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Six Tips for Starting Your Own Business
Starting your own business can be an exciting prospect, but there is more to it than simply writing a business plan. Also, if you expect to have employees, there are a variety of federal and state forms and applications that you need to complete to get your business up and running. That's where a tax professional can help. With this in mind, let's take a look at what you need to know before you start a new business.
1. Business Entity
The first decision you need to make is determining which business entity you will use because the type of business structure you choose determines what taxes you need to pay and how to pay them, as well as which income tax return you file. The most common types of business entities are:
- Sole proprietorship - An unincorporated business owned by an individual. There's no distinction between the taxpayer and their business.
- Partnership - An unincorporated business with ownership shared between two or more people.
- Corporation - Also known as a C corporation. It's a separate entity owned by shareholders.
- S Corporation - A corporation that elects to pass corporate income, losses, deductions and credits through to the shareholders.
- Limited Liability Company - A business structure allowed by state statute.
2. Employer Identification Number (EIN)
Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing you must do since many other forms require it. The IRS issues EINs to employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates, government agencies, certain individuals, and other business entities for tax filing and reporting purposes.
An EIN is used to identify a business. Most businesses need one of these numbers. A business with an EIN needs to keep the business mailing address, location, and responsible party up to date. IRS regulations require EIN holders to report changes in the responsible party within 60 days. They do this by completing Form 8822-B, Change of Address or Responsible Party, and mailing it to the address on the form.
Even if you already have an EIN as a sole proprietor, for example, if you start a new business with a different business entity, you will need to apply for a new EIN.
The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks, and you can apply for one EIN per day. There is no cost to apply.
3. Choosing a Tax Year
A tax year is defined as an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either calendar year or fiscal year defined as follows:
- Calendar year. 12 consecutive months beginning January 1 and ending December 31.
- Fiscal year. 12 consecutive months ending on the last day of any month except December.
4. State Withholding, Unemployment, Sales, and other Business Taxes
Once you have your EIN, you need to fill out forms to establish an account with the state for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable). Business taxes include income tax, self-employment tax, employment tax, and excise tax. Generally, the type of tax your business pays depends on the type of business structure. Keep in mind that you may also need to make estimated tax payments.
5. Payroll Record Keeping
Payroll reporting and recordkeeping can be very time-consuming and costly. Also, keep in mind that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee's employment application as well as the following:
- Form W-4, Employee's Withholding Allowance Certificate. Completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as the employee's address and Social Security number.
- Form I-9, Employment Eligibility Verification U.S. Citizenship and Immigration Services . This form verifies that an employee is legally permitted to work in the U.S.
6. Employee Healthcare
As an employer with employees, you may have certain healthcare requirements you need to comply with as well. If so, you should know about the Small Business Health Care Tax Credit, which helps small businesses (fewer than 25 employees who work full-time, or a combination of full-time and part-time) pay for health care coverage they offer their employees. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities. It is available to eligible employers for two consecutive taxable years.
If you have any questions or need help setting up a payroll and accounting system for your new business, help is just a phone call away.
Tax Treatment of Virtual Currency Transactions
Whether you've invested in Bitcoin and sold it at a profit or loss or received it for services performed, you'll need to report it on your tax return. Here's what you should know:
Prior to 2014, there was no IRS guidance and many people did not understand that selling virtual currency was a reportable transaction. They may have found themselves with a hefty tax bill -- money they were hard-pressed to come up with at tax time. Others were unaware that they needed to report their transactions at all or failed to do so because it seemed too complicated.
In October 2019, the IRS expanded their guidance to include two additional pieces of information that help taxpayers understand their reporting and tax obligations concerning their virtual currency transactions. This expanded guidance included answers to common questions regarding the tax treatment of a cryptocurrency hard fork and a set of FAQs that addressed virtual currency transactions for those who hold virtual currency as a capital asset.
More recently, taxpayers may have noticed a checkbox at the top of Form 1040, Schedule 1, Additional Income and Adjustments to Income when preparing their 2019 tax return. Looking ahead, taxpayers should look for a cryptocurrency question on the front page of their 2020 Form 1040.
Virtual Currency - a digital representation of value, other than a representation of the U.S. dollar or foreign currency ("real currency"), that functions as a unit of account, a store of value, and a medium of exchange.
Cryptocurrency - a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.
Hard Fork - when a single cryptocurrency splits in two. This may result in the creation of a new cryptocurrency on a new distributed ledger such as blockchain in addition to the legacy cryptocurrency on the legacy distributed ledger (e.g., blockchain).
Virtual Currency Taxed as Property
Virtual currency, as generally defined, functions in the same manner as a country's traditional currency. An IRS memorandum issued in August 2020, reiterated that convertible virtual currency is "property" for federal tax purposes and that its receipt in exchange for performing services is considered gross income including receiving convertible virtual currency in exchange for performing a microtask through a crowdsourcing platform in exchange for performing a service.
The same general tax principles that apply to property transactions also apply to transactions using virtual currency such as:
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
- Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply. Normally, payers must issue Form 1099-MISC.
