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Two-Factor Authentication

Posted on April 4, 2025 - 1:17 pm by

What is two-factor authentication?

Two-factor authentication (2FA) is one of the most effective measures to ensure security, especially when it comes to accounts related to Internal Revenue Service dealings. It requires two forms of identification to access an account or system. This adds a layer of extra protection beyond just a password. The two factors are:

  • Something you know: Typically, a password or PIN that’s personal to the user.
  • Something you have: A physical device such as a smartphone, which receives a time-sensitive code or verification prompt.

Additionally, 2FA is a critical step in the protection of taxpayer information due to the sensitive nature of data such as Social Security numbers (SSNs), Employer Identification Numbers (EINs), and financial records.

Therefore, before using any e-service or any other online IRS tool, such as the Modernized e-File [MeF] system, ensure that it has 2FA.

 

How Two-Factor Authentication Works

Let’s take an example of the IRS platforms to understand the 2FA mechanism.

  • Login Attempt: A user enters their username and password on an IRS portal (e.g., e-Services or Online Account).
  • Second Factor Prompt: The system requests additional verification.
  • Code Delivery: A one-time code is sent to the user’s registered phone (via SMS), email, or authenticator app (e.g., Google Authenticator for ID.me users).
  • Code Entry: The user inputs the code, which expires after a short period (e.g., 10 minutes).
  • Access Granted: Successful entry of both factors grants access to tax records or filing tools.

 

IRS Security Standards and 2FA

The IRS mandates robust security for anyone handling taxpayer data, as outlined in Publication 4557:

  • Safeguarding Requirement: Tax preparers and software providers must protect PII under IRC Section 7216, with 2FA as a recommended control.
  • Encryption Complement: 2FA pairs with 256-bit encryption for data at rest and in transit, a standard for IRS e-file systems.
  • Annual Security Reviews: The IRS encourages annual assessments, including verifying 2FA implementation.

For e-file providers, the IRS requires compliance with NIST Special Publication 800-63 standards, which endorse 2FA as a baseline for authentication.

 

 

Benefits of 2FA in IRS Taxation

2FA offers specific advantages in the tax ecosystem:

  • Protection Against Identity Theft: Prevents fraudulent access to taxpayer accounts, critical given the 1.4 million identity theft cases reported to the IRS in 2023.
  • Secure Filing: Ensures only authorized users submit returns or information returns (e.g., Forms 1099, W-2), reducing fraud risk.
  • Compliance Assurance: Aligns with IRS Publication 1345 requirements for e-file providers, enhancing trust in electronic submissions.
  • Data Breach Mitigation: Protects against phishing and credential stuffing, common threats to tax professionals managing client data.

For taxpayers and preparers, 2FA provides peace of mind when interacting with IRS systems or third-party tools like Tax1099.

 

Setting Up 2FA for IRS-Related Access

The setup process varies by IRS platform:

 

IRS Online Account (via ID.me):

  • Visit irs.gov and select “Sign in to Your Account.”
  • Create or log into an ID.me account with a password.
  • Enable 2FA by choosing SMS, email, or an authenticator app.
  • Verify identity with a government-issued ID and phone number.
  • Receive and enter a test code to activate.

 

e-Services:

  • Register or log in at the e-Services portal.
  • Update secure access by linking a mobile number or email.
  • Confirm 2FA setup with a received code.
  • Third-Party E-File Providers: Follow provider-specific instructions (e.g., Tax1099’s SMS-based 2FA setup), often requiring a phone number linked to the account.

The IRS provides step-by-step guides and support via its helpline (1-800-829-1040) for setup issues.

Qualified Intermediary (QI)

Posted on April 4, 2025 - 12:59 pm by

What is Qualified Intermediary (QI)?

A Qualified Intermediary (QI) is a person or foreign financial institution qualified under specific sections of the U.S. Internal Revenue Code (IRC). It acts as an intermediary for tax withholding and reporting purposes.

In the context of Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding), a QI facilitates the reporting of U.S.-source income paid to non-U.S. persons and ensures compliance with withholding requirements under Chapter 3 (IRC sections 1441-1446) and Chapter 4 (FATCA, IRC sections 1471-1474).

