Life & Taxes

Life & Taxes

Welcome to the official blog of Brittany Lanphier, managing partner of Lanphier Accounting LLP based in Denver, Colorado!

I will admit that I have always been a bit anti-blog. Something about it seemed a little bit self-aggrandizing and voyeuristic, especially during college when, for the most part, all of my friends had very similar lives. The distinctions, at the very least, were not interesting enough to read or write about. I am also always reminded of the words of Frederick Buechner, that to write anything for public consumption — whether a book or a blog — is itself a rather arrogant act, making the bold assumption that you have something to say worth reading.

I have, however, found in the years passed since college, that I am increasingly fascinated by the divergent paths of the lives that were once so similar. I particularly find interest in the unique careers that everyone has found themselves in, and how those careers have shaped their marriages, their families, and their homes.

So, here I find myself, at the beginning of an exciting new chapter in grown-up life. After several years in “Big Four” public accounting, Dennis and I have launched our own accounting practice. After six months of getting it up and running, we are finally in full-swing, allowing me to realize a dream of finally calling myself a “full-time business owner.” And I find myself wanting to share this journey with friends, family, clients, and potential clients, so that they can see inside the life of a young business owner, working to make their dream a success.

Ever since I chose to be an accounting major in college, people have asked me the question “Do you have a passion for accounting?” I always responded that I didn’t think anyone had a “passion for accounting”, if by accounting you meant debits and credits, journal entries, or tax returns. What I did and do have a passion for is business, in all its varied forms, and more specifically, the financial side of business.

Like it or not (and many business owners resent this), finances are the lifeblood of business. By looking at an income statement or balance sheet of a company, I can instantly tell almost anything I need to know about what a business does, how it makes its money, how healthy the business is, and what hopes they might have for succeeding in the future. So no – I do not have a “passion” for accounting. Accounting is only the toolbox, the specialized set of skills, that I use to do what I really love — helping small business owners realize their passion in business, be that through photography, medicine, real estate, or anything else.

I also have a passion for putting all of this critical information into plain English, so that my clients can at once understand how important financial health is for their business and know how to act on it in very practical ways. I have found that many business owners are incredibly talented at something – but often that something is not running a business. I hate to see businesses fail – dreams fail – simply as a result of lack of information or guidance.

I also hate the reputation CPAs have received for being the kill-joys of business, for sucking all of the fun and freedom out of operating your own company. When many think of their CPA, they just think of someone who shows up mid-spring to bark at them for not keeping their QuickBooks file in good order and then prepares their tax return with little or no effort to help them understand what it all means for them. My goal for my practice is to be a trusted advisor to my clients, someone who leaves room for their dreams and goals to flourish, but in a highly informed environment that will lay the foundation for success in years to come.

So…here is my blog! A blog by a small business owner for small business owners (or anyone else who wants to read it). I hope to provide some insight into the day-to-day life of someone working to make their own dream a success. And while I am at it, I plan to offer a little generic tax and business advice in plain English, which will hopefully be helpful and informative to business owners and individuals alike.

Obviously, this is intended to be for informational purposes only and is not guidance on which Lanphier Accounting LLP intends for you to rely. All tax issues specific to your business are largely facts-and-circumstances based and you should consult your tax advisor (or me directly) to discuss how this might relate to your business.

So for my first installment, in honor of the end of January, I will cover….

Payroll Taxes

This is a subject that is very near and dear to my heart at the moment, as many late nights over the past few weeks have been spent preparing payroll tax returns and watching the Australian Open tennis tournament in my living room here in Denver.

I have found that payroll taxes are one of the least understood areas of taxation for many business owners — even though it is the #1 most important area of tax for them to understand! Many employees also have no idea how the net amount of their paycheck is calculated and where all of their hard-earned money is going.

So, first thing everyone needs to know is that the IRS loves payroll taxes. Why? Because they are some of the easiest taxes for the IRS to detect errors in the reporting and payment. All of your employer payroll tax returns are reconciled against your employee W-2s, and any discrepancies quickly surface. This is the not the area to screw around and pursue “aggressive” tax strategies. I always advise my clients “Get your payroll taxes done correctly and on time, every time.” If you do realize an error made in prior periods, correct it immediately. The IRS is much more forgiving when you correct your own mistakes, rather than waiting for them to pursue you with penalties and interest.