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
- Certain third parties who settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers are required to report payments to those merchants on Form 1099-K, Payment Card and Third-Party Network Transactions.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
What to Do if You Failed to Report Virtual Currency Transactions
The good news is that if you failed to report income from virtual currency transactions on your income tax return, it's not too late. Even though the due date for filing your income tax return has passed, taxpayers can still report income by filing Form 1040X, Amended U.S. Individual Income Tax Return within 3 years after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. For tax year 2019, taxpayers may file an electronic Form 1040-X.
Taxpayers should also be aware that forgetting, not knowing, or generally pleading ignorance about reporting income from these types of transactions on your tax return is not viewed favorably by the IRS. Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest.
Taxpayers who do not report transactions involving virtual currency or who reported them incorrectly may, when appropriate, be liable for tax, penalties, and interest. In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.
Help is Just a Phone Call Away
If you have any questions about virtual currency and your taxes, don't hesitate to contact the office.
Taking Early Withdrawals From Retirement Accounts
While taking money out of a retirement fund before age 59 1/2 is usually not recommended, in certain cases, it may be unavoidable, especially during times of economic crisis. If you need cash and have a retirement fund you can tap, here's what you need to know.
When retirement plans such as the 401(k) were introduced, company pensions were still the norm. Today, however, very few companies offer pensions anymore and most people rely entirely on social security and whatever savings they've accumulated in their retirement account to get them through their golden years.
For many people, retirement accounts are their most significant source of cash, but because they were created to help you save money for your retirement years, withdrawals before retirement age (59 1/2) are discouraged. In fact, early withdrawals from traditional and Roth IRAs are subject to an additional 10 percent tax, unless an exception applies. Exceptions to the additional 10 percent tax apply for early distributions include the following:
- Beneficiary or estate on account of the IRA owner's death
- Totally and permanently disabled
- Distributions made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
- Qualified first-time homebuyer
- Qualified expenses for higher education
- Medical insurance premiums paid while unemployed
- Unreimbursed medical expenses that are not more than a certain percentage of your adjusted gross income
- Distributions due to an IRS levy of the IRA under section 6331 of the Code
- A qualified reservist distribution, or
- A qualified disaster distribution (certain rules apply)
Relief Under the CARES Act of 2020
Due to the coronavirus pandemic, there is additional relief for taxpayers experiencing economic hardships. The Coronavirus Aid, Relief, and Economic Security (CARES) Act helps eligible taxpayers in need by providing favorable tax treatment for withdrawals from retirement plans and IRAs and allowing certain retirement plans to offer expanded loan options.
Coronavirus-related withdrawals or loans can only be made to an individual (or the individual's spouse) if they are diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention or a test authorized under the Federal Food, Drug, and Cosmetics Act.
The individual must also experience adverse financial consequences as a result of the following conditions:
Quarantine. The individual, individual's spouse or a member of the individual's household (someone who shares the principal residence) is quarantined, furloughed, laid off, has work hours reduced, is unable to work due to lack of childcare, has a reduction in pay (or self-employment income), or has a job offer rescinded or start date for a job delayed, due to COVID-19.
Business closures or reduced hours. Closing or reducing hours of a business owned or operated by the individual, the individual's spouse, or a member of the individual's household, due to COVID-19.
Coronavirus-related Withdrawals from Retirement Accounts
Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before Dec. 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans, and others.
Coronavirus-related Loans from Retirement Accounts
Loans are not available from an IRA. Individuals who were eligible to take coronavirus-related withdrawals until September 22, 2020, were able to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan if their plan allows.
For eligible individuals, plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before January 1, 2021. A suspended loan is subject to interest during the suspension period, and the term of the loan may be extended to account for the suspension period. Taxpayers should check with their plan administrator to see if their plan offers these expanded loan options and for more details about these options.
Tax Treatment of Coronavirus-related Withdrawals
The distributions generally are included in income ratably over a three-year period, starting with the year in which you receive your distribution. For example, if you receive a $12,000 coronavirus-related distribution in 2020, you would report $4,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.
In summary, coronavirus-related distributions:
- May be included in taxable income either over a three-year period (one-third each year) or in the year taken, at the individual's option.
- Are not subject to the 10 percent additional tax on early distributions that would otherwise apply to most withdrawals before age 59 1/2,
- Are not subject to mandatory tax withholding, and
- May be repaid to an IRA or workplace retirement plan within three years.
Before withdrawing funds from a retirement account please call the office and speak to a tax professional. While you may be able to minimize or avoid the 10 percent penalty tax using one of the exceptions listed above including those under the Cares Act, remember that you are still liable for any regular income tax that's owed on the funds that you've withdrawn and you may be liable for more tax than you anticipated when filing future tax returns.
Choosing a Retirement Destination: Tax Considerations
With health care, housing, food, and transportation costs increasing every year, many retirees on fixed incomes wonder how they can stretch their dollars even further. One solution is to move to another state where income taxes are lower than the one in which they currently reside.
While federal tax rates are the same in every state, retirees may find that even if they move to a state with no income tax, there may be additional taxes they're liable for including sales taxes, excise taxes, inheritance, and estate taxes, income taxes, intangible taxes, and property taxes. Retirement benefits are also treated differently in every state and many retirees also have additional income from a job.
