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Payroll Accounting: The Basics

Payroll is an integral part of every business. The payroll accounting process involves paying wages, calculating hours, applying benefits, deducting taxes and collecting garnishments, all while staying in compliance with federal rules, state laws and local regulations.

The best thing you can do for your business is to create a payroll schedule. Not only will this ensure that you complete payroll-related tasks in a timely manner, but it can also help you decide what benefits to offer.

What type of documentation do you need in order to file payroll taxes?

In order to file payroll taxes, the federal government says you’ll need either an employer number or a federal tax identification number. On a state or local level, you’ll likely also need an identification number for your business.

Why is payroll accounting beneficial?

Payroll accounting makes it possible for you to stay on top of expenses, namely when it comes to paying employees. That way, you can understand the total value of your company’s labor-related business costs.

A payroll accounting process can help you assess the financial impact of the decisions you make for your business. For instance, payroll accounting measures allow you to understand whether you should hire more full-time employees, part-time staff, consultants or contractors. Likewise, payroll accounting processes are what make managing tax liability records that much easier.

The easiest way to document information pertaining to payroll accounting processes is to create financial journal entries. You can jot down information about benefits, payroll taxes and wage deductions among other payroll-related details. Just make sure you are as detailed as possible so that your entries reflect a clear depiction of your business’ payroll expenses.

What information should you include as part of your payroll accounting process?

You should include the following information:

Employee compensation
Taxes withheld for employees
Taxes withheld for employers
Pay withheld for benefits-related reasons
Tuition reimbursement, if applicable
Costs associated with employee benefits

The entire point of a payroll accounting process is to provide yourself with a documented record of all the tax and legal obligations pertaining to your business. From there, you can compare your payroll information to federal, state and local tax laws to ensure you’re in compliance, which will naturally eliminate the chances of tax-related penalties and audits. Plus, your employees will be able to monitor what portion of their paychecks is taken out for taxes.

When you can look at the costs associated with hiring and retaining employees, you’re more likely to properly assess the profitability of the business. A payroll accounting overview will also help you decide how much and how often to pay your employees based on factors like the number of hours worked, each person’s job title and the services rendered from employing them. Payroll accounting processes make onboarding a breeze too.

Similarly, payroll accounting practices involve calculating the payments associated with payroll, which your business must make. You have two options when it comes to these calculations: manual or automatic. If you opt for manual calculations, make sure you have a system in place to ensure no human mathematical errors seep through the cracks.

You’ll need to determine the gross pay for each of your employees for each pay period. If you have hourly employees, all you have to do is multiply the number of hours each employee works by the hourly rate that each employee earns. On the other hand, you can choose to pursue an automatic payroll system carried out by technology instead.

With an automatic payroll system, the gross pay and relevant withholdings for each employee will be calculated automatically. From there, the technology you utilize will output an overview of all payroll-related expenses on behalf of your business.

If you decide to use payroll software, look for options that offer a cloud-based portal. That way, your employees will be able to access the portal, resulting in full transparency of each employee’s benefits and salary.

This is an incredible option for those who want to ensure that no payroll-related errors arise, because the automated payroll option automatically tracks hours logged by employees. It will also calculate pay rates and indicate which deductions should be made.

What should be included in your chart of accounts?

Your chart of accounts should include the following information:

The salaries and compensation of your employees
The cost of health insurance as an employee benefit
The amount of money withheld from paychecks for federal and state taxes
The amount of money withheld for Social Security and Medicare
The amount of money spent on workers’ compensation cases

Now that you have paid all the taxes you owe on both a federal and a state level, make it a point to maintain an updated and accurate record of the taxes you paid. In other words, remember to take recordkeeping seriously. As a general rule of thumb, you should keep a copy of your employee tax records on file for four years at a minimum.

At the end of the day, a payroll accounting process tailored to your business means your team will always have access to an accurate overview of the cost of paying employees. The key to success is to establish a process from the very beginning and uphold it over time.

The Changing Role of the CFO

glevi Blog CFO

We have experienced so much business disruption in recent years, and one change that should not be overlooked is the new role of the chief financial officer.

Business success means keeping both customers and employees happy, but recently the priority has shifted to employees. This change has been fueled largely by the COVID-19 pandemic. According to the U.S. Chamber of Commerce, there are nearly 3 million fewer Americans working today than there were in February 2020. This loss of manpower is magnified by the shift to remote and hybrid work, which comes with a different set of expectations and norms than in the pre-COVID-19 workplace.

