Form W-4

 A common practice for bookkeepers, accounting clerks, HR professionals and Controllers such as myself is to advise an employee, friend or relative on how to fill out their form W-4.  This is a mistake!  Unless you are a tax-preparer, you should not be handing out ANY tax advice, including the simple W-4 form.

Frequently over the years, I have had employees come into my office asking me if they should file (with me) a new W-4 form for whatever reason (change in marital status, new baby, etc.).  This is all innocent enough however the employee usually also asks, “How many deductions should I list?”  This is where the problem comes in; we should never hand out advice or tell an employee what to put down on the form.  I have also heard that some bookkeepers will even fill out the form for the employee – another huge mistake.  Fines and penalties can result from either of the two items described above.

The Basics

Federal form W-4 is used for individuals to identify their basic information and the number of Allowances (commonly referred to as deductions) for their employer to use in determining how much federal income tax to withhold from their paychecks.

While the IRS updates form W-4 each year, once a W-4 form is filed with the employer it is to be used until a new form is given to them by the employee, regardless of how old the current version is.  It is the employee’s responsibility to update their W-4 form.  As a personal practice, I generally inform employees at least once a year, in a short paycheck-stuffer memo, stating that I have blank W-4 forms available if the employee wishes to make any changes to their filing status.

Unless provided with a State version of the W-4 form (WT-4 for the State of Wisconsin), the federal form filing status and number of allowances will be used for state tax withholdings.

Best Practice

Without providing specific tax advice you can offer a generalization of how changing the number of allowances will affect an employee’s paycheck.  For instance, one could say that decreasing your number of allowances will result in more tax being withheld from your check and by increasing the number it will result in less tax being withheld.

One word of caution however is that if an employee wants no tax taken out, while they can do this legally, you should warn them about underpayment penalties and the form may be sent to the IRS if required.

The best practice is to ask the employee how it turned out for them last year, as far as how much tax they owed or how much of a tax refund they received.  Then, work from there in changing the number of allowances, but let them be the ones that tell you and fill out the form for themselves.  Another word of caution should be given when looking at the “How did last year work out for you” scenario is given is to ask if there will be anything changing this year.  Examples include a deduction dropping off your personal tax return, getting married, having a baby etc?  Sometimes these “life events” are not administratively thought of until it’s too late and a tax penalty comes around for underpayment.

A Savings Account? Really?

Over the years I have had several employees willingly enter in zero allowances, or have an extra amount of federal (or state) taxes withheld from their paychecks in order to receive a large(r) tax refund to be used as a Savings Account.  While this is legal, and somewhat common, my personal feeling is why let the government have use of your money all year long without giving you a dime in return?  I would much rather use the proper amount of allowances so that I neither have too much or too little taken out of my paychecks.  Certainly back in the days when you could have a savings account earning 5% I would stuff the money into that account versus having it withheld from my paycheck; this is a little more difficult now with little or no-return bank savings accounts.. My point is if you are diligent enough to put money away into a Savings Account of your own you should and not use the IRS form W-4 as a tool for a way to save money.  However, if you can’t save money, and there are so many of US out there who can’t, then this may be the way to go.

Employees have the ability to go to IRS.Com to get advice and to use an interactive tool to help them calculate the number of allowances.  A useful tool and takes the liability off of the bookkeeper!

The individual (I will call him Joe) that posed the question to me about being able to deduct the cost of his “home office” on his federal tax return started out by saying, literally, that his brother in law (Let’s call him Vinny for the sake of our story), deducted some $1,400 for the use of his home office for a business related expense item.  Joe was going to do the very same thing as well, until I spoke with him and found out that one piece of information he didn’t know about (or that his bro-in-law Vinny didn’t know about).

Like in so many other instances, if you get most of the information, most of the rules, most of the regulations correct, but leave out one – you will be in big trouble with whatever government agency you are dealing with.  You won’t get “most” of the deduction if you only have most of the requirements, you won’t get any – any maybe even a fine to top things off.

