Category: Tax Forms

4 Commonly Ignored Financial Reports

The coronavirus has put a strain on businesses in every industry. As McKinsey explains: “The timeline for companies to react to the coronavirus has shrunk dramatically.” In order to adapt, you need accurate and timely information.

Which information is most useful?

The decision can be difficult, given the sheer volume of data you can generate from accounting software. If you don’t use the right information, you can make the wrong decision, or miss the opportunity to make positive change.

Here are four commonly ignored financial reports that can help you make better business decisions.

#1 – Using a Multi-Step Income Statement

A multi-step income statement separates income into operating and non-operating categories, and this information helps you understand what activities are driving company profit. A business should produce the vast majority of sales and profits from operating income.

Operating income is generated from the day-to-day activities of running your business. A furniture manufacturer, for example, buys raw materials, builds furniture, and ships goods to customers. Furniture sales generate operating income month after month.

While operating income is sustainable over time, non-operating income is unusual. Let’s assume that furniture manufacturer sells a piece of equipment for a gain. Selling assets is not the primary business, and the manufacturer may not sell another asset for years. Non-operating income is not sustainable, and an owner can’t rely on the income to generate a consistent profit.

Increasing sales is great, but you need to understand the profitability of each product that you sell.

#2 – Understanding Profit Margin and Sales Mix

Profit margin is defined as (profit / sales), and a business can change the sales mix of products to generate a higher overall profit. Generate a report that lists the profit margin on each product you sell, and that product’s contribution to the sales mix.

Here are the sales price, profit, and profit margin for two products:

Child’s baseball glove	$20 price	$4 profit	0% profit margin ($4/$20)
Adult baseball uniform	$300 price	$45 profit	15% profit margin ($45/$300)

Adult baseball uniform    $300 price    $45 profit      15% profit margin ($45/$300)

The uniform generates far more revenue, but less profit per dollar of sales. A retailer can increase the company-wide profit margin by selling more baseball gloves and fewer uniforms.

Keep in mind that the selling the uniform requires a much bigger investment in inventory, which ties up available cash. Businesses seek to balance the need to produce more revenue with the profit generated from each dollar of sales.

Sales mix is the percentage of total sales generated by a particular product. The goal is to change your marketing efforts and increase sales of products with higher profit margins. If the baseball glove is only 2% of total sales, try increasing the percentage.

#3 – Effectively Manage Debt

If you carry debt in your business, you may only think about making your monthly payments. However, a growing amount of debt can limit your financial options. You may not be able to start that new product line, if you’re carrying too much debt.

Use your accounting software to run a report listing the debt to equity ratio. Here’s the formula:

(Total debt) / (company equity)

Equity is the total amount of money raised from investors to operate your business.

The ratio is used to analyze debt as a percentage of total equity. Let’s assume that a typical ratio for companies in your industry is 2-to-1, or $2 in debt for every $1 of equity issued. If your firm’s ratio climbs to 3-to-1 or 5-to-1, it may be a red flag that your total level of debt is not manageable.

You can reduce your debt load by reviewing your budget, and cutting some expenses. Use the savings to pay off debt faster.

#4 – Monitoring the Accounts Receivable Aging Report

No business can operate without a sufficient level of cash inflows, and you need to monitor and collect money owed by customers. Use the accounts receivable aging report to collect money faster.

The report combines the dollar amount of outstanding invoices based on the date they were issued. Typically, invoices 0 to 30 days are grouped together, followed by 31 to 60 days and 61 to 90 days.

Put a system in place to email customers after 30 days, and to call customers with invoices older than 60 days. If you have a procedure for following up on payments, you’ll collect receivables faster, and you won’t have to borrow money to operate your business.

Use Form Pros to produce business and tax forms quickly, and at a fraction of the cost of hiring a lawyer. The process is intuitive, and easy to use. Try Form Pros to save time, so you can manage your business more effectively.

Which financial data is most important to you?

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Misunderstood Tax Deductions for Your Business

You work hard to generate a profit, and there are a number of business deductions that can reduce your tax liability. Filling out your tax return is time consuming, and recent tax law changes have made the process more difficult.