 

Roles and Responsibilities

  • Withholding on US-source Income:
    QIs calculate and impose appropriate withholding taxes-either the default 30 percent rate or a reduced treaty rate-on dividends, interest, or royalties paid directly to foreign account holders. All these figures appear in Form 1042-S, along with classification of income type, tax withheld, and exemptions.
  • Investor Classification:
    QIs identify account holders as U.S. persons, foreign persons, or FATCA-subject entities using documentation such as Form W-8 (i.e., W-8BEN for individuals) to verify tax status and eligibility for treaty benefits.
  • Income Reporting:
    QIs complete and submit Form 1042-S for every non-U.S. recipient, given the source of the income, the withholdings to be made, and relevant Exemption Codes (e.g., “04” for treaty exemptions). They also give copies to recipients as of March 15 of next year.
  • Documentation and Record-keeping:
    These include accurate recording by QIs, containing W-8 forms, FATCA statuses, and withholding certificates that support the information reflected in the Form 1042-S, which are obligatory to be kept for audits or inquiries by the IRS.
  • Remittance of Taxes:
    QIs deposit the withheld taxes to the IRS by Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) and ensure that remittances are made timely to avoid penalties.
  • Compliance with FATCA and Treaties:
    QIs ensure compliance with FATCA by identifying U.S. account holders and reporting their activities, while also applying tax treaty provisions when applicable, which may reduce or eliminate withholding.

 

QI vs. Non-QI Status on Form 1042-S:

  • A QI assumes primary withholding and reporting responsibility, often using its own QI Employer Identification Number (QI-EIN) on Form 1042-S.
  • A non-QI intermediary shifts these duties to upstream payers, complicating the process for FFIs and account holders.
  • Box 15a on Form 1042-S typically lists the QI’s QI-EIN, indicating its role in the payment chain.

 

Key Requirements:

  • QIs must enter a formal QI Agreement with the IRS, renewable every three years.
  • They undergo periodic compliance reviews to maintain QI status.
  • Documentation errors (e.g., missing W-8 forms) may trigger backup withholding (24%) or penalties.

Scheduled Filing

Posted on April 4, 2025 - 12:42 pm by

What is scheduled filing?

Scheduled filing refers to the preparation of various tax forms, including 1099s, W-2s, 941s, or 1095s, prior to a specified date for electronic submission to the IRS or another relevant authority on a fixed date in advance. Tax1099, an IRS-authorized e-file provider, integrates this service to give users the ability to control their filing timeline. Instead of filing their forms immediately, users can select a date for their automatic submission, allowing themselves time for review and making necessary adjustments while remaining compliant.

For example, a business preparing 1099-NEC forms for contractors could enter filing data any time during January (while delivering recipient copies) and schedule filing in March (before the electronic filing deadline —March 31). This helps with any necessary edits up to that date at absolutely no charge. This is different than instant filing, which provides a cushion for perfecting submissions.

 

How Scheduled Filing Works at Tax1099

Tax1099 is designed to ease out the filing process for every user, and scheduled filing is one such feature. Here’s a stepwise guide to help you schedule your next filings:

STEP 1— Preparation of the form: Once the user logs into the Tax1099 account, follow the same procedure as filing the form (manual filing, bulk import, integration, or using the API). Select the tax year, form type (e.g., 1099-MISC, W-2), and enter or import the data through integrations (like QuickBooks or Excel).

STEP 2 —Review and Validate: The platform’s automated system checks for errors (e.g., mismatched TINs, invalid addresses, missing information) with built-in error checks, TIN matching, and USPS Address Validation.

STEP 3— Schedule Your Submissions: Select “Schedule eFiling” from the dashboard and choose a preferred (future) submission date.

STEP 4— Confirmation: Once scheduled, forms are queued for transmission. Tax1099 processes vendor delivery (e.g., emailing or mailing recipient copies) immediately, while IRS submission occurs on the designated date.