Even if you're not retired yet, if you are working remotely due to COVID-19 and are close to retirement age you may also be considering whether to make a move right now.
If you move to a different state but are still working for an employer in the state you formerly resided in, you will be subject to income tax in that state (as a nonresident) because your employer is located there.
If you're thinking about making a move to another state, here are six things to keep in mind:
1. Income Tax Rates
Retirees planning to work part-time in addition to receiving retirement benefits should keep in mind that those earnings may be subject to state tax in certain states, as well as federal income tax if your combined income (individual) is more than $25,000. Combined income is defined as your adjusted gross income + nontaxable interest plus 1/2 of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you see this scenario in your future, it may be in your best interest to consider a state with low income tax rates (Pennsylvania, Arizona, or New Mexico for instance) or no income tax such as Florida, Nevada, Alaska, Washington state, or Wyoming.
2. Income Tax on Retirement Income
Retirement typically income includes social security payments, retirement plan distributions, and income from pension plans. Income tax rates for Social security payments and income from retirement plans and pensions vary for each state. Some states do not tax this income at all, while in other states, a portion of pension income is exempt, while other states tax pension income in its entirety. State tax laws, like federal tax laws, are always changing. Please call if you have any questions about tax law changes in your state
Even if you live in a high-tax state, many offer significant tax benefits for senior citizens.
3. Tax on Social Security
In 2020, thirteen states tax Social Security income in addition to taxing social security income at the federal level; however, there may be exceptions depending on age or income level. Some states treat the taxation of social security benefits the same as federal taxation. Moving to a state that doesn't tax Social Security is tempting, but keep in mind that tax rates on Social Security payments are just one factor to consider.
4. State and Local Property Taxes
Despite a decline in property values, property taxes have not decreased for most homeowners. Some states, however, offer property tax exemptions to retirees who are homeowners and renters. Again, this varies by individual state.
5. State and Local Sales Taxes
State and local sales taxes may or may not be a factor in the overall decision about where you decide to retire, but keep in mind that only five states, Alaska, Delaware, Montana, New Hampshire, and Oregon, do not impose any sales or use tax.
6. Estate Taxes
Estate tax may or may not matter, depending on your estate and whether you care about what happens to your estate after you die. Like other state taxes, estate tax varies depending on which state in which you reside. In some states, there is a tax on estates below the federal threshold amount ($11.58 million in 2020). Many states have no estate tax whatsoever, including North Carolina, Delaware, Florida, Kansas, Oklahoma, and Arizona.
The Bottom Line
When it comes to retirees, relocating, and taxes, there are several factors to consider - including the overall tax burden. As you've read here, not all states are created equal. If you're thinking about retiring to another state, please contact the office and make an appointment with a tax professional who will help you figure out which state fits your particular circumstances.
Health Coverage Terms Employers Should Know
Under the Affordable Care Act, certain employers - known as applicable large employers - are subject to the employer shared responsibility provisions. You might be thinking about these topics as you make plans about 2021 health coverage for your employees.
If you are an employer that is subject to the employer shared responsibility provisions, you may choose either to offer affordable minimum essential coverage that provides minimum value to your full-time employees and their dependents or to potentially owe an employer shared responsibility payment to the IRS.
Here are definitions of key terms related to health coverage you might offer to employees:
Affordable coverage: If the lowest cost self-only health plan is 9.5 percent or less of your full-time employee's household income, then the coverage is considered affordable. Because you likely will not know your employee's household income, for purposes of the employer shared responsibility provisions, you can determine whether you offered affordable coverage under various safe harbors based on information available to you as the employer.
Minimum essential coverage: For purposes of reporting by applicable large employers, minimum essential coverage means coverage under an employer-sponsored plan. It does not include fixed indemnity coverage, life insurance, or dental or vision coverage.
Minimum value coverage: An employer-sponsored plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan.
Please call if you have any questions or need more information about the employer shared responsibility provisions.
Final Regulations for 100 Percent Bonus Depreciation
Final regulations have been issued by the Treasury Department and the Internal Revenue Service implementing the 100% additional first-year depreciation deduction that allows businesses to write off the cost of most depreciable business assets in the year they are placed in service by the business.
The 100% additional first-year depreciation deduction was created in 2017 by the Tax Cuts and Jobs Act and generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances, and furniture generally qualify. While the bonus depreciation has been around for a while, the TCJA amended it to include certain used depreciable property and certain film, TV, or live theatrical productions and increased the first-year depreciation deduction to 100 percent (up from 50 percent).
The deduction applies to qualifying property (including used property) acquired and placed in service after September 27, 2017. The final regulations provide clarifying guidance on the requirements that must be met for property to qualify for the deduction, including used property.
Additionally, the final regulations provide rules for consolidated groups and rules for components acquired or self-constructed after September 27, 2017, for larger self-constructed property on which production began before September 28, 2017.
To claim the deduction, taxpayers should use Form 4562, Depreciation and Amortization (Including Information on Listed Property). For more information about this and other TCJA provisions, please call.