To understand the deductions your business can take, you need to consider your business structure.

Understanding Your Business Structure

There are a number of ways to structure your business, and the structure impacts how your profits are taxed. Broadly speaking, a business can have a C corporation structure, or a pass-through entity structure.

Taxation of C Corporations (C Corp)

Both the C Corp and the individual taxpayer (shareholder) are taxed on company profits. Here’s an example:

• Company taxes: the C Corp earns $100,000 in 2020. The corporation files a C Corp tax return and pays taxes on company profit
• Dividend: The C Corp pays a $40,000 dividend (share of earnings) to Julie, a shareholder.
• Personal taxes: Julie pays taxes on the $40,000 dividend on her personal tax return.

If you operate a C Corp, you need to be aware of the double taxation of business profits. Pass-through entities, on the other hand, have one level of taxation on profits.

Operating a Pass-through Entity:

As the name implies, pass-through entities pass the company profits and losses directly to the owners. Sole proprietorships, partnerships, S Corporations, and some other businesses are pass-through entities. Here’s a partnership example:

• Openfield Partners generates a $50,000 profit in 2020.
• The partnership files a tax return that documents the profit, the partners, and each partner’s ownership interest. However, no taxes are assessed on the partnership tax return.
• Sally, a partner, is entitled to 20% of the 2020 profit. She is issued a K-1 form and receives $10,000. The $10,000 is added to other income on her personal tax return, and she sends the K-1 form with her tax return.

Most businesses operate as pass-through entities. If you understand how to file business taxes, you can post the proper tax deductions.

Posting Car and Truck Expenses

The IRS instructions allow you to deduct the actual expense of operating a vehicle, or take a standard mileage rate. Actual expenses include repair and maintenance costs incurred during the year.

Keep in mind, however, that tracking actual expenses can be time consuming, and you may fall behind on your recordkeeping. If you can stay on top of your actual expenses, you can compare the total to the standard mileage deduction and take the larger deduction.

Accounting For Depreciation Expense

Physical assets, including machinery, equipment, furniture, computer hardware and software are depreciated. Depreciation expense is posted as an asset and is used to produce revenue over time.

It’s important to remember that the tax deduction for depreciation may be different than the depreciation expense in your financial statements. Work with an accountant on this issue. If you simply take the depreciation expense from your income statement, you may be using the wrong amount for tax purposes.

Including Repair and Maintenance Costs

Don’t let the costs incurred to repair and maintain assets slip through the cracks. Many business owners focus on the dollars needed to purchase assets, and forget about repair and maintenance expenses.

Keep your vehicle repair and maintenance expenses separate- see the car and truck expense discussion above.

Counting Retirement Plan Contributions

A Simplified Employee Pension (SEP) plan is for self-employed people, and an Individual Retirement Account (IRA) is available to both employees and self-employed workers.

Business owners may be able to deduct contributions made to retirement plans, and you need to understand the difference between two retirement plan categories. Talk with your financial advisor and an accountant regarding this deduction.

Paying Self-employment Taxes

This may be the biggest source of confusion for sole proprietors. Keep these points in mind:

• Employees pay their share of FICA Tax (Social Security and Medicare taxes) through payroll withholdings, and the dollar amount of the withholdings are reported on the W-2 form.

• The employer pays a portion of the FICA tax also, and the employer deducts the taxes paid as a business expense.

• For 2020, the employer and the worker each pay a 7.65% tax, and high-income earners may pay an additional Medicare tax.

• If you’re self-employed, you pay both the employer and employee portion, and then deduct the employer portion on Form 1040. Use Schedule SE to compute the amount of the tax deduction.

It’s critically important that self-employed workers complete Schedule SE and pay self-employment taxes. If you don’t, you may be subject to large penalties and interest on the amount that you owe.

Create Your W-2 Form

Tax Impact of a Business Sale

If you decide to sell your business, your tax liability is based on the sales proceeds you receive, and the cost basis of your business. Cost basis is the money an owner has invested in the business. Here are the components of cost basis:

• Original capital contributed to the business by the owner
• Add: Any additional capital contributions since business inception
• Less: Capital withdrawals
• Equals: Cost basis

Dividends (taking a share of earnings) does not affect cost basis. Withdrawals are dollars taken out of the business that are not earnings.