STEP 5— Submission: On the scheduled date, forms are electronically filed with the IRS, and the acknowledgment is shared to the registered email ID.

 

Please note that the scheduling applies to the IRS and state form submissions. The recipient copy is delivered at the time of filing, ensuring vendors/contractors receive forms promptly to review.

 

Tax1099 Scheduled Filing feature benefits

  • Bulk Scheduling: Import data for multiple forms using CSV templates or integrations, ideal for businesses with large workforces or multiple EINs, and schedule them for a future date.
  • Edit Flexibility: Modify forms before the scheduled date without additional fees, reducing the need for corrected filings. Users can also click on “Change Schedule Date for All Vendor Files to the IRS,” enter a new submission date, and reschedule the filings.
  • Automated Notification: Receive reminders and updates about upcoming scheduled filings, ensuring timely submissions and compliance.

Payroll Tax

Posted on March 27, 2025 - 1:55 pm by

What Is Payroll Tax? 

Payroll tax is a tax that employees and employers pay for their salaries, wages, or tips. For employees, employers withhold taxes from employees’ paychecks and pay to the government. State, federal, and local income taxes are included under these taxes. Additionally, the employee’s share of Social Security and Medicare taxes, which is known as the FICA (Federal Insurance Contributions Act) tax, also consists of and must be paid to the federal government. 

Employers pay their share of payroll tax directly. They pay not only state unemployment taxes but also their part of FICA. The general fund of the US Treasury receives the federal income tax. Generally, federal authorities and some state governments collect the payroll taxes. So, some state governments impose income taxes as well.  

By using payroll tax, the government spends some dedicated programs, such as compensation for workers, social work, or healthcare. Local government also utilizes this payroll tax by improving the road condition or infrastructure. 

 

How much is payroll tax? 

In the US, both employees and employers have to pay 7.65% each as a portion of their Medicare and Social Security. Employees need to pay 1.45% for Medicare and 6.2% for Social Security out of their share of 7.65%. While the total Medicare tax is 2.9%, the Social Security tax amount is 12.4%, which is paid by employees and employers combined. There is no particular rate of unemployment tax. The self-employment tax rate (15.3%) is equal to Medicare and Social Security. 

 

Who Needs to Pay Payroll Tax? 

Employees, as well as employers, pay payroll tax. While payroll tax is deducted from the salaries or wages of the employees, employers pay directly to the federal government. 

 

Limits of wages for payroll tax: 

There is no wage limit for payroll tax except the Social Security tax. In 2025, the base limit is $176,100. 

 

Certified Public Accountants (CPA) 

Posted on March 27, 2025 - 1:53 pm by

What Is a Certified Public Accountant (CPA)? 

A CPA, or certified public accountant, is a licensed accounting professional who has cleared the examination organized or administered by the state’s Board of Accountancy. The CPA license is only granted when the professionals meet certain education, experience, and other requirements. The state CPA exam is created according to the guidelines of the AICPA (the American Institute of Certified Public Accountants).  

Accountants who not only hold a bachelor’s degree but also have professional experience in the field can take the Uniform CPA Exam. CPAs must have essential technical skills and can provide several services like financial reporting, financial accounting, business environments, and business concepts.  

CPA candidates must complete at least 150 hours of education and have a minimum of two years of public accounting experience. CPAs have multiple skills like critical thinking, written communication, leadership, and technical soundness. 

 

Roles and Responsibilities of a CPA 

It is essential to remember that not all accountants are CPAs. Only those accountants who have received CPA licenses are called CPAs. A Certified Public Accountant has several responsibilities. Generally, they work in diverse industries, such as NGOS (nonprofit organizations), public accounting firms, corporate finance, and government agencies. 

Anyone who becomes a CPA can help clients prepare the financial statements. According to the SEC, you must be a CPA to prepare a financial report. The IRS allows CPAs to solve tax problems on behalf of clients. Being a certified public accountant, you can also work in a wide range of sectors, such as health, forensic services, or accounting services.  

