Determining the Difference Between W2 and 1099. AND WHY IT MATTERS.

The IRS is constantly conducting payroll audits for misclassification of workers. It is a very common mistake that small business owners make, but one that comes with a very heavy fine if an auditor decides to find an owner guilty of doing so. Small businesses are easy targets because most lack an HR department to ensure that employee files are dealt with correctly. Most small business owners would rather believe that if the IRS hasn’t knocked on their door by now, they probably aren’t coming. They are wrong.

I started working with a client right around the time that she received her audit notice last year. She confessed to me that she had been classifying everyone working for her as a 1099 for years! By the time she realized it, putting these misclassified workers on payroll, as employees should be, would have been more expensive than what she could realistically afford. My client had grown her business saving over 35% on labor costs and now she had workers she could not legally afford. She thought that because she paid these workers anyway, what she was doing was really harmless. But the IRS takes this matter very seriously so it’s important for you to always know when a worker is considered an independent contractor (1099) or an employee (W-2), and the proper procedure that each one requires.

If your intentions are to do things right but the lines between employee and independent contractor seem to blur all too easily, I’ve put together 4 fool proof ways to help you determine if your worker should be receiving a 1099 or a W-2 at the end of the tax year.

1. Work hours: This can be one of the easiest ways to know right off the bat. If you tell your worker at what time they must report to the office or be out on the field and how long you expect them to be there, they are 100 % an employee.

2. Tools and supplies: Are you providing all of the supplies and materials for your worker to perform the tasks agreed? They are 100% an employee.

3. Payment terms: Do you receive an invoice from your worker or are they clocking in to the time tracker monitored by your office? If your worker is invoicing you, they are 100% an independent contractor. If you are paying your worker based off their weekly time sheet generated by you or any of your company’s applications, then they are 100% an employee.

4. Availability: Is your worker free to provide similar services to other companies while they are providing their services to you at the same time? If there is no conflict of interest there, then that worker is 100% an independent contractor.
It’s important to always classify your workers correctly. If you have been consistently doing so, keep records of all contracts and hire forms in case you have to dispute an audit.


What to expect when audited:
When you receive an audit notification, you will be notified for which period they are choosing to audit you. It is in your best interest to send as much information of the two pages of information requested by the IRS. The funny thing is that when you are audited for misclassification of workers they request everything from your balance sheet, to your cash flow statement, even stub payment copies for that period. Most of the information that will be requested by your auditor can actually be printed straight from your accounting software, so here is where the importance of keeping clean books comes in as well.

The earlier you do things right, the better. But if you are already in the middle of an audit, speak with your accountant and develop the best way to proceed. They will know if there is any possibility of fees being reduced and they can give you an idea of how serious your case is. However, in the end it is up to your auditor to decide whether or not to fine you to the full extent. Some auditors just intend to “educate” you and fine you less than the required amount with the agreement that you will attend an additional meeting.

If you find yourself in the middle of an audit and require help reviewing your notice letter, feel free to contact us any time.

Free Business Checking

Free checking accounts are not just for personal accounts. If you’re starting a new business and would just like a less expensive way to carry out a trial run, there are banks who are willing to help you. Some of these accounts do not require a minimum balance each month so you can rest easy knowing that there will be no maintenance fee. As your business grows, you will ideally move into premium business checking accounts and those should always be the end goal because of the amenities the accounts provide. But for now, take a look at this list compiled by Nerd Wallet and find a free business checking provider in your state.

Top 3 Cloud Accounting Software for Small Businesses

It’s no secret that accounting software is the most efficient way of handling your bookkeeping and until recently, desktop software had been the most reliable software to do so. Now small business owners, like you, are opting for cloud accounting software vs. traditional desktop software and it’s easy to see why! From the outlay to the usability of the features, the truth is, that these accounting cloud platforms were designed with you in mind.

If you’re interested in cloud accounting software but don’t know where to start, we’ve compiled a list of the top 3 cloud accounting programs and their features so that you can decide what platform works best for you and your business.


3. Wave
Cost: Free! Extra Payroll Service: Base price $5. First 10 employees: $4 per employee. 11+ employees: $1 per employee. Premium coaching services are available for a one-time fee of $99
Perfect For: Start-ups and small business owners on a budget, with little to no accounting experience.

Top Features:

• You can upload receipts right onto their free program
• You have mobile access
• You will experience an easy set up process
• You have a basic invoicing tool
• You can manage expenses
• You can easily generate reports
• You can calculate multiple tax rates
• You can work with multiple currencies
• You can connect to bank and credit card companies to download recent transactions
• You can allow a trusted collaborator to have access to your information
• You can collect payment online
• You can reconcile accounts
• You can integrate with Etsy for Shop Owners, Shoeboxed and Paypal

Pros: This is a great cloud accounting tool for any small business owner who is just starting to build their business or the small business owner transitioning to doing their own bookkeeping. For beginning expense management it is ideal that you have the ability to directly connect to your financial institution so that you can have the most current information rather than just downloading statements or using CSV import methods. It’s a very attractive website that doesn’t make the tedious task of handling finances as unbearable. Each section has small directions or tips to guide you in performing your tasks. It’s a great “training wheels” program because it has all the basic level options you need to run your business without you needing much of a learning curve to use it.
Cons: Although pretty much everything in this program is as free as they promise, where they get you is in support fees. In order to get live chat support you need to pay $9 per month. To have live phone and chat support you need to pay $19 per month.

