MyArizonaAccountant.com Arizona small business tips
You do not have to do everything on your own. As a new small business owner you may feel pressured to wear many hats. Of course, there are some things that you will do well and others that you will need help with. One area in which you may need help is with taxes, accounting & payroll. Do yourself a favor and hire a accountant to assist you from day one. This may be the best tax tip that you ever receive as a small business owner.To read reviews check out BASC Expertise at kudzu.com
Deirdre Morhet MBA
MyArizonaAccountant.com payroll & accounting
If you hire employees there is information that you need to secure for your records and forms that you must complete for taxes, payroll etc.
Eligibility to Work in the United States
You must verify that each new employee is legally eligible to work in the United States. Have the employees you hire fill out Form I-9, Employment Eligibility Verification (PDF).
Employee's Social Security Number (SSN)
You are required to get each employee's name and Social Security Number (SSN) and to enter them on Form W-2. (This requirement also applies to resident and nonresident alien employees.) You should ask your employee to show you his or her social security card. The employee may show the card if it is available. You may, but are not required to, photocopy the social security card if the employee provides it. Record each new employee's name and social security number from his or her social security card. Any employee without a social security card should apply for one using Form SS-5, Application for Social Security Card (PDF). The Social Security Administration (SSA) offers social security number (SSN) verification and quick access to relevant forms and publications.
**Do not accept an ITIN in place of an SSN for employee identification or for work. An ITIN is only available to resident and nonresident aliens who are not eligible for U.S. employment and need identification for other tax purposes, payroll & accounting. You can identify an ITIN because it is a 9-digit number, beginning with the number "9" and is formatted like an SSN (NNN-NN-NNN).
Note: An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN.
Advance Earned Income Credit Payments
If your employees qualify and want to receive advance earned income credit payments, they must give you a completed Form Form W-5, Earned Income Credit Advance Payment Certificate (PDF).
To know how much income tax to withhold from employees' payroll, you should have a Form W-4, Employee's Withholding Allowance Certificate (PDF), on file for each employee. Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment. If employees claim exemption from income tax withholding, they must indicate this on their W-4. The amount of income tax withholding must be based on filing status and withholding allowances as indicated on the form. If a new employee does not give you a completed Form W-4, withhold tax as if he or she is single, with no withholding allowances. Additional withholding may be required on wages paid to non-resident aliens.
A Form W-4 remains in effect until the employee gives you a new one. If employees claim exemption from income tax withholding, they must give you a new Form W-4 each year. If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on, or after the 30th day, from the date you received the replacement Form W-4. For exceptions and invalid Forms W-4, refer to Publication 15 Circular E, Employer's Tax Guide.
You may also refer your employees to the withholding allowance calculator. Remember that this application is to help employees to ensure that they do not have too much or too little income tax withheld from their pay. It is not a replacement for Form W-4, but most people will find it more accurate and easier to use than the worksheets that accompany Form W-4. They may use the results of this program to help them complete a new Form W-4, which they will submit to their employer. Special rules may apply to agricultural employers. For more information, please refer to Publication 51 Circular A, Agricultural Employer's Tax Guide.
When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file. Employment taxes include the following:
- Social security and Medicare taxes
- Federal income tax withholding
- Federal unemployment (FUTA) tax
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Small business workshops. Small business workshops are designed to help the small business owner understand and fulfill their federal tax responsibilities. Workshops are sponsored and presented by IRS partners who are federal tax specialists. Workshop topics vary from a general overview of taxes to more specific topics such as recordkeeping and retirement plans. Although most are free, some workshops have fees associated with them. Any fees charged for a workshop are paid to the sponsoring organization, not the IRS.
For more information, visit www.irs.gov/businesses/small.
Federal Income Tax and Social Security and Medicare Taxes
You generally must withhold federal income tax from your employees' wages. You withhold part of Social Security and Medicare taxes from your employees' wages and you pay a matching amount yourself. To figure how much to withhold from each wage payment, use the employee's Form W-4 and the methods described in Publication 15, Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide (PDF).
Federal Unemployment (FUTA) Tax
You report and pay FUTA tax separately from Federal Income tax, and Social Security and Medicare taxes. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay. Refer to Publication 15, Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide (PDF) for more information on FUTA tax.
Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.
Depositing Employment Taxes
In general, you must deposit income tax withheld, both the employer and employee Social Security and Medicare taxes (minus any advance EIC payments), and FUTA tax by depositing electronically, mailing or delivering a check, money order, or cash to a financial institution that is an authorized depositary for federal taxes using Form 8109-B. You can also make your deposits using the Electronic Federal Tax Payment System (EFTPS). Some taxpayers are required to deposit using the EFTPS. See Publication 15, Employer's Tax Guide, under How to Deposit - Electronic Deposit Requirement.
