Dive into the Numbers-Who Does What?

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Bookkeepers, Accountants, & CPA’s: Who Does What?

 In my experience, I have found that frequently, many people do not understand the difference between a Bookkeeper, an Accountant, and a Certified Public Accountant.

A business owner may wonder, “ Do I need a bookkeeper or an accountant?”

The answer might be both.

The following general descriptions may provide some insight as to function and how each group may work together to provide value to those they serve.

Bookkeepers: May have Certifications

  • Uses accounting software to record day-to-day financial transactions
  • Generates financial reports
  • Sends invoices to customers
  • Enters invoices received from suppliers into the accounting system
  • Reconciles Bank Statements
  • Prepares Payroll
  • Specific responsibilities will vary by type and size of business
  • Work may be overseen by an accountant and/or the small business owner

Accountants: Bachelors Degree, with an emphasis in Accounting 

  • Assist Business Owners with their accounting systems, financial statements, income tax returns, tax planning, and investment decisions
  • Prepares detailed budgets
  • Works with a corporation’s management in analyzing costs of operations, products, and special projects such as forecasted to actual results
  • Works with management in setting prices of products manufactured or services offered
  • May prepare Cash Flow projections and analysis
  • Works with banks to ensure the company will have funds when required
  • Leads Tax Planning and determines income tax and other taxes payable to governmental entities
  • Assess financial risks associated with projects
  • Accountants and auditors perform overviews of the financial operations of a business in order to help it run efficiently.
  • May Supervise teams of Bookkeepers in a large office or work in conjunction with bookkeepers to provide a different level of service to owners
  • Help a business owner interpret the financial statements and offer suggestions to improve profitability, cash flow, and efficiency

 

Certified Public Accountants (CPA’s)- Licensed by the State and agrees to abide by a Code of Ethics

  • Have met the “Three E’s” – Education, Examination, and Experience – that are required for initial licensure as a CPA and they continue to meet the annual continuing education requirements to renew their license each year
  • The current exam includes 4 parts and includes a testing period of up to 14 hours
  • A minimum of 40 continuing education hours are required each year
  • CPA’s frequently become Trusted Business &/or Personal Financial Advisors
  • We may perform any of the services shown under Accountants, or work in Public Accounting which includes a wide range of accounting, auditing, tax, and consulting tasks for small business, corporations, non-profit organizations, government, and for individuals (Personal Financial Planning)
  • A CPA can do two things than an accountant without a CPA license cannot:
  1. Provide Attestation Services: Compilations, Reviews & Audits of an entity’s financial statements
  2. Represent clients in front of the Internal Revenue Service
  • Certified Public Accountants, Enrolled Agents, and Attorneys have Unlimited Representation Rights before the IRS. Tax professionals with these credentials may represent their clients on any matters including audits, payment/collection issues, and appeals

 

Accounting and Tax is like a foreign language for most people.

It is an acquired skill.

Experience can be wide and deep.

Yet, most of us “Number Crunchers” have one thing in common, we enjoy helping and we use our knowledge and experience to empower others.

We like to use our gifts to help you.

 

“The most important thing in communication is hearing what isn’t said” – Dr. Peter F. Drucker

Similarly, an accountant/CPA may find meaning for you by “reading between the lines” and offer suggestions to improve the Bottom Line on your financial statements.

 

Thanks for reading,

Deb

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations and is available for appointments – including remote. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Tips for Tax- Efficient Financial Planning

For Tax-Efficient Financial Planning, it is important to consider your:

  • “Income” sources
  • How each source is taxed
  • Your Tax Bracket

Income Sources:

Visualize a pie and then divide your sources of income in to 3 general categories: Taxable, Tax Deferred, and Tax Free.

How does it look?

