The Importance Of Accurate Bookkeeping To Business Tax Returns

The preparation of an annual income tax return is dependent on accurate bookkeeping throughout the year. A business is likely to have additional types of tax reporting requirements during each year. If you are the owner of a small business, your bookkeeping records can be relied upon to determine if you have reached any of the thresholds at which an information tax return is required.

An information return is different from an income tax return. The main purpose of an information return is to inform the recipient that relevant tax data has been reported to the IRS. Information returns that a small business might be required to file include Form 1099-MISC and Form W-2. If you are a small-business owner, your information return requirements depend on the type of payments made and how much is paid.

Amounts paid for nonemployee compensation

The nature of your business may require you to use an independent contractor to perform certain types of work. If you pay $600 or more during the year to an independent contractor, you are generally required to issue that individual a Form 1099-MISC. The $600 threshold applies separately to each independent contractor. Therefore, you will need to compare the payments made to each nonemployee worker with the $600 threshold.

There is an exception to the Form 1099-MISC requirement if compensation is paid to a corporation. Even if payments are in excess of the $600 threshold, a Form 1099-MISC is generally not required if the recipient is structured as a corporation. The exception also applies to payments made to a limited liability company if the LLC elects to be treated as a corporation for tax purposes. The exception is generally not applicable to proceeds paid to an attorney.

Wages paid to employees

Keeping track of payments made to an independent contractor is fairly simple compared with maintaining watch over employee payroll. In addition to providing a year-end Form W-2 for each employee, employers are required to deposit withheld taxes on a prescribed schedule. Failure to deposit withheld taxes on a timely basis can result in a penalty.

You may also be required to file quarterly payroll tax returns. Some smaller employers are allowed to file an annual payroll tax return. However, the frequency of your tax return filing does not influence the deposit requirements. Accurate bookkeeping determines your payroll deposit requirements, which in turn is reported on your quarterly or annual payroll tax return.

Many small-business owners prefer to devote the majority of their own time to the principal activity of the company. Contact your local small business bookkeeping services for assistance in handling the bookkeeping duties of your business.