Corporations are an older legal structure, and thus, more formal. In certain situations, these formalities are desirable. For instance, most passive investors favor a corporate structure. Because they are not actively involved, they tend to prefer the business observe corporate customs, such as maintaining a board of directors, electing officers, and holding annual meetings. In smaller, owner-operated companies, there is less of a need for these rigid (statutory) requirements. Moreover, they can be costly to observe and time-consuming. Over time, legislatures enacted statutes that provide for a more flexible entity that can adapt to changes a business will experience over its lifespan: the limited liability company. With this background, I like to recommend the LLC as a starting-point for owner-operated businesses. However, an exception would be entrepreneurs who will immediately seek investment from passive investors. In these scenarios, the corporation is usually preferable.

While an LLC is not required, I typically recommend new business owners register for one. The state of Ohio processing fee is reasonable. LLCs are the simplest business entity, and the easiest to administer. They are also flexible with how they can be treated for tax purposes.

How do you want to be taxed? The beauty of the LLC is that you can choose from the options available and change the classification year-by-year. For-profit LLCs can register as sole-proprietors, partnerships, S corporations, or C corporations. A single-member LLC, taxed as a sole-proprietor, is the simplest classification. You file business income on your personal tax return by attaching Schedule C. Net profit is subject to self-employment and federal income tax. If you do not have employees, you do not need a payroll service in this situation. Multi-member LLCs are taxed as partnerships by default. The partnership will file a separate Form 1065 tax return. Income or loss from the partnership is distributed to the partners on Schedule K-1. S corporations are popular because owner-operators can avoid some of the hefty self-employment tax on the investment component of their income. In this structure, an owner-operator is paid a salary and receives a K-1 for the income or loss from the business (after deducting expenses and salaries). This K-1 income is not subject to self-employment tax. However, S corporations are more complicated to operate. The business will need to file a separate tax return, Form 1120S. In addition, because owner-operators are W-2 employees, a payroll service is recommended. Historically, for small businesses, the C corporation was less popular due to double-taxation. Unlike the sole-proprietor, partnership, and S corporation, the C corporation, itself, is subject to federal income tax. In addition, dividend (profit) distributions to owners are taxed. However, C corporations have seen a resurgence in recent years due to the lowering of the corporate income tax rate. And they are the standard classification-selection in situations where there will be more than a handful of passive investors.

CAT tax, as it’s informally known, is a gross receipts tax imposed on businesses operating in Ohio with sales of at least $150,000. The tax return is due each May.

When you pay a vendor $600 or more for services rendered to your business, you may need to report the income to this contractor, and the IRS, by annually filing form 1099-NEC. The IRS is now requiring you to answer whether you filed (or will file) required 1099s directly on business tax returns. Failure to file 1099s may impact your ability to later claim these business-related payments as tax deductions, in particular, if you are subject to audit.

Certain businesses are required to register as vendors with the state of Ohio and to collect sales tax when payment is received. These vendors report and pay sales tax on a monthly basis via the Ohio Business Gateway. Failure to collect and remit sales tax can result in fines, penalties, and, in egregious cases, criminal charges.

QuickBooks Online will connect to your bank and credit card accounts and directly upload economic transactions. This ability greatly diminishes the need for mundane data entry, copying receipt figures into bookkeeping software. Also, suffice to say, computers are more accurate than humans when replicating data. As a result, less time is spent on error-correction. At J. Hunter Company, we believe a highly-qualified person, with an in-depth understanding of tax accounting principles, should be in charge of coding transactions into QuickBooks Online. This person’s work-product will be directly responsible for the precision of figures used in financial reporting analysis and tax return preparation.

Finding a qualified, part-time bookkeeper to work as your internal employee is a challenge. Several of our clients tried a number of long-term candidates before deciding to outsource. Note, with our service, you are not responsible for employer payroll taxes related to our services or the costs of other employee benefits, such as health insurance and retirement plans. You simply pay a service fee for work performed. Over the long-term, if you continue with our bookkeeping services, we believe you will see additional cost reduction from the lack of employee turnover in this role.

