Business Tax

As a business owner, you should familiarize yourself with your federal, state, and local tax requirements. Understanding what your obligations are will assist you in filing returns and paying taxes accurately and on time. Whatever taxes you are required to pay, you have to be very aware that there are deadlines for remitting them and any delays on your part could result in penalties. Here are some tips that can help you avoid tax trouble with the IRS.

Employment Taxes

The IRS requires employers to withhold federal income tax and FICA (Social Security and Medicare) taxes from their employees’ wages. The IRS also wants you to remit these employment taxes, along with your company’s FICA contributions, to them in a timely manner. Failing to remit these taxes can lead to serious penalties for noncompliance. This is one issue you absolutely must stay on top of.

Remember, sole proprietors, general partners, and, usually, members of limited liability companies do not have Social Security and Medicare taxes withheld like employees do. Instead, they must pay self-employment taxes, which typically cover Social Security and Medicare.

Estimated Taxes

You must generally make quarterly estimated tax payments to cover self-employment taxes and income tax on income that is not subject to withholding. If you do not make required estimated payments on time, you may owe the IRS an underpayment penalty.

Misclassifying Workers

Employees and independent contractors are treated differently for income tax withholding and employment tax purposes. Generally, the more control you have over a worker’s tasks and hours of work, the more likely that individual is an employee. In the case of employees, you must withhold federal income tax and FICA taxes, pay your share of FICA taxes, and pay unemployment taxes. You are not required to withhold income or FICA taxes from an independent contractor. Independent contractors pay income taxes and self-employment taxes on their own. If the IRS determines that your business has misclassified employees as independent contractors, it could prove to be costly.

Keep Business and Personal Transactions Separate

Personal bank and credit card accounts should always be kept separate from business accounts. Doing so makes it easier to identify all appropriate business expenses at tax time. That, in turn, simplifies things when it comes to claiming business tax deductions.

Substantiating Business Expenses

Like every business, your company will incur various expenses that are simply the cost of doing business. Many of these business expenses will be deductible. You should have proof of purchase for those expenses that you intend to deduct. Proof can be a cancelled check (or a legible image of the check), or a credit card, debit card, or electronic funds transfer (EFT) statement that shows the payee, amount of purchase or transfer, and the date of the transaction.

It’s also important that you can provide an invoice or receipt that identifies the purchase. If it’s not clear what the business purpose for the purchase is, then you should attach a note of explanation or write directly on the invoice or receipt. This can be helpful if the deductibility of the purchase is ever questioned by the IRS. Deductions for business travel expenses have very specific substantiation requirements, so be sure you are familiar with them before claiming these expenses.

Determining what taxes your business is subject to and when those taxes must be remitted is complex. Unfortunately, errors can be costly to your business. A professional who specializes in small business tax and accounting matters can help your business put systems and procedures in place so that it can claim all the deductions it is entitled to and meet its tax obligations in a timely and accurate manner.

As a small business owner, tax liability is the money you owe the government when your business generates income. With changing laws and gray areas regarding deductions, exemptions, and credits, it’s no wonder small business owners rank taxes at the top of the list of the most stress-inducing aspect of business ownership. To reduce that stress, taxes shouldn’t be something to focus on only at year’s end. Use these tips on reducing your business tax year-round and see your taxes and stress level decrease!

1. Business structure

Your company’s business structure is how it is organized – it answers questions like who is in charge, how are profits distributed, and who is responsible for business debt. The most common business structures are:

• Sole proprietorships have one owner who takes all profits as personal income. The owner is personally liable for any business debts.
• Partnerships are structured like sole proprietorships but can have an unlimited number of owners.
• C corporations have unlimited shareholders who each own part of the company. Profits are distributed as dividends between them. Owners are not personally liable for business debts.
• S corporations are structured like C corporations, but the number of shareholders is capped at 100.

In addition to affecting how a business operates, business structure impacts how much a company pays in taxes. The U.S. tax code is complex and includes four main tax categories:

• Income tax – paid on profits
• Employment tax – employee Social Security and Medicare contributions
• Self-employment tax – Social Security and Medicare contributions for self-employed individuals
• Excise tax – special taxes for specific goods and services like tobacco, alcohol, etc.