For additional information on when and how you must make deposits, refer to What are FTDs and why are they important?
Reporting Employment Taxes
In general, employers are responsible to report federal Income Taxes, Social Security, and Medicare taxes on Form 941, Employer's Quarterly Federal Tax Return (PDF) and Instructions (PDF), or Form 943, Employer's Annual Federal Tax Return for Agriculture Employees (PDF) and Instructions (PDF) (For use by farm employers).
Note: Employers who have an employment tax liability of $1,000 or less for the year may file Form 944, Employerâ??s Annual Federal Tax Return (PDF) and Instructions (PDF), instead of Form 941, Employerâ??s Quarterly Federal Tax Return. Eligible taxpayers will be notified by mail.
Important information for Sole Proprietors
A sole proprietor can have only one EIN, regardless of the number or types of businesses you operate. If you were previously assigned an EIN as a sole proprietor, you must continue to use that number. If you were previously assigned an EIN as a Household Employer, you should use that number for your sole proprietor needs as well. If you are unable to locate your sole proprietor EIN, follow the instructions located here. If you need to update your business address information, complete Form 8822 (PDF) and mail it to us.
I am self-employed. How do I report my income and how do I pay Medicare and Social Security taxes?
Answer: You are a sole proprietor if you are the sole owner of a business that is not a corporation:
Note: The Federal tax system is based on a pay-as-you-go plan. Tax is generally withheld from employees' wages or salary before they get it. However, tax is generally not withheld from self-employment income. Thus, you may be required to make estimated tax payments. Publication 505, Tax Withholding and Estimated Tax, provides information on making estimated tax payments.
Planning is the key to successfully and legally reducing your tax liability. We go beyond tax compliance and proactively recommend tax saving strategies to maximize your after-tax income.
We make it a priority to enhance our mastery of the current tax law, complex tax code, and new tax regulations by attending frequent tax seminars.
Businesses and individuals pay the lowest amount of taxes allowable by law because we continually look for ways to minimize your taxes throughout the year, not just at the end of the year.
We recommend Tax Saving Strategies that help you...
- grow and preserve assets by keeping Uncle Sam out of your pockets.
- defer income so you can keep your money now and pay less taxes later.
- reduce taxes on your income so you keep more of what you make.
- reduce taxes on your estate so your family keeps more of what you've made.
- reduce taxes on your gifts so you can give more.
- reduce taxes on your investments so you can grow your wealth faster.
- reduce taxes on your retirement distributions so you can retire in style.
Here's just a few of the Tax Saving Strategies we use...
- Splitting income among several family members or legal entities in order to get more of the income taxed in lower bracket.
- Shifting income or expenses from one year to another in order to have them fall where it will be taxed at a lower rate.
- Deferring tax liabilities through certain investment choices such as pension plans, contributions and other similar plans.
- Using certain investments to produce income that is tax exempt from either federal or state or both taxing entities.
- Finding tax deductions by structuring your money to pay for things you enjoy, such as a vacation home.
Remember, we work for you not for the IRS. Many of our clients save many times the fee in reduced tax liability through careful planning and legitimate tax strategies.
Employer ID Numbers (EINs)
An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity. Generally, businesses need an EIN. You may apply for an EIN in various ways, and now you may apply online. This is a free service offered by the Internal Revenue Service. You must check with your state to make sure you need a state number or charter.
WHAT CAN I DEDUCT?
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
You can and should take advantage of tax deductions. And as a small business owner there will be plenty of these available. Once again, this is an area that your accountant will be able to go over with you. There is no reason to ever pass up a legitimate deduction; no matter how big or small.
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It is important to separate business expenses from the following expenses:
Cost of Goods Sold
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
The following are types of expenses that go into figuring the cost of goods sold.
The cost of products or raw materials, including freight
Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.
For additional information, refer to the chapter on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods.
You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.
Note: You can elect to deduct or amortize certain business start-up costs. Refer to chapters 7 and 8 of Publication 535, Business Expenses.
Personal versus Business Expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.
Business Use of Your Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Home Office Deduction and Publication 587, Business Use of Your Home, for more information.
Business Use of Your Car
If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a list of current and prior year mileage rates see the Standard Mileage Rates.
Deducting Automobile Expenses
Have you ever considered deducting automobile expenses on your final tax return? If not, you may be missing out on a gold mine. While there are only a select few people who can take advantage of this deduction you may be one of them.
The cost of operating an automobile is tax deductible if used for one of the following reasons:
1. Medical purposes
2. Business purposes
3. Relocating your primary address
4. For a charitable reason
If you meet one of the above circumstances you can deduct the cost of operating your automobile for that particular period of time. How much of a deduction can you take? This depends on the amount of miles you spent driving for one of the four reasons listed above.
