QuickBooks Tip: Receiving Payments in QuickBooks Online

It’s perhaps one of your favorite activities in QuickBooks Online: recording money that comes in. Are you doing it right?

Your days of matching paper checks to paper invoices are over. QuickBooks Online excels at keeping your accounts receivable organized. No more digging through piles of forms and hand-stamping PAID on your customer bills and statements. No more trying to write small enough in your register so you can identify the origins of deposits.

You do, though, need to know how to get to payment screens—there are multiple ways—and which form to complete for each remittance. Here are the three types you’ll deal with most often.

Receive payment on an invoice
When payment comes in on an invoice, you can get to the right screens in any of several ways.

Click the + (plus) sign in the upper right corner. Under Customers, select Receive Payment. In the upper left of the window that opens, select the correct customer by clicking the down arrow at the end of that field to open the list.

Make sure the Payment date is correct. Open the Payment method list and select from Cash, Check, Credit card, etc. If there’s a Reference no., like a check number, enter it in that field. The default value for Deposit to is Undeposited Funds. Leave that active, and enter the Amount received in that field.

When you select a customer’s name in the Receive Payment window, a list of unpaid invoices will appear at the bottom.

If the customer has multiple outstanding invoices, QuickBooks Online will put a check mark in front of the oldest one(s). You can change this if you need to by clicking to uncheck the box and clicking in the box in front of the correct one.

Tip: If you want to isolate invoices from a specific date range, click the arrow next to Filter.

When you’ve specified where the payment(s) will go, add a memo and/or attachment if you’d like and select either Save and close or Save and new in the lower right corner.

You can also record payments on invoices from other screens in QuickBooks Online. For example, click Transactions in the left vertical navigation bar and select Sales to open the list of sales transactions. At the far right end of every line that contains an unpaid invoice, you’ll see a link to Receive payment. Click it, and the payment screen will open with the name and amount already filled in. Another option: With an invoice open, click Receive payment in the upper right corner.

Receive payment at the time of the sale
When a customer pays you immediately for products and/or services, there’s no need to create an invoice. You’d instead use a sales receipt. Click the + sign in the upper right and select Sales Receipt under Customers.

Tip: If you click the small diagonal arrow when it appears next to an option, the site will open the screen in a separate window.

Fill in the fields at the top like you did on the Receive Payments screen.

Use a sales receipt in QuickBooks Online if you receive payment at the same time you provide a product or service.

Complete the lower half of the sales receipt by selecting the products and/or services sold from the drop-down lists. Then click the links at the bottom of the screen to print or email the receipt.

Receive a down payment or retainer
If a customer gives you money as part of a down payment or a retainer for work to be done or products to be delivered, you can enter it on the Receive Payment screen without connecting it to an invoice. If you’re prepared to create a record of the specific charges, though, you can use an invoice form and categorize the payment as a deposit.

There are other ways to receive payments from customers in QuickBooks Online, like creating credit memos or using a mobile payment device. However you do it, your bookkeeping needs to be precise, or you’ll run into problems down the road. If this is a topic that creates some uncertainty, we can go over the whole concept with you and outline your options. You work too hard for your money to risk applying it incorrectly –or worse, losing it to an accounting error.

How An Accountant Can Help Your Small Business Boom

One of the most positive qualities that many small business owners share is a burning desire – an insatiable willingness – to “do it all.” It’s what separates entrepreneurs from employees in the first place. An employee is more than willing to set out on the path that someone else has carved for them. An entrepreneur has a need to carve a path for themselves.

Unfortunately, this mentality can also get even the most passionate small business owners into a bit of trouble – particularly when it comes to their finances. Being able to balance your own checkbook and running the finances of a small business are NOT the same thing, nor should they ever be treated as such. To that end, the importance of finding the right accounting professional to help support your small business as it continues to grow and evolve cannot be overstated enough.

There are a number of essential ways, in particular, that an accounting expert can help your small business.

When You’re Just Starting Out
Perhaps the most important role that an accounting professional will play in terms of your small business takes place when you’re just starting out. One of the most common mistakes that many business owners make involves selecting the wrong business entity – a small problem that can have major ramifications when tax season rolls around. A accounting pro who is intimately involved with the makeup of your business from a basic level can help make sure this doesn’t happen to you.

Along the same lines, an accounting professional can also help make sure that your accounting system is properly set up in the first place. They can make sure that you’re picking the right accounting system that actually supports your long-term goals for your business and can create a chart of accounts to offer superior visibility into money coming into and out of your organization.

The Day-to-Day Grind
Another one of the hugely invaluable ways that an accounting expert can help your small business comes by the small, yet critical, decisions they make on a daily basis. A financial expert can help give you greater visibility into cash flow (including accounts payable and accounts receivable), for example. Cash flow and other instability issues are one of the major reasons why most small businesses fail in the first place, and having the right person at your side can help you avoid them altogether.

