How to Crack the 1099-NEC Code

Every Year as tax time rolls around inevitably, I get the frantic phone calls from potential clients because there behind in getting their 1099-NEC filed. Their vendors and contract employees are screaming bloody murder. If this sounds a little bit like you it may be time to up your game.

Just remember that as a small business owner you may both send a 1099 and receive a 1099. We’ll look at both.

To be clear there are MANY different 1099 forms we are only going to look at the 1099-NEC. If you have questions about the other ones send us an email and we’ll try to answer the questions for you.

Free 1099-misc tracking sheet: Get our ” 1099-Misc Spreadsheet” that lets you keep track of your vendors and contractors all year long. Make tax season a breeze.

Get the 1099 Tracking Sheet Here

What the Heck is a 1099-NEC Form Anyway?

The first thing to understand is what is the 1099-NEC and why do we need it.

The form is used by companies to tell the IRS that you paid an individual, non-employee money for services over $600.00 annually You know I love examples so ….

Let’s say you hired a web design company to redo your website and paid that company $1000.00. At the end of the year (January 31^st) of the following year, you will need to send three entities a copy of the 1099-NEC.

The IRS
The state government
The company or individual that you paid.

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Andrea's Tip

This includes all independent contractors who do work for you. If your’re not sure you can check out our article So, you’re thinking about making a new hire for more information on independent contractors vs. employees.

Now if you have someone work for you as an Independent Contractor you can request a Taxpayer Identification Number and Certification. This can be used to verify the TIN or the Social Security Number or an Employer Identification Number (EIN). Though, to be honest you probably won’t need this. But if you do You can find the information here.

How do you know if the person you hired needs you to issue 1099? You need to request their W9. The W9 proves what the type of business is. Corporation, Sole Proprietorship, Limited Liability etc. The W9 is what proves it. If you ever get audited, they will want a copy of that on file for at least four years, If you don’t have them on file you can send the form here

Going back to the Web developer that you paid $1000.00 to redesign your website. Before they get started or before you pay them even one dime get their W9. If you need a copy you can find it here. (Insert Link)

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Andrea's Tip

Going forward there is going to be a LOT more changes in documents you need to fill out and send to contractors, vendors or suppliers. Make sure you get a W9 from each of them BEFORE you pay them. (Even if they are a corporation).

What Information Do I Need to Create the 1099-NEC

The only thing you need to create 1099-NEC is their W9. It will have all the information to prepare and send the form to the three groups mentioned above.

The second thing you’ll need is the actual form. Believe it or not, you won’t be able to download a refillable form and send it out. You will need to purchase the form. Online or by mail. However, in order to mail this information to the IRS you will need the RED-INK Forms that you buy in packs at your local office supply store.

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Andrea's Tip

You will incur penalties if you try and use the 1099-Misc form downloaded from the website so when you order you may want to keep plenty on hand.

You will have to order the form from the IRS. Which you can do Here

How to Electronically File the 1099-NEC Forms

1099-Misc are really easy to file online. You can use an online service and file them electronically, Usually for less than 5 dollars for each form.

The Services will do the following automatically

E-File your forms with the Federal and State Government
Mail a copy of 1099 to your contractors
Give you a PDF copy for your records

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Andrea's Tip

They will also email a copy of the 1099 to your contractors….Please, Please, Please do NOT DO this…not only does it send your personal EIN, or SSN unsecurely but it also shares the contractors’ information and this is an easy way for TAX Identity Theft to occur.

Some good 1099 companies that will file for you

1099online

Efile4Biz

Yearli

What Happens if My Client Doesn’t Send Me a 1099-NEC Form?

Let’ say you are supposed to receive 1099 from a client and January 31^st rolls around and nothing shows up. You call your client, and they play hide and seek with you. Well, you could go pound on their door but hey these things happen. First off, hopefully, you got their information EIN, SSN or Tin but if not, you will need to report the income anyway (as long as you earned over 600.00). While it’s nice for the IRS to have something to cross check against your income, it’s not mandatory for you to have it to report the income.

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Andrea's Tip

In case of an audit, you want to have a back up invoice or a receipt of payment so that you can verify your income for that client.

What Happens if My Vendor or Contractor Refuses to Send me a W9?

I try not to worry about why someone might refuse to fill out their W9 or send me the information. But it happens far more often than I would like for both me and my clients. The fines can be big, and it doesn’t excuse the business from filing the 1099 and some more issues.

Make sure you made a request in writing for the documentation. This could be an email form. You’ll need to request this at multiple times throughout the year. Keep track of this because as you know documentation is everything for the IRS.
- Make the request for the W9 at the beginning of the relationship
- Make a second request prior to December 31^st
- And a third request Prior to January 31^st of the following year.
If you’ve sent the request and you still have the invoices due to the vendor independent contractor, you’re going to have to begin backup withholding of 24% IMMEDIATELY. The money you withhold will be reported on Form 945 and sent to the IRS.