There are many examples of how the labor shortage is affecting people’s everyday lives. For example, an upstate New York regional health center temporarily closed 12 locations at least partly due to staffing issues. The result is that patients have a longer wait for services and employees are stretched to meet the need. The CFO of that organization must find ways to maintain productivity and profitability in challenging circumstances. This is just one example. With the worldwide talent shortage predicted to reach up to 85 million people by 2030, CFOs need to rethink how they measure productivity. Additionally, the metrics typically used by CFOs to measure productivity are affected by remote work.

Know the numbers

Many company leaders perceive remote employees to be less productive than they are. At least two examples illustrate a different story.

First, consider that remote or hybrid work models are embraced by 63% of high-growth companies. This points to the models’ effectiveness in supporting productivity as measured by revenue growth.

Then, note this example, written up in a recent Forbes article: “A NASDAQ-listed company randomly assigned call center employees to work from home or the office for 9 months. Work from home resulted in a 13% performance increase, due to a combination of fewer sick days, and a quieter and more convenient work environment. Those working from home had improved work satisfaction and a 50% lower attrition rate.”

What’s needed then are new ways to measure productivity.

Think outside the box

While creativity is not a trait usually associated with CFOs, it is vital that CFOs think of new ways to measure productivity. For example, CFOs can show employees that they are trusted to do their work even when they are not in the office by tracking how individual contributions relate to outcomes rather than by using a one-size-fits-all performance measurement. Similarly, CFOs can add tracking impact and results to their metrics; these show more than the simple calculation of annual revenue divided by number of employees. The goal is to value and evaluate all contributions regardless of where employees work.

There is a real opportunity now to reshape the company’s policies and procedures to align with the post-COVID-19 shape of work. Refocusing CFOs from a one-dimensional view of the bottom line is a recognition of how roles in the entire C-suite are changing.

Budgeting Success for the Construction Industry

glevi Blog Budgets, planning

When a business doesn’t have a clear idea of its annual budget, it runs the risk of spending more money than it earns that year. You may have been running smoothly for years, and then decide to expand or replace old machinery. There’s money coming in, so it seems you’re fine. But if you don’t have a good handle on expenses versus income, you can quickly find yourself in the red.

Maybe you want to apply for a loan. If so, the bank is certainly going to want to see a formal budget as part of your business plan.

Basic budgeting techniques

Budgeting can be done in different ways with different processes, depending on the particular business and the people involved. However, there are several universal parameters within a typical budget plan that provide a foundation. For instance, most businesses make a rent or mortgage payment on their premises.

Next, there are basic overhead costs such as utility bills, payroll expenses and raw material costs, as well as interest, insurance and tax payments. As a construction expert, you may know that, but have you considered some of the “softer” expenses, such as website development, signage for your business, business cards and advertisements?

These are safe initial elements when developing a budget plan, and then you can add any expenses that are specific to your business. As a construction business, there are several key expenses you need to account for, including:

Business permits and licensing requirements.
Salaries, wages and benefits for you and your employees.
Tools, supplies and inventory.
Loan and credit card payments.
Services such as accounting, maintenance and marketing.
Heavy machinery and vehicle or equipment payments, fuel and insurance.

If you are just launching your business, you may need to do some research to come up with estimates of monthly expenses. If your business is already established, you can base your assumptions of future costs or revenues on your past 12 months of figures.

A typical 12-month budget can be updated with actual expenditures and revenues each month so you know whether you are on target for your goals. Many plans feature one column of estimated expenses, with one blank column next to it where businesses fill in their actual expenses each month to track and compare.

If you are missing your planned targets, you can then apply the plan to troubleshoot by figuring out how you can reduce expenses like labor or new machinery, increase your sales with more aggressive marketing, or lower your profit expectations.

By charting on paper a comprehensive budget plan, you can enhance your chances of your business succeeding by anticipating future needs, spending, profits and cash flow. A good budget provides a detailed road map so that you are not driving your business blindly. When done correctly, it will provide clear insight into how your business is performing to help you achieve growth and success.

If you want more details on getting your budget going, give us a call.

Employee Taxes: Your Responsibilities

glevi Blog Payroll, Tax

Employers generally must withhold income tax from employees’ wages. To figure out how much tax to withhold, you need to use the employee’s Form W-4, the appropriate method and the appropriate withholding table described in Publication 15-T, Federal Income Tax Withholding Methods. You’ll deposit your withholdings based on your business and the amount you withhold.

