Tax Tips for Independent Contactors & Sole Proprietors

 

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Tax Planning & What Money is Really Yours to Spend?

“In this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin

Death will only come once, while taxes linger with us year after year.

Many of us spend 2,000+ hours a year working to earn money. Doesn’t it make sense to spend a few hours to learn how to manage it, particularly, when it comes to tax, which is our most expensive lifetime expense?

This blog is offered as a tool to help Independent Contractors & Sole Proprietors avoid tax “surprises” and pro-actively plan their cash flow.

Why Read? Cash Flow – You need to know: What money is really yours to spend?

Many taxpayers were surprised earlier this year when they filed their 2015 tax returns. Why? They were not prepared for the tax affect of having earned what the IRS calls “non-employee compensation”.   For example, the 15.3% Self-Employment Tax was an unexpected hit to their cash flow.

Who should read? : (Independent Contractors including Direct Sellers, Freelancers, Airbnb Hosts, Uber & Lyft Drivers, Internet Sellers)

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, Profit or Loss from the business
  • Self-Employment tax is required if your annual net-earnings is more than $400
  • Net Earnings is determined by tracking both the revenue earned and the corresponding acceptable business expense

What to Do:

Self-Employment requires both basic accounting and additional tax reporting

Accounting:

Maintain a Basic Profit & Loss Statement to determine Net Earnings per Quarter

  • A Profit & Loss statement is needed to determine if you owe income tax and self employment tax
  • If expenses are less than income, the difference is Net Profit
  • If expenses are more than income, the difference is Net Loss
  • Losses may be limited on your tax return
  • Expense definition may differ for “books” and “tax”
  • Tax requires that certain expenses “be capitalized” and expensed over a period of time

Income includes:

IRS Form 1099-Miscellaneous (1099-M)- Income

The Gig Economy is also known as the 1099 Economy because Independent Contractors should receive this form from anyone that has paid them $600 or more during a tax year. The form is sent to both to you and to the IRS. This means, that yes, you need to report the income – even if you did not receive your 1099-M form or if you were paid less than $600 from a single source.

IRS Form 1099-K- shows Income you received through payment processing platforms

  • PayPal and other merchants that process payments for your business will issue this form to you & yes, the IRS
  • The form is issued in settlement of third-party payment network transactions above the minimum reporting thresholds of $20K in transactions and 200 transactions
  • The income reported is the Gross amount of all reportable transactions
  • The Gross amount does not include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts
  • The dollar amount of each transaction is determined on the date of the transaction
  • The 1099K only shows income paid to you; it does not include charge backs to your account or fees you paid
  • You are responsible for tracking your “income” – you certainly don’t want to pay tax on more than you actually received

Be aware that possible “double reporting” could occur – Reconcile to avoid  “overlap”:

  • Your clients could issue you a 1099-M and send a copy to the IRS
  • PayPal or another vendor could, theoretically, include this same income when they send you a 1099-K
  • Although it is not required, it is a good idea to at least review, if not reconcile, what is being reported as “income to you”
  • Consider creating a spreadsheet to Cross –Reference payments, for a 1099-M and 1099-K comparison

Business Expense:

1099 Income can be reduced by the related “ordinary and necessary” expense

  • Receipts and mileage logs must be maintained to support the deduction expense you claim on your tax forms
  • Mileage logs should include beginning and ending mileage, where you went, who you saw, and why you went (business purpose)
  • Receipts fade. Add notes in ink and then scan to preserve
  • Ordinary expense = Common or accepted in your trade or business
  • Necessary expense= Helpful or appropriate for your trade or business
  • The IRS code provides for allowable deductible expenses and the IRS can take the deductions away if records are not maintained

When: Tax Tips for Filing Requirements:

Federal, State, & Local Tax may need to be paid each Quarter

  • The IRS expects you to pay tax as the money is earned. If you operate on a calendar year, due dates are 4/15, 6/15, 9/15, and 1/15 for the previous year
  • Quarterly estimated tax payments should be paid if you expect to owe more than $1,000 in federal taxes
  • Use 1040ES- Individual Estimated Payments
  • Reconcile payments on your annual Year End tax return
  • File your federal return on Form 1040 and Schedule C- Profit or Loss from Business (Sole Proprietor)
  • Check to see what tax reporting is required by your state tax board and local municipality

Schedule C:

  • If you drive for Uber and also sell items on ETSY, a separate Schedule C is required for each source of business income.

