Ask an Accountant: Small Business Owner Tax Changes?


Thanks to Mom on Dealz for sharing her series, Ask an Accountant!  Sharon is married to an experienced accountant.  Although tax season is over, tax questions arise year round.

Question:
I read on Yahoo today that Social Security Tax is being raised. The article said that in 2012 the rate will go up to 12.4%, meaning 12.4% of a self employeed person’s income goes straight to Social Security Tax. Is this true?

Answer:

Social Security tax has always been 12.4% except this past year because in 2011 the government gave a reprieve making the tax only 10.4%. Starting next year it will go back to 12.4% as its always been. However tax laws change a hundred times in the tax year so it could be less or more by the time tax season rolls around again. On another note, don’t forget Medicare will still be applied, so really self employed individuals will pay 15.3% (as its always been).

*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation.

photo credit: austinpost.org

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Ask an Accountant: Blogging From a Tax Perspective

Thanks to Mom on Dealz for sharing her new series, Ask an Accountant!  Sharon is married to an experienced accountant, so if you’re looking for a professional to help out with taxes this year, give him a call.

Recently, I have received numerous requests for assistance in “setting up” blogs from a tax perspective, so I figured I would address this to give a basic understanding of the options that are out there & compare them.

Let’s start with the need behind organizing the entity.
1. Taxes – a necessary part of our economy…nobody likes to pay them, but without a tax structure, we would not be where we are today as a country.
2. Liability protection – we want to protect and seperate our personal assets (homes, vehicles, bank accounts) from any business activities in the event there is a problem, error, or mistake another person or entity can hold you liable for. You do not want the legal system to use these personal assets for retribution.

Here are the different types of entities:

Let’s start with the sole proprietor. From an administrative standpoint, this is the most simplistic. There are no additional tax forms, as the income is reported on your 1040, however, this essentially is an extension of you personally, and any income from these operations are considered Self Employment income and come with an additional Self Employment Tax in addition to your regular income tax rate. Self Employent Tax can be estimated at approx. 15% of the self-employment income. The drawback here is there is no liablitity protection in the event of litigation.

The next option, is an LLC. They have become a very popular business form for new entities, and many existing entities have converted to this form. They exist in some form in every state. They combine limited liability features of corporations and pass through characteristics of partnerships and S corps, but are more flexible than S corps. For federal tax purposes, LLC’s are treated as partnerships (unless they elect otherwise). There is one exception, a Single-Member LLC, which retains the liability protection, but is taxed as a sole-proprietor. The profit from these entities also trigger Self-Employment tax.

Finally, Corporations: The S Corp (so named from a chapter of the tax code) is a regular corporation with regular limited liability, whose owners elect “pass through” status meaning the corporation itself pays no tax. The profit is passed through to the owner and the tax is paid on the owner’s 1040. Corporations whose owners don’t choose to make the federal S corp. election-that choose to be taxed as corporations-are called C corps and pay tax a higher corporate tax rates. The benefit here is there is no self-employment tax on the profits.

*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation.

photo credit: austinpost.org

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Ask an Accountant: Reminders Before the 18th

 

Thanks to Mom on Dealz for sharing her new series, Ask an Accountant!  Sharon is married to an experienced accountant, so if you’re looking for a professional to help out with taxes this year, give him a call.

Some of you may not know due to Emancipation Day, the Tax Deadline has been extended to Monday April 18th. Here are some last minute reminders for those of you who have waited until the last minute.

1. You can still make a 2010 tax deductible IRA contribution until Monday.

2. If you know you won’t have your paperwork ready in time, you will need to file an extension.

3. If you owed money this year, consider making estimated payments this year. The first estimate for 2011 is due Monday.

4. Consider opening an IRA for 2011. These are tax deductible and help you save for your future.

*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation.

photo credit: austinpost.org

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Ask an Accountant: Home Office Space

Thanks to Mom on Dealz for sharing her new series, Ask an Accountant!  Sharon is married to an experienced accountant, so if you’re looking for a professional to help out with taxes this year, give him a call.

Question:
How do I determine the amount of office space to use for a write off?