  • All taxable? This is an excellent opportunity to reduce your tax bill and keep more of your money. Your recent filed tax return can be a good road map to provide clues for tax savings opportunities
  • Taxable and Tax-Deferred? Good for you; you have some balance
  • All 3? Even better. This provides flexibility on how you draw down your assets later, which could save tax dollars and money

Tax Rates:

Taxable “Income”:

  • Ordinary Income is income earned from providing services or the sales of goods
  • Capital gains are usually associated with the sale or exchange of property characterized as capital assets
  • Short Term Capital Gains are taxed at your Ordinary Income tax rate (10 % to 39.6%)
  • Long Term Capital-Gains tax rates vary by your income tax bracket and the type asset sold
  • Generally, if you’re in the 10% or 15% tax bracket, you’ll pay 0% on those gains. Most other taxpayers pay 15%; however, the rate can also be 20, 25, or 28% for certain asset classes and/or income levels.

Tax Deferred Investment Income includes:

Withdrawals from traditional IRAs and your 401K, which are, taxed as ordinary income (10% to 39.6%)

Tax Free Investment Income: Roth IRA

  • Tax Free Income as long as the account has been open for at least 5 years
  • Provides flexibility in the timing of future income – you decide
  • Required Minimum Distributions do not apply to Roth accounts as are required by Traditional IRA plans
  • Roth IRA distributions are not considered as income when determining how your Social Security payments are taxed
  • Qualified Roth distributions are not included in either net investment income or in the modified adjusted gross income calculation for assessing the 3.8% net investment income tax

Tax-Brackets:

To determine your tax-bracket, you, generally, need to know your annual taxable income and your tax status as of the end of the year.

As you have already seen or already knew, Ordinary Income is taxed at the highest rate.

Managing your tax-brackets means:

  • Try to keep your Ordinary Income in the lower tax brackets
  • “Fill up” each bracket, where possible
  • Be aware of tax consequences before making decisions that push you into the next highest rate bracket; i.e. can you defer a bonus or sale to new year if it means you will be taxed 10% less?
  • If you itemize, group deductions where possible; i.e. elective medical or dental procedures; charitable contributions to reduce your taxable income

Takeaways for Tax-Efficient Decisions:

  • Know your tax bracket
  • Estimate your current annual taxable income
  • Use the 2015 IRS Tax Bracket Schedules to determine “how much room you have to move, before moving to the next highest tax bracket
  • You could use this “room to move” as the potential amount to convert the specific amount of money from a Traditional IRA to a Roth IRA
  • A conversion to a Roth IRA results in taxation of any untaxed amounts in the traditional IRA. The conversion is reported on Form 8606, Nondeductible IRAs. See  Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), for more information.
  • Determine the tax consequence before you convert and ensure you have the cash to pay the tax for converting

The IRS is spelled just like that: “Theirs”. However, tax laws were put in to place to help save you money. The IRS is not going to tell you that you could have paid less when you submit your tax return. It is your job and I am here to help, which is why I share information – so you can.

Deborah Ann Fox, CPA studies tax laws so you don’t have to. She enjoys making a difference in peoples lives, hearts, and wallets as she helps them on the road to financial freedom.

Deb provides free 30-minute consultations. More information is available at www.debfoxfinancial.com.

Thanks for reading!

SBW2015: Showing Gratitude for all Small Business Owners

Risk

America is celebrating National Small Business Week all over the country & special events will be held May 4 – May 8, 2015 in cities across the United States & via the web. It is a time that we as consumers can show our appreciation for local business by shopping locally & promoting them by sharing their information with others.

As a small business owner myself, I also thought it would be fun to share a few financial tips that may be helpful to other small business owners. It is another small way to say thank you & show support to my community.

Take Time to Work On Your Business & Not Just In It:
• Financial Statements & Tax Returns both tell a financial story & can be used as a road map or a compass to help guide profitability
• On at least a quarterly basis, Compare your Budgeted/Forecasted Amounts to Actual Results to identity differences (variance)
• Try to determine why there was a difference, if any, & adjust as necessary
• Also compare Year to Year Actual Results – where is your value being created & lost?

