Archives for IRS

small business taz

How to Register Your Small Business for Tax?

If you recently started a small business, or your looking to do so, tax is an important subject that you simply can’t ignore. You must know how to register your small business for tax, or whether tax registration is even necessary in for your business.

A lot of small business owners feel intimidated by tax rules, so much so that it might deter some people from starting a business altogether. The idea of an already unstable income combined with uncertainty on how to fulfil tax obligations is a major sore point.

Don’t let the fear of tax get in your way of achieving something great. Tax can seem daunting, but it doesn’t have to be. There are a few simple ways in which you can make sure that your business is paying tax the right way. One of the first ways to start, is to register your business for tax in a way that suits your industry.

Does My Small Business Need to Pay Tax?

Paying tax won’t be an issue if your business doesn’t need to, so asking the question of whether you need to pay tax is a logical place to start. Unfortunately, no profitable small business is normally small enough to qualify for tax exemption.

Very few people expect a child running a lemonade stand to pay tax on their earnings. Realistically, these earnings are too small to amount to anything significant. Similarly, if someone bakes cookies and sells them from home, it may be more of a hobby than a serious business venture, and this is likely to reflect in the earnings.

You’ll know if your small business is more of a hobby than anything else. If you’re a hobbyist, chances you’ll end up spending all your earnings to support your hobby, meaning you won’t truly have a profit, so you’re not running a business, as all your earnings go back into your hobby rather than to contribute to your personal expenses.

It should be noted that the gap for earning without being liable to pay taxes is very narrow. Even if you’re working alone without any employees as a sole proprietorship, your earnings are be taxable. This is especially true if you’re a freelancer, contractor or any other kind of service provider and you earn most of your income through your business.

If your earnings are substantial enough that you can buy groceries, pay rent or afford to cover any of your personal expenses with your business earnings, you should consider yourself to be a small business owner, which means your business is tax liable.

Different Ways to Register Your Small Business for Tax

How you pay small business tax will depend on how you registered your business with the IRS. If you’re still in the process of starting your business, here are the different ways you can register:

  • Sole proprietorship: This is the simplest business structure. It’s easy to start, seeing as you don’t need any formal registration to run your business as a sole proprietor. As a sole proprietor, you’ll be entitled to all of your business earnings, with no legal distinction between yourself and your business. The benefit of running a sole proprietorship is that it’s simple and easy, the disadvantage is that you’ll also be liable for any debt incurred by your business, meaning your personal assets are at risk.
  • Partnership: Where two or more persons decided to start a business venture together, a business is considered to be a partnership. Depending on how a partnership is registered, business partners (like sole proprietors) can be responsible for all business losses, placing their personal assets at risk. This is known as a general partnership.
  • Limited liability company (LLC): Registering an LLC is a good option for many different business owners. The main benefit of an LLC is that the business owners or any shareholders aren’t liable for business debts or legal fees incurred, protecting personal assets. Additionally, business owners have the choice whether their LLC company should be taxed as a personal proprietor, partnership, S-corporation or C-corporation.
  • Corporation: Corporations are owned by stockholders and require a set structure. Corporations can fall in either one of two categories – S or C-corporations. It’s unlikely that you’ll register your new small business as a corporation, seeing as stockholders are required to elect a board of directors for a corporation. Although some small business owners register as the sole stockholder and appoint themselves as the a single-person board of directors, this business model doesn’t lend itself well to most small businesses that are just starting out.

As mentioned above, there are different ways in which you can register an LLC for tax. While registering an LLC to be taxed as a sole proprietorship or partnership won’t change the tax rules that your business falls under, there are two unique corporate tax regimes for LLC companies. Here’s some more information about registering your business as an S or C-corporation.

  • S-corporation: With the S-corporation model, the business entity pays no income tax. Instead, the tax liability of the business tax is distributed to the S shareholders on a personal income tax level. To qualify as an S-corporation, a business must be a domestic corporation (i.e. not foreign) and have no more than 100 shareholders. Additionally, an S-corporation may only have 1 class of shares. Certain businesses, such as financial corporations, are ineligible to be registered as S-corporations.
  • C-corporation: Unlike an S-corporation, C-corporations are taxed independently of their business owners. With a C-corporation, there’s no limit with regards to how many shareholders a company may have. Furthermore, rules regarding foreign shareholders are more relaxed. Because of this, most major corporate companies are taxed as C-corporations

For most new businesses, sole proprietorship is the most popular choice. It’s easy and doesn’t require any upfront investment in terms of registering your business. Once your business expands, however, registering it as an LLC to be taxed as sole proprietorship can be a good way to protect your personal assets.

