Tag: Self employment
IRS Getting Tough on Small Business Owners
Sanjiv Gupta CPA - 9 years ago
Internal Revenue Service will not compromise while inspecting on pay-roll taxes, tax- advocates confirmed. Many will suffer consequences on having to deter tax payments,Payroll taxes are federal or central taxes that an employer is entitled to pay or withhold on behalf of his employees. Under its fold, the employing organization has to take the liability of paying social security and Medicare taxes also. There have been a large number of cases where small business entities or small companies have been found deterring central payroll tax payments. The tax lawyers express that following this the IRS has started acting stricter about exercising penalties and fine on accountants, executives, and business individuals for the tax-delays or evasion.Paying business payroll taxes must be considered a priority. The different tactics available at the hands of the IRS to treat these cases are freezing a company’s business accounts, grabbing assets, imposing garnishment on wages of a debtor. Other than tough methods it can assess substantial penalties and impose tax liens on the property of the defaulters.In the opinion of Sanjiv Gupta CPA, the payroll tax debt can be very dangerous so much so that they can completely bring down the company. To support his argument he described the instance of an equipment company that had to bite the dust for not paying the federal payroll taxes. Similar things happened to a medical care center and a group of licensed schools.According to the report of government agency findings every year $54Billion as employment dues goes unchecked. To curb this serious loss to the government exchequer the IRS sees it necessary to amend payroll-tax parameters by approximately 6600 employers for the upcoming tax years. Robert E. Mc Kenzie a tax-layer based at Chicago opposes the IRS actions and expresses that the tactics adopted by the IRS by individualizing tax-payers to penalize for defaulting are particularly harsh and cannot treat the actual cause accountable for the tax-debts.The tax laws allow certain freedom which causes an unnecessary payroll tax debt by laying the sole responsibility of tax evasion on the officers, bookkeepers, business owners, and anyone who prevents the company from clearing employment tax by taking sole control of business accounts and governing the debt payment process.When the IRS charges penalties the payroll tax debt stands double the actual amount. The three grounds that IRS can exercise its right to penalize are in the case of nonpayment of the debt, failure to state/ itemize the debt and finally for late payment. Fines that are charged for payment delay shot up to 25% tax debt. A person who has previously failed to report tax should not make the mistake of deterring from filing tax in the future. Adverse to this there will be more penalties.The best way to avoid mounting debts with the addition of penalties is by clearing it off before the deadline and also to pay the taxes to the IRS before it imposes a personal liability.
Tax Tips That Offer Better Results for Small Businesses
Sanjiv Gupta CPA - 9 years ago
Come the month of January/February and the nation prepares itself for tax sessions. It is time to check that all your financial records are in perfect order. The Certified Public Accountant who will start corporate accounting can call you any time and ask for your spontaneous cooperation if certain papers to prepare the actual audit results are missing. Are you ready? Still, worrying if 2012 will be an expensive Tax-year? Follow the below-stated tips to prepare yourself better for the tax-return file. Establish your business as an entity with the state:This is a great tactic as it allows you to enjoy tax benefits by protecting your personal assets and possessions from your business’ sponsors or financers. This you can simply do by listing your business as an entity with the state. Being an entity of the State increases your brand value and authenticates you as a trustworthy and reliable entity to both the clients and the IRS. In order to enjoy this kind of tax benefit or tax break, you need to undergo paperwork proceedings with the Secretary of State. This process is completely different and is in no way similar to the process of filing with the country records office for an assumed-name certificate. Anyone with such a paper gets permission to conduct business under an assumed or imaginary name. If the firm is recognized as a legal entity then it attracts some amount of costs which is normally capitalized for tax purposes and considerable amortization is done for a period of 15 years. The first tax tip states that for the current year if the total start-up expense for a firm does not exceed $50000 annually then up to $5000 can be deducted from the expenses. Business owners need to keep track of their expensesThe domain of tracking expenses covers home, office, auto, and client development expenses. All these expenses are integral to the development of the business and as such is considered to be an integral part of it. The costs incurred on these heads are liable to be deducted from tax but to get the benefits there are certain rules to be followed. The IRS will ask you for the mileage bills in cases of business automobile usage. It is very well known that small businesses overstate automobile expenses and so bills must be kept for the actual information. If you fail to keep a record of your transport cost then the IRS can decline a small or major part of your deduction from auto expenses. Just like auto and home-office expenses, client development costs are also subjected to some specific rules. In matters of deductible client development costs, there must be a clear mention of time, date and place – these include details such as when you went to meet the client, the business contact’s name and the business you thought of generating as a direct effect of your expenditure. Unreasonable client development expenditures are not considered and only 50% of the business meal prices and other client entertainment expenses are deductible. Small business owners need to invest in equipmentThere is a provision of a total tax cut of $139000 on total business equipment expenses ranging between $560000 and less. This is calculated annually. If in any case repair extends the life of equipment or the equipment is used for a different cause other than the requirement of the company, then the cost will be regarded as an improvement that is entitled to be capitalized and depreciated for the purpose of tax deduction. Need to collect past due accountsIf you are running a proper business you must be well aware that for some obvious reasons there may be a few clients who will refuse to pay you the due money. The work will become easier for you if you have some valid documents to prove your claims such as a receipt, contract, or written slip which documents the fact that these people owe you money. This will place you in a position to exercise your right to collect past-dues. For speeding up the collection process write a note to your client requesting him to clear off their payment and if they express their inability or refusal to pay then you can place your claim on this amount as a “bad business debt loss” for tax purposes. But the debt has to be appropriate and on business grounds. Only then will it be granted for a tax deduction by the IRS. The need to protect payroll taxesBeware of using the payroll taxes for financing any kinds of business operations or proceedings such as clearing the dues of the creditors and suppliers. This is one common mistake that small businesses commit. Payroll taxes are strictly inspected by the IRS and in cases of tax-default or evasion, the IRS can also freeze your personal assets. Even though you have established yourself as an organized business firm the IRS will not entertain any reason while calculating payroll taxes.
Discounted Kaiser Insurance for Small Business Owners
Sanjiv Gupta CPA - 8 years ago
Our public accounting firm is focused on Small Business Owners and Individuals and many times new business owners ask us about health insurance. Most of us live in the Bay Area and prefer “Kaiser” as a health care provider and therefore I gathered some basic information about Kaiser health care plans for small business owners.Kaiser offers many health care plans but one that suits the need of small business owners is called “GROUP POLICY”. You can buy this group policy in two flavors. One with the annual deductible and one with no annual deductible.Plan with annual deductibles cost about $250-$300 less than the non-deductible plans. Both policies cover doctor's visits and other services offered by Kaiser. Both plans have minimum out of pocket doctor’s visit cost but the key difference is that with an annual deductible plan you have to pay the minimum deductible ($1500) before your major benefits kick in. For example, a daily rate for the hospital room maybe $500/night and you will have to pay for 3 nights before your insurance pays. However, with non-deductible plans you won’t be required to pay for these three days.So, if you and your employees are fairly healthy and won’t be needing any major services than you can opt for deductible plan and save a significant amount on a monthly basis.How about Spouse and kids?Yes, of course, your employees along with officers/owners of the company can also enroll their dependents including kids and spouses. Most policies don’t allow you to include your parents.What are the requirements for this kind of policy?You must have a business in good standing.You must have two or more people enrolling in the policy.More than 50% of all eligible persons should have insurance.Can I get a tax deduction for the health policy?You can read my post about health care policy deduction for more details.How much does the policy cost?I found the group policy of very good value. Rate varies by age but here is a simple example. Females less than 30 years old can get this kind of policy for about $300. Not Bad?How can I enroll in group policy?Simply call Kaiser and ask for enrolling in group policy.
Tax Deductions for Independent Contractor or 1099
Sanjiv Gupta CPA - 8 years ago
Starting out a consulting business can be very lucrative. However, it can also result in a heavy tax bill you do not organize your income and expense properly. So, how do you organize your income and expenses?You can start by opening a different bank account. Do not mix your business bank account with your personal bank account. All business-related income should come to this account and all expenses should be paid from this account. Your client will send you to form 1099-misc at the end of the year. IRS will also reactive a copy of this 1099. That being said your total business income should be greater or equal to the amount listed in 1099. You may get an automated customer-generated audit if you report a total income less than the amount listed on your 1099. Keeping a separate bank account will help in calculating total business income and you act as proof in case of an audit.Now you need to deal with your business expenses. The easiest way to do this is to categories your business expenses. We recommend you use the same or similar categories listed on schedule C. This will help during tax time. Now, every time you pay a bill, you simply need to enter that transaction in the correct category. You can use a simple spreadsheet, financial software or you can use a shoe-box. Most CPA firms also provide bookkeeping services. For example, you can simply send us your bank statement at the end of the month and we can do the complete bookkeeping. We will assign each expense into appropriate categories based upon its tax implication.What are some of the most popular business expense categories?Advertising – All expenses paid for online marketing or print marketing including business cards or flyers.Consultation Fees – Fee paid to professionals like attorney, CPA, or marketing professionals.Insurance Cost – Business Insurance Expenses including life, property & casualty, or business insuranceInterest Cost – Interest cost of your business loans. You can include fees and other related cost.Office expense – Any supply or equipment you purchase for your business operation.Rent or lease other business property – Cost of operating your business office.Repairs and maintenance – Include all cost related to your business only.Travel – the cost of traveling to a business-related event like convention, meeting, or business tripMeals and entertainment – You can include meals and entertainment expenses related to your business.Utilities –electricity, gas, telephone, internetOther expenses – such as Dues & Subscriptions, Web development, and Business telephone expenses. Health Insurance expenses: Premiums paid for your health insurance are tax-deductible. You can deduct the full cost of health insurance premiums on form 1040 but you must have an Income from your business. You can deduct the health insurance cost event if you run into losses but it has to be reported differently. Consult with your CPA to ensure you are reporting the deduction properly.Still have a question about your business expense? Leave us a comment or call our office at 510-825-7563
All You Wanted to Know About Medicare Tax
Sanjiv Gupta CPA - 8 years ago
Medicare tax is quite popular in theUS. Like land tax and service tax, Medicare tax is imposed on earning/wage/salary of an employee or a self-employed individual. As per the 2013 budget the US government has announced an increase in Medicare tax rate; from 2.9% to 3.8%.Medicare hospital insurance amount is divided amongst the employees and the employer; both are subjected to pay half the amount of the total taxable money. Those that are self-employed have to pay the total amount as they themselves are employee and employer, rolled into one. However such individuals can file for half the amount paid as Medicare tax when filing for tax return.Medicare tax rate will be increased to bring under its fold higher-income individuals and investment income. This as a part of health care reform laws is called ‘unearned income Medicare contribution tax and it is calculated as follows:Multiply 3.8% tax rate by the lower of either of net investment income or the gross income over a certain amountWhile the net investment amount covers interests, annuities, rents, dividends, capital gains, etc the gross adjusted income includes overseas income/ income from properties abroad, etc.Employers are required to deduct an additional 0.9% from their employee’s salary which is calculated on the threshold amount. This deductible amount is the difference between 3.8% unearned Medicare tax and the 2.9% Medicare contribution tax. Because employers may not have knowledge of whether an employee is subjected to additional Medicare tax or not the tax amount is decided upon the individual’s income tax return. All extra tax amounts are to be cleared by the individual who is filing for tax return. On the other hand, if employers do not calculate on this basis then they can be subjected to penalties and fines.If you fall within the higher income group then you might want to calculate the amount that you have to pay as additional Medicare tax at the rate of 3.8%.Tax-deferred plans such as IRAs and 401(k) accounts should be the place where you would need to shift income-producing investments.Avoid taxable bonds in favor of tax-exempt bonds.To ensure net capital gains to be as low as possible you need to pair capital gains with capital losses.When the additional Medicare tax would not apply you would need to postpone selling investments with a capital gain by about a year.Children or other family members who aren’t subject to the additional Medicare tax should be bestowed with income-producing investments.Increase payroll withholding or estimated taxes to cover the additional Medicare tax.By all these methods you would be able to ensure that you plan your medicare axes well and gain greater savings.
