If you’ve ever wondered why your small business pays so much in taxes, maybe it’s because you need to hire a tax professional to help you avoid common mistakes. There are a number of mistakes businesses routinely make that cost them big money when paying taxes, such as not choosing the right entity type for their business, not paying as they go, not investing in the company, and not properly planning.
Why You Need a Tax Professional
If you’ve done your own taxes for years, you may think you don’t need to do this. A tax professional familiar with laws that apply to small businesses knows how the laws apply to you and knows how you can avoid the mistakes that will cost you money. A CPA will also do a detailed and thorough analysis of your business and can even represent you in an audit before the IRS, although his knowledge of tax laws may keep an audit from ever happening. In addition, even though many businesses do file their taxes successfully, they take a lot of unnecessary time in doing so. A tax professional can help you save time.
One Mistake A Professional Can Help You Avoid: Choosing the Wrong Entity Type
It is always best to discuss what type of structure is best for your business. Choosing the wrong type can cost you at tax time. Business owners who don’t seek the advice of a competent tax professional often make a number of mistakes, such as:
- Structuring their business as a LLC to save on taxes. Simply put, this does protect assets and is good for partnership relationships, but there are disadvantages for taxes. Business owners face the self-employment tax and taxes on appreciated assets.
- They structure themselves as a C corporation, because all fortune 500 corporations are C corporations. They think they will save on taxes. Actually, profits, under this model face taxes, and if business owners take profits home, they must distribute them and pay taxes on them.
- There are several other mistakes small business owners make, such as wrongly believing a sole proprietorship is always bad. Actually, for some, it is good, because you can save on self-employment tax by deducting half of it from your profit. This structure also has less legal formalities, but it doesn’t protect assets. Some small businesses will pay more under this model.
Actually, a tax professional can help you choose the best model for your business.
Another Mistake to Avoid: Not Paying As You Go
A tax professional could also help you make the mistake of not paying as you go. Simply put, this is failing to pay taxes by withholding taxes from wages and other payments or making quarterly tax payments. As a small business owner, you must pay the taxes almost immediately after earning income. Some small business owners don’t realize if they are self-employed, they must make the quarterly tax payments.
There are severe penalties for not paying your taxes for your small business. You can typically expect to pay a penalty to the IRS of 0.5 to 1 percent per month to an income tax bill not paid on time. This penalty is computerized and added automatically whenever a return is filed, without the full payment amount, or for a late payment. To make matters worse, you will pay even more for not making a payroll tax deposit on time.
Not Properly Planning
Not properly planning, by such things as not keeping tax diaries to document your travel, entertainment, and other expenses for the IRS can cost you a lot. Other mistakes include not planning include not hiring a tax professional, borrowing from employee withholding, which is illegal, giving yourself a huge raise the IRS considers suspicious after a good year, failing to claim all your allowed deductions, and wrongly designating everyone who works for you as an independent contractor, instead of an employee.
Invest In Your Company and Get Your Deductions
A tax professional will help you invest in yourself and your company and get all the deductions you are entitled to. This could include using depreciation rules for your benefit, claiming startup costs, claiming a home office deduction, and others.
For more information, feel free to contact us.
Tax season is coming to a close in the next few weeks or so. While many people have already completed their returns, there are others who are waiting until the last minute to get things done. Either they don’t feel like filling out their taxes, or they’re way too busy to get things done. Either way, filling out taxes is required and inevitable. As tax season comes to a close, what are some things that you can do to start preparing for it? After all, considering how tax season is ending very soon, if you haven’t already prepared for it, you better get started right away. Overall, here are some important things to consider.
#1. Hire a Tax Professional
Believe it or not, this is one of the most important things you could do when it comes to preparing for your taxes. If you’ve been doing taxes for years, you might even think that you can handle it on your own. However, what if you end up missing an important document when filing your taxes? Overall, this is one of the reasons you need to hire a tax professional. Not only will they show you the ropes of what it takes to file your taxes successfully, but a tax professional can also show you ways to improve as well. After all, even though many businesses do file their taxes successfully, they waste a lot of time. As an example, a tax professional could give you some shortcuts on ways to file your taxes much faster. Overall, these are some important things to keep in mind.