IA sole proprietorship or partnership is a good idea for businesses wanting tax simplicity. For those with less than 100 owners, an S corporation might be the right fit and best tax option. Again, business structure and tax laws are complex and are best determined by a qualified, experienced accountant.

2. Net Earnings

Net earnings (i.e., net income or profit) is the gross business income minus business expenses. Regardless of the business, it begins with gross income (the income received directly by an individual, before any withholding, deductions, or taxes), and allowable expenses are deducted to arrive at net income. How this figure is calculated is dependent upon business structure.

Net earnings are used to calculate business income taxes. Again, the calculation process differs slightly for different business structures. It is best to seek a professional to help with net earnings calculations for the proper calculation and maximum legal deductions.

3. Employ a Family Member

One of the best ways for small business owners to reduce taxes is hiring a family member. The (IRS allows a variety of options for tax sheltering. For example, suppose you hire your child, as a small business owner. In that case, you will pay a lower marginal rate or eliminate the tax on the income paid to your child. Sole proprietorships are not required to pay Social Security and Medicare taxes on a child’s wages. They can also avoid Federal Unemployment Tax Act (FUTA) tax. Consult a trusted accounting professional for details about the benefits of hiring your children or even your spouse.

4. Retirement contributions

Employee retirement plans benefit employees, but they can also be good for your small business. Employer contributions to an employee retirement plan are tax-deductible. They can also carry an employer tax credit for setting up an employee retirement plan. Again, this is a task an accountant can handle for you. They can guide you on retirement plan choices based on your business’s situation, employees, and other factors.

As a small business owner, you can deduct contributions to a tax-qualified retirement account from your income taxes (except for Roth IRAs and Roth 401(k)s). Sole proprietors, members of a partnership, or LLC members can deduct from their personal income contributions to their retirement account.

As with any tax situation, consulting your trusted accounting professional is always best. They are up to date on the latest tax laws, information, and allowable deductions. By being aware of ways your small business can reduce taxes, you can bring these topics up with your accountant, discuss the best options for you, and be prepared long before tax time rolls around.

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Contact our tax professionals to learn more about how you can control tax exposure for your small business.

It’s not just self-employed individuals who must pay estimated taxes. Here’s what you need to know.

W-2 income tax withholding isn’t perfect. You’ve probably had years when you owed more than you expected to on April 15. Or you were pleasantly surprised to receive a sizable refund. The idea, of course, is to try to come out as even as possible. You can usually do this by adjusting your withholding when you experience a life change like taking on a mortgage or having a baby.

Income taxes are also pay-as-you-go for self-employed individuals – or at least they should be. If you’re striking out on your own by starting your own small business in 2022 or you’re simply taking on a side gig to improve your finances, your tax obligation will change dramatically. Your income will not be subject to employer withholding every week or two. In most cases, you’ll get it all. But the IRS expects you to pay estimated taxes on that income four times a year.

Who Else Must Pay?

There are other situations where you’ll be expected to make quarterly payments. In fact, the only individuals who aren’t required to pay estimated taxes (besides W-2 employees whose withholding is on target) are those who meet all three of these conditions:

• You owed no taxes the previous tax year (line 24 on your 2021 1040—total tax—is zero, or you weren’t required to file a return).
• You were a resident alien or U.S. citizen for all of 2021.
• Your 2021 tax year covered a 12-month period.

You’ll find your total tax for 2021 on line 24 of the Form 1040. Notice, too, that line 26 asks for 2021 estimated tax payments.

There are numerous situations where individuals who have payroll taxes regularly withheld on their income may still be required to submit quarterly estimated taxes. For example, did you receive income from rents or royalties? Dividends or interest? Income from selling an asset? Gambling?

If you have an employer who withholds taxes, but you don’t think you’ll be paying enough given the deductions and credits you might receive, you need to plan for estimated taxes. Self-employed individuals are almost always required to submit them.