Top 3 Deductions for Self Employed | Infographics
Sanjiv Gupta CPA - 8 years ago
Self-employed individuals can also take advantage of many tax breaks. Here are the three most popular tax breaks that can help you reduce your tax bill. Do you have health insurance? You can deduct the cost of your health insurance and of your family. Do you have an office? You can deduct your office expenses. Yes, it also includes your home office expenses. If you are in business for yourself than you must be spending money on supplies. Most supplies are also tax-deductible. However, there are many tax deductions that can also get you in trouble. You must watch out for those kinds of tax deductions.
Understanding Self Employment Tax
Sanjiv Gupta CPA - 8 years ago
The word tax never fails not to scare us right? No matter however much money we are paying to the government as a tax it seems that whenever it’s time to pay back to the government there is some shiver that goes down the spine. But much of the fear is allayed when the necessary taxes are deducted from the salary itself and you don’t have to bother much about paying them yourself. But when the case is otherwise and you have to yourself tell the government about your earnings and then pay the relevant taxes, it becomes a bit scary then. So definitely it not only sounds scary but quite draining as well.How Does One Go About Paying Self Employment Taxes?If you are self-employed and you do not draw monthly cheques under a company then you have to individually make arrangements for getting your taxes paid. This may sound tough but as you systematize and organize the important documents, the task of you paying your taxes is not that difficult anymore. What is important is knowing when to pay themIf you are self-employed then such taxes may be paid throughout the year. If you are making a good living out of your self-employed incomes or earnings, which is again registered as your primary income then probably you have to pay the scary taxes. Also, you can only skip the quarterly taxes at the risk of paying heavy fines during the tax-paying time.As a self-employed individual one has to also pay social security and medicare to the government out of their incomes. The best thing to allay your self-paying tax fears is to stash away those essential bucks to be used only during tax time.Not all is bad for self-employed persons!Yes in such cases you may have to pay only half of the entire tax burden. Also, you are liable to face deductions if you are using your home office, other business expenses or purchasing your own health insurance schemes. The only thing that ought to be kept in mind here is keeping all the papers ready for audit time.If all the above is a little complicated for you then you better consult an attorney to secure legal advice.
Want Funding For Your Business ? Look at Crowdfunding
Sanjiv Gupta CPA - 8 years ago
For a beginner, the term crowdfunding may be new. However, it is quite easy to understand. It simply means the collective drawing of resources or investing the collective money drawn from various resources to some activities as investments etc.Crowdfunding implies collective drawing of money from disparate resources, usually through the internet in order to support the earning initiatives by other people and organizations. Crowdfunding can be used in the wide spectrum of activities like disaster management, political propaganda, movie promotion, research, and development, etc, the term crowdfunding is more in use now than it was ever.Legality – How legal is crowdfunding?Once you understand the meaning of crowdfunding, the natural question that follows is how legal is crowdfunding? Is it safe for any business house to go about crowdfunding? If so then how shall one go about it? Questions likewise follow and to get full knowledge about all of the above, here’s a bit of discussion about it all.Though Jobs Act regulations favor crowdfunding, there are of course more significant ways companies should deal with them. For starters, owners of small businesses should state the requirements to investors and only move forward once all the rules defined.Again the rules are not without their risks and the biggest and most grievous of them is getting involved in a scam. Often the brokers, introducing themselves as know – all of the crowdfunding are treacherous and so the warning, that unless with proper documentation such people cannot and should not be trusted. Offers that promise smart deals in a short time can never be good offers.Crowdfunding will be available next year for small business owners. However, businesses should watch out for companies looking to make a quick buck. As per NASAA reports, such owners are already after investors.
Bankcruptcy Attorney Fraud Making News
Sanjiv Gupta CPA - 8 years ago
Thinking about doing Bankruptcy? Think twice before you pick your attorney. An Illinois attorney was recently accused of using his bankruptcy client’s credit cards to make purchases. Moreover, the lawyer also asked an employee to create false tax returns in order to avoid student loan payments. The attorney was arrested on federal fraud and obstruction charges, reported Chicago Tribune.Bradley A. worked for the Vernon Hills lawyer and was regularly asked by his employer to get cash advances from the credit cards of his Bankruptcy clients. This debt was later included in the bankruptcy filing of his clients. Bradley is now being described as a “cooperating individual”. He was arrested for identity theft in 2010.
1099 Independent Contractor Tax Deduction
Sanjiv Gupta CPA - 8 years ago
Recently we got a question asking about the tax deduction for the 1099 contractor. The caller wanted to know if he can deduct the travel expense from his home to his office.In the San Francisco Bay Area, many of us are 1099 contractors, working for consulting companies or own our small business. With gas prices reaching $5 per gallon, it is no wonder that we are starting to pay special attention to the travel expenses. The small answer, like always, to this question, is – Yes, but it depends.You can deduct travel expenses from your office to your client site. Meaning, if you have a home office and you travel from your home office to your work than that expense can be deducted.However, if you simply travel from your home to your work than that expense is not tax-deductible. Set Up A Home Office To Take Tax Deduction.Your home office should be a separate place in your home that is dedicated to your office. There is no special rule that defines what furniture or equipment you need to buy to claim a place as your office. However, your office should serve as your “HOME OFFICE”. Meaning you should be able to do an operational task from such a place. Moreover, this office space should not be used for personal use. It should be dedicated forth office use only.With an increasing number of audits from the IRS, I suggest that you keep a picture of when your office was set up. Taking your home office pictures can also help strengthen your position in case of an audit. Making a list of things you do from your home office can also help you establish your home office.
Why Set Up A Proper Business Structure? Case Study
Sanjiv Gupta CPA - 8 years ago
Sanjiv Gupta CPA specializes in setting up businesses in San Jose, Santa Clara area. His office is located in Sunnyvale CA. You can call 510-825-7563 to set up a “Business Formation” appointment.Let’s talk about the incorporation from the tax and business survival point of view.
Solo 401k Plan Explained for Self Employed
Sanjiv Gupta CPA - 8 years ago
Last week I talked about the 401K plan and how shared an example explaining how your 401k plan contribution can earn you a 25% return on investment.Today, I want to continue with that conversation and how to explain how an independent contractor or self-employed person can save even more taxes by investing in their solo 401k plan.In today’s video, I am going to explain the following.A.) How much money can you contribute to your solo 401k plan?B.) What are some of the limitations with a solo 401k plan?C.) Where to open a solo 401k plan?D.) How much does it cost to open a 401k plan?E.) What kind of tax benefit you can get by investing in your 401k plan?We have about 2 months before the end of this tax year. Self-employed personals can contribute up to $50,000 to their solo 401k plan and reduce their tax liability accordingly.There are fees associated with the solo 401k plan, but you can borrow funds from your 401k to help you with cash flow and you can pay the money back within 5 years. You can also move the 401k plan to another company in the future. In the video, I will tell you how you can open a solo 401k plan for free.A self-employed person with income of $75,000 will have to pay about $7500 in federal income tax. However, this person can contribute up to $30,941 to the solo 401k plan and reduce the federal income tax to only $2,304. Savings of over $5000.Moreover, a contribution to a 401k plan can be made as profit sharing. In this case, Up to $13,941 can be contributed as profit share further reducing the tax to about $600.In other words, you can earn up to $75,000 and pay almost no federal income tax if you contribute fully to your 401k plan and take advantage of a few other deductions. Have you checked your retirement plan this year?This is a good time to review your retirement account for the year 2012. Single tax filers can contribute up to $17,000 to their 401k retirement plan. Contributing to your 401k can significantly reduce your tax liability for the year 2012.1099 Contractors and Small Business Owners can also reduce their tax liability by taking advantage of various retirement plans. You still have time to set up a proper retirement plan for this year and save thousands of dollars in taxes.Want to come in for a consultation to discuss your retirement plan? Please make sure to bring your retirement statement and current year income statement.Free Solo 401k plan for self-employedWatch this video to learn how you can deduct up to $50,000 this year.
Home Office Deduction | Video
Sanjiv Gupta CPA - 8 years ago
In this short video, Sanjiv Gupta CPA discusses the “Home Office Deduction”.What is considered as Home Office?Please consider the IRS definition for Home Office.Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction. Here are six things the IRS wants you to know about the Home Office deduction1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:as your principal place of business, oras a place to meet or deal with patients, clients or customers in the normal course of your business, orin any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business.6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.
Tax Breaks for Health Insurance
Sanjiv Gupta CPA - 8 years ago
Health insurance is one of the largest costs that most people deal with on a monthly basis other than the mortgage. Health insurance for those who are self-employed is normally higher than those who have employers offset health insurance. Luckily, there is a tax break for those who are experiencing large health insurance payments.To qualify for the IRS health care tax deductions for you and your family you must be either a self-employed individual with a net profit, have a self-employed partner who qualifies or is a shareholder with more than a 2 percent stock in an S corporation.The insurance plan must be established under your name or the name of your qualifying partner. For the self-employed, this can be your personal name as long as this is the name the business is run under. The self-employed individual or the stockholders must be the one who is paying the health insurance premium for this credit to apply.Stockholders must have the health insurance plan in their name or be reimbursed by the business for health costs to be eligible. This must be verifiable via W-2. To qualify for the tax credit, you must use the Schedule C or 1040 form to apply for the credit.This tax credit can be a large offset for those who are self-employed, as health insurance costs can equal up to a large amount of self-employed income each year. Self-employed persons also pay a higher tax rate than those with an employer so this credit can decrease the tax amount in an effective manner.
Employers (Dental Practices) Engaging Independent Contractors are Prone to Scrutiny
Sanjiv Gupta CPA - 8 years ago
The government acts strictly with employers who make attempts at evading taxes by resorting to unscrupulous means. Many employers project their permanent employees as being independent contractors in order to avoid employment tax.Hiring independent contractors are legal in certain businesses and professions, provided the conditions allowing for the same are adequately satisfied. Dentistry also falls under the same purview. The government is liable to identify and arrest any practice by an employer wherein he manipulates or misuses this provision of law with the intention of avoiding employment tax.To be considered as an independent contractor, one needs to fulfill certain conditions, so that status as an independent contractor can be defended in the court of law if the need arises. The conditions which validate a person as a contractor require to include the ability of the person to work freely in the premises of the owner is liable to be paid by the owner for the project based on any frequency other than on an hourly basis, the person uses his own appurtenances, recruits and pays for his own employees, and has a control on the final product of the service he is giving.The person who doesn’t fulfill the stated criteria cannot be validated as an independent contractor. Let’s consider the case of a dental specialist. He doesn’t practice on his own as an individual practitioner but works in the facility owned by some other practitioner. He is compensated for his services separately from the regular employees of the facility owner, He comes with his own team – which does not fall under the owner’s supervision – and is totally responsible for the quality of the services he provides.The owner cannot supervise his work and operates as a business entity; thus his company has signed a contract with the owner’s entity for delivering a certain service for a particular period. The way the workers connect to the owner’s facility in terms of financial and business relations is what decides the exact status of the worker.The owner who wrongly classifies an employee as an independent contractor can be assessed for social security and medicare tax attributed to the employer. The owner can also be held responsible for the employee portion of Medicare and social security taxes.The owner can also be additionally penalized for not covering the wrongly classified employee under any benefit plans like health and retirement. An independent contractor is a self-employed individual and has certain tax obligations to be met, which are listed on the IRS website’s Self Employed Tax Centre page.Any worker that does not fulfill the criteria required of an independent contractor will be deemed as being wrongly classified by the employer. Even an associate uses the employer’s resources and his work is dirigible by the employer, keeping him out of the purview of being an independent contractor.In case of any discrepancies are proved related to the same, the onus of taking the beating would fall on the owner. There have been cases where larger firms have been penalized for classifying an employee as an independent contractor due to the inconsistencies being discovered in their terms of employment by the IRS. Such owners had been forced to pay the payroll taxes and related penalties.