Watch The Bottom Line by Protecting your Assets & Managing your Risk:
• On 10/1/15, the financial responsibility (liability) starts to shift for fraudulent transactions to U.S. merchants if they have not upgraded their payment systems to accept EMV Chip Payment Cards. This is true if the card issuing company has added the chip to their card & you have not upgraded your POS system. Rules vary by issuing card companies & products sold. More information can be found from http://www.darkreading.com at : http://t.co/1OqiwTLY0P
• Know your Net Worth & make a conscious decision about how much of it you want to protect by buying insurance & how much you want to “self-insure”

Try Not to Leave Money on the Table:
• Avoid financial pitfalls, fines, & penalties by knowing & applying FLSA laws correctly including classifying Exempt, Non-Exempt, & Independent Contractors & treat them & pay them correctly
• Use the tax laws to strategically plan your business operations to minimize tax expense & keep more money “in your pocket”

Deborah Ann Fox, CPA helps individuals & small business owners build & protect their financial wealth. She is available for in-person, or remote appointments. See http://www.debfoxfinancial.com for more information.

Smart Personal Tax Planning –What to do before Year-End

2013 TaxTaxes take a big bite out of the income we earn. We may pay: federal (IRS) income tax, state income tax, payroll tax (social security/medicare), sales tax, and property tax. Most of these taxes offer limited options to control how much we pay. However, our golden opportunity comes with income tax because there are a ways to reduce our expense. Today, I offer some of these for you to consider:

The Why & The How

If you want to want to make sure your money is more in “your pocket” than in theirs (The IRS), now is the time to act. Estimating your 2014 tax bill keeps you from being surprised next year. More importantly, it provides you the opportunity to perhaps decrease the amount of tax you pay by planning and acting strategically before the end of this year.

To start:

  • Determine how much you have earned this year
  • Determine what you have paid toward your 2014 tax bill
  • Then increase each of these amounts to estimate the year-end amounts

Now that you have a glimpse of your 2014 tax situation, compare those numbers to those on your 2013 tax return. A filed return can be used as a sort of “road map” to see if there are options to reduce your tax bill now or in the future.

For example, did you get a refund last year? If so, consider this:

Kiplinger’s recently had a great article titled, “Safeguard your Refund by shrinking it”. The article includes the following:

  • More than 75% of Americans get an IRS tax refund each year which is the equivalent of giving the IRS an interest free loan
  • Identity Theft is on the rise and thieves file fraudulent returns to collect refunds. Avoid this risk by limiting the amount of refund you receive
  • Use on –line tax calculators to see if your estimated tax withholding is correct; the IRS and Kiplinger’s both provide these
  • File a revised W-4 with your employer this year to change your tax withholdings; remember the goal is to break even

Shift Income?

Then consider if you can shift income to decrease the amount of tax owed:

If you think your income will decrease next year and your tax rate would be lower, can you:

  1. Defer a year-end bonus to January 2015?
  2. Postpone a sale that will trigger a gain to next year?
  3. Delay exercising stock options?

Alternatively, it may make sense to move income to this year:

  1. Covert a traditional IRA into a Roth IRA and recognize the conversion income this year
  2. Take IRA distributions this year?

Shift Payments?

If you itemize, would you benefit if you changed the timing of some of your payments?

If you expect your income to decrease next year, then you might want to move some payments/deductions to the current year to offset your higher income this year. Can you:

  • Prepay property taxes?
  • Make your January mortgage payment this year?
  • If you owe state income taxes, consider making up any shortfall rather than waiting until your return is due
  • Consider the timing of medical expenses so you can benefit from the deduction?
  • Sell some or all of your loss stocks?
  • If you qualify for a health savings account, consider setting one up and making the maximum contribution allowable

Defer Deductions into 2015

If you expect tax rates to increase next year, or if you anticipate a substantial increase in taxable income, you may want to explore waiting to take deductions until 2015:

  • Postpone year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent you might get a deduction for such payments
  • Postpone the sale of any loss-generating property

Can you do anything else?