File returns four times a year, and at the end of the year, prepare and file Form W-2, Wage and Tax Statement, to report wages, tips and other compensation paid to employees. Each employee needs a copy. You will use Form W-3, Transmittal of Wage and Tax Statements, to transmit Form W-2 to the Social Security Administration.

Know the details

The situation can get complicated when both employee and employer have to contribute. For example, the current tax rate for Social Security is 6.2% for the company and 6.2% for the employee. For Medicare, the current rate is 1.45% for you and 1.45% for the employee. Also, an Additional Medicare Tax applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status. You’ll withhold an Additional Medicare Tax of 0.9% for single filers who make more than $200,000, and for married couples filing jointly, the threshold is $250,000, but if filing separately, $125,000. You don’t have to match this additional portion.

Employers report and pay Federal Unemployment Tax Act tax separately from federal income tax and Social Security and Medicare taxes. You pay FUTA tax only from your own funds. Employees don’t pay this tax or have it withheld from their pay.

Mark your calendar with key dates. The IRS has an Employment Tax Due Dates page with information on what you need to do and when you need to do it. The matching share of the Social Security and Medicare payroll taxes is collected as the Federal Insurance Contributions Act taxes, and your part is considered a business expense, not a liability. Because it’s a business expense, it can be written off at tax time.

Don’t forget the states

This is just the beginning of an employer’s responsibilities. You are likely subject to state withholding rules as well. It’s essential that employers be on top of the general rules and any annual rate changes. Understanding these tax issues is important since you bear the responsibility of fulfilling your tax obligations related to your employees. It’s important to send out payments on time to avoid penalties and late fees. Be sure to work closely with financial professionals to make sure you stay compliant.

Pro Tip

glevi Blog Compliance, pro tip

Compliance seems boring, but being out of compliance in the variety of ways that can happen can create very serious risks for your business. Ensuring that you are in compliance in your business organization and operations can include things like professional licensing, business licensing, insurance, banking, record keeping, financial recording and more. Creating procedures to keep up with compliance tasks is essential for any business interested in avoiding penalties, fines and potentially criminal or civil charges. If you suspect you are out of compliance, don’t procrastinate, act now!

Construction Companies: Recognizing Revenue Under ASC 606

glevi Blog Construction, Revenue Recognition

Recently, construction companies industrywide made a change in how they calculated revenue. Before ASC 606, Revenue from Contracts with Customers, was adopted, different industries used different methods for reporting income even when they were accounting for similar transactions. Standardizing transactions is an important step, but now that all public and private companies must use the same accounting methods for reporting revenue, companies need to make certain adjustments.

ASC 606 is designed to standardize reporting for the delivery of the goods or services promised in a contract. It takes the place of all existing transaction- and industry-specific guidance.

The standard uses different terminology from previous versions, describing the delivery of promised goods as a “performance obligation.” One contract may include several performance obligations, each of which must be identified and tracked separately. Keep in mind that while lease contracts, insurance contracts, financial instruments, guarantees and nonmonetary exchanges generally are excluded from ASC 606, there may be other guidance that affects these types of agreements.

For construction companies, the changes are especially far-reaching because they affect some documents that are commonly created during the life of a project, including change orders. This is not a simple semantic change. Any of these documents may qualify as a performance order, which requires every contract to be carefully examined.

ASC 606 provides five steps for recognizing revenue.

Step 1: Identifying the contract with the customer

This step involves recognizing each of the enforceable rights and obligations the parties have to each other. The seller promises to deliver goods and/or services, and the customer promises payment and determines when payment is to be made. The contract may be either written or oral, in accordance with customary business practices.

Step 2: Identifying the performance obligations within the contract

You generally do not need to draft separate contracts for two performance obligations if they are for essentially the same goods or services. However, separate contracts may be needed if the promised goods or services are substantially different.

Step 3: Determining the transaction price

The transaction price may be set in the contract, or the contract may state that the selling price will be based on certain variables.

Step 4. Allocating the transaction price to the performance obligations

This step requires you to estimate all variables in the selling price, including ones that may not be apparent.

Step 5. Recognizing revenue as the performance obligations are satisfied

Once control over the promised goods or services is delivered to the customer, you have met your performance obligation. Sometimes, control is handed over in stages, such as when a particular phase of a project is completed. When that happens, ASC 606 requires the seller to choose an appropriate way to measure progress relating to when the obligation will be completed.

There are myriad subtleties involved in each of these steps. Incentives like discounts, bonuses for meeting performance deadlines, high material costs and the impact of state and local taxes all need to be considered. In addition, the way performance obligations are stipulated in contracts also has an impact. Each of these items, and many others, must be reviewed under the ASC 606 guidelines.