Self Directed IRA – Caution
Sanjiv Gupta CPA - 7 years ago
Self-directed IRA schemes have a great chance of being involved in a prohibited transaction and hence the owner of these retirement benefits face the potential danger of their IRA account being disqualified. This was discussed and decided in the Peek V. Comr. Case. The details of this case are explained below.A fire safety business was considered a potential investment opportunity by two taxpayers. A broker, who was facilitating the sale, connected these taxpayers to a third party agent who managed the process further. This agent explained a technique to the taxpayers which involved them to set up a self-directed IRA, move funds from their existing IRA schemes to the self-directed schemes, set up a company, sell shares of the company and direct the funds into the self-directed IRA scheme and finally use these funds to buy a business interest.The paperwork for this scheme suggested that any prohibited transaction undertaken would prove harmful for the whole objective of this strategy. The paperwork was also accompanied by a letter from the firm’s accountant explaining the prohibited transaction rules clearly, though no personal guaranties were specified.The scheme went as per plan and the transferred funds were used to purchase the assets of the fire safety business. This transaction included a promissory note from the company to the sellers for one-fifth of the total sales price. A couple of years later, the taxpayers moved to Roth IRAs from their original IRAs and hence when the company was finally sold, the payments were finally transferred to Roth IRAs.The taxpayers’ income was fully adjusted to include the capital gains acquired from company stock sales by the IRS and the justification provided by them was that personal guaranties were equivalent to prohibited transactions. The assets from the IRA were deemed to have been distributed to these guaranties. The IRS reasoned that section 4975©(1) (B) disallows taxpayers from creating loans or loan guaranties indirectly to their IRAs. The Roth IRAs discontinue its existence if it is funded by company-owned stock.The taxpayers had to suffer an additional burden of 20% in penalties for not declaring the sales of the company. Their tax advisers could not be trusted upon, because they were the promoter of this sales strategy. The advisers were not given full information either because they were not transparent with the advisors and did not inform them about their decision to personally guarantee their loans.This is a good example for investors to understand the prohibition rules clearly and what transactions to proceed with and what transactions to avoid. It becomes doubly complicated when dealing with investment in retirement funds as the rules pertaining to the IRA accounts are more comprehensive than the other funds. This case also explains the need to be fully transparent with the tax advisers as they are the ones who represent a particular tax strategy and no transaction should be carried out without their knowledge.
Tax deductible gifts – Your 2013 Holiday Gift Guide
Sanjiv Gupta CPA - 7 years ago
Tax-deductible gifts are the order of the day, to save taxes while holidaying. People who find tax-deductible gifts as a mundane option, need to think again as the US government has introduced lots of attractive gifts in the tax-deductible category as long as they are used for the right purposes.Some of the technological gadgets that are classified as tax-deductible are computers, tablets, smartphones, kindles, cameras, video cameras and modern GPS’s. The pre-requisite for making these gadgets tax deductible is that these have to be used for official purposes only. Self-educational gifts are also tax-deductible as this is pursued to develop one’s current skill sets. Some of the educational gifts that can be claimed for deductions are books, subscriptions paid for educational magazines, tuition fees paid for a course, etc.People who work from home are not left behind. There is something in this scheme for these people also. A person can gift himself a new office or some furniture and claim the same for tax deductions as these are used for official purposes; only, in this case, the office is at one’s home itself. Furniture especially is a very good example of a tax-deductible gift and the taxpayer has the added advantage of using this for domestic purposes also.A taxpayer can gift himself a brand new car and claim tax deductions for the same as long as it is used for official purposes. There is no other pleasure than splurging in a new car and getting a tax benefit for the same. A full-time employee can also claim for these deductions as long as the employer does not already reimburse this. Cars are used as tax-deductible gifts mostly by contract employees, freelancers, and entrepreneurs who do not have direct employers to reimburse these.The taxpayer should always note that the gifts can be tax deductible only if it is used for purely official purposes and if the IRS recognizes these gifts only if it is absolutely necessary for the business needs. Care should be taken that a gift used for personal reasons should never be claimed for tax deductions. This is a serious offense and there are high chances that the taxpayer might get inquiries for audit by the IRS and this causes loss of reputation for the individual.However, the taxpayer can prudently use some of the gifts for personal as well as official purposes and still claim tax deductions. Computers, for example, can be used for personal purposes as well but the individual should exercise control to claim deductions only for the official expenses part. The taxpayer should keep a clean record of all receipts in order to claim tax deductions.With these effective tax savings gifts, one can not only enjoy holidays but also have enough money to save for a rainy day. One must smartly use the tax laws to save money, the ethical way.
Are you making more than average income ?
Sanjiv Gupta CPA - 7 years ago
Here is a chart from the Tax Foundation. According to this chart, the average income for taxpayers age 55 to 65 is nearly $82,000—and the average for all taxpayers is about $57,606. For more charts like the one below, see the second edition of our chart book, Putting a Face on America’s Tax Returns.
Strategies To Reduce The Net Investment Income Tax
Sanjiv Gupta CPA - 7 years ago
The goal of planning net investment income tax (NIIT) is to manage the adjusted gross income and net investment in order to reduce the total amount subject to federal tax. The net investment income tax is calculated using the lesser of the net investment income or the adjusted gross income over the tax threshold amount for the year.How Is The Net Investment Income Tax Calculated?The net investment income tax is a surtax at a 3.8% tax rate of a base income. The base income is the lesser of:Net investment incomeModified AGI above the thresholdNIIT ThresholdsFiling Status of Taxpayer Modified AGISingle and Head of Household $200,000Married Filing Jointly, Qualified Widower or Widow $250,000Married Filing Separately $125,000If you are trying to reduce your net investment income tax, you could reduce the net investment income, AGI or both. If your adjusted gross income is lowered below the threshold, the net investment income wouldn’t apply to you because it created a negative amount that becomes zero. Also, if the adjusted gross income is above the threshold, reducing the net investment income and/or AGI lowers the amount of your income that is subject to net investment income tax.If you reduce your capital gains amount earned during the year, your income will be reduced and your AGI will be reduced. It is important to remember that the adjusted gross income is your total income less all the first page deductions on the first page of the IRS form 1040. All itemized deductions don’t reduce your adjusted gross income.Two Basic Net Investment Income Tax Planning StrategiesReduce AGI below the thresholdReduce your net investment incomeTax-Sheltered Investments Life Insurance. Growth in a life insurance policy is sheltered from current income taxes. Additionally, the death benefit is also tax-free. Placing assets directly into life insurance removes that investment income from net investment income and AGI. Roth 401(k) or Roth IRA plans. Qualified distributions from a Roth retirement plan are not included as income. Deferred Annuities. Consider using deferred annuities after all 401(k) and contributions to retirement plans have been maxed out. Annuities will shelter your earnings from immediately being taxed. They will help you smooth out your income and help keep your AGI under the NIIT threshold.Possibly convert Pretax Retirement Plans into a Roth plan. Taxpayers need to determine if this will make sense for them. The amount that is converted into a Roth plan increases adjusted gross income and income which could potentially cause income tax liability and net investment income tax liability. However, future income distributions from the Roth IRA will be exempt from tax. Passive Income StrategiesConsider investments where your investment can be depreciated. For example, rental real estate can be depreciated. Depreciation reduces the total rental income that is taxable. Another option is gas and oil investments. These offer a large deduction for depletion that can be taken upfront and a deduction for most of the intangible drilling costs. These deductions give gas and oil investments more tax advantages than many other investments. Both of these strategies help reduce the total investment income that is taxable.Many taxpayers own real estate and rent their building to directly to their own business (self rentals). These may be subject to a 3.8% net investment income tax.When taxpayers own multiple passive businesses or rental properties, they should consider how these activities are grouped to calculate passive activity loss limitations. The IRS provides taxpayers an opportunity to regroup these activities which can be a better way to handle passive losses. It can reduce the amount of income that is subject to federal tax.Strategies for Capital GainsInstallment Sales. Taxpayers that are selling major capital assets or real estate should think about using installment sales. The seller directly finances the purchase using a loan. Taxpayers will then have the choice of whether they want to spread the capital gains over a loan’s life or not. This will help smooth income for the number of years of the loan.Charitable Remainder Trusts. Property can be placed in a charitable remainder trust and the taxpayer can draw distributions over the rest of the taxpayer’s life. The remainder will go to charity. The distributions are subject to the net investment income tax but it can be done over many years. Taxpayers, for example, can sell appreciated assets from inside of the charitable remainder trust and income can be distributed over many years.Charitable Lead Trusts. Taxpayers get an upfront charitable deduction and they are able to keep the gains off of their tax returns. This is a good option for extremely generous taxpayers.
What Is The New Home Office Deduction?
Sanjiv Gupta CPA - 7 years ago
The new deduction for people that work from home could save taxpayers money and time when it is time to file tax returns. There are millions of people that work from home every day in the United States. The Internal Revenue Service has created a new option for these people so that they are able to deduct some of the expenses on their federal income tax returns.The home office deduction is currently in effect for the 2013 tax year. Workers based out of their home will be able to claim a tax deduction of $5 sq. ft for 300 sq. ft of workspace or less. The total deduction will be up to $1,500 depending on the amount of office space they are using. Space must meet requirements set by the IRS. Space must be used exclusively and regularly for the purpose of business. Save Time On Record-keeping And PaperworkThe internal revenue service is estimating that this new option for home office expenses will save more than 1.6 million hours for small businesses in paperwork and record-keeping. However, taxpayers will still have the old option to use Form 8829 in order to calculate the deduction if they choose to. Is The New Home Office Deduction The Best Option?The new home office tax deduction is not going to be the best option for all small businesses. It will be the best option for taxpayers who have less than $1,500 each year in-home office expenses and if the home office is smaller than 300 sq. ft. The best thing to do is to calculate whether your expenses will be more than $1,500 or if you will have a lot of depreciation. If your expenses are much higher than $1,500, then using Form 8829 will be the best option for you. Your tax advisor can also assist you in determining the option that is best based on your individual situation.This option may be easier for more workers that are based out of their home to be able to get a deduction. In the past, the home office deduction was a red flag for IRS audits. Many people were afraid to take the deduction because they were afraid that they would not have the proper records to back up the deduction. The new home office deduction is a safe harbor method taxpayers can choose to use.If you work from home, now you can take the new home office deduction when you file your federal tax return this year. The first thing you need to do is determine if you meet all of the IRS requirements for a home office. Next, determine if the new deduction will be the best option for you. Consider speaking with a tax advisor to help you decide what makes the most financial sense for you. Remember, you do not have to use the new home office diction option. You can still use Form 8829 if it will provide a higher deduction for you.
