5 Important Principles of Modern Accounting

Every business needs to have a strong accounting system in place so that they can understand their finances and make accurate projections about the direction of their companies. Accounting involves continuously observing and exercising control over your company’s economic activities. The success of your business will largely depend on your accounting, and it’s important for your company to strictly follow the generally accepted accounting principles (GAAP) in your accounting practices.

As a discipline, accounting is strict and follows the GAAP to prevent inaccurate or incomplete information from being reported. Here is what to know about modern accounting and the five generally accepted accounting principles from the professionals at TMD Accounting.

Principle 1: Revenue Recognition

The revenue recognition principle is the first principle your business should know. When you record data, you need to think about the time during which you recognize revenues your company earns through its income statements. When you will recognize your revenues will depend on whether your company uses the cash-basis or accrual-basis method of accounting. If you are using the cash-basis method, you will recognize your revenues during the period in which your company receives them. If you are using the accrual-basis method, you will recognize your revenues during the period in which you provide services.

The revenue recognition principle states that companies should only recognize revenues when they have mostly or totally completed the process of earnings. This means you should record revenues at the time when the purchaser takes possession or when you have completed your service. The revenue recognition principle helps businesses to keep accurate track of their accounts and prevents them from counting profits too early.

Principle 2: Cost

Businesses should also record their assets at the time they purchase a service or product to accurately track their expenses. YOu should record the cost of anything on which your business spends money and properly account for depreciation. Under the cost principle, businesses should not record the resale cost of items in their books. You should instead use the item’s historical cost. For example, if you own an office, use the historical cost of the property instead of its fair market value while making certain to account for overhead costs.

Principle 3: Matching

Businesses should make sure they match the revenues they have recognized with their expenses during the same period and record them when the expenses were incurred. If your business recognizes revenues for services or products you sold, you should also recognize the cost of those services or products during the same period.

Every expense item should match a revenue item under the matching principle. For example, if you sell t-shirts, you should recognize the revenue of a t-shirt when a customer purchases it while also accounting for the expense involved in your business purchasing the item at its wholesale price. When you apply the matching principle, you are using the accrual-basis method of accounting.

Principle 4: Full Disclosure

When your business creates its financial statements, all of the information must be complete and transparent. You should not include any information that is misleading so that your clients or partners are aware of all relevant information about your company.

Prinicple 5: Objectivity

At all times, your accounting information should remain accurate and free from opinions. You should make sure your accounting data is supported by evidence, including receipts, invoices, and vouchers. When you remain objective, your financial reports will be more reliable. You should steer clear of anything that could call your work into question because of your subjective opinion.

Under the objectivity principle, your books should include verifiable information that is supported by objective evidence and should not include any unsupported data. The values used in your reports should not be subjectively measured even when subjective data is more favorable than the data that can be verified. If you violate this rule, it could lead to confusion because of making it difficult to comprehend the subjective data. It is best to only include data that others can verify in your financial reports.

Why Is It Important for Businesses to Know Accounting Principles?

The five generally accepted accounting principles are justified, and they provide a good foundation for your company’s budgeting and planning processes. By strictly adhering to these five principles, you can avoid conjectures that could lead to financial problems.

Following basic accounting principles can also help to improve the cohesiveness of your organization. Depending on your business’s size, different employees might be in charge of different accounting principles. If you don’t have a plan, it could be impossible for your employees to perform their jobs so that you can get a clear picture of your business’s financial health. If left unchecked, this can result in significant financial problems and potential business failure. Making sure your plan is founded on the five generally accepted accounting principles can help to avoid these types of issues.

The basic principles of accounting provide a straightforward method for reporting your finances. Each principle has a role in the big picture of your company’s financial health. When you establish these principles at your business, you can facilitate a more productive and organized environment to track your cash flow and avoid problems such as unverified data and missing funds.

Find an Accountant for My Small Business

When you work with TMD Accounting, we can help you establish the generally accepted accounting principles at your business to facilitate your company’s growth and success. To learn more, call us today at 1-856-228-2205.

Best Practices For Effective Budgeting and Forecasting

If you are a small business owner, you are always on a search to improve your bottom line. Forecasting and budgeting your expenses is one of the best ways to boost your revenue. With that, you can ensure your business is on track for both short- and long-term goals. Here are some of the best practices to incorporate into your business for effective budgeting and forecasting.

Create a Budget

Effective budgeting and forecasting need to start with a plan. You cannot make a solid business decision without a budget. Your business needs to create a budget and stick to it. This step can help your operations stay on track. With a budget, you have a road map to track the progress of the business. Once you have created a budget, please do not ignore it. A budget is there for a reason: to help manage your expenses and other costs.

Plan for Short- and Long-Term Business Expenses

If you want effective budgeting and bookkeeping, you must always plan for your business’s short- and long-term expenses. With this plan, you can ensure you have the necessary resources to meet your current and future financial needs. Take time to list all of your current expenses, including both variable and fixed ones. By doing that, you can see where the money is going for each month. After that, consider your long-term goals. Whether you have to make improvements or expand your business, you need to factor those long-term costs into your business plan.

