Taxes are as much a part of business as selling projects and servicing clients. But unlike making sales and completing projects, accounting for and paying taxes is probably not at the forefront of your mind. You may even want to squeeze taxes from your thoughts altogether, merely deeming them something to be handled by someone else (i.e. your finance department). However, taxes can greatly impact profitability for projects and creative agencies. Thus, overlooking taxes is one of the most common budget mistakes that you’re probably making.
Failing to add in the percentage off the top could skew your project budget, particularly if your client isn’t required to pay the government withholding. You are best served by factoring tax into every budget in order to avoid hindering your ability to execute your project by constraining resources.
You must also ensure that you collect taxes due from clients and pay taxes that you owe in order to avoid financial challenges or legal problems. Follow this Tax Prep Guide for Creative Agencies in order to maintain compliance and profitability.
Include taxes that you must pay for staff members when calculating their hourly cost for budgeting purposes. Start by adding annual pay, benefits, and payroll taxes. Then divide by 2,080 hours (52 weeks times 40 hours per week), which will also account for paid time off for holidays and vacation. You can then apply the hourly cost when budgeting for a project.
Use an employee’s monthly cost for team, departmental, or agency budgets. Similar to the hourly cost, include pay, benefits, and taxes. Calculate the monthly cost after all time entries for a month have been entered. If a monthly employee entered more hours in one month, then the hourly cost of each time entry during that month would be lower so that the sum total of those hourly costs equals the monthly cost value for that employee.
Sales tax should be tracked correctly and flow from estimating through to billing. Agency management software that integrates accounting and project management can simplify this by connecting expenses to projects.
Define what is taxable and what is not for services, items purchased, expense report items, and media items. Specify the tax rate(s) associated with the client; also, label descriptions to include on estimates and invoices for the client. Then code and describe charges appropriately.
When recording taxes, you should also specify the taxing authority to which a tax will be paid and the general ledger account with which you want to track the collected sales tax. Specify the sales tax rate percentage as well.
Run a sales tax analysis report regularly if your software allows. Monitor taxable sales, tax amounts paid and collected, and groupings by sales tax rate codes.
Income taxYour finance department is best suited for year-accounting. Whether it prepares and submits taxes or works with an outsourced CPA to do so, your finance department must compile and submit forms that must be submitted for your agency in order to avoid penalties and fines.
In so handling the tax forms, accountants help creative teams focus on the projects at hand. But you should be aware of the following tax preparations for creative agencies, because they affect your team members’ ability to pay their taxes on time, as well as your agency’s profitability.
For example, the IRS requires employers to report annual earnings of full-time employees (W-2s) and independent contractors (1099s) by February 1 and to mail copies of the tax forms to the people who worked for you. You must also file with the IRS by February 28.
You do not have to file a 1099 form or mail one to contractors who earned less than $600 during the year. The IRS offers guidance to help you determine if someone you paid is an independent contractor or an employee.
Try as you might, you cannot avoid taxes. You can push many of the responsibilities for calculating, collecting, and paying them to your finance department. But you should ultimately be aware of the implications that taxes have on the profitability of your projects and your agency. Consider this Tax Prep Guide for Creative Agencies as a means to help you and your agency maintain compliance and profitability.
Do you have suggestions on tax preparations for creative agencies? Share them with us.