For those that would like to take it a step further, consider if there is anything you can do to increase your “Above the Line Deductions”.

On a Federal Individual1040 tax form, the basic formula is:

Income minus “Above the Line” deductions = Adjusted Gross Income.

These deductions include paying monies to:

  • Establish an IRA for you or your spouse?
  • If qualified, set up a Health Savings Account?
  • If self-employed, would you benefit from having health insurance or a Qualified Pension Plan?

While this is not an exhaustive list, I hope it gives you enough information to initiate your plan, act this year, and save money on your next tax bill.

A dollar saved is a dollar you don’t need to earn. Keep marching towards financial freedom. Happy planning!

Deb Fox is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointment. More information is available at www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com. Thanks for reading

What you don’t know can hurt you

RiskIgnorance may be bliss, but what you don’t know, can also hurt you.

You work hard for your money. You want to enjoy it, stretch it, and protect it.  Personal Risk Management is a way to protect your money. It is a systematic process of evaluating the chance of loss and then taking steps to combat the potential risk by practicing risk avoidance, using contractual indemnification, or by purchasing insurance.

One example of risk avoidance is if a sole-proprietor choses to incorporate and thus limits their personal liability exposure.

Contractual indemnification is a common clause in many contracts. Black’s Law Dictionary defines indemnity as a ““a duty to make good any loss, damage, or liability incurred by another.” Indemnity has a general meaning of holding one harmless; that is to say, that one party holds the other harmless for some loss or damage. Indemnification protects you against personal liability.

Insurance helps to stop an insured “loss” from being a financially life-changing event.

Most people probably find insurance boring and reading insurance contracts even more so. As a CPA, with the Associate in Risk Management (ARM) designation, I enjoy looking for the “devil in the details”. It is one way I provide value to others.

The goal of this blog is to plant some seeds of thought, initiate action, and provide you some “sleep insurance” because you took the time to evaluate, know, and feel comfortable with your financial position.  Factors to consider include:

Limits and Exposure:

  • Know what you have to protect:  What is your net worth; i.e. how much could you lose?
  • What type of losses are you covered for?
  • What percentage of your net-worth is protected by insurance and what amount is left “self-insured” in the event of a loss?

Property:

  • Do you know that if you do not buy the correct property insurance limit that you could be held financially responsible, for a portion of the loss? This is called the co-insurance requirement; read your policy
  • What does your insurance cover you for?
  • Do you have a property “named peril” or an “all-risk” policy? A Named Peril policy only provides coverage for the peril specifically named. An All Risk policy provides coverage for all losses not specifically excluded from coverage
  • If you do not have an All Risk policy, your fire policy might include “extended coverage”. Rev Shaw is an easy acronym to see what might be covered other than loss caused by a fire. R=Riot, E=explosion, V=Vehicle; S=smoke; H=hail; A=aircraft; W=Wind

Liability:

  • How do you determine the policy limit that you buy on your auto, homeowners, or Business Owners Policy? Do you buy the minimum limit or do you also have an Umbrella policy that responds in the event that a loss exceeds your primary limit?
  • In a Money magazine 2/5/14 article, Ed Charlebois of Travelers Insurance said “More than 80% of umbrella losses are auto-related,” If you remodel, does your general contractor make sure that the subcontractors are covered for worker’s compensation and general liability? Do you own a swimming pool, hot tub, or boat that increases your risk/exposure for a loss?
  • If you are a business owner, do your contracts require you to name others as an Additional Insured on your policy? Do you know that this means you are sharing your policy limit (s) with others? Is your defense coverage included in your policy limit?