As a CPA, you can choose your role in the following areas as well: 

  • In preparing tax returns of businesses and individuals 
  • Detecting the company’s internal financial discrepancies and solving those 
  • Provide consultation on financial matters 
  • Give advice about the financial risk to an organization 
  • Keeping the financial record 

Medicare Tax

Posted on March 27, 2025 - 6:29 am by

What is Medicare Tax?

The Medicare tax is a mandatory payroll deduction that helps fund the Medicare program. A federal program that provides health insurance coverage to people who are 65 years and older, as well as those with disabilities.

This tax is part of the Federal Insurance Contributions Act (FICA), which also includes Social Security tax. The revenue collected here directly funds Medicare Part A, which covers hospital-related care, including skilled nursing, hospice, and home healthcare services.

Keep in mind that paying Medicare tax doesn’t automatically qualify an individual for Medicare benefits. Instead, it ensures that the program remains financially stable so that those eligible can access essential healthcare when they need it.

 

Who Pays Medicare Tax?

Most workers in the U.S. pay Medicare tax, including:

  • Full-time employee and employer (including non-citizens working in the U.S.)
  • Self-employed
  • High-income earners (pays an additional surtax)

 

How Does Medicare Tax Work?

For an employee, the Medicare tax is automatically deducted from their gross income which includes wages, salary, bonuses, and tips. The employer, on the other hand, will handle the withholding and send both their share and the employees to the IRS.

Self-employed individuals, since they’re both the employee and employer, pay the full amount as part of their self-employment tax.

For example, a full-time employee earning $60,000 annually would have 1.45% deducted from their paycheck, which is roughly $72.50 per month. Their employer would also contribute $72.50, totaling $145 going towards Medicare. However, for self-employed individuals they would need to pay the full 2.9%.

 

Medicare Tax Rates For 2025

The applicable Medicare tax rates are:

  • Employees & Employers: Both parties will contribute 1.45%, totaling 2.9%.
  • Self-Employed Individuals: They are responsible for the full 2.9% rate.
  • High-Income Earners: Earnings that exceed $200,000 (individual filers) or $250,000 (married couples filing jointly) will pay an additional 0.9% Medicare surtax.

IRS Form 8889 (HSA)

Posted on March 27, 2025 - 6:19 am by

What is IRS Form 8889?

IRS Form 8889 is used to report contributions to and distributions from a Health Savings Account (HSA). It is attached to Form 1040, 1040-SR, or 1040-NR and is required for taxpayers who made or received HSA contributions (including employer contributions) or took distributions from an HSA. It allows taxpayers to claim a deduction for HSA contributions, report withdrawals, and determine any taxable amounts or penalties owed.

Health Savings Accounts (HSA) are tax-advantaged accounts that help individuals save for qualified medical expenses. It acts like an emergency fund specifically for healthcare costs while offering tax benefits.

 

Who Needs to File Form 8889?

A taxpayer must file Form 8889 if any of the following applies:

  • Made contributions to an HSA for the tax year.
  • Received HSA distributions during the tax year.
  • Included certain amounts in income due to failing to meet HSA eligibility requirements during the testing period.
  • Acquired an interest in an HSA because of the death of the account beneficiary.

For spouses who are receiving HSA distributions in a tax year, Form 8889 must be filed along with Form 1040, Form 1040-SR, or Form 1040-NR.

 

How to fill out Form 8889

Step 1: Enter Personal Information

Enter taxpayer’s name and Social Security Number (SSN) as shown on the tax return. If filing jointly, both spouses should have separate Form 8889s.

 

Step 2: Part I – HSA Contributions & Deductions

In this section, you will calculate:

  • HSA deduction
  • Excess contributions outside of payroll deductions (yours or those made on your behalf)
  • Excess employer contributions

 

Step 3: Part II – HSA Distributions

This section reports HSA withdrawals and whether they were used for qualified medical expenses including Total Distributions (Line 14a), Rollovers and Excess Contributions (Line 14b), Qualified Medical Expenses (Line 15), etc.

 

Step 4: Part III – Additional Taxes for Loss of Eligibility

Use this section to determine additional income or taxes owed due to failing to maintain High Deductible Health Plan (HDHP) coverage under the last-month rule or an HSA funding distribution. Add adjustments for last-month rule (line 18), Qualified HSA Funding Distributions (Line 19), etc.