Top 10 Mistakes You Can Get Sued For
Sanjiv Gupta CPA - 7 years ago
Employers with good intentions might be breaking employment laws without realizing it. The California Chamber of Commerce cataloged the top mistakes that a company can get sued for. Some of the mistakes are federal and other mistakes apply to some states. The report finds that many employers don’t realize the mistakes they are making when they are trying to be nice, save a little money or trying to be flexible for employees. Top Ten Mistakes #1 – Allowing employees to work during lunch in order for them to leave early. Non-exempt employees have required a thirty-minute break for a meal in addition to a ten-minute break for every 4 hours worked. Denying either requires an extra hour of pay. If you deny both breaks during the same day, you will be required to pay two hours' pay. An employee does not have the right to waive breaks. The extra pay hours are required to be paid during the same period that the breaks were denied. #2 – Classifying all of the employees as exempt regardless of whether they are exempt or notEmployers could be subject to lawsuits or huge penalties if they pay everyone's salary instead of calculating meal breaks and overtime. #3 – Categorizing all employees as independent contractors because it is easier.Employers need to determine who is an employee and who is an independent contractor to avoid many legal spider webs. #4 – Not training supervisors and managers about discrimination and harassment. Do not assume that your employees know all of the information or that they will not need it. Providing basic training will help you avoid lawsuits. #5 – Allowing employees to decide when they are going to work and the number of hours. The majority of employees are restricted under the law about the number of hours each day that can be worked before overtime needs to be paid. Letting employees work fewer days per week for more hours each day, might require you to pay overtime for the week. Specific rules must be followed. Make sure to check your state laws. # 6 – Withholding final paycheck because the employee never returned the property of the company.Some state laws require you give a fired employee their check the moment you say “you are fired”. You can not withhold the final paycheck because they have not returned property belonging to the company like a cell phone or computer. There are penalties that start accruing for the time the check should have been paid. Often times, the penalty is 1 day’s pay for each day the paycheck is delayed. # 7 –Terminating an employee that took a leave of absence.There is a legal protection that is provided to employees that have to take a leave of absences for a variety of reasons including disability, worker’s compensation, family leave, medical leave, pregnancy, jury duty, military leave as well as many other reasons.# 8 – Making employees sign non-compete agreements in order to protect the company’s confidential informationYou can not force an employee to stay under your employment or prevent a previous employee from making a living with another company. #9 – Giving employee loans and deducting money each pay period from their paycheck Most states have labor codes that only allow paycheck deductions that are authorized by the law or for benefits. If you give an employee a loan, you need to have the employee sign a promissory note that was reviewed by a lawyer. #10 – Vacation policies that force employees to “use it or lose it” so money does not have to be paid out at termination. The vacation that has accrued is a form of wages and is not allowed to be denied. The only thing you can do is stop the amount of vacation that can be accrued over a reasonable amount. Generally, the reasonable amount is 1.5 to 2 times the annual vacation that is accrued.
The IRS Is Getting Ready to Audit More Partnerships
Sanjiv Gupta CPA - 7 years ago
If you have a partnership including an LLC or S corporation, your chances of being selected for auditing are increasing. The Internal Revenue Service is getting ready to audit more LLCs and S corps than they have ever done before.In the upcoming years, the IRS is planning on shifting the focus on business auditing from corporations and start concentrating on “pass-through” entities. This shift information comes from the head of the Internal Revenue Services’ Self-Employed and Small Business division, Faris Fink, at a recent American Institute of CPAs’ National Tax Conference. The reason for the shift is because partnerships have become more complex. The Internal Revenue Service sees partnerships as a business type that has many opportunities for potential tax fraud.For a long time, the IRS has focused all of its energy on looking into corporations. According to Mr. Fink, the IRS is behind the curve when it comes to developing a strategy for looking into partnerships.Approximately 95% of all the businesses have a pass-through structure including sole proprietors, S corps and LLCs according to official Internal Revenue Service data. With pass-through entities, the income earned flows directly down to the taxpayer. Bloomberg reported between the years 2007 and 2011, the number of pass-through entities grew 15.3%.Over the years, partnerships have gotten increasingly complex. There are some partnerships that have various tiers and even thousands of partners. These issues make the chances of fraud much more likely according to Mr. Fink. The Internal Revenue Service has started training its auditors on the best way to evaluate pass-through entities so they will be able to identify any red flags.In 2012, the Internal Revenue Service audited only a small amount of partnerships tax returns, approximately .5%. That is compared with the 1.6% of corporate tax returns and 1% of individual tax returns.In small business tax and audit news, the Internal Revenue Service announced recently that it would start allowing small businesses that had less than $10 million dollars in revenue the ability to request a fast track settlement. This fast track settlement is similar to what midsize and large businesses have had the ability to do. The rule would let small businesses appeal audits early and they can get resolution in 60 days or less instead of having to wait for the audit to be complete. CNN money sources state that it can take many years for an audit to be officially complete. This is a huge benefit for small businesses. Sanjiv’s Thoughts on Setting Up Business:
Self Employment Income Needs To Be Turned Into Pension Plan
Sanjiv Gupta CPA - 7 years ago
For people who are self-employed, had a great year and want to save for retirement, it is advised that they start a defined benefit plan by the end of the year. You are funding the pension plan: you can deduct and contributed the most and build up your benefits significantly in a relatively short time (often only 5-10 years). If you combine your defined benefit plan with a 401(k) plan, you will be able to shelter your income from taxes with a tax deduction that could reach a couple hundred thousand dollars each year. How Do I Get The Tax Deduction For This Year?To get this year’s deduction, you will have to start the plan before the 31st of December but the good news is you do not have to fund it fully until the following year before your tax filing deadline. The exact amount that you will be able to contribute is based on actuarial calculations that consider your income, years until you retire and age. Generally speaking, the older a person is, the more they can contribute. These defined benefit plans are perfect for those individuals who would like to contribute more money than they are allowed under many retirement plans including 401(k)s or SEP-IRAs.Defined benefit plans are best for small practices and owner-only businesses. Think architects, doctors, software developers or sales reps. If you are married to your business partner, you could put away large amounts of money for your retirement. These plans are also perfect for employees that have a side business for extra income and spouses that are self-employed but they are not the partner that has to contribute to the living expenses of the family. Do I Have To Make Contributions To The Defined Benefit Plan Every Year?Once your defined benefit plan is set up, you will be required to add the minimum contribution that has been recalculated for the year. It is important that you only sign up for a defined benefit plan if you are expecting 3-5 steady years with a good income. Only put in the amount you feel comfortable with. Do not let any advisors push you over that amount. Many people want to put the maximum amount in because they want to get the most take benefits; however, they need to think about the future. If your business goes out of business, you are able to close the plan.If you are not sure if you will have a steady income over the next few years, you should consider contributing a smaller about to the plan and open a 401(k). This way, in good years you can contribute to the 401(k) plan after you have made the defined benefit plan’s minimum contribution.Now is the time to start your defined benefit plan. Remember, if you want to take advantage of the tax advantages for this year’s taxes, you need to open your plan by December 31st. You have until the filing deadline to fully fund your plan and it will still count for this year’s tax return.
Tax Advantages of being a home owner
Sanjiv Gupta CPA - 7 years ago
When you own a home you are able to deduct a lot of home-related expenses if you itemize your deductions. That means that you will have to file Form 1040 including schedule A. Below is a look at some of the tax advantages when you own a home.Mortgage InterestAll of the mortgage interest you pay each month is tax-deductible unless you have a loan over $1 million dollars. That is great news since most of the money you pay goes toward interest.Even if you refinance your home, get a line of credit or get a home equity loan, the interest is generally fully tax-deductible on equity debts that are $100,000 or under.Even second homes are fully tax-deductible. It can be a home, RV or boat as long as it has facilities for sleeping, cooking and a bathroom. You can even rent your second home as long as you stay in your home 14 days a year or more than 10% the number of days you rent the property (whichever is more). If you do not stay in your home that long, the IRS will consider it a rental property and you will lose your mortgage interest deduction.PointsIf you paid points on your mortgage so you could get a better rate, you can get a tax break. When you purchase your main residence, the IRS will let you deduct all of the points during the year they were paid.When you refinance your home, you still get a tax break but the points usually get deducted over the loan’s life.For lines of credit or home equity loans, you can deduct the points the same year they are paid if the money is used to do work on the home. If you use the money to do anything else, the points will be deducted throughout the term of the loan.On second homes and vacation residences, the money paid in points must be amortized over the term of the loan.Property TaxesAnother big tax break you will receive is deducting the amount you paid for property taxes during the year. All of your property taxes that were paid will be itemized as an expense on IRS Schedule A.Sell Your HomeIf you sell your home, you can avoid some of the taxes on any profit you make. A sales gain up to $250,000 for individuals and $500,000 for married couples is tax-free if the property was owned for 2 years and has lived in it 2 years before the sale. If you do not meet the residency and ownership requirements, you will owe tax on all of the profit.Unforeseen CircumstancesIf you sell your home because of unforeseen circumstances, the IRS provides some tax relief for people who have to sell before they fully qualify for the tax break.Unforeseen circumstances include:– Job loss– Divorce– Death– Multiple births during the same pregnancy– Employment changes that make it hard for the owner to pay a mortgage and cover all basic living expenses.Also, you can receive a partial exclusion if you have to sell because of damage to the residence from a man-make disaster if the property is converted involuntarily, taken by the government or natural disaster. Check with your tax professional for more information.ForeclosureUnder the Mortgage Debt Relief Act, homeowners that were either foreclosed had their debt reduced in a restructuring of their mortgage or had a short sale do not have to pay taxes on the canceled debt as taxable interest. This tax law is only in effect until the end of 2013 unless Congress takes action.
Could You Get Audited in 2014 ?
Sanjiv Gupta CPA - 7 years ago
The IRS is on the prowl this year and they could be coming after you. The Internal Revenue Service is able to more easily identify possible red flags that will trigger audits thanks to computerized checks and an improved detection system.Audits are normally triggered when a tax return is filed containing something unusual such as a deduction that is above average. The taxpayer has nothing to worry about as long as they are able to properly defend the filings with documentation and logic. Unfortunately, if this happens, you will still have to deal with the added stress and the response time.Below are 9 signs that you might get audited this year.You Forgot To File One Of The Tax Forms – All tax forms sent out to taxpayers are also sent to the IRS. If you forget to file one of the forms you received with your taxes, the IRS might flag your tax return to be reviewed.You Are Self-employed – Although it does not seem fair, when a taxpayer is self-employed it can raise red flags. The best advice, if you are self-employed, is to keep track of all of your expenses and all documentation so you are able to defend all credits and deductions that you claim.You Made A Lot More Money In 2013 – Major changes in this year’s income is a red flag for the IRS. It can mean that the taxpayer has under-reported earnings in the prior year.You Claimed Losses From One Of Your Hobbies – It is not legal to write hobbies off as business expenses. For example, if you make jewelry as a hobby, you cannot deduct material costs and tools. Now if you were selling the jewelry you made, it would be considered a business and you would be able to deduct those costs. Remember, a business is an endeavor you enter into and conduct with a reasonable expectation of making money.You Were Exceedingly Charitable This Year – The IRS looks for taxpayers that have inflated donations to charitable organizations. They pay particular attention to people who have donated close to $500 because that is the limit that can be deducted without filing Form 8283.You Have A Bank Account Overseas – This year, the IRS has additional requirements for taxpayers with banks accounts overseas. If you fail to report one of the requirements, it could be an audit trigger.The Numbers On Your Forms Do Not Match – If you make a mistake with the numbers on your forms or the amounts do not add up, chances are the IRS will notice and will review your return carefully for any other discrepancies. Make sure you review your return carefully before filing.Your Deductions Include Expensive Entertainment And Meal Costs – The IRS usually checks high business deductions to ensure the business expense is legitimate.You Deducted High Home Office Expenses (Not The New Home Office Standard Deduction) – When you itemize your home office expenses, the IRS will often review the tax return to make sure the expenses are really for business purposes. There is a new standard deduction for home office expenses that will not raise any red flags.You should not worry as long as you know that you filled out your tax return properly. Just make sure that you keep good records of all the deductions and credits you take so you will be prepared if the IRS has any questions.