Your insurance agent can help you review the type of coverage you buy. From a risk management perspective, insurance agents/brokers generally will not tell you how much insurance to buy; this increases their liability.  Likewise, I would not suggest limits either. I could, however, help you determine your exposed net worth and help you review how well you are covered from a property/casualty (liability) perspective.

Warren Buffet said, “Risk comes from not knowing what you are doing”.  Take the time to know and sleep well tonight.

Deb Fox is working to “make a difference in peoples lives, hearts, and wallets”. Although she earned her CPA designation in 1997, she is not currently practicing as a CPA. She does use her knowledge to help others protect their financial health and is available for side –by- side, remote, or mobile appointments.

Website: www.debfoxfinancial.com

E-mail: debfoxfinancial@gmail.com

Twitter: @debfoxfinancial

Where is “The Help?”

We have a need. We have a want. Where is The Help?

Where is the help if we want to talk to an affordable professional about our money?

The Need:

Many of us worry about our money situation because of consumer debt, student debt, limited savings, or the ability to retire.

We might worry, but talking about our money is not something we like to do. A recent survey by the National Foundation for Credit Counseling (NFCC) showed that we would rather tell people how much we weigh than the amount of our credit card debit or our FICO score. Many of us are embarrassed.

We might not want to talk about our money situation, but we also know that we could benefit if we did. We know what we don’t know or understand.  We might be comfortable not thinking about it, but this only allows anxiety to grow and does not change anything. A comfort zone can be a beautiful place to be, but nothing ever grows there.

The Want:

We all need and want financial stability.

We might know what to do with our money and just not do it. We know that we need to spend less than we make, but doing that is hard. It can also be hard to save and not spend. We have heard, pay your self first, but do we? We leave money on the table by not getting the full company match for our 401k plans at work.

Most of us were not taught how to manage our finances when we were in school.  We learned the hard way: through trial and error and through the “school of hard knocks”.

Increasingly, we want financial literacy taught in our schools. Students need to learn how to balance their bank account, manage debt, credit, and avoid financial traps.  In short, we want our children or the youth of our community to be better prepared than we were.

The Help:

Clearly, we have a need and a want. Where can we go for affordable help?

Historically, formal financial planning services were designed for and enjoyed by those who had large sums of money to protect. Comprehensive Financial Plans are expensive and time consuming to prepare. Financial Planning service firms may have provided this service at a nominal cost and made their money by selling insurance or investment products or by providing investment management services.  This works well for people who have plenty of money and the need for a comprehensive plan.

Where is the help for those that have less money?

Where is the help for those that do not yet need comprehensive financial plans, but have questions about their money?

Where is The Help for the:

  • Young Adult?
  • Young Career?
  • Young Family?
  • Families living paycheck to paycheck?
  • Working Poor?
  • Shrinking Middle Class?

Over the last few years, service providers have started to pop up. The marketplace had a void and some are stating to fill it, including me. I want to make financial planning, understanding, and capability more accessible for this underserved market for both individuals and small business owners.

For personal finance, maybe you would like to:

  • Talk about your money situation, evaluate, prioritize, act, and build confidence about your economic future?
  • Learn to use a systematic approach to evaluate a financial decision?
  • Have a mentor/friend to help empower you to become more accountable?

For the entrepreneur or small business owner, would you benefit by learning new business skills about:

  • Pro-Forma financials for your business plan?
  • Budgets and cash flow?
  • Tax planning?

For those that like to read and learn on your own, there are a lot of good resources out there to help you.  I have resources listed on my website at www.debfoxfinancial.com. I also blog, post frequently on my Facebook page and share information on Twitter.

Perhaps, you learn best by working “one on one” and would benefit by having the opportunity to ask financial questions and then work together, as a team, to learn, grow, and achieve your financial goals.

I believe that the scope of financial services should be broader than is currently available and want to use my expertise and experience to help others.  We could work together on one project, many projects, or perhaps, I can just be a resource for financial information?

