6. Payroll and Taxes
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Welcome back to The Accounting Edit podcast.
I am Leah McCool from Orca Accounting.
And I'm Aminder Mann from Sequoia CPA.
How's studying going for FAR?
Oh my God, it is...
I know.
I should have studied and taken the exams right when I graduated school.
That's what I should have done.
Because I just actually...
And I'll talk about this more today, but I just got back into a delicious routine that I have for myself with just work, studying, and just setting myself up so that I can actually get my studying done.
Because that's been the hardest part, is just finding the time.
And it's not like I'm horribly busy.
I have time in my day.
I just am not organized and using my time efficiently.
And so, now that I have figured that out, I now am feeling better about studying.
It's just like going through.
But it's just like things like, like going back and forth between, like today, for example, I was going over par value and the cost method for literally like stockholders' equity and treasury, like the treasury stock method.
And I was just, as I was going through it, I was like, I literally don't even remember this from school, and I surely didn't use that when I was at my last job.
Like, I just didn't think, we just, it's just such a, it's so in-depth, but I do honestly, in a weird way, love it.
It's been so, I love what I'm learning, so that's been fun.
It's refreshing too, right?
Like, you start getting a new perspective on things, you're like, oh yeah, I forgot about this, or I hadn't considered this, so just being able to learn a lot of this new stuff, even if you don't directly apply it, like a lot of your clients, I'm sure, don't have stock equity, where you're calculating par value, but just to be able to have that knowledge and understand, okay, if someone does have some sort of stock, or if you're looking at someone's equity, how are you going to be really looking at it, right?
Gives more depth to your analysis, really, when you provide the information that you do to your clients.
No, yeah, 100%.
That's what I've been thinking the whole time, which is making me very happy, is just even though as I'm learning it, I kind of think like, okay, when am I going to use this in my business?
But I do think I love feeling as though I know more than what I need to know versus the other, obviously, versus the other way around.
And so just being able to, and so I think that that's a whole idea of why I wanted to take the CPA exams at all, was I want to feel like I am finally, I finally have that title of a CPA where I have passed this exam, where I do think that a lot of people could do it if they chose to, but a lot of people don't choose to, like I didn't.
And so, like I didn't, until now, it's just like those hurdles that you have to get over to just make it happen.
And so, I'm happy that I'm doing that now.
But yeah, so it is, I'm so excited to just get far out of the way and then just move on to the next ones.
The first one I did was far as well, because I think it aligns a lot with corporate accounting.
And getting that one out of the way felt like gave me a lot more confidence to kind of go through the other sections.
And you kind of get a rhythm and a feel for how things are going to go.
I never left any exam feeling like, oh yeah, I nailed it.
I always left feeling like, oh crap, I don't know how I did on that one.
I hope I pass.
And it turned out that it's because of the grading system, you don't know exactly how they're grading it, like on the back end of things.
It's just relevant.
And so I ended up passing all of them.
And I was like, okay, I guess I didn't do as poorly as I thought in my head.
You get that feeling of like, oh, goodness, there were questions that I didn't know exactly how to answer, but hopefully I used my educated guesses here to get close enough.
Yeah.
And it really is, as I go through, I think that because 75 percent in school doesn't seem like very good.
And so whenever I look back on when I've done the multiple choice questions and I see up there, and for some of it will be like, at the first round I go through it, it's like 65 percent.
And I'm like, oh my god, I'm not even making that like 75.
That's so depressing.
But then after I go back, I study and then redo the section, then I get like at least 75 or 80.
And so that still seems low, but it's like good enough.
And so just like definitely the levels of confidence that I feel just going back through is so huge.
But yeah, I have no idea if that will actually translate to the exams.
I mean, it doesn't seem like anybody walks out feeling good.
Like good at it.
Yeah.
Yeah.
Yeah.
But I'm sure you're going to do great because you're like doing lots of prep work.
I think that's the biggest thing.
And Becker does a really good job, I think, in their material, just to prepare you for all the information that could be presented.
And then the questions, some of them I felt like were quite similar to the way they're written, at least, so that when you're reading it, you're like, oh yeah, I've seen this type of thing before, so you're not feeling so like, ah, what is this?
Yeah, yeah, it does seem to flow very well, so I'm just so happy that I'm using a test prep software.