Tax Rates for Different Small Businesses

Your taxable income will differ depending on how your business is registered for tax. Here are the business tax rates:

  • Sole proprietorships pay a 13.3% tax rate
  • Partnerships pay a 23.6% tax rate
  • S-Corporation pay a 26.9% tax rate
  • C-corporations pay a 17.5% tax rate

Keep in mind that for these tax rates to apply, your business must fall within the guidelines of a small business in your industry. For new businesses, this usually isn’t a problem. Most freelancers, contractors or even healthcare professionals with a healthcare practice quite easily fall into the specifications set for small businesses. Similarly, small building contract firms, plumbers or other service providers are usually eligible to qualify for small business tax rates.

Different Kinds of Small Business Taxes

Although it can be tempting to register your business as a sole proprietorship simply to take advantage of the 13.3% tax rate, there are other taxes that small business owners must pay, which can complicate your choice.

Depending on your business model, there are different kinds of tax you might have to pay such as:

  • Income tax
  • Employment/Payroll tax
  • Self-employment tax
  • Excise tax
  • Sales tax
  • Property tax

While all businesses are required to pay some form income tax, you won’t be liable to employment tax if you have no employees, not would you need to pay excise tax if you don’t sell eligible products such as cigarettes or liquor.

If you register your business as a sole proprietorship, you’ll usually have to pay self-employment tax. Self-employment tax covers tax expenses that are normally at least partially covered by your employer, such as Social Security and Medicare. You are liable to pay self-employment taxes if you’re self-employed and your net earnings in the past year were at least $400.

How to Pay Small Business Tax for the first time?

Whether you’re starting a new business, or you already have a young startup and you need to pay tax for the first time, consulting an accountant is the best way to help you stay on track with your tax obligations.

Although owning a sole proprietorship can simplify your taxes, there are various reasons why getting an accountant is still the best choice, especially when you’re just starting out.

Firstly, you may choose to register your business under a different tax regime than sole proprietorship, which can complicate your taxes. Even if you register as a partnership, tax rules can become daunting.

Secondly, your first year or two of business will be a busy time. You’ll need to learn a lot about your industry to succeed. You’re unlikely to have enough time to learn enough about filing your small business tax correctly, which could place you at risk for penalties for late payments and other mistakes.

Most importantly, consulting an accountant is a great way to get professional, trustworthy advice on how you should register your business for tax, giving you a head start on your small business tax.

Read more
tax-reform-2019

Tax Reform Changes and How They Affect Your Tax Return

Tax is a necessary but unpopular subject for most people. While most people are more than willing to pay tax, the tax system can seem daunting and hard to navigate, especially since it’s always changing. Just when you think you’re in the swing of things, the tax rules change again.

The 2018 tax reform bill, instituted by President Trump, was passed all the way back in late 2017. This new bill is called The Tax Cuts and Jobs Act, and under it many new rules will apply this tax season.

Although the bill was passed in late 2017, you’ll only see the effects of it in your income tax by this year. Overall the bill is meant to simplify and lower the tax you pay – of course, the efficacy of the bill in lowering your personal income taxes will, among other things, be determined by whether you know how the new system works to take advantage of the changes.

With income tax season upon us, learning about the recent tax changes is going to be an essential part of getting your tax done this year. Here’s what you’ll need to know to file your taxes in 2019.

Standard vs Itemized Deductions New Rules

In the past, itemized deductions were often the best way to go if you didn’t want to overpay on tax. However, in 2019 this probably won’t be the case. That’s because the amount for standard tax deductions is now approximately twice as much as it used to be.

If you’re a little confused as to what this means for you, let’s take a step back to distinguish between standard and itemized tax deductions.