Keep Organized Records

Use technology to keep accurate records and to save time. Form Pros provides intuitive forms that ask the right questions to quickly generate documents for you at a fraction of the cost of hiring a lawyer.

Form Pros offers expertly customized business and tax forms, including Form W-2, Form W-4, and 1099-NEC forms. Use Form Pros to save time and to grow your business.

What tax deduction is the most confusing to you?

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5 Accounting Mistakes That Business Owners Make

Business owners wear many different hats, and your work can change from one moment to the next. You may work on new product ideas, address customer service, and interview a job candidate- all in the same day. Some tasks may fall behind, including your accounting work.

Here are five common accounting mistakes that owners make, and what you can do to avoid them.

#1 – Starting With The Chart of Accounts

You need to set up and maintain a complete chart of accounts, in order to create useful accounting reports. The chart of accounts lists each account and the account’s description, and your financial statements are generated based on the accounts you use. Many owners don’t update the chart of accounts for changes in the business.

Let’s assume that you own a sporting goods equipment manufacturer. Your firm has three product lines: baseball, football, and hiking equipment. You need accounts set up to track the performance of each product line.

If company revenue is posted to account #6000, you should create subaccounts for each product line. Revenue- baseball is account #6100, football is #6200, and hiking is #6300. You can generate profit and loss reports by product line, which allows you to make more informed decisions.

#2 – Planning Inventory Purchases

Managing inventory is a balancing act. You need enough inventory to meet customer demand, but you also need to avoid investing too much cash into inventory. Inventory ties up your available cash, and you can’t recover the cash until the inventory is sold.

Decide on a dollar amount of ending inventory that you can keep on hand at month end. The amount might be based on a percentage of monthly sales (maybe 10%).

If you get customer orders during the first few days of the next month, you’ll be able to fill the orders. Estimate your sales for the month, and use the ending inventory formula to plan your purchases:

Beginning inventory + purchases – sales = ending inventory

You can change any of the variables in the formula and manage your inventory.

Assume that a sporting goods retailer has a beginning inventory of baseball bats totaling 700 units, and the store forecasts 2,000 bat sales for the month. If the retailer wants 200 bats (10% of expected sales) in ending inventory, the number of bats purchased should be:

 (2,000 projected sales + 200 ending inventory – 700 beginning inventory = 1,500 purchased)

Use the inventory formula to ensure that you maintain a sufficient amount of inventory, and to minimize the cash required for inventory purchases.

#3 – Forecasting Cash Flow

If you don’t have enough cash to operate, you’ll need to raise funds by selling equity or issuing debt. Selling equity means that you sell a percentage of ownership to a third party, and issuing debt requires principal and interest payments. To minimize the risk of running short on cash, create a cash flow rollforward using this formula:

(Beginning cash balance  +  cash inflows  – cash outflows = ending cash balance)

You receive cash inflows from customers, and you pay cash for inventory purchases, payroll, and other costs. The ending cash balance for March is also your beginning cash balance in April, so each month is connected.

Create a cash flow rollforward, and update it each month. If the forecast projects a negative balance in cash, use the strategies in step four to collect cash faster.

#4 – Create a Formal Policy for Collections

You work hard to deliver a quality product or service, and you deserve to be paid in a timely manner. Put a formal policy in place to collect accounts receivable. You may email customers if an invoice is 30 days old, and call if a receivable is 60 days old.

Ask customers for a deposit when they order a good or service. People pay deposits for many different reasons, and your request for a deposit is reasonable. Explain that the deposit covers some of your costs as you start working on the customer’s order. When the sale is completed, the amount you’re owed won’t be as large.

 #5 – Working With Profit Margin and Sales Mix

Making a sale is great, but many business owners don’t consider the amount of profit per sale, and the mix of products and services they can offer.