Note* If no money is still owed you can skip this step

You MUST file the 1099-NEC even if they do not send you their W9.

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Andrea's Tip

You will file the 1099-NEC with all the information that you have. If you have a copy of their EIN great but if you don’t you’ll have to Mail the 1099 with Refused where the EIN or SSN will go.

2. If you’ve sent the requests and you still have invoices due to the Vendor you’re going to have to begin backup withholding of 24% immediately. The money that you withhold will be reported on the Form 945 and sent.

3. You will still file a form 1099-MISC EVEN if they Refuse to send you their TIN, EIN or SSN.

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Andrea's Tip

You will not be able to fill out this form electronically because you can’t have blank spaces . You will need to complete the Paper Form Write the Word REFUSED where the TIN, EIN or SSN is supposed to go and put all the information you do have on the document.

How Do I Correct a 1099 Form?

Hey, mistakes happen you type in a wrong number or maybe you were trying to get ahead of the game, and you filled out the form wrong. No worries it’s pretty easy to correct.

File out a new 1099-NEC form and Place an X in the “VOID” box at the top of the form and then issue a new 1099 with an X in the “Corrected” box. The enter in zeros for all the money amounts. Send the corrected form to the IRS and make sure you send a copy to your Vendor/Supplier or contractor.

Free 1099-misc tracking sheet: Get our ” 1099-Misc Spreadsheet” that lets you keep track of your vendors and contractors all year long. Make tax season a breeze.

Get the 1099 Tracking Sheet Here

What Happens if I file My 1099-NEC Forms Late?

I know that filing a 1099 form may be rushed and you may not be able to get the form in on time. You should, however, take the penalties very seriously as they can be quick to rack up.

The amount of the penalty is based on when you file the correct information and goes as follows:

1099-NEC	Penalty (per form)	Maximum Penalty (Annually)
Less than 30 days late	$50.00	$194,000 for small businesses, $556,500 for larger businesses
More than 30 Days Late	$110.00	$556,600 for small businesses, $556,500 for larger businesses
After August 1, 2023	$270.00	$1,113,000 for small business, $3,339,000 for larger businesses

As you cnn see the penalties (not even including interest) are substantial. The IRS desginates a small business as making less than $5,000,000 per year on average over the last three tax years.

Putting it All Together

I know that there is a lot of information here but if you’ve read through the article you now have all the tools you need to file your 1099-NECs without a penalty. If you’re struggling to put your taxes together, you can feel free to check out some of our other blog posts like The Big Fat List of Small Business Tax Deductions or our Tax Preparation Handbook.

If you have questions or need a consultation you can always talk to us.

The Big Fat List of Small Business Tax Deductions for 2021

As a business owner, you have a huge amount of control over your business expenses….that means if you have a plan for your business in the up coming few years you can control your tax deductions. But you need to know a few things:

Pick an Entity Type that works for you

Most companies start out as a sole proprietorship, an LLC or a Partnership. You may need to determine when it’s appropriate to change over to a corporation as it may save you some money in the future.

Whether you have an existing business or you’re just starting out, you have some choices about your entity type but you should contact an attorney to weigh some pros and cons of each one depending on the industry and type of your business.

Tax Law is Complicated

Major legislation, court cases, IRS rulings, and even natural disaster can all affect your taxes and they are constantly changing.

Many changes can benefit you as the business owner-but only if you know about them and you have time to respond. Waiting for a once-yearly meeting with your CPA may not leave you enough time to learn about and manage these changes.

For example, in 2005, after hurricanes Katrina, Rita, and Wilma struck the U.S. the government created several short-term tax savings opportunities for those affected.

Make sure you check in with your tax specialist throughout the year so understand how these may affect you and your business.

There’s a Difference Between a Tax Credit and a Tax Deduction

Tax credit will reduce the amount of tax that you owe, giving you a dollar for dollar reduction of your tax liability. Let’s say you’re eligible to receive a tax credit for hiring a military veteran of $1,000. This will lower your tax bill by $1,000. So, if you owe $10,000 you would only pay $9,000. Now let’s say you actually get a refund of 500.00 if you add a tax credit instead you’ll receive $1,500.00

Tax deductions reduce how much of your income is subject to taxes to begin with. Let’s say you make 100,000 but you have expenses of $10,000 your taxable income would be $90,000. To reduce your tax, you need to keep track of your deductions (the most hated part of being a small business owner).

A tax deduction is an expense that you can deduct from your taxable income. You take the amount of the expenses and subtract that from your taxable income. Essentially, tax write-offs allow you to pay a smaller tax bill. You just must make sure that your expenses are fitting the IRS criterial of a tax deduction.