Industries and organizations are unique. What matters to a construction business owner, may mean very little to a manufacturer, and vice versa. The factors that make a business work are of unique interest to us, and we strive to create custom financial reports, which give you access to the information you need to make competitive decisions. This process begins with studying your industry and developing a distinct Chart of Accounts, “buckets” to categorize economic transactions in ways that make sense to you as the business owner. Finance is personal. In this role, we hope that you begin to view us as your trusted financial consultant, equipped with the task of helping you succeed.

We offer bookkeeping packages with account reconciliation on a monthly or quarterly basis. Monthly reconciliation will ensure that your books match your bank and credit card statements each month, which allows you to grab up-to-date reports and assess the financial status of your business. Often in business, you need to move fast. Current accounting books place you in a better position to rapidly secure loans, make offers, and analyze offers you receive from customers or other interested parties. Opening and running a small business is hard. The vast majority of entrepreneurs did not start their businesses to sit behind a desk and crunch numbers. We believe your time is best spent developing your product or service and building the relationships and awareness required to sell your offering. Hopefully, you started a business, because of your passion, and we want to enable you to focus on the operational tasks you enjoy.

QuickBooks Online is hosted in the cloud. Intuit, the maker of QuickBooks, is responsible to store, secure, and backup the data. For small businesses, we believe this hosting service is best outsourced to a large, publicly-traded firm, like Intuit, with their technical expertise and financial resources. By maintaining your data in the cloud, multiple users (and departments) can instantaneously access the same set of books via Internet connection. All users will see updates in real-time. QuickBooks Online also allows you to designate user privileges; for example, you may want to provide certain employees viewing access but not grant them authority to make changes to coded transactions. Such a universal platform eliminates much of the back and forth communication and reconciling, which took place before, when financials were stored on users’ personal, local systems. You no longer need to use USB drives to backup your data. And, you can access your books from any location with a cellphone and the QuickBooks Online mobile application.

Employers must report new employee hires (and certain independent contractors) to the state of Ohio within 20 days of the date that payments begin. The objective of the new hire reporting law is to expedite collection and recovery of child support, particularly from non-custodial parents. We report all new hires using Ohio’s online reporting center, although the state continues to allow reporting using the Ohio New Hire Reporting form.

Ohio is one of a few states that allows employee income tax by local jurisdictions. Municipalities impose local income tax on businesses and employees operating in their jurisdictions, as well as residents. Most municipalities provide a credit to residents who pay local income tax to another municipality where they work. Voters may also approve local school district income taxes. An employer’s responsibility to withhold local income tax is determined by work location. Although permitted, we do not recommend that small employers withhold an employee’s local income tax based on residence.

Form IT-4 is Ohio’s version of form W-4 and allows an employer to determine the exact Ohio income tax to withhold each pay period.

Federal, state, and local governments impose payroll taxes. As such, good payroll accounting practices are essential to small businesses. Because the rules are complex, J. Hunter Company offers a solution to simplify and outsource this important responsibility placed on small business owners.

If you were ever employed, you probably remember completing a W-4 form. This Internal Revenue Service form enables an employer to calculate the correct federal income tax to withhold from an employee’s paycheck. Remember, when you hire an employee, as opposed to paying a contractor, the law requires you to deduct the employee’s federal income tax liability each pay period and periodically pay these amounts to the United States Treasury.

Registration with the Social Security Administration’s business services online division allows us to take an extra step in verifying a new hire’s social security number directly with the responsible federal agency. Confirmation is always best practice but can prove particularly useful when the employee cannot provide an authentic social security card, or in situations where the employee will be exposed to sensitive financial or personal data. Avoid the hassle of correcting W2s and ensure your employees receive proper credit for paying into the Social Security system.

Most small businesses with employees remit payroll taxes to the United States Treasury on a monthly or semiweekly schedule. The frequency with which you are required to deposit is determined by the amount paid in a look back period. New employers start as monthly depositors the first year (unless a special $100,000 next-day deposit rule applies), and federal employer taxes are due by the 15th day of each month. Federal payroll tax deposits include six components: Employee’s federal income tax withheld; Employee’s social security tax withheld; Employee’s medicare tax withheld; Employer’s social security tax; Employer’s medicare tax; and Employer’s federal unemployment tax (FUTA tax). Thus, federal payroll tax deposits are not just taxes withheld from an employee’s paycheck. The employer is responsible for half of the social security and medicare tax burden, as well as the entire FUTA tax.