Always Anticipate Changes

Unfortunately, income and expenses will not stay the same. If you want to ensure your finances stay on track, you always need to anticipate those changes. While it may seem like an impossible task, you will want to review your financial statements regularly with your accountant. With a quick meeting, you can see where all the money is heading and whether there are any potential problems on the horizon.

After that, you can always make adjustments to your budget. If you are spending more than expected, adjust the figures so that your budgeting remains accurate. Forecasting is not always exact, but you can use these best practices to prevent any problems that could harm the financial future of your business.

Forecast To Predict Trends

Forecasting can help with your financial planning and budgeting. Look at past trends and use them to predict future patterns. You can make more informed decisions about where to spend money. There are several ways to forecast your financial future. No matter the method you use, you need to collect accurate data. Also, it is crucial to revise and review your forecasts as new data becomes available. Forecasting can be an invaluable source to help you make better decisions for your business by continuously updating your budgeting and examining the current data.

Review Your Budget

As previously mentioned, your budget will change. You should not think of a budget as a stationary number. Schedule a time to review your budget with your bookkeeper or accountant. If you need to make adjustments to keep you on track, that does not mean there is a problem. All businesses review their budgets from time to time. Use your budget as a tool to track your income and expenses. You can make better decisions about allocating resources and managing your operations with a budget.

Seek Experienced Financial Help

Forecasting and budgeting are vital tools for both small and large businesses. When you have a clear picture of your finances, you will be able to make better decisions. However, many business owners do not know where to start and often struggle to manage their expenses.

In those cases, you may want to seek professional help for your bookkeeping and accounting duties. Many business owners struggle to keep up with books, budgets, and other financial responsibilities. While you may not want to spare the extra expense, think about these professional services as an investment in your business.

An experienced and qualified accountant can offer some guidance and expertise to help improve your bottom line. With their help, you can develop a budget that will work for your business needs, giving you more clarity to make significant financial decisions. You should never be afraid to ask for help, especially regarding your finances.

Effective Budgeting and Forecasting Benefits

An effective budget can help your business save money and keep track of any spending. Along with that, it can help forecast your future income and expenses, which might help if you need to tighten costs down the road.

Don’t forget about forecasting. This tool is vital for making informed decisions for expansions, investments, and other financial moves. When you have effective budgeting and forecasting, you can make the most of your existing resources and keep all those finances on track for your business.

Budgeting helps your business in the present, and forecasting is essential for those future plans. With these best practices, you can ensure that your data is accurate, helping to move the business in the right direction.

Reach Out To an Experienced Accounting Firm

At TMD Accounting, we have over 40 years of experience helping small and big businesses reach their financial goals in Gloucester County. We are here for your business if you need help with bookkeeping, taxes, payroll, or financial planning. We provide affordable, flexible, and reliable solutions for your accounting needs. Schedule a consultation by calling 856-228-2205.

Accounts Receivable Services for a More Efficient Business

Are you looking to become a more profitable and efficient business? Accounts receivable services may be able to help. Small business accounting services can streamline your billing process, ensuring that payments are received on time. Additionally, outsourcing these accounts receivable services allow you to focus on other parts of your business. Here is how accounts receivable services can help you have a more efficient business.

What Are Accounts Receivable?

Accounts receivable is the money a business has a right to receive because it provides services or goods on credit. In short, it is the money customers owe for services or products that have not been paid. For example, if your business sells a product on credit, a customer will have a certain period to pay you for the product. In many cases, the time frame is 30 days.

Your business must record the sale as an account receivable on the balance sheet. Once the company reviews the money, the account receivable would be removed from the balance sheet and replaced with cash. As you may tell, these accounts play a vital role in your bookkeeping since they represent future revenue. Accounts receivable will give your company insight into your overall cash flow and when you can expect timely payments from customers.

Generally, companies with higher amounts of accounts receivable could have more difficulty collecting payments from their customers than those businesses with fewer accounts. Customers who owe a large amount of money could default on their payments, meaning you could lose out on that income.

What Are Accounts Receivable Services?

You can track your customers’ payments and manage your cash flow with a professional accounts receivable service. These services handle many tasks, such as collections, invoicing, and customer service. An account receivable service will also allow you to gain insight into your customers’ behaviors. Also, accounts receivable services can optimize your billing and collection process, helping identify or correct trends. All these services can streamline the billing process, helping improve your bottom line.

Why You Need an AR Service

Using accounts receivable services will provide your business with the resources and tools to streamline invoicing, collections, and payment processes. There are plenty of benefits, and they include:

 

Reduce Administrative Costs

With an AR service, your business can save time and money by allowing them to handle all aspects of collections and invoicing, including sending payment reminders and following up with customers.

Improve Cash Flow

These AR services can help you get money faster into your account by using automated invoice processing that can optimize your cash flow.

Keep a Focus on Your Business

Managing accounts receivable can be time-consuming, especially if there is no dedicated person or staff to handle these responsibilities. Outsourcing your accounts receivable tasks allow you to free up time to operate your business. With that, you can help grow your company and generate more revenue.

Increase Insight Into Your Customer Base

These AR services will give insight into your customers’ behaviors, including payment trends and patterns. With this information, you can improve your business planning and customer relations. You can see these trends to understand your clients’ spending patterns so that you can tailor your services and products to their needs.