Profit margin is defined as (profit / sales), or the amount of profit generated on each dollar of sales. Assume that a sporting goods retailer earns $4 on a children’s baseball glove priced at $20, and a $45 profit on a $300 adult catcher’s mask. Here are the profit margins:

• Children’s baseball glove: ($4 / $20), or 20%
• Adult catcher’s mask: ($45 / $300), or 15%

The retailer earns more revenue (sales) on the catcher’s mask, but selling the baseball glove generates a 5% higher profit. While the catcher’s mask brings in far more revenue, the cost to purchase and sell the masks is much higher than the baseball gloves.

Now, consider a business that sells dozens or even hundreds of products. Sales mix is the percentage of total sales generated by each individual product. If a business focuses its marketing efforts on products that produce a higher profit margin, company profits will increase.

Finally, look for software products that can help you save time and generate accurate information. Form Pros provide intuitive forms that ask the right questions to quickly generate documents for you at a fraction of the cost of hiring a lawyer.

Form Pros offers expertly customized business and tax forms, including Form W-2, Form W-4, and 1099-NEC forms. Use Form Pros to save time and to grow your business.

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Creating Paystubs If You’re Self-employed

If you’re self-employed, you focus on securing new customers and delivering a great product or service. However, there’s more to growing your business, and that includes payroll-related issues. To maintain productivity as you scale, use Form Pros and other technology tools, in order to save time on administrative tasks.

If you hire employees, you may need to generate pay stubs for workers, and you may also provide pay stubs to independent contractors who provide services.

What, exactly, is a pay stub?

Understanding the Pay Stub

A pay stub lists all of the key information related to an employee’s pay.

When you review a pay stub, it’s important to note the difference between current (current pay period) and year-to-date (YTD) amounts. Both are important, and the YTD balances help the employer and the worker understand if the amounts are correct.

The pay stub provides information on wages, tax withholdings, and benefit withholdings. Independent contractors, however, do not have any withholdings from their pay. You can issue pay stubs to a contractor that lists the gross amount paid, and the contractor can use the form to prove the income to a lender.

The rules regarding pay stubs vary by state. Some states require employers to provide pay information to workers, while other states do not. Businesses should confirm the requirements in each state where they employ workers.

Employees should keep their most recent pay stubs as proof of income. If an individual applies for a loan, the pay stub confirms the borrower’s gross income. Employers should keep pay stubs on file, if they are generated.

The pay stub information should match the data on each employee’s W-2 form, which individuals used to file their personal tax returns. To create a pay stub, the first step is to have each employee complete a Form W-4.

Generating the W-4 Form

The Employee’s Withholding Allowance Certificate (Form W-4) is a form that the federal government requires employees to fill out when they are newly hired. Information submitted on the form (allowances) lets employers know how much salary to withhold from a paycheck for tax purposes.

Once you have a completed W-4, you’ll need to collect additional information for the pay stub.

Create Your W-4 Form

Information Needed to Create a Pay Stub

Determine this information for each employee:

• Payroll cycle: The number of pay periods determines how much salary is paid on each payroll date. It also determines the start and ending days for computing hourly payroll.
• Wages: Gross pay and net pay. Wages may be based on a salary, or calculated using an hourly rate of pay.
• Tax withholdings: Federal, state, and possibly local amounts withheld for taxes.
• Benefit withholdings: Amounts withheld for the employee’s share of insurance premiums, or funds to be invested in a retirement plan.

Here’s a simple example to help you visualize the process.

How to Calculate Net Pay

Julie’s annual income is $50,000, and your firm processes payroll 26 times a year. Julie’s gross wages each pay period total ($50,000 / 26), or $1,923 per pay period.

Based on the allowances on her W-4, your company should withhold 20% of her gross pay ($384) for federal taxes, and 5% ($96) for state taxes. Julie also pays $50 each pay period for her share of the company health insurance plan.

Julie’s net pay is $1,923, less a total of $480 for taxes, and $50 for her health insurance premiums. Her net pay is $1,393.

The pay stub must include all of this information for the current payroll period and year-to-date. The pay stubs you generate may also include unemployment tax payments. Hourly workers need detail on their total hours worked, and any hours that are paid as overtime wages.

Employers need to generate accurate pay stubs, and using technology can help.