Below is a list of the standard deductions mostly used by sole proprietors, and s-corps or companies organized as partnerships and limited liability companies (LLCs). Most of these are for your business but as solopreneurs you should be aware of some more personal deductions that business owners can take as well.

Don’t Have Time to Read the Article?

Download the PDF version of the article and keep it with you for reference. If you purchase something, check to see if you can take a deduction.

Grab The Big Fat List of Tax Deductions

Expenses You Can Write Off for Your Small Business – Capitalized Expenses

Depreciation

Need to buy a new computer, office equipment, even a vehicle. Then you’ll want to look at bonus depreciation where you can write off 100% of the purchase cost. The Tax Cuts and Jobs Act, enacted at the end of 2018, increases first-year bonus depreciation to 100%. It goes into effect for any long-term assets placed in service after September 27, 2017. The 100% bonus depreciation amount remains in effect from September 27, 2017 until January 1, 2023. If you want to know how you can use this for a vehicle check out last year’s Last Minute Tax Savings on Cars.

Bonus Depreciation

Though bonus depreciation is great it may be more tax advantageous to use regular depreciation that can be amortized over a certain number of months and years.

Cost of Goods and Services

If you produce a product or even if you purchase them, those expenses will reduce your income, so your income is lower. Just remember that these expenses can NOT be deducted as a regular business expense at the same time. If you’ve itemized them under cost of goods sold you can’t take them as a business expense. If you’re not sure what is considered a cost of goods sold you can check out our article on What the Heck is Cost of Goods Sold.

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Hot Tip | Check Your Costs

Costs over $50,000 are subject to certain limitations and at this point you should contact a professional

Start Up and Organizational Costs

If you started your business in 2019 and beyond, and spend up to $5,000, you can deduct the full amount in the first year without having to capitalize the expense. If you spent more than $5,000, you can deduct a percentage over 15 years. Just make sure you know how much for each year.

Self-Employment Expenses to Deduct from your Small Business Taxes

Health Insurance Premiums

To give you a break the US allows you to deduct your health insurance premiums paid for yourself, your spouse and your dependents under the age of 27 on your personal income tax.

If you own an S-Corp, make sure you own more than 2%. Or you can have this as a business expense and have your business pay for it without it coming out of your personal income.

Retirement Plans

Reduce your tax obligations by contributing to tax deferred retirement plans like SEP IRA, SIMPLE IRAs and 401(k)s. Checkout the IRS site on how much you can contribute and the limits.

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Hot Tip | Retirement Plans Help You Plan for the Future

Small business owners are responsible for their retirement so make sure your nest egg is getting bigger by putting some money away.

Self Employment Taxes

You still must pay a lot in social security, Medicare taxes that you pay throughout the year however, you may deduct 50% of it off your taxes.

Standard Small Business Tax Deductions

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Hot Tip | Good Records Increase Tax Deductions

Just taking the deductions in many cases won’t get you your deductions but having great records will increase the likely hood of you getting the most deductions. And reduce costs.

Advertising

You already know that providing amazing goods and services isn’t enough to make your business succeed. You also need to advertise so your potential customers can find you. Advertising and marketing dollars can add up fast, but fortunately, they are all tax-deductible. You can deduct everything that you use to advertise and market from business cards, to google ads.

Bad Debt

Sometimes clients just don’t pay (this sucks! but it is what it is). You can deduct them. You’ll just need to make sure that your bookkeeping system reflects them, and you have the paperwork showing that this money is uncollectable

Bank Fees

Pesky little 12-dollar charges and ATM fees suck to pay but they are tax deductible.

Advertising

Bad Debt

Bank Fees

Pesky little 12-dollar charges and ATM fees suck to pay but they are tax deductible.

Car and Truck Expenses

Let’s face it the biggest deductions you can make right away in your business is your car. Make sure your keeping track of your expenses with a good mileage tracking program like MileIQ. If you don’t want an automated way you can keep a log in your car and fill it out as you go. Make sure that you include all the expenses for the trip including:

Parking
Tolls

For LLC and Sole Prop you’ll take the standard IRS mileage rate of .56 for 2021on every mile driven for business.

S-Corp

S corps can make this a little bit more fun by filling out expense reports and reimbursement you and your employees for mileage. Just make sure you have the reports and have filled out an expense report. You’ll want to create an Accountable Plan for this expense.

If you think you are too small to be effective, you have never been to bed with a mosquito.

Betty Reese

Carryovers from Previous Years.

Some small business tax deductions carry over from year to year. For instance, if you had a capital loss in a previous year, you may be able to take it in the current year. Specifics often change from year to year, to make sure you’re up to date on the latest IRS regulations.

