By now most business owners and independent contactors in the US are well aware of the new 1099 reporting requirements that were included in the 2010 Patient Protection and Affordable Care Act.

This expansion of 1099 reporting, included to help cover the costs associated with the healthcare reforms, now requires businesses to issue the form 1099 to individuals and corporations providing more than $600 in goods and services in a calendar year. In the previous years 1099s only had to be issued to individuals and not to corporations.

So what does this mean to you?

This means that every business MUST meet this new reporting requirement for 2011. To put that another way; this includes everybody and every business that you purchase $600 or more from including companies where you buy office supplies, gas, office furniture, raw materials, etc.  Yep. Every time you buy a new computer or a desk for your office YOU have to ask that company to give you a W9. Sounds like fun, right?

The general guideline is that you should not give a person or a business payment for goods or services until they give you a filled out and signed W-9 so you can issue the person or company a 1099-Misc form.

Here are a few recommendations to help you get a head start:

1. Send all current vendors that you that you know you will do $600 or more business with in 2011, a form W-9: http://www.irs.gov/pub/irs-pdf/fw9.pdf .
2. For all new vendors or vendors that you make large purchases with that you will pay $600 or more within 2011 you will need to have them fill out a W-9 as well.
3. It is very important to keep track of all payments for each person or company that you have to send a 1099 to.  You should have accounting software for this that is capable of tracking your 1099 vendors, giving you year-end summaries for each vendor and has the capabilities of producing the 1099-Misc.  Using an accounting program such as QuickBooks Desktop will save a lot of time, frustration and money.
4. All 1099-Misc must be mailed to your vendors by January 31^st of each year and a copy of the 1099-Misc and the 1096 must be mailed to the IRS no later than February 28^th of each year (except for a leap year in which the due date is February 29^th).  Some other exceptions apply to the IRS due dates based on holidays and weekends.  Please go to www.irs.gov for more information.

Fortunately, there are a lot of people, business’s and tax professionals that see the disastrous avalanche of paperwork ahead and are speaking out against this new 1099 law. Currently Congress and the President are working on the details of how to repeal Section 9006 from law.

Unfortunately, removing a bill is not simple these days with Republicans and Democrats adding on self-serving amendments that threaten to derail the repeal. But we can cross our fingers and hope they come together on this issue. If Section 9006 is repealed then all of the work above may not be needed and we may be back to the old rules which do not include corporations. If it isn’t repealed, give us a call if you need some help keeping things straight.

Accrual Method or Cash Method Accounting?

It’s one of the first questions you’re usually asked when setting up your accounting software and it can be one of the most puzzling. This topic is complicated and often confuses a lot of people (you are not alone if you’re stumped). Whether it is for personal finances or business, this is an important decision that will have a big affect on your financial future.

So which is right for you? Well, that depends on your goals: are you interested in a quick fix and maintaining your financial status or would you like to get out of debt, grow your business and increase your personal financial status?

The Cash Method

The Cash Method of Accounting tracks income when it is received (money is collected) and expenses when they are actually paid (money is disbursed) in a given period.  This method does not match income to expenses in a given time period.  It is a strict cash in and cash out system.  The benefit of the Cash Method of Accounting is that it reports a better representation of cash flow than the accrual method.  The downside here is that it does not match income to the expenses that the income is associated to in the appropriate time period.

Basically, the cash method for either personal or business purposes is your absolute basic method of recording your finances to meet minimum government reporting requirements. It is a quick fix that will keep you apprised of how much you have in the bank at that moment in time. What it won’t do for you is alert you to any imminent issues like runaway debt or give you a full understanding of your financial situation. If unchecked, you could find your personal or business finances getting out of control leading you to bankruptcy and loss of your home and/or business.

The Accrual Method

The Accrual Method of Accounting reports income when earned (before the cash is received) and expenses as they occur (before the cash is paid out) in a given time period.  The Accrual Method of Accounting recognizes economic events at the time the transactions occurs thus matching revenues to expense which is often referred to as “The Matching Principle”.  This method’s strength is that it gives a more accurate picture of an entity’s current financial position. The downside is that it does not measure cash unless a Cash Flow Statement is included in the Financial Statement Presentation.

Accrual Method accounting takes more effort to use, and if you are self employed or own a small business you’ll definitely need a bookkeeper to help you stay on top of things, however the benefits far outweigh the expense and inconvenience. For self employed and business owners this method can alert you to growing trends of outstanding A/R that could sink you in a matter of months. It also helps you have a more accurate picture of the growth of your business. For personal purposes, this method will help you get off the treadmill of cash in/cash out and start you on a path to financial growth.