[♪ music playing in background, with a bit of background music playing in the background as well.] Thanks, everyone, for joining us again.
Today, we're going to be digging into payroll and taxes.
And we'll, again, use Michelle, who's the photographer, as an agency business.
We'll be using her, again, as an example on some of these topics.
But really, our goal is to share some background, some context on payroll, and then also on taxes in general.
And we can share our insights specifically from Washington State, and Leah, you're in Oregon.
If you can share some of the reporting requirements down there to kind of give us a little bit of context.
And really, I think that this will be so insightful.
Also for me, because we don't deal with sales tax down in Oregon, there's so many different types of taxes that are relevant when you're a business owner, and when you're earning revenue and have to pay taxes on that revenue.
There's so many jurisdictions that you have to worry about.
So yeah, there's always lots on taxes.
Yes, so just to kind of intro this with some common questions about what people have about payroll and taxes, what does a payroll cycle look like?
What does accounting for payroll involve?
What softwares are out there to help automate payroll?
There's, we hear the big ones like Gusto and ADP, but what other ones are relevant?
And so we can cover these payroll questions first, and we'll touch on the tax questions in a little bit.
Yeah.
So in terms of payroll, we would be really running payroll if you had had an employee.
So there's a distinction between having an employee and a contractor, right, if you're 1099.
And so you really want to make sure that you have that sorted.
If you have a contractor, you should not be running payroll for them.
You should be paying them through whatever software you have, like QuickBooks, Xero, and be tracking the 1099 wages.
And in that case, you're not collecting or reporting any of the taxes that are due.
That is the responsibility of the contractor.
For an employee, you would be collecting those taxes.
So what does payroll really include?
It's going to be wages and salaries.
It's going to be employee benefits.
Depending on what type of benefits you offer through your company, there will be taxes, and that's employer portion of them as a business, and then the employee portion.
You need to withhold those from your employee's check and submit them to the tax authorities.
And there's also withholdings for federal and state taxes.
And depending on if you offer some sort of retirement program, you could have 401k.
It really depends on the type of benefits and retirement plans you have through your business.
Not everything is required, but some states, like in Washington, there are certain types of benefits that you would need to be aware of and know that you need to withhold from your employee's checks.
Super important to know all those aspects.
I know it can feel a little bit overwhelming when you're hiring an employee.
It's not just, I'm going to give you an X amount as your salary.
There's a little bit of a more of a nuance to it.
Yeah, absolutely.
It's something where until you're on the employer side of the business, you probably don't know anything more than just, okay, you get a W-2 from your employer.
When you're first getting hired, you fill out the hiring documents like the I-9 form.
And so you really don't see a ton of really anything else besides just getting your paycheck and seeing, okay, like my gross pay was this, but then this was withheld from taxes.
And so that really on the employer side is what you're seeing.
The employer has to withhold those taxes from your paycheck so that they can remit them on behalf of you.
And so that really falls on the employer responsibility, which like Aminder said, is not present when you're a 1099 employee, or not even a 1099 employee, but a 1099 contractor.
Yes.
So I think it's important as a business owner, be aware of all these aspects, right?
So that you can accurately track and report them.
So then this is where it comes in to question, what is the payroll process?
So what does it look like for a business owner from step one?
And it really starts from issuing, Leah, you touched on this, an I-9 to a new employee that you're onboarding.
And this is just an employment verification.
You're checking that they're legally allowed to work in the states, right?
You're checking their documentation, and you have to keep this information on file as a business owner.
And you're collecting their tax withholdings, and you'll use a W-4 for that.
So the employee will fill that out.
You'll use that information to determine their withholdings on their paycheck.
So those are the first steps you would need for when you are hiring an employee.
And then from payroll processing point of view, you would calculate out their gross pay.
And a lot of software to do this now, they'll allow for onboarding your employee, and then also determining your gross wages and the net pay.
But really, you want to check what the gross pay is.
You want to look at what their withholdings are and their benefits.
Make sure the deductions are calculating correctly on their paycheck.
You'll pay them through the payroll software.
You can use QuickBooks for this.
Gusto is another one.
And that software will just automatically direct deposit, most likely, in your employee's bank account.
And after that, you'll submit the taxes and filings to the appropriate agencies.
And some of the software platforms do do this piece for you.