Here is the rub.  Vinny was mostly correct about being able to use a home-office deduction.  He accurately calculated the square footage of the area.  The area itself was a spare bedroom that was not used for any other purpose.  I mention this only because so many of us (myself included) have space in a shared area, a living room, a family room etc.  Deduct-ability of this area gets into numerous gray-areas that I simply state I would not include them, but if the business owner persists, then it’s something for him to bring up to his tax preparer.

Back to our story.  The area of the home-office was accurately calculated to arrive at the pro-rated percentage of home expense.  Mortgage interest, utilities and insurance were all expenses that could be pro-rated based on square footage as a deduction for the home-office.  Vinny was also correct when he stated that in order to use the home-office deduction that the home must be the “principal place of business” and used “regularly and exclusively”  What Vinny didn’t know, or did not tell Joe was the fact that you can’t deduct the home-office expense if all expenses for the business are grater than the net income of the business.

In other words, if your home based business had a loss for the year, you can’t use any home-office deduction whatsoever.   At most you would be able to deduct a portion of the home-office deduction to the point of a zero net income.  A fact that almost got Joe into a heap of trouble since his home based business did indeed have a loss for the the year.  His plan was going to be to add that home-office deduction and have even more of a loss which would of course offset other income on his tax return.  Joe had most of the information correct, but the one part he didn’t have would have cost him all of the deduction to be disallowed and who knows what type of underpayment of tax penalty not to mention the red flag he just threw up in the air saying “Look at me, I’m running a home based business and I am reckless in how I categorize expenses”.  Something federal and/or state taxing authorities might notate if they saw this erroneous deduction.

Get the facts, and don’t get them from Vinny, or your own brother in law.  Her is a link to the IRS website page that discusses the home-office deduction.  You must read Publication 587 – Business Use of Your Home to see ALL of the rules and regulations of this potentially valuable business expense.  Certainly discuss the matter at length with your CPA or tax preparer.

My bottom line recommendation is to document as much as possible.  Take pictures and or a video of the space, write down the exact dimensions of the room, write down the exact calculation you performed (and show your work) of how you obtained the percentage.  Of course, keep records of all expenses that you are taking a percentage of including copies of your monthly mortgage statement, insurance bill, repair bills etc.  Remember, if you don’t have documented proof of this deduction, the IRS will be forced to estimate it for you!

It’s no rumor, but I’m not getting too excited just yet.  Allow me to explain.

Currently, in general, a company must issue a 1099-misc to any company that provides services, that is not a corporation, that is not an employee (W-2 should be used), and the dollar amount is over $600.00.

Most common examples are accountants, lawyers, consultants – those individuals that provide your company with some type of service – no tangible goods.  Other uses are for landlords, if you pay rent, you should issue a 1099 to the landlord for the amount of rent you paid that year.  Finally, the other common use is for medical payments.  If you pay a 3rd party provider for sick pay, or if you pay a company to do drug tests on new employees etc, you should issue them 1099s.

Simple enough.  Not too complicated, not too taxing…

Enter in the proposed laws effective with the calendar year 2012.

About the only thing that remains the same is the $600 threshold.  Current lawmakers want all companies to issue Form 1099 to any individual or company for any goods or services.

What that sentence just said was that your company must issue a 1099 to every single vendor they have regardless what they purchase from that vendor, regardless if they are a corporation or not.

This is huge!

Companies will go from issuing a typical 3, 4 or 5 1099′s to a hundred or more forms!

That’s the current proposed law to take effect in 2012.  I personally feel that changes will be made and the lawmakers will realize just how much of a burden this will be on the small business owner.  I hope that they will realize that every company will have to request a W-9 form (request for taxpayer identification number) from every vendor/supplier they do business with.

AND I hope the government will realize that same company will have to issue a like W-9 form and issue one to every one of their customers!  Not to mention that these 1099 forms are printed up special for the IRS so they can’t be simply printed off your computer printer.

