What's Up with the New W-4?

If you are now or ever have been a W-2 employee, you know that one of the many documents that you’re required to submit to HR in your first couple of weeks is the W-4. But do you know why?

What is the W-4?

The W-4 is a document used by your employer to estimate the amount of tax that should be taken out of each paycheck to meet your tax due by the end of the year. What you are submitting is a very brief overview of your tax situation to get that estimate as accurate as possible. Thing is, it used to be a much more simple form.

Why did it change?

While the old form used to be simple, many taxpayers found it hard to use the accompanying worksheets to figure out how much to withhold (remember withholding allowances?) The IRS says the new design “reduces the form’s complexity and increases the transparency and accuracy of the withholding system”. The new worksheets ask straightforward questions about your situation to help you more easily determine what to report.

Do you have to submit a new W-4?

Nope! Employees who have submitted a W-4 before 2020 are not required to submit a new form just because of the redesign, but since employers will continue to compute withholding based on the information from your most recently submitted W-4, you’ll want to update if you think adjustments need to be made.

So what should you do next?

The IRS has built a tax withholding estimator to help you calculate where you stand and what you’ll owe at the end of the tax year. Grab your most recent pay stub and tax return and get to it. Happy estimating!


Regardless of Your Business Type, We've All Got These Three Things in Common

When we talk about entrepreneurship, it seems like creatives get all the love. But there are so many types of creatives, including service providers, consultants, and retail / restaurant spaces. We often treat them as different because there are so many nuances based on your business type, but we also have quite a bit in common. Curious as to what? I’ll tell you below.

Little Fish Accounting
  1. We all need a team.

    I recently listened to the Company of One podcast where the host was discussing how “solopreneur” is a misnomer. Little Fish specifically focuses on very small businesses (and we say solopreneur often) but the truth is, none of us are doing it alone. You can give yourself some grace when you are reminded that there is no expectation that you could take care of EVERY thing in your business by yourself.

  2. We all have to pay taxes.

    Most of us aren’t excited about it, but the IRS and state authorities look forward to hearing from us (and our bank accounts) on a quarterly or annual basis. This means, we have to have our financial lives together in order to pay them accurately on a timely basis. So, the question is, how? I give you all of the information I can via the Fish Food podcast, newsletter, and these blog posts, but the first step is TRACK EVERYTHING. Hopefully via a cloud accounting system, but at least by way of a very good excel spreadsheet.

  3. We all have bad days.

    You will see this suggestion everywhere, but don’t get caught up in the internet version (and sometimes real life conversations) about the constant joy of entrepreneurship. It can be hard. It can be demanding. It can feel like the best of times and worst of times at the same time for a short time or a long time. But it gets better. If you make a mistake, learn how to correct it, and then take the steps. If you’re confused about how to move forward with something you don’t understand, find someone to help you. And when you need to rest, because you can’t take anymore or don’t want to push any harder, take a break. The work and to-do list will be there tomorrow.

Four Systems that Will Help your Business Grow

We talk a lot about accounting over here (no surprise there, huh?) but we know that it takes an efficient system or network of systems to get customers into your business to pay you in the first place. If you do not build automations into your workflows, you can spend more time than necessary just getting to the work than doing the work that is being asked of you. We’re all about giving you time back to do what you actually got into business to do, so let’s jump right into three systems that are imperative to helping you do so.

Photo credit:  Darden Creative

Photo credit: Darden Creative

  1. Online Scheduler

    Our Pick: Acuity

    Tired of the back and forth emails to schedule an appointment? Use an online scheduler to allow anyone to quickly view your real-time availability and self-book their own appointments. As another perk, using an appointment scheduler allows you to set appropriate work hours and automate sending reminders.

  2. Electronic Document Signing Software

    Our Pick: SignNow

    Offering clients the ability to sign documents electronically makes it easier for all parties involved to provide and receive approval, which helps keep the process moving. One thing we love about SignNow is the ability to send the invite to sign as a link , which cuts down on the number of emails a client receives buy allowing us to include in the stream of communication we are already using.