An accounting professional can also help make sure your security controls are properly set up and executed, particularly in terms of factors like compliance. Remember that we’re living in an era where the average cost of a data breach has ballooned to almost $4 million. If the security aspect of your finances is not properly accounted for, it could be putting your entire business at risk. Even one small data breach could expose the personal records of multiple clients, something that opens the door to things like lawsuits, and that could eventually close the door on everything you’ve worked so hard to build.

Other Benefits
A financial professional will also play an important role when it comes to growing your small business. Remember that both an inability to scale up as fast as you need AND growing your business faster than you can sustain are additional reasons why many small businesses fail. Because such a large part of your growth and expansion pace has to do with personal finances, it stands to reason that bringing someone into the fold who can leverage their years of experience to your advantage is a very good idea.

A financial expert can help you raise money – particularly helpful if you’re getting ready to bring a new product or service to market. If you ever decide that this chapter of your life is closed and that it’s time to look for new opportunities, these professionals can also help sell your small business as well. Selling a business is a process filled with potential mistakes just waiting to happen, and the expert hand of someone who has been in this position before is something that you literally cannot put a price on. It isn’t just an investment in your organizational ability – it’s an investment in the future of your business as a whole.

In the End
The fact of the matter is that there really is no “one size fits all” approach to small business accounting. Every business is a little bit different, which will require a certain level of care and finesse when it comes to finances in particular. Only by consulting the help of a professional as early on in the process as possible will you be able to avoid the normal pitfalls of running a small business and create a financially stable foundation from which to work.

If you are considering starting a new business, it may be appropriate to consult with this office before you get too far through the process. Please call for assistance.

Does Your Employer Misclassify You as an Independent Contractor Instead of as an Employee?

It is not uncommon for employers to misclassify employees as independent contractors, either to intentionally avoid their withholding and tax responsibilities or because they are not aware of the laws regarding the issue. If your employer reports your income on a Form 1099 (as opposed to a W-2), you are being treated as an independent contractor, not as an employee. This can have significant ramifications in terms of how much you have to pay in income, Social Security, and Medicare taxes.

The general distinction, of course, is that an employee is an individual who works under the direction and control of an employer, and an independent contractor is a business owner or contractor who provides services to other businesses.

To determine whether a worker is an independent contractor or an employee, the IRS examines the relationship between the worker and the business and considers all evidence regarding control and independence. This evidence falls into the following three categories:

(1) Behavioral control covers whether the business has the right to direct or control how the work is done through instructions, training, or other means. Employees are generally given instructions on when and where to work, what tools to use, where to purchase supplies, what order to follow, and so on.

(2) Financial control covers whether the business has the right to control the financial and business aspects of the worker’s job. This includes the extent to which the worker has unreimbursed business expenses; the extent of his or her investment in the facilities being used; the extent to which his or her services are made available to the relevant market; how he or she is paid; and the extent to which he or she can realize a profit or incur a loss.

(3) Type of relationship includes any written contracts that describe the relationship the parties intended to create; the extent to which the worker is available to perform services for other, similar businesses; whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay; the permanency of the relationship; and the extent to which the worker’s services are a key aspect of the company’s regular business.

When a worker’s status is in doubt, Form SS-8 (Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding) can be used. This form may be completed by an employer or a worker; it asks the IRS to determine whether the worker is an employee or an independent contractor for federal tax purposes. Form SS-8 is filed separately from the requestor’s tax return. The IRS does not issue determinations for proposed employment arrangements or hypothetical situations, and it will only issue a determination if the statute of limitations for the year at issue hasn’t expired.

If an employee wants to avoid paying self-employed tax on 1099-MISC income after he or she has already been determined to be an employee – or when he or she has filed an SS-8 but has not received a response – that individual can file Form 8919, which only requires payment of what would have been withheld if the worker had been treated as an employee. Form 8919 requires the employee to choose one of these codes:

Code A. I filed Form SS-8 and received a determination letter stating that I am an employee of this firm.
Code C. I received other correspondence from the IRS that states I am an employee.
Code G. I filed Form SS-8 with the IRS but have not received a reply.
Code H. I received a Form W-2 and a Form 1099-MISC from this firm for the same tax year. The amount on Form 1099-MISC should have been included as wages on the Form W-2.

If using Code H, do not file an SS-8. Here are some examples of amounts that are sometimes erroneously included (but not necessarily deliberately misclassified) on Form 1099-MISC and that should be reported as wages on Form W-2: employee bonuses, awards, travel expense reimbursements not paid under an accountable plan, scholarships, and signing bonuses.