Execution matters. I can help. It is important that you know that I would not tell you what to do.  I can be a financial compass and help you sort through choices and evaluate the potential costs and the benefits of the available options. You decide what is best for you.

I am a financial literacy advocate and want to provide affordable financial solutions by providing meaningful, actionable, advice. If you can afford a personal fitness trainer; you could afford “one on one” help from me.

Takeaways:

  • Decisions made today affect the options available to you in the future
  • What you do today with “Your Present Self” has a direct impact on “Your Future Self”
  • An investment in you today can result in a financially stronger you tomorrow
  • Financial strength brings more freedom of choice

“Tell me and I’ll forget. Teach me & I may remember. Involve me & I learn” – Benjamin Franklin

Deb Fox is working to “make a difference in peoples lives, hearts, and wallets”. Although she earned her CPA designation in 1997, she is not currently practicing as a CPA. She does use her knowledge to help others. She does not give investment advice; this is outside her areas of expertise. She can help with financial planning, tax, accounting, and commercial property and casualty insurance questions.

Website: www.debfoxfinancial.com

E-mail: debfoxfinancial@gmail.com

Twitter: @debfoxfinancial

 

Have you reviewed your legal business structure for tax savings and/or liability?

Tax Time is a great time to review your business financial life and determine if there are changes you can make to help you keep more of the money your earn in your pocket. One way to do this is to see if your legal business structure provides you the best opportunity for tax savings and/ or more limited liability.

In the U.S., there are four major legal choices to chose from when deciding how to operate your business: sole proprietorship, partnership, corporation, and the limited liability company. There are also variations within these categories, such as the S-corporation.

Making this decision is complicated and both an attorney and an accountant should be consulted to provide information to help you decide which form may be best for your business. Factors to consider include:

  • Legal Liability
  • Tax implications
  • Cost of formation and record keeping
  • Flexibility
  • Future needs

As someone with both an accounting and risk management background, I look at choices from both perspectives. The number side of me wants to find out if there is a way to save money. The risk management part of me wants to make sure we are protecting the money we have. The following business entity review focuses upon these two aspects.

Liability can arise from negligence, statutory law, and assumption by contract. The risk of potential liability varies by business entity form.

Sole Proprietor: Flying Solo

  • Taxpayer is the owner; the business is not separate
  • Unlimited exposure to liability
  • All debts or claims against the business can be filed against the owners’ personal property
  • If the owner is sued, insurance is the only form of protection
  • The business itself is not taxed separately; The IRS calls this “pass-through” taxation, because the business Profit and Loss passes through the business to be taxed on your personal tax return
  • Tax is based on your personal income level and is taxed at graduated rates
  • File your personal income tax on Federal Form 1040 and all business information on Schedule C or Schedule F, Profit or Loss from the business
  • Sole Proprietors must pay both the employer and the employee side of Social Security and Medicare taxes; this is called Self-Employment tax
  • Self-Employment tax is required if your annual net-earnings is more than $400
  • The self-employment tax rate for 2014 is 15.3% of the first $117,000 of income and 2.9% of everything above that amount
  • Self-Employment taxes are reported on Federal Form Schedule SE
  • Sole Proprietors can deduct ½ of this cost on 1040-Line 27, the deductible part of self-employment tax 

Partnership: Two or More

  • General Partnerships: Partners are exposed to unlimited liability for business expenses
  • Limited Partnerships: General Partner is personally liable; Limited Partners have limited liability unless they are participating in management
  • Depending on the form, Partners may lose their investment and/or personal assets as well
  • Partners are not employees and should not be issued a W-2
  • Partnerships file an annual information return on Federal Form 1065; Schedule K1 form is used for the individual member’s profit and loss allocations
  • Individual Partners file their personal tax information on Federal Form 1040 and Schedule E, Supplemental Income and Loss
  • Taxable at the personal income level and at the graduated rates
  • File Self-Employment tax on Schedule SE; see Sole Proprietor for additional information