  3. Project Management Tool

    Our Picks: Asana and Airtable

    Depending on your company needs, there are are many tasks that have to happen behind the scenes to get work done. Whether that’s onboarding a client or managing your team, a project management tool helps you keep track of everything that needs to get done. Asana is a winner for our internal organization needs. From onboarding to tracking to note-taking, this has really changed the game for how we keep track of team needs and responsibilities. On the other hand, Airtable allows you to organize data, present information to your team, and store information that you may need to manipulate later. We use it for our customer database, but there are so many more opportunities to incorporate this system into our business.

  4. Payroll Processing System

    Our Pick: Gusto

    Are you hiring yet? If so, you do not want to have the responsibility of managing the payroll withholding and reporting requirements for employee taxes. If you are looking for an easy way to pay your employees, Gusto offers full-service payroll services, including payroll filings and tax payments, direct deposit, and W-2 / 1099 prep and filing. As a bonus, if you register and pay at least one employee, Gusto also allows you to pay contractors as well, allowing you to handle all of your workers in one place

Interested what helps Little Fish run behind the scenes?

Well you’re in for a treat, because we’ve listed all of our favorite non-human helpers here. Click the links to sign up - we may or may not get a little something for referring you but rest assured - we wouldn’t send you their way if we didn’t believe in the product.

Hiring 101 - Contractor v. Employee

Congratulations! Your team is growing. Now you have moved beyond working alone (or with the free help of family and friends) and into the realm of becoming an employer. One of the first questions that arises is how to know the difference between an employee and a contractor, and I’m here to help you stay on the right side of the IRS definition.

Hiring 101 - Contractor v. Employee

Why does it matter?

In the tax world, the distinction between employees and independent contractors generally lies in how much control you have over the worker. You can determine the level of control by asking a few questions about the position:

  • Does your company control or have the right to control over when and how the worker does the job?

  • Does the company require that the worker show up to perform the work at a specific site or office location?

  • Will the worker receive benefits?

  • Is the work engaged for a specific time period?

  • Is the worker an individual or a business (including LLCs)?

  • Can the worker take on other work outside of the work your company is requesting?

Per the IRS, “The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.”

How to Handle an Employee

If you determine that the worker is an employee position, you will need to register with your state as an employer, in order to properly set up your company to withhold payroll taxes and . This is required for each state that your worker lives in, so keep this in mind for those employees who work remotely or outside the state that your business operates in.

All employees should meet the Federal and legal requirements for your state in order to be hired, but the first thing they will all need is a W-4, where the worker will provide their legal name, address, SSN, and tax filing status. This information will be included in your payroll system of choice in order to properly withhold appropriate Federal and state taxes. The employee will be paid an hourly rate or salary, which must be established and stay the same unless formally changed. All wages paid and taxes withheld will be reported on a W-2 that you must provide to the employee and the IRS at the beginning of each tax year.

Keep in mind that you will also be held to the employment laws of your state and the state of the employee. Obtain legal advice to be prepared for all of the expectations and requirements of being an employer.

What about Independent Contractors?

Independent contractor positions are generally expected to be a self-employed individual who performs a professional service for a specified period of time. No Federal or state tax registration is needed when hiring independent contractors, since payroll withholdings are not withheld from their payments.

The first step in hiring an independent contractor is to provide a W-9, where the worker will provide name, address, Taxpayer Identification Number (SSN or EIN), and certification about back up withholding. The W-9 should be kept in your records in case of request by the IRS. Payments to independent contractors that exceed $600 for the year must be reported on a 1099-MISC, which is to be provided to the worker and the IRS by January 31 of the following tax year. Per the IRS, note that independent contractors may have their own employees or may hire other independent contractors (subcontractors). In either case, they should be aware of their tax responsibilities, including filing and reporting requirements, for these workers.

There are pros and cons to hiring independent contractors v. employees, but either way, know which is applicable in your situation.

For more information, use the IRS Small Business and Self-Employed Tax Center as a resource.

DISCLAIMER: I am an accountant, not your accountant. Please speak with a professional about your specific accounting and tax needs before putting any of the aforementioned tips into practice.

Cash v. Accrual Accounting. What does it all mean?

This post is for the non-accountants.