So it's sometimes worth paying a little bit extra, so you don't have to do this in-house.
So Gusto will do that reporting, they'll withhold it, and they'll file this on your behalf.
So that takes a big piece of payroll off your plate.
And then the other aspect is being able to book those journal entries in your software, like QuickBooks.
You need to be able to look at what were your wage expenses for that period, and then any of the tax liabilities need to go on your balance sheet, any retirement expenses that are there, any fees associated with running payroll.
So there's a lot of pieces to it.
A lot of these softwares, again, will give you a journal entry that you can use if it's not integrating directly with your platform.
You can book that journal entry.
They'll have that piece of information for you.
But in the end, you will be required to file quarterly taxes and an annual payroll report.
So this is where you might have to hire someone or be familiar with the quarterly federal tax return is the form 941, right?
There's employer's federal annual employment tax return as well.
So there's the W-2s need to be filed in a timely manner so that employees have that to submit for their taxes the following year.
So there's a couple of different filings that need to happen.
So you need to be aware of those deadlines as well.
And if you can do all of that, then you're golden.
Yes, that's all.
That's all it takes to do payroll.
Yeah, no, literally.
Okay, but honestly though, that is such an accurate depiction of, I mean, truly, that is literally what you do as a, and it's an employer, as someone who is running payroll on behalf of your clients.
All of those steps, it sounds like a lot because it is.
And it is so important to get these aspects right.
That's why certain things, so if Michelle was our, Michelle, our ongoing example of a gal who owns a photography business, she's making around $250,000 a year.
So if she was going to hire that part-time employee, say she hired a person to do her marketing part-time, they were working maybe 10 hours a week.
And that is something where if she's planning on hiring that employee and providing them that consistent work schedule of 10 hours a week, the first step really starts with onboarding them, having them fill out a W-4 form, sending them the I-9, verifying that that employee is legal to work in the US.
And that process, in my experience, is only made more just efficient.
It's just more safely taken care of.
There's less risk involved when you are using a software like Gusto, ADP, if you have QuickBooks using the payroll feature, Paychex and Rippling are other softwares that can really help you as a business owner at least give you some guidelines on where to start, because there's so much to know, and so you want to make sure that you're doing it correctly.
And even if, you know, you should always double check and do your research about, okay, this is the state I live in, this is the jurisdiction I'm in, you don't want to just take the software's word for it, but it is a fantastic and pretty well-rounded starting place for at least how, where to get started, and have all those boxes and bases checked for when you're starting out as an employer, because there's a lot that goes into it.
Yeah, yeah.
Peril is really about compliance, and reporting is a huge piece.
So you really have to be diligent with those reporting deadlines, even just if you're withholding 401k, withholdings from an employee's paycheck.
You have to submit those within a certain number of hours from withholding, otherwise there's penalties when you have a 401k audit.
So there's a lot of nuances.
Sometimes payroll can feel scary.
So it's good to consult if you're not feeling 100% on this.
Talk to someone who knows payroll, right?
There's resources.
A lot of these softwares do make it a little bit easier, Leah, like you said.
But if you're feeling uncertain on, oh, I hired this employee, I'm paying them hourly.
Do I owe them overtime?
Right?
Those types of questions.
You can definitely set time up with someone I support on payroll, right?
So if you have questions on that, definitely go over how you should be doing it, even if you don't want someone to be doing it full time for you.
So.
Yeah, absolutely.
And do you find Aminder, cause with just offering payroll, my personal experience with it is even if someone like Michelle, say that she owns her own business, she's the only one doing it, maybe she doesn't want to hire an employee yet, because that's also an aspect of it, is you want to make sure you're doing it right so that you're not letting down the people that are working for you.
But another thing is if you are just self-employed and you're literally employing yourself through your own company.
So say you have an S-corp election and we won't get into the specific tax benefits or anything like that from just making yourself an S-corp.
But if you are that type of employee where you are an employee of the business and you need to have payroll run for you, that is also something where I've seen business owners just not want to deal with learning all of this and having to deal with it, primarily because they just want to focus on running their own business.
And so is that something that you have seen just with your clients as well?
Yes, so definitely if you're an S-corp, like you said, you have to run that payroll for yourself.
So they don't want to deal with that piece of things.
They would rather just the direct deposit hit their bank account, their personal bank account, and they're done with it, right?