Choosing an Accounts Receivables Service

These professionals are here to help improve and manage your cash flow. Along with that, they can help you reduce the time you spend on administrative tasks. Most AR services will cover a few areas in accounting and bookkeeping, such as reporting, invoicing, collections, and customer services. An AR service can reduce administrative costs, improve cash flow, and increase efficiency.

There are several things to consider when it comes time to choose an accounts receivable provider. First, when it comes time to find an accountant for my small business, they should have the experience and reputation to handle most of these tasks. You need to choose a company that can meet your specific needs. Some accounts receivable services will be able to provide you with generalized services. However, others may only specialize in a particular area. Choose one that will work best for your business operations.

Accounts Receivable Services Offer Many Benefits

When you need to keep your company’s financial accounts up-to-date and accurate, consider choosing an accounts receivable service for your business. Without help, tracking invoices or transactions with customers can become difficult. Selecting a professional AR service provider is essential to pursuing a healthy financial future.

Accounts receivable management is essential to all businesses, but it doesn’t have to be a hassle. When you want to ensure timely customer payments, you need to consider outsourcing these services. With that, you can save time, money, and headaches. Think of these services as an investment in your business. Your AR team will take care of those critical tasks as you manage other aspects of the business. By partnering with a reputable accounts receivable company, all of your invoices will be paid on time and in full.

Looking for a South Jersey Accountant?

If you are ready to choose a professional AR team for your business, reach out to TMD Accounting. We have over 40 years of experience helping companies with their accounting needs in the Gloucester County area. We are a family-owned and -operated business. We pride ourselves on being an affordable, reliable, and flexible solution for your accounting needs. Our team wants to help your business grow. One way to do that is by outsourcing your accounts receivable services. Schedule a consultation by calling 856-228-2205.

Types of Errors in Small Business Accounting

When you have a small business, you do not want to make any type of accounting errors. These errors could throw off your books and lead to penalties from the IRS. If there are errors, it is crucial to spot and correct them. Here are some of the types of errors found in small business accounting.

Error of Duplication

Sometimes, you may have recorded a debit or credit twice in the books. Many of these errors are made when several people handle the bookkeeping duties. Also, when more than one invoice is sent to your business, you may put a double entry in the books. While many duplicate entries are minor, those significant amounts can seriously impact your business, leading you to understate or overstate your income.

Error of Omission

On the other hand, if you fail to enter a financial transaction in the books, that is known as an error of omission. These errors can overstate or understate your income and affect the balance sheet. For those errors of omission in the accounting process, it can significantly impact the trial balance, which is the report for the accounts in the general ledger. Anytime you misplace an invoice or receipt, it can lead to those errors of omission in your accounting books.

Error of Original Entry

This type of error means that someone entered incorrect information into the books. A receipt or invoice should back up all entries. In this case, an individual made the original entry, but the bookkeeper may have transposed the numbers. Like other errors, this one can have a significant impact on the books.

Error of Commission

In some cases, the numbers do not make it to the right place. Errors of commission occur when the item is entered in the wrong spot. For example, you could post the items to the accounts receivable account rather than the account payable, or someone had applied a customer’s payment to another invoice. These errors can affect the balance sheet and income statement.

Compensating Error

In some situations, one account error is balanced out by an error in another account. For example, an incorrect entry in the inventory and a corresponding error in the account payables may cancel each other. These errors do not affect the trial balance since they are both opposite and equal, but they are still errors in your books.

Error of Principle

When an accounting error is made on both sides of the transaction, that is known as an error of principle. Often, these errors happen when the individual recording the transaction does not grasp the basic accounting principles. For example, a fixed asset purchase is entered as an operating expense. These errors will not affect the trial balance. One way to correct these issues is by hiring a professional to handle your books.

Error of Entry Reversal

You may find those reversing entries at the end of the accounting period. In some cases, a credit will be posted as debit, or an invoice is listed in the accounts payable instead of accounts receivable.

Preventing Business Accounting Errors

You can prevent those accounting errors with a few tips. First, you always want to have someone capable of understanding accounting and bookkeeping in charge of the entries. They should be accurate with their typing. In many cases, transposing numbers can throw off an entire ledger. Your would-be bookkeeper needs to understand those financial statements and know where to enter the entries.

While it may be tempting to handle the bookkeeping and accounting yourself, hiring a professional team can make life easier for everyone. An experienced firm understands the basics of the bookkeeping and accounting world. By using professional services, you can ensure there will be no entry mistakes in those books. You can save money using a friend or family member, but an experienced and reputable accountant must adhere to specific guidelines to produce accurate reports for your small business. Get some peace of mind and hire a professional for the job.

When you hire a professional bookkeeper, they will compare bank accounts to the accounting ledger. With that, they will correct any errors before those mistakes lead to big problems. Bookkeepers will also help you stay on track. Hire those small business accounting services for the job. They will track all your financial transactions, whether big or small.

Errors Can Be Costly

As a small business, you need to understand your costs. All businesses need to know whether they are operating at a loss or profit. With those mistakes, you could underestimate or overestimate your costs, leading to financial problems down the road. One error can cause many headaches for your business, making it a nightmare to straighten out. Plus, you can even face penalties from the IRS if that mistake leads to filing incorrect taxes.