Charitable Donations

Yes, your small business can donate to charity and take a deduction for it. It can donate supplies, money, or property to a recognized charity, but pay attention to the rules before you go crazy giving stuff away. Donations of your time don’t count, and you can’t wipe out your business income with donations. Also, check with the IRS before you make a charitable deduction to make sure the organization you want to support qualifies for the deduction.

Cleaning and Janitorial Expenses

Do you have a janitorial service come in and clean your offices? Well that’s tax deductible too. If you use a cleaning service for your home and they clean your office a portion of that charge is tax deductible too.

Conventions and Trade Shows

Conventions, trade shows that networking group and any associations you belong to are all deductions for your taxes. Make sure that you keep good records and can prove that the events are related to your business.

Disaster and Theft Losses

If your business is unfortunate enough to suffer theft or to be the victim of a natural disaster during the year, you may be able to turn any losses that your insurance company didn’t reimburse into a small business tax deduction.

Don’t Have Time to Read the Article?

Download the PDF version of the article and keep it with you for reference. If you purchase something, check to see if you can take a deduction.

Grab The Big Fat List of Tax Deductions

Education

As a lifelong learner, I take pride in my education whether it’s a seminar on the latest blockchain technology or new tax changes for the year. Thankfully, you can claim these as education expenses and deduct them from your taxes.

You must pay taxes. But there’s no law that says you gotta leave a tip. Morgan Stanley

Furniture and Equipment.

Did you buy new chairs for your eat-in bakery or new juicing blenders for your juice bar this year? You have a choice regarding how you take your small business tax deduction for furniture and equipment. You can either deduct the entire cost for the tax year in which it was purchased, or you can depreciate the purchases over a seven-year period. The IRS has specific regulations that govern your choices here, so make sure you’re following the rules and make the right choice between depreciation and full deduction.

Insurance

Every business should have business insurance which is tax deductible. So, whether you have business, malpractice, business continuation or errors and omissions you can deduct it.

Intangibles

Getting a trademark or need to pay for franchise fees guess what? They’re tax deductible.

Interest

This one is often overlooked but you can deduct the interest on a business loan. Make sure you categorize the money as principle and the interest as interest and your good to go. It doesn’t count if you take out a home loan only business loans count.

The difference between death and taxes is death doesn’t get worse every time Congress meets. – Will Rogers

Do you know what your direct labor is costing you?

Home Office

If you do a lot of work at home, it may be time to take that deduction. I know there is a huge myth about red flags and the IRS but if you keep your paperwork in order an audit will not be an issue. Let’s take what we can get from the government.

There are two methods for taking the home office deduction the simplified option and the regular method. With the simplified option you cannot exceed 300 square foot of space and it must be exclusively used on a regular basis. (so, you do a lot of administrative type work at home then this would be a great example. This works even if you have a separate corporate or business office.

You can check out the simplified option vs. the regular method on the IRS website. You can deduct or expense the following items using the same percentage as the office space

Mortgage
Real Estate Taxes
Utilities
Internet
Phone

Home Renovations and Insurance

Did you take a deduction for a home office already? If so, business expenses related to any renovations to that part of your home are also deductible, and so is the percentage of your homeowner’s insurance that covers that part of your home. Remember, all small business deductions related to home offices only apply if you use part of your home exclusively for business.

Legal, Accounting and Professional Fees

Yes, if you can deduct my services. Any consultant or professional that you hire to help you make money or deal within your business are deductible. So if you need a lawyer, an accountant, or a business consultant you can add them to this list.

Machinery and Equipment Rental

Sometimes renting equipment for your coffee shop or concession stand is beneficial to your bottom line, since you can deduct these business expenses in the year they occur with no depreciation.

Maintenance, Repairs and Renovations

Move into a new space as you expanded this year? Or maybe just routine maintenance on your existing space well those are tax deductible too. If your using the home deduction you can and have renovated your office space, you can deduct those too.

Meals and Entertainment

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Hot Tip | Deduct 100% on Employee Activities

Throwing a Christmas Party or a Picnic for your employees? You can deduct 100% of the costs involved. Just make sure you categorize them separately from the client meals you attend.

Yes, you can take small business deductions for schmoozing your clients, if you do indeed discuss business with them, and if the entertainment occurs in a business setting and for business purposes. In some cases, you can’t deduct the full amount of your entertainment expenses, but every bit helps.

Here are some tips to guide when and what you can deduct:

Exceptions include lavish and extravagant meals.
At least one employee must be present at the mealor outing.
The food and beverages must be provided to a current or potential business customer, client, consultant or similar business contact.
Food and beverages provided during or at an entertainment activity may only be deducted as long as they are purchased separately from the entertainment or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

You may deduct 100% of the costs of:

Company cafeterias and executive dining rooms.
Recreational and social activities held for employees.
Meals provided as compensation or part of the company culture.

