The new tax law, unofficially entitled The Tax Cuts and Jobs Act has finally been passed. Most provisions will take affect beginning January 1, 2018. It does not affect 2017. As with any new tax law, there will be a lot confusion as to how your business and, in many cases, how you as an individual may be affected. [Read more…]
Anyone who operates a business or who is planning to start a business must be aware of how businesses are taxed. Taxes are one of the largest costs a business will incur. If they are not planned for, or if the rules are not followed, the results can be devastating. That’s why you need to know:
Self-employment accounts for a significant portion of jobs in the United States; over 10.1 percent of all those employed across the country—or 15 million people—were self-employed as of 2015. The Las Vegas metropolitan area, in particular, has seen growth in self-employment of over two percent since 2009, more than all but two other metropolitan areas across the country. Self-employment offers a lot of advantages and freedom, but with the perks comes the need to correctly calculate tax on self-employed earnings and file correctly. The taxes that the self-employed must pay are intended to mirror the tax burden that the traditionally employed carry, but these taxes can be confusing to work out for the newly—and veteran—self-employed.
Are you self-employed in Las Vegas? Let us fix your accounting mistakes before (and after) they happen. Call (702) 471-7223 today for your free consultation.
Self-employed individuals have two tax burdens to consider when calculating taxes on their self-employed earnings: income tax and self-employment tax. The self-employed are only subject to income tax, however, if their self-employment activities in a given year generate a net profit (if their business income exceeds their business expenses). This is because income tax is only calculated on net profit, not total self-employment earnings. For those self-employed individuals who are profitable, income tax operates in the same way for the self-employed as it does for the traditionally employed.
Self-employed individuals must also calculate the self-employment tax on their earnings. This tax covers the entire portion of Social Security and Medicare taxes that all working Americans must pay. Traditionally employed individuals share this tax burden with their employers, but the self-employed must pay the entire amount; this equals 12.4 percent of your net self-employment earnings for Social Security tax and 2.9 percent for Medicare tax, or 15.3 percent in total. However, the employer-equivalent amount of the self-employment tax is deductible for the purposes of income tax.
Related: The Tax Season Survival Guide: 9 Tips You Need to Know
Because calculating tax for self-employed earnings is more complicated than doing so on employer-provided income, the newly self-employed face a lot of possible tax mistakes—and these mistakes have big repercussions. Three particular tax errors have the potential to cost you thousands.
Many self-employed individuals, particularly those that do freelance project work, find that their income fluctuates from year-to-year; the difficulty of estimating yearly income leads many to fail to set aside money for taxes. This can cause many potential issues if tax time comes and you don’t have the funds to cover your tax bill. Estimate your yearly income as closely as possible by looking at your previous year’s income and aim to save at least 30 percent of your projected income for taxes.
Both under- and over-reporting your income can have tremendously expensive consequences for the self-employed. Overestimating your self-employment income will obviously lead to paying more tax than necessary, but underreporting your income may actually be costlier. Purposely or accidentally underreporting your self-employment income may constitute tax fraud, and underreporting your income can trigger an IRS audit and lead to massive civil fines, penalties and even prison time. If an IRS audits uncovers unreported self-employment income, tax penalties can begin at 25 percent for true mistakes and go up to 75 percent for purposeful fraud.
Related: 5 Things to Do Right Now When Facing the Dreaded IRS Tax Audit
Failing to take full advantage of all available tax deductions is potentially costly for all taxpayers, but the self-employed in particular stand to lose a lot of money by not taking all of the deductions available to them. With self-employment comes a long list of business expenses, and many deductions exist to directly offset a wide variety of expenses for the self-employed. If you run your business from your home, for example, you can potentially deduct all of your housing-related expenses generated by your business. Use of your personal automobile for business purposes can similarly be deducted.
Related: How to Maximize Your Business Mileage Deducation
Other potential deductions that all self-employed individuals should investigate include educational expenses, advertising and promotional costs, business-related entertainment and restaurant meals, and depreciation of business equipment. In all cases, strive to maintain accurate records including saving receipts throughout the year to make the process of figuring out your deductions easier at tax time.
If you make at least $400 in income from self-employment, you must file an annual tax return using Form 1040. How you report your self-employment income to the IRS will depend on whether you are considered a self-employed business owner or a self-employed independent contractor. Business owners who submit a Form 1120 business tax return will report their income via Schedule K-1 while independent contractors submit their income information via either Form 1099-MISC or receipts. Both types of self-employed individuals will need to pay estimated taxes quarterly and any remaining tax owed with their tax return.
Correctly calculating and filing your taxes when you are self-employed can be challenging, but proper preparation can help you avoid many tax pitfalls. Keeping accurate records throughout the year and seeking professional tax guidance when necessary can help save you money and keep you in good standing with the IRS.
