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Accounting for Overhead Costs

Accurate overhead allocations are essential to understanding financial performance and making informed pricing decisions. Here’s guidance on how to estimate overhead rates to allocate these indirect costs to your products and how to adjust for variances that may occur.

What’s included in overhead?

Overhead costs are a part of every business. These accounts frequently serve as catch-alls for any expense that can’t be directly allocated to production, including:

  • Equipment maintenance and depreciation,
  • Factory and warehouse rent,
  • Building maintenance,
  • Administrative and executive salaries,
  • Taxes,
  • Insurance, and
  • Utilities.

Generally, such indirect costs of production are fixed, meaning they won’t change appreciably whether production increases or diminishes.

How are overhead rates calculated?

The challenge comes in deciding how to allocate these costs to products using an overhead rate. The rate is typically determined by dividing estimated overhead expenses by estimated totals in the allocation base (for example, direct labor hours) for a future period of time. Then you multiply the rate by the actual number of direct labor hours for each product (or batch of products) to establish the amount of overhead that should be applied.

In some organizations, the rate is applied companywide, across all products. This is particularly appropriate for organizations that make single, standard products — such as bricks — over long periods of time. If your product mix is more complex and customized, you may use multiple overhead rates to allocate costs more accurately. If one department is machine-intensive and another is labor-intensive, for example, multiple rates may be appropriate.

How do you handle variances from actual costs?

There’s one problem with accounting for overhead costs: Variances are almost certain. There are likely to be more variances if you use a simple companywide overhead rate, but even the most carefully thought-out multiple rates won’t always be 100% accurate.

The result? Large accounts that many managers don’t understand and that require constant adjustment. This situation creates opportunities for errors — and for dishonest people to commit fraud. Fortunately, you can reduce the chance of overhead anomalies with strong internal control procedures, such as:

  • Conducting independent reviews of all adjustments to overhead and inventory accounts,
  • Studying significant overhead adjustments over different periods of time to spot anomalies,
  • Discussing complaints about high product costs with nonaccounting managers, and
  • Evaluating your existing overhead allocation and making adjustments as necessary.

Allocating costs more accurately won’t guarantee that you make a profit. To do that, you have to make prudent pricing decisions — based on the production costs and market conditions — and then sell what you produce.

Need help?

Cost accounting can be complex, and indirect overhead costs can be difficult to trace. Here, at Patrick & Raines CPAs, we can help you understand how to minimize the guesswork in accounting for overhead and identify when it’s time to adjust your allocation rates. Our accounting pros can also suggest ways to monitor cost allocations to prevent errors and mismanagement.

904.396.5400 | office@CPAsite.com

2019 Q1 tax calendar: Key deadlines for businesses and other employers


Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 31

  • File 2018 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • Provide copies of 2018 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
  • File 2018 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2018. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 11 to file the return.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2018. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2018 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 11 to file the return.

February 28

  • File 2018 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 1.)

March 15

  • If a calendar-year partnership or S corporation, file or extend your 2018 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2018 contributions to pension and profit-sharing plans.

Reach us at Office@CPAsite.com or 904-396-5400 if you have questions.

© 2018

Join the IRS for Free Tax Reform Webcasts

As a small business owner, responsible for both your individual and business tax return, are you wondering how the new tax reform legislation, the Tax Cuts and Jobs Act, might affect both you and your employees next year? No worries; the IRS will try to ease your concerns.

In support of National Small Business Week, April 30 – May 4, the IRS is offering free webcasts geared toward educating small business owners on the effects of the new law.

An additional webcast, “the Paycheck Checkup” offers guidelines regarding your employees’ current withholding status and individual income tax return. Considering the 2018 tax changes may cause some big impacts to refund checks, reminding employees to take the correct tax amount out of their paychecks is imperative to help them avoid owing Uncle Sam next filing season.

The 30-minute webcast sessions will be available twice each day, and you can register by clicking the appropriate link to be redirected to the registration page:

  • Session 1– 11 a.m. (ET), 10 a.m. (CT), 9 a.m. (MT), 8 a.m. (PT), 5 a.m. Hawaii
  • Session 2– 1 p.m. (ET), 12 p.m. (CT), 11 p.m. (MT), 10 a.m. (PT), 7 a.m. Hawaii
Webcast Date Topic Registration Link
Monday, April 30 Can I Deduct This? (OIH, Meals, Transportation, Cell Phone) Register for Session 1

Register for Session 2

Tuesday, May 1 Employee v. Independent Contractor Register for Session 1

Register for Session 2

Wednesday, May 2 Pay Now? Pay Later? Can’t Pay? (payment options) Register for Session 1

Register for Session 2

Thursday, May 3 Small Biz Resources @ Your Fingertips (irs.gov, safeguarding data, etc.) Register for Session 1

Register for Session 2

Friday, May 4 Paycheck Check-Up Register for Session 1

Register for Session 2

You can even join the webcasts from your smartphone or tablet. The WebEx app is available from both the Android and Apple stores. For more information on mobile apps, visit the WebEx Products page.

