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How to Make Tax Time Less Stressful by @Pamela_Lund

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How to Make Tax Time Less Stressful

by Pamela Lund | Featured Contributor

Tax time just passed so you don’t have to think about income tax again for a year, right? Sure, if you like being stressed out and cash strapped every April. 🙅‍♀️ If you always scramble to get all of your records together, have to frantically pull together cash to pay what you owe, or haven’t set your business up to maximize deductions you should start making changes now so next year goes more smoothly.

I’m not a CPA or an attorney so the advice here is based on my decade of experience owning a business, originally as an independent contractor then as an S-Corp. You should speak with a professional before you make any major changes but these tips will help you ask the right questions when you do so you get the most benefit.

Make Bookkeeping a Habit

Until I became a business owner I never balanced my checkbook or budgeted. Every month I’d sit down to pay my bills and cross my fingers hoping there was enough money to cover my expenses. If there wasn’t? Well that’s what credit is for, right? 🤦‍♀️ When it came time to do my taxes I had a pile of receipts and no organized record of deductions. Not only was this time consuming and stressful, I know I missed out on deductions which means I wasted money. While this might work for a salaried employee with one income stream, it’s not ideal for a business.

Basic bookkeeping will make tax time less stressful by consolidating all of your information in one place. Use an accounting program, such as QuickBooks or FreshBooks, to categorize your transactions so it’s easy to find deductions. Accounting programs also make it easy to send your CPA the financial reports they need to prepare your tax return. Even if you don’t know anything about financial reports, all you have to do is click a few buttons to run the right reports. No more gathering receipts, trying to remember which credit card you used to buy your laptop, or worrying about what you’ve forgotten.

Speaking of credit cards, keep your business and personal expenses completely separate to make bookkeeping as streamlined as possible. Once a week or so simply download your transactions and classify them, pay your bills, and reconcile your accounts so you never have to worry about your balances.

Consider outsourcing your bookkeeping if it’s difficult for you to stay on top of or if it’s particularly stressful for you. You should spend your time doing what you’re good at so you can maximize your productivity and profitability.

Hire a CPA

As business owners we wear a lot of hats (and we wouldn’t have it any other way) but there are some things that are best left to a professional. Business taxes are one of those things. A good CPA will advise you on more than just taxes but the peace of mind that comes with knowing your taxes are done correctly and with the maximum deductions possible makes the expense worthwhile.

Ask other entrepreneurs, your lawyer, or people in your networking group for a recommendation to find someone you can trust. It helps if they are familiar with your specific type of business but it’s not usually necessary.

Pre-pay Estimated Income Taxes

If you’re a salaried employee of your company you should already be paying the bulk of your income taxes with each payroll. If you’re a salaried employee but you’re not using a payroll service, consider using one so you don’t have to calculate payroll taxes and can automate tax payments to reduce the time you spend on payroll. There are numerous payroll services you can find with a quick search or QuickBooks has one that you can add on if you use their bookkeeping software.

If you have a pass-through business, like an S-Corp, you’ll need to estimate how much additional (distribution) income you expect your business to have beyond your salary and pay quarterly estimated taxes so you don’t have a big tax bill at the end of the year. Your CPA can help you estimate how much you should pre-pay but in most cases you should pre-pay what you paid the prior year unless you expect your income to change drastically.

If you aren’t paying yourself a salary and you expect to be profitable, you still need to pay income taxes before you file your return with quarterly estimated tax payments. Not only will you avoid penalties by pre-paying your taxes, you also won’t have the stress of a large tax bill.

Maximize IRA Deposits

You already know that you can and should deposit the maximum (currently $5500 for people under 50) in an IRA to reduce your tax liability. But, as a business owner you may qualify to have a SEP-IRA instead to which you can deposit an amount equal to up to 25% of your salary. As long as your salary is over $22,000 annually that’s more than the standard IRA limit so it’s worth looking into.

Keep in mind that you may have to give other employees, current or future, the same SEP-IRA benefits that you have. Check with your CPA before moving forward so they can advise you on the legal and financial impacts.

If you do set up an SEP-IRA, make sure to set aside 25% of your salary each month for the deposit or actually deposit it with each payroll so you don’t have to scramble at the end of the year to come up with the money.

Incorporate (or Don’t)

Depending on your state, business type, and income level it may make sense for you to incorporate as an S-Corp or LLC. Doing so may offer tax advantages by reducing the self-employment tax you pay on the distribution portion of your income vs. the salary portion.