Standard and itemized deductions are two different options that allow tax payers to reduce their amount of taxable income. As an overly basic example, if someone earns $24,000 annually and they are eligible for a tax deduction of $4000, they’re taxable income would be $20,000. So instead of being taxed on all their income, they’re being taxed as follows:

annual income – tax deduction = annual taxable income

There are two different ways in which tax payers can determine what tax deduction they’re eligible for:

  • Standard tax deductions
  • Itemized tax deductions

Standard tax deductions, as the name implies, is a standard or fixed amount that can be subtracted from your annual income to determine your taxable income. This amount is set by the government and will apply to every tax payer who chooses to make use of standard tax deductions.

The benefit of going with standard tax deductions is that it’s simple, less time-consuming and generally just a lot easier than itemized deductions. Although in some cases, especially before 2019, there was a good chance choosing standard tax deductions also meant you’d end up with a smaller tax deduction. This lead to a higher taxable income – so in the end, you’d be paying more tax.

Unlike standard tax deductions, itemized deductions can differ completely from one tax payer to another. Instead of paying a standard amount, you’ll need to keep track of all your tax deductible expenses in order to list them when you file your tax. If your tax deductible expenses add up to more than the standard tax deduction amount, then putting in the extra bookkeeping effort and tracking your tax deductible expenses will be well worthwhile.

Last year, approximately 70% of tax payers took the standard deduction route. This could be because tax payers found that the standard tax deduction allowed them to pay less tax. But it could also be an indication that most tax payers don’t want to keep track of tax deductible expenses.

The good news is that the 2019 Tax Reform Law will make it much less likely that tax payers will benefit from choosing to file tax with itemized deductions. This is because the standard tax deduction has been bumped up quite a bit. For comparison, here’s how much standard tax deductions have increased since 2017:

  • For single filers the standard deduction goes from $6350 to $12,000
  • For married couples filing jointly, the standard tax deduction goes up to $24,000 from $12,700 in previous years
  • If you’re 65 or older, you can expect to add another $1300-$1600 onto your standard deduction, depending on whether you’re married
  • For heads of households, the standard tax deduction is now $18,000

But while standard deductions have gone up, itemized deductions have gone down. This is because many expenses that were previously tax deductible are now limited for deductions.

Most notably, state and local taxes (called SALT for short) were seen as a tax deductible expense with no limit. This meant filers paying high taxes in their local state could file all of the taxes paid in the state or area where they lived as a tax deductible expense. Under the new tax rules, there’s a cap as to how much state and local taxes will be deductible, and that number is sitting on $10,000. Some examples of SALT taxes include:

  • Property tax
  • Local income tax
  • Sales tax

The states that will be hit most hard by this new change will be the high tax states such as California, New Jersey, New York and Maryland. Florida, along a few other states, doesn’t currently have state taxes, so this change currently isn’t relevant locally. Many other states have some state-specific income tax, but this is limited to dividends and income from investments.

Lower Tax Across All Income Tax Brackets

The new tax bill will also reduce the percentage of tax all tax payers across different income brackets will need to pay.  Many tax payers have already seen the change resulting from the lower tax to their monthly salaries, as a lower percentage of income is now deductible.

For the highest earners, 39.6% of income was deductible in previous years, whereas this year that number has reduced to 37%. Here’s how taxes are now reduced based on annual income:

  • Single filers earning between $38,701 and $82,500 will pay will go down 3%
  • Married tax payers filing jointly who earn between $77,401 and $165,000 also drops by 3%

Generally, this will lead to lower taxes for most households. However, it should be noted that you can no longer get personal exemptions, which could negatively affect some households.

Increase in Child Tax Credit

Child tax credit has been bumped up from $1000 to $2000 per qualifying child under the age of 17. Tax payers with higher incomes will now also be eligible for child tax credit.

Another benefit of the new tax bill is that tax payers will also be eligible for $500 tax credit for very other dependent they support. These dependents could include children over the age of 17, parents, siblings or even distant relatives. This will help tax payers who are supporting a large number of dependents to save quite a reasonable amount of tax.

Some other notable changes of the 2019 tax reform is a drop in corporate tax from 35% to 21%. Another change is that medical expenses will only be deductible if they exceed 7.5% of a tax payer’s adjusted gross income.

Get Professional Tax Advice

Navigating taxes for yourself and your business can be a difficult task. The current tax reform will be in practice from its inception in 2017 up until approximately 2025 for income tax. After this, the future of income tax is still uncertain, but there’s good possibility that things will change again.

