Yesterday, I talked about two core financial systems you must get on track in 2011: setting up and maintaining a record keeping system, and creating and maintaining a business budget.  Today, more systems to set up in 2011:

Create a Debt Collection System to Minimize Bad Debts

When I talk to business owners, I find many of them don't know who owes them money or how to collect it.  Having a large amount in accounts receivable is like working for nothing! You have money sitting around not being used and you're letting other people get away with not paying you.  Start today to figure out who owes what and work your collections system to get paid.

Plan for Business Disasters

What would you do if a storm zapped all your business computer records?  What if a flood destroyed your building and equipment?  Stop right now and prepare a disaster plan, to keep your employees and business safe in the event of a disaster, then to recover quickly after disaster hits.

Create and Maintain Legal Records for Your Business

I am on the board of directors for several small non-profit corporations, and I have to keep reminding them that keeping records is absolutely essential to maintaining non-profit status.  For for-profit corporations, good records are even more essential, to maintain the corporate shield against liability.  If you don't keep records of board actions and resolutions, you could be at risk of losing your liability separation.  Don't wait until your state comes calling to create this records and keep them.

Get Your Payroll System in Order

It isn't just about paying employees.  Your responsibilities as an employer include reporting on payroll taxes to federal and state authorities, and, of course, submitting those taxes as required by law.  Payroll taxes are a trust fund tax, meaning they aren't your money, so make sure you have your system in order before you are audited.

Got all that?  Sure, it will take some time.  You don't have to do it all at once, but work on each of these systems...soon.

Read all 6 Business System Resolutions for 2011

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While the Earned Income Tax Credit for low-income individuals continues into 2011, the  Advance Earned Income Credit has been discontinued beginning January 1, 2011.  The advance was taken by the employer, reducing the person's withholding during each pay period.  Employers were required to provide Advance Earned Income Credits to eligible employees,  if the employee provided a Form W-5 to the employer. Advance Earned Income Credits were reported to the IRS on Form 941.

What You Need to Do:

If you have employee to whom you have been making Advance EIC payments:

• You will still need to include this information when you file Form 941 for the last quarter, by January 15, 2011.
• Be sure paychecks beginning January 1, 2011 do not include the Advance EIC tax credit.  If you are using a payroll preparer or payroll software, be sure this change has been recognized by your software or preparer.
• Inform the employees that the advance will not continue to be taken, but they will be able to take the credit when they file their 2011 tax return.

Are you confused and frustrated by all the new laws that have been passed in 2009 and 2010?  Are you wondering how to comply with all these changes?  Are you so confused you don't even know what questions to ask your tax advisor?  I have a simple list of tax changes that will affect your 2010 business taxes and your 2011 business tax planning.   Let's get started:

Changes for 2010 only:

• If you hired previously unemployed people in 2010, you may be eligible for a tax credit under the HIRE Act (Jobs Bill). This credit expires December 31, 2010.
• The Making Work Pay tax credit (part of the American Recovery and Reinvestment Act), expires at the end of 2010.

Changes for 2010 and 2011:

• Accelerated depreciation (Section 179 and Bonus Depreciation) has been increased for business purchases in 2010, and bonus depreciation will increase to 100% in 2011.  Be sure you talk to your tax advisor, though, before you make any decisions to purchase business property.
• An increase from 50% to 100% on the exclusion from gross income of the capital gains from the sale or exchange of qualified small business stock acquired after March 15, 2010, and before January 1, 2012.
• Business Tax Credits for Use of Alternative Fuels were continued into 2011.

Changes for 2011 Only

• Under the new Tax Relief Act, The Social Security portion of payroll taxes (OASDI) will be reduced from 6.2% to 4.2% for 2011 only. This reduction affects only the employee portion, not the employer portion, which remains at 6.2%. You will need to change your payroll deduction calculations to reflect this reduction.
• The self-employment tax rate will also be reduced for self-employed individuals, by 2%, in 2011 only; the rate will be reduced from 12.4% to 10.4% on net business income.

At this point, that's what I have on tax changes for 2010 and 2011. I'll keep you posted if anything changes.  To be sure you receive the most up-to-date information, sign up for the U.S. Business Law & Taxes newsletter (twice a week, usually).

Disclaimer: The information provided in this article is intended to be general information, and not to be tax or legal advice. Each tax situation is different. Be sure to talk with your tax advisor before taking any action based on this information.

More details in this article about 2010 and 2011 Business Tax Changes

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The backup withholding rate you withhold from payments to contractors is increasing from 28% in 2010 to 31% in 2011.

Backup Withholding for Payments to Contractors

If you have independent contractors you are paying, and you pay any one of these people $600 or more in 2011, you may have to withhold income taxes from this person's payments.  In the same way as you must withhold federal income taxes from employees, you must withhold federal income taxes from contractors IF they don't provide you with a valid taxpayer ID number.  Here are the details:

First, remember that everyone you pay must have a Taxpayer ID number (either an EIN or a Social Security Number or some other number).  And you must include that number on any payments to employees or independent contractors.

Then, you must figure the amount of withholding.  Employee withholding rates are determined by employees on their W-4 form.  But contractors don't have withholding UNLESS the Tax ID is missing or incorrect.  If you don't have a correct tax id number for a contractor (W-9), you must take withholding from payments to that person.  That means backup withholding.  The rate at which you must withhold income taxes is set by the IRS.  And that's the rate that is increasing for 2011.

For more detailed information, read my article with questions and answers on backup withholding