#2. Know How Much You’ll Give and Receive
Another reason why many people don’t like preparing for taxes, is because they’re not sure of how much they’re going to pay and receive. In the long run, this could make things frustrating because by the time they file taxes, the payer might realize that they don’t have enough to pay for taxes. As an example, let’s say that you’re self employed. Not only do you make around ten thousand dollars a year, but you’re also unaware of self-employment taxes. Just imagine you’re surprise when it’s tax time, and you realize that you’ll have to pay a portion ofyour money back. On the other hand, if you knew what you were getting yourself into, at least you could plan and prepare ahead of time. Overall, one way to pay for taxes, is to have a general idea of how much you’ll have to pay in the long run.
#3. Make Estimated Payments
As another way to prepare for taxes, especially if you’re self-employed, be sure to make estimated payments all throughout the year. That way, come tax time, you’ll certainly be paying a lot less. When you’re self-employed, for example, if you make a certain amount per year, instead of making a payment during tax time, you will be required to make quarterly estimated payments. Overall, this is definitely something important to consider.
Do you really need to pay so much in taxes? Not if you’re prepared ahead of time, that’s for sure.
For more information about why you’re paying so much in taxes, as well as how you can start preparing for things in the upcoming weeks, feel contact us today at GMLCPA. I’m a CPA with a sense of humor and love to provide my customers with valuable advice. On top of that, I also provide information in regards to financial services. Whether you’re looking for financial advice or want to find ways to better manage your taxes, I look forward to hearing from you, and assisting you in the best way possible.
You know that QuickBooks saves a lot of time. But have you explored how it does so by memorizing transactions?
Your accounting work involves a lot of repetition. You send invoices. Pay bills. Create purchase orders. Generate payroll checks and submit payroll taxes.
Some of the time, you only fill out those transaction forms once. You might be doing a one-time purchase, like paying for some new office furniture. Other times, though, you’re paying or charging the same companies or individuals on a regular basis.
QuickBooks contains a shortcut to those recurring tasks, called Memorized Transactions. You can save the details that remain the same every time, and use that template every time the bill or invoice is due, which can save a lot of time and improve accuracy. Here’s how it works.
To memorize a transaction, you first need to create a model for it. Let’s say you have a monthly bill for $450 that’s paid to Bruce’s Office Machines. You’d click Enter Bills on the home page or open the Vendors menu and select Enter Bills. Fill in the blanks and select from drop-down lists to create the bill. Then click Memorize in the horizontal toolbar at the top of the form. This window will open.
Before you can Memorize a transaction, you first have to create a model (template) for it.
The vendor’s name will already be filled in on the Memorize Transaction screen. Look directly below that. There are three ways that QuickBooks can handle these Memorized Transactions when one of their due dates is approaching:
- Add to my Reminders List. If you click the button in front of this option, the current transaction will appear on your Reminders List every time it’s due. You might request this for transactions that will change some every time they’re processed, like a utility bill that’s always expected on the same day, but which has a different amount every month.
- Do Not Remind Me. Obviously, QuickBooks will not post a reminder if you click this button. This is best used for transactions that don’t recur on a regular basis. Maybe you have a snow-shoveling service that you pay only when there’s a storm. So the date is always different, but everything else is the same.
- Automate Transaction Entry. Be very careful with this one. It’s reserved for transactions that are identical except for the issue date. They don’t need your approval – they’re just created and dispatched.
Click the down arrow in the field to the right of How Often and select the correct interval. Then click the calendar icon to pick a date for the next occurrence. If you have selected Automate Transaction Entry, the grayed-out lines below Next Date not shown here) contain fields for Number Remaining and Days in Advance to Enter.
How Does QuickBooks Know?