AND that’s assuming that your accounting software can even print them.  Many software packages won’t allow printing of 1099′s unless you subscribe to a “service” or their “maintenance plan” costing again the small business owner more money that they don’t have.

Let’s hope I’m right and changes will be made prior to the 2012 deadline.  If not, you better get ready for issuing and collecting more useless government paperwork!

Enjoy your end of year, this may be the last “easy” one!

Thanks for reading!

Mark

There is a common misconception in business that when you purchase something and the vendor/supplier does not charge you sales tax for whatever reason, the business is not responsible to pay the sales tax.  They treat it like a discount, a bonus, yippee – I screwed the MAN.  Well, sorry folks, businesses ARE responsible to pay sales tax (retail and manufacturing exemptions noted).  If sales tax was not previously paid, and the purchased was being used in a taxable manner USE tax is due.  Here are a few common examples of USE tax:

RETAIL – A business that purchases and re-sells items is called a retailer, or wholesaler, depending on exactly who they are selling products to.  If the business sells “Widgets”, they do not pay, nor are they required to pay sales tax from the entity that sold them the Widgets (supplier, vendor, and distributor).  The business must provide a Certificate of Exemption in order for the supplier not to charge sales tax.  When the business then sells the individual Widgets to the public, sales tax is charged, collected and paid to the state.  This is all fair, common and straight forward.  The problem however comes in when the business USES the Widgets for either themselves, or “samples” out the widgets to prospective customers.  Let’s use copy paper as an example for the above Widget.  A copy store purchases a lot of paper to resell to the public.  However, there is going to be some paper that the company uses itself right?  Now a business does not have to go crazy to the page tracking, but some amount should be used.  This same store may give reams of paper out to prospective customers as samples in hopes that the customer will purchase many cases of that paper.  These are two situations when USE tax comes in.  Companies sometimes get into the habit that they are automatically tax exempt because the bulk of their business is reselling items that they purchase.  However, you can’t simply provide a tax exemption certificate to every one of your suppliers and not pay sales tax.  Office supplies, office furniture, uniforms, shipping supplies, tools etc.  These are all common items that are used in a business in a taxable manner and yet sometimes they are not paying sales tax on those purchases.  Being Tax Exempt because you are a retailer is much different than being Tax Exempt for being a Charitable Organization or a Non-Profit.

MANUFACTURER – Another area where Use tax comes to play is in the manufacturing arena.  Again, as with a retailer the bulk of your vendors or suppliers were probably provided a Certificate of Exemption since when you purchase raw materials, or materials that your business will manipulate into another product to sell, are not required to pay sales tax.  The sales tax is paid when the manufacturer sells the product.  However, not all purchases are considered tax exempt, depending on how they are used within the company.  For example, I once worked for a manufacturer that painted metal parts and pieces that eventually made up office workstations.  The metal parts were certainly exempt.  The paint was certainly exempt, but what about the masking tape used while painting?  What about the stretch wrap used when delivering the parts to the end user?  All actual questions that came up during an audit of my records.  In the end I was allowed to purchase the stretch wrap without paying sales tax, but not the masking tape.  The tape was not entirely used in the manufacturing process – it was like a tool that was used in the process, but not in the actual end product.  Another area that was caught during this audit was on purchases from the local hardware store.  When we opened up a commercial account with the hardware store, it was set up as being tax exempt.  We provided our exemption certificate that showed our “sellers permit” number and we were good to go.  The account was set up for us to purchase a case of primer in spray cans that we used now and then.  We didn’t use a lot of them, but when we needed them, we would just typically run down to the hardware and grab a case or two.  This is all fine and completely legal.  However, this account was also used to purchase miscellaneous items that our company used in the day – to – day operations.  Floor cleaners, small tools, light bulbs etc would be purchased on this account with no sales tax being paid.  BAM – you have USE tax, plus penalty due when the auditor comes around.

