Preparing For an Audit:
Springtime brings a sense of renewal and refreshment that can inspire more than just a tidy home—it’s the perfect season for small business owners to stay ahead of things and be prepared for any possible audits. There is no better time than Spring to get organized. Understanding what various government agencies would be looking for in an audit and organizing your records accordingly will set the stage to make any audit a breeze. Our sister company, JJ BizWorks, has created this guide to help you navigate these challenges smoothly.
Payroll:
The main area of audit for most companies is their payroll records. There are several agencies who are interested in checking your records relating to payroll: State Department of Labor & Industries (or Other State ‘Worker’s Comp’ Agency), State Employment Security or Unemployment Department (SUTA), United States Internal Revenue Service, and your own business liability insurance provider. At the bottom of this article are several links to record-keeping guidelines and requirements provided by these agencies.
Here are some of the main areas they are interested in reviewing:
- Employee Hours: overtime vs. regular hours reported, compared to actual timesheets
- Employee Benefits: amounts deducted from pay vs. remitted to benefit agency
- Employee Fringe Benefits: amounts given to employees as work-related expense reimbursements, gifts or prizes which may not have been identified as wages and taxed
- Employee Wages: making sure that the rate you are paying your employees calculates out to fair minimum wage standard, and is correctly classified per the Fair Labor Standards Act
You want to make sure that you collect and maintain the following records in a systematic manner:
- Timesheets: It is extremely important to collect and maintain timesheets, even for salary or piecework employees. This is the employee’s statement of work and serves as proof of why you paid them as you did.
- Employee Forms: You need to make sure you collect at least a W-4 form and I-9 form for all employees. This is the employee declaring that the tax ID and name you are remitting taxes for them under is correct. If you do not have these forms and an employee’s tax ID or name is incorrect, then your company can be construed as being a party of tax fraud.
- Reimbursements: Any time you reimburse an employee for anything, you need to make sure you obtain a receipt. Straight reimbursements are non-taxed, but the IRS wants to make sure that your reimbursement is not some form of a fringe benefit, which may be taxable.
Subcontractors:
Another large area of record-keeping that is often subject to audit is vendor-payment and Subcontractor payment. The Internal Revenue Services is very interested in knowing who you pay as a company, because they want to make sure that those folks are paying their taxes on the money you pay them. Businesses are required to track payments to any vendor for any kind of service, with their Tax ID number, and then report that to the IRS each year using the 1099 tax form. In order to confirm that each person you pay is either tracked for 1099 reporting, or exempt from the reporting, you need to collect a W9 form from them. This form tells you their tax ID number for reporting, and if they are exempt. Collecting W9 forms from all vendors paid for any services and keeping them in a systematic manner ensures that you have done your part to report 1099 eligible transactions properly. Be sure to see below link to IRS’s Employee vs Contractor information site in order to understand how to properly classify payees in your books.
Income:
The money flowing into your company bank account is NOT always income! Sometimes you receive refunds for prior expenses, or payments back for a loan your company has given. When you pay the DOR based on income, it’s good to keep those non-income transactions totally separated from your income accounts, and save your records (email, receipts, deposit slip notes, check memo notes) for proof of what the incoming money was for, if not general income.
Expenses:
The DOR audits also pay a lot of attention to sales tax (Resale/wholesale vs Retail). Well organized records of your receipts and vendor bills/invoices help to ensure that you have clear back-up for when you have purchased items at wholesale vs. retail and when you may be able to take Tax-Paid-At-Source credits on returns. The other important factor is that if you are claiming expenses on your Corporate Tax return, the IRS will insist on seeing the actual receipts for those expenses in the event of an audit.
Income Tax Records and Banking:
It’s important to review the IRS Record-keeping guide link provided below. One example of records people don’t always think of retaining: Bank statements! Your biggest proof of ‘what really happened’ is the bank-provided statement of what literal money entered and left your business bank account.
Often the thought of overhauling your financial record-keeping system seems overwhelming. Our sister company, JJ BizWorks, can help! They excel at quickly and efficiently reviewing your records, and aiding in the process of updating your records so that you are all ready to go for year-end tax filing. Feel free to visit their website to see what other types of support they offer for business! www.jjbizworks.com
Learn more about JB Consulting Systems’ Business Consulting Services.
Business Record Retention Guides and Requirements:
WA State Labor & Industries: Payroll and Personnel Records
WA State Administrative Code – Employee Records: WAC 296-17-35201
WA State Small Business Guide – How to set up a company in WA State, step by step: Washington BusinessHub
United States IRS: Recordkeeping Guide for Businesses
IRS ‘What is a Contractor’ Test: Independent contractor (self-employed) or employee? | Internal Revenue Service (irs.gov)