Frequently Asked Questions About Bookkeeping and Small Business Taxes

QuickBooks Online is primarily accounting software. It records business transactions and produces financial reports such as the profit and loss statement and balance sheet.

When QuickBooks Payroll is activated and properly configured, it may calculate payroll taxes and file payroll forms such as Forms 941, 940, W-2, and W-3. It may also file applicable state and local payroll forms. Whether Intuit files these forms automatically depends on the payroll subscription, account setup, and filing settings. Business owners should confirm that each filing was accepted rather than assuming it was completed.

Standard QuickBooks Online does not prepare or file the S corporation income tax return, Form 1120-S, shareholder Schedule K-1 forms, or the owner’s individual Form 1040. QuickBooks information may be exported into separate tax preparation software, but the accounting records must still be reviewed, reconciled, and adjusted before the tax return is prepared.

QuickBooks also does not determine reasonable compensation, calculate shareholder basis, identify every available tax deduction, or provide a complete tax strategy. Software can organize the numbers, but it cannot replace professional review.

Federal income tax is a pay-as-you-go system. S corporation income generally passes through to the shareholders, who report their share of the business income on their personal tax returns. A shareholder may owe tax on this income even when the business does not distribute all of the cash.

Individuals, including S corporation shareholders, generally need to make estimated tax payments when they expect to owe at least $1,000 after subtracting withholding and available tax credits. Payments are normally made four times during the year. A penalty may apply when the required amount is not paid by each applicable due date.

Many taxpayers can avoid an underpayment penalty by paying at least the smaller of:

• Ninety percent of the current year tax
• One hundred percent of the prior year tax

For certain higher income taxpayers, the prior year percentage increases to 110 percent. The prior year return must cover a full twelve-month tax year. This rule may help avoid an underpayment penalty, but it does not guarantee that there will be no balance due when the return is filed.

Estimated payments should be reviewed when income changes significantly, a large transaction occurs, or the business becomes substantially more profitable. Some S corporation owners may also increase federal withholding through payroll rather than making separate estimated payments.

A business may need bookkeeping cleanup when its accounting records are incomplete, inaccurate, or no longer agree with the actual bank, credit card, loan, and payroll records.

Common signs that cleanup is needed include:

• Bank or credit card accounts have not been reconciled
• QuickBooks shows negative bank or credit card balances that do not make sense
• Transactions remain uncategorized for several months
• Income or expenses appear to have been entered more than once
• Loan balances do not agree with lender statements
• Personal and business transactions are mixed together
• Old customer invoices or vendor bills remain open even though they were paid
• Payroll liabilities remain on the balance sheet after the taxes were paid
• Owner contributions, distributions, and payroll were recorded incorrectly
• The prior year tax return does not agree with the QuickBooks balance sheet

Cleanup should generally be completed before preparing a business tax return or beginning monthly bookkeeping. Filing a return from unreliable books can result in inaccurate income, missed deductions, incorrect shareholder information, and additional professional fees.

An S corporation shareholder who performs services for the business is generally considered an employee of the corporation. The business must pay the shareholder reasonable compensation through payroll before treating additional payments as nonwage distributions.

Reasonable compensation is not based on a universal percentage, and there is no automatic rule that salary and distributions should be divided sixty-forty or any other fixed ratio.

The appropriate salary depends on the facts and circumstances, including:

• The owner’s duties and responsibilities
• The amount of time devoted to the business
• The owner’s training, experience, and professional qualifications
• What similar businesses pay for comparable services
• The business’s size, location, revenue, and profitability
• Whether other employees perform portions of the owner’s work
• The amount and timing of shareholder distributions

The salary should be supportable based on the work actually performed and should be reviewed as the business changes. The IRS states that wages paid to corporate officers should generally be consistent with their duties.

The specific records needed depend on the business and the services being performed. In general, the accountant should receive enough documentation to verify income, expenses, assets, debts, payroll, and owner activity.

Commonly requested records include:

• Complete bank and credit card statements
• Loan statements and financing agreements
• Payment processor statements from systems such as Stripe, Square, PayPal, or similar providers
• Payroll reports and payroll tax filings
• Sales tax and other state tax filings
• Vehicle and equipment purchase documents
• Documents for assets that were sold, traded, or disposed of
• Details of owner contributions, distributions, and personal expenses paid by the business
• Health insurance and retirement plan information
• Vendor Forms W-9 and contractor payment information
• Business mileage records
• Prior year federal and state tax returns
• Formation documents and S corporation election records
• Correspondence or notices from the IRS or state agencies

The IRS requires businesses to maintain records that support the income, deductions, and credits reported on their tax returns. Receipts, canceled checks, invoices, statements, payroll records, and other supporting documents should be retained for the applicable recordkeeping period.

The business tax return is built from the accounting records. When the bookkeeping is complete and accurate, the tax preparer can more efficiently determine the business’s taxable income, deductions, assets, liabilities, payroll, and shareholder activity.

Incomplete or inaccurate bookkeeping may cause:

• Income to be reported twice or omitted
• Deductible expenses to be missed
• Loan proceeds to be incorrectly recorded as income
• Loan principal payments to be incorrectly deducted as expenses
• Owner transactions to be misclassified
• Asset purchases to be incorrectly expensed
• Payroll and contractor reporting errors
• Inaccurate estimated tax calculations
• Delays in preparing the return
• Additional bookkeeping and tax preparation fees

Accurate bookkeeping also creates opportunities for proactive tax planning. When the books are updated throughout the year, the accountant can review profitability, estimate the tax liability, evaluate payroll, discuss retirement contributions, and identify planning opportunities before the year has ended.

The IRS notes that organized records make tax return preparation easier and provide support if the return is examined or the taxpayer receives a notice.

Service businesses often have fewer inventory concerns, but they can still develop significant accounting problems.

Common mistakes include:

• Mixing personal and business transactions
• Recording transfers between business accounts as income or expenses
• Categorizing the entire loan payment as an expense instead of separating principal and interest
• Recording owner contributions or loan proceeds as sales
• Recording owner distributions as business expenses
• Adding bank feed transactions that were already entered through invoices, bills, or payment systems
• Failing to reconcile every bank and credit card account
• Recording the net payment processor deposit without separately recording fees
• Leaving customer payments unapplied to invoices
• Failing to track accounts receivable
• Recording equipment purchases as ordinary office expenses
• Failing to collect Forms W-9 from contractors
• Failing to review potential Form 1099 filing requirements
• Recording sales tax collected as business income
• Ignoring the balance sheet because the owner only reviews the profit and loss statement

A profit and loss statement can appear reasonable while the balance sheet contains significant errors. Both reports should be reviewed as part of monthly bookkeeping and tax preparation.

Florida does not impose a state individual income tax on natural persons. Moving to Florida, however, does not automatically eliminate filing obligations in the state where the taxpayer previously lived.

A taxpayer who moves during the year may need to file a part-year resident return with the former state. That state may also continue taxing certain income earned or sourced there after the move, including income from property, businesses, employment, deferred compensation, or other continuing connections.

Changing residency involves more than obtaining a Florida address. The former state may examine where the individual actually lives, works, owns property, registers vehicles, votes, maintains professional relationships, and intends to make a permanent home. Taxpayers moving from a state with an income tax should maintain documentation supporting the date and facts of the move.

Federal income tax still applies after moving to Florida. Florida businesses may also have responsibilities involving sales and use tax, payroll and reemployment tax, property tax, annual state filings, and local licensing requirements, depending on their activities.

Individuals with significant income, business ownership, investments, or ongoing connections to their former state should consider working with a tax professional familiar with that state’s residency and income sourcing rules for the year of the move.