ONLINE – Out of State – This is a very common area that both businesses and as tax payers, we as individuals are forgetting about Use tax.  If your business purchases office supplies from a cheap, out of state supplier, they may not be required to charge sales tax.  If they don’t, you are responsible to pay Use tax on those items.  I believe the rule is that if you sell via e-commerce you are not required to charge sales tax unless you have a brick & mortar operation in that state.  So if you happen to purchase an office chair from a guy out in California who has no other presence in your state, he is not obligated to charge you sales tax.  You, has the end-user however, are obligated to pay USE tax on that purchase.

Why do we pay USE tax?  Simple, if we did not have to pay USE tax, everyone would simply purchase items out of state to avoid paying the sales tax on those purchases.

Use tax is a simple amount (exact same rate as applicable sales tax) that can easily be tracked and paid right along with your sales tax on a monthly/quarterly/yearly basis.  It is “due” when your sales tax return is due.  If you are a retailer or a manufacturer and never have any USE tax, that would be a huge red flag and I would say you most certainly will be audited eventually by the state.

When business owners start up a new business one of the challenges for them is state sales tax.  What is taxable?  How much do I collect?  When do I have to send the tax into the state?  All good questions that a new business owner will have.

Chances are that if you will be selling products in the State of Wisconsin, the transaction will be taxable.  You are obligated to collect the correct amount of sales tax and remit it to the State.  When you have to remit to the state is determined by your registration form when you filed for a seller’s permit number.  The state may change your filing frequency if your sales change from the previous year of from the amount indicated on the BTR registration form.  Our state has a pretty good website that will answer most of the other questions of a new business owner.

After going through several sales tax audits for past employers and clients, I just wanted to bring up a few tips so that you may perhaps avoid a time consuming and expensive audit experience.

Trouble issues I have seen are:

Tax Exempt Customers

Selling items for “Cash” or nice even amounts

Collecting the correct counties tax

Use Tax

If your customer is tax exempt, you MUST obtain a sales tax exemption certificate from them.  If no form is on file, and you are audited, even if the name of the customer was St. Joseph of Israel, they are going to be considered taxable without proof otherwise.  If you sell products to another dealer, commercial account, or retail store etc., you again must obtain an exemption form from them as well.  Tax exempt organizations are used to being asked for a copy of the certificate.  Some sales folks feel that they are inconveniencing the customer asking for the form; however, it’s a much greater inconvenience for the business owner when they get audited and then have to go back and request certificates from these same customers for sales that were possibly made several years ago.

Sales tax is to be clearly identified on all invoices. Depending on your accounting system, this may or may not be a challenge, however sales tax should be clearly shown on invoices to first show the customer you are collecting sales tax and secondly to keep record of the appropriate amounts to remit to the state.

Laziness or the theory of “perceived discount” sometimes brings about a sale in an even amount to make it easy on the customer for the transaction to move forward.  “$10.00 cash gets you this widget”! Regardless if weather it’s a salesperson who does not want to count out or charge a customer change, or if the sales person is sending out a perceived discount to the customer, sales tax must be identified in each and every sale.

If you sell a product for $10.00 even, you still must record how much was in sales and how much was in sales tax.  For Milwaukee the sales tax is 5.6%, so the product sales would be $9.47 and sales tax would be $0.53 (Divide the sale amount by 1.056 to get the product amount).

New business owners sometimes are not aware how they should deal with county sales tax.  You need to account for all sales tax, separately by county, so that you will have that information for the ST-12 form you fill out for the state.  The general rule of thumb is where did the product or service “exchange ownership”?  If you have a brick and mortar store, this is easy, you sell widgets out of the store, and then whatever county your store is located in the county sales tax you should charge.

If you deliver product however and have a brick and mortar store, it’s the customer’s location to where you are delivering the product that must be taken into consideration when charging sales tax.  Example is your store is in Milwaukee, but you deliver, for a fee, the product to Waukesha County.  You should charge 5.1% and track those sales separate from the Milwaukee County sales.  “Ownership” was exchanged when it was transferred out of your delivery truck to the customer.  If this same customer came to your store and picked up the product, then they should be charged Milwaukee County sales tax.

