When it comes to your finances, accounting, or tax rules, do you ever feel like a “Duck out of Water?”
If so, this post is designed to help you get started on the right foot, make your 2017 easier, and ideally, more profitable.
Here are 6 tips to help you get started:
1. Employ your money by considering how you can make it work for you:
One way to do this is to work with a tax accountant who can help you learn to use the tax rules to help you improve your financial results by decreasing your income tax expense. A tax software program may help you prepare and file your tax return, but it does not help you plan or make informed financial decisions.
A tax return is based upon the past. The best opportunity to make a difference is in the present.
Tax planning (and acting) may also help you save some money on your 2016 tax return – before you file. You can read the rules, read some of my others blogs, or ask someone for guidance.
2. Self-employment comes with both a lot of perks and responsibilities; this is particularly true for income tax rules and obligations.
The IRS defines Earned Income as all taxable income and wages from working either as an employee or from running or owning a business (net earnings from self-employment).
Last year at tax time, a lot of people were caught by surprise because they had not considered how their UBER or other self-employment income would be taxed. It is important to know the rules to avoid penalties for either not reporting on time and/or for not paying income tax on time.
Use the following information to avoid penalties, price your products/services and to plan your budget:
IRS Business Basics – Compliance – “Must Do”:
- The U.S. tax system is “Pay as You Go, generally, not at the end of the year
- If you owe the IRS more than $1K during a year, it is not ok to wait to pay
- Quarterly Reporting & estimated tax payments are required to avoid late payments, interest & penalties
- Accounting records must be current to determine – if you need to pay quarterly tax
- Generally, Calendar Year Due Dates are 4/15, 6/15, 9/15, and 1/15 for the previous year
- If you don’t pay enough tax by the due date of each of the payment periods, you may be charged a penalty
- Individuals (Sole Proprietors, Partners, S-Corp Shareholders) need to pay estimated tax if they owe $1,000+
- Corporations need to pay estimated tax if they owe $500+
- 2 Possible Penalties: Failure to Fail and Fail to Pay on time – If you can’t pay, at least file; prevents 1 penalty
- Estimated tax is used for: Income Tax; Self-Employment Tax and Alternative Minimum Tax
- Reconcile payments on your annual tax return
3. Self-Employment Tax of 15.30% is required on Annual Net Earnings of $400+ – “Must Do”
- You, need to know “Up front” to budget for cash expense and to consider for product/service profitability
- Sole Proprietors & Independent Contractors must pay both the employer and the employee side of Social Security and Medicare taxes
- The 2016 SE tax rate on Net Earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax)
- The Self-Employment tax rate is 15.3% of the first $118,500 of income and 2.9% of everything above that amount
- If you also work as an employee, be careful that you do not overpay your Social Security tax. The $118,500 applies to your combined wages, tips, and net earnings
- Sole Proprietors can deduct ½ of this cost on Form 1040-Line 27, the deductible part of self-employment tax
- QuickBooks Self-Employed can help you with your business recordkeeping and to determine your estimated tax:
This product is a little less than 2 years old and was designed to simplify the basics for those who are self-employed, own a small business, and who do not have employees (payroll) or inventory. Good examples include realtors and independent contractors.
The program allows you to track business income and expenses and to make tax time simple by capturing all expense deductions, including tracking business mileage. The program also estimates your required IRS quarterly tax payments, lets you separate personal and business expense and create and send invoices on the go.
The cost of $10 or less per month makes it affordable. If you work with a Certified QuickBooks ProAdvisor Accountant, they may be able to provide you a 50% discount on the program cost for your 1st year of use. Reach out to them and ask. If so, they can send you a link to help you get started at the discounted rate.
- MileIQ is an easy way to track your mileage for expense purposes.
The app is an automatic mileage tracker, which can improve accuracy and add convenience.
2017 rates are:
- $0.535 for business
- $0.170 for medical or moving
- $0.140 for charity
Alternatively, you can use actual expenses incurred.
Either way, the IRS requires documentation, which includes both the beginning and ending mileage, where you went, and why. If you have not been doing this, step outside and record your odometer reading today. That number can provide a good estimate to end your 2016 tax year and to begin 2017.
Also note that if you used accelerated depreciation for your vehicle and used the Section 179 deduction, you cannot revert and use the standard mileage rates.
6. Don’t Believe, “Don’t Worry, it’s a Write-Off:
There are a lot of rules for what is an acceptable deductible business expense that apply for who, for what amount, and when.
Following are some general terms that will help you get started in learning IRS terminology and rules.
Note that what is an acceptable taxable deduction in your business may not be acceptable for my business. The “tool belt” is different for a carpenter than for an accountant.
- Use IRS rules to decrease income tax expense
- Business Income can be reduced by “ordinary and necessary” expense:
- Ordinary expense = Common or Accepted in your trade or business
- Necessary expense= Helpful or Appropriate for your trade or business
- Operating Expense = expense incurred under normal business operations (rent, utilities, insurance, payroll)
- Capital Expense= benefits more than 1 year (property, plant & equipment)
- Capital Assets are generally expensed over a period of time by using depreciation and amortization rules
- Depreciation and Amortization are both a Non-Cash expense
- They reduce Net Income on an Income Statement, but do not reduce the Cash account on the Balance Sheet
- The expense can either be based on standard or accelerated rules.
- Section 179 is an example of an accelerated expense i.e. take a larger deduction in earlier years. Be careful here because you can also be subject to “recapture rules”.
- This list is not exhaustive nor does it include all the rules. The information is shared to provide general concepts and to plant seeds for future learning.
I hope these tips to help you get started on the “right foot” and help you feel less “like a duck out of water”.
We all have gifts we can use to make a difference for each other.
I hope this blog post might have made a small difference for you.
Thanks for reading.
To your success,
Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.
Deb offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.
E-Mail me @ firstname.lastname@example.org
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