If you choose to incorporate, try to do it on a date such as the first day of a new quarter or the first of the year to make accounting, and therefore taxes, as easy as possible.

If you’re only incorporating for a tax advantage, keeping mind that those advantages may go away in the near future, that there is paperwork to be filed regularly, and that there are annual fees associated with incorporation that may not make it worthwhile for your situation. Speak with a business lawyer and your CPA to determine the business structure for your situation.

As a business owner you’ve got enough stress. If you implement a bookkeeping process, maximize your deductions, and pre-pay your income taxes, tax time shouldn’t involve more than a bit of paperwork and will definitely be less stressful.

Self-Employed or in the Gig Economy? Why the Difference Matters for Taxes by @DeborahSweeney

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Unless you happen to fall into one of the two categories, you may not know the difference between self-employed professionals and gig economy workers. According to the Second Annual Self-Employment Report released by accounting software company FreshBooks, these two groups are often categorized as a single entity despite their differences. Self-employed professionals are defined as having a primary income that comes from independent, client based work. Members of the gig economy, on the other hand, work side gigs such as rideshare driving or freelance writing in addition to maintaining a traditional full-time job. Their primary source of income is the paycheck from their full-time position, with side hustles bringing in a little extra money.

With 27 million Americans estimated to exit traditional employment for self-employment by 2020, defining the difference between the two groups has become crucial for tax purposes. As you work on filing tax returns, here are the key areas for both self-employed professionals and gig economy workers to keep in mind.

Make sure you have been properly classified

Both self-employed and gig economy professionals must be properly classified for the services that they provided. The IRS states that business owners must correctly determine if these individuals are employees or independent contractors (AKA self-employed).

Self-employed individuals are in business for their own self and therefore do not have businesses that withhold or pay their taxes. Businesses that work with gig economy professionals use common law rules to determine if these workers are employees or independent contractors. The major three factors are behavioral (control, or not, as to how the worker does their job), financial (if there are business aspects of the worker’s job controlled by the payer), and their relationship type (such as written contracts).

Once these three factors have been examined, businesses will have contractors complete and file the appropriate forms like Form W-9 or Form 1099-MISC to pay their associated taxes.

Determine if you will need to pay estimated taxes

Paying estimated taxes is a tax strategy that self-employed professionals and members of the gig economy may consider doing, if they haven’t started already. Estimated tax payments are used by taxpayers to pay income and self-employment taxes. These quarterly payments are due on the 15th of April, June, September, and January.

If you do decide to start making estimated tax payments, remember that your payments must be made in full and on time. Failure to do so may result in being charged a penalty for underpaid taxes.

How are your records looking?

One of the most strategic moves that anyone, self-employed, in the gig economy, or an employee, can do when filing their tax returns is to keep their paperwork organized. Who did you work for or complete work throughout the year? Did you receive all of your necessary tax forms or are you still waiting on a few? What about deductions? Do you have your receipts handy for business expenses you can deduct? Establish a solid recordkeeping system for every year that you are self-employed or a member of the gig economy and keep it as up-to-date as possible. Doing this allows you to document and track your income and expenses and can come in quite handy if you need to provide proof of your professional activities within a specified timespan.

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Deborah Sweeney – Legal Expert, CEO, MyCorporation.com – Calabasas, CA

Deborah Sweeney HeadshotAs CEO of MyCorporation Business Services, Inc. (MyCorporation.com), Deborah Sweeney is an advocate for protecting personal and business assets for business owners and entrepreneurs. With her experience in the fields of corporate and intellectual property law, Deborah has evolved from lawyer to business owner. She has extensive experience in the start-up and entrepreneurial industry as she has been involved in the formation of hundreds of thousands of businesses for MyCorporation.com’s customers.

Ms. Sweeney received her JD & MBA degrees from Pepperdine University. She is active in the community and loves working with students and aspiring entrepreneurs. She serves on the Board of Regents at California Lutheran University and is a founding member of Partners of Pepperdine. Deborah has served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in the areas of corporate and intellectual property law. Ms. Sweeney is also well-recognized for her written work online as a contributing writer with top business and entrepreneurial blogging sites.  She is a regular contributor on Forbes, American Express, Social Media Today, and BlogHer among many others.