Making the transition from sole proprietor or partnership, with no employees, to employer is a major step for small businesses. When you hire your first employee, you begin to pay workers’ compensation and unemployment insurance. Workers’ compensation provides your employees insurance coverage for work-related injuries. Federal and state unemployment insurance creates a fund to pay compensation to employees who lose their jobs. The costs of workers’ compensation and unemployment insurance are significant, in particular, with industries like construction, where accident incident rates are high, and seasonal layoffs are typical. At J. Hunter Company, our objective is to help you understand these real costs when you are making strategic hiring and compensation decisions.

Employees that want to receive payment by direct deposit should complete an authorization form allowing you (and your agents, if applicable) to make certain ACH transfers into their accounts. At this time, we also recommend that you obtain a voided check.

Ohio maintains a reciprocity agreement with Kentucky, Indiana, Michigan, Pennsylvania, and West Virginia; thus, employees residing in one of these border states that work in Ohio pay income tax to the state of their residence, not Ohio. To document non-residence, employees must sign the form IT-4NR, and employers should maintain the signed form.

The I-9 form, authorized by the Department of Homeland Security, verifies an employee’s identity and authorization to work in the United States. The form includes an employee and employer section and requires the employee to provide identity verification. Most often, the identity verification is satisfied by making a copy of the employee’s driver’s license and social security card. A passport may also verify identity.

Ohio employers also withhold and remit an employee’s Ohio income tax on a periodic basis determined by previous payments in a look back period. Employees that reside in a bordering state, working in Ohio, do not owe Ohio income tax, based on the reciprocity agreements Ohio maintains with each of the bordering states. They would owe income tax to the state of their residence, but employers operating exclusively in Ohio are not required to withhold and remit state income taxes to bordering states. For example, Marie lives in Kentucky but works for an employer in Ohio. The employer does not maintain business operations in Kentucky and chooses not to register with Kentucky to withhold state income tax for Marie. In this scenario, Marie is responsible to file and pay her state income taxes.

In addition to making tax deposits, employers are required to file certain information returns on a periodic basis. J. Hunter Company will complete and submit these forms for you in a timely fashion. As a result, when you sign-up for our payroll services, you can carry on in your business with the assurance of knowing that payroll tax reporting deadlines will be met. Form 941 Employer’s Quarterly Federal Tax Return Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return Form W-2 Wage and Tax Statement Ohio IT 3 Transmittal of Wage and Tax Statements Ohio IT 941 Ohio Employer’s Annual Reconciliation of Income Tax Withheld Ohio JFS 20127 OH Wage Detail and Quarterly Summary Report Local withholding tax and reconciliation forms

In tax lingo, the traditional corporate form is referred to as the C corporation. If you ever purchased a stock through a brokerage firm, you probably bought ownership into a C corporation. Nearly all publicly-traded companies operate in this form. When an entity gets to a certain number of owners, it’s simply not practical to “pass-through” the income or loss. C corporations pay income tax at the entity level. The tax disadvantage, known as “double taxation,” occurs when a shareholder is also personally taxed on dividends and capital gains. We rarely recommend the C corporation form, but that’s because our client base consists of smaller, family-owned businesses, who are not in a position to raise major capital, or who are not interested in giving up the control that may follow from taking on numerous investors. A lot of our clients are in the early stages, and paying the double tax makes little sense. C corporations report income or loss on form 1120. Owner-operators of C corporations are, of course, employees and, thus, subject to payroll taxes.