Even though you're running payroll for one person, the compliance parts are all the same.
So you still have to submit the taxes.
You still have to submit all these pieces and generate the W-2 at year end.
So this is, I do see this with clients.
They don't want that equal payroll.
They'll be like, here, can you just take care of this as well?
And I'm happy to do that, just because, again, my background, I started in payroll, so.
You love payroll.
Yes, I can't get away from it.
Yeah, and it really is, that compliance bit is just so specific to payroll, I mean, compliance in general with accounting is everywhere.
But it definitely, with payroll, there's just so many little things involved where just getting someone like Aminder or myself is just so crucial to have someone that can just do it for you, take the stress off of your plate, and you can focus on doing what your business is doing and not being a payroll expert, because it definitely takes a lot of time.
Yeah, that's what we're here for, right, Leah?
Yes.
Shameless plug for ourselves.
We do that.
Yes.
So, okay, so that is, and we kind of touched on this a little bit just with the payroll taxes because a lot of softwares will do it for you and will send in those forms.
But just having a knowledge of what those forms are, what you're double checking for when you're reviewing those forms.
So that's all payroll tax related.
We already covered the majority of that.
So with other types of taxes, though, there's so many.
There's sales taxes, there's occupancy taxes, which are very hospitality specific, and there's just so many other ones.
So with, for example, for sales taxes, I don't deal with that.
How is your, how is your experience with sales taxes?
And what is, what does Washington have to deal with with a regular basis that Oregon does not?
Yeah, and I know each state has different requirements on sales tax, so this is where it really comes down to the type of business you have and the products you're selling.
So in Washington state, there's certain goods and services that are subject to sales tax, and the way it's calculated is based off of destination base.
So if you don't have a, like a storefront, a shop that has, is located in a certain region, you're going to be charging sales tax based on where you made the sale.
So this becomes really nuanced, like for example, in our example for Michelle here, for her photography business, she sells printed materials that are considered tangible products here in Washington.
And if she didn't have a storefront, she's just selling them online, depending on who comes through as her client.
She would need to be able to calculate the sales tax of like, say, Seattle versus Redmond versus Bellevue, and the rates are slightly different in all these places.
So she'd need to track that on her end to be able to calculate the right amount and then submit that tax to Washington Department of Revenue.
So the way it's done is, you collect that sales tax from the client.
So you're really like the middle person holding on to those funds.
So it becomes a liability on your books.
And when it comes due to the Washington Department of Revenue, and that frequency is determined by them, depending on how much revenue you make in a year, you need to file that with them to avoid any penalties or fees.
So you need to pass on and say, hey, yeah, these are all the sales I made this month, this quarter, and this is everything I collected.
So here you go.
And they will check that, verify that, make sure it looks good.
So that's another deadline, timeline you need to be aware of in terms of compliance on Washington side.
And it really depends on other states.
Like if you're selling, she's selling goods in other states online, right?
Her clients may not be strictly in Washington.
She'll need to look at what are the reporting requirements in each state.
So I just like to make sure clients are aware of that.
Yeah, it's all so state-specific, and especially just with...
There's so much that can be made easier through software as well.
I think that this might be something that's daunting if you think that you have to keep track of this in a spreadsheet, all of the rates at all times, especially if you're in e-commerce business.
It's, I mean, it can be a lot to just have tabs on everything.
And so that's where we're not sponsored by Shopify.
But if that's software that I've used for a client where it just does help make that whole process a little bit easier because you don't have to just have all of that self-reported in terms of the sales tax rates.
And so that's definitely something that can help make that a little bit easier when the time comes.
And some software is even just hold on to those taxes and remit it for you, not saying that you, because you still have to record that liability on your books, but it's definitely the actual payment of that is not your direct responsibility.
So that can help make things easier as well.
Yeah.
And using like a software like Avalara is also really good because they'll be able to tell you, you're now liable in this state now based off of your sales.
So having some sort of software to track and remit even in some cases is really helpful to be able to stay compliant in this area.
Yes.
Avalara, I love Avalara so much.
We use that.
So just a bit more on hospitality tax, which is occupancy tax.
It also can be just seen a lot of jurisdictions call it transient occupancy tax, transient lodging tax.
