In 2015, a California regulatory agency posed a similar question to Uber, and they weren’t satisfied with the answer.  They went on to conclude that Uber’s drivers were employees.  Subsequently, nearly 400,000 Uber drivers in CA and MA reached a $100 million settlement with the company in 2016 (later thrown out by a federal court as insufficient compensation). 

While Uber may serve as a poster child in this vexing area of employment law, no business, however large or small, is exempt from the requirements and the penalties for failure to comply. In this essential guide, we provide you with some practical tips to help you understand the differences.

Guide to Contents

• Setting the stage
• But why does it matter?
• How to get it right
• What happens if I’m wrong?
• Conclusion

Setting the stage

The debate over worker misclassification pervades the modern workforce and economy. In the United States, a multitude of employment arrangements exist.  For instance, some workers are part-time while others are full-time.  Some are salaried employees, while others work on an hourly basis.  One of the more complicated, and important, classifications is between employees and independent contractors.

These differences may seem like academic labels used merely to categorize the American workforce. However, in practice, they have far-reaching implications for employers (and employees too) on everything from worker rights to taxation, to compensation.

An important initial step in onboarding any employee is determining whether he or she is an employee or an independent contractor.  Employers that misclassify their workers—whether by accident, negligence or wilfully —face financial penalties and other legal ramifications.  Thus, as an employer, you must understand the difference between an employee and an independent contractor.

But why does it matter?

It’s really quite simple: Taxes. Sure, other reasons exist, but none more paramount than taxes. If an employer classifies a worker as an employee, it needs to withhold, deposit, report, and pay employment taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid. The IRS also has filing requirements for employees.

On the other hand, for “independent contractors”, the employer is subjected to a much lower compliance standard. Independent contractors arrange and pay their own income tax quarterly, they receive no benefits and aren’t eligible for unemployment insurance.

Not withholding taxes and benefits (or incorrectly withholding them) doesn’t just put an undue burden on employees and contractors. If you “misclassify” a worker and fail to correctly withhold or pay the required amounts, the IRS may flag your business and pursue you for the money, penalties and interest (which can be excessive).

For the employee, the impacts of misclassification are almost always the same: below-market wages, no benefits, and increased exposure to risks. And when misclassification is adopted as a business strategy by some companies, it disadvantages competitors who bear the costs of compliance with labour standards and responsibilities.

How to get it right

In certain situations, the line between employee and contractor can get incredibly pale.  But the difficulty is no excuse,  as the employer is responsible to make an accurate and consistent classification for each new hire.  Thankfully, the IRS has provided some guidance to help (at least at the federal level). Four key gating questions to ask are:

1. Does the company control what the worker does?
2. Does the company administer the financial and business aspects of the worker’s job (how the worker is paid, reimbursement of expenses)?
3. Does the company provide common benefits to the worker (ie. personal time-off, 401k plans, pensions, health or dental insurance)?
4. Does the company provide the equipment and/or tools needed to complete the worker’s job?

While each factor is considered, the IRS cautions that no single factor is dispositive. Control is of particular importance.  State and federal agencies, such as the IRS, normally rely on the “right of control” test to determine whether a worker is an employee or independent contractor.  If an employer controls when and how a worker performs the job, that militates in favour of employee status. On the other hand, if the company’s input is limited to accepting or rejecting the final results (much like you would with a painter at your house), then independent contractor classification seems correct.

While a survey of 50 state laws around classification is well beyond the scope of this article, it’s worth noting that the home state of the company and the worker will also have an interest in the classification, as it has implications for workers’ compensation and unemployment insurance laws. Most tend to rely heavily on control, but also focus on other factors. Most good small business lawyers will be able to help you with the classification, and with multiple employees on the books, you’ll likely need payroll and accounting help too.

What happens if I’m wrong?