Mortgage Interest

If your business owns its own building, even if it’s just a hot dog stand, you can deduct all your mortgage interest.

Non-Cash Gifts and Rewards

You can claim up to $25.00 for business gifts that you give to each client or potential customer. So if your giving out Christmas gift cards your good to go. You can spend as much as you want but only deduct the $25.00.

Office Supplies, Tools and Services

Even if you aren’t taking the home office deduction all of your business supplies and office expenses are tax deductible as long as they are used within the year they’re purchased. Make sure you file your receipts with a great app like Expensify. If shipping samples are a part of your business you can also deduct the postage, delivery and shipping costs (this is assuming you haven’t taken it in Cost of Goods Sold).

The hardest thing i the world to understand is the income tax – Albert Einstein

Qualified Business Income

Remember to claim the 20% deduction on qualified business income. This rule was a part of the TCJA and you can find out more on what qualifies here.

Free Fillable Accountable Expense Policy: Get our ” Sample Expense Policy and Calculator” that lets you craft an expense policy that saves you and your employees’ money.

Grab the Accountable Plan Template Here

Rent and Property Leases

Rent a space in the mall go ahead and deduct those expenses. You can also deduct the expenses related to leasing a vehicle and equipment at 100%.

Salaries and Wages

If you’re a sole proprietor or your company is an LLC, you may not be able to deduct draws and income that you take from your business. You can, however, deduct a bunch of other stuff. Below is a partial list.

Employers may deduct:

Employer-paid taxes(payroll taxes) including:
Employer contributions paid for social security and Medicare (FICA) taxes
Employer contributions for federal (FUTA) and state (SUTA) unemployment taxes.
Salaries and wages
Bonuses, commissions and awards
Benefit programs — life insurance, education reimbursements, etc.
Meals and lodging provided as part of the workplace
Per diems and allowances
Fringe benefits
Contract labor — if the contractor (freelancer or service provider) was paid $600+ during the year. (Documented by Form 1099-MISC.) Checkout our article on paying contractors here
Employer credit for paid family and medical leave

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Hot Tip | This is in no way comprehensive

I tried to get everything but there are a lot of benefit programs that you can provide your employees that are tax deductible so don’t forget to head on over to the IRS webpage if you need more information

Software

You may have a lot of subscription software like QuickBooks, Xero, or Microsoft office to name a few you can now deduct the full cost each year.

Taxes

I know it sounds a bit weird but there are some taxes that you can deduct.

Employer-paid payroll taxes.
Sales tax on day to day items
Excise and fuel taxes
State income taxes
Real estate taxes on business properties

Travel

You already know you can deduct the cost of a tradeshow or conventions, but you can also deduct the travel to and from them too. Make sure you keep all your receipts and fill out your expense reports for airfare, hotels, meals on the road. If you drive to the convention you can take the standard mileage rate. Don’t forget to tip your Uber driver and deduct that too. Paying for parking at the convention center and hey if you live in Dallas you know you’ll be paying tolls make sure these get deducted as well.

Telephone

If your using your cell phone you may be able to deduct a portion of your bill as a business expense or add a new line just for your business and deduct 50% of your telephone bill

Tools

The IRS distinguishes between tools and equipment. While you may have to capitalize on equipment rather than deducting it in one year, you can deduct tools that aren’t expensive or that have a life of only a year or less. And for the IRS, “tools” doesn’t just refer to hammers or screwdrivers; your spatulas and cookie sheets are tools as well.

Few of us ever test our powers of deduction, except when filling out an income tax form – Laurence J. Peter

Unpaid Goods

If your business produces goods rather than providing a service, you can deduct the cost of any goods that you haven’t been paid for yet.

Utilities

Don’t miss the small business tax deductions for your electricity, mobile phone, and other utilities. If you use the home office deduction, your landline must be dedicated to your business to be deductible.

Managing Your Small Business Tax Deductions

If you want to maximize your deductions and avoid last-minute mistakes, you must put a system in place right away.

Determine Your Accounting Method

You’ll need to determine which one is best for you the cash or accrual method.

Cash Method – Manage your cash when it comes in and goes out.

Accrual – Manage revenues and expenses when the transaction takes place. So if you invoice a customer you recognize the invoice before they’ve actual paid for the service

Use a Good Accounting Software

Nowadays accounting software has come a long way and can manage your transactions in real time. Though it still needs to be categorized correctly to get the maximum taxable deductions and credits.

A solid technology stack will help you get by automating receipts, transactions, projects and even more. Let us know if your interested in how we go from total chaos to total control.