While mistakes can happen, and no one is perfect, you need accuracy with your financial statements, balance sheets, and the rest of your books. Hiring a reputable and experienced bookkeeping and accounting firm can help you avoid those mistakes.

When you need a South Jersey accountant for my small business, reach out to TMD Accounting. We are a family-owned and -operated business that has been serving the community of Gloucester County for over 40 years. Our team has helped many small businesses in the area. We are your flexible, reliable, and affordable choice when you need accounting, bookkeeping, and tax services in the area. Schedule your consultation by calling 856-228-2205.

Understanding a Restaurant Cash Flow Statement

Some restaurants might raise money with outside financing or by selling assets. However, the majority of the cash should come from its cash flow. Why is understanding cash flow necessary for your restaurant? Here are a few things to understand about these cash flow statements.

What Is Cash Flow?

This term is the amount of money you have made from food and beverage minus what you spent on operating costs. Understanding the restaurant’s cash flow can help budget for expenses and allow investors to see the potential in your business. If you want to calculate your restaurant’s cash flow, you can use the following formula:

Cash Inflow – Cash Outflow = Total Restaurant Cash Flow

However, there are a couple of things to take into consideration. You will need to know your inflow and outflow of cash. For the inflow, you need to add up all the money that comes into your restaurant during a specific period, including food and beverage sales. You can also include merchandise sales, received loans, catering and event money, and other items your restaurant has sold. That is known as your cash inflow.

Next, you need to determine your cash outflow. During this stage, you will want to add your operating costs for the same period. These expenses include utilities, inventory, rent, insurance, payroll, restaurant furniture, kitchen supplies, and appliances. Adding all of those expenses will give you the cash outflow.

With those two figures, you can calculate your total restaurant cash flow.

Reading the Restaurant Cash Flow Statement

There are three crucial statements for restaurants that help manage finances: the balance sheet, income statement, and cash flow statement. The restaurant’s cash flow statement will determine whether your company is financially healthy. These cash flow statements are broken into three categories:

  • Cash flow from operating activities
  • Cash flow from investing activities
  • Cash flow from financing activities

However, the two most important aspects of the cash flow statement are financing cash and net income.

Financing cash will show that your restaurant has borrowed money or raised funds by selling stock. To an investor, your financing cash will show whether you have the money to pay dividends.

As you may have guessed, the amount of money the business produces is called the net income. This figure does not tell the whole story. Instead of relying on a single number, investors will look at the cash flows. If the restaurant’s cash flow is smaller than the net income, it could be a sign that the company is losing money.

Restaurant Cash Flow Management Tips

Now that you understand the basics of a restaurant’s cash flow statement, how can you properly manage your cash? First, you may want to work with our small business accounting services. We can provide advice to help manage those expenses and assets.

Aside from that, here are a couple of tips for your business.

Have a Restaurant Cash Flow Forecast

By analyzing your restaurant’s point of sales system, you can guess the amount of cash flow for the upcoming year. While sales can always change, you will have a little more insight into what you should be making for the forthcoming year. You can then decide whether to cut back on spending or invest more money into the business. A restaurant cash flow statement allows you to create seasonal budgets. With that, you can navigate those ups and downs in the industry.

Streamlining Your Costs

If you are unhappy with your restaurant’s cash flow, you might want to reduce overhead costs. Take time to talk to vendors and utility providers about whether you can lower your payments. You may want to remove low-profile or less popular items from the menu. Also, you could reassess your schedule and cut down on staffing hours.

Don’t Rely on Credit

When you have to pay back those debts, it can take a massive chunk out of your restaurant’s cash flow. Instead of relying on credit, you might want to talk to vendors about getting a discount when paying in full.

Get Those Books in Order

While bookkeeping is not a glamorous part of the job, you must stay on top of your books and accounting. A clearer picture can give you a more accurate look at your financial health. If you don’t want to handle this responsibility, consider hiring a professional to take on the bookkeeping and accounting tasks.

Diversify the Vendors

When you rely on one vendor, it may be convenient, but it can put you in a bad situation if something happens to their business. You can get the best deal and negotiate on those prices by working with multiple vendors. Plus, you will always have a fallback if a company goes out of business or runs out of an item.

Save for Emergencies

With a large cash flow, you might want to spend it on something big for the restaurant. However, take a portion of that money and set it aside for emergencies. If you are prepared for expenses, you will not scramble to take out a high-interest loan or pay on credit in an emergency.

A restaurant cash flow statement is vital to understanding the financial picture of your business. Without it, you will not know whether you’re making money or spending too much of it.

When you need an accountant for your small business, reach out to TMD Accounting. Our family-owned and -operated business has been serving the community of Gloucester County for over 40 years. We are a flexible and affordable way to keep track of your restaurant finances, including those cash flow statements. Schedule your consultation by calling 856-228-2205.

Assets vs. Liabilities: The Complete Breakdown

As a business owner, you want to keep an eye on your finances, including your expenses. When you process any transaction, it needs to be recorded in the books. For that reason, you need to know the difference between liabilities and assets. Here is a complete breakdown of these terms and what they mean for your small business.