Instead of calculating the actual expense of using your automobile, which is an option, you may want to opt for the standard mileage rate. For 2009 this is set at 14 cents per mile for charitable reasons, 24 cents per mile for relocating or medical purposes, and 55 cents per mile for business purposes. To go along with this, donâ??t forget to deduct other expenses that you incur along the way such as tolls and parking garage fees.
Believe it or not, automobile expenses are often times overlooked when it comes to tax deductions. Many people are under the impression that you can only deduct these expenses if you use your vehicle for business expenses. But as you can see above this is not the case.
If you are using your automobile for any of the four reasons above be sure to track your mileage so you can take advantage of a tax deduction at the end of the year.
Starting on July 1, 2008, the standard mileage rate for business related driving is set to increase to 58.5 cents per mile. This is much more than the current rate of 50.5 cents per mile. Why is the IRS making such a big change this time around? Simply put, they are doing their best to keep up with the ever increasing cost of fuel. Although they have raised the standard mileage rate by 8 cents, most experts agree that the IRS is still far behind where they should be. After all, gas has topped $4/gallon in most parts of the United States and there is no reason to believe that this will be reversed anytime in the near future.
Why is the standard mileage rate important? Well, this is what businesses use to reimburse employees who drive for work related purposes. To go along with this, self-employed professionals also use this rate when driving for anything that has to do with their job.
If you currently take advantage of the standard mileage rate or will be in the near future, it is important that you keep this rate increase in mind. Those who work for a company will not have to worry about this because their employer should make this change come July 1. But if you work for yourself, this is something to keep in mind if you will be filing your own tax return.
Remember, you need to keep accurate records so that you can get what is coming to you without lying on your tax return. Anytime that you are driving for business, record both your beginning and ending odometer reading.
All in all, an increase in the standard mileage rate deduction was a long time coming. Fortunately, the IRS did the right thing and made this change effective July 1, 2008.
Other Types of Business Expenses
Employees' Payroll - You can generally deduct the pay you give your employees for the services they perform for your business.
Retirement Plans - Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees' retirement.
Rent Expense - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities.
Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
This list is not all inclusive of the types of business expenses that you can deduct. For additional information, refer to Publication 535, Business Expenses.
Credit for contributions to a qualifying charity.
How to track busuness expenses for tax purposes.
As a small business owner you have a lot of responsibility. This is something you are probably well aware of. You will wear many hats. Every decision you make is an important one. This is definitely true when it comes to your tax situation. You need to be aware of all the tax laws that apply to you. To go along with this, you also need to track your income and expenses with 100 percent accuracy.
How are you tracking your business expenses? This is a big question because these expenses can be used as deductions and will help you save money. Those who do not properly track their expenses end up paying more than they should. Do you really want to send extra money to the IRS? Probably not.
The way you track your expenses does not matter as long as you are organized and accurate. Problems begin to occur when you misplace information, forget to record a purchase, etc. This is why your system needs to be full proof. Many small business owners use some sort of accounting software to track everything from expenses to income and much more. Others stick to a more traditional paper-based system.
Once you get into a groove and know how to track your expenses this will become part of your business. It can be difficult at first to find a system that works, but when you do there will not be anything holding you back from that point on. Remember these two words: organization and accuracy.
The procedures for compensating yourself for your efforts in carrying on a trade or business will depend on the type of business structure you elect. Below are topics that frequently arise when new business owners ask the Internal Revenue Service questions about paying themselves.
An officer of a corporation is generally an employee, but an officer who performs no services or only minor services, and who neither receives nor is entitled to receive any pay, is not considered an employee. Refer to "Who Are Employees?" in Publication 15-A, Employer's Supplemental Tax Guide (PDF).
Partners are not employees and should not be issued a Form W-2 in lieu of Form 1065, Schedule K-1, for distributions or guaranteed payments from the partnership. Refer to partnerships for more information.
Any distribution to shareholders from earnings and profits is generally a dividend. However, a distribution is not a taxable dividend if it is a return of capital to the shareholder. Most distributions are in money, but they may also be in stock or other property. For information on shareholder reporting of dividends and other distributions, refer to Publication 550, Investment Income and Expenses.
Form 1099-MISC or Form W-2
You cannot designate a worker, including yourself, as an employee or independent contractor solely by the issuance of Form W-2 or Form 1099-MISC. It does not matter whether the person works full time or part time. You use Form 1099-MISC, Miscellaneous Income (PDF) to report payments to others who are not your employees. You use Form W-2 to report wages, car allowance, and other compensation for employees.
Treating employees as nonemployees
You will be liable for social security and Medicare taxes and withheld income tax if you do not deduct from payroll and withhold them because you treat an employee as a nonemployee, including yourself if you are a corporate officer, and you may be liable for a trust fund recovery penalty. Refer to Publication 15, Circular E, Employer's Tax Guide for details about the trust fund recovery penalty or Independent Contractor for more information on employee classification.