 

Step 5: Filing & Recordkeeping

Once completed, attach Form 8889 to the federal tax return. While it is not required to submit receipts for your medical expenses, you should keep them for at least three years in case of an audit.

 

HSA Contribution Limits for 2025

Self-only coverage: $4,300

Family coverage: $8,550

Catch-up contribution (age 55+): Additional $1,000

If the contribution is more than these limits, withdraw the excess before the tax deadline (April 15) to avoid a 6% penalty.

Qualified ABLE Program

Posted on March 27, 2025 - 6:11 am by

What is a Qualified ABLE Program?

A Qualified ABLE Program is a state-established initiative designed to support individuals who became blind or disabled before age 26. The program must meet strict criteria under Section 529A to maintain its “qualified” status:

  • Eligibility: An ABLE account may be opened for an individual who is blind or disabled, with the condition onset occurring before age 26. This individual is both the account owner and the designated beneficiary.
  • Purpose: Contributions support Qualified Disability Expenses, or QDEs, which include, but are not limited to, expenses for education, housing, transportation, training for employment, health care, assistive technology, and other costs related to enhancing health, independence, or quality of life.
  • Contribution Limits: One ABLE account for each beneficiary (other than a rollover case) is allowed, and contributions within each calendar year must be limited. For 2025, the total contribution limit allowed by all sources is aligned with that of the federal gift tax exclusion (currently $18,000, subject to inflation adjustments), adding up an allowance for employing beneficiaries of either their compensation or for a household of one to a poverty line (for example, in 2024, $14,580 adjusted for 2025).
  • Program Requirements: The program must limit contributions that exceed those amounts (other than rollovers and program-to-program transfers) and comply with other requirements of Section 529A, such as separate accounting for each account.

States or other designated entities administer these programs, overseeing such compliance. Each distribution or termination of an account becomes the subject grant of Form 1099-QA reporting requirements from the IRS for tax implications.

 

Tax Benefits of ABLE Accounts

ABLE accounts offer some unique tax advantages similar to those of qualified tuition programs (QTPs) under Section 529, but designed for disability-related benefits:

  • Tax-Free Withdrawals: Amounts withdrawn from an ABLE account, including earnings, are excluded from taxable income if spent on QDEs. This is similar to tax-free treatment for qualified education expenses under a 529 plan.
  • Tax-Deferred Growth: The earnings in the account-interest, dividend and investment gains-are allowed to accumulate free of tax liability to enhance the growth potential of the account.
  • No Federal Deduction for Contributions: Contributions to ABLE accounts do not qualify for a federal income tax deduction, like contributions to some retirement accounts. However, some states may offer state tax incentives.

If an expenditure is a non-qualified expense, the earnings portion is taxable and possibly subject to a 10% additional tax, much like penalties for non-qualified 529 plan distributions. Therefore, it is critical that funds are used correctly to maintain tax benefits.

 

Form 1099-QA: Reporting Distributions

The IRS mandates detailed reporting for ABLE accounts through Form 1099-QA, which tracks distributions and terminations. This form ensures transparency and compliance with tax rules. Here’s how it functions:

  • Who Files: Any state, agency, or instrumentality maintaining a Qualified ABLE Program must file Form 1099-QA for each account with a distribution or termination in the calendar year. An officer, employee, or their designer overseeing the program handles the filing.
  • Filing Deadline: The form must be submitted to the IRS by February 28 (or the next business day if it falls on a weekend or holiday) of the following year. For 2025 distributions, this means February 28, 2026. In leap years, the deadline remains February 28, not February 29.
  • Recipient Statements: A copy or substitute statement must also be furnished to the designated beneficiary and any contributor receiving a returned contribution (plus earnings) by March 15 of the following year (e.g., March 15, 2026, for 2025 distributions).