The Difference Between Assets and Liabilities

Before you can know the differences, you need to understand these terms’ meanings. Liabilities are existing debts that a business owes to a vendor, organization, employee, lender, another business, or government agency. Many of these liabilities will help the business owner finance their company, such as a loan. On the other hand, assets are the resources or sums of value that a business owns. These assets can provide long-term benefits to the owner and also help to generate revenue.

You must list all liabilities and assets on a balance sheet, which is a vital financial document for any business.

What Is a Balance Sheet?

The balance sheet is one of the three fundamental financial statements for a business, along with a cash flow statement and income statement. The balance sheet lists the business’s total assets and how those assets are financed. Balance sheets could be called a statement of financial position or net worth.

The balance sheet will be divided into two sections. All the company’s assets remain on the left side. A list of the liabilities and equity stays on the right. The liabilities and assets are separated into two categories: current and noncurrent. Liquid accounts, such as cash and inventory, are considered part of the current category. Property, equipment, and long-term debt will end up in the noncurrent categories.

Liabilities Examples

Liabilities are either long- or short-term. As previously mentioned, short-term liabilities are current liabilities, and those long-term ones are considered noncurrent. Current liabilities often include credit card balances, accrued expenses, unpaid invoices, and payroll taxes. Noncurrent liabilities are leases, deferred tax payments, and mortgage loans. You must pay those short-term liabilities within one year of incurring the debt. Long-term liabilities are often paid over several years.

Examples of Assets

Similar to liabilities, businesses can also have noncurrent and current assets. A current asset is known as a short-term one, while noncurrent assets are long-term. Current assets include investments, accounts receivable, cash, and inventory. Those noncurrent assets include equipment, trademarks, and patents. All of these items provide continual, long-term value to the businesses. However, you cannot convert noncurrent assets into cash within a year. Additionally, these long-term assets tend to depreciate over a period of time.

Along with that, assets are intangible or tangible. Intangible assets are non-physical items you cannot convert to cash, including trademarks, business licenses, logos, and patents. Tangible assets are physical items that you can easily convert to cash. These assets include bonds, equipment, and inventory.

Assets, Liabilities, and Equity

Once you figure out what you owe compared to what you own, you will want to know how much value is left over. That term is known as equity. You can figure that out by totaling your assets and subtracting those liabilities. For small business owners, your equity is the business’s net worth. If you have a partnership or sole proprietorship, the equity is often called the “owners equity” on the balance sheet. In a corporation, this equity is referred to as “shareholders’ equity.”

No matter the name, equity is vital to your company’s relationship between liabilities and assets. On the balance sheet, the assets equal the total returns plus the total equity. There are several accounting equations to use to determine these figures, such as:

  • Equity = Assets – Liabilities
  • Assets = Liabilities + Equity
  • Liabilities = Assets – Equity

With those equations, your small business accounting services can determine if the business finances through debt or uses its own funds to operate the company. However, these equations will only work for those who use the double-entry bookkeeping methods for their books.

Equity can affect both sides of these equations. If the business only has figures for equity and assets, it can easily calculate liabilities with no issues. Remember that bookkeeping and accounting can be tricky for any business owner. For that reason, hiring a professional to help calculate your assets, liabilities, and equity may be a good idea.

Do These Calculations Matter?

Liabilities, assets, and equity are essential for your business accounting system. With these numbers, you know how much you own, how much you have, and what is left over for your business. You will know where your money is at any given point in your business. These numbers ensure you do not make mistakes in recording those transactions.

Balancing liabilities, assets, and equity is the foundation of double-entry bookkeeping. Without knowing these calculations, you will not be able to understand your business’s finances. As a result, you could have a strong cash flow, but you may have an outstanding debt that eats away at your profits. With a better understanding of these terms, you can confidently know the financial health of your business.

At TMD Accounting, we help you track your assets, liabilities, and equity. Our experienced team can assist with your small business’s accounting, bookkeeping, and tax matters. We are a family-owned and -operated business that has been serving the Gloucester County area for over 40 years. You can count on us when you need an accountant for my small business. Schedule an appointment by calling 1-856-228-2205.

The Ultimate Guide to Independent Contractor Taxes – New Jersey

Independent contractors have to worry about federal income tax, self-employment tax, and local and state taxes when they file their returns. Sole proprietors use Schedule C with Form 1040 to report their business profits and losses to calculate the taxes they will have to pay. To avoid an underpayment penalty, independent contractors must also submit quarterly estimated tax payments each year. When you begin working for one or more companies, they should determine whether you should be treated as an independent contractor or employer based on several factors. If you are classified as an independent contractor, you will be responsible for paying both your portion and the employer’s portion of your taxes and will receive a 1099-NEC at the end of the year instead of a W-2 for your annual earnings. Here is what you need to know as an independent contractor about taxes from TMD Accounting.