Construction company leaders need to review all existing contracts to be sure their financial reports are in compliance with ASC 606. This process will need time and planning and will require changes to certain processes and procedures. Keep in mind that all future contracts must be compliant as well.

AI and Manufacturing: The Future Is Now

glevi Blog AI, Forecasting, Manufacturing

All manufacturers should be aware of this statistic: Artificial intelligence (AI) in the manufacturing industry is expected to reach $11.7 billion by 2025, growing at a compound annual growth rate of 54.6% from $2.6 billion in 2021. Among manufacturing leaders, 34% report investing in AI to bolster their bottom lines. These eye-opening statistics indicate that even small manufacturers can benefit from implementing AI in their businesses.

Undoubtedly, the pace of this change was accelerated by the COVID-19 pandemic, which caused manufacturers across the board to reassess their supply and distribution chains and their warehousing strategies. In those areas, AI can proactively identify problems and provide predictive forecasting.

Machine maintenance

The promise of integrating AI on the manufacturing floor cannot be overstated. AI can be used to predict which machines will need maintenance and when. This is a big shift from scheduled maintenance, although it can integrate with preexisting schedules. AI relies on machine-specific data such as workload and shift schedules to determine maintenance schedules. Using this data, AI can predict how much longer a piece of machinery will continue performing before it needs to be repaired. Consequently, it can reduce downtime, especially unplanned downtime caused by an unexpected breakdown, and allow hard-to-get parts to be ordered in a timely manner.

Cybersecurity

Cybersecurity is another area in which AI can help manufacturers make positive changes. There are many facets of cybersecurity, from setting and implementing zero-tolerance policies to choosing operational technology. AI can help by automatically sifting through the company’s data to detect and identify internal and external threats and intrusions.

Physical and premises security

Often, manufacturers are forced to weigh the cost of live security against the need to protect company assets. AI allows companies to utilize video surveillance systems for this purpose. These systems are sensitive enough to distinguish among people, animals and objects, and to identify suspicious behavior patterns. The systems can trigger alerts based on specific parameters. Some systems can communicate with trespassers and call for help in real time.

Forecasting

Forecasting is never easy, but perhaps the biggest lesson manufacturers learned during the COVID-19 pandemic is that they had to get better at it. There are still shortages in many areas that are causing prices to rise. While many experts suggest these high prices will ease, manufacturers are faced with forecasting their future needs and their associated costs.

This means forecasting on the basis of best-better-worst scenarios looking forward, rather than on past performance. Predictive AI technologies can assist with this, helping manufacturers reduce costs by better predicting inventory and warehousing needs.

As AI continues to evolve and grow more sophisticated, companies need to be flexible in their approach to adopting it. This means being open and agile enough to adopt new technologies. It also means reskilling and upskilling employees so they can use it to maximum effect. On the software side, it means doing the necessary research so the software the company purchases has the requisite interfaces and growth potential.

Don’t Let Undercapitalization Affect Your Construction Company

glevi Blog Cash Flow, Construction, Forecasting, Liquidity

Even without knowing its exact definition, you can just tell from the way the word sounds that undercapitalization is not good for your business. Undercapitalization occurs when a business holds insufficient funding — or capital — to support its operations. It is cause for serious concern about a potential major financial crisis for any business, but among contractors it is considered by many financial experts to be the leading cause of business failures.

Obviously, your company needs enough money to achieve your financial and business goals. More specifically, though, you should never underestimate how much capital is necessary to pursue the most profitable construction projects. Those contractors who aren’t fully aware or conscious of the money required to get a business up and running, and then sustain it as they work to establish a commercial foundation, may find themselves undercapitalized. The challenge is that, for any business, undercapitalization can quickly turn into a perpetual downward spiral from which it is difficult to recover.

Construction businesses need to keep their focus on attaining and maintaining the cash necessary to fund projects in terms of employee wages, equipment and supplier materials before the first installment of project payment.

The Impacts of Bad Cash Flow

Often, bad decisions are made when a company’s management is forced to wrestle with poor cash flow. Behind-schedule payments then have an increasingly detrimental effect on the company’s cash flow and start that downward slide into undercapitalization.

One cash flow issue you should try to avoid is mistaking cash receipt or positive cash flow with excess cash. Once money is spent, there’s no way to get it back, right? So one of the best tools you should employ to manage cash flow is your monthly budget and cash flow projections. Regular comparison of current and projected expenses, for example, will help keep you on track with spending.