Rules To Claim A Person As A Dependent On Your Tax Return
Sanjiv Gupta CPA - 7 years ago
It is not always easy to figure out who you can claim as a dependent on the Internal Revenue Service. Below is a cheat sheet that will help you easily figure out who you can claim when it is time to file your tax return.Why Should You Claim A Person As A Dependent?Claiming a dependent on your tax return could save you thousands of dollars. For each qualified dependent, you could reduce your taxable income by $3,900. These savings add up quickly and can be very substantial.Many other benefits are also only available for qualified dependents including tax credits. For example, the earned income tax credit and child tax credit only apply to qualified dependents. These rules will also help you determine if you are able to write off medical expenses, dependent daycare, other deductions and most of the tax credits that involve family issues or children. Qualifying for all of these benefits can mean the difference between having a large tax bill and getting a refund.Who Can Qualify As A Dependent?There are 2 types of qualifying dependents. Both are subject to completely different rules.1. A Qualifying Child2. A Qualifying RelativeThe first thing you need to do is answer the below questions to determine if you will be able to claim them.Are they a resident or citizen? They must be a United States resident, United States citizen or United States national, Mexican resident or Canadian resident.Are you the only taxpayer that is claiming the person as a dependent? Only one person can claim the dependent on their tax return.Is the person you are claiming filing a joint return with another taxpayer? You cannot claim a dependent if they are filing a joint return with another taxpayer.Qualifying ChildWhen it comes to a qualifying child, you must also be able to answer “yes” to the below questions.Is the child related to you? The child must be your daughter, son, foster child, sister, brother, half-sister, half-brother, stepsister, stepbrother, adopted child or offspring of one of the previously listed.Does the child meet the age limit? The child needs to be under 19 years old or 24 years old if they are a full-time student. If the child is totally and permanently disabled, there is no dependent age limit.Does the child live with you? The child needs to live with you for more than 50% of the year, although there are several exceptions.Do you support the child financially? You must provide more than 50% of their support during the year.Are you the only taxpayer claiming the child? Two taxpayers cannot claim the same child as a dependent. In situations where the parents are divorced, you can use IRS’s Publication 501, “tie-breaker rules”.Qualifying RelativeReview the below checklist to determine if you can claim your relative as a dependent.Does the relative live with you? The relative must live with you or be on the IRS’s Publication 501 “Relatives who do not live with you”.Does the relative make less than $3,900 in income? The relative cannot have more than $3,900 in gross income.Do you support your relative financially? In order to claim your relative as a dependent, you must provide more than 50% of their financial support during the year.Are you the only taxpayer claiming the relative? Only one taxpayer can claim the relative on their tax return.
Am I Going To Have To Work Forever Because I Am Self-Employed?
Sanjiv Gupta CPA - 6 years ago
When you are self-employed you rely on yourself to pay your paychecks and insurance. Without any employer, retirement funding and saving fall on you entirely. That can be a lot to take on all by yourself. Unfortunately, more than 70% of self-employed people are not saving regularly for their retirement.Irregular income is one of the largest challenges for self-employed people; therefore, opening up a retirement savings account is not always the top priority.The first step is to set up your retirement foundation. You should open up a retirement account as soon as you know which type of retirement account would be best for you. Just because you have an account open does not mean you have to start putting money in it right away. Having an open account will make it easy for you to be able to contribute money when you find yourself with extra cash flow.Retirement TipsFinancial advisors offer several retirement tips that will help get self-employed people started with their retirement savings.Simplified Employee Pension (SEP-IRAs): Simplified Employee Pensions have a higher limit for contributions in comparison to Roth IRAs and Traditional IRAs. The contribution limits are calculated by a percentage of your net profit. It is a good option for small businesses and partnerships that are closely held because every participant will have the exact same benefits. These plans are very easy to maintain, have flexible funding options and a variety of investment choices. You can contribute up to 25% of your compensation up to $52,000.Individual 401(k)s: Individual 401(k)s are best suited for self-employed people that do not have any other employees. You are able to make the employer and the employee contributions for yourself allowing you to maximize your business tax deductions and your personal contributions to your retirement. If your business experiences irregular patterns of profits, you should consider this retirement plan type. Depending on your business’s net profit, the contribution limit is up to $52,000.Savings Incentive Match Plan for Employees (SIMPLE IRAs): If your business has a steady flow of income and the employees would like to make contributions to save for their retirement, this plan might work for you. It allows employees to have salary deferral contributions and you can match a percentage of their contribution. Using a SIMPLE IRA, you can offer employees an incentive and avoid tons of administrative work that is required with a traditional 401(k)Profit-Sharing Plans: A profit-sharing plan may be a good option for business owners that have variable profit but they want to reward employees by giving employees a percentage of the profits. These plans are extremely flexible. Every year, you can decide how much you want to contribute or skip a year if necessary.Take Control Of Your Retirement Future: Self-employed people face many decisions every day but they often do not make themselves a top priority. The decisions you make are just as important as the ones you do not make. You can take control of your future by deciding right now to start your retirement foundation so you do not have to work forever. The only person that you hurt by putting it off is yourself.
Tax Terms You Should Understand
Sanjiv Gupta CPA - 5 years ago
We do not want you to look at the jargons associated with filling of tax returns and think however are you going to understand all of the important and basic tax terms. Instead, we want to prepare you to file your tax returns with ease without getting intimidated. Even though the tax terms might be complex in nature, they are not as difficult to comprehend, especially now, since you have this book to refer to when tax season rolls around.After a while, assuming that your visit to the United States is a permanent one, you will only have to rack through your brain to remember the meaning behind each one. However, for now, it is pertinent that you have a clear and comprehensive understanding of the tax terms, at least the important one that you should remember and know by heart. Here is the list of the following tax terms you need to know:TermDefinition1040 FormThe basic IRS form that people needs to submit their income tax return. 1040A and 1040EZ are two other names for this form. Adjusted Gross Income or AGIThis is taxable income, which consists of gross income from chargeable sources minus allowable adjustments. Alternative Minimum Tax or AMTA tax computation that includes items labeled for tax-deductible items into the adjusted gross income. If the alternative minimum tax is higher than the regular tax liability for that year, the regular tax and the amount exceeding it are payable. The reason behind the creation of the alternative minimum tax was to force taxpayers to pay their tax liability. Capital GainWhen the value of a capital asset increases such as a type of investment, the price of the property, in this instance, increases. The owner will earn more money when it is time to sell it, as the price increased from the original buying price. Taxpayers can classify this type of capital gain as a short-term or long-term and must clam it on their next income tax return. Child Tax CreditTaxpayers can claim taxes on children who are dependent on them and are under the age of seventeen at the end of the tax season. DeductionTaxpayers need to subtract all expenditures and allowable items from the adjusted gross income. In doing so, it decreases the amount of income that qualifies for taxation. DependentDependent is a spouse, parent, child, or a relative to whom a taxpayer provides for with a large chunk of their salary going towards their care. Earned IncomeThe taxpayer earns income thorough his/her business or trade, and this includes salary, wages, commissions, bonuses, and tips. Earned Income CreditTaxpayers can refund earned income credit. For people who only earn a meager or low-income, the earned income credit decrease and at times, eliminate their taxes. Sometimes, earned income credit acts as a wage subsidy, allowing the taxpayer to pay a decreased amount of tax owed. Estate TaxAn estate tax is the amount of levied tax on a person who has passed away but has left behind taxable assets. The value in estate tax is set above the exemption total of the gross estate minus allowable deductions. However, the deceased individual’s spouse, if alive, will not be subject to pay estate tax. ExemptionThe tax law defines exemption as a deduction used to decrease the entire amount of payable income. However, an exemption to decrease payable income is only granted by looking at the circumstances and status of the taxpayer. Filing StatusFiling status consists of five categories, single, married, but filing individually, married and filing together, head of the house, widow or widower with a dependent child. Itemized DeductionItemized deduction is subtracted from a taxpayer’s adjusted gross income. It consists of money spend on particular services and good that year. The IRS has outlined specific deductions a taxpayer is qualified to ask for include deductions on local and state taxes, interest on a mortgage, medical expenses, and gift tax. You can find them in the FORM 1040 Schedule A. Non-Refundable Tax CreditA non-refundable tax credit cannot decrease the amount of tax an individual owes to less than a zero. In the event, the amount of tax the taxpayer owes could lower to less than a zero; the IRS would need to pay them. Passive IncomePassive income is classified as earnings acquired from a limited partnership, rental property, or an enterprise in which the taxpayer does not play an active role in the activities. Property TaxLocal government bodies evaluate the property of the taxpayer, assessing its value along with the value of the land it sits upon. On the basis of their evaluation, the taxpayer will be required to property tax. Self-Employment TaxTaxpayers who work for themselves, meaning they run their own business, will have to pay self-employment tax, as this is the only way for them to receive social security benefits when they retire. However, the amount they are required to pay may be decreased if they pay Medicare and Social Security Taxes thorough another individual. Standard DeductionThe standard deduction is referred to as the base value of the income, which is not taxable. The taxpayer can use the base value to reduce their taxes, specifically reduce their adjusted gross income, but only if he/she does not select the itemized deduction technique of computing taxable income. The taxpayer’s status, disability, age, or if he/she is dependent on another taxpayer for support is taken into account when computing the value of the standard deduction. Tax CreditThe tax credit reduces the actual amount owed taxes. Taxable IncomeTaxable income is the value of the net income—deductions, gross income without all the adjustments, and exemptions—used to compute the amount of income tax a taxpayer owes. Whenever you see a term you do not know the definition of, at least you will not have to search the entire web for it, as they will be right here in this book. Immigrants who are coming to the United States to start a new life will not have trouble understanding the terms and concepts related to taxes in the country. However, your lesson of learning all about the United States tax laws is not over yet. So, keep reading!
What is Incorporation and How Does It Work?