Answer:

A home office is defined by IRS guidelines as “any area of your home used exclusively for business”. This means, it cannot serve any other purpose other than business use. If an area of you home qualifies, the easiest way to determine the area is to estimate the suare footage of the business area of the home as a percentage of the entire square footage of the home.

This is reported on Form 8829, then you are able to apply that percentage to mortgage interest, real estate taxes, hazard insurance, repairs, and utilities and get a better deduction than you would normally get from those items on schedule A. The remaining percentage of the mortgage interest & real estate tax then goes on the appropriate line on Schedule A.

Here is an example
: Your home is 1,000 sqaure feet and your home office is 100 square feet. Therefore your business percentage is 10%. You would then apply the 10% to your mortgage interest, real estate taxes, hazard insurance, repairs, and utilities. Your remaining percentage of mortgage interest and real estate tax would be 90% and would go on your scedule A.

*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation
.

photo credit: austinpost.org

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Ask An Accountant: What to do with My IRA Rollover

Thanks to Mom on Dealz for sharing her new series, Ask an Accountant!  Sharon is married to an experienced accountant, so if you’re looking for a professional to help out with taxes this year, give him a call.

Question:
How I want to handle my rollover..In 2010 I rolled over all the money from my IRA (which started out as a 401K )to a Roth IRA. Do I want to split the taxable amount between 2011 & 2012 or do I want put in the whole taxable amount this year & take the tax hit all this year?

Answer:

If you think you will be in a higher tax bracket next year, then take it all now. If it will not make that much of a difference, split it to get refunds in both years. In the end you will most likely pay the same amount of tax on those dollars, you just have the option of paying the tax over 1 year or 2. Personally, I would opt for 2 years…(why pay the IRS now if they are allowing you to pay later with no penalty) You control the use of the money, not the IRS. This can be a gamble if tax rates increase, but I don’t think that wil happen for a few years.

*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation
.

photo credit: austinpost.org

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Ask an Accountant: File an Extension

Thanks to Mom on Dealz for sharing her new series, Ask an Accountant!  Sharon is married to an experienced accountant, so if you’re looking for a professional to help out with taxes this year, give him a call.

Question:
I am way behind and know I will not have my stuff ready in time to file by the 15th. What should I do?

Answer:

You will need to file an extension with the IRS. This is an automatic 6 month extension that is valid until October 15th. Keep in mind this will only be an extension for time to file, not time to pay. What you will need to do to avoid underpayment penalty (under paying your taxes) is pay 90% of your previous year tax liability (in this case 2009). For example if your total tax liability for 2009 was $10,000-90% of that would be $9,000. That’s what you would have to pay in. However your withholding is included in that. So if you had $8,000 withheld that same year, you would need to pay in $1,000 to make it to the $9,000 of your liability.

*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation
.

photo credit: austinpost.org

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Ask an Accountant: Giveaway Wins & Estimating Earnings

Thanks to Mom on Dealz for sharing her new series, Ask an Accountant!  Sharon is married to an experienced accountant, so if you’re looking for a professional to help out with taxes this year, give him a call.

Question:
I keep hearing that as a person who enters giveaways you have to file taxes on the prizes that you win (no matter the value). Is this true? Do you claim the prizes as income and as a new blogger I haven’t earned any income yet, but I sometimes work out of my home just doing hair with no chemicals (more of a stylist because I work with dreads). How do I claim this as an income or can I and if so: Do I estimate my earnings and will this hurt me because I haven’t paid any taxes but earned income (plus I am a mom of 4).

Answer:

While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don’t realize that they must also report most other income, such as:

  • cash earned from side jobs,
  • barter exchanges of goods or services,
  • awards, prizes, contest winnings and
  • gambling proceeds.