Save Time Using Form Pros

FormPros provides a pay stub generator that is user friendly, and helps you produce accurate pay stubs in less time. You can use the site to produce a number of documents, including 1099s, W-2s, and W-9s. Use FormPros to take charge of the pay stub process.

Which payroll task is the most difficult for you?

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Tax Documents That Every Freelancer and Contractor Needs

Working as a freelancer or independent contractor can be challenging. You have to juggle client needs and provide a great product or service. Freelancers must also carefully review their business records, in order to file an accurate tax return.

Here are the tax documents that every freelancer and contractor needs. First, let’s define an independent contractor.

How to determine your freelancer status

The IRS defines a worker as an independent contractor using three different criteria:

1. Behavioral control: Does your company have a right to control what the worker does and how they perform the job?
2. Financial control: Does your company have a say in the material aspects of a worker’s job? In other words, do you decide which expenses are reimbursed or who provides necessary tools and supplies?
3. Contractual Relationship: Is there a written contract? Are benefits such as pension, insurance, and vacation, or sick days a part of that contractual obligation?

When these three criteria are met, the IRS considers the worker an employee of your company, and you are responsible for filling out Form W-2 and paying your share of the FICA taxes.

If these criteria are not met, the worker is an independent contractor who is responsible for paying their own taxes. These individuals receive a 1099-NEC.

To keep the discussion simple, we’ll use “freelancer” to refer to both freelancer and contractors in the rest of the article.

Form 1099-NEC

Companies use Form 1099-NEC to report income earned by people who work as freelancers. For tax year 2020, your customers must send you a 1099 form by February 1st of 2021.

Attach copies for your 1099-NEC forms to your tax return. Employees, on the other hand, use a W-2 form to report income to the IRS.

If a business pays a freelancer less than $600, the company is not required to provide a 1099-NEC form. Keep in mind that freelancers must pay taxes on all earnings, regardless of the dollar amount paid by a client.

Create Your1099-NEC Form

Filing Taxes Without a 1099 Form

Here are the steps to file a tax return, when you don’t receive a 1099 from all of your customers:

Check for your 1099 Forms

Gather all of the forms that you received from customers during the year.

Review your bank deposits

Review your deposits, and compare your 1099 documents with the customer deposits. If you received a client payment and not a 1099, the dollar amount must still be posted to your tax return.

Complete Schedule C

Freelancers post business revenue and expenses to Schedule C of the personal tax return (Form 1040). Revenue less expenses equals net income (or profit), and the freelancer’s net income is added to other source of income on Form 1040.

All of the freelancer’s income must be posted to Part 1, line 1 of Schedule C (Gross receipts and sales). This includes income reported on 1099 forms, and payments under $600 that did not require a 1099 form.

The freelancer’s business net income is posted to Schedule 1 of Form 1040, and the amount is added to other income (spouse’s income, dividend income, interest income) on the personal tax return.

Here are some other forms that are not required for freelancers.

Other tax forms

If you’re worked as an employee, you may be familiar with these forms:

Understanding Form W-4

The Employee’s Withholding Allowance Certificate (Form W-4) is a form that the federal government requires employees to fill out when they are newly hired. Information submitted on the form (allowances) lets employers know how much salary to withhold from a paycheck for tax purposes.

Freelancers are not categorized as employees, and do not need to complete W-4 forms for clients.

Create Your W-4 Form

Going over pay stubs

A pay stub lists all of the key information related to an employee’s pay. The pay stub provides information on wages, tax withholdings, and benefit withholdings. In most cases, freelancers don’t receive pay stubs from customers.

Whether you’re a freelancer or a business owner, you can save time and increase accuracy by using technology.

How FormPros Can Help

Form Pros offers expertly customized business and tax forms. The software provides intuitive forms that ask the right questions, so you can quickly generate documents at a fraction of the cost of hiring a lawyer.

Your business can generate 1099-NEC documents, Form W-2, and W-9 forms using FormPros. The process is quick and painless, and you’ll have more time available to grow your business.

Do you have your business records organized so far this year?

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How to Keep Books for a Small Business: Bookkeeping & Accounting Basics

You need to work efficiently, in order to grow your business over time. Accounting tasks can be time consuming, but you can work more productively if you have a clearly defined process.