The legal consequences of misclassification will include, at minimum, payment of back taxes.  The financial exposure increases if misclassification was intentional, and repeat-offenders will incur substantial financial penalties (in some cases even jail-time).  In addition to back taxes payable at the federal level, the business will also owe state unemployment taxes and unpaid workers’ compensation premiums and may owe unpaid overtime or minimum wages, medical expenses and unpaid vacation and sick pay.

Also, as noted, each state has an interest in the employee/contractor classification, so applicable penalties will likely be two-fold, once at the federal level and again at the state level.

Conclusion

Remember that state and federal tests as to proper classification will apply irrespective of the parties’ intent and contract language. Any business currently using independent contractors on a regular basis should review those relationships based upon the tests described in this article. If a company is not certain about the proper classification of its workers, a business attorney with employment expertise can assist with the analysis. The IRS, Department of Labor and state regulatory bodies are all paying attention even if you are not.

The post The Essential Guide to Navigating the Independent Contractor v. Employee Minefield appeared first on financepal.

This article covers the most commonly missed deductions for small business owners—and how you can determine if your business is eligible.

• The Home Office Deduction
• The Mileage Deduction
• S-Corp Tax Benefits
• Business Meal Deductions
• Miscellaneous (But Useful) Deductions
• The Big Picture

The Home Office Deduction

Many small businesses conduct their operations from a home office. A home office can be located within a room at your residence or an outbuilding unattached to your home. Working from a home office provides several benefits such as flexibility, ease of access, and of course, inherent tax deductions.

However, the IRS can be a stickler for eligibility; to ensure that your home office qualifies for deductions, it must pass two tests.

1. The Regularity Test: You must use the room regularly.
2. The Exclusivity Test: The room must be exclusive to business activities. 

In addition, your home office has to be your “principal place of business.” As your principal place of business, you must use your home office as the primary location for meeting with clients or conducting other business activities. If you perform administrative or management duties elsewhere—or have a secondary office—the IRS will reject your home office deduction.

The Mileage Deduction

Business travel can make up a significant expense, especially for small business owners. Luckily, there is a deduction for that; currently, the IRS permits a deduction of 56 cents per qualifying mile. This rate is subject to change each year but should remain within the same ballpark. You can easily track your business miles with a service such as Mile IQ.

Unfortunately, you cannot deduct your commute. However, there is a workaround within the tax code language; the difference lies in how ‘commute’ is defined.

Commuting travel is defined as travel to and from your home to your business. Travelling from your business to another business site, such as a branch or a meeting place with a client or prospect, is considered travel eligible for a mileage deduction. This is where a home office can come in handy; when you have a qualifying home office, business travel from your home to another place of business can be deductible because it doesn’t meet the definition of a commute.

For the sake of example, let’s say you own a restaurant 30 miles from your residence. Suppose your restaurant doesn’t have any office space, and you can do business in a qualifying home office. In that case, the 30-mile trip can count as deductible mileage instead of a non-deductible commute.

S-Corp Tax Benefits

While the S-Corporation designation is not for every business, it may open the door to some next-level tax savings. Unlike standard corporations, S-Corps are considered “pass-through” entities because income, losses, and deductions “pass-through” directly to shareholders, circumventing corporate income tax. After being passed through to shareholders, income, losses, and deductions are taxed at each shareholder’s income tax rate.

The S-Corp designation can be a popular choice for certain business owners because they avoid double taxation, but it is not suitable for everyone. In fact, many businesses are not even eligible. Companies with more than 100 shareholders or foreign shareholders, ownership by a separate corporation or partnership, or multiple classes of stock are disqualified.

Even if you are eligible for an S-Corp designation, several downsides must be weighed. For example, S-Corps must run payroll and withhold taxes. In addition, the IRS closely watches S-Corps to dissuade those taking advantage of the designation. Also, outside investors tend to prefer investing in C-Corps over S-Corps because C-Corps are more conducive to growth. S-Corp profits are subject to taxation, whereas C-Corp gains are only taxed once distributed, encouraging C-Corps to keep money in the business to fund growth.