Self-Employment tax of 15.30% is required on all Annual Net Earnings of more than $400

  • Sole Proprietors & Independent Contractors must pay both the employer and the employee side of Social Security and Medicare taxes; this is called Self-Employment tax
  • The 2015 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
  • 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

Tips for Financial Success:

  • Don’t Co-Mingle Personal & Business Money – keep separate accounts
  • Maintaining separate accounts helps to show your business intent of making a profit
  • Use tax planning for better cash flow management
  • Profitability is the goal for most small business and one great tool to get there is to use the tax laws that are designed to help your success

Action Steps:

  • Fine tune your DIY process and use the above information as a guide – schedule time to review financials and calendar dates for payments
  • If you want some help or prefer a “Do it for Me” process, contact me for an introductory special

Your Success matters to me.

My intent is to use my blog to educate and empower others by teaching tax rules to save you money.        Thanks for reading!

You either master money, or on some level, money Masters you” – Scot Alan Turner

Deborah Ann Fox, CPA is working to make a difference in peoples lives and wallets, by helping them build and protect their financial health. Her mission is to be an affordable & accessible resource to help answer money questions for individuals and small business. 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 

 

 

Starting Over – A Happy Tax Story

 

Red Crossed Bandaids

Zig Ziglar said, “We cannot start over, but we can begin now and make a new ending”.

The Problem:

A few years back, I had a contact call me in a panic after she had finished her initial attempt at preparing her own tax return. She owed almost $5,000 and was shocked that she owed that much money.   It was scary because she didn’t have the money to pay that kind of tax bill. She called me for help and advice.

The Beginning:

To put this into perspective, this was her 1st year to file Single.

Previously, her husband of almost 25 years had handled their tax returns. They had filed Married Filing Joint and had dependent children. At work, her tax withholding was based upon her previous situation, not her present circumstance.

Originally, she thought filing a tax return would be simple and at first, it seemed as if it was. TurboTax asked her questions and she completed the answers the best that she could.

The Middle:

After receiving her call, we agreed to meet and I reviewed what she had completed, but had not yet filed. After a good interview process, we had a game plan and she began to collect tax related documents that could be used to determine the feasibility of itemizing rather than to use the standard deduction.

The End:

After several weeks of back and forth questions and answers, I had the documentation that I needed to help her complete a revised return. This resulted in about a $3,900 savings and she thankfully, filed her federal and state tax returns.

The Zig Ziglar quote is great, but it did not fully apply in this situation. She could “start over” and could also make a new ending.

Since that time, we work together every year. We don’t just wait until the tax season to talk. We use tax planning and action during the year to manage her annual tax bill and to keep it as low as possible. Frequently she knows her current tax situation before 12/31. We don’t know the exact number, but she does have the comfort of “No Surprises” when the tax season officially arrives.

The Lessons:

  • Sometimes, a 2nd look can make a big difference
  • If the tax filing process is new to you, having someone help you, may prove to be beneficial
  • If you ask someone to help,  try to find someone that will take the time to educate you about the process.
  • It is empowering to learn and apply the tax rules; it saves you money 

Thanks for reading!

Deborah Ann Fox, CPA is working to make a difference in peoples lives and wallets, by helping them build and protect their financial health.

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 

“Money on the Table”- 2015 Year-End Tax Saving Strategies

Leaving “Money on the Table” is an idiom, which means not getting as much money as you could.

You can do this in a lot of different ways such as salary negotiations, selling low when you bought high, or by not using the IRS tax rules and planning opportunities and then leave your hard earned money “on the table”.

The IRS, literally, spells “theirs”. The money is theirs if you just wait until the tax- filing season comes, complete & submit your 1040 tax form and then pay the amount owed or get a refund.

As a CPA – Tax Advisor, I love learning the rules and then sharing information to help other people reduce their tax bills. It is my way to help empower other people and hopefully, make a small difference in their quality of life. Nobody likes paying taxes; almost all of us like to save money.

Yes, we need to pay our share, but we don’t need to pay more than we need to. The IRS also does not want us to pay more than we should. The rules are in place to help us pay less. It is our responsibility and our choice to use them or not. The IRS is not going to tell you, you could have paid less, if you had just (xxx). There are a lot of possible ways to “fill in the blank”. Each tax story is unique.

As an advocate for “not leaving money on the table”, I offer you some practical, actionable, steps to take now to see if you can reduce your 2015 tax bill, now, before it is too late.