Sanjiv Gupta CPA - 4 years ago
One of the first decisions you have to make in creating incorporation is the type of business you want to create. A sole proprietorship? A corporation? A limited liability company? This decision is important because the type of business you create determines the types of applications you will need to submit. You should also research liability implications for personal investments you make into your business, as well as the taxes you will need to pay. It is important to understand each business type and select the one that is best suited for your situation and objectives. Keep in mind that you may need to contact several federal agencies, as well as your state business entity registration office.The first step in understanding how businesses can be set up comes with knowing that, even though they may all seem similar from the outside, not all businesses are structured identically. Even within the same industry, some owners might opt for one setup while another owner will decide that a different type of arrangement is more suitable. It all depends on the individual needs, preferences, and requirements of the potential business and the business owner. This article will give you a glimpse of how an Incorporation works and how a business owner can use this model to further his or her ventures.How does Incorporation Work?A business becomes incorporated when the company’s organizers file incorporation paperwork with the state. For example, corporations in Texas must file a certificate of formation with the Texas Secretary of State’s office, as a condition of its formation. Incorporating a business requires activities, such as selecting individuals to serve as directors, and creating a unique business name. In most cases, a fill-in-the-blank certificate of formation, also known as articles of incorporation, will be provided by the Secretary of State’s office where the corporation is organized. The fee to file a certificate of formation will vary from state to state.When a business becomes incorporated, a separate and distinct legal entity is created. An incorporated business acts independently of its business owners. According to the Entrepreneur website, incorporating a business provides the company with most of the legal rights granted to an individual, with the exception of voting privileges. Incorporated businesses must hold shareholder and director meetings, and keep company minutes, as described on the Companies Incorporated website. In addition, corporations must keep accurate banking records that are separate from the personal funds of its owners. Furthermore, an incorporated business must file taxes and annual reports with the state where the company is organized. This new business entity – corporation or limited liability company (LLC) – transforms the way the business is seen through the eyes of the law and often has more credibility with potential customers, vendors, and employees.When it comes to business taxes, owners of an incorporated business may pay taxes twice on the same corporate dollars, also known as double taxation. This occurs when the company pays business taxes on its earnings. If dividends are issued to shareholders of the corporation, the shareholder pays taxes on those dividends at their individual tax bracket. Dividends issued to shareholders of a corporation aren’t deductible and don’t reduce the corporation’s tax liability. Lastly, for company Stocks, unlike a sole proprietorship or a partnership, an incorporated business has the ability to issue stock to employees and investors. Corporations with unissued shares of stock can sell shares to raise money for the company. Because an incorporated business has limited liability protection, investors may be more likely to invest in a corporation in comparison to a sole proprietorship or partnership. Employee stock incentives may be used to attract talented individuals to work for the corporation.In any case that the venture hits some financial hurdles, corporations normally file one of two different types of bankruptcy – Chapter 7 or Chapter 11. Alternatively, corporate creditors may force a corporation into bankruptcy. When a corporation enters Chapter 7 bankruptcy, the bankruptcy court appoints a trustee to oversee the liquidation of corporate assets. Assets are then distributed to external creditors according to their priority and the amount that they are owed. Shareholders are the lowest priority unless, for example, the corporation borrowed money from a shareholder. Unlike an individual debtor, the corporation receives no discharge of debt – it simply dissolves and ceases to exist after its assets are liquidated and distributed. On the other hand, when a corporation enters Chapter 11 bankruptcy, corporate representatives negotiate with a creditor’s committee for favorable payment terms, reduced interest rates and, sometimes, a reduction in the principal balance of its debts. The corporation must usually pay its outstanding debts within five years. Both the creditors and the corporation may submit payment plans to the bankruptcy court, but the court must approve it. Once the corporation complies with the settlement, it receives a discharge of any remaining debt.The Incorporation DoctrineThe incorporation doctrine is a constitutional doctrine through which selected provisions of the Bill of Rights are made applicable to the states through the Due Process Clause of the Fourteenth Amendment, the Legal Information Institute explains. This means that state governments are held to the same standards as the Federal Government regarding certain constitutional rights. The Supreme Court could have used the Privileges and Immunities Clause of the Fourteenth Amendment to apply the Bill of Rights to the states. However, in the Slaughter-House Cases 83 US 36, the Supreme Court held that the Privileges and Immunities Clause of the Fourteenth Amendment placed no restriction on the police powers of the state and it was intended to apply only to privileges and immunities of citizens of the United States and not the privileges and immunities of citizens of the individual states. This decision effectively put state laws beyond the review of the Supreme Court. To circumvent this, the Supreme Court began a process dubbed as “selective incorporation” by gradually applying selected provisions of the Bill of Rights to the states through the Fourteenth Amendment Due Process clause.Selective and Offshore IncorporationTo give you a breakdown of what “selective incorporation,” it is a constitutional doctrine that ensures states cannot enact laws that take away the constitutional rights of American citizens that are enshrined in the Bill of Rights. Selective incorporation is not a law but has been established over time through court cases and rulings by the United States Supreme Court. In actuality, selective incorporation is the process that has evolved over the years, through court cases and rulings, used by the United States Supreme Court to ensure that the rights of the people are not violated by state laws or procedures. Moreover, according to Law Teacher, it does not consider all rights in the Bill of Rights fundamental not all rights in the Bill of Rights and some rights outside the Bill of Rights are fundamental. This approach rejects the totality of circumstances to decide whether phases of rights or particular portions of Instead if a right was fundamental, drafters incorporated it into the Fourteenth Amendment through the Due Process Clause and deemed applicable to the states and the federal government. At its heart, selective incorporation is about the ability of the federal government to limit the states’ lawmaking powers.Meanwhile, Offshore incorporation is a corporation or limited liability company that has been formed outside of your country of residence. One is well advised to choose the country of incorporation wisely. The great thing, however, about having an offshore corporation company that has been established properly is that it will give you, the owner's financial confidentiality. If one has an offshore bank account in one’s own name, the name of the account holder is easy to trace. Many people who have an offshore corporation have several companies. Having more than one offshore company allows funds to be transferred between companies that are free from government reporting. There is usually a significant reduction in paperwork because there may be no requirements by the government to report transfers of money between one foreign account and another.Filing Articles of IncorporationStarting your own business is a big step, and the legal issues involved can be confusing. Thinking of a business idea is hard enough, but then there are forms to fill out and technicalities to deal with, especially if you’re structuring your company as a corporation. Here’s what you need to know about one of the first and most important steps of incorporating your business: filing your articles of incorporation.The articles of incorporation sometimes called a certification of formation or a charter is a set of documents filed with a government body to legally document the creation of a corporation. This type of document contains general information about the corporation, such as the business’s name and location.Articles of incorporation can easily be confused with bylaws, which lay out the rules and regulations that govern a corporation and help establish the roles and duties of the company’s directors and officers. Articles of incorporation are also sometimes called a certification of formation or a charter. The articles of incorporation contain general information about a corporation, such as a name and location of the business. Bylaws, on the other hand, contain information about the rules and regulations that govern a corporation. In addition, corporate bylaws help to establish the roles and duties of the company’s directors and officers. Forms and Legal Documents The first step in the process is structuring a business as a corporation. The specific documents vary by state, but each will include a number of questions about the business and its owners. The forms are easily found online but don’t be alarmed if they are called something other than articles of incorporation.Despite a state-by-state filing, the forms will all ask pretty much the same questions and will be in a fill-in-the-blank format. The most crucial information that is required will be corporate name, recipient of all legal notices and official mailings, the purpose of the business, the duration of the business, the incorporator, the directors, how many shares of stock can be issued, and how many classes of stock the corporation will be allowed to issue.Articles of incorporation must be submitted to the secretary or department of state in order to establish a company as a corporate entity. Depending on the state of incorporation, articles of incorporation may be submitted in person to the secretary or department of state’s office, by mail or electronically to the secretary or department of state website. A corporation is not required to file the company’s bylaws with any government agency. Instead, corporations are required to maintain their bylaws at the company’s primary business location. Corporate bylaws are an internal document, establishing operating procedures for a corporation.Legally, the answer is no. In fact, over 70 percent of U.S. businesses are owned by sole proprietors and operate successfully without incorporating it. However, if you need liability protection to protect personal assets if a client sues you, potential tax savings (at a price), or a loan to grow your business in the future, then incorporation might benefit you.Typically, if you only operate in one state, you should incorporate it in that state. If you operate in multiple states, you should determine which state is the friendliest to corporations and incorporate them in that state. File your articles of incorporation in the state where you intend to incorporate – usually with the Secretary of State’s office and for a fee, depending on where you live. Check your state website for more information.The primary benefit of business incorporation is limited liability. When you own a small business, you will invest a lot of money into not only getting it launched but in keeping it running smoothly as well. As the owner, you are responsible for any debts and losses your business may accumulate along the way. However, when you incorporate, you are typically only held responsible for the amount of money you personally invest. Your personal assets typically cannot be used to satisfy the debts and liabilities of your business.