Avoid Refund Delays by Renewing Expiring ITINs Now
People who are not eligible for a Social Security number must use individual taxpayer identification numbers (ITINs) if they have tax filing or payment obligations under U.S. law. Periodically and under certain circumstances, these ITINs expire and should be renewed as soon as possible to avoid unnecessary delays related to tax refunds next year.
ITINs that expire on December 31, 2020:
- Numbers with middle digits 88
- Those with middle digits 90, 91, 92, 94, 95, 96, 97, 98 or 99, if assigned before 2013 and if not already renewed.
Affected taxpayers will receive a CP48 Notice, informing a taxpayer that the ITIN should be renewed before the end of the year. This notice explains what actions a taxpayer will need to take to renew the ITIN if it will be used on a U.S. tax return filed in 2021. If a taxpayer has an ITIN number that has already expired and expects to have a filing requirement in 2021, they can renew any time.
Taxpayers with an expiring ITINs have the option to renew them for their entire family at the same time if they have received a renewal letter from the IRS. Family members include the tax filer, spouse and any dependents claimed on the tax return.
How to renew a ITIN
To renew an ITIN, a taxpayer must complete a Form W-7, Application for IRS Individual Taxpayer Identification Number and submit all required documentation. Taxpayers submitting a Form W-7 are not required to attach a federal tax return; however, they must still note a reason for needing an ITIN on the form.
Avoid these common errors when renewing an ITIN:
- Mailing identification documentation without a Form W-7
- Missing information on the Form W-7
- Insufficient supporting documentation, such as proof of U.S. residency or documents that support name changes.
If you need assistance renewing an expiring ITIN, don't hesitate to call.
File Cash Transaction Reports Electronically
Businesses that receive cash transactions of more than $10,000 must report these payments to the IRS. Now businesses can batch file their cash reports; this is especially helpful for those required to file many forms. Let's take a look at several key points that taxpayers should know about reporting cash transactions.
How the IRS defines cash
Cash includes coins and currency of the United States or any foreign country. For certain transactions, it's also a cashier’s check, bank draft, traveler's check, or money order with a face amount of $10,000 or less.
Businesses must report cash of more than $10,000 that they receive:
- In one lump sum
- In two or more related payments within 24 hours
- As part of a single transaction within 12 months
- As part of two or more related transactions within 12 months
Reporting these payments
Taxpayers report cash payments by filing Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.
Filing electronically is encouraged; however, to e-file, a business must have an account with the Financial Crimes Enforcement Network's BSA E-Filing System. E-filing is free, secure, and typically a more convenient and cost-effective way to meet the reporting deadline. Filers will receive an electronic acknowledgment of each form they file. Businesses can also paper file Form 8300 and send it to the IRS at the address listed on the form.
When to file
Form 8300 must be filed within 15 days after the date the cash is received. If a business receives payments toward a single transaction or two or more related transactions, they should file when the total amount paid exceeds $10,000.
If you have any questions about reporting cash payments or need help setting up an account with the BSA E-Filing System, please contact the office.
How To Track Employee Time, Part 2
Last month, the concept of time tracking in QuickBooks was introduced. As a reminder, using the software's tools makes it possible to record individual blocks of time that employees have worked and include them in payroll and billing customers when necessary. Each step required to set up QuickBooks for time tracking was discussed, as well as the process of creating individual time entries. A completed record for billable time should look something like this:
Figure 1: To enter an individual time record, open the Employees menu and select Enter Time | Time/Enter Single Activity.
Using a Timesheet
QuickBooks offers another way to enter time records that is especially useful if you have multiple employees and a lot of work hours to track. Open the Employees menu and select Enter Time | Use Weekly Timesheet. You can also get there by clicking the down arrow next to the Enter Time icon on the home page. This screen resembles a paper timesheet, with columns for all of the information you would enter if you created a single activity.
At the top of the screen, click the down arrow next to Name and select the correct employee. To the right of that is the Week Of field. If you need to change the dates, click the small graphical calendar, then click anywhere in the correct week. If you have already created individual records for that employee during that week, the information for each one will appear in the corresponding date column at the end of the row. Anything you enter on the Timesheet will also appear as an individual entry.
To create a new entry on the Timesheet, click the down arrow in the Customer column and select the correct Customer:Job. Next, choose the Service the employee provided by again clicking the down arrow in that field. You want to be sure that the Payroll Item code is the right one, so choose carefully there; the WC Code (Workers' Comp) should fill in automatically. Enter Notes if you'd like, then the number of hours the employee worked performing a specific service for that customer in the date column. Be sure to click in the Billable box to create a checkmark if the service was billable.
Figure 2: Any data you enter on a QuickBooks Timesheet will also appear as a Single Activity, and vice versa.
Totals for each column appear at the bottom. Save the Timesheet and repeat the process for any other employees as needed. These hours will now be available to you when you run payroll and bill customers.
Time Reports and Invoicing
QuickBooks makes it easy for you to see the time data you've entered. It offers four pre-formatted reports that tally this information in different ways. Open the Reports menu and select Report Center. Locate Jobs, Time & Mileage in the left vertical pane and click on it. Scroll down to the Time heading to see these four reports. They are:
- Time by Job Summary (tells you how much time your company spent on each job, broken down by services provided)
- Time by Job Detail (shows you the same thing, but includes employee name and billing status)
- Time by Name (lists employees and the hours they spent on each job)
- Time by Item (tells you how much time your company has spent on each service type, broken down by job)
When you open a report, you can double-click on any number in the Duration column to see the underlying detail.
