1) WHAT IS THE DIFFERENCE BETWEEN CASH AND ACCRUAL BOOKKEEPING?
Keeping books on a cash basis means that you can only write off expenses actually paid during that tax year and you will only have to claim income that has actually been paid during the same time frame. If you have accounts receivable and accounts payable on the books, they will need to be backed out of your figures in order for your accountant to prepare your taxes.
Keeping books on an accrual basis means that you can write off all expenses that have been incurred whether they have been paid or not during your calendar or fiscal year. In addition, you will also have to include all sales that have been billed whether they have been paid or not.
Once you are set up on a cash or accrual basis, you must continue using the same method of tax reporting unless a change is approved by the IRS.
2) WHAT IS THE DIFFERENCE BETWEEN AN EMPLOYEE AND A SUBCONTRACTOR?
According to the IRS the definition of an independent contractor is as follows:
"People such as lawyers, accountants, contractors, subcontractors, public stenographers, auctioneers, who follow an independent trade, business, or profession in which they offer their services to the general public are generally not employees. However, whether those people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."
Essentially, this means that you must have the knowledge and ability to perform your services without the benefit of directions. The person you contract with can tell you that they want you to handle a task, but you have to complete the task yourself.
According to the Internal Revenue Service the worker is an employee if...
- You or your representative tells the worker where, when, and how to work.
- You train the worker.
- The business performance depends on the worker.
- The worker has a continuing relationship with the company.
- The worker's services must be personally rendered by him/her.
- You set the worker's work hours.
- The worker works on the employer's premises.
- You are paid by the hour, weeks, or month.
- You furnish tools and materials.
- You can fire the worker without violating a contract.
- The worker has a right to quit without incurring a liability.
- The worker does not offer the worker's services to the public at large.
- The worker has no opportunity for profit or loss as a result of the worker's service.
- The worker has no significant investment in the business.
- You require the worker to submit oral or written reports.
- The worker is a corporate officer.
3) WHAT ARE 1099'S AND WHY DO I NEED TO FILE THEM?
1099-MISC forms must be issued when paying $600 per year or more to anyone for services rendered or rents. The forms are only issued to those who are not incorporated (individuals and partnerships), with two exceptions. 1099-MISC forms must be issued to all attorneys or medical professionals, even if incorporated. The forms must be distributed to payees by Jan. 31. You have until Feb. 28 to file them with IRS.
The big trick to filling out the forms is getting your payees' taxpayer identification numbers. If you didn't get the numbers before you paid them, it could be quite a daunting experience now. You can't even imagine how hostile some people become when you tell them you'll be reporting their income to IRS.
So, if your vendor refuses to provide an ID number, send them a registered letter requesting the information within 5 days. Keep a copy of the letter in your 1099 file, along with the proof of delivery.
If you don't get the ID number before the filing deadline at the end of February, simply put "REFUSED" where the Social Security number would go. Attach a statement that the payee refused to provide their identification number; this will help you avoid paying IRS a $50 penalty for each 1099 form without a recipient's number on it.
For this year, insist on getting the ID number before you pay anyone. It's much easier when they know up front. Have your vendors who provide a service or rents fill in Form W-9 for you before you issue their first check.