Step One: Estimate your 2015 Income & IRS Withholding

If you want to want to make sure your money is more in “your pocket” than theirs:
• Determine how much you have earned this year
• Determine what you have paid toward your 2015 tax bill
• Then increase each of these amounts to estimate the year-end amounts

Step Two: Compare this year to last year:

Now that you have a glimpse of your 2015 tax situation, compare those numbers to those on your 2014 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:

Last year, Kiplinger’s 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 tools
• File a revised W-4 with your employer this year to change your tax withholdings; remember the goal is to break even

Step Three: Review 2015 & determine actionable steps

Shift “Income” to this year or to next year?

Consider if you can shift your 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 2016?
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 to 2016
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 2016:
• Postpone year-end charitable contributions, property tax payments, and medical & dental expense payments, to the extent you might get a deduction for such payments
• Postpone the sale of any loss-generating property

Step Four: 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 Individual 1040 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 2015 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 appointments. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com

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.

Part 2: Financial Success : Our Kids: Money, Its Value & Values

piggy

Teaching kids about money, its value, & values can be frequently connected to each other.

Kids learn when they are young that money is something we trade for something else.

Teaching kids “value” is also something we can introduce to them when they are young.

How many times as parents, have we heard, “Mom/Dad, will you buy this for me?” We tell them, no, but you can spend your own money to buy it and then they decide they don’t want it. As the parent, you might think, I sure am glad I did not spend my money on something they don’t really want. I know I did & was glad that I had responded the way that I had.

Yes, the kids thought they wanted “it” & they did, when they did not have to pay for it. The “value” changed when they needed to spend their own money. Kids begin to learn that “value is what we think something is worth”. If we buy it, they don’t have to think about it. If they buy it, the value or the cost becomes a reality. Kids can become “pretty tight fisted” when it comes to spending their own money & that is a good thing.

Indirectly, they are also learning “relative value”. Yes, I want that, but I want something else more. Slowly, they begin to learn delayed gratification, priorities, & the need to save their money for what they want or think they need.

Kids often think that they need a certain brand of clothes or perhaps shoes & there are a lot of reasons for them to think this way. As parents, we can choose to re-enforce this belief or use it as a springboard for education. Yes, they might need a new pair of jeans or shoes, but you could set a dollar limit on what they can spend. If you want to spend $60 for that item & they want something more expensive, tell them they can earn the difference & you will give them the $60 when they have enough money to pay for it, Until then, they wait or can have the $60 item.

Teach your kids to count & also teach them what counts
• Tell your kids that advertisements are designed to try to get people to buy things
• Educate them that retailers place “impulse items” at the check out in the hope that you will decide to buy it while you were waiting in line
• Teach them to comparison shop: buy the store brand or the name brand? What is the difference in cost? Let them know that sometimes you can taste the difference, but most of the time you cannot. Why spend more money on something you can’t even taste?

Perspective on our possessions can help us learn about value as we develop our values:
• When my son, Jason, was in 9th grade he tutored Hispanic children in the Colonia’s outside of McAllen, TX. Most of the children’s parents only spoke Spanish & lacked education to help their children with their homework. Jason tutored one day a week for the school year & grew to be more thankful for what he had. After his 1st visit, he told me he was glad to even have a pair of shoes. Serving others that had so much less, made his heart more sensitive to other people – less judgmental, more caring. Of course a boy is not going to tell you that, but I could see it in his actions. For example, when he was older, he & a friend bought pizzas & served them to the homeless, who were living under the bridges in Houston.
• Learning to appreciate what we have helps us value our possessions; it subtly teaches perspective & gratitude

Build their self-esteem. Become an advocate & a role model to show them “who you are is more important than what you own”
• Share good examples of living “beneath your means” – tell them Warren Buffet is one of the richest people in the world & he is well known for being “frugal” with his money
• Tell them that even though Warren is worth billions, he still lives in the same house he bought before he had very much money
• Let them know there is a big difference between what you make, what you have, & what you keep
• To have money, we need to learn how to earn it, how to spend it, how to keep it, and how we try to make more money by saving & investing

    Marty Rubin said, “A scale can tell what a body weighs, but not its value.” Like wise, our value comes from within – not outside of ourselves.

Thanks for reading,
Deb

Deborah Ann Fox, CPA uses her “money” knowledge to help families & small business with budgeting, homeownership/debt, tax planning (saving), cash management, etc. She is available for side-by-side, local, & remote appointments. She offers free 30-minute consultations.

http://www.debfoxfinancial.com