Obviously, you’ll want advance warning of transactions that will require processing. QuickBooks lets you specify how many days’ notice you want for each type. Open the Edit menu and select Preferences. Click Reminders in the left vertical pane, then the Company Preferences tab. You can tell QuickBooks whether you want to see a summary in each category or a list, or no Reminder. Then you can enter the number of days’ warning you want.
QuickBooks lets you specify the content and timing of your Reminders.
Working with Memorized Transactions
Once you’ve created some Memorized Transactions, you will undoubtedly need to review them at some point. QuickBooks makes this happen. Open the Lists menu and select Memorized Transaction List to see all the templates for recurring bills, invoices, etc., that you’ve defined. Right-click on one you want to work with, and this menu appears:
The Memorized Transaction List with the right-click window open
You have several options here. If your list is so long that it fills multiple screens, you can Find the transaction you’re looking for. If you’ve created multiple related transactions, you can save them as a New Group. You can also Edit, Delete, and Enter Memorized Transactions.
Anytime you’re letting QuickBooks do something on its own, it’s critical that you thoroughly understand the mechanics of setting the process up. We’d be happy to go over the whole topic of Memorized Transactions with you, or any other aspect of QuickBooks operations.
Raising money through Internet crowdfunding sites prompts questions about the taxability of the money raised. A number of sites host money-raising projects for fees ranging from 5 to 9%, including GoFundMe, Kickstarter, and Indiegogo. Each site specifies its own charges, limitations, and withdrawal processes. Whether the money raised is taxable depends upon the purpose of the fundraising campaign.
Gifts – When an entity raises funds for its own benefit and the contributions are made out of detached generosity (and not because of any moral or legal duty or the incentive of anticipated economic benefit), the contributions are considered tax-free gifts to the recipient.
On the other hand, the contributor is subject to the gift tax rules if he or she contributes more than $14,000 to a particular fundraising effort that benefits one individual; the contributor is then liable to file a gift tax return. Unfortunately, regardless of the need, gifts to individuals are never tax deductible.
The “gift tax trap” occurs when an individual establishes a crowdfunding account to help someone else in need (whom we’ll call the beneficiary) and takes possession of the funds before passing the money on to the beneficiary. Because the fundraiser takes possession of the funds, the contributions are treated as a tax-free gift to the fundraiser. However, when the fundraiser passes the money on to the beneficiary, the money then is treated as a gift from the fundraiser to the beneficiary; if the amount is over $14,000, the fundraiser is required to file a gift tax return and to reduce his or her lifetime gift and estate tax exemption. Some crowdfunding sites allow the fundraiser to designate a beneficiary so that the beneficiary has direct access to the funds.
Charitable Gifts – Even if the funds are being raised for a qualified charity, the contributors cannot deduct the donations as charitable contributions without proper documentation. Taxpayers cannot deduct cash contributions, regardless of the amount, unless they can document the contributions in one of the following ways:
- Contribution Less Than $250: To claim a deduction for a contribution of less than $250, the taxpayer must have a cancelled check, a bank or credit card statement, or a letter from the qualified organization; this proof must show the name of the organization, the date of the contribution, and the amount of the contribution.
- Cash contributions of $250 or More – To claim a deduction for a contribution of $250 or more, the taxpayer must have a written acknowledgment of the contribution from the qualified organization; this acknowledgment must include the following details:
- The amount of cash contributed;
- Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution, along with a description and good-faith estimate of the value of those goods or services (other than intangible religious benefits); and
- A statement that the only benefit received was an intangible religious benefit, if that was the case.
Thus, if the contributor is to claim a charitable deduction for the cash donation, some means of providing the contributor with a receipt must be established.
Business Ventures – When raising money for business projects, two issues must be contended with: the taxability of the money raised and the Security and Exchange Commission (SEC) regulations that come into play if the contributor is given an ownership interest in the venture.