Where it wins: Technically if you are the kind of person that needs peace of mind and opt for the most expensive monthly support package, it’s still cheaper than other cloud accounting services out there. If you are just starting out organization is key, and they do a great job in making sure you don’t need to have a million different apps in addition to their service in order to do your day-to-day bookkeeping.

2. Freshbooks
Cost: Free for up to three clients. Packages range from $19.95-39.95 per month
Perfect For: Small business with large amounts of invoices and those who need an efficient way to track billable time and expense.

Top Features:

• Create customized invoices that can be e-mailed or even mailed straight from Freshbooks
• You can manage your income and expenses
• You can set up reoccurring expenses
• You can track time
• You can generate reports of you company’s financial standing
• You can calculate multiple tax rates
• You can get paid faster with online payment remind options and credit card processing
• You have full mobile access
• You have free support via phone and e-mail
• You can generate support tickets
• You have automatic data storage available
• You have more than 70 Add—on capabilities including mail chimp and salesforce

Freshbooks is king in collaboration. Clients and independent contractors can access areas of your site that you designate in a way no other cloud accounting software can do. You can easily import clients via CSV formats if you already have a list and you can import expenses in the same fashion. We mentioned in the list of top features that you have automatic data storage. What does that mean exactly? It means that you can store company documents in folders right on the site! Convenient for keeping client contracts online for example. Accepting payments online with Freshbooks is a total breeze. Not to mention that the collections process is simplified by allowing you to customize when you would like it to follow up with customers and clients when a bill is past due.
In order to have more than one person access the system, you have to purchase the highest level at $39.95 per month and that allows you just one more employee access. In order to add more, you have to pay $10 per month. However, if it’s just you or your personal assistant handling the bookkeeping, this shouldn’t be too much of a problem. Freshbooks also does not have a balance sheet or ledger.

Where it wins: Freshbooks’ invoicing features and collaboration capabilities takes the hassle out of communicating with contractors and clients. Its task automation capabilities is also one of the best we’ve seen and their add-ons options leave little to be desired.
1. Quickbooks Online Simple Start/Essentials/ Plus
Cost: Simple Start (1 user): $12.95 per user. Essentials (3 users): $39.95 per month. Plus (5 users) $39.95 per month. Payroll service add-on: $31.20 a month
Perfect For: Established and growing businesses with some experience in bookkeeping

Top Features:
• You can connect to banks or other financial institutions to download transactions
• You can create purchase orders
• You can easily reconcile accounts
• You have mobile access
• You can customize your menu views
• You have extensive invoice customization
• You can calculate multiple tax rates including some international tax rates
• You have access to an activity log to track all activity within your account
• You can print checks straight from the program
• You can print tax forms straight from the program
• You can pay tax fees straight from the program
• You can manage bill payment
• You can accept online payments
• You have free support via chat, phone or e-mail
• You can set different user access permissions
• You can manage 1099 vendors
• You have access to over 32 application integrations such as for shipping and CRM
• You can import data from a desktop quickbooks program, spreadsheet, or comma delimited file

Pros: You can’t discuss accounting software without discussing Quickbooks. They have not only mastered the desktop software, but they offer the same professional and functional service in their cloud platforms. This is the number one cloud accounting software for a reason. Your accountant will most likely love you because you have an extensive amount of reports that you can generate and your books can be reconciled monthly to eliminate errors. The chart of accounts is very flexible and easy to manage. You are most likely going to keep track of quarterly tax forms within the platform, taking the guessing game out of remaining compliant with the IRS in that area. One of my favorite features is the activity log which does an amazing job of tracking your absolute every move within your account. The activity log does everything from detailing when an invoicing was deleted to tracking when a user logs in or out. This is a perfect feature if you appointed a separate individual to be in charge of your bookkeeping.
Cons: It has a bit of a learning curve even if you are familiar with the desktop program because the design outlay is completely different. This program does not yet support multiple currencies if that is something you need. If you don’t have at least some understanding of accounting it can be easy to classify incorrectly because of the many options under which you can classify expenses.

Where it wins: Quickbooks is number one not only in functionality but in support as well! They have a great team that can answer any of your questions via phone, e-mail, or chat if you are handling payroll with them also. If you absolutely cannot fix the problem you are experiencing on your own, they can remotely access your account, with your permission of course, and fix the problem for you. It’s very difficult to feel lost for more than 5 minutes when you can count on their support. If your business can make use of all of the features then the price is well worth it. You can always trust that your information is more than secure and it is a program that can meet all of your current needs and has the capacity to support any of your future needs as your business grows.

So let’s recap!

1.Quickbooks Online Simple Start/Essentials/Plus: Best overall cloud accounting for established and growing businesses to oversee their finances.
2.Freshbooks: Perfect for invoicing, tracking billable time and expense, and collaboration.
3.Wave: Perfect for start-ups and bookkeeping beginners on a budget.

Cloud accounting is the future and these three programs are leading it. To get started all you have to do is evaluate which one fits your business size, which one fits your bookkeeping needs, and then sign up! If the service is not free it will come with a free 30 day trial so in any case, you can always try them all and stick with the one that met your experience level and expectations best.

At Ledger Aid we work with a variety of not only cloud but desktop accounting programs. Feel free to contact us if you need set-up help or a if you need to hire a bookkeeper.