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Terms
You Should Know...
Here
are some terms and definitions to help you to better understand
payroll taxes, tax returns and accounting terminology. The
entries with asterisks (*) indicate you should have a file
folder for that item or form.
- 940
Deposit/Taxes/Return* - This is otherwise known as
Federal Unemployment Tax. The deposits are done quarterly
and the 940 Form is an annual report and reconciliation.
- 941
Deposit/Taxes/Return* - This type of tax is Federal
Withholding, Medicare and Social Security combined. These
deposits are due on the 15th for payroll paid in the prior
month. The 941 Form is sent to the IRS quarterly to report
total payroll and reconcile deposits made during the quarter.
- Account,
Accounts, Accounting - To account for something is
to furnish a record of the event. An account is a record
of a financial transaction or set of financial transactions
(usually limited in some way a "bank account"
is limited to transactions presented to a single bank
bearing a single account number). Accounting is the practice
of setting up and ensuring the accuracy of financial records.
- Asset
- Anything owned that has value (cash, equipment, real
estate, accounts or loans receivable, etc.) Assets in
accounting are the bookkeeping entries showing the value
of all of the resources of the person or business.
- Balance
Sheet - A summarized statement showing the financial
status of a business. The Balance Sheet must follow the
formula of :
Assets = Liabilities + Capital/Equity
If the Assets are greater than the Liabilities then the
Equity is a positive number. If the Assets are less than
the Liabilities, then the Equity would be a negative number.
See Equity
- Books
- To "keep books" means to create and maintain
records of business financial transactions. This work
is called "Bookkeeping".
- Capital
- Money used in business by a person, corporation.
"Start-up Capital" means the money used to get
a company going. Time spent cannot be translated into
"capital" in case you were wondering.
- Cost
of Goods Sold (COGS) - If your business involves selling
an item or object, the cost of that item or the raw materials,
equipment, labor and other costs to produce and deliver
it are reported separately from "expenses" on
your tax return. If you have this type of business, then
you need to keep records of inventory as well. The difference
between "Cost of Goods Sold" and "Expenses"
is, in general, those costs paid in order to produce and
deliver your product versus things like overhead, office
supplies, etc.
- EIN/FEIN
- EIN stands for Employer Identification Number, and FEIN
is the same thing with Federal in front of it. This is
your business tax ID number.
Employer Matching/Burden - This is the amount of money
that an Employer pays on behalf of Employees. The employer
pays the same amount as withheld from employees to Social
Security and Medicare (FICA). The employer pays all unemployment
tax as an additional "burden". Social Security
tax is 12.4% of gross pay, split 50/50 between employee
and employer. Medicare is 2.9% figured the same way. See
SUTA and FUTA for unemployment rates.
- Equity
- Also called Net Worth this is the value of property
and other resources reduced by the amount owed on it from
its purchase or production. If this is a negative number,
then the cost of the item or service was greater than
its sales value resulting in a loss. A positive number
reflects profit made OR money paid in as Capital.
- Exemption
- Taxpayers do not pay any tax on a minimum amount of
income ($2700 for 1998) for themselves and their dependents.
Some people qualify for extra (blind, disabled, etc.).
The W-4 Form tells the employer how many such individuals
the employee wants considered in calculating his income
tax withholding. The form gives information on how to
figure this so as to withhold correctly during the year.
- Expense
- Financial cost or fee. A business expense is anything
spent in order to put or keep the business there; make
it produce it's product; sell or deliver that product;
or collect the income in exchange for the product.
- FICA
- FICA stands for Federal Insurance Contributions Act
and is Social Security and Medicare combined.
- FIT/FWT
- These are both abbreviations for Federal Withholding
Tax or Federal Income Tax. The amount to be withheld for
income tax is provided on tax tables and formulas published
and sent to employers (Circular E Employers Tax Guide)
each year but more or less can be withheld at the employees
request.
- Form
1099-Misc. - This form reports the amount of money
a Subcontractor has earned during the year. This form
can also be used for other types of non-employee income
and has other versions for interest (1099-Int), dividends
(1099-Div), etc.