The S-Corp designation is not optimal for every business, but for highly profitable small businesses with shareholders, it can save a lot of money by circumventing double taxation.

Business Meal Deductions

The business meal deduction goalposts are constantly shifting, but 2021–22 is shaping up to be an optimal period for meal-related tax savings. The recent COVID-19 Relief Bill permits businesses to write off 100% of the cost of business-related restaurant meals, food, and beverages in 2021 and 2022.

By definition, deductible food and beverage items include all food and beverages, including:

• Snacks
• Alcohol
• Other non-traditional “meals”

Delivery charges, sales tax, and tips are also covered. 

Notably, entertainment expenses are not deductible—but meals at entertainment venues can be. While it may seem like an inconvenience at the time, always ask for an itemized receipt at entertainment venues that separate the meal from the entertainment expense. 

It’s always good practice to document every business-related expense, and business meals are no different. After each business meal, remember to put the receipt somewhere safe like your online accounting dashboard. Doing so is crucial to protect your finances in the event of an audit.

Miscellaneous (But Useful) Deductions

Giving gifts to your clients is more than a fast-track to their hearts; it can save your business money on its tax return. The IRS allows a business deduction of up to $25 per client per year.

Business Clothing

Business clothes can also be deductible, but with many strings attached—you cannot deduct street-appropriate work clothes, for example. To qualify for the business clothes deduction, the clothes in question must be “mandatory for your job and unsuitable for everyday wear.” 

Unfortunately, this means you cannot deduct a brand-new, custom-tailored Italian suit—even if it is required for your job—but a bariatric welding contractor could deduct the cost of wetsuits, for example. However, there is a workaround to deducting street-appropriate wear: if the clothing contains a visible business logo, it can be considered advertising—which is deductible.

Charitable Deductions

Another deduction opportunity lies in charitable contributions. However, deducting these contributions is not as straightforward as one might expect. The only businesses that can directly deduct charitable donations are C-Corps—and most small businesses are not C-Corps. 

Fortunately, there is a workaround: classifying the charitable contribution as an advertising expense. This isn’t a simple “misclassify the deduction and hope the IRS doesn’t notice” type job—which, by the way, is illegal. To successfully classify your donation as advertising spend, you must be able to show how you leveraged the donation into an advertisement. 

For example, a business can accomplish this by donating money to a local high school sports or arts program, which will, in turn, list the business as a sponsor, such as in a printed program or on a scoreboard panel. In turn, the donation becomes classified as a “necessary business expense” and is now deductible as advertising spend—while still supporting a cause you care about.

The Big Picture

Tax benefits for small businesses exist for a reason. Unfortunately, many small business owners who aren’t financially savvy—or don’t employ specialized small business accountants—miss out on what is, basically, free money. Familiarity with top tax deductions is highly beneficial for any business’s bottom line and may even help business owners scope out opportunities for further tax write-offs. Because the business tax landscape is prone to rapid, yearly change, it is crucial for business owners to keep their ears on the ground for more upcoming opportunities to save.

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But what exactly does this mean for your business, and what are the benefits of a sole proprietorship over, say, a single-person LLC? This article addresses some of the minutiae of taxes for small businesses alongside the implications, benefits, and advantages of running a sole proprietorship. Use the links below to navigate the article.

• What is a sole proprietorship?
• How are sole proprietors taxed?
• How do I file taxes as a sole proprietor?
• Sole proprietorship tax benefits

What is a sole proprietorship?

A sole proprietorship is the default business classification for any single-person business or contractor engaging in business activities. Under a sole proprietorship, there is no distinction between the business owner as an individual and the company itself, as far as the IRS is concerned. Many business owners who maintain single-employee businesses choose to keep this classification as it makes business taxes much more straightforward.

How are sole proprietors taxed?