This article explains the accounting cycle, and the bookkeeping and accounting tasks that are required to complete the cycle. If you follow these steps in order, you’ll produce accurate financial statements in less time.

So, why should you use the accounting cycle in your business?

Why the accounting cycle is important

If you use the accounting cycle, you can generate accurate financial statements for your firm’s stakeholders. Stakeholders include investors, creditors, vendors, and regulators.

Investors want to know if your firm is increasing sales and generating a profit, while your creditors are focused the ability to repay company loans. When you follow the steps in the accounting cycle, you can produce accurate financial statements for your stakeholders.

A bookkeeper or an accountant must perform each of these steps:

Developing a chart of accounts

The chart of accounts is a list of each account needed to operate the business, and the account number. As your firm grows, you may add, subtract, or change the accounts to meet your needs, and the chart of accounts is used to post every accounting transaction.

Once you set up your chart of accounts, you use source documents to post transactions.

Posting activity using journal entries

Source documents are receipts, invoices and other documents that record business activity. Transactions are posted using journal entries, which post activity to accounts.

The general ledger is a list of every transaction posted to the accounting records during a month or year. General ledger lists every account name and number in the chart of accounts, along with each debit and credit entry for a particular account.

General ledger lists all of the accounting details for your business, and accountants refer to the general ledger frequently.

How double-entry accounting works

Businesses post accounting transactions using the concept of double-entry accounting. Double-entry accounting requires a business to follow these rules to post a journal entry:

• Debit entries: Debit entries are posted on the left side of each journal entry. Asset and expense accounts are increased with a debit entry, with some exceptions.
• Credit entries: Credit entries are posted on the right side of each journal entry. Liability and revenue accounts are increased with a credit entry, with some exceptions.
• Totals: The total dollar amount of debits must always equal credits. Accounting software requires each journal entry to post an equal dollar amount of debits and credits.

As an example, this journal entry is posted to record an asset purchase:

July 20th

Debit inventory            $5,000

Credit cash                     $5,000

(To record purchase of inventory for cash)

The journal entry includes the date, accounts, dollar amounts, and the debit and credit entries. An explanation is listed below the journal entry, so that the purpose of the entry can be quickly determined.

The general ledger detail for a particular account may include dozens of transactions in a given month. The next step is to create a trial balance.

Working with the trial balance

After all of the transactions are posted, companies generate a trail balance, which is a listing of each account and the account balance. A trial balance may require adjustments and corrections.

Generally Accepted Accounting Principles (GAAP) requires the accrual basis of accounting, so that the financial statements are clearly stated. An adjusting entry is an accounting transaction that is required to comply with the accrual basis method of accounting. Here are the final steps in the accounting cycle:

• Once the adjusting entries are posted, an updated trial balance is generated
• The adjusted trial balance is used to produce the financial statements
• Revenue and expense accounts in the income statements are adjusted to zero
• Net income, which is the ending balance in the income statement, is posted as an increase in equity on the balance sheet.

Starting the cycle again

At the beginning of a new month, you follow the same steps in order to generate the financial statements:

• Posts journal entries to general ledger
• Generate a trail balance
• Post adjusting entries
• Use the adjusted trial balance to create the financial statements.

The owner, a bookkeeper, or an accountant must perform each of the steps in the accounting cycle.

Delegating accounting work

Accounting work may be delegated between the owner, a bookkeeper, and an accountant. In smaller businesses, the owner does all of the accounting work.

Bookkeepers use source documents to post transactions, which is a task at the beginning of the accounting cycle. Accountants use their higher level of training to make decisions and judgment calls that bookkeepers don’t address.

The accountant uses the transactions prepared by a bookkeeper, along with payroll data and other records, to generate monthly financial statements, including the balance sheet and income statement. An accountant performs work toward the end of the accounting cycle.

Business owners use the financial statements to assess business performance, and to make informed business decisions. Well-managed firms use automation to complete many accounting tasks.

How FormPros can help

FormPros offers expertly customized business and tax forms. The software provides intuitive forms that ask the right questions, so businesses can quickly generate documents at a fraction of the cost of hiring a lawyer.