While getting paid on time can be an ongoing struggle, there are steps you can take to address that issue as well. Understanding how each client handles accounts payable when you submit for draws will help you maintain a positive cash flow. Missing a draw or having poor-paying clients can lead to problems, so stay committed to your draw dates.

The Rewards of Planning

One of the most important skill sets to avoid undercapitalization is the ability to develop a comprehensive, accurate construction project plan. By determining your manpower, equipment and cash items up front, you will enhance the chances of success for a project. Basically, you never want to overestimate your team’s capabilities or underestimate your cash flow. If you have correctly accounted for what machinery, tools and skilled specialists will be needed and when they must be provided in the construction schedule, you can limit any periods of downtime or decreased productivity. Of course, you need to continually monitor and review a project plan to address any delays or other circumstances that may arise.

Always Strive for Sufficient Capitalization

In the end, undercapitalization can seriously restrict your business’s daily operations, growth and success. Sufficient capitalization, on the other hand, enables a business to handle slow periods in the business cycle or address other challenges that occasionally happen in the life of a company. More important, it can give you a competitive edge that positions you to grow and move ahead as a company.

In fact, according to the Small Business Administration publication Financing for the Small Business, one of the critical characteristics of successful entrepreneurship is having access to sufficient funds to run a business.

The Secure 2.0 Act and Form W-2

glevi Blog Tax

The Secure 2.0 Act allows for features in employer retirement plans to encourage their use. The changes are designed to encourage employees to contribute to 401(k) or 403(b) plans, allowing you to offer small financial incentives to employees.

If employers use a little financial motivation, it’s considered part of employees’ income and is subject to regular tax withholding unless exempted. Let’s look under the hood:

Salary reduction contributions to a Roth SEP or Roth Simple IRA plan are subject to federal income tax withholding, as well as to FICA and FUTA taxes. These contributions should be included in boxes 1, 3 and 5 of Form W-2, as well as reported in box 12 with code F for a SEP and code S for a Simple IRA.
Employer-matching and nonelective contributions to a Roth SEP or Roth Simple IRA are not subject to withholding for federal income tax, FICA or FUTA taxes. These contributions must be reported on Form 1099-R in the year the contributions are made. List total amounts in boxes 1 and 2a of Form 1099-R with code 2 or 7 in box 7, and check the IRA/SEP/Simple checkbox.

The matching details

Under Section 604 of the Secure 2.0 Act, plans can allow employees to designate certain matching and nonelective contributions made after Dec. 29, 2022, as Roth contributions and not subject to withholding for federal income, Social Security or Medicare tax. But designated Roth nonelective contributions are treated as matching contributions as if the plan is a qualified plan and the contributions are made to a governmental section 457(b). Refer to Q&A L-7 in Notice 2024-2 published in the Internal Revenue Bulletin.

Unlike regular Roth contributions, designated Roth nonelective and matching contributions must be reported on Form 1099-R in the year they’re allocated to accounts and reported in boxes 1 and 2a of Form 1099-R, as well as code G used in box 7. Refer to the Q&A L-1 through L-11 in that same Notice 2024-2.

The reporting requirements that apply to contributions made to a Roth IRA under a SEP arrangement or Simple IRA plan or to a designated Roth account via an applicable retirement plan depend on the type of contribution made. Refer to the 2024 General Instructions for Forms W-2 and W-3, as well as 2024 instructions for Forms 1099-R and 5498.

Know the copies

You can complete and print various copies — but not Copy A — of Forms W-2, W-2AS, W-2GU and W-2VI on IRS.gov for recipients. Any information entered on one copy — but not Copy A — will automatically appear on the others. So what about Copy A? It cannot be completed online to print and file with the Social Security Administration.

If you filed 2023 Form W-2 without following these new guidelines, you may need to file Form W-2C to correct any errors. Refer to the General Instructions for Forms W-2 and W-3 for details on when and how to file Form W-2C.

As you can see, this can get complicated. We’re always here to help make sure you take full advantage of any changes — and remain in compliance.

Pro Tip

glevi Blog Forecasting, pro tip

Driving blindfolded is scary, right? So is operating your business without a financial forecast! Taking the time to use a data driven approach to plan out your future growth trajectory is worth its weight in gold. We see the advantages of this process every day, including empowering informed decision-making, a better understanding of the needed liquidity for planned growth and a focus on using assets in the most efficient way. Get to work analyzing past financials, determining realistic assumptions and considering external factors to pave the way for forecasting effectively.