C-Corporation: Double-Taxation applies

  • Separate legal entity that exists, separately and is distinct from its owners
  • Owners’ personal assets are protected from claims against the corporation
  • Generally, the owners of a corporation cannot lose any more than they have invested in the corporation
  • The corporation is taxed and can be held legally liable for its actions
  • Double-Taxation applies: the profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends
  • Owners do not pay tax on corporate earnings unless they receive money as compensation for services or as dividends
  • The corporation pays taxes on the annual net earnings and files Federal Form 1120
  • Corporate owners, who want to leave some profit in the business, may benefit from lower corporate rates
  • For example, 2013 corporate tax rates are 15% for taxable income below $50K, plus 25% for taxable income between $50K-$75K; perhaps, lower than individual rates
  • Corporate taxation is more complicated than the pass-through taxation
  • Self-Employment tax does not apply; FICA payroll taxes are shared 50/50 between the corporation and the employee

Limited Liability Company (LLC) – Single Member

  • An LLC is an entity created by state statute
  • LLCs are state entities, so the level of legal protection given to a company’s owners depends upon the rules of the state in which the LLC was formed
  • Tax reporting depends on the status of the LLC
  • Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return; i.e. a disregarded entity
  • An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes unless it files Form 8832 and elects to be treated as a corporation
  • If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return on Federal Form 1040 and Schedule C, Schedule E, or Schedule F
  • An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship
  • A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Federal Form 8832 and elects to be treated as a corporation
  • All income, gain, loss, and deduction flow through to members unless the LLC is taxed as C-Corp
  • No double taxation unless the LLC choses to file as a corporation
  • Taxable at the personal income level and at the graduated rates
  • Self-Employment Tax applies except if the LLC operates as C-Corp
  • File Self-Employment tax on Schedule SE; see Sole Proprietor for additional information

Subchapter S-Corporation (S-Corp): Double Taxation does not apply

  • Separate legal entity
  • Limited liability for shareholders, officers, and directors
  • Generally, a corporation’s shareholders are not personally liable for the corporations debts just because they have ownership in the business; the same is true for the members of an LLC
  • S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes
  • Generally, the S-Corp does not pay Income Tax at the Corporate level; they can be responsible for tax on certain built-in gains and passive income at the entity level
  • Self-Employment tax does not apply
  • Many small business owners use S-Corps because they can save a business owner Social Security and Medicare taxes
  • Owners receive a salary and normal payroll taxes apply
  • As an owner-employee, the corporation pays ½ of the payroll tax which can be a substantial tax savings to the owner-employee
  • An S corporation must pay reasonable employee compensation to a shareholder-employee in return for the services the employee provides before a distribution
  • File S-Corp informational return on Federal Form 1120-S
  • Income, gain, loss, and deduction is passed through to share holders
  • Shareholder-employees will receive two tax documents from the S-Corporation: a W-2 wage statement and a Schedule K-1 statement
  • Shareholders report the flow-through of income and losses on their personal tax returns; taxed are based upon the individual income tax rates
  • Double-Taxation does not apply
  • Shareholder-employees are taxed on their salary income and on any profits distributed by the S-Corporation
  • Profit distribution is not subject to FICA payroll taxes; salaries paid must be reasonable for services provided
  • Shareholder-Employees file Federal Form 1040 and Schedule E – Supplemental Income and Loss
  • Under California law, the S corporation is subject to a 1.5 percent tax on its net income
  • See if special tax rules apply in your state

Understandably, reading about tax implications and legal liability might seem a bit boring. Most would agree. Think about it this way:

  • Money saved is money you do not need to earn
  • Knowing you are protected is a good form of “sleep insurance”

Chinese Proverb: To open a shop is easy; to keep it open is an art.

Deb Fox can be reached via twitter @ debfoxfinancial or via e-mail @ debfoxfinancial@gmail.com.

http://www.debfoxfinancial.com/