Discounts the State allows you when you compile the sales tax return shall be considered income.

If the state has determined that you should remit the collected sales tax to them annually, I would recommend that you set up a second checking account or savings account if one would be available for your business and deposit on a monthly or quarterly basis the amount of sales tax liability that has been collected.  January 31 has a way of sneaking up on you and by not keeping the sales tax monies available may cause some issues and penalties if you don’t have it when the sales tax return is due.

The most common issue that comes from an audit is Use tax.  That will be the subject of my next post so please stay tuned!

I wanted to bring up common issues with sales tax; this post is by no means an all inclusive sales tax guide for the State of Wisconsin.  There are many industry, product and service-specific issues that should be researched by a new business owner.  I highly recommend a new business owner to contact the state and verify issues with them (take names, ID’s and phone numbers – all date stamped).  Another way is to simply do a little research on what your competition does.  Do all of your competitors charge sales tax for their IT services?  If so, you probably should too!

Once you have your business name and business checking account established you must register with the State of Wisconsin since you will be conducting business in the state, as well as possibly collecting sales tax.

If you are selling anything tangible you will be required to obtain a Seller’s Permit.  If you will have employees you are required to obtain a withholding number.  In both cases since you are also required to obtain a Registration Certificate you will be able to receive these numbers at the same time with the same application.

Form BTR-101 is the registration form that the state requires to be filled out.  It may be completed online or by the mail.  If you file the form online I highly recommend you print out a copy first since you will be doing some information gathering when completing the form.

Part A – New Business

Part B – Select all applicable areas

Part C – Depends on business structure you have chosen -If you choose an LLC, select both LLC and Disregarded as an entity separate from it owner.

Part D – NAICS codes can be found from my website here: http://www.naics.com/search.html

Part E – Estimate the date of when your first sale will be made (2 weeks from today).

Estimate your monthly sales – depending on your estimates you will be required to file a sales tax return either annually, quarterly, monthly or by the 20th of the following month.

Estimated monthly purchases subject to USE tax.  I will write an additional blog post on USE tax in the near future as this seems to be a trouble spot with new business owners that purchase products for re-sale.

Yes to business being operated all 12 months

Leave line 3 & 4 blank (your fiscal year ending date will be December 31)

Part F – Enter date of when you think your first payroll will be made.  Under Item #2 again they are asking what your estimated withholding tax will be, as with sales tax the report and deposit of the withholding will be contingent on your answer.

Part G – Your name address etc.  If you are an LLC, your title is Member

Part H – Fill in information about your business checking account you just opened up.

With the state’s new “My Tax Account”, they have made it very easy to file reports and deposit taxes due.

After the state receives your application, a Registration Certificate will be mailed back to you with your Seller’s Permit Number, your Wisconsin

COST = $20.00 (two years, $10.00 annual renewal afterward)

If expenses are paid out prior to the company being set up, a business owner just merely needs to track those expenses, and enter in a journal entry to accurately record what those expenses were for.  You may then cut yourself a check for the total of those expenses, enter the amount in as an owner’s investment, or treat it as a loan outstanding.  The main thing is to properly segregate business expenses from personal expenses.

The Company Checking Account

Now that you have made the previous decisions as to what type of entity you want, if you are going to form an LLC or not, and you have received your federal ID number if required, you can open up a business checking account.

A checking account strictly used for business transactions is highly recommended. – Avoid using cash to pay for any expenses and deposit all cash you receive into your business checking account – itemizing all deposits as to who or what they are from.

This new checking account is solely used for your new business’s financial activity.  You will record all income and expenses for the business.  You do not want to co-mingle personal funds in this account.

Personal funds going into a business checking account are called Owners Investment or Owners Contributions.  Funds going out of the business back to you are called Owners Draws*.  Your business’s financial statements must keep track of these transactions.  If you have personal bills being paid out of a business checking, you are opening up yourself to many potential errors and it can become a nightmare not if but when you are audited to provide explanations as to what every check was written for (many years later).