One of the biggest mistakes we witness among small businesses is electing S corporation classification too soon. Commonly, CPAs and other tax practitioners recommend the S corporation, because in certain situations it can reduce an owner’s social security and medicare tax liability. But, owner-operators of an S corporation are employees of the corporation, and this status of “employer” triggers a host of additional legal and financial responsibilities, like payroll taxes. Also, in recent years, the IRS is cracking-down on the ability of an S corporation owner-employee to avoid social security and medicare taxes, by requiring the officer to take “reasonable compensation.” A brief note on social security: we always remind clients that social security works like a pension. Your social security benefit is determined, in part, by your contributions into the system. In our discussions with employees at social security, we’ve heard of stories where new retirees complain about not receiving a social security benefit. But, the response is always, you paid no (or very little) money into the system, why should you receive a benefit? S corporation shareholders report income or loss on form 1120S. Like a partnership, the S corporation does not pay earnings tax. Rather, the shareholders report their share of the profit or loss on form 1040, schedule E. The S corporation must send each shareholder schedule K-1 (form 1120S). S corporation income is not subject to self-employment tax, which is the major tax advantage and reason why this form is favored by advanced practitioners.

How old were you when you filed your first federal tax return with the IRS? The basic (two page) form 1040 matured in complication over the years. Certain deductions are taken directly on form 1040. With respect to other deductions, taxpayers choose between taking a standard deduction or itemizing deductions on schedule A. Common itemized deductions include medical and dental expenses, state and local taxes, real estate taxes, home mortgage interest, and charitable donations. The vast majority of form 1040 tax returns are electronically filed, and tax preparation firms, like Ohio-based J. Hunter Company, are required to e-file, unless you elect to paper file. Schedule B of form 1040 lists interest and ordinary dividends received in the tax year. Schedule D sets forth capital gains and loss. Schedule E addresses supplemental income and loss. Landlords use schedule E to report rental income, while partners and shareholders use this schedule to include income or loss from partnerships or S corporations. Finally, income or loss from an estate or trust is also accounted for on schedule E. Sole proprietors report profit or loss from a business directly on their personal tax returns using schedule C. A sole proprietorship is a business owned by a single person, where, for tax purposes, the business and taxpayer are not separately identified. Many sole proprietors establish a single-member LLC, which provides them limited liability protection, but for tax purposes, the business and owner are still one and the same. Because sole proprietors are owners and not employees, and thus not subject to payroll taxes, they must pay self-employment tax, which is reported on schedule SE, to account for their required social security and medicare contributions.

Estates and certain trusts are separate taxable entities and report income or loss on form 1041. An estate is automatically created when a person dies, consisting of all assets subject to probate. If an estate earns gross income of $600 or more for the tax year (before the assets are distributed to beneficiaries), the estate must file an estate income tax return. The estate income tax is often confused with the “estate tax,” the latter also known as the death tax. The estate tax is rarely imposed today due to the basic exclusion amount. But, many estates that are not required to pay estate tax are still subject to estate income tax, because investments held by the estate earn income in the interim period before they are distributed to beneficiaries. Another misconception is that all trusts need to file a separate income tax return. The opposite is true with most revocable trusts. In these situations, taxpayers report the trust income directly on their personal tax return (form 1040), as if the trust was not in existence. However, a fiduciary will need to file form 1041 if any taxable income, or gross income of $600 or more, is earned by an irrevocable trust. These trusts are commonly used in medicaid planning. After a look back period, assets transferred to an irrevocable trust are not considered “countable resources,” and the settlor (the person funding the trust) can qualify for medicaid nursing home benefits without a requirement to spend down the trust assets.

When two or more owners start a business, partnership is the default tax classification. A partnership reports profit or loss on form 1065, but this return is used for informational purposes only. The partnership entity will not pay income tax on the profit; rather, owners report their share of the profit or loss on their personal tax returns (form 1040, schedule E). To facilitate this reporting, the partnership must send each partner schedule K-1 (form 1065) after the partnership tax return is prepared. Like sole proprietor income, partnership income is subject to self-employment tax.