When you create an invoice for a customer who needs to be billed for services provided, QuickBooks displays this message:
Figure 3: To make this standard procedure, check the box in front of Save this as a preference.
QuickBooks offers another way to bill for time and expenses that allows you to create invoices in batches. Open the Customers menu and select Invoice for Time & Expenses. In the window that opens, specify your Date Range, and make sure the Template showing is the one you want.
Click in the column in front of each Customer:Job you want to bill and then click Next Step. You can Review Billables to see details and Edit Options by clicking on those buttons. Click on Create Invoices and make sure each customer's Preferred Send Method is correct in the next window before dispatching them.
QuickBooks' time tracking tools may be all your company needs, but if you find them lacking, please call to discuss adding TSheets, an integrated solution that adds more advanced features. As always, don't hesitate to call if you need help using any of QuickBooks' own tools or with any other accounting needs.
Tax Due Dates for October 2020
Employees who work for tips - If you received $20 or more in tips during September, report them to your employer. You can use Form 4070.
Individuals - If you have an automatic 6-month extension to file your income tax return for 2019, file Form 1040 and pay any tax, interest, and penalties due.
Corporations - File a 2019 calendar year income tax return (Form 1120) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in September.
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in September.
Employers - Social Security, Medicare, and withheld income tax. File form 941 for the third quarter of 2020. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 10 to file the return.
Certain Small Employers - Deposit any undeposited tax if your tax liability is $2,500 or more for 2020 but less than $2,500 for the third quarter.
Employers - Federal Unemployment Tax. Deposit the tax owed through October if more than $500.
7 Tips For Living Primarily on Social Security During Retirement
According to the government accountability office, the average amount of money most Americans manage to save by retirement is just $101,000, 11% of the amount that many advisors recommend. These statistics leave many individuals depending on social security benefits during retirement.
If you’re nearing retirement and worried that social security may not be enough to support you, there are still steps you can take to better your situation. There are several ways you can maximize the value of your social security payments to ensure you get the most out of them.
1. Delay the Start of Your Social Security Payments
As long as you are age 62, you can start collecting social security benefits. However, your benefit amount will be higher each year you wait, up to the age of 70. For each year you wait to begin withdrawals, your payouts go up by 8%. This increase continues until the age of 70. The total rise if you wait until age 70 is 32%, meaning your payouts will be 32% larger if you wait until age 70 to begin accepting payments.
Conversely, if you begin receiving benefits earlier than age 66, the amount is reduced based on the number of months you start receiving benefits early. For instance, if you start withdrawals at age 62, you can reduce your payments by 25%. At age 64, your reduction would be 13.3%, and 6.7% at age 65.
2. Split Housing Costs
This idea may seem somewhat unconventional, but the young people have it right: splitting housing costs means each person can pay half of what they would’ve paid if living solo. When you share your resources during retirement, you make it possible to live on a lot less. This arrangement works equally well whether you split a mortgage payment or rent. If you own the property, of course, it goes much further! Even if you choose not to share expenses, owning your home in full will make a big difference in retirement.
3. Consider Relocating
If the housing costs in your area are getting ridiculous, as they are in many urban areas, consider relocation as a way to save on retirement costs. In many places, rising housing costs outpace inflation, actual value, and income increases, leading to housing bubbles and affordability problems for many. In some cases, the same house might cost 4-5 times as much to live in merely due to its location. You can save a tremendous amount of money in your retirement years by living somewhere with more affordable housing.
The best part is that if you have a decent amount of equity in your current home, you could sell it and use the money to buy an entire home outright in a more affordable area, thus eliminating your mortgage payment. Even if your equity is insufficient to cover the full purchase cost of your new home, if the new home is a more affordable one, it could dramatically reduce your cost of living thanks to a much lower mortgage payment.
4. Choose a Location with a Mild Climate
The idea behind this is simple and related to the above point – if you choose to live somewhere where you don’t need to use a lot of heating and air conditioning, it can save you a tremendous amount on monthly utility costs.
These costs can eat up a substantial chunk of your social security check each month, so reducing them is a good strategy in general. Even if you can’t live somewhere with milder weather, consider investing in things like insulation and energy-efficient HVAC systems to reduce costs. You could also consider solar panels as a way to reduce electricity costs.
5. Get Out of Debt Before Entering Retirement
This idea may seem fairly obvious, but if you are still making debt payments on things like credit cards and car payments when you enter retirement, that will eat into your social security checks substantially. If you are unable to eliminate debt, try to reduce it by as much as possible. The lower your balances, the lower your monthly payments will be. Any reduction is an improvement.
6. Cut Expenses
Budgeting is essential in all stages of life, but when you are trying to live on just Social Security benefits, it can be critical. Consider creating a budget spreadsheet that contains items for every dollar you spend in a typical month. Then go through and assess each item to see if it is necessary. Consider whether you could trim back or replace it with a more affordable option.