 

What’s Reported:

  • Box 1: Gross Distribution: Total amount distributed, including both basis (contributions) and earnings, whether for qualified or non-qualified purposes.
  • Box 2: Earnings: The taxable portion of the distribution, calculated as the difference between the gross distribution and the basis, if not used for QDEs.
  • Box 3: Basis: The non-taxable portion representing original contributions.
  • Box 4: Program-to-Program Transfer: Checked if funds were rolled over to another ABLE account or transferred between state programs, typically non-taxable if completed within 60 days.
  • Box 5: Reserved for future use.
  • Box 6: Recipient Not Designated Beneficiary: Checked if the distribution went to someone other than the account’s designated beneficiary (e.g., a contributor receiving excess funds).

 

Special Cases: If the designated beneficiary changes to an ineligible individual or non-family member, the fair market value (FMV) of the account on the change date is reported as a distribution in Box 1. Family members (siblings, including step- or half-siblings) qualify for tax-free beneficiary changes, and no Form 1099-QA is filed in such cases.

Due to low paper filing volumes, Form 1099-QA is available as an online fillable PDF at IRS.gov/Form1099QA. Entities filing fewer than 10 forms may submit paper copies with Form 1096, while those filing 10 or more must e-file via the IRS FIRE System.

 

Key Rules and Restrictions

To maintain its qualified status and tax benefits, an ABLE Program enforces specific rules:

  • One Account Limit: Each eligible individual is restricted to one ABLE account nationwide, barring rollovers or transfers. Excess accounts may lose tax advantages.
  • Contribution Caps: Beyond the annual limit, employed beneficiaries may contribute additional amounts from their compensation, up to the poverty line threshold, provided they do not participate in certain employer retirement plans.
  • Rollover Rules: Funds can be rolled over from one ABLE account to another for the same beneficiary or a family member within 60 days without tax consequences. Program-to-program transfers between states follow similar guidelines.
  • Excess Contributions: Programs must reject contributions exceeding limits unless part of a rollover. Returned contributions, including earnings, trigger a Form 1099-QA filing for the contributor.

 

Tax Implications for Beneficiaries and Contributors

Beneficiaries: When distributions cover QDEs, no income tax or penalty applies. Non-qualified distributions tax the earnings portion at the beneficiary’s ordinary income tax rate, plus a 10% additional tax, reported on Form 1040 or 1040-SR. Records of expenses should be retained to substantiate qualified use.

Contributors: Contributions are made with after-tax dollars and returned contributions (e.g., excess amounts) are non-taxable up to the basis. Earnings on returned contributions may be taxable if not rolled over or used for QDEs.

Accounts Receivable (AR)

Posted on March 26, 2025 - 4:00 pm by

What is Accounts Receivable?

Accounts Receivable (AR) are those debts that are owed to a company by its customers for goods or services supplied, and for which payment has yet to be made. Accounts Receivable must always be recorded under the current asset account on the balance sheet. This includes invoicing, payment tracking, and collections that are designed to guarantee effective cash flow and customer relationships under the defined credit terms the latter being different from cash sales.

 

Key Terms

 

Term Definition
Accounts Receivable Current assets amounting unpaid bills with customers.
Invoice Generation Creation and distribution of request for payment to customers.
Payment Terms Conditions that have been agreed upon regarding payment, e.g., Net 30, 2/10 Net 30.
Aging Reports Receives accounts receivable according to the due date for overdue accounts detection.
DSOs (Days Sales Outstanding) Measures how many average days it takes for payment to be received after sale.

 

Aging Report

Stock-based aging invoices for collection action prioritization:

 

Timeframe Action
0-30 days Watch for incoming payments
31-60 days Send payment reminders
61-90 days Forward to collections
Over 90 days Consider write-off

 

AR Automation

These are services that would automate the management of receivables by these types of technology:

  • Automated Invoicing: Generates/delivers invoices via email/portals.
  • Payment Portals: Self-service platforms for customers making payments.
  • AI Collections: Prioritizes overdue accounts using predictive analytics.

