It’s the most wonderful time of the year!

After the holidays are over and the decorations put away until next year, it’s time to start gathering your information for year-end and tax prep. Oh, joy!

Okay, maybe not. Here are a few tips so you don’t miss any steps along the way.

AUTHOR: Rayanne Buchianico, Owner and Founder of ABC Solutions

Year-End Tax Compliance

January is the busiest month of the year. There is way too much to do in a short 31 days. Focus on the deadline-oriented tasks and get them out of the way as quickly as possible.

Quarterly payroll tax forms are due in January. That’s no different than any other quarter of the year. The same forms are due as each quarter. However, all payroll in the United States is based on a calendar year. Additional payroll forms are due each January:

Form 940 – Federal Unemployment Tax Return

Forms W-3/W-2 – The W-2 forms are the wage and tax statements you give to your employees. Form W-3 is the summary transmittal page showing the totals of all the W-2s added together. These forms are filed with the Social Security Administration, not the IRS.

State withholding reconciliations and W-2s

Tangible Personal Property Tax Returns, CAT returns, Local tax reporting & licensing

Forms 1099 come in multiple flavors. Here are some of the most popular.

NEC Non-Employee Compensation. More on this in a moment.

MISC – Miscellaneous reporting for rent payments, legal fees, and other payments

INT – Interest. You may need to file this if you paid interest on a loan from a private lender. If you plan to deduct the interest expense, you must file this form. All banks are required to file this if you paid more or are paid more than $10 in interest. This is only necessary for private loans.

B – Barter or Exchange. If you use a barter company or barter services with your clients/vendors, you should report the barter transactions on Form 1099-B.

Related Content: Year-end financial planning for MSPs

Filing Form 1099-NEC

There is always some confusion regarding Form 1099-NEC. It is the most common 1099 form that businesses file each January. Forms 1099-NEC are due to the recipient by January 31.

Forms 1099-NEC must be filed for any business payment in excess of $600 per calendar year to an unincorporated business. In short, if you want to deduct payments to an independent worker and they do not own a corporation, then you must file Form 1099-NEC.

Side note: This is how tax deductions work. In order for one entity to deduct an expense, another entity must report the income. Forms 1099 helps keep everyone honest. If you choose not to report an independent worker, you should be prepared to not claim the deduction.

Form 1099 & Corporations

Corporations are deemed separate entities and have enough oversight to report all income. In an effort to reduce the amount of paperwork required by small businesses and the amount of paperwork received by large corporations, all corporations are exempt from receiving Forms 1099. Imagine if everyone had to send Amazon a 1099 for purchases each year. They would need a whole building just to handle the paper.

Form 1099 and LLCs

What if the company is a Limited Liability Company or LLC? LLCs are not corporations. They need a 1099. However, if the LLC has elected to be treated as a corporation with the Internal Revenue Service, then a 1099 is not required for them. The best way to determine if a company or person requires a Form 1099 is to send them Form W-9 to request their taxpayer identification number. Form W-9 not only requests complete name, address, and taxpayer identification number, but it also requests tax entity type.

Every vendor to whom you send money should complete Form W-9 and return it to you before receiving their first check. My customers require this from me, and I require it from my vendors.

New 1099-NEC Rules

But wait, there’s more! There are new rules regarding Form 1099-NEC. These rules have been evolving over the past few years.

Companies and people should not receive a 1099 from you if:

You paid them less than $600 in a calendar year.

You paid them with a credit or debit card

You paid them through PayPal, Bill.com, Venmo, Zelle, or other US-based payment systems

Payments to vendors using a credit card or online payment systems are considered merchant payments. Those merchants will send Form 1099-K reporting all payments your vendor received through them. If you send a 1099 and the vendor sends a 1099, the vendor will have duplicate payments reported to the tax authorities. Many modern accounting systems track payment types and will automatically adjust the amounts for 1099s based on how the vendor was paid. However, if you manually enter your accounting data, the system won’t know the difference. When in doubt, double-check.

Payments of cash, check, or ACH should still be reported.

Financial Year-End

With all that fun out of the way, you can focus on closing your business books for the year. This is where I start to geek out. I like seeing the financial reports take shape and begin to resemble what my tax return will look like. Cleaning up the balance sheet in January is a bit like spring cleaning, except that it’s winter and it’s done on a computer instead of the hall closet. Regardless, I still find it a bit cathartic.

I like to start with the simple items first, like reconciling the bank accounts. Each bank and credit card account should be reconciled to the statements.

I like to start with the simple items first, like reconciling the bank accounts. Each bank and credit card account should be reconciled to the statements.

Look for any old transactions that have not cleared. If you purchased gasoline on your credit card 3 months ago and it remains uncleared in the reconciliation screen, it’s probably a duplicate or in the wrong account. Clean up the old, outstanding transactions.

Next, run your accounts receivable aging report. Clean up those items, too. Any small balances hanging around for months on end when a customer dropped the pennies on a payment to you or paid a few dollars to much. Either apply the credits or get rid of the balances. Review the accounts for any customers from whom you are unlikely to collect money. Write off your bad debt on the last day of the year. An easy way to do that is to create an invoice to offset negative amounts or create a credit memo to write off balances.

Next on the list is inventory…ugh, inventory. No one enjoys counting inventory, but it should be done at least once a year. Make sure your inventory is accurate going into the new year. You don’t want to pay taxes on inventory you don’t really have. The inventory amount on your balance sheet should accurately reflect the amount of inventory in your stock closet.

Make your way through the liability accounts, too. Sales tax payable and payroll taxes on December 31 should match the taxes you will pay in January. Loans and lines of credit should be updated to match the actual balance owed. Fixed assets are another area where you can save tax dollars. Go through your list of equipment. Your accountant should have a complete list of your fixed assets on a depreciation schedule. Review this every year and be sure to remove equipment and items no longer in service. Many states have a tangible personal property tax, and it is based on the fixed assets on your balance sheet. Don’t pay tax on a computer you recycled 5 years ago.

If you have an account on your balance sheet that you don’t recognize, get rid of it or ask your accountant to help.

Conclusion

Taking some time now to clean up your accounting system will save you money in taxes and accounting fees. It also provides a clean starting point for the new year. Come back next month when we talk about budgeting and setting targets and goals for the year ahead.


About the Author

Rayanne Buchianico provides MSP accounting and PSA Consulting services to IT Professionals and is the owner of ABC Solutions, LLC. Rayanne is a member of the ModernMSP community and a frequent contributor to the ModernMSP blog in addition to her own podcast, PSA Impact.