Don’t Have Time to Read the Article?

Download the PDF version of the article and keep it with you for reference. If you purchase something, check to see if you can take a deduction.

Grab The Big Fat List of Tax Deductions

Putting it All Together

Once your business takes off, you’ll have to pay your estimated taxes if the business income taxes are more then $1,000. Check out how to pay your estimated tax me every time.

Taxes are complicated. Prior to your owning your business you paid your taxes through payroll deductions and then filed at the end of the year. Now you’ll have to pay several times a year plus other scheduled payment like payroll taxes and sales taxes.

Keeping good records is a must and keeping compliant with all the tax codes can be a daunting task. Make sure you hire a professional that can help you plan to take the maximum amount so you’re not missing out on valuable tax saving strategies that can help you keep more in your pocket.

Negotiating with Vendors and Suppliers

Negotiating with Vendors and Suppliers can be a daunting prospect. But if you’re a parent, let’s face it anyone who has kids is a skilled negotiator. From the time they can talk the second most used word of a two-year-old is “NO”. We can all learn from that. As my son has gotten older, he has gotten even more creative with his negotiation skills. You’d be surprised at what that kid will do to get the absolute best deal.

Since I’ve been asked by more than one client how I negotiate with suppliers and vendors I thought I would share the lessons my son has taught me.

How to Negotiate with Vendors and Suppliers Like a Kid

Know the Person Behind the Product or Service (Build A Relationship)

My son knows me in and out. He knows when he’s pushed me past the point of no return. He says it’s because I get a crazy look in my eyes (also known as mom’s face). But really, it’s all about building relationships with people that will do you good In the long term. Building a relationship with your vendors and suppliers will help you get the best possible terms. Go ahead and ask them questions about their business, their family, and even their kids. If you’re not sure what to ask, try these 8 Ways to Improve Your Relationship with Your Suppliers.

Free Fillable Accountable Expense Policy: Get our ” Sample Expense Policy and Calculator” that lets you craft an expense policy that saves you and your employees’ money.

Grab the Accountable Plan Template Here

Kids Know Exactly What They Want (or Know Your Facts)

My son is brilliant he knows he can’t ask for everything so he’ll break it up in pieces but he always knows before he approaches me what exactly he wants to get for the engagement. When my son wanted an Xbox, he knew which make and model, what games he wanted, and all the accessories before he even approached me. He knows what it’s going to cost at each store, and he knows when it goes on sale. Don’t be afraid to do your research before you even talk to the Vendor. If you want to better your positions with a supplier, you can help your self by researching the equipment and supplies so you know what they cost your vendor. If you’re not sure where to start read this article on Market Research

Never Take the First Offer

Going back to the Xbox example when my son came to me, I offered to pay for half if he paid the other half. He came back with “I’ll pay a third and do some chores to make up the difference. (such a little shit). He has never taken the first offer. He always comes up with some creative ways to get what he wants for as little cash as he can get. (It kinda warms my cheap ass heart right up). Don’t negotiate from desperation and be prepared with several creative solutions that might be a better fit for you. The trick is to learn what your vendor may need from the sale. What’s the minimum he needs and what’s the maximum you can pay.

Always Have a Backup Plan

On occasion, I say no to my son for things that he wants but I don’t necessarily want to spend money on want to wait until a birthday or something comes up. For my son, if he can’t get a deal thru me, he’ll look to other sources. For example, he wanted to get some new named brand clothes. Since I rarely buy anything named brand or expensive for clothing (because he grows fast not because I don’t want to). He will ask if he can go to a consignment shop. He gets the name brands he wants, and I get the price I want. Win-win for all. Don’t be afraid to find other suppliers and vendors who might be able to give you a better deal. Feel free to get creative if your vendors won’t bend on price.

Free Fillable Accountable Expense Policy: Get our ” Sample Expense Policy and Calculator” that lets you craft an expense policy that saves you and your employees’ money.

Grab the Accountable Plan Template Here

Make it a Point to Find Out What Your Vendor Needs

When Evan wants really wants something, he’ll find out what he can do for me. He’ll offer to do dishes clean stuff work for me etc. When you’re in a service industry one of the areas I use to negotiate with potential clients is on the scope. Sometimes they just need a little bit of help so instead of the full monthly cost we talk about hourly training sessions or some teaching time.

Some of the things that can be negotiable for a vendor.

Downpayment
Shipping costs
Bulk discounts
Length of Assignment
Scope of work

Don’t Be Afraid to Ask

One of the first things Evan seemed to have learned outright from the time he was small was to just start asking for what he wants. One of the first things you must get over in negotiations is just asking outright for what you want and what you need. (This could really be a life lesson). Too many times we are too embarrassed to just ask outright for a discount. You’d be shocked at how happy people are to give you what you want if only you’d ask.