Any bank is fine; you may start with where you currently bank if this location is best for you or have established a banking relationship already.

US Bank – a good option for a new business checking, no monthly maintenance fees if you keep within certain limits (75 checks per month etc).  Watch the potential for fees however.

Normal check register as you have with your current personal checking account is fine; there are some advantages to having the 7-ring binder checking account.  Separate deposit book with duplicate copies is recommended.

If you find that you are paying for a lot of expenses using cash (a check card is preferred over paying cash) you may think about having a petty cash fund for these expenses.  Paying for cash does not exclude the need for obtaining a receipt.  A petty cash fund is like having another bank checking account that is reconciled on a monthly basis.

Your checkbook register (stubs) along with your deposit book will be used at a later date either by yourself or someone else when “doing the books”.

*I will discuss account names in further detail later.

In my current blog series of the list of items that one needs to do when starting up a business, we find ourselves with yet another question, do I need to have a federal ID number or not?  In my opinion, I don’t see any reason not to, but here is some information that may help your decision one way or the other.

Per IRS regulations you must have a federal EIN number if:

Your business structure is a partnership or corporation.

You have or will have employees.

You file any Employment, Excise, Alcohol, Tobacco or Firearm tax returns.

Have or will have certain retirement plans.

Are a Trust, Estate, Real Estate mortgage investment conduit, non-profit organization.

A Farmers coop or plan administrator.

Some banks also may require a FEIN to open a business checking account.

An LLC is not required to have a FEIN if the classification is sole-proprietor (Disregarded Entity). If you don’t have a FEIN, you MUST use your social security number on all forms.  It’s easy, it’s free and it may avoid ID theft, I highly recommend obtaining a federal ID number.

To obtain a FEIN you can apply online at https://sa1.www4.irs.gov/modiein/individual/index.jsp or call  800-829-4933 or complete and mail out form SS-4.

Things are happening now!  You are going into business, you have a killer company name, you have an LLC and you have a brand new federal ID number.  It’s now time to open up that company checking account.

As always, care should be given prior to completing the following tasks to avoid further cost and the hassle of correcting simple mistakes.  If you have decided to form an LLC, the following two steps are needed:

An LLC may be set up all on-line by simply clicking to the State of Wisconsin, Department of Financial Institutions at

www.wdfi.org/corporations

Here you can find out further information on the process, research existing names, and create your LLC.

LLC Name The first step is to think of a name for your business.  On the page listed above, click on “Corporate Registration Information System”.  From here you will be able to search the current businesses that have registered a name with the State of Wisconsin.  You must have a unique business name that is distinguishable from all others listed.

Distinguishable meaning you can’t use Best Oil, LLC (Best Oil Co. is already being used)

Do research – Internet search, Yellow/white pages make sure it’s a unique name.  See my previous post on business naming for ideas and suggestions.

Think of how you will be branding this name – business cards, advertising, web presents, ….

This is a good time to consider a domain name for your business.  You may be able to select ABC Oil, LLC in the State of Wisconsin, but www.abcoil.com is long gone….

Create the LLC The second step is the actual creation of the LLC – online.  From the page listed above, click on “Create an LLC or Business Corporation”, then select “Wisconsin Limited Liability Company”.  The following information will be required:

Name of the LLC

Registered Agent (YOU)

Management of the LLC (Typically management is vested in a member – YOU)

Organizers (YOU)

Drafter (YOU)

Contact (YOU)

You fill in your name and address over and over, enter in your credit card information and that’s it!

COST = $130.00 First year, $25.00/year renewal fee
Make sure to print off a copy of the “Articles of Organization” for your records.  After submitting the form and payment to the State of Wisconsin, you receive an email first confirming the submission, and then a second email stating that the LLC was approved by the state.  In that second email there will be a link to the “Filed” version of the “Articles of Organization” which will be needed when you set up your business checking account at the bank.  Print several copies to have available for future use.

As always, if you have any questions on the above, feel free to contact me directly!