So, what are payroll taxes and what needs to be filed? Well, depending on your state, there will be both federal and state liabilities that you need to pay for and on behalf of your employees.

Form 941 – FICA & Federal Withholding

On the federal side you will have Social Security and Medicare taxes. These are often referred to collectively as “FICA” after the Federal Insurance Contribution Act, which mandated these taxes. Both the employer and the employee are required to pay into these insurance funds, therefore half of the tax is withheld from an employee’s paycheck and the other half is paid directly by the employer.

Both the employer and employee share of Social Security tax is 6.2% on the first $106,800 (for 2010) of wages paid to each employee in a year; Medicare is 1.45% of all wages. Therefore, if you look at your next paystub (for employees) you will see that these taxes make up 7.65% of your total gross wages. It may be (somewhat) comforting to know that the employer is also paying the same 7.65% on your behalf, bringing the total FICA taxes to 15.3%.

Additionally, the employer is required by law to withhold appropriate federal income tax and deposit it on behalf of their employees. What is appropriate withholding? This is determined by Form W-4, which is completed by each employee on their first day of work. In my experience, most employees (including myself when I began working) have no idea what this form means. I will leave this for another post so it can get the space it deserves.

Each quarter, employers are required to file Form 941, which reports both employer and employee shares of FICA and federal withholding. Most employers, besides the very smallest, are required to deposit their tax monthly, so generally by the time you file Form 941, all of your tax should have already been paid. Form 941 is due on the last day of the month following the end of the quarter (so January 31, 2010 for the quarter ended December 31, 2009).

Form 940 – FUTA

The other federal tax that employers need to be aware of is Federal Unemployment Tax, also referred to as FUTA after the Federal Unemployment Tax Act. FUTA is an employer-only tax, meaning the employee does not pay into this at all.

Generally, FUTA tax is 6.2% on the first $7,000 of wages for each employee. You are allowed, however, a credit of 5.4% if you paid your state unemployment tax on time for that year. Therefore, for most employers, FUTA is only 0.8% (6.2%-5.4%), and the maximum FUTA tax on each employee is usually $54 per year (0.8% * $7,000).

Form 940 must be prepared and filed annually to report FUTA tax for each employer. Unless your liability exceeds $500 at the end of the quarter you are not required to deposit this tax. Therefore, many small employers pay all of their FUTA tax with their annual return in January.

State Withholding Taxes

Depending on the state you operate in, you may be required to withhold state income tax from your employees. Some states, like Texas, do not have an individual income tax so there is no need to withhold. Other states, like Colorado, do have an income tax. The withholding rates vary from state to state, so I won’t get into specifics, but you need to double-check this with your payroll provider or taxing authority! You will likely be required to deposit any withheld tax on a quarterly basis.

State Unemployment Taxes

You will also be required to pay state unemployment tax on your employees. As discussed above with FUTA, paying your state unemployment taxes actually qualifies you for a reduced rate on your federal unemployment taxes, so it’s not all bad.

When you register for an unemployment account with your state agency, you will be assigned a new employer tax rate. In subsequent years, this rate may be increased or decreased based on the unemployment claims that have been filed against your company by terminated employees. Therefore, if you are an employer that has never fired an employee, your rate will likely remain fairly low after the initial period (different for each state).

Wrapping Up…

So…I hope this gave you a helpful, quick run-down of the payroll taxes that your business may be liable for. As you can tell these can be pretty confusing and involved, and the fun part is that laws are always changing in this area. Therefore, it is generally recommended that you utilize some kind of payroll service provider, whether it is built into your accounting software and you process it yourself, or you truly outsource it to a third-party processor or your CPA.

In future posts, I will revisit the area of employment and payroll taxes, particularly as it relates to self-employment taxes, a huge area that needs to be understood by all small business owners.

Thanks everyone for reading my first ever blog post, and I hope you will drop in again soon to see what we are up to at Lanphier Accounting LLP

Best to all of you!

Brittany Lanphier, CPA

Brittany Lanphier | 01/30/2010

Lanphier Accounting LLP
600 17th St., Suite 2800 South
Denver, CO 80202

Phone: 720.961.0310