/taxes/products/33n.html

 


TaxACT

Launched in 1998, TaxACT has grown to be the second most popular online tax prep software destination behind TurboTax. TaxACT, much like TurboTax and H&R Block's At Home, offers several tax prep software tiers ranging from a basic/free federal-only version for individuals to several business-specific federal and state software packages. TaxACT tends to fall at the more affordable end of the market price-wise, below even H&R Block, and offers a more á la carte product menu, letting small businesses separately purchase downloadable Business 1065, 1120, or 1120S software packages for $39.95 each, all of which include the filing of one federal business return either by mail or electronically. To file additional state 1065, 1120, and 1120S returns, however, you must pay an extra $14.95 per state and TaxACT charges another $7.95 apiece to efile each of those state tax returns. For companies with a wide geographical footprint, TaxACT also offers an All-States edition that lets you file in as many states as necessary for just $51.80.

 


For entrepreneurs looking to combine the preparation of their personal and business taxes, TaxACT does have a Home & Business package for $54.95 that bundles a Business 1065, 1120, or 1120S return (and free federal efiling) with free federal and state 1040 returns. But as with its other platforms, the filing of state business returns and efiling of state personal and business returns cost extra. As a result, the owner of a C Corporation that intends to efile both corporate and personal tax returns in at least one state would pay just over $85. This compares to the $120 price if one used H&R Block's At Home Premium & Business edition and the $246 price found by combining TurboTax's Premier and Business editions.

 


TaxACT Business Software Products: http://www.taxact.com/products/index_business.asp

 

TaxACT Home & Business Bundles: http://www.taxact.com/products/homebiz_overview.asp

SBC Team

Finding a Tax Professional

Posted by SBC Team Jan 4, 2010
What a small business should look for in a professional tax preparer

By Reed Richardson

 

Despite the seeming ubiquity of tax-prep software like TurboTax, using a paid professional remains the most popular form of tax preparation-roughly six in ten Americans are expected to use a local accounting firm or a nationwide franchise like H&R Block to prepare their individual tax returns this year. That number is even higher for businesses. For most, the choice to use a tax preparer is one based on convenience and peace of mind. Just as you wouldn't try to perform a root canal or bring a lawsuit by yourself, many entrepreneurs feel the same analogy applies to doing their taxes-let the pros handle it.

 


"If you have rental property or get a Schedule K-1 because of a business partnership or own a second home, it would probably pay to have a tax pro or C.P.A.," advises Tom Ochsenschlager, vice president of the American Institute of Certified Public Accountant's (AICPA) taxation division. Additionally, he suggests that anytime you experience what he calls a "major lifestyle change"-get married, move, have a child, get divorced, start a business-it is probably a good year to consider having a professional handle all your taxes. "They are going to suggest ways to structure your finances and minimize your taxes, such as setting up a 529 college savings plan for a new baby, that you're just not going to get to from a software program," he says.

 


Another reason to consider a tax preparer for 2009 specifically, involves the host of tax law changes that have occurred this past year. "The tax code becomes more complex every year-especially this year with so many new tax credits and other rules as the federal government attempts to provide some taxpayers with relief during the economic downturn," notes National Society of Accountants president Robert Cross. With all these constant changes and new provisions, Cross explains that it pays to have a professional tracking all the potential tax breaks for which you may qualify. "Even one extra deduction or tax credit can more than cover the fee paid to a professional tax preparer."

 


But what's the best way to find a reputable tax preparer? "Word of mouth," answers the AICPA's Ochsenschlager. "Talk to friends to see what their experiences have been like, or failing that, try contacting your state C.P.A. society to get some referrals." He adds that, if you are thinking about hiring an accountant, most C.P.A.s should agree to an initial interview free of charge so you can get a sense of whether or not their expertise matches your particular tax situation. " You'll get a real feel for what they know very quickly just by the questions they ask you," he says. "But, in the end, it comes down to comfort level. After all, if they prepare your taxes, they're going to find out a lot about you so you have to pick someone you're comfortable with." (To find a nearby C.P.A. or tax preparer, see the online search tools at the end of this article.)

 


So just how much can a small business owner expect in the way of costs if they choose to go with a tax professional? According to a biennial survey just completed by Cross's NSA this past December, the average fee charged by a C.P.A. to prepare a business tax return (1065, 1120, or 1120S) for the 2009 tax year will be between $142 and $148 an hour. According to the survey, most small business returns take four to five hours to complete, making the average total cost of preparing a 1065, 1120S, and 1120 tax return this year approximately $551, $665, and $692, respectively. These costs are relatively unchanged from what the same survey found in 2007.

 


And while tax professionals are typically the most expensive option for a small business owner, many feel it's the costs you don't see that make them worth it. Claiming a highly dubious deduction and risking an expensive audit, for example, is a trap that a C.P.A. is unlikely to fall into. "C.P.A.s have to go through 40 hours of continuing education every year," Ochenschlager points out, "and they also don't want be breaching the industry's ethical rules and earning a poor reputation with the IRS because that jeopardizes their livelihoods."

 


Tip: If you do end up using a storefront tax preparation service like Jackson-Hewitt or H&R Block rather than an accountant, you might consider requesting that your preparer be an "enrolled agent." They may cost a bit more, but they will have passed rigorous IRS exams and can represent you in the event you get audited later.

 

 

Try these online search tools o find an accountant or professional tax preparer: http://www.nsacct.org/professional.asp

 

http://www.cpadirectory.com/

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