Fred’s Fast Track Tax Tip:

If you’re considering switching to the Accrual Method for your personal or business finances, be aware that there is a bit of a learning curve.  I generally steer my non-public business clients to a Modified Accrual Method which integrates the Cash Method and the Accrual Method because it adds a level of reporting on the Accrual side that should be taken into consideration.

I would suggest finding an accountant in your area and scheduling a one hour consultation. Your investment in professional advice will probably cost a few hundred dollars and several hours of your personal time to understand the Accrual Method, but you will be more likely to understand it, stick with it and get better reporting results (lower debt, more savings) if you do.

Very few business owners start their company with the goal of becoming collection agents, so being put in that position can lead to avoidance. You have a personal relationship with your clients and it can become an emotional issue for many small business owners—who wants to add stress to people you know are already struggling? So let’s take the emotional baggage out of the equation by setting up some simple guidelines that communicate your expectations and provide more up to date information for your clients that will help them better budget their payments so you get to avoid being “the bad guy”.

No doubt about it, invoicing is tedious. But with a little tweaking, the process can be improved to make communication between you and your clients/customers more frequent and reduce accounts receivable aging.

Avoidance and lack of communication leads to misinformed or uninformed (and eventually very frustrated) clients, this is often the first mistake that starts you on the road to the A/R blues. Unappealing as it may seem, staying on top of your invoicing improves your cash flow, helps you identify problem clients more quickly, reduces invoice disputes since clients still have the transactions fresh in their heads, and improves client relations because it helps your customers manage their own cash flow.

Your new mantra: Invoice clients/customers promptly and more often!

So where do we begin? As with most things, having the right tools for the job can save you time, frustration and money. The invoicing process can be drastically simplified with commonly used accounting software packages like QuickBooks which will automate the invoicing process, producing professional looking invoices that can be mailed or e-mailed to your clients. The power behind most invoicing systems is that you can enter time, products and reimbursable expenses into the program’s customer center during work hours and invoice on a daily basis if needed. Yes, these systems can take some time to set up and often the use of a consultant to guide you through the installation process, however, the upfront investment of time and money significantly reduces the time and embarrassing mistakes that can ultimately show up on your invoices down the road.

How often you invoice is up to you, but ideally you’ll want to shoot for invoicing on a weekly basis or a biweekly basis. Invoicing on a daily basis any finished work is a great way to stay on top of your invoicing workload too. This invoicing schedule might seem somewhat overkill, and you may be worried about your client’s reaction to the change but think of it more like a marketing campaign than billing. “The squeaky wheel gets the grease” and the more often you correspond with the customers, the more likely your invoice will fall at the top of their list for prompt payment.

Okay, so you’ve got the “why” and you’re ready to get your accounting software setup, now let’s outline the steps to implement your plan of action:

1. Invoice your client and include that the amount was either deducted from their prepaid account or that the invoiced amount will be deducted from their payment account on file (Credit Card, ACH) within 3 business days of the invoice date. Always, always include an invitation to call you if they have any questions.
2. Prepaid accounts need to be notified of their balance and any additional payments needed to keep their account current in order for work to continue. If this prepaid account runs out, then work stops until additional prepayment funds are received.
3. The accounts are then paid within the 3 business days of the invoice date and either accepted or denied by the credit card merchant or bank.
4. Any denied accounts are promptly followed up on and any work on that account is stopped until the invoice payment is satisfied.
5. Clients who do not follow up on denied accounts are placed into the collection process (this will come later in our series).

This process is service-based but can be easily modified for retail business: Payment must be received in full prior to delivery. Better yet, never order product for the customer until the client has at least paid your costs on that product by requiring a non-refundable deposit.

Don’t allow yourself to be at the mercy of your clients; take your power back by implementing these simple and extremely effective processes! It’s not rocket science, but there are still companies that will not subscribe to these simple rules who will find themselves singin’ the A/R Blues and, sooner or later, out of business.

Be proactive with your client communication and be honest about your expectations; you’ll have happier clients, enjoy your business more and have the satisfaction of seeing it thrive.

_{Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money and grow their income since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida with a focus on providing outstanding service, tax savings and financial growth to clients in the Tampa Bay area,  Nationwide and around the world. Visit our website www.FredrickJames.com or call 727-230-0716 for more information.}