- No Business Interest Given – This applies when the fundraiser only provides nominal gifts, such as products from the business, coffee cups, or T-shirts; the money raised is taxable to the fundraiser.
- Business Interest Provided – This applies when the fundraiser provides the contributor with partial business ownership in the form of stock or a partnership interest; the money raised is treated as a capital contribution and is not taxable to the fundraiser. (The amount contributed becomes the contributor’s tax basis in the investment.) When the fundraiser is selling business ownership, the resulting sales must comply with SEC regulations, which generally require any such offering to be registered with the SEC. However, the SEC regulations were modified in 2012 to carve out a special exemption for crowdfunding:
- Fundraising Maximum – The maximum amount a business can raise without registering its offering with the SEC in a 12-month period is $1 million. Non-U.S. companies, businesses without a business plan, firms that report under the Exchange Act, certain investment companies, and companies that have failed to meet their reporting responsibilities may not participate.
- Contributor Maximum – The amount an individual can invest through crowdfunding in any 12-month period is limited:
- If the individual’s annual income or net worth is less than $100,000, his or her equity investment through crowdfunding is limited to the greater of $2,000 or 5% of the investor’s annual net worth.
- If the individual’s annual income or net worth is at least $100,000, his or her investment via crowdfunding is limited to 10% of the investor’s net worth or annual income, whichever is less, up to an aggregate limit of $100,000.
If you have questions about crowdfunding-related tax issues, please give our office a call.
As your business grows over time you will probably want to expand and hire people for different roles. Luckily there are many options available for companies who need to find talented workers. As an employer, there are two main types of workers: employees and independent contractors. What’s the difference you ask? For a new business, it’s important to know the difference between independent contractors and employees for tax purposes. The IRS takes misclassification very seriously so it is important for you to understand the difference to prevent future legal and financial issues. Here’s more information about how to classify your company’s workers so you won’t have to worry during tax season.
How Employees and Independent Contractors Affect Your Company’s Taxes
Employees are great (especially if they are productive), but they also come with significant tax obligations. As an employer you have to withhold some of their income every month to cover their Medicare and Social Security. You also have to take out money for federal and state taxes in every paycheck. Do you plan to offer your employees health insurance and retirement benefits? That will affect their pay and taxes as well.
You don’t have to withhold taxes for independent contractors. Since they are independent and working for you for a short-term, they are responsible for paying their own state and federal taxes using the money they earn.
How to Tell if You Have an Employee or Independent Contractor
Now that you understand how the two types of workers can affect your company’s taxes, let’s discuss some questions you can ask to determine which category they are in.
The Common Law Test is a typical test used by the IRS to divide the two groups. The test focuses on three different categories: money, relationship, and behavior. Based on how the worker is compensated, their relationship and power dynamic with the employer and their behavior, the government can decide if a worker is an employee or independent contractor.
Below are some sample questions you could ask under the Common Law Test.
- Who has financial control of when the worker receives payment? The employer or the worker?
- Does the employer provide equipment and tools for the worker or do they use their own?
- Does the employer control of how the work is done or can the worker complete the task in their own time with their own discretion?
- Is the work a core part of the business?
- How long has the worker had a business relationship with the employer?
- Is there a contract?
- Does the worker receive benefits like sick and vacation pay?
- Does the employer pay for the worker’s health insurance?
Overall, when a worker uses their own tools to complete a job and can complete it under their own discretion, they are most likely classified as an independent contractor. Independent contractors typically have more autonomy and can complete their work in any location. When employers control what the worker does, provides their equipment and dictates how they should do their job, the IRS typically classifies the worker as an employee.
There are harsh consequences if the IRS believes your company willingly misclassified an employee as an independent contractors for tax advantages. You may have to pay fees and suffer other penalties. That’s why it’s important to work with a qualified CPA firm that can guide you in the right direction.
Please contact us today to learn more about our financial services. We can sit down with you and help you sort out the tax status of your workers. We can also offer other professional services including strategic business advice. At GMLCPA, we value helping small and local businesses.