Don’t Be Afraid to Walk Away

I offered my son what I thought was a good deal when it comes to paying for some of his after-school activities. He liked none of the options and let me know that in no uncertain that none of the options were for him. Though he ended up taking 1 as I gave him no choice. His willingness to walk away from the table gave him power. It may be hard especially if you’re in a long-time relationship but if they can’t satisfy your needs as a business owner sometimes you just need to find someone who can.

Consistent Patience Can Get You Places

One thing I’ve noticed about my son is that he is not afraid of taking his time for things he really wants. Take your time, negotiations can be ongoing and over several weeks. Take your time to make the decision.

Free Fillable Accountable Expense Policy: Get our ” Sample Expense Policy and Calculator” that lets you craft an expense policy that saves you and your employees’ money.

Grab the Accountable Plan Template Here

Putting it All Together

If you don’t have kids you probably can’t relate to this article however, the principles are the same. Just remember these simple lessons.

Know the Person Behind the Product or Service (Build A Relationship)
Kids Know Exactly What They Want (or Know Your Facts)
Never Take the First Offer
Always Have a Backup Plan
Make it a Point to Find Out What Your Vendor Needs
Don’t Be Afraid to Ask
Don’t Be Afraid to Walk Away
Consistent Patience Can Get You Places

I should also point out that negotiations with anyone including suppliers and vendors takes practice. I suggest starting with your kids 😉

7 Simple Numbers

Have you ever had someone approach you speaking a different language than you? You know the frustration of trying to understand what they’re saying as they gesture and point.

That’s how most accountants talk to their small business owners. Or they bring out a fancy looking dashboard with lots of gadgets and numbers that look like the cockpit of a 747.

Less 10 % of small business owners want or need something that fancy. Most of the data is overkill and it makes it harder to see the real picture of your business.

Wouldn’t it be great if you could just boil it down to 7 simple numbers that make sense to you?

I do to……

That’s why we’re going to talk about the 7 Simple numbers that you can track (easily) that will keep your business from growing out of control.

7 Simple Numbers that Help Your Business Grow

Tracking your numbers will help you reach your goals quicker. That’s why in the 7 Simple Numbers series we’re going to discuss each one in detail and how it can help you see your business in a new light.

Break-Even Point
Money In (Revenue)
Money Out (Expenses)
Direct Labor Cost
Management and Admin Labor Cost
Core Capital Fund
Profit and Profit Margin

I know you’re asking yourself

“Why is Profit Last?”

If you don’t know the first 6, you won’t know your numbers and it will be harder to get your business to a profitable and sustainable company..

In the 7 Simple Numbers Series, we’re going to talk about each of these numbers.

We’re going to discuss what each of them means to you

And….

How to track them easily without a headache

To your business Success

Andrea

7 Things About an Accountable Plan You’ll Kick Yourself for Not Knowing.

Are you making the most of your expense reimbursements with an Accountable plan? If not it’s time to get cracking so don’t let expense report blunders trigger unnecessary taxes, that punish you and your employees.

I’m talking about a little known IRS document called an Accountable plan that helps you reimburse your employees (and yourself) the right way so you can maximize your deductions and minimize your taxes.

What the Heck is an Accountable Plan Anyway?

No, I’m not talking about a plan where you call me up so that I can keep you accountable because you want to lose 10 lbs before summer. If that is something you want or need there are plenty of coaches that will be more than happy to help.

What do I mean the right way…..the right way creates tax deductions for the business and non-taxable reimbursements for your employees when they make purchases on behalf of the business.

And it even works if you’re a sole proprietor, partnership, LLC, or a corporation. Yay!

Sorry, I always get excited when I can save my clients’ money.

Here’s the long version.

An accountable plan is a plan that follows the Internal Revenue Service (IRS) regulations for reimbursing workers for business expenses in which reimbursement is not counted as income. This means that reimbursements are not subject to withholding taxes or W-2 reporting. However, these expenses must be business-related to fall under an accountable plan.

Free Fillable Accountable Expense Policy: Get our ” Sample Expense Policy and Calculator” that lets you craft an expense policy that saves you and your employees’ money.

Grab the Accountable Plan Template Here

Now let’s talk about it in English….

An accountable plan allows you to reimburse employees for work-related costs (including yourself).
They are not subject to taxation by your employees (but are 100% deductible for you).
They must be business-related and reported using an expense report
If you give your employee an amount (to buy a laptop etc.) and they don’t use all of the money the excess must be returned to the business.
If the reimbursement is considered non-accountable, then it is considered a taxable event and it would be added to the employee’s taxable wages (including you).

Got it?

If not just keep reading and hopefully, it will become a bit clearer.