Special Rules for Some

As with all things IRS, there are many exceptions to the rules regarding estimated taxes. For example, there are special rules for:

• Fishermen and farmers.
• Some household employers.
• Certain high-income taxpayers.
• Nonresident aliens.

How Do You Estimate Your Quarterly Taxes?

That’s the hard part, especially if you’re new to the world of estimated taxes. There is no magic formula, no way to calculate to the penny what you’ll owe. You’re basically making an educated guess. Since you won’t know for sure what changes to the tax code will be put in place until the end of the year, you can’t be absolutely certain that you might get a particular credit or deduction.

But you know roughly what your income will be for a given quarter once you’re nearing the end of it. Do you have a lot of business-related expenses? Keeping track of those is critical, as they’ll offset your income. If you don’t, you’ll have to budget for a heftier quarterly payment. And you must keep in mind that you’ll be paying self-employment tax – that portion of your income taxes that your employer used to pay.

Once you’ve been self-employed for a full tax year and have seen what your tax obligation was, it will be easier to estimate in subsequent years. But you may have a difficult time your first year.

How Do You Pay Estimated Taxes?

Individuals and business that had to pay estimated taxes in 2021 submitted the Form 1040-ES four times. If you’re self-employed in 2022, you’ll need to submit similar vouchers with your payments, unless you’re paying online.

If you’re self-employed and you anticipate owing $1,000 or more in taxes on your 2022 income, you’ll need to file quarterlies using IRS Form 1040-ES vouchers (available on the IRS website) along with a check or money order. There are also ways to pay online using a credit or debit card or direct bank withdrawal. Corporations would file the Form 1120-W if they expect to owe $500 or more.

Estimated taxes for the 2022 tax year are due:

April 18, 2022 (January 1-March 31, 2022)

June 15, 2022 (April 1-May 31, 2022)

September 15, 2022 (June 1- August 31, 2022)

January 16, 2023 (September 1-December 31, 2022)

A Challenging Task

Estimated taxes are not precise. And it may be difficult to set aside money for them if your income is not where you’d like it to be. But as you might expect, the IRS will levy penalties on you if you don’t.

Year-round tax planning can help you in this critical area. We’ll be happy to set aside time to consult with you about estimated taxes. We’re also available to do tax preparation and to look at how your taxes fit into your overall financial situation. Contact us soon to get a jump on the 2022 tax season — or to finish up 2021.

Unless you’ve been planning for 2021 taxes all year, it’s time to take actions that can reduce your IRS obligation.

We’ve talked before about the importance of planning for taxes year-round. If you haven’t been able to do that because 2021 has been another complicated year, it’s not too late. There are things you can still do in November and December that will have impact on this year’s taxes.

It may be that taxes are not as big an issue for you because the COVID pandemic reduced your household income or your business sales, so you assume you’ll pay less in taxes. If so, you’re not alone. The Fidelity Investments 2021 Financial Resolutions Study found that two-thirds of Americans experienced a financial setback in 2020, for a variety of reasons, and 38 percent predicted that they’d be in survival mode in 2021.

Whether you’ve just been hanging on for the last ten months or 2021 was a good year for you, taking actions now that will affect your financial obligation that will come due next April should be high on your to-do list. Here are some suggestions.

Take advantage of Section 179.

No one likes dealing with depreciation. If you purchase or finance qualifying equipment or software in 2021, you may not have to. Section 179 in the IRS code allows you to write off the entire purchase price for the current tax year, up to $1,050,000. Though larger businesses may benefit from it, this tax legislation was specifically designed to help small businesses invest in themselves.

This doesn’t mean that you can only take the deduction if you buy equipment that costs less than $1,050,000. But the benefits start to diminish when you spend more than $2,620,000 total. The IRS also requires that you begin using the equipment—used or new—in 2021 to take the deduction.

Questions about whether you can take this deduction? Contact us.

Inventory your inventory.