Shareholder loan or officer's compensation?
A loan by a corporation to a corporate officer should include the characteristics of a loan made at arm's length. That is, there should be a contract with a stated interest rate, a specified length of time for repayment, and a consequence for failure to repay the loan. Collateral would also be an indication of a loan. A below-market loan is a loan which provides for no interest or interest at a rate below the federal rate that applies. If a corporation issues you, as a shareholder or an employee, a below-market loan, the lender's payment to the borrower is treated as a gift, dividend, contribution to capital, payment of wages, or other payment, depending on the substance of the transaction.
Refer to Costs You Can Deduct or Capitalize in Publication 535, Business Expenses for more information.
Because an officer of a corporation is generally an employee with wages subject to withholding, corporate officers may question what is considered reasonable compensation for the efforts they contribute to conducting their trade or business. Wages paid to you as an officer of a corporation should generally be commensurate with your duties. Refer to "Employee's Pay, Tests for Deducting Pay" in Publication 535, Business Expenses for more information. Public libraries may have reference sources that provide averages of compensation paid for various types of services. The Internal Revenue Service may determine that adjustments must be made to the income and expenses of tax returns for both the corporation and an individual shareholder if the officer is substantially underpaid for services provided.
If you are a sole proprietor or partner in a partnership, the money or other forms of payment you take from your business should be accounted for in a draw account. This helps you know what amount of benefits you have taken from the business during the year. You cannot deduct the sole proprietor s own salary or any personal withdrawals made from the business.
Form 941, the employer's quarterly migrane
Every three months, employers must file IRS Form 941, Employer's Quarterly Federal Tax Return.
It's required of all employers who pay wages subject to income tax withholding or Social Security and Medicare. Its purpose is straightforward -- to report and pay business taxes for the quarter -- but the form itself isn't.
When the U.S. Senate Small Business Committee held an online "Paperwork Unpopularity Poll," Form 941 came in first among all business-related forms. As one business person griped, "Even with business software, the IRS rules surrounding this form are so complicated it makes my head spin!".This is included in our payroll package.To read reviews check out BASC Expertise at kudzu.com
Tax Calendar for Small Businesses.
Responding to an IRS Notice
Millions of taxpayers receive a letter from the IRS each year. Here are ten tips for what to do if the IRS contacts you.
- Donâ??t ignore the letter. Open it promptly. The actions you need to take are almost always time sensitive so itâ??s best to act immediately.
- With most letters the resolution is had with a few simple steps like providing additional information or filling out an additional form. Donâ??t worry so much about the letter, just do what needs to be done to resolve the issue.
- Follow instructions. The letters include very specific instructions. When you donâ??t follow those instructions the resolution of the issue can be delayed.
- Be aware that the notice may ask you to pay taxes. The letter should describe in specific details why this is the case.
- Whenever responding to a letter, be specific and accurate in your communication. This will speed the resolution of your particular issue.
- Have your tax return handy. The IRS may ask you to correct information filed in your return.
- Often with a correction request, no reply is necessary. Again, read the instructions carefully.
- If the letter says you may appeal an IRS decision and you disagree with that decision, respond to the letter with an explanation of your position. Include supporting documentation to your dispute.
- The letter you receive includes a phone number you can call if you have questions about the notice. Call it if you are unsure about anything. Most of your questions can be answered by doing this.
- Finally, keep detailed records of each correspondence including phone calls. Keep copies of letters and documents.
Youâ??re Being Investigated for Tax Fraud
"The IRS wants you to understand that you'll never actually see that message in a subject line from IRS. It's the newest scam to target taxpayers.
Taxpayers have reported the receipt of an email allegedly from "IRS Criminal Investigation" claiming that an investigation is underway for filing of a false return or other complaint. The email has an attachment and link which may result in a virus commonly called a Trojan Horse which allows hackers access to your computer's hard drive.
If you receive any emails claiming to be from the IRS, please remember that the IRS does not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS will never ask for your PIN numbers, passwords or other access information for credit card, bank or other financial accounts.
Do not open the attachment! Instead, forward the e-mails to email@example.com."
My comments: Just use common sense. The IRS is going to use a letter to announce something this drastic. I can't say that I have ever seen email correspondence from the IRS. I am on some of their email lists, where updates on tax changes are given to preparers, but that's about it from the IRS. It's true that things are evolving. but this future isn't here yet.
You can and should take advantage of tax deductions. And as a small business owner there will be plenty of these available. Once again, this is an area that your accountant will be able to go over with you. There is no reason to ever pass up a legitimate deduction; no matter how big or small.
When you start a small business you may feel overwhelmed. In order to avoid tax related problems, hire a certified public accountant to work on your behalf. An accountant can help with everything from filing final returns to locating deductions and much more.