Taxes Self-Employed People Must Pay

Independent contractors must pay federal, state, and local taxes and the federal self-employment tax. Here are the taxes self-employed people must pay:

  • Federal income tax at a rate ranging from 10% to 37% based on the total income for the tax year
  • Self-employment tax to pay into Medicare and Social Security with tax rates of 15.3% for net profits of up to $147,000 and 2.9% for net earnings above that amount
  • Additional federal taxes in some situations such as the net investment income tax, alternative minimum tax, and additional Medicare tax
  • State and local taxes, including income tax, registration and licensing fees, and business tax
  • Sales tax if you sell goods
  • Excise tax if you sell items such as guns, cigarettes, alcohol, or telephone services

Understanding the Self-Employment Tax

The self-employment tax includes a 12.4% Social Security tax on your net profits up to $147,000 and a 2.9% Medicare tax on all net earnings. This means you will pay a total self-employment tax of 15.3% on your earnings up to $147,000 and 2.9% on any earnings above that amount. If you have net earnings of more than $200,000 as a single taxpayer or $250,000 as a joint filer, you might also have to pay an additional 0.9% Medicare tax.

Available Deductions for Independent Contractors

There are many different deductions that might be available to independent contractors, including the following:

  • Home office deduction for contractors who work from home and use the office space solely for business purposes on a regular basis
  • Health insurance premiums
  • Retirement plan contributions
  • Depreciation of your equipment, machinery, and furnishings for your office and business use
  • Truck and auto expenses if used for work
  • The qualified business income deduction
  • Expenses for outside services and contract labor
  • Miscellaneous business expenses

Preparing to File Your Taxes as an Independent Contractor

Before you file your taxes, it is important for you to organize everything. You will need to know the gross amount you made as an independent contractor and how much you spent on tax-deductible expenses. Gather your 1099-NECs, profit and loss statements, expense statements and bills, receipts, and other relevant documents together.

Report Income and Deductions on Schedule C

When you fill out your Form 1040, you will use Schedule C to report your business income and deductions. You will report other sources of income, including rental income, dividends, and interest on Form 1040.

Report Net Self-Employment Income on Schedule SE

Once you complete Schedule C, you will then carry over the self-employment income to Schedule SE to calculate your self-employment tax. The self-employment tax will then need to be entered in your Form 1040 tax section.

Complete Form 1040

On your Form 1040, you will include all of your other non-business income. You can also claim non-business deductions on Form 1040, including things like student loan interest, charitable donations, self-employed health insurance, itemized deductions, and others.

Calculate Your Federal Taxes

When you enter everything into your Form 1040 and perform the calculations, you will see your total federal tax obligation. After you subtract your estimated tax payments made during the year, you will either owe taxes or have an expected refund.

Estimate Your Taxes for the Next Tax Year

As a self-employed person, you will need to estimate the taxes you’ll likely owe in the next tax year so that you can divide that amount into quarterly estimated payments to send each quarter throughout the year.

Complete Your State Income Tax Return

Once you have completed your federal tax return, you will then need to complete your state return.

What Happens if You Can’t Pay?

If you can’t pay your taxes in full, you can complete Form 9465 to request an installment arrangement. However, you can’t owe more than $25,000 and must show that you do not have the means to pay your taxes. You will then have three years to pay. The IRS will penalize you for waiting to pay your taxes after the deadline. If you fail to file a tax return by the deadline, you will be assessed a 5% penalty for each month of the outstanding amount you owe but haven’t paid. If you submit your return on time but do not pay what you owe, the late payment penalty will be 0.5% of the tax owed for each month you are overdue.

Find an Accountant for My Small Business

Small business accounting services can help to make filing your taxes simpler. If you are self-employed, working with TMD Accounting might help to ensure your taxes are filed on time and correctly and that you claim the deductions that are available to you. Contact us today to schedule an appointment at 1-856-228-2205.

How to Find the Best Business Accountant for Your Small Business in South Jersey

Running your business is difficult enough without including managing your business’s finances and books. Financial management of your company can involve potential landmines. If you make a wrong choice, your business could lose money, face penalties, and deal with tax consequences. To make sure that you avoid accounting errors and ensure your books are accurate, you might consider hiring an accountant. Finding the right firm for your small business accounting needs will require you to know the steps to take. Here is some information to get you started from TMD Accounting.

Why Do I Need an Accountant for My Small Business?

If you’ve never worked with an accountant, you might not understand whether you need one for your business. There are multiple reasons why you should work with an accountant to help with your business’s finances. Some of the benefits an accountant can offer include the following:

  • Ensure the accuracy of your books
  • Assist your business with budgeting
  • Simplify tax filing
  • Provide strong device for business decisions
  • Answer your accounting questions
  • Ensure your bases are covered in the event of an audit

An accountant can ensure that your books are current and accurate. While accounting software can help with tracking day-to-day transactions, you should partner with an accountant to review your books on a regular basis.

Identify the Accounting Services You Need

Once you’ve decided that you should find an accountant, you will need to determine which accounting services you will need. Some of the types of services accountants offer include the following:

After you have determined which services your business needs from an accountant, you can move forward with searching for the best accounting firm to meet your needs by taking the following steps.

Ask for Referrals From Other Business Owners

A great way to narrow down your list of potential accountants is to ask others you trust for referrals. Ask your family, friends, and fellow business professionals for their recommendations of the accounting firms they trust. You can also ask your attorney or your banker for recommendations and ask members of your business network.

Once you have gathered several referrals, research the options by reading online reviews. Make sure the reviews you read are authentic by checking their consistency over time and the validity of the profiles that the reviews are attached to.