In her ‘free’ time, Deborah enjoys spending time with her husband and two sons, Benjamin (8) and Christopher (6). Deborah believes in the importance of family and credits the entrepreneurial business model for giving her the flexibility to enjoy both a career and motherhood. Follow her on Twitter @deborahsweeney and @mycorporation.

How to Get Through a Tax Audit by @deborahsweeney

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by Deborah Sweeney | Featured Contributor

No matter how big or small the company is, there is nothing more frightening for a business than being audited. Auditors are the small business bogeymen, and everyone has a story about a friend of a friend who was hit with an audit and wound up paying out the nose. Even if you’ve done absolutely nothing wrong, a notification of audit is enough to send you into a panic. Before you start panicking though, it’s important to note that audits, while certainly an inconvenience, are really nothing to worry about, especially if you know what to expect before going into one.

The IRS uses a computerized scoring system

The IRS uses two computer-generated scores when selecting returns to audit. The Discriminant Function System, or DIF, scores tax returns based on similar past returns. Then the Unreported Income DIF score rates a return based on the potential of there being unreported income. If your return scores too high, the IRS takes a closer look. Be aware, however, that the IRS also pulls returns randomly for auditing, so there is no surefire way to always avoid an audit.

Beware audit triggers

Before you go into your audit, review your returns and see if you can find any possible triggers or discrepancies. It’s generally accepted that claiming deductions like a home office, business mileage on a personal car, or partial business use of personal assets can all trigger suspicion. Unfortunately, this puts home-based businesses in the IRS’s crosshairs, as they are most likely to claim all of those deductions. Keep in mind, however, that no one knows for sure what sorts of deductions can trigger an audit – the IRS tries to keep its system a secret.

You do have rights as a taxpayer

If you are targeted for an audit, remember that you do have rights and are not at the complete mercy of the IRS. Publication 1, Your Rights as a Taxpayer, lists the declaration of taxpayer rights, and the IRS will likely advise you on your rights before beginning the audit. Amongst those rights are the right to know why the IRS is asking for information, a right to representation, and a right to appeal.

Be neat, nice, and quiet.

No one likes being audited, but it’s important to treat your auditor with respect. As tempting as it may be to fling a shoebox of old receipts at them and tell them to figure it out, the more work you make for your auditor, the deeper they’ll dig into your finances. Keep all of your paperwork in order, and be courteous. At the same time, remember not to reveal anything more than what they ask for, and don’t offer any documents that don’t pertain to the year being audited.

Try to relax

The United States tax code is confusing, to say the least. The actual tax code is 5,000 pages long, and the comprehensive guide published for tax professionals is over 75,000 pages. More often than not, it’s the general lack of knowledge about our own tax code that causes so much panic and apprehension during tax season. We fear what we don’t know, and there are few people that can claim to know the intricacies of the US tax code. Relax and stay calm throughout the audit. Panic and you’ll misplace paperwork, talk too much, and snap at your auditor. Relax, review your returns, and the whole auditing process should go smoothly. You never know – they may even find deductions you missed!

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Deborah Sweeney – Legal Expert, CEO, MyCorporation.com – Calabasas, CA

Deborah Sweeney Headshot

As CEO of MyCorporation Business Services, Inc. (MyCorporation.com), Deborah Sweeney is an advocate for protecting personal and business assets for business owners and entrepreneurs. With her experience in the fields of corporate and intellectual property law, Deborah has evolved from lawyer to business owner. She has extensive experience in the start-up and entrepreneurial industry as she has been involved in the formation of hundreds of thousands of businesses for MyCorporation.com’s customers.

Ms. Sweeney received her JD & MBA degrees from Pepperdine University. She is active in the community and loves working with students and aspiring entrepreneurs. She serves on the Board of Regents at California Lutheran University and is a founding member of Partners of Pepperdine. Deborah has served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in the areas of corporate and intellectual property law. Ms. Sweeney is also well-recognized for her written work online as a contributing writer with top business and entrepreneurial blogging sites.  She is a regular contributor on Forbes, American Express, Social Media Today, and BlogHer among many others.

In her ‘free’ time, Deborah enjoys spending time with her husband and two sons, Benjamin (8) and Christopher (6). Deborah believes in the importance of family and credits the entrepreneurial business model for giving her the flexibility to enjoy both a career and motherhood. Follow her on Twitter @deborahsweeney and @mycorporation.