The folks who run a business, want to run a business, or are thinking about whether they should run a business. There are a couple of things you’ll need to know when it comes to accounting for your business, and this is the first in a series of terms you’ll need to know to get started.

photo via  #WOCinTechChat

photo via #WOCinTechChat

Cash and accrual accounting refers to the timing of when you record (or “recognize”) revenue and expense transactions within your system. Curious about the differences and the pros and cons of each? Read more below.

ACCRUAL ACCOUNTING

Accural basis accounting users include sales in the accounting system when earned, and expenses when incurred. The use of accounts receivable (i.e. income earned but not yet received) and accounts payable (i.e. expenses incurred but not yet paid) are like placeholders in your balance sheet to reflect money that you are including in your reports even though cash hasn’t exchanged hands yet.

PRO: Using the accrual basis is the most common and most accurate way to track income and expenses, since the amounts are included as soon as the work is performed or bill is received.

CON: Since revenue isn’t automatically cash, the company can appear profitable without a sense of how much money is actually in the bank. In addition, the accrual system takes a bit more time since some transactions will have two steps: recording the revenue and expense, and a separate entry for when the cash is received or spent. Lastly, the tax impact can feel unfair, since the company is taxed on revenue earned that may or may not have been received in the same tax year.

CASH ACCOUNTING

When using the cash basis of accounting, you record income when you receive it and expenses when you pay them, regardless of when they are incurred. When using this method, you do not have accounts receivable or accounts payable accounts, since nothing is recorded until cash is involved.

PROS: Cash accounting is simpler to maintain, since this method takes the same idea as following your bank account - amounts are recognized only when you receive money or pay for an expense. Also, cash accounting provides a clearer picture as to cash flow throughout the year in a way that accrual accounting cannot.

CONS: The cash accounting method is less accurate since profitability doesn’t take into account items that have not had a cash transaction involved.

Once you choose an accounting method with the IRS, you’ll need to stick with it for subsequent tax years (unless you file a form requesting a change). Some business types require accrual accounting, so talk to your accountant to determine which type would work best in your particular situation.

DISCLAIMER: I am an accountant, not your accountant. Please speak with a professional about your specific accounting and tax needs before putting any of the aforementioned tips into practice.

You Owe. Now What?

Tax season is over, but for some that’s the beginning of a new process: that of preparing for payments for tax due to Federal and state agencies. So what now? See below for the next four steps you should take to get a handle on it.

1. FILE ANYWAY.

The IRS imposes penalties for both late filing AND late payment. You can avoid one of these by filing your tax return on time.

2. FIGURE OUT HOW MUCH YOU CAN PAY TODAY

Since penalties on late payments are assessed based on the amount remaining due, you can decrease the amount of interest you'll pay on the unpaid amount by sending something towards your bill. Remember, even if you choose to file an extension, any taxes owed are still due on the filing deadline. Therefore if you don’t pay by the deadline, you are subject to those extra penalties and fees.

3. GET ON A PAYMENT PLAN

If you are not able to pay the amount due in full by the tax deadline, the IRS offers methods by which to pay over a period of time.

• You may qualify for extra time to pay your taxes if you can pay in full in 120 days or less. You can apply online at IRS.gov. There is usually no setup fee for a short-term extension.

• If you owe $50,000 or less and need more time to pay, you can apply for an Online Payment Agreement on IRS.gov. A direct debit payment plan is your best option. This plan is the lower-cost, hassle-free way to pay. The set-up fee is less than other plans. There are no reminders, no missed payments and no checks to write and mail. You can also use Form 9465, Installment Agreement Request, to apply.

4. REASSESS

Now is the perfect time to review your withholdings and estimated tax amounts. Are you on track to be in a similar income situation next year? You may want to update how taxes are withheld from your paycheck, or if you’re self-employed, how much you send to the IRS throughout the year so that you aren’t in for a surprise next April. Take advantage of the IRS paycheck checkup tool to be proactive about your tax planning before it’s time to file.

DISCLAIMER: I am an accountant, not your accountant. Please speak with a professional about your specific accounting and tax needs before putting any of the aforementioned tips into practice.