Research on Your Own

Whether or not you receive quality referrals, it is also a good idea to research on your own to find the best accountant. Try searching online, reading reviews, and looking at a business directory. When you read reviews, be sure and read both those that are positive and those that are negative. This can provide you with a picture of the experiences of others. If you identify accountants in a business directory, follow up by searching the firms online to read about others’ experiences. Once you have done your homework, you should have a list of a few prospective firms.

Interview Prospective Accountants

Once you have a list of a few accounting firms, schedule time with each one to interview them. This can help you see which accounting firm will be the right fit for your company. Prepare some questions to bring with you so that you know what to ask. Some of the types of questions you should consider include asking about their services, their fees and fee structures, any additional fees they charge for specific services, their communication methods, and the types of clients they typically do business with.
You should also ask about the accounting programs they use, their credentials, and their experience with businesses in your industry. You should ask more questions than you might think are necessary because doing so can help you identify red flags. For example, if an accountant overpromises, doesn’t have credentials, or seems to embellish their accomplishments, you might want to steer clear. Make sure to interview several accountants so that you can compare the pros and cons of each before you decide.

Choose Your Accounting Firm

Once you have interviewed potential accountants, you will need to make a decision about which one to hire. In addition to weighing the pros and cons of each one, make sure to consider whether you are compatible with the accountant you are considering. You will need to work closely with your accountant, so picking one you trust and believe you can do business with is important. After you decide on a firm, contact the accountant to get started.

Contact TMD Accounting

If you are searching for an accountant for your small business, it is important to take the necessary steps to research and interview several potential firms to ensure you find one that meets your business’s accounting needs. TMD Accounting has provided small business accounting services to many different businesses throughout New Jersey for 40 years and has extensive experience helping companies in a variety of different industries. To learn more about the services we can provide, contact us today to schedule a consultation by calling 1-856-228-2205.

Why Your Law Firm Needs a Specialized Accountant

Law firms have unique financial needs that must be addressed differently than how other types of businesses handle their finances. A law firm’s need for specialized accounting applies to both the firm’s business and accounting strategies and how they track and manage various types of accounts. Because of the requirements law firms have, they can benefit from working with accounting firms that offer small business accounting services to attorneys. TMD Accounting provides accounting services that focus on the unique accounting needs of law firms and can help your firm stay on track.

Help With Income Forecasting

Most law firms use billable hours to determine how much to charge clients. Many attorneys charge for their time in six- or 10-minute increments. Tracking billable hours can be a headache for many attorneys. To ensure that your firm is accurately determining its billing, we can help you transition to tools in the cloud to track your lawyers’ hours. Using the cloud can help you to accurately and efficiently track billable hours for every client while reducing or eliminating time losses. Many small- and mid-sized law firms contend with income fluctuations, which make managing your firm’s cash flow important to your success. Our accountants help law firms to manage accounts payable, create forecasts, and reduce the time involved with receiving payments for accounts receivable.

Optimizing Taxes

Employment agreements with attorneys can be structured by law firms in different ways. Some firms pay attorneys as independent contractors. Others hire lawyers as full-time, salaried employees. Some agreements might include profit-sharing or bonuses. What might work for your firm will depend on several factors. An accounting firm that specializes in providing services to law firms can help you choose the structure that works the best for your business.

In addition to your employment agreements, you also need to ensure that you have the right business structure. The business structure you choose for your law firm can affect the taxes you might pay. We can help you choose the structure that will provide you with the most tax advantages.

Tracking Trust Funds

Law firms must keep their clients’ funds in separate trust accounts and cannot commingle them with their other money. Many firms ask for retainers upfront before they begin work. Firms must follow strict rules when they hold client funds in a trust account for recordkeeping and client notification. It is critical for you to avoid commingling the funds with your firm’s money or using one client’s money to pay for services you provide to another client. If you mismanage your trust accounts, deposit funds in the wrong account, or fail to meet your recordkeeping and reporting requirements, you could face significant penalties, including the possible suspension of your law license. A specialized accountant can help to track client funds to ensure you avoid these types of mistakes.

Matter Cost Tracking

Law firms have both direct and indirect costs. You must correctly identify which costs are direct and indirect. The accounting for direct and indirect costs must be handled differently. Our accountants can help to identify which costs are direct or indirect and account for them properly.

How to Choose the Right Accounting Firm

Choosing the right accounting firm to handle your law firm’s accounting needs is important. Here are some tips to find the right legal accountant for your firm.

1. Ask About the Company’s Experience

While finding an experienced accountant is important, you want to find an accounting firm that has significant experience working with legal clients. Ask a prospective accounting firm about its experience working with law firms.

2. Ask About the Services Provided by the Firm

You will want to know about all of the services the accounting firm offers to law firms and their levels. For example, you will need to determine the degree of control you want to give the accounting firm over your bookkeeping. If you want comprehensive accounting services, you will want to look for a full-service firm. Some firms have bookkeepers to handle daily transactions. Others might charge more if you need to hire a certified public accountant to handle regular bookkeeping tasks.