Since the new tax law is the largest tax reform legislation in 30 years, you should definitely take advantage of these free informative webcasts. Should you have any questions, refer to the IRS website: https://www.irs.gov/businesses/small-businesses-self-employed/webinars-for-small-businesses.

Of course, we can help you navigate the new tax landscape. For more than three decades, Patrick & Raines CPAs has been privileged to provide complex individual and business tax return services and small business advice to help our clients gain the results they desire.

For your tax planning and preparation, assurance needs, accounting services and more, contact us at Office@CPAsite.com or 904-396-5400.

Scammers Targeting Tax Preparers—and We’re Ready

As the filing deadline for your individual income tax return approaches, the unscrupulous identity thieves shift into high gear, knowing taxpayers and their preparers are under more pressure and could make careless mistakes.

While we’re certainly not perfect, we’re doing all we can to protect your identity, your financial planning records and, of course, your tax refund.

You may have seen a recent USA Today story about the scammers specifically targeting tax professionals. The statistics are sobering. According to the story, “About 75 firms acknowledged taxpayer data thefts in January and February—a nearly 60% increase from the same time last year.”

Rest assured we’re on the lookout for the crooks’ latest tactics, such as:

  • Introducing themselves as prospective—or desperate—new clients and sending us attachments, supposedly their W2’s and other tax documents. They’re actually viruses—some providing remote access to the infected computer—they hope we’ll download on our computer system.
  • Filing in your name, with all your data stolen elsewhere, and we find out when you call us to say you’ve already received your refund, and we haven’t finished your return yet!

The fraudster’s next step is to call and tell you he or she  works for one of the IRS’ out-sourced collection agencies and  the money was deposited in error, which the IRS calls an “erroneous refund,” and you must forward that money to them immediately.

Don’t do it! Hang up and call us immediately. We’ll connect you to the IRS Criminal Investigation Division.

In addition to being on the lookout for the tricks and scams, we use the latest anti-virus, anti-malware protection and protocols to protect you and your records.

We do ask you to do your part: use our secure portal, or ask us to send you a link in an email. We know we’re asking you to take extra steps, but our request protects both of us. So, please, never send us your sensitive documents in an unsecure Email!

We remain committed to your financial success—and security. Our tax accounting professionals pride themselves on serving, and protecting, you.

Income tax day is less than two weeks away so contact us if we can help: Office@CPAsite.com or (904) 396-5400.

Update Your Withholding Now to Avoid Surprises Next April

As you know, the government recently enacted the Tax Cut and Jobs Act, which made some sweeping changes to the federal income tax—and will certainly affect your individual income tax return next year.

So now’s the time to do some homework and possibly provide your employer with a new W-4, Employee’s Withholding Allowance Certificate, to change the amount withheld from your paycheck for federal income taxes.

Withholding the correct amount of tax can greatly assist in your annual budget planning, prevent an unpleasantly large tax bill, and possibly provide you with more take-home pay each pay period.

Wondering whether your 2018 paycheck will result in the right amount of taxes? Check it out yourself: the IRS recently released an updated Withholding Calculator, reflecting new tax law changes. Note that this simply serves as a calculator so you won’t need to enter any personally-identifiable information, and no information will be saved.

Before you begin to calculate possible changes, be prepared. Gather your most recent pay stubs and tax return. To determine the right balance for your federal withholding, be familiar with the employee allowance guidelines:

  • You’re entitled to one allowance for yourself and one for your spouse.
  • If you’re filing as “head of household,” you’re allowed one allowance.
  • You can claim an additional allowance if:
    • You’re single or married filing separately and have only one job;
    • If you’re married filing jointly, have only one job, and your spouse doesn’t work;
    • If your wages from a second job or your spouse’s wages (or total of both) are $1,500 or less.
  • If you claim additional dependents, you may be entitled to more allowances.

If the calculator indicates you need to make changes to your withholding, complete and submit form W-4 to your employer as soon as possible. Don’t send form W-4 to the IRS. Remember, the new withholding rates will not affect your 2017 return (filed in 2018).

If you have a more complicated tax situation, such as self-employment tax, long-term capital gains, or other complexities, this calculator probably isn’t for you. Instead, look for the IRS’ Publication 505, Tax Withholding and Estimated Tax, to be updated in early spring.

For more than three decades, Patrick & Raines CPAs has been privileged to provide complex individual and business tax return services and small business advice to help build your future.

For your tax planning and preparation, assurance needs, accounting services and more, contact us at Office@CPAsite.com or 904-396-5400.

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Frequently Asked Questions

Q.

How much should I withhold from my paycheck?

A.

The answer depends on many factors. Do you prefer to withhold more today so you get a refund next year? (Your money is really an interest-free loan from you to...

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