And so if you're in the hospitality business, say you own short-term rentals or a hotel or something like that, then this is a tax that you pay on the rental income that you earn.
And same thing, specific by state and by other jurisdictions.
It's really something that you are literally going into the state department of revenue website or the county department of revenue website and just self-reporting all of it.
So that's something that Avalara is so helpful in at least reporting that top line income so that then it helps you understand exactly what you're liable for, when you're liable for it, and it just helps keep you organized as a business owner, if you're to the scale where it makes sense to pay for that software to do it all for you.
Yep, that makes sense.
And just in terms of other taxes, I know it really varies by region.
In Washington, we have the business and occupation tax as well.
So depending on the type of business you have, that could be due, there could be other local taxes.
So definitely, Leah, if you're like you recommended, if you can use a software to make your life easier on this front, definitely recommend it.
Yes, absolutely.
And then just in terms of tracking for any sort of tax, you really want to be tracking the liabilities.
So you can plan for your cash flow.
And so it helps with cash flow management too.
We kind of dug into payroll tax and sales tax here, but also in terms of income tax, that liability comes due at the end of the year.
So you really want to be tracking how much will you be owing if you're making the estimated quarterly tax payments.
This can also help in trying to determine your liability.
So just being able to track all these different taxes that are due will help you determine how much cash do you need on hand at certain points in time.
So this is really important for cash flow management.
Absolutely.
And that's definitely something where if you have ever read the book Profit First or you've heard of anything related to this.
As accountants, I feel like this book is kind of controversial.
But one aspect that I really do like about it is making sure that you're having a separate account in your bank that is set aside for taxes.
That way, you are not tempted to spend that money, you're not tempted to take an owner's draw, and just take that for yourself.
But just having those estimated quarterly amounts set aside on a monthly basis, you can just contribute what you think you need to put in there to be able to fund that estimated quarterly tax.
That is so helpful for just when you have to go to make those so that you don't have to scramble to just do anything crazy on the cash flow side and just try to make those payments work.
Because definitely, definitely always more of a relief to get a tax refund and no penalties than having to owe just penalties and all that other messy stuff.
Yeah.
It's always better to be proactive, I like to say, rather than reactive.
So planning will get you ahead of the curve on this one.
Yes.
Cool.
Well, that's everything we had today for payroll and sales tax.
Hopefully, that was helpful.
We'll be continuing our mini-series and closing out with reporting on the next one, so stay tuned.
Yes.
Thank you, everyone, for listening to our extremely exciting episode on payroll and taxes.
Hopefully, it made it a little bit more fun to listen to.
And yeah, we will see you next time.
You've been listening to The Accounting Edit, a podcast by Aminder Mann of Sequoia CPA and Leah McCool of Orca Accounting.
We'll be posting new episodes every other week, so be sure to follow so you don't miss out.
Does your business need help on the accounting side of things?
We would love to help you.
You can find Aminder at sequoia.cpa.com or on Instagram at sequoiacpa.
You can find me, Leah, at orcaaccounting.com or on Instagram at orca-accounting.
Welcome to Episode 6 of The Accounting Edit podcast!
In this episode, Leah and Aminder discuss the intricacies of payroll and taxes, focusing on the processes involved in managing payroll, the responsibilities of business owners regarding tax compliance, and the importance of understanding sales tax. They also touch on cash flow management and the significance of being proactive in tax planning.
Takeaways
• Payroll involves wages, benefits, and tax withholdings.
• Understanding the difference between employees and contractors is crucial.
• Using payroll software can simplify the payroll process.
• Sales tax varies by state and jurisdiction.
• Proactive tax planning helps avoid penalties.
• Tracking cash flow is essential for managing tax liabilities.
• Quarterly tax payments should be set aside monthly.
• Compliance with tax deadlines is critical for business owners.
• Consulting with a payroll expert can alleviate stress.
• Continuous education is important for staying updated on tax laws.
We can’t wait to hear what you think!! Thanks for listening.
— Leah & Aminder
Contact
Website: TheAccountingEdit.com
Leah’s Links:
Website: orca-accounting.com
Instagram: @orcaaccounting
LinkedIn: linkedin.com/in/leahmccool
Aminder's Links:
Website: sequoia-cpa.com
Instagram: @sequoiacpa
LinkedIn: linkedin.com/company/sequoia-cpa