1. Who Should Use an Accountable Plan?

Anyone who owns a business. Period. A couple of exceptions though because every rule should have an exception.

If you’re a single member LLC with no employees all your business expenses are deductible, and you don’t need to bother creating an Accountable Plan. But as soon as you hire your first employee it’s time to start creating one. You can download our sample worksheet and sample Accountable Plan here.

2. Not All Tax Deductions Are Created Equal

Let’s Talk Meals and Entertainment

When the Tax Cuts and Jobs Act (TCJA) was put into effect it really tried to limit the deductibility of some meals and most entertainment expenses. But there are exceptions to every rule.

Because you’re reimbursing an employee for their work-related expenses you can now deduct 100% of the meal and entertainment as long as it’s properly identified. (Make sure you have an expense policy in place for the proper documentation).

Remote workers and Office Allowance

Since COVID-19 everyone seems to be working from home which means they are incurring expenses. As an employer, you can give your employees reimbursement for their home offices.

This can include:

Home office
Utilities
Equipment
Computer
Cell phone or land line
Vehicle
Mileage

Which means you can do this in 1 of 2 ways.

You can give them an allowance per month to cover these expenses. (Let’s say 250.00) for the use of their home.

You can have them submit their bills and you cover a portion of them based on usage.

For example, you can have them submit their electricity bill and then cover a portion as it relates to their home office. Or a portion of their internet bill etc.

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Andrea's Tip

If your employee is getting reimbursed for these expenses it is nontaxable to them so they will not be able to take these deductions on their personal tax return. I think it’s wise to let them know that.

3. You Must Keep Good Records

Look one of the downfalls of many good businesses is that they keep lousy records. Once you have an accountable plan in place it becomes important that you keep your expense reports and associated documentation, and that you properly account for it in whatever your accounting system your using.

A few rules to note when putting it in place

The Expenses must have a business connection
The expenses must be substantiated within a reasonable time period. ( we try to use 60 days) but it can be 365 days as long as it’s in the accountable plan).
Employees must return any money not spent on the employer (also within a reasonable time).

4. You Can Even Give Your Employees an Allowance to Use Their Own Equipment

If your employees use their cell phone, lap tops or desktops for business use then it might be nice to offer them a yearly allowance to upgrade their equipment. Just make sure you go by the three rules above to make sure it is documented. And if any of the equipment is less then the allowance the employee will have to return the excess.

5. Not All Employees Are Equal Under an Accountable Plan

With retirement and other accounts you have to treat all your employees equal so if you give a match of pay to one employee you have to give it to all of them (there are exceptions to this for business owners). However, under an accountable plan you can treat differently.

Let’s use an example:

As the owner you create an accountable plan and reimburse yourself as an executive for the office allowance. That does not mean you have to give your sales staff an allowance for their home office. Just make sure you cover everything in your Accountable Plan. If you need some help you can download the Accountable Plan Reimbursement and Spreadsheet Here.

6. Beware of Business Credit Cards without an Accountable Plan

I love those mileage perks of having a business credit card but beware if you have a corporate credit card without an Accountable Plan. Let’s say you have corporate credit card with three employees. Without an Accountable Plan, the money that you pay to the credit card becomes taxable income to your employees. What would happen? You would have to include that amount as a taxable wage on their W2. Make sure your employees are aware of your expense policy and reinforce it. They’ll thank you at tax time.

7. If You Create it Wrong You Could Create a Taxable Wage to Your Employees

If you don’t have an accountable plan or you don’t create it correctly you could end up reimbursing yourself and your employees and causing a tax event. For example, you have an employee and you reimbursed him $200.00 for mileage. Without an Accountable Plan that $200.00 is considered a taxable wage which means you need to collect payroll taxes and you would be on the hook for paying the business side of the payroll tax.

Instead, download our sample Accountable Plan and make sure your employees have an expense policy that reimburses them for work-related expenses that doesn’t cause tax headaches.

Free Fillable Accountable Expense Policy: Get our ” Sample Expense Policy and Calculator” that lets you craft an expense policy that saves you and your employees’ money.

Grab the Accountable Plan Template Here

Putting it All Together

Accountable Plans come with a lot of perks if you set them up right. Make sure you document your deductions, so they don’t come and bite you in the ass come tax time. You don’t have to treat your employees equal so just because you take an allowance for a home office doesn’t mean you have to give it to your employees as well. Beware of business credit cards so you don’t punish yourself or your employees with taxes. If your not sure which expenses are deductible make sure you read the Big Fat List of Small Business Deductions and include them in your expense plan.

And remember, if you need some help creating an Accountable Plan for your business, we’re here to help you out. You can either download the Sample Accountable Plan or give us make an appointment with us.

Cheers!

Andrea

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