Fixed annuities allow you to purchase future income without fear of losing insured principal. When combined with social security, this strategy provides a foundation of retirement income, which is not subject to market turbulence. 1) Fixed versus variable annuities. Jarad Hunter works with fixed, as opposed to variable, annuities. All fixed annuities provide a minimum guaranteed rate for the life of the insurance contract. Variable annuities are securities, and thus, returns depend on the market. The cash value of variable annuities can decrease when markets sour. 2) Fixed interest annuities. Fixed interest annuities operate like bank CDs. The product’s interest rate, over the life of the contract, is set in advance of purchase. Depending on the contract’s terms, an insured may be allowed to withdraw interest each year without surrender charges. Insurance companies, operating with lower overhead, are often able to offer guaranteed interest rates that exceed the rates offered in comparable bank CDs. 3) Fixed index annuities. If you want a guaranteed minimum return, with an ability to participate in market upside, consider the fixed index annuity. These products provide a guaranteed minimum interest rate, but overall return is determined by the performance of an underlying index during the insurance contract period. Fixed index annuities vary tremendously in how they credit interest. One method is to use a participation rate, based on the annual (point-to-point) return of the S&P 500. With these products, the interest credited to your account is determined, annually, by the performance of the S&P 500. For example, if the index is up 20% in a particular year, a 40% participation rate would result in an eight percent interest credit to your account (40% of 20% equals eight percent). Notably, if the index is down 20%, the interest credited to your account that year is zero. But, the annuity will not lose value when the market is down. 4) Income tax advantage. Lastly, we should mention the tax advantage with annuities, as compared with, for example, bank CDs. If you do not receive distributions from your annuity, the interest credited to your account is tax-deferred during the policy’s term. On the other hand, if you own a CD, you would annually receive form 1099-INT, reporting the interest income you must include on your tax return. Tax deferral is a major advantage annuities hold over CDs. However, in the case of annuities held inside IRAs, this tax advantage is lost, because IRAs already feature tax deferral.

The evaporation of defined benefits leaves retirees with a “two-legged stool,” social security and personal savings. We believe fixed annuities can act as the third leg, supplanting the role previously played by pension plans as a primary source of retirement income.

1) Social Security. Of course, social security was only intended as a rudimentary, supplemental income. Think of social security as the “wobbly leg.” (Incidentally, our eyes were opened from our experience in tax preparation, where each year, we come across several retired clients managing to stay above water with social security serving as their only viable earnings source.) 2) Defined benefit plans. Employer pensions, also known as defined benefit plans, are similar to social security in how they operate. Both pay a lifetime (defined) benefit when you retire. Actuarial accountants determine payable amounts using formulas, which are based on life-expectancy statistics. In essence, social security and defined benefit plans serve as retirement income insurance, because they provide the retiree guaranteed income for life. The challenge with the defined benefit system, just described, is that people are dying at older ages. And, in many cases, the system no longer works. Now, it’s quite common for employers to pay pensions 20, or even 30, years after a worker retires. Where before, when life expectancy was much shorter, these situations were minor exceptions. As a result, a disturbing trend developed, the disappearance of defined benefit plans. 3) Defined contribution plans. Employers gradually replaced defined benefit plans with alternatives that allow employees to make tax-deferred contributions into an investment account, like the 401(k) and 403(b) savings plans. These programs are referred to as “defined contribution” plans. Based on their characteristics, we categorize defined contribution plans with personal savings. For employers, defined contribution plans remove the financial uncertainty associated with pensions. But, the gradual replacement of defined benefit with defined contribution raises concerns. Defined benefit plans are akin to a forced participation program. Typically, the pension applies to all vested employees, and the payable amounts are ascertained using factors like years of service, average annual wages, and age of employee when benefits begin. With defined contribution, an employer can automatically enroll employees and provide certain matching incentives, thus encouraging enrollment. But, the employer cannot require participation. This election, to defer receipt of earnings, is an employee’s decision. Also, the ten percent tax penalty for accessing money contributed to a defined contribution plan before age 59.5 is severe. Many employees simply prefer (or need) to receive the money now. Finally, defined contribution transfers the investment risk from employer to employee. Employers can mitigate the employee’s investment risk by conservatively limiting the investment choices available within a defined contribution plan. But, even conservative investments are subject to market folly, and the untrained employee may buy and sell at the most inopportune moments. Employees may also lack the temperament to make purchase and sale decisions. Moreover, unsatisfied employees can rollover 401(k) or 403(b) assets into an IRA, where riskier investment alternatives are available.