Year end and 1099’s
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1099’s for 2007 are due to your Contract Labor vendors by Jan 31st. Even if you did not set up your 1099 tracking correctly in QuickBooks at the beginning of 2007, you can capture the information by setting it up now. As with any year-end report processing, I always recommend reconciling all of your checking accounts prior to preparing your reports. As with W-2’s, the data you provide to your 1099 vendors will have personal income tax consequences for them, and it’s important the information you report to them and to the government is accurate. The first step in 1099 processing is to be sure you know who to send 1099’s to and have the system set up correctly in QuickBooks. The general rules are that for every unincorporated vendor you contract for labor or labor and material services combined, you must have them complete a form W-9, which provides you with their Tax ID#*. In order to generate a 1099 report for this vendor at the end of the year, you must set up the vendor properly in QuickBooks by clicking on the “Additional Information” tab in the vendor record, checking the “Vendor eligible for 1099”, and enter the vendor’s tax id#. This part of 1099 processing is pretty intuitive, as you are likely to notice these options during vendor set up. However, this is not all you need to do in order to generate the 1099’s in QuickBooks. You also need to go into the “Edit” “Preferences” menu. Near the bottom of the list you will see the option “Tax:1099”, click on this option and the tab “Company preferences”. If you are not sure about what to do here, by all means, consult the IRS web site at www.irs.gov or your tax professional. For most contractors, we are focusing on contracted labor services, which should be reported in box 7 for “non-employee compensation” , which has a default threshold of $600*. Here we need to tell QuickBooks which accounts to apply 1099 reporting to. This step is required in order to generate 1099’s in QuickBooks. The reason QuickBooks needs to know this is that not all payments you make to your 1099 vendors may be reportable on the 1099 as non-employee compensation. For instance, if you happen to reimburse them for materials or mileage, these payments may not be included on the 1099*. In this space, I usually select the “multiple accounts” option and choose any accounts that I may pay a 1099 vendor that may qualify as non-employee compensation. You must consider how your items are set up as well and be sure accounts that are linked to items that may include employee compensation are included here. For instance, you may choose your Cost of Goods Sold Account called “Sub- Contractor Costs”, but you may sometimes pay your subcontractors with an item linked to a generic Cost of Goods Sold Account, in this case you may need to include this account as well. Keep in mind, though, that material purchases only are generally not included in 1099, only labor or labor and materials contracted in combination*. After saving these preferences, you should be ready for 1099 processing. The next step is to run a 1099 detail and 1099 summary report from the “Reports” “Vendors and Payables” menu and review the transactions that are included carefully. I also run a “Transaction List by Vendor” report for the entire year to be sure I have not missed any vendors who should receive a 1099. Now I will go to the “Vendor” menu and “Print 1099’s and 1096’s”. In this menu QuickBooks has a 4-step process similar to that I have outlined here. Believe it or not, I step through each step once again as a final check. By this time, you should feel confident enough to run your 1099’s. If you are having difficulty capturing the information, or are unsure of the proper set up, contact a QuickBooks expert or your Tax Professional for advice.
*NOTE: I am not a tax professional and do not profess to advise 1099 or tax reporting requirements. These instructions are intended to generalize the reporting IRS reporting requirements in order to provide technical
information on how to set up QuickBooks properly for reporting. Please consult your tax
professional or the IRS for complete 1099 reporting requirements.
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Year End Checklist
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The end of the year is fast approaching, as it always seems to! Just thinking about wrapping up the end of the year bookkeeping can feel overwhelming. Reviewing your yearend tasks now, and getting a head start on some can help you feel more relaxed and in control. Here are a few things you can get started on before the end of the year:
1. Preferably the last day of the year – conduct a physical inventory and make any adjustments into your accounting system.
2. Review your 1099 vendor information to make sure it is complete. In QuickBooks, run the report called 1099 summary under Reports – Vendors and Payables. If you want to make sure you haven’t forgotten to assign a vendor as a 1099 vendor, try this: At the top of the 1099 summary report you will see 1099 Options, from the drop down menu choose all vendors and review the report. If you forgot to mark a vendor as a 1099 vendor upon set up, now you can go back and make the correction in the vendor record.
3. Review your Receivables to be sure there are no payments that are not applied to invoices by running the report under Customers and Receivables called: Open Invoices. Post any unapplied payments through the Received payments feature in QuickBooks. (For more information see my QuickBooks Corner article “Resolving Unapplied payments and the significance” at www.nevadacountybiz.com.
4. Clean up your Accounts Payable as well. Run the report under Vendors and Payables called Unpaid bills detail and resolve any incorrect credits or outstanding bills.