Many people have countless cable channels they never watch. They may pay for a landline phone they never use, or lease a cell phone rather than owning a used one. There are countless ways to save money. Consider evaluating all of your monthly and annual subscriptions. You may have some you never use, others you’ve entirely forgotten about, and even more you didn’t know you were still paying.
7. Stay Healthy and Live an Active Lifestyle
While developing health problems during your senior years may seem unavoidable, the most common issues seniors face come from bad diet and lifestyle choices earlier in life. You can’t change the past, but you can decide to begin living a healthy lifestyle today.
Another key tip is to make sure you have a good health insurance plan. When you need medical care, it is best to have a health insurance policy with low out-of-pocket expenses balanced with a reasonably low monthly premium. A supplemental Medicare plan works well for many seniors.
Most Americans wait too late to follow good retirement advice. Don’t let that happen to you. With these tips and some good old-fashioned common sense, you can make the most of Social Security and any other income you can generate and enjoy a happy retirement. If you have any other tips for fellow retirees or people anticipating retirement, feel free to share them here in the comments below!The post 7 Tips For Living Primarily on Social Security During Retirement first appeared on www.financialhotspot.com.
What is a W-9, and Who Needs One?
If you are an independent contractor or freelancer such as a vendor, consultant, accountant, or architect, the company that hires you will require you to fill out a W-9 form. This is a very straightforward way to send critical information. However, because you do not submit it directly to the IRS, you need to be cautious about who you send it to.
A W-9 form is a tax document from the IRS. It requires you to fill in your personal information such as tax ID number (TIN), Employer Identification Number (EIN), Social Security Number, name, and address. When a business hires you as a self-employed contractor and pays you more than $600 a year, you are required to fill out the W-9 form so that they can send you a 1099 form that you present to the IRS.
Companies and businesses that hire freelancers and independent contractors don’t hold back FICA taxes and income taxes. It is your responsibility as an independent contractor to meet Internal Revenue Service (IRS) tax obligations.
Who needs a W-9 form?
If you are a self-employed individual, the company or client who hires you will require you to fill out the W-9 form. Self-employed individuals include:
Freelancers: These are workers who depend on “gigs,” which are short term. They include writers and web designers, among others. They are required to provide a W-9 form on demand to clients as a fulfillment of their tax obligations.
Professional Consultants: They offer advisory services to clients on finance, marketing, information technology, and sales. They file W-9 forms in fulfillment of their tax obligations.
Independent Contractors: These are professionals who offer landscaping, architecture, and accounting on a contract basis. Limited Liability Company contractors can only fill a W-9 form if they are individual entities and not corporations.
How to File a W-9 Form
If you get nervous just thinking about tax forms, don’t worry. The W-9 is one of the easiest IRS forms to complete.
- Fill in your full name correctly at the top and ensure it matches the name on all other tax forms.
- Fill in your business name, and if you don’t have one, leave the space blank.
- Enter your business entity, such as single-member LLC, individual, sole proprietor, partnership, estate/trust business, C corporation, and S corporation.
- Enter your residential address, including apartment numbers, street names, and street numbers.
- Enter your social security number or employer identification number (EIN); for most independent contractors, the Social Security number is all that is required.
- Enter your signature and date, which is considered a declaration that all the information entered on your W-9 is verified.
What to Do if You Don’t Receive Your W-9
Financial institutions and hiring companies are required to send you a W-9 form. However, if you don’t receive yours, you can download it as a PDF from the IRS website.
When submitting your W-9, handing it over in person is the best option. However, if this is not possible, you can encrypt it freely online, email it, or use another encrypted sharing service to ensure its security. Don’t send this information in an unprotected email.
What is Backup Withholding?
This is withholding of income tax from the invoice of independent contractors by the hiring company to submit it to the IRS. If you are an independent contractor and do not provide accurate information, the company paying you is required to withhold 24% of your income and send it to the IRS. Additionally, the hiring company will withhold your income taxes if your W-9 is missing the TIN, or if it is unverifiable.
When Should You Not Send a W-9 Form?
When sent by a stranger: Remember, a W-9 form includes your personal information like your Social Security Number. Therefore, filing a W-9 form from a stranger could expose your personal information to scammers and identity thieves.
In case you receive one from a suspicious individual, ask relevant questions such as what tax forms they intend to send you. The only time you are required to file a W-9 form is when it will be needed to send back an IRS form. Seek help from a tax professional if you are unsure.
When sent by an employer: Employees should only receive a W-4 form from their employers. If you are working as a permanent employee, a W-9 could mean that you’ve been classified as a freelancer or independent contractor, and this could put you on the hook for IRS tax payments.
The IRS needs to ensure that everyone is observing their tax obligations, including independent contractors and freelancers. The hiring company or client requires a W-9 form to send back a 1099 form, indicating that the individual is fully responsible for their tax payments. If you need assistance in understanding your tax obligations, it is smart to get advice from a seasoned tax professional.
Do you have any tips to share about W-9 forms? Feel free to share them in the comments below.The post What is a W-9, and Who Needs One? first appeared on www.financialhotspot.com.