- Form
1120* - The tax return that regular Corporations file.
- Form
1120-S* - The tax return that S-Corporations file.
Usually, S-Corporations don't pay corporate income tax
but they are still required to send the information on
their income and expenses.
- Form
8109/Federal Tax Deposit Coupon - This is the coupon
that an Employer fills out and gives to his bank to pay
various federal taxes. The form asks for amount, type
of tax and time period being paid for. Usually only used
for "941" and "940" taxes.
- Form
DR 1094/Colorado Dept. of Revenue Income Withholding Tax
Return - This is the coupon that pays and reports
State Income Tax withheld quarterly or monthly, depending
on the period assigned by the state.
- Form
I-9 - This form is used to make sure an employee is
who he says he is and is not an illegal alien.
- Form
W-2 - A W-2 is the form employers must provide to
employees at the end of each year to report annual income
and withholding for the employees tax return. Various
government agencies use their copies of the form to ensure
they have been properly paid during the year by the employer
as well as to ensure the employee files and pays his taxes.
- Form
W-4 - A W-4 is the form that employees must fill out
when starting a new job or if they wish to change their
exemptions. The form usually stays in their personnel
file but the IRS can request it at anytime. The employer
uses the information on this form to determine how much
income tax to withhold from each payroll on behalf of
the employee.
- Form
W-9/Request for Taxpayer Identification Number and Certification
- Whenever you are about to receive income that does not
have income tax taken out before you get it, whether you
are acting as a company or an individual, you are supposed
to provide the payer with this form which basically swears
that it's OK and you will eventually pay.
- FUTA*
- FUTA stands for Federal Unemployment Tax Account. This
tax is paid by employers and is usually 0.8% of the first
$7000 of annual gross pay for each employee.
- Income
- The money or other gain received in exchange for labor,
services, goods sold, rents, sales of assets, interest,
etc.
- Liability
- Debts, whether due and payable or not, of a person or
business. In accounting, these are shown in terms of money
value even if the debt is not paid with money but bartered
or traded.
- Quarters/Quarterly
- All payroll related agencies use calendar quarters.
1st Q = Jan-Mar, 2nd Q = Apr-June, 3rd Q = July-Sept,
4th Q = Oct-Dec. Most reports are due at the end of the
month following the end of the quarter.
- SDNH,
State Directory of New Hires - Effective May, 1997,
whenever you hire a new employee, you must mail or FAX
a copy of their W-4 to this agency for child support enforcement
purposes. FAX to (303)297-2595 or Mail to: SDNH, PO Box
2920, Denver, CO 80201-2920
- SIT/SWT*
- These are abbreviations for State Withholding Tax or
State Income Tax. The Colorado Income Tax rate was reduced
to 4.75% in 1999 and another reduction is being considered
due to the incredible tax surplus our state enjoys.
- SSN
- SSN stands for Social Security Number. This is someone's
personal tax ID number. You need a record of this in each
employee's personnel file. (See Form W-4)
- SUBCONTRACTOR-This
individual is engaged in an independent trade or business
and is free from control and direction in the performance
of the service. He is not required to work exclusively
for anyone. The quality of work is established by himself
based on plans and specifications provided. He is paid
on a fixed or contract rate and the checks are made payable
to his business name. He can only be terminated if he
violates the contract. He is responsible for his own training,
tools, benefits, tax withholding and work schedule. His
business operations are kept separate and distinct from
the companies he does contract work for. (Compiled from
Colorado Employer's Handbook)
- SUTA*
- SUTA stands for State Unemployment Tax Account. This
tax is paid by employers and varies from 0% to 6% of the
first $10,000 of annual gross pay for each employee. The
rate changes based on the employer's history of paying
the tax, lay-offs and accumulation of funds paid in over
the years. The Colorado Department of Labor and Employment
sends a notice to each employer annually giving the rate
for the year. The Department sends a quarterly report
form so you can provide them with payroll information
and the calculation of the amount due and pay it with
the form at the end of April, July, October and January.
- TIN/Taxpayer
Identification Number - See SSN and EIN which are
both types of TINs!
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