Now is a good time to take a close look at your inventory. Are there products that are doing well? You might buy more before the year ends so you can claim a business expense. On the other hand, is there inventory that hasn’t sold and is unlikely to? If you have items that have lost their value, they can have impact on the balance sheet and income statement. Best to write them off.

This involves some complex calculations and knowledge of accounting rules. We can help you sort this out.

Consider putting off some income.

Are you due a bonus? You might consider putting that off until next year if your company allows it. Of course, you don’t yet know what your income and expenses will be for 2022. But at least you’ll be able to start including that as income at the beginning of the year and you’ll have plenty of time to make plans to offset it.

If you’re a freelancer or independent contractor and you know that your income will far outweigh your expenses in 2021, you might wait until the end of December to send out some invoices. That way, they won’t be included in 2021 income.

Look for more deductions.

It’s better to think about this now instead of during tax preparation, so you can assemble any documentation needed and have it handy. You already know about commonly-claimed deductions like hardware and software costs, internet and phone connections, and office rent and utilities. Are you considering your home office space, as long as it’s devoted to business use? Legal and professional fees? Bank fees and business interest? Advertising and promotions? Business insurance?

Then there are charitable contributions to qualifying organizations, which must be made by December 31, 2021, to be deductible for this tax year. Single filers who do not itemize can claim up to $300 in donations, while married couples filing jointly can take up to a $600 deduction. Individuals who do itemize can give up to 100 percent of their adjusted gross income (AGI) and claim it on their tax returns. C Corporations are limited to cash donations equaling up to 25 percent of taxable income.

Put more money in your retirement accounts.

This, of course, benefits you in two ways. Your retirement will be better funded the more you contribute to your 401(k)s, IRAs. etc. You’ll also benefit from a tax break by maxing out your contributions.

“Bunch” deductions.

When you bunch deductions, you claim as many deductions as you can in a given tax year so you can itemize. You take a standard deduction the next year, then continue to alternate between the two. This is often done with charitable donations that you make at the beginning and end of the year, but it can work with deductions like medical expenses and property taxes.

Use Our Services

You may have heard some of these suggestions before and either didn’t think they would help you or weren’t sure how to use then in your tax preparation. But your goal should be to pay as little tax as is legally possible. We can help you with this. If you want to have a conversation about any of the ideas mentioned here before the end of the year, contact us. We’ll also be available to consult with you and prepare your taxes next year. Let us know now if you’d like to do that so we can get you on the schedule.

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There’s still time to take actions that will affect your 2021 taxes. We can help you minimize this year’s tax obligation.

Now is a good time to scrutinize your inventory. Which items haven’t sold well? You could write them off on your 2021 taxes.

If you expect to pay a lot in income taxes this year, maybe you could defer some income until 2022. Ask us about this.

Do you need to buy expensive capital equipment? Take advantage of Section 179 and deduct it all in 2021 instead of depreciating.

As a small business owner, you probably know that willfully avoiding paying taxes will lead to severe problems with the IRS; however, IRS problems aren’t always a result of a business owner’s intentional actions. These are five ways business owners can get into trouble with the IRS that they might overlook or not realize.

1. Under-Reporting Income

All business income must be reported to the IRS. Even if you are a freelancer, receive contract payments, or are paid in cash, you must let the IRS know or risk hefty fines and penalties on top of the tax you owe on that income. Some individual self-employed people fail to pay taxes – either due to lack of knowledge about tax laws or evasion – and do not realize they are responsible for up to six years of back tax returns. Take note that if you do need to file back tax returns, many deductions are not claimable on more than the most recent three returns. Additional years, up to six, must be filed; however, the benefit of deductions is lost beyond three years.

2. Over-Reporting Expenses

Keep business expenses separate, preferably paid from a separate account and with a separate credit card, so that your expenses do not get mixed in with those for your business. The most common over-reported expenses are private travel being claimed and business travel and private miles driven and claimed as business miles. If you’re not sure what qualifies as an actual business expense, consult with your tax preparer or accountant. For a business expense to be deductible, it must be ordinary and necessary. An “ordinary” expense is common and accepted in your business; a “necessary” expense is helpful and appropriate for your business. Expenses like the cost of goods sold (for manufacturing businesses) and capital expenses (costs that are part of your investment in your business) are figured separately from business expenses.