5 Areas You Might be Wasting Money Each Month
No matter how much income you have each month, none of us want to waste money on things we don’t need. The idea of hard-earned cash drifting away on impulse buys, forgotten subscriptions, and hidden fees is frustrating. Chances are if you’re like most people, you probably have at least some areas of your budget where you could stand to save a little money.
In this article, we’ll go over five areas you might be wasting money each month. While each area may or may not apply to you, try to think of them as a template to inspire your own budget cuts. Evaluate your monthly bank statements and look for areas where you could apply similar reductions to your spending habits. You might be surprised by what you find!
1. Extra Subscriptions
This expense is a big one and often overlooked. We live in an age of convenience and immediate services, where smartphones give us access to almost anything. Many of these services come with a price, however.
Some services probably provide you with value daily. If you watch Netflix or Hulu every day, don’t cut them. If, however, you have a bunch of subscriptions you haven’t used in months or had completely forgotten about, those should be on the list to cut. Perhaps you signed up for a 30-day free trial of some service a year ago but forgot to cancel, and they have been billing you ever since. Maybe you have two competing service subscriptions that provide roughly the same value. You could cut one and keep the other.
The idea is to audit all your subscriptions and ensure that every one of them is still providing value. You will probably be surprised how many active subscriptions you currently have, yet how few you regularly use.
2. Retirement Account Fees
Saving for retirement is something we all need to do. Just make sure you don’t get bitten by sneaky hidden fees on your retirement account or investments. Not all investments are equal, and some cost quite a bit more than others. For example, if your retirement account charges 1.5% in fees and expenses, that would mean that your balance will be significantly smaller at retirement than if you had fees of 0.5%.
Be sure to read through your plan’s fine print to see what they are charging you and evaluate alternatives to see if you could save any money. Don’t hesitate to talk to your plan’s administrator so they can answer any questions you may have.
3. Bank Fees
Some banks offer free checking or savings accounts that don’t charge any fees, so if you can find one of these, you can save a substantial amount on those recurring monthly or annual fees. If your bank does charge fees, consider asking for a refund on them.
If you are a customer with an account in good standing, and especially if you have credit cards or loans with the bank, they are already making quite a bit of money off of you without those fees. Don’t hesitate to consider switching banks or asking for a refund of your fees.
4. Kids Extracurricular Activities
This is an area where you’ll need to evaluate both the costs and the benefits. While some extracurricular activities can be useful for children, some are increasingly being over-scheduled. Organized activities have almost entirely replaced the free time and unstructured play that used to occupy childhood development. This rigidity can have the unintended side effect of diminishing creativity and can sometimes lead to stress.
However, the financial aspect is the main focus, and the average monthly costs for extracurricular activities are $302 per child for sports, $218 for arts-related activities, and $124 for school clubs. Considering that this is per child, that quickly adds up for those with multiple children. This estimate also doesn’t take into account the extra costs of food, gasoline, uniforms, supplies, travel, fundraisers, etc. which are all substantial.
The key is to talk to your kids openly and have a conversation about what activities they most enjoy and if they participate in any out of perceived obligation or social pressure. Evaluate more affordable alternatives and consider trimming events which aren’t making your family happier.
5. Commuting to Work
Commuting to work by car is something few people enjoy. It also places a tremendous amount of wear and tear on your vehicle. Worse yet, it causes a lot of stress. Some studies have shown that commute time is inversely related to self-reported happiness levels! The thing about commuting is that it is the act of driving in traffic that bothers most of us. Riding in a passenger seat, bicycling, or walking all result is significantly reduced stress.
The benefits of not driving extend beyond the commute, however. Commuting is very expensive in terms of fuel and vehicle maintenance, but also in terms of lost time and energy cost. There are a handful of ways to mitigate this problem. One is to work remotely from home if your job is compatible with it. Another is to move closer to work or get an occupation closer to home. If you can’t change the distance between home and work and it is too far to walk, consider joining a carpool or vanpool. You could also use public transportation if it is available. If you are fortunate enoughThe post 5 Areas You Might be Wasting Money Each Month first appeared on www.financialhotspot.com.
10 Business Tax Savings Strategies You Can Use Before the Year Ends
Many small business owners often think of taxes as a once-per-year sprint to file by April 15. However, taxes play a significant role in your business’s performance, and investing the time to strategize is well worth the effort. All the decisions you make throughout the year have consequences, and that’s why it’s essential to create a proactive strategy that will get you the most savings at the end of the year. Here are ten tax saving strategies that you can use before the year ends for maximum savings.
1. Contribute to Your Retirement
As a small business owner, you have three main options for choosing a retirement plan. With these plans, you’ll not only be saving towards your retirement but also reducing your tax liability – you can even qualify for the Saver’s Credit. Here are the three retirement savings options to consider:
- SEP IRA – If you’re a small business owner with a workplace of fewer than 100 employees, you can choose to make tax-deductible contributions for yourself and all your employees. However, only you can contribute, and the IRS sets limits based on your income and whether or not other retirement plans are available to you or your spouse.
- Simple IRA – As a business owner of any size company, you may also choose to make tax-deductible contributions for yourself and one or more of your employees. For this option, you and your employees can contribute to this account, and the IRS sets limits for the same.