As one of the most vital tasks for any business (without it, your business could come crashing into a wall without even you seeing it), bookkeeping involves recording all the financial transactions and activities that occur in your Las Vegas business. This includes:
All of this is in the effort of ensuring that any money flowing in and out of your business is properly accounted for. Ultimately, you’ll use this information as the basis for making many financial and organizational plans: calculating your revenues, paying taxes, borrowing loans, and more. Therefore, with bad bookkeeping practices, your small business could be in big trouble with the IRS or when looking for financing from banks.
Some of the leading causes of bad record keeping practices include:
Asides from implementing good record keeping practices, there are also general accounting errors that you should be aware of.
Here is a glimpse on 3 of the most common bad bookkeeping habits that can cause serious damage to the finances of your small business:
1. Trusting an inexperienced (newbie) bookkeeper
We have mentioned that one of the leading causes of poor record keeping is doing all the accounting work in-house. It is always advisable to hire a professional bookkeeper who has the experience in handling all aspects of the practice for best results. Outsourcing your bookkeeping tasks can alleviate a ton of troubles. However, if you go for an inexperienced or newbie bookkeeper for a cheaper fee, expect costly bookkeeping troubles ahead.
2. Keeping inaccurate books (falling behind on books)
Keeping inaccurate books can cripple your business down to the very core. You can end up using more on your budget than the business is earning, filing less returns than you are supposed to, and generally losing track of your business profits.
3. Missing tax deadlines
No one ever wants the IRS knocking on their business door for an audit. But if your bookkeeping habits are in question—perhaps you are not paying the right amount of tax, you are missing on tax deadlines, or defaulting—you will surely get a visit from the IRS soon.
There are many tough consequences of bad bookkeeping. One is that you could lose an audit by the IRS auditors, causing your business to be levied hefty fines that can cripple your operations. Another consequence would be running into cashflow crunches because your business cannot operate effectively if the money flow is not flowing. You could also face losing your small company all together because of poor financial and business planning. Without proper bookkeeping, you simply can’t tell whether your business is growing, stagnant, or expected to close down.
To avoid poor bookkeeping, you need to have a system in place that ensures all your business records are well recorded from day one. Make sure that:
However, if all this work is too much for you or you don’t have an in-depth knowledge on how to it perfectly, consult a professional Las Vegas bookkeeper for small businesses to help you out. Professionals understand your businesses bookkeeping needs better and will advise you on how well the business is doing based on the book values.
Now that you have read how vital proper bookkeeping is and how if done wrongly can damage your business, it’s time to re-think your current practices before tough times come calling. Remember, a professional bookkeeper can do all the leg work for you while you concentrate on growing your business. Call us at (702) 471-7223 if you want more information on what we offer.
As a small business owner, you’re aware that tax preparation can be nothing short of a perpetual nightmare, particularly during the early stages. Taking responsibility for your business strategy is crucial to ensure that you don’t conflict with the IRS. Thus, you need to manage all possible tax breaks to reduce tax liabilities for your business, which could rack up even bigger savings than you might be aware of.
You always have a chance to reduce your tax burden in legal and ethical ways and here are five strategies that might turn effective for your small business:
Year-end tax planning is crucial when it comes to managing exactly what you are expected to owe and strategically reducing it. One way to do this is to make philanthropy a big part of what you’re doing. Firms that are giving back to their community can take big tax write-offs. A good rule of thumb is 10 percent. Devote 10 percent of your total income to charitable causes, and this will help eliminate a lot of extra taxation.
In doing your taxes and working to reduce tax liabilities, track office expenses like environmentally sustainable equipment, furniture, travel, and conferences. Keep accurate records throughout the year to maximize their deductions in this area. Refer to the IRS website for a list of acceptable deductions.
It also pays to know what the IRS is willing to give out tax breaks for. The United States Federal Government is known for giving all sorts of a write offs to businesses that focus on employing union workers, minorities, manufacturing, and exports. Emphasize exports to get some great tax breaks such as the IC-DISC.
Accountable plans affect the tax liability of a small business. If you don’t have good records, do not count something as a deduction. The IRS might hit you hard if you didn’t honestly report your tax returns based on what you know. It is better to have fewer deductions but no IRS audit than to have many deductions and get an IRS audit. Go for simplicity and prioritize deducting major items.
A good way to save on taxes for your business is for you to compensate your employees by raising your contribution to their health insurance. Instead of increasing their salary, it’s a better option to give the same amount to cater for their medical expenses. For instance, if an employer increases the employee’s salary by $350 a month, those wages would then be subjected to Medicare taxation, FICA tax, and income tax.
Consequently, the employer will share the cost of paying Medicare, FICA and may have to pay out for federal and state unemployment. Thus, instead of giving an employee $350 more, the company can pay the same amount to cover their medical insurance. Doing so will eliminate FICA, Medicare, income tax, and unemployment taxes, and both the employer and employee will be saved from taxation.
A trustworthy accountant can not only save you time and clear up the uncertainty of managing your finances and taxes but also has other benefits:
Hiring a small business accountant to assist your taxation strategies is crucial. It will allow you to utilize wise planning to significantly reduce your tax burden and keep more of your money working for you.