If you manage a business, FormPros can generate 1099-NEC documents, Form W-2, and W-9 forms. The process is quick and painless, and you’ll have more time available to grow your business.

Have you automated each step in your accounting process?

Are Pay Stubs Better Than Excel Spreadsheets?

You need to work efficiently to grow your business. Successful companies expand by completing more work in less time. One of the most complex tasks you must complete is payroll, and that includes pay stubs.

This article defines pay stubs, and the information needed to create pay stubs. You’ll read about common mistakes, why using Excel spreadsheets is a bad idea, and how FormPros makes the pay stub process easy.

Let’s start with the definition.

What is a Pay Stub?

A pay stub lists all of the key information related to an employee’s pay. The pay stub provides information on wages, tax withholdings, and benefit withholdings.

The rules regarding pay stubs vary by state. Some states require employers to provide pay information to workers, while other states do not. Businesses should confirm the requirements in each state where they employ workers.

Employees should keep their most recent pay stubs as proof of income. If an individual applies for a loan, the pay stub confirms the borrower’s gross income.

Employers should keep pay stubs on file, if they are generated. The pay stub information should match the data on each employee’s W-2 form, which individuals used to file their personal tax returns.

Create Your Pay Stub

Information Needed to Create a Pay Stub

Determine this information for each employee:

• Payroll cycle: The number of pay periods determines how much salary is paid on each payroll date. It also determines the start and ending days for computing hourly payroll.
• Wages: Gross pay and net pay. Wages may be based on a salary, or calculated using an hourly rate of pay.
• Tax withholdings: Federal, state, and possibly local amounts withheld for taxes.
• Benefit withholdings: Amounts withheld for the employee’s share of insurance premiums, or funds to be invested in a retirement plan.

Here are some common mistakes that businesses make when generating pay stubs.

Common Pay stub Mistakes

Review your pay stubs carefully, to avoid these mistakes:

#1: Current period vs. year-to-date data

Your workers must clearly understand the differences between current period and year-to-date information. If you don’t label each dollar amount correctly, your staff will be confused.

Workers use year-to-date data to confirm that their gross wages, tax withholdings, and benefit contributions are on track.

#2: Outdated W-4 information

Your employees may need to change tax withholdings, based on a pay raise, having a child, or if a worker gets married. You need the current W-4 to process payroll correctly. Ask each worker for updated W-4 information periodically, and use the updated forms on the next payroll run.

Create Your W-4 From

#3: Incorrect pay cycle

Workers need to plan their finances based on your company’s pay cycles. It’s important that your pay stubs clearly state the pay date, and that workers understand how frequently pay is processed (weekly, bi-weekly, monthly).

#4: Incorrect tax data

The federal and state tax laws change constantly, and your pay stub must include withholdings based on current tax law. If the withholdings are not correct, the worker may have an unexpected tax liability at the end of the year, and possible owe penalties for underpayment of taxes.

Using spreadsheets makes the pay stub process more time consuming.

Why Excel spreadsheets are a bad idea

Here are some reasons to move away from spreadsheets, and to use technology:

• Tabs: The tabs on a spreadsheet may not be properly linked.
• Version: Are you using the current version of the spreadsheet? Are you saving the data using the same file name?
• Integration: Spreadsheets can’t be integrated with software tools, including accounting software. If you have to manually enter data into software, the risk of error is higher.
• Training employees is more difficult, because using spreadsheets requires more steps and input work. You’ll spend more time on training, and the risk of error is higher when you delegate work on someone new.

As your business grows, the number of transactions increases, and so does the number of pay stubs you must produce. If you’re posting more transactions, spreadsheet data entry makes accounting more difficult.

Employers need to generate accurate pay stubs, and using technology can help.

Minimize Pay Stub Errors With FormPros

FormPros provides a pay stub generator that is user friendly, and helps you produce accurate pay stubs in less time. The software automatically calculates earnings and deductions, based on the data you input. Your information is also processed in a secure online system.

Use FormPros to take charge of the pay stub process.

Which payroll task is the most difficult for you?

Create Your Pay Stub