If you’re a business owner, focusing on tax could cost you precious time you could be spending to build your business. Making use a professional accountant or bookkeeping firm can save you money, hassle and time on doing your tax, allowing you to focus on growing your business and income. Call Choice Accounting Solutions to learn more about how we can help you stay current with all your tax, without the need for you to waste time learning about new changes every tax season.

Read more

Four Reasons Tax Season Doesn’t End in April for Small Businesses

It is a common misconception that tax season hits a small business owner one time a year. In fact, the small business owner is being periodically taxed, which makes it important to stay on top of the deadlines to avoid unnecessary fines. If you are living in the Miami area, it is recommended to get in touch with a company that performs bookkeeping services in Miami in order to ensure that you are complying with the proper deadlines. According to Miami bookkeeping, here are four reasons that the tax season does not end in April for small businesses:

1. Estimated Tax Payments. If a small business is paying a quarter of what they owe, they usually break up their balance into estimated tax payments that may be made quarterly. If your business has decided to do this, then it is imperative that you stay on top of the deadlines.

2. Payroll Taxes. Payroll taxes are something that needs to be paid quarterly as well. Many businesses are unaware of this fact and it causes many misunderstandings when they are billed for their taxes many times per year.

3. Sales Taxes. Sales taxes for any prospective sale made also need to be paid by small businesses. By staying on top of this, small businesses owners can rest assured that they will not be penalized.

4. Property Taxes. If your business owns an office space, be prepared to pay the relevant property taxes. This is a common misconception that many people are unaware of and need to factor into their taxation calculations.

The reality is, a small business owner is being taxed year round. The important thing to remember is that you should have a calendar setup so that you are not missing any essential deadlines. By doing this, you will be able to avoid any unnecessary fines and stay in the good graces of the IRS.

Read more

Two Smart Ways to Deal With an IRS Audit

Being selected for an IRS audit is never an activity that a business owner or individual looks forward to. The key to mitigating an unfortunate situation such as this is to be prepared to deal with the audit so that it can pass and you can move on. If you live in the Miami area, it is highly recommended that you consider consulting with a company that provides bookkeeping services in Miami. According to Miami bookkeeping, here are two smart ways to deal with an IRS audit:

1. Hire a Professional. If you are being audited and there is a great deal of capital at stake, then it is best that you hire a professional bookkeeper for advice. This will mitigate your risk a great deal and assist you in avoiding common IRS traps that could cost you a great deal of money in the long run.

2. Be Forthcoming. One of the important things to remember is that honesty is the best policy. This principle also applies to your IRS audit. If you try to hide your financial information, the IRS is going to find it. Additionally, they are going to charge you double if not triple what you previously owed in penalty fees. Additionally, they can also give you jail time in certain circumstances. Thus, it is likely best that you consider being entirely forthcoming, paying your obligations, and moving on. This will likely produce the best income for your personal or business finances.

When faced with an IRS audit, it is imperative that you are forthcoming from the start and face the audit you are dealing with. Many individuals and business owners fail to do this and end up paying more as a result. If you are able to do this, you will avoid many pitfalls that are commonly faced with IRS audits and be able to move forward with your personal or business finances.

Read more

Two Tips for Dealing with an IRS Audit

Given that tax season is upon us, it is always a great fear to both consumers and businesses that they will face an audit from the IRS. If you are living in the Miami area, it is wise to consult bookkeeping services in Miami to ensure that you are covered. Miami bookkeeping will allow you to navigate your tax return in a way that you will be prepared for an IRS audit. Consider these two tips in the event that you are faced with an IRS audit:

Keep All Of Your Credit Card Receipts And Product Purchase Invoices.

It is important to have paperwork or digital files to show the IRS in order to prove your innocence. Without these records, you will have to pay a great deal of fines because you will not be able to show that you complied with the tax code. Keep these records in an organized and safe place in order to avoid headaches later on.

Hire An Assistant For Your Audit.

If you are in the position that the IRS is knocking on your door, it is best to hire someone to go through your case who has your interests at heart. This way, you can be briefed and prepared for any questions or documents that the IRS may request from you.

If you are faced with an IRS audit it is important to not panic. Many times, they are just completed at random. That being said, if you have been dishonest, be prepared to pay the consequences. The important thing to remember in these cases is that honesty is the best policy in order to save you many fees and problems down the road. Additionally, by seeking assistance with your case, you will have far less to worry about as you go through your IRS audit.

Read more