If Code G is used, both the employee and the firm that paid the employee may be contacted for additional information. Use of this code is not a guarantee that the IRS will agree with the worker’s opinion as to his or her status. If the IRS does not agree that the worker is an employee, the worker may be billed an additional amount for the employment tax, as well as penalties and interest resulting from the change in the worker’s status.

If the IRS determination is for multiple open years, the employee can amend returns for open years to recover a portion of the self-employed tax paid.

If you have questions about being misclassified as an independent contractor, please give this office a call.

Can You Deduct a Home Office, and Is It Worth It?

Home office is a term used to describe the tax deduction for the business use of your home, which may or may not be an office. It is often misunderstood and claimed by those who don’t qualify for it or not claimed to the taxpayer’s best advantage. Understanding the requirements, options, limitations, advantages and disadvantages will help you determine if you qualify for the deduction and whether it is right for you.

Qualifications – In general, for you to deduct home office expenses, the office area must be used exclusively (no personal use) in your trade or business on a regular, continuing basis, and one of the following must apply—it is:

  1. Used for storing inventory for a wholesale or retail business for which your home is the only fixed location. Use of the area need not be exclusive under this test, but it must be regularly used;
  2. Used as a licensed day care center (exclusive use not required);
  3. A separate structure not attached to your home but used for business;
  4. A place where you meet with customers, patients or clients (just telephone contact with clients isn’t enough to meet this test); or
  5. The principal place of business for any of your trades or businesses.

Employee Issues – If you are an employee, in addition to the general qualifications for a home office discussed above, the home office use must also be for the convenience of your employer. Convenience of the employer means a business necessity—the use of the home must be a condition of employment. The employee needs a place to work, but the employer doesn’t provide one (or the office provided by the employer is inadequate or unsafe). Usage by the employee for personal convenience is not enough.

Method Options – Two methods are available for determining the amount of the home office deduction: the actual expense method and the simplified method (sometimes termed the safe-harbor method).

  • Actual Expense Method – The actual expense method uses home expenses that are prorated based upon the portion of the home that qualifies as a home office, generally based upon square footage. The prorated expenses include mortgage interest, real property taxes, insurance, heating, electricity, maintenance and depreciation. In the case of a rented home, the interest, tax and depreciation expenses are replaced by rent. Besides the prorated expenses, 100% of the costs directly related to the office, such as painting the office or repairs specific to the office, are allowed.
  • Simplified Method – In lieu of the actual expense method, the simplified method can be elected annually. The deduction is $5 per square foot, with a maximum square footage of 300. Thus, the maximum deduction is $1,500 per year. If the space was not used the entire year as a qualified home office, then this simple method becomes a little more complex, as the deduction must be limited to $5 times the average monthly square footage. Under the actual expense method, since part of the home mortgage interest and taxes are deducted as home office expenses, only the difference between 100% of the mortgage interest and taxes and the amount claimed for the office expense is allowed as a Schedule A itemized deduction. With the simplified method, all of the qualified home mortgage interest and taxes can be deducted on Schedule A.

When using the actual method, the unused deduction as a result of the income limitations (discussed below) carries over to future years, but none of the unused deduction figured by the simplified method will carry over.

Income Limitations – Even if you qualify for a home office deduction, the home office deduction is limited to the business activity’s gross income or, in the case of an employee, wages from the employer. Many people mistakenly believe that the limitation is the activity’s net income. The gross income limitation is actually the gross sales less the cost of goods sold, the business portion of the home’s mortgage interest and taxes and the otherwise deductible business expenses that are not related to the home’s business use. If the simplified home office deduction is used, there is no adjustment for home mortgage interest and taxes.

Relocation – There are additional things to consider when you deduct a home office and subsequently leave the rental or sell the home.

  • Renter – When you rent your home, move and use space at the new location as a home office, for the year of the move, you’ll need to figure the deduction separately for each home office based on the specific expenses and business use area of each home. If you don’t use space at your new living quarters for business purposes, then your home office deduction for the year of the move will only need to factor in the expenses for the time you lived in the first home.
  • Homeowner – If you own the home, sell it and had lived in it for 2 of the 5 years prior to the sale date, you can exclude up to $250,000 of gain ($500,000 for a married couple). However, you cannot exclude the part of any gain to the extent of depreciation you claimed for the home office after May 6, 1997.
    In addition, if the home office was within the same structure as the home, the exclusion will apply to the entire gain from the home except for the deprecation claimed. On the other hand, if the office was within a separate structure, then the sale must be treated as two sales – one for the home and one for the office – and the gain from the home office portion cannot be excluded, which can be a huge negative to claiming the home office deduction in the first place.

As you can see, there is more to the home office deduction than meets the eye. If you have questions about how a home office might fit into your tax situation, please give this office a call.