- 401(k) – If you’re a business owner who wants to make tax-deductible contributions for yourself only, a 401(k) is a viable option.
2. Deduct Your Home Office
Small-business owners and entrepreneurs working from home could make huge savings on their taxes by taking advantage of home office deductions. However, you need to meet the IRS requirements and maintain proper financial records. Suppose you regularly use part of your home exclusively for business-related activities. In that case, the IRS allows you to write off the associated rent, repairs, utilities, real estate taxes, maintenance, and other related expenses.
You can determine the value of your home office deduction in two ways. If you choose the simplified option, you won’t deduct the actual expenses. Instead, you multiply the square footage of your space by a prescribed rate. For example, $5 per square foot for office spaces up to 300 square feet.
The standard and more challenging approach values your home office by measuring the actual expenditures against your overall residence expenses. It allows you to deduct mortgage interest, taxes, insurance, maintenance and repairs, utilities, and other costs. The IRS suggests Form 8829 to help you figure out the expenses you can deduct.
3. Go to the Doctor
If you’ve been in the hospital this year or had other costly medical or dental procedures, keep those receipts. You can generally deduct qualified medical expenses that amount to more than 7.5% of your adjusted gross income for that tax year.
For example, if your annual adjusted gross income is $20,000, anything beyond the first $1,500 of your medical expenditures (7.5% of your AGI) could be deductible. That means that if you spent up to $5,000 in medical bills, $3,500 of it could be deductible. You can check out the IRS Publication 502 for the full list of tax-deductible medical expenses.
4. Wait on Billing
Timing your income involves shifting it from one financial year to another. But first, you need to determine the year in which you anticipate to pay the most in taxes. Review your current expenses before the year elapses and prepay some of those expenditures if you want to reduce your income for the current year.
You can also wait on some bills if you think you might make less money in the next financial year. If that’s the case, hold on sending some invoices until January 1 to reduce your taxable income for the current financial year.
5. Contribute to a Health Savings Account
Both flexible spending accounts (FSAs) and health savings accounts (HSAs) allow you to put away pretax contributions for qualified medical expenditures that your insurance doesn’t cover.
To take advantage of an HSA, you must purchase a high-deductible health insurance plan, and you cannot have a disqualifying additional medical coverage like a general-purpose FSA. One notable benefit of HSAs is that you don’t need to spend all of the money in your account every year. The contributions roll over and grow tax-free to provide money for medical expenses the following year.
However, the funds you contribute to an FSA must be exhausted during the same plan year. While you can deposit funds into your HSA up to the tax filing due date in the subsequent financial year, FSA contributions are only added during open enrollment or the moment you join a new company.
6. Get Educated
You can take advantage of the American opportunity tax credit (AOTC) to bring down your taxes. AOTC is a credit meant for qualified education expenses paid for eligible students to cover the first four years of higher education. If the credit brings down the amount of tax you owe to zero, you can be refunded 40 percent of any remaining amount of the credit (to a maximum of $1,000).
The lifetime learning credit (LLC) is another credit for qualified tuition and related expenses paid for eligible students who enroll in an eligible educational institution. The IRS doesn’t place any limit on the number of years you can claim the credit, and you can gain up to $2,000 per tax return.
7. Invest in Your Children’s Education
By putting away some money into your child’s 529 education savings plan, you can present a tax-free gift to a beneficiary of any age. The IRS allows you to make a gift of up to $15,000 per beneficiary annually (which amounts to $30,000 from a married couple splitting contributions) without the need to fill out the federal gift tax form. Moreover, you can contribute up to five years’ worth of gifts.
You can use 529s to pay up to $10,000 of qualified higher education expenditures annually for the beneficiary’s enrollment. You can include expenses to public, secondary, private, or religious elementary schools or registered and certified apprenticeship programs without paying any federal income taxes.
8. Give to Your Favorite Charity
Whether it is cash or appreciated stock, any charitable gift is still tax-deductible if you itemize it. The same does not apply if you take the standard deduction. So, if you regularly give to charities, consider stashing several years’ worth of gifts into a single year’s donor-advised fund (DAF). That step helps increase savings, and you can still spread out the giving from the DAF over the next couple of years, depending on your charitable intent.
Even taxpayers who itemize may be allowed to deduct charitable cash contributions of as much as 60% of their adjusted gross income. And if you give items such as clothing or furniture, be sure to ask for receipts and itemize them at the end of the tax year.
9. Take Time to Review Your Deductions
As a small business owner, you can write off many expenses as tax deductions to reduce the amount you owe on your income tax. Take time to review available deductions on the IRS website and ensure that you’re taking advantage of all the ones available. Standard tax deductions to consider include:
- Business meals
- Work-related travel expenses
- Business insurance
- Work-related car use
- Home office expenses
10. Get Professional Tax Help
Tax planning is always a complex and time-consuming process. As a small business owner, you may not have time to investigate opportunities, so you should work with a qualified CPA to make the process seamless. Don’t wait too long, do it now before tax season begins.
If you have any questions or tips on tax-saving strategies, be sure to leave a comment below!The post 10 Business Tax Savings Strategies You Can Use Before the Year Ends first appeared on www.financialhotspot.com.
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