 

Components of the Processes of AR 

Component Function
Credit Management Assesses customers’ creditworthiness and limits
Invoice Delivery Pay invoices electronically (via EDI, email, etc.)
Collections Consistent follow-up of overdue payments
Cash Application Matching payments with open invoices

 

Key Metrics

DSO: <45 days is the target (measures how fast everything gets collected). Collection Effectiveness Index (CEI): >80% (measures how effective all collections are).

Bad Debt Ratio: Less than 2% of total AR (tracks uncollectible accounts).

 

Conclusion

Automated modern-day practice of AR, alongside data analytics, helps reduce DSO, improve cash flow predictability, and build confidence with clients. Businesses are placing AR as a functional strategic importance that directly drives financial stability and growth, transforming operational processes through the integration of tools such as AI-driven aging reports and digital payment portals.

Accounts Payable (AP) 

Posted on March 26, 2025 - 3:54 pm by

Accounts Payable (AP) means present and due liabilities of a firm or company for goods and/or services supplied by vendors and suppliers but not paid for. AP is recorded as a current liability in the balance sheet of a company. Activities under AP include the processing of invoices, approval of payments, and disbursements, and keeping accurate financial records and adherence to payment terms such as Net 30, early payment discounts, etc.

 

Key Terms 

 

Term Definition
Accounts Payable A current asset account that carries the amounts owed to vendors for goods/services received but not yet paid for and which stand on the balance sheet until payment falls due.
Invoice Processing The receipt, validation, approval, and posting of vendor invoices for payment—an essentially automated process these days owing to AP software solutions.
Payment Terms Contractual terms concerning date of payment that indicate a due date (e.g., Net 30) and may include any early payment discounts that may be applicable (e.g., 2/10 Net 30).
Three-way Matching A control process that verifies matching of purchase order, receiving report, and vendor invoice before payments may be approved in order to catch erroneous or fraudulent transactions.

 

Three-Way Matching

The Three-Way Matching is a control process that verifies matching of purchase order, receiving report, and vendor invoice before payments may be approved in order to catch erroneous or fraudulent transactions. 

 

Document Purpose
Purchase Order Verifies authorization of order
Receiving Report Verifies delivery of goods/services
Vendor Invoice Verifies pricing and terms

 

Payment Terms

The terms negotiated between buyer and seller include: 

  • Net 30: Payment is to be made within 30 days of shipment or receipt of invoice. 
  • 2/10 Net 30: 2% discount if payment is made within 10 days. 

 

AP Automation

Software that handles invoices with the minimal amount of human data-entry and therefore, human error. It has features that include: 

  • OCR (Optical Character Recognition) scanning 
  • Self-approving business processes 
  • Integrated with Accounting systems 

 

E-Invoicing

Electronic invoices exchanged between suppliers and buyers rather than paper-heavy processes. 

 

Components of AP Processes 

By integrating the use of technology and standardized business processes with the non-stop flow of cash, modern accounts payable functions have enabled their stringent control over funds. These operational processes guarantee prompt and accurate payment with the capture of early payment discounts while preventing duplicate or fraud payment. 

 

Component Function
Invoice Capture Technology capturing data from paper/PDF invoices (through OCR or AI) and inputting it into AP systems without keying.
Approval Workflows Customizable rules that route invoices to the right approvers by amount, department, or vendor, with audit trails.
Payment Execution Disbursal options (ACH, checks, virtual cards), all with embedded fraud detection and bank reconciliation.

 

Key Metrics 

These are the metrics a firm may use to gauge AP performance: 

  • Per Invoice Cost: The average cost of per invoice to process (Target: <$5 thru automation) 
  • Cycle Time: The number of days to get invoice through payment (Target: <5 days) 
  • Excellence Factor: World-class standards in every metric and measure of performance for various processes; in effect, it means measuring the inputs to, through-put in, and outcomes out of an activity considered. 

 

Conclusion 

Modern accounts payable operations have transformed from back-office clerical functions to strategic financial hubs through automation and integration. By implementing AP automation software with robust three-way matching and approval workflows, organizations can reduce processing costs by 60-80% while improving compliance and capturing early payment discounts. The integration of e-invoicing networks and payment gateways further enhances efficiency, creating a seamless flow from procurement to payment.  

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