After the end of the year:
5. If you file your taxes on an accrual basis, be sure to accrue any expenses that belong in 2009 by entering bills for them and any accrued payroll expenses by making a Journal Entry. Tip – Use the Reverse button on a Journal Entry to easily create reversing entries. Also be sure to invoice your customers for income Earned in 2009.
6. Check with your accountant, but it may be appropriate to accrue Work In Progress Income or Expenses at the end of the year by creating a Journal Entry.
7. Carefully review your Balance Sheet report for things like Customer Deposits and be sure they are correct.
8. Reconcile all of your bank and credit card accounts.
9. Reconcile your loan accounts and make sure all accrued interest has been recorded appropriately and that your accounting Loan Balance matches your actual Loan Balance.
10. Update your Unemployment rate if it has changed. Sometime in December you will have received a letter from them with your new rate for 2010.
11. Run your Yearend Profit and Loss and Balance Sheet and review carefully. When you are ready to file your taxes, it’s a good idea to set a closing date password in QuickBooks to ensure that you don’t accidentally make any prior year entries into QuickBooks – you can still go back and make necessary entries with the password.
12. If you do payroll, be sure to run your DE6-DE7, 940, 941, W-2 and W-3’s by the end of January.
The end of the year is also a good time to review your Budget and Business Plan. Every business should have both, no matter how long they have been established. Business Matters offers Financial Evaluation, Projection, Business Planning and Budget Planning assistance.
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About “Closing” year end in QuickBooks
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I set a closing date password. To access the feature in QuickBooks: From the Edit menu –select Preferences – on the left of this new window – At the top of the Preferences Menu click – Accounting – and then choose the Company Preferences tab on the Right. At the bottom of the Company Preferences window, you will see the Set Date/Password button under the Closing Date section. When you click this button, another window opens and allows you to select a closing date and enter a password. For the closing date, you should enter the last day of the year, not the first date of the New Year. Keep your password simple and easy to remember, I recommend writing it down…. And, of course….. not forgetting where you wrote it down.
I am often asked by customers about “closing” their books at year-end. Many old-school and complex accounting programs require you to perform a closing process at the end of a financial year before entering any information for the current year. In fact, at the large corporation I used to work, we had to close the books every month! After the closing process is complete, the information is “locked down” and there is no changing it. Period. This creates deadlines, bottlenecks, and stress for all of us in accounting trying to get our work done.
Most small business owners are not native accountants and don’t understand the exact reason for the “closing” procedure, they just know it’s something that is done, and don’t they need to do it? The answer is yes, and no. Large businesses that provide periodic financial statements to shareholders and/or Board Members must ensure that the statements are accurate and will not be changed after presentation. They must close the books in finality at certain periods in order to present this information as complete. For most small businesses, the cut off is related to filing their tax return. In other words, once you run the Profit and Loss and Balance Sheet and use that information to file your taxes, you do not want to make any further changes to that year’s data. That makes sense; after all, if you entered some additional Income or Expenses after the year is over, it wouldn’t be reported on your tax return ever.
QuickBooks doesn’t have a formal “closing” process, and this makes some people feel like it must not be a “real” accounting program. But QuickBooks is designed for Small Business users, and, although it can be dangerous, there are practical reasons why QuickBooks leaves prior year data open for editing. The main reason is that it is just not practical to expect every small business to complete all of their yearend work before creating any other transactions in the New Year. Often there are credit card expenses coming in on statements clear through February. Another reason is that many of us depend on our CPA or tax preparer to provide us with adjustments like depreciation expenses that need to be entered once the tax return is prepared… and that could be much later. So, rather than imposing a locked down closing, QuickBooks creates a Journal Entry automatically at the end of the year to transfer the Net Income to Retained Earnings and allows you to set a closing date password. The closing date password feature allows anyone with the password to change prior year’s data, and helps keep you from accidentally entering anything into the wrong year.
Once I have completed my year end closing tasks (see the Year End Checklist under “QuickBooks Corner” at www.nevadacountybiz.com, I set a closing date password. To access the feature in QuickBooks: From the Edit menu –select Preferences – on the left of this new window – At the top of the Preferences Menu click – Accounting – and then choose the Company Preferences tab on the Right. At the bottom of the Company Preferences window, you will see the Set Date/Password button under the Closing Date section. When you click this button, another window opens and allows you to select a closing date and enter a password. For the closing date, you should enter the last day of the year, not the first date of the New Year. Keep your password simple and easy to remember, I recommend writing it down…. And, of course….. not forgetting where you wrote it down.
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