How to Simplify Business Taxes
Sanjiv Gupta CPA - 4 years ago
If the only purpose of the tax system is to raise the government’s revenue, it could have been simpler. Unfortunately, its goals include ensuring efficiency, fairness, and enforceability, influencing social policy and delivering benefits for certain industries, so simplicity in taxes seems out of the question.While the current tax system is already too complicated, it gets even more complex year after year. Oftentimes, tax simplicity contradicts certain policy goals. While most people think that taxes should be equally conductive, fair, enforceable and simple, it is a fact that even those people who agree on these goals also disagree when it comes to their relative importance. Consequently, policies serve to balance the competing goals and simplicity ends up being least prioritized.If you own a small business and are unfortunately not a tax expert, you may find it hard to deal with your business taxes. Because of the complexity of the tax system, it is very common for business owners to spend their tax time in panic and stress as they scramble to get their documents together in hopes of meeting deadlines and avoiding penalties.Business owners often experience tax woes since they are supposed to treat business taxes as a process that needs careful attention throughout the year. The complexity of the tax system makes business tax preparation just as difficult that business owners sometimes feel like preparing for the tax season is an all-year burden that they have to carry.Business taxes may be a bit complicated, but the good news is that there are ways through which you can simplify them. But before you know how to simplify business tax, it is better to understand first what business taxes are all about.Business Taxes Business taxes have five general types, and the type you pay depends on the form of business that you operate. They give general types of business taxes are:Income Tax. Except for partnerships, all types of businesses are required to file an annual income tax return. The form that you use in filing depends on the organization of your business or your business structure. This type of tax is a pay-as-you-go tax, which means that you pay it as you earn or receive your income. Usually, this is withheld from your pay. Otherwise, you might be required to pay estimated tax. Estimated Tax. It is by making regular payments of this type of tax during the year that you pay your taxes on income, including your self-employment tax. Self-Employment Tax. This business tax is primarily for those who work for themselves. Whatever self-employment tax you pay contributes to your social security system coverage, which is responsible for providing you with disability benefits, retirement benefits, survivor benefits, and hospital insurance benefits. The law requires you to pay your SE tax if you meet any of the following requirements: (1) your net earnings from being self-employed were $400 or more; (2) you work for a church or any organization controlled by a church which elected an exemption from the FICA taxes. Employment Tax. You should pay your employment tax if you have employees whose social security and Medicare taxes, as well as federal income tax withholding and federal unemployment (FUTA) tax you are responsible to file. Excise Tax. You need to pay your excise tax if you do manufacture or sell products, operate different businesses, use various kinds of facilities, products or equipment, or receive payment for certain services. This tax has several tax programs, and one of the major components of these programs is motor fuel. Now that you know the different business taxes that you need to pay, and considering how complicated filing and paying them are, it is time to understand how to simplify your business taxes. Preparing for the Tax Season The key to simplifying your business taxes is to treat them as something that requires your attention throughout the entire tax year. As you begin to see it that way, preparing for tax time won’t be as burdensome for you anymore and it will no longer have to take your time away from your business.Business taxes are manageable if you know how to prepare them right. Basically, you will need reliable technology to help you automate your finances. Other things that you need will be— Establish better habits for next year and beyond. After completing your taxes for the current year, commit to establishing better habits for the following years. You may have promised yourself to do the same last tax year and in the years prior, but this time, make sure that you will stand by your commitment to do better. Your business finances need your attention as much as your family finances do. If you are not the type of business owner who keeps track of your business income and expenses, then you are one of those business owners who see tax time as a nightmare. Track your Business Income and Expenses. To save yourself the trouble, make it a habit to track your income and expenses all the time. That may sound a bit demanding, but it definitely works. To keep track of your finances as they happen, use a spreadsheet or a software program. Reconstructing all your income and expenses for months at once will not only lead to an erratic report but will also leave you drained.Another advantage of keeping track of your income and expenses in a simple spreadsheet is that you get to see the profit you make and all the numbers you need for tax time.Set Aside Money for Taxes. One of the easiest ways to avoid getting hit with a surprisingly hefty tax bill is to make it a habit to allot money for your business taxes each month. For most businesses, that is equivalent to 30% of your total income. If you set aside this percentage, you will be better off than business owners who don’t set aside anything for tax time.If you make a conscious decision now to set aside money for your taxes, you don’t only get to avoid considerable penalties but also ease the burden of having to pay a huge sum when the due date for filing taxes comes. That may seem difficult to do at first, but it positively forces you to not procrastinate your taxes until the crazy tax time arrives.Record everything electronically. Most business owners keep piles of receipts and other important documents in a box, particularly a shoebox. Such a practice is highly inefficient because when the receipts pile up, everything becomes a mess and things become even more stressful for you since you will end up not even knowing what’s in that box. Why don’t you ditch it and start learning how to record everything electronically? That way, you can be sure that your archive is automatically ready when the filing time next year comes.It is also best to set aside one time to sort out your records. If you plan to do this once a month, a good date would be the time you get your monthly statement for your business checking account. Come up with a checklist that includes your bank account reconciliation and look through all of your transactions to make sure that you don’t commit errors.Back up your records. Have you ever thought of what may happen to all your data in case a huge disaster hits your place? That is why it is important that you back up all your files and records regularly to a remote location, such as in the cloud. You may also do the backing up on-site, but make sure that you store away all valuable business information from the office. Remember that the law does not find lost records as an excuse when the auditing time comes.Find a good accountant/ tax advisor. If you think you can’t handle all the paperwork by yourself, you can get an accountant. Accountants are trusted advisors that you can rely on throughout the year. They can help you plan and prepare for the tax season.If you have just started your business, it is better if you talk to a tax advisor as soon as now. You can explain the basics of your business to your accountant and tax advisor so he can clue you in on the tax deductions you are entitled to. You may not appreciate having a tax advisor by your side straight away, but when the demands of tax time get more complicated, you will. Since they are savvy about business taxes, they can help you go about every stage of the process.In the months leading up to tax time, accountants and tax advisors are business owners’ best friends. Ahead of this dreaded season, request from them a tax preparation document to ensure that you have enough time to prepare and that you get all the deductions and breaks you are entitled to.Use online banking. In most cases, banks allow their clients to download all of their transactions. To help you prepare for the tax season, you can visit the bank every month to mark all your tax-deductible transactions. That way, you can prepare a comprehensive list of all your tax-deductible items before the tax season comes.As you prepare for the tax season, it also helps to use reminders and alerts. You may consider having a specific calendar that’s especially dedicated to your business finances. There, you can set up all your financial reminders for all the payments, transfers and other transactions that you need to perform. This way, you don’t let your financial tasks get lost in the rush of your daily business reminders. It is also advisable that you put alerts on your business checking account so the calendar can alert you when your balance gets too low, or when a new transaction is made.Automate accounting process. If you own a business, considering an accounting solution is a big help to your tax woes. Finding an accounting solution will help you drive accuracy and efficiency throughout the year and ease your burden during tax time. When you use online accounting for your finances, you don’t only get the latest version of the accounting tool but you also remove the need to invest a large sum of money upfront.If you own a small business, you can easily pull the transactions you had from your business bank accounts and automatically update them. That way, you can come up with customized financial reports and view your balances more straightforwardly, especially if you use a software that features customizable reports. This is a big time-saver, you’ll see.Another benefit of automating your accounting process is that you get to plan ahead for your important deadlines. Most accounting software today doesn’t only keep track of your income and expenses but also has alert features to ensure that you are up-to-date with your business finances and deadlines.File online. Filing your taxes online is not only faster for you but also ensures that your filing is less prone to errors. In most cases, tax agencies also require online than manual filing.When you start having your business financial tracking set in place, you will discover that it actually takes so little time to accomplish your financial review and just a bit of effort to get rid of tax woes that are usually experienced by delinquent business owners. The business tax system is complicated, yes, but there is always something you can do to streamline the process.If you have just started out your business, it’s normal if your expenses outweigh your income. Setting up a system to track your finances may seem unnecessary at this point, but you shouldn’t make the mistake of waiting until all your financial records have already piled up. Simplifying your business tax is a result of easy habits that you need to learn from the beginning. Try it. When the tax time comes around, you’ll be grateful you’re prepared.
How To Save Taxes By Setting Up S-Corp
Sanjiv Gupta CPA - 3 years ago
How to Save Taxes as an S-CorporationIf the individual is self-employed, it is possible to help avoid high Medicare and Social Security taxes to organize the business as some kind of S-corporation. This is because individuals who are not hired by any corporation must pay higher Medicare and Social Security. By organizing the business as some kind of S-corporation, then having higher taxes can be avoided.The IRS or the Internal Revenue Service can also take a close look at the taxes if this route is chosen as it could also lower the overall tax liability and then generating a similar net income.Self-Employment TaxesWhether the individual is an employee or self-employed, they still have to pay Medicare and Social Security taxes to the government. When working for someone else, the individual is only responsible for his share of the taxes and the employer can make the difference by paying the balance off. However, for those who are self-employed, they are expected to pay both the portions of the tax. The combined employer and employee portions of this tax usually amount to a total of 15.3 percent.S-Corp DistributionsIf the business is organized as some kind of S-corporation, then it is possible to classify some of the incurred income like a salary and some of these as a distribution. The individual is still liable for the self-employment taxes on the salary portion of the income, but they just have to pay the average income tax on the distribution portion. It also depends on how the income is divided. In doing so, it can save a substantial amount of the self-employment taxes by merely converting this into the S-corporation.The Risks of Filing the Business as an S-CorporationThe Internal Revenue System or the IRS looks closely at the S-corporation returns because it has more potential to be taken advantage of. Take this situation for example. An entrepreneur who generates an annual income of $500,000 abuts only records $20,000 will trigger an inquiry from the IRS because he is obviously avoiding many self-employed taxes. The guiding principle is that the taxpayer must designate an amount that is reasonable to his income. However, this is quite a gray area and if the envelope is pushed too far, then there is more risk for the IRS to do an audit and also start of potential penalties on the interest of the back taxes that the IRS have already addressed.Additional costs for S-CorporationsThe S-Corporation saves the individual from self-employment taxes. It also costs the individual more than he can save. With larger corporations, the S-corporation is some start-up that has accounting and legal costs. There are some states that are expected to pay more taxes and fees. Take for example the S-corporation in California must pay 1.5% on the income and a minimum annual amount of $800. This is not a requirement for sole proprietors.Difference Between S Corp and LLCBoth the S-corp and the LLC provide the entrepreneur with a similar kind of protection. However, the LLC is much simpler than the S-corp. Filing it as LLC can also save the taxpayer a couple of thousand dollars especially on the cost of administration. However, studies show that there is more money saved when incorporating. This is because of the differential in the Medicare tax.It is important to note that the profits from the LLC are taxed completely for FICA, which is Medicare and Social Security combined. This means 15.3% of the FICA taxes along with the additional $2.9 Medicare taxes on the profits that are above the wage base.This is where the difference between the S-profits comes in. An S-Corporation is not taxed for FICA. This is the differential in Medicare. Under normal circumstances, full-time physicians usually earn more than what they get from the wage base of Social Security. The tax savings are also generated from the Medicare differential between the non-taxed profits of the S-corps and the fully taxed profits of the LLC.The catch is when the entrepreneur incorporates then he is both the owner and employee of the corporation. As the corporate owner, the taxpayer hires himself, who is also the employee. The upside is that the LLC is some kind of venue where the taxpayer is both the worker bee and the business owner. Therefore, the business results of the LLC when reported and filed on Schedule C that also includes the individual’s 1040, there is no separate income. This then saves him money.Receiving Remuneration from S-Corp in Two Ways:As an employee, the taxpayer receives a “fair salary” by the corporation because he is productive.As the owner, the taxpayer pays himself a “distribution” of the said profits that remain after every other expense (including the salary of the taxpayer). These profits are also taxable because it is income and not because it is considered as Medicare taxes.For S-Corp to make sense financially, the individual must have profits that are significant and long-lasting even after the salary of the employees have been paid fair and square. How is a fair salary calculated? Here are two ways:The IRS typically does not challenge the “fairness” of the salary if it is not equal to the remaining profits even after paying one’s self.The entrepreneur must also pay a reasonable amount depending on one’s production, location, and profession.The salary being reasonable is constantly scrutinized by the Internal Revenue System. This is because of the owners of S-corp are tempted to earn their remaining profits from the Medicare taxes because all year round, they were only getting a minuscule paycheck.Business owners and self-made entrepreneurs must understand that S corporations can save owners tax when registered as a small business. There is a big benefit for the entrepreneur if they list the business down as an S corporation. The S corporation minimizes employment taxes.However, it must be clarified that the S corporation is not really a corporation. Instead, an S corporation is actually a limited liability company that is strictly made for the Subchapter S election.People including tax accountants regard this as “S corporation.” However, the more proper way of calling it is Subchapter S corporations especially when the entity that is making the election is a “Subchapter S LLC.” It only comes to show that the entity that makes the election is really an LLC.Here is a more elaborate explanation on how the Subchapter S allows the business owners to save more money:Avoiding Some TaxesThe S corporation election lets the business owner avoid Medicare, self-employment taxes and Social Security on the portion of the business profits. That is the deal as well as the trick. The tax avoidance gambit also works quite simply despite it being regularly debated by the Congress and also reaffirm the works.With an S corporation, the entrepreneur splits the business profits into two: “distributive share” and “shareholder wages.” The shareholder wages are subjected to 15.3% tax and the leftover distributive share cannot be subject to 15.3%.Tax accountants really do not explain this and can be quite sheepish on this particular subject matter. However, for entrepreneurs who wish to avoid Medicare and Social Security taxes along with the self-employment taxes, it is definitely beneficial for them to be listed as an S corporation.Note that the S corporation also lets the active shareholders to not pay the surtax of 3.8% for Medicare on business profits.The Deductible Losses for Smaller S CorporationsAs mentioned in the previous paragraphs, the saving tax loophole on taxes that are associated with the S corporation passes by S corporations that let the shareholder, as well as the employee, avoid the employment taxes. This is where entrepreneurs and self-employed individuals must focus on if they wish to make a Subchapter S election for their LLC or their corporation.However, there are also two smaller general tax benefits that are associated with the S corporation. The first benefit is that the S corporation tends to lose money and that loss eventually becomes a tax deduction on the individual tax return of the shareholder.There are some rules that the entrepreneur must follow in order to deduct these losses. In summation, the money that is lost must be the money of the beneficiary. They must also be working in the S corporation. This is a good benefit for businesses that experience losses whenever they ramp up.Another benefit is that the minor tax savings can also flow from the Subchapter S status. An S corporation has a safer tax return that can put deductions. This results in entrepreneurs claiming deductions that are legitimate.No Corporate Income TaxAnother tax-saving benefit that must be delivered by S corporations is a special case and is only applicable to businesses that are operated in the form of regular corporations. These are also regarded as C corporations.In most situations, the S corporation does not pay corporate income tax. This means that when compared side by side with the C corporation, the S corporation can pretty much save the entrepreneur a corporate income tax.With the examples presented above, it only makes sense that it is definitely fair for the entrepreneur to tax these small business corporations at a 63% tax rate. It is also self-evident that a corporation should be elected and treated as an S corporation. This is because as S corporation, there is no income tax that can be levied. Whenever the income is allocated to the individual shareholders, there is a maximum rate of 44%. This means that it would be around $440,000 in the form of income taxes and then it would be around $600,000 leftover right after the tax profit.Year-End Tax Planning for S Corporations Businessmen and entrepreneurs work hard on preparing and planning for the upcoming tax season. An area that must be paid significant attention is how to properly plan for the S-Corporation clients. This is because the S-corporation is a designation within the IRS tax code which also changes how corporations are taxed. If the corporation is created within the state law and it is applicable, then it is granted the S Corporation status from the IRS. The business is no longer taxed as a corporation and this is good news for the owner because they receive lower tax rates. In the long run, it transforms into a “flow-through” entity and its earnings accumulated from the corporation are eventually taxed at the level of shareholder and listed as-is on the 1040 tax return. There are also other entities that are requested and treated as the S Corporation for the taxes whereas the remaining amount is simply for the LLC and its legality.There are also several aspects that are connected to S corporations and must be specially planned toward the end of the year. When Congress enacted the statutes of the S-Corporation, there have been lots of quirks and this was created and it primarily affected the S-Corporations. It eventually seemed inconsistent along with the other areas from the tax code. Nonetheless, it requires that this may be properly accounted for.Salary of the OwnerThe profits of partnerships, LLCs and sole proprietorships are subjected to two taxes: self-employment taxes and income taxes. When one of these two is treated as some kind of S-corporation. The residual profits are not subjected to taxes for the self-employed. This can definitely decrease taxes. This is somehow true to a certain degree. Offsetting the tax savings is the very reason why an owner of an S-corporation must pay himself or herself a salary that is within the means to commensurate services that have been provided to corporations. The salary is then subjected to employment taxes. In effect, the portion of the residual profits of corporations is not allocated to salaries subjected to self-employment taxes.