3. Ask About Audit Support

It is a good idea for you to find an accounting firm that offers help in case your law firm is audited by the state or the Internal Revenue Service. The state licensing body can audit law firms to ensure they are accurately tracking and handling client funds, and the IRS audit can happen to anyone. Undergoing an audit can be stressful. If you have a trusted accountant’s help during an audit, it can greatly reduce your stress because you can feel confident in the accuracy of your financial data.

4. Ask About Fees

Accounting firms have different payment structures. Some charge flat fees for each task performed while others charge by the minute. You will want to understand your accountant’s fee structure so that you will know whether your accountant’s bill will increase each time you make a phone call or whether it will be calculated by task.

5. Ask for References

It is a good idea to ask other law firms about their experiences working with the accounting firm you are considering. Word-of-mouth referrals can help you determine which firms are known to provide good specialized services to law firms. You can also ask the firm you are considering to provide you with references from law firms that have used or currently use their services. Follow up with any references you are provided to ask about their experiences.

Talk to an Accountant for My Small Business

As an attorney, it is critical for you to carefully track your firm’s and your clients’ money. Working with an experienced accountant at TMD Accounting can help to ensure you meet your regulatory requirements and grow your practice. Contact us today for a consultation by calling 1-856-228-2205.

Cash vs. Accrual Basis of Accounting – What’s Best For Small Business?

Choosing the right accounting type for your small business can be a challenge. Cash and accrual accounting might seem similar, but choosing the wrong one can hurt your financial reports. When you know which one works for your purposes, you can keep all your books in order. Here are the differences between cash and accrual accounting.

What Is Cash Basis Accounting?

Before choosing the right accounting method, you need to know the basics. Let’s start with cash basis accounting. When you use these methods, you will record the income as it is received. All expenses are recorded when paid as well. With cash basis accounting, you only record the money when it enters or leaves the account. For example, if you have a restaurant that purchased supplies on credit for June but will not pay the bill until July, it is recorded as a July expense. With these accounting methods, you will not have any accounts payable or accounts receivable.

Since cash basis accounting is a simple way to track your financial records, many small businesses and sole proprietors use this method. If you make less than $25 million in annual sales with no direct-to-consumer merchandise, then cash basis accounting could be a good option. Cash basis accounting has a shorter learning curve than accrual accounting. There are a few items to record, making tracking your revenue and expenses more manageable.

Unfortunately, cash basis accounting does not provide you with the most accurate financial picture. You might think you have a high cash flow when it is just the result of your previous month’s work. Cash basis accounting does not conform to the GAAP standards. If you think your business will grow in the future, you might not want to choose this method.

What Is the Accrual Method?

With the accrual accounting methods, all expenses and incomes are recorded when earned and billed. This method abides by the generally accepted accounting principles (GAAP). With these methods, you will have a clearer picture of your finances. For example, if your business bills a client for $1,000 in March, you record that income for the month, even if the funds don’t reach your account until April. The same is done for expenses.

Some small businesses use accrual accounting as their primary method. However, if your company produces over $25 million in sales revenue during a three-year period, you must use the accrual method.

Many small business owners avoid accrual basis accounting because it is resource-intensive. There will be plenty of extra steps and paperwork associated with this method. You will need to have an adequate cash flow to ensure all bills are covered from month to month. Unfortunately, this method does not provide an accurate short-term view of your financial health.

Accrual Vs. Cash Basis: Which Is Better for Small Business?

Now that you know the basics of these accounting methods, it is time to choose the right one for your small business. If you have a small business that primarily takes cash transactions and does not have a large inventory of products, then the cash basis method might be the right choice for you. This method is a reliable, convenient, and easy way to track your expenses and revenue without knowing much about bookkeeping.

Accrual accounting is definitely the better option if you want an updated and accurate accounting of your company’s financial health. For the most part, accrual accounting can be a little intimidating. You can always hire small business accounting services to help with your finances. Here are some other factors to consider when choosing your accounting method.

Sales Revenue

You should take a look at your sales revenue. If you have more than $25 million in annual revenue, you must use the accrual methods according to GAAP. Many small businesses might not have hit that amount, but it could be a possibility in the future. Keep that in mind for your business.

Complexity of Your Business

Depending on the complexity of your books and industry, one accounting method might be the better choice. For example, you should avoid the cash-based accounting method if your business has multiple accounts, various LLCs, and hundreds of employees. With those methods, you will not be able to gather information about your financial picture from the balance sheets, cash flow statements, or income statements.

Public Company

According to the GAAP guidelines, if you have a public company or one that will go public in the future, you need to use the accrual basis. These types of businesses have to report an accurate view of their financial health to shareholders.

Final Word

Before choosing the right small business accounting method, you must thoroughly examine your company. While you can always switch the methods later, it can be a hassle and disrupt business. Many accounting tools and professional services help you accurately account for your financials. Whether you choose accrual or cash basis accounting, you always want to select the right option that will work for your business. Plus, you must make sure to stay compliant with those GAAP standards.

Do you need an accountant for my small business? Reach out to TMD Accounting. Whether you choose the cash basis or accrual accounting method, we will make sure you have an accurate record of your financial health. We have helped small businesses throughout Gloucester County for over 40 years. Schedule your consultation by calling 1-856-228-2205.

1 2