You would normally include these as miscellaneous income on your tax return, not subject to self-employment tax.
For the hair business, that income would be reported as a Schedule C (Profit From Business). I would also suggest you get yourself a separate business license and an EIN for each of these ventures ASAP. This will generate additional taxable income as well as “self-employment” tax which is an additional tax (estimated to be around 14%) on the profits from these activities. So for every $100 dollars in profit you should expect to pay $14 in self employment tax. Avoid “estimating” as the use of whole round numbers sends a red flag to the IRS that you may be estimating the figures and they may ask for substantiation of these figures.
As an accountant that has Hair Salon clients, I would say there must be some basic supplies you need to operate (combs, brushes, scissors, clippers, water bottles, clips, aprons, as well as Home Office expenses (for the portion of your home used exclusively for hair styling) such as a portion of the electricity, water, mortgage interest/rent, taxes, etc… All of these can be deductible items for you business.
*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation.

photo credit: austinpost.org

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Ask an Accountant: Blogger EIN Number & 1099 Form

Thanks to Mom on Dealz for sharing her new series, Ask an Accountant!  Sharon is married to an experienced accountant, so if you’re looking for a professional to help out with taxes this year, give him a call.

Since I am a blogger and know how confusing tax time can be, I thought it would be appropriate to share some questions I have received from fellow bloggers this week. I inserted my name and blog name to keep the situation anonymous. Also, due to the number of blogger tax questions I have received, I will be including 2 questions this week.

Question #1:

I’m a bit lost on the EIN and the company name thing and if I need to do it as a business or what…. I got an EIN but its for my name…do I need one for the blog? Do I need to get a business license? I know some have their blogs as corporations or LLC. ???

Answer #1:

The blog and you are one in the same (unless you incorporated or filed LLC registration with the state). Essentially the blog name is a d/b/a for you personally (sharon ____ d/b/a momondealz.com). What this does is allows you to get paid under your personal name for income of the business without putting your social security number for all to see.

If you plan to generate revenue or sell anything (advertising, tangible items, coupons, etc…) you do need a business license. Along with this comes an annual registration fee as well as Tangible Business Personal Property Tax for the city you live in (computer, camera). Tangible business personal property is any asset or item with a useful life used to produce income. The tax is similar to your personal property tax on your car. Without this, the IRS would consider your venture a “hobby” and limit the deductions you can take.

Question #2

Is it true that if you make under $600 you don’t have to report it? And is it $600 per source (this affiliate, that affiliate) or $600 from all sources?

Answer #2

Per IRS guidelines you are required to report ALL income from all sources whether you receive a 1099 or not.

The $600 threshold is for the “payer” or in this case the affiliates. The IRS mandates that the “payer” fill out and send form 1099 to each un-incorporated entity/person (blogger in this case) that they paid for services (no tangible items). The reasoning behind this is two-fold. One is to remind the recipient of the income they received from each source they received income from, and two, provides a “paper-trail” for the payer to substantiate payments they will deduct from their business. In the event of an audit, this is one of the first things the IRS will ask a business for in order to allow the deduction.

Keep in mind, even if you are incorporated or received less than $600, you may still receive a 1099 for services you performed, as $600 is the IRS threshold, not necessarily the company’s threshold

*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation
.

photo credit: austinpost.org

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Ask an Accountant: Land Lease


Thanks to Mom on Dealz for sharing her new series, Ask an Accountant!  Sharon is married to an experienced accountant, so if you’re looking for a professional to help out with taxes this year, give him a call.

As we all know, it’s that dreaded time of the year-Tax time! In honor of tax season, I have a new series called “Ask An Accountant”. Send in your tax questions and each week to [email protected] and I will post the question and give an answer from an experienced accountant.

Question:

We recently bought a manufactured home in 2010 (une). We have a mortgage on the house, and have a 30 year land lease for the land that it is on. can we claim the land lease on our taxes? Several places i have read give me different answers, some say yes, others say no unless it is a lease to own, which it is not. Any advice on how this plays into our taxes would be great appreciated!!

Answer:

If the lease payment is broken down by the lessor into principal and interest then you may deduct the interest just like a mortgage. This would typically be a situation where there is a lease to own with a small buyout at the end of the lease. If you are paying the taxes on the land you can deduct that.
*Please keep in mind this post is for informational purposes only and answers given are very general. Many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation.

photo credit: austinpost.org

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