Tips to Reduce Self-Employment Taxes
Sanjiv Gupta CPA - 3 years ago
Tips to Reduce Self-Employment TaxesSelf-employed individuals must know that aside from income tax, they must pay self-employment taxes that support Social Security and Medicare programs. There are ways that can reduce the amount that they owe.More and more individuals opt for self-employment as opposed to being employed because they can set their own hours and are not pressured to punch in a fixed schedule each morning. However, when the day ends, they still have similar tax obligations as full-time employees. Aside from the income tax that they have to pay, they must secure payment for self-employment taxes such as Medicare and Social Security. The fact that they have their own businesses definitely increases the exertion of record-keeping that must be done for tax purposes. Whenever the self-employed digs through countless boxes of business receipts, they envy those who are just required to enter their over-all income from their W2 form.Self-employment is synonymous with freedom. It is also synonymous with responsibility and therefore, lots of expenses. There are self-employed individuals who choose this path because they prefer the first two, but they cringe every time it is tax time. This is because they are not completely aware of some of the tax write-offs that they are actually entitled to.It may seem daunting at first but there are various ways that allow the self-employed individual to reduce the amount owed.Educational ExpensesWhen it is time to file income tax returns, self-employed individuals must not hesitate to take claim of their benefits simply because they are their own boss. For example, an expense that they can get paid for is “educational expense.” This is a deduction that is often overlooked. If the self-employed are taking courses or even buying material that is needed for research, then this is considered a deductible because it makes one’s work more effective.Individual Retirement Plans (IRAs)The best tax write-off for those who are self-employed is their retirement plan. This is because they have no employees that they are required to set individual 401k plans for. However, for those who are self-employed and have employees, it is recommended that they opt for SIMPLE or what is also known as the Savings Incentive Match Plan for Employees IRA. This is an IRA-based plan that provides small employers with a method that is simplified and easy to understand so that they can also contribute to the retirement of their employees.Therefore, retirement plans are the best kind of tax deduction. To top this off, the government even assists in funding this.Self-employment taxes 101Self-employment taxes are up and about so that the programs from Social Security as well as Medicare are funded. Employees must pay similar taxes by going through what is known as employer withholding. Employers make additional tax contributions and they do this for their full-time employees. Self-employed individuals must pay all these taxes on their own.Tax Deduction for SEThe IRS or the Internal Revenue Service requires those who make $400 or above this amount in being self-employed to file a tax return. The return must have a Schedule SE. This is used to calculate how much taxes that the self-employed individual owes. However, when the 1040s are being filled out, the IRS lets the self-employed deduct a percentage of their tax payments and also adjust to their income. They can also deduct around 50 to 57% of the self-employed tax payments. The exact amount depends primarily on how much the self-employed can earn.S Corp Savings If the self-employed create a business as a corporation or an LLC (Limited Liability Company), then making the S Corp election with IRS can present opportunities that also reduce their self-employment tax liability. With S-Corp, individuals pay a reasonable salary from their earnings. They can also distribute the profits that remain to themselves as well as the other shareholders and even the partners and leave the remaining in the business. There are situations that the money is in excess of the salary that is calculated for the income tax but is not exempted from the employment taxes.For example, if the self-employed operate the business and lists this as a sole-proprietorship then they earn $100,000 for that given year. Self-employment taxes are then due on that amount. However, there are also appropriate circumstances along with the S Corp that the amount may also exceed the salary that is reasonable for the self-employed to not be subject to self-employment taxes.Reducing Net ProfitThe Schedule C-EZ or popularly known as Schedule C calculates the net profit of the self-employed individual. They must then include and list this as an income on their 1040. They can use this on Schedule SE so that self-employment taxes can be calculated. The net profit is also equal to the gross recipients that the individual earned after business expenses have been deducted. This lowers the net profit number. The lower the amount is, then the lower the employment tax bill is.In order to reduce self-employment taxes, the individual must also be extremely accurate and thorough when filing and preparing the Schedule C. This ensures that the deductions are possible. The business expenses must be necessary in order to operate the business as a deductible. This cannot be filed as personal in nature. There are various types of deductible business expenses. These are the cost of acquiring as well as maintaining a business vehicle, office rent, calls made and office equipment and supplies.Using the home or dwelling for businessMost self-employed individuals start their businesses as home-based businesses. Therefore, they must determine which business costs are deductible. They should always keep track of the expenses that are related to their housing costs because their houses are the locations for their business.If the taxpayer’s gross income from the business exceeds the total expenses, then they can deduct all the expenses that are related to their business use in their home. If the gross income is less than the total expenses, then the deduction is also limited to the difference of the gross income and the sum of every business expense that the individual would pay if the business is not conducted in the home. These expenses also include the Internet, phone lines and other costs that the business accumulates.The individual must have a home office that is exclusively used for the business. This is because the Internal Revenue Service requires self-employed individuals to document this.Deducting Automobile ExpensesIf the individual travels for the business, even if it is short distances in the city, this must be deducted and documented as business miles traveled on the tax return. The taxpayer can also file the over-all actual expenses that have been incurred and use the standard mileage rate that is prescribed by the IRS. The IRS also has a mileage rate that is allowed and should be checked each year that they can change.If the taxpayer decides to use the actual and over-all care expenses, they have to include depreciation, insurance, registration, payments, licenses, maintenance, repairs, garage rent, fees for parking and too. If taxpayers decide to use the standard mileage rate, it would be best that they keep a log. Document daily, weekly and monthly usage of miles and also distinguish the business use from personal use.Depreciation of equipmentThere are some people who are self-employed and can purchase the equipment and property for the business. If they expect that the property will last longer than a year, it could also be depreciated on the tax return. According to the IRS, claims regarding the property must meet these criteria: the taxpayer must own the property and it must be held and used to generate income. The property must have a useful life, meaning the individual can guess how long the owner can generate income from it. It may not be considered a useful life if it is just a year or less and it can also not be disposed of and purchased in the very year.There are certain repairs on the property that has been used for the business that can also be deducted. Another advantage is that it facilitates the system that lets the individual track the changes conducted every year.Other areas to exploreThere are deductions that can be missed especially in advertising as well as promotional expenses, air, bus and train fare, and banking fees. Restaurant meals along with other entertainment costs are also easily written off as long as these are necessary and important business expenses.In addition, self-employed individuals are suggested to consider health insurance premiums that represent credit and not a tax deduction. This is because the credit directly goes against the taxes and not a reduction of the income.No matter which expenses that the taxpayer discovers can be written off, the important thing to remember is that records must be accurate throughout the year. Save the receipts, as well as email receipts and log and file these so that it is easy to retrieve them during tax time.Long-term tax-saving strategiesIndividuals are encouraged to not look at the last-minute write-offs especially when considering the tax deductions from being self-employed. They should think about laying long-term strategies connected to saving money, especially in an annual context. This is highly suggested if the taxpayer earns a lot.Accountants are trained to tell their clients what they have to pay. They are not working to come up with strategies for payment reduction.To reduce the gross taxable income, taxpayers are also asked to consider setting up a benefit pension plan that is well defined. The basis of this plan is age and income. The older the individual is and the higher his earnings, the more they are allowed to contribute. Another alternative plan is an age-weighed profit-sharing plan. This is similar and beneficial to entrepreneurs that hire several employees.Another strategy for business owners who earn higher than average has their own building through LLCs or limited liability companies. A similar business structure is required to pay rent. This rent is then used to pay the mortgage. However, this is also regarded as a business expense strictly for tax purposes.Self-employed professionals are required to have liability insurance and they should consider setting up their very own insurance company. A captive insurance company insures the risks that any businesses can accumulate. The premiums are also tax-deductible.However, they are warned that if the money has been accumulated along with claims that are minimal, then the money is taken out and filed as taxable under capital gains. This is actually not a retirement strategy, but it saves them money and lets them pay this by themselves instead of getting an insurance company to deduct this as premiums. With these long-term strategies that end up complicated, financial planners and business attorneys must be consulted in order to ensure that the best plan possible is made for the business to thrive.Being self-employed also means taking on costs and risks that are not encountered when they are employed by someone else. They are responsible for obtaining customers and generating income. They also have to constantly prove the value of the service and the product. They also have to pay the internet bills and phone bills that are incurred to get and also retain these customers. Other costs include travel expenses for meetings and above all, liability insurance just in case they are sued.Numerous tax codes have been written in order to soften the blow of covering tax costs. Everyone must claim the business tax deduction that they qualify for. The profitability of the business depends on minimizing the costs as well as maximizing the resources. There are small business tax deductions that are regarded as more complicated. Remember that any time that the cost is an expense that is legitimate, then the IRS will eventually examine this and see if it can be audited.
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