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My company rendered IT consulting services to a client in March,

Customer Question
invoiced for the hours in...
My company rendered IT consulting services to a client in March, invoiced for the hours in April and got paid in May.

1) If using the Accrual accounting method, when should the books reflect the revenue? Starting in March or April or May?

2) When does my company start accruing tax liability per IRS rules?

3) I am planning to run my first payroll in June, can I include backpay? i.e. pay my company employee for the prior months wages in the same payroll? or will IRS balk at that?

Thanks.
Accounting-challenged new business owner
Submitted: 8 years ago.Category: Tax
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Answered in 7 hours by:
6/10/2010
Tax Professional: Stephen G., Sr Income Tax Expert replied 8 years ago
Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7,469
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Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.

 

1. Why do you want to be on the accrual basis?

 

2. Are you organized as a corporation? If so, have you made an S-Corp election?

 

3. In a service business, if you were on the accrual basis, you would record the revenue when the services were provided, (March) either as work-in-process or when a contract was completed.

 

4. Most service businesses report their income on the cash basis as you generally don't want to record revenue until it is collected, otherwise you could wind up paying income taxes on income before it is collected or paying taxes on income that is never collected (requiring adjustments in a subsequent period for bad debts).

 

5. Sure pay your employee whatever you owe him/her, including back pay, as soon as possible. Do yourself a giant favor & hire a payroll service to do your payroll. It gets complicated & when you screw it up, it will take you forever to straighten it out & the penalties will far outweigh the cost of having it done right in the first place.

 

6. Depending upon how you are organized (ie. what type of business entity you are using to conduct business), will determine what your estimated income tax payment requirements you have & how & when they should be paid.

 

Based upon the nature of your questions, you're probably going to need an accountant/tax preparer. Stick to your IT consulting & go see an accountant to determine exactly what you need to do & when you need to do it.

 

You haven't even scratched the surface as far as the questions an "accounting challenged new business owner" should be asking. What you need is way beyond the scope of what we can deal with in this format.

 

Please remember to click on the green "ACCEPT" "ICON" & thanks again for using our service. Feedback, if you have time, is always most appreciated.

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