Quickbooks payroll question - Engraving Etc. Forum

From:	Cody (BOBTNAILER)	13 Jul 2006
To:	ALL	1 of 14

4323.1
Well, as of today it looks like we're going "full-time" with Eternity Creations. Woooohoooooooooooooo! Now I'll actually be getting PAID to do what I love!! I don't know much about doing payroll stuff, so I bought the payroll add-on for Quickbooks. As I went through the setup for it, I found that "owner" and "employee" are mutually exclusive terms to the IRS (and to QB). The setup wizard said that an owner cannot be paid from the Payroll Expense account, and that draws must come from Owner's Equity. Ok...that makes some sense. I wanted to read more about it in the QB manual and help files, but there was NO additional info. All they ever said was that it had to come from the Equity account. Here's where my confusion begins...and please pardon my ignorance of accounting! Let's assume that I have $1,000 in the Owner's Equity account. If I make draws against that account for $200 per week, after the 5th week, the Equity account will be in the red. I read somewhere that Retained Earnings become Equity at some point, but I don't remember where I saw that, or when/how that happens. Can someone explain that to me? Also, since the draws are not considered Payroll expenses, how do we account for the taxes associated with my income? Would I manually enter the taxes into the appropriate accounts? Is there something glaringly simple that I'm missing? Thanks in advance! Cody the Confused
EDITED: 13 Jul 2006 by BOBTNAILER

From:	Harvey only (HARVEY-ONLY)	13 Jul 2006
To:	Cody (BOBTNAILER)	2 of 14

4323.2 In reply to 4323.1

Do not feel alone. I understood everything you wrote and still do not have a clue.

I hate programs that have help files that assume that you already know what they are talking about. If you knew, you would not need the help files.

Philadelphia, PA (Really Bensalem)

When you finally understand it completely... it changes.

From:	UncleSteve	13 Jul 2006
To:	Cody (BOBTNAILER)	3 of 14

4323.3 In reply to 4323.1
In the short version, here is the way the IRS looks at it..... As the owner, your income/loss is from the ongoing business. IF you are a corporation, you set yourself up as an employee and can run your withdrawals as salary paid by the corp. As a company or partnership, your initial equity is based on your initial investment which can be cash or other assets such as machinery, supplies, etc. you "loan" to the company to get it started. Your monthly or weekly checks as an owner are considered a return of your investment (equity) and therefore are not income till you hit the breakeven on your investment. At the end of your tax year you will either have a profit which, if not withdrawn, becomes retained earnings in a corp. OR if you have a loss or took out more than your equity balance, you will have NEGATIVE retained earnings in the corp. meaning that you took out more than you earned and invested so your equity was used up. SOOOO...... the two main questions are: 1. Are you set up as a Corportation/LLC or a proprietorship/partnership? 2. Do you WANT to be an employer or owner? Also, as an employee, the taxes are taken out when the check is drawn and as an owner, it is all settled up at the end of the year and you should make estimated payments (usually quarterly) during the year based on your expected earnings. Clear as mud? :-) "My Karma ran over your Dogma!"

From:	Cody (BOBTNAILER)	14 Jul 2006
To:	UncleSteve	6 of 14

4323.6 In reply to 4323.3

Steve,

Wonderful explanation.

To answer your questions:

1) We are set up as a sole proprietorship.
2) I honestly have no preference regarding my title...doesn't matter.

That leaves only one question (for now) unanswered: How do you account for the estimated tax payments that you make to the IRS? Would it still go into a Payroll Tax account, as if it was for an employee?

We've gotten pretty good at accounting for our business over the last couple of years. I do all of the bookkeeping through the year, and my wife does the taxes. She's much better at her job than I am at mine! Since we use Quickbooks and TurboTax (both Intuit products), the information flow at tax time is virtually seamless. We've learned a great deal about our accounting process from the way that TurboTax sorts information...it's been a big help.

You're a big help! Thanks!!

Cody

From:	Engravin' Dave (DATAKES)	14 Jul 2006
To:	Cody (BOBTNAILER)	7 of 14

4323.7 In reply to 4323.6

Cody,

The Turbo Tax software seems to be a good program on the surface. Unless your wife is a CPA, I would recommend doing a comparison some time. Do it on Turbo Tax, then have a CPA do your taxes that same year. You might be surprised that you may be throwing money away in an effort to save some.