3. Failing to Report “Trust Fund Taxes”

As an employer, you must withhold taxes from employee earnings. Those taxes are not paid to employees as wages and are held “in trust” until paid to the U.S. Treasury. Thus, the name “trust fund taxes.” These are income tax, Social Security, and Medicare taxes (aka “withholdings”). Sales tax is also considered a “trust fund” tax since it is collected from someone else like a customer or client and held until paid to the Treasury. These taxes must be paid and reported to the proper taxing authority and cannot be used for operating or financing a business. If they are, and they are not reported, it is considered tax fraud.

4. Forgetting the Self-Employment Tax

Just like an employer must withhold Social Security and Medicare taxes from employees, if you are self-employed, you must pay self-employment (SE) tax, consisting of Social Security and Medicare taxes, to the Treasury. The SE tax is 15.3 percent (12.4 percent for social security (old-age, survivors, and disability insurance) and 2.9 percent for Medicare (hospital insurance) of net self-employment income in addition to income taxes. That means it is calculated after expenses are deducted. Note that SE tax does not include any other taxes that self-employed individuals may be required to file, so these individuals must consult their tax preparer or accountant to be sure they are paying all the required taxes. Also, self-employed individuals can deduct the employer-equivalent portion of the SE tax when calculating their adjusted gross income (AGI). Also, keep in mind that the tax is paid only on net self-employment earnings, that is, income after expenses are deducted.

5. Not Paying Estimated Quarterly Taxes

As a small business owner, you do not have taxes withheld from a formal paycheck as wage-earning employees do. However, that does not mean there are no taxes due to the IRS. If a small business owner anticipates a tax liability of $1,000 or more, they must send estimated quarterly tax payments to the IRS. Not doing so can lead to a whopping end-of-year tax bill with penalties, too.

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Again, as mentioned above, consult your tax preparer or trusted accountant to help you make sure you stay in the clear with the IRS.

Our Albuquerque, NM CPA firm provides accounting services  for all types of small businesses. Call us at 505-200-0094 now and tell us about your business or request a complimentary consultation online.

Health care costs are getting higher and higher. Even so, many individuals and families who could take advantage of the tax law’s medical expense deduction don’t.

Surpassing the Floor

The Tax Cuts and Jobs Act of 2017 lowered the threshold for the deduction of medical and dental expense. The new law permits taxpayers to deduct unreimbursed medical expenses that are in excess of 7.5% of their adjusted gross income (AGI), down from 10% previously. This change, unlike others, was made retroactive to January 1, 2017. To be deductible, the expenses may not be reimbursed by insurance or elsewhere. For example, a family with AGI of $60,000 would have to spend more than $4,500 on unreimbursed medical expenses to qualify for any deduction. That floor rate may seem high, but with the increases in medical costs in recent years, expenses can add up quickly. Many families have no, or little, coverage for vision care or dental care. And an unexpected illness or accident can lead to thousands of dollars of unreimbursed expenses.

Out-of-Pocket Expenses

Only out-of-pocket costs can be deducted, that is, expenses not paid for by insurance or an employer. And expenses that are paid with money from tax-advantaged accounts (such as health savings accounts or flexible spending accounts) are not deductible either. Nor are any health insurance premiums automatically drawn from your paycheck on a pretax basis.

Nonetheless, the list of medical expenses that can qualify for the deduction is quite long. Doctors’ bills, tooth repairs, eyeglasses and contact lenses, hearing aids, laboratory fees, oxygen, psychiatric care, stop-smoking programs, surgery, and X-ray costs, for example, can all qualify. In addition, the expenses of dependent family members can also qualify for deduction.

Don’t sweat tax season! When we prepare your tax return you can be confident that and your taxes will be prepared accurately and filed on time, every time. Call us now at 505-200-0094 or request your complimentary consultation online to get started.