I used to do my own, but have found it much wiser to pay the professional.

EDITED: 14 Jul 2006 by DATAKES

From:	Cody (BOBTNAILER)	14 Jul 2006
To:	Engravin' Dave (DATAKES)	8 of 14

4323.8 In reply to 4323.7

David,

We seriously considered doing that this past tax year (her suggestion), mainly because our scope of work had expanded so much. She has done a wonderful job, and is meticulous about getting back every dime possible. In fact, she typically spends over a week on our return, running the numbers in different ways. The more stuff we add to our returns, the more nervous she is about doing it.

This year, I think we're going to go with a CPA. There's only one in our town that I really trust, and he's agreed to take us on as a client...even though he's not accepting any new ones these days.

I think it would be VERY worthwhile to do a cost/benefit comparison. Not only would we know that everything is right, but he can also shed some light on some of my accounting practices that may be less than perfect. :-$

Good suggestion!

Cody

From:	UncleSteve	14 Jul 2006
To:	Cody (BOBTNAILER)	9 of 14

4323.9 In reply to 4323.6
As a sole proprietorship, you are "stuck" with taxes on all the profits the company makes whether you take them out or not.... On the other side, you get credit for any losses at year end. Personally, I would suggest incorporating your company. The annual cost may be a bit higher up front, but the deductions and benefits should far outweigh the filing costs. Also, it will shield you from MOST (not all!) lawsuits that might crop up like the one for $25,000 for ruining a wedding cause you made a mistake or didn't deliver the gifts on time. :'-( Also, the car/van you use for deliveries and picking up materials, the travel to trade shows including your fees, hotels,etc. are deductable from your income. Your CPA will ask you for a quarterly P&L report which will be used to file any estimated taxes on your behalf...... If there is no income, you will be required to file a $0 return just to keep big brother happy. Hope this helps a bit and your CPA should be able to handle the rest. If you are using Quickbooks, print out your chart of accounts, a YTD balance sheet and P&L to go over with him the first time. "My Karma ran over your Dogma!"

From:	Dave Jones (DAVERJ)	14 Jul 2006
To:	Cody (BOBTNAILER)	10 of 14

4323.10 In reply to 4323.6

As a sole proprietor, the company is not a seperate entity. You are the company. The employees work for you. Everything sold by "the company" is your personal gross income and whatever is left after you deduct what you can is then your net taxable income.

With a corporation you and the others all work for the corporation. You can be paid like the rest and if anything is left at the end of the year then the corporation pays taxes on that.

The rules of what is deductable are very different for a sole proprietor than they are for a corporation. There are a lot of things that you might feel you should be able to deduct that in reality you can't deduct as a sole proprietorship.

It sounds like you really need to talk to an accountant ASAP.

From:	Engravin' Dave (DATAKES)	14 Jul 2006
To:	Dave Jones (DAVERJ)	11 of 14

4323.11 In reply to 4323.10
quote: With a corporation you and the others all work for the corporation. You can be paid like the rest and if anything is left at the end of the year then the corporation pays taxes on that. Most smaller businesses would set themselves up as an S corporation, rather than a C corporation, avoiding the corporate tax you are referring to. An S corpration would allow you the same limitations on personal liability, plus, if you are in the early stages of your business development and you have some losses, the S corporation structure will allow losses to be passed through to yourself, the shareholder, allowing you to use this loss to offset other income you may have had on your return.
EDITED: 14 Jul 2006 by DATAKES

From:	bobkat	15 Jul 2006
To:	ALL	13 of 14

4323.13
An LLC will give you the protections and advantages of a corporation with lower cost and less continuing paperwork for the government. In my state, you can set up an LLC yourself, online, in about 20 min. for a cost of $130.00. You then have a $25.00 per year renewal fee, and that is all the paperwork there is to do, (no meetings, no minutes, no charter, no board of directors, blah, blah, blah......).

From:	Engravin' Dave (DATAKES)	15 Jul 2006
To:	UCONN Dave & Lynn too (DANDL48)	14 of 14

4323.14 In reply to 4323.12
quote: Also as a Corporation you don't have to pay Social Security on dividends, at least as a Sub S corp. Shhhhhh! There may be a politician lurking among us.
EDITED: 15 Jul 2006 by DATAKES