Sole proprietorships are considered a “pass-through entity,” meaning that revenue “passes through” to the owner. Because of this, sole proprietorships are exempt from certain business taxes that larger corporations have to contend with.

 Sole proprietors have to pay income tax at the federal and, if applicable, the state level. Also, sole proprietors must contend with sales tax (if applicable) and self-employment tax. Self-employment tax goes towards Social Security and Medicare — usually paid for by your employer, but in this case, you are the employer.

Finally, sole proprietors have to contend with federal and state estimated tax. In a nutshell, estimated tax is the amount you estimate you will owe for employment and income taxes at the end of the year. Estimated tax is paid every quarter, on the 15th of January, April, June, and September. We will further examine estimated tax later in the article.

Related Reading: Advantages of Running a Small Business

How do I file taxes as a sole proprietor?

Sole proprietorship tax returns are much more closely intertwined with personal tax returns compared to corporation taxes. However, there are still several unique steps that sole proprietors have to complete come tax time. Chief among these steps is listing your profit and loss statement on a Schedule C alongside form 1040.

What is Schedule C?

 Schedule C (Profit or Loss from a Business) consists of five parts:

1. Income
2. Expenses
3. Cost of Goods Sold
4. Information on your Vehicle
5. Other Expenses

Section I: Income

The first part of Schedule C records your business’s income for the relevant tax year. On this item, you must report:

•     Gross receipts or sales
•     Returns and allowances
•     Cost of Goods Sold (if applicable)

 You will use these items to calculate your total gross income.

 Section II: Expenses

Because there are a myriad of possible expense categories, there are many different items in Section II, even though many sole proprietors will only use a fraction of these items. They include:

•     Advertising costs
•     Vehicle expenses
•     Commissions
•     Contract Labor
•     Depletion
•     Depreciation
•     Insurance
•     Interest
•     Mortgage
•     Legal and professional spend
•     Office expenses
•     Benefits, pensions, and profit-sharing plans
•     Rent or lease for vehicles, machinery, equipment, or other business property
•     Maintenance and repair spend
•     Office supplies
•     Taxes
•     Licenses
•     Travel and deductible meals
•     Utilities
•     Wages

Although this list is extensive, a sole proprietorship may have qualifying business expenses that don’t fall neatly into any of these categories. The miscellaneous spend will need to be reported in Section V (other expenses) and subsequently added to Section II’s total spend.

 After these expenses are added up, you subtract the total amount from section I. The resulting figure is known as tentative profit or loss.

 If you use any part of your home for business activities, you need to report it in this section. There are two ways to do this: either attaching Form 8829, Expenses for Business Use of Your Home or using the Simplified Method worksheet. The purpose of this is to put a monetary value on any personal space used for business activities. The resulting figure is then subtracted from your tentative profit or loss to get your net profit or a net loss. If you made a net loss in the relevant tax year, your work might not be done; you may have to attach Form  6198, At-Risk Limitations.

 Sections I and II together paint a clear picture of any sole proprietorship’s cashflow health to the IRS. They comprise the mandatory part of Schedule C that every single sole proprietorship needs to complete. Some sole proprietorships may be exempt from some or all of the remaining sections, depending on applicability.

 Section III: Cost of Goods Sold

 This section needs to be completed by any sole proprietorships that operate with an inventory. The cost of goods sold is simply the measure of how much it costs to produce products, including direct material or labor expenses.

 When filling out Section III, you must disclose the method you use to value your business’s closing inventory. Also, you will need to list:

•     The value of your inventory at the beginning of the year
•     Value of business purchases made
•     The cost of labor excluding payments made to yourself
•     Cost of materials and supplies directly involved in producing goods sold
•     Other costs related to goods sold

 You will then subtract the value of your year-end inventory from this amount to find your total cost of goods sold.

Section IV: Information on Your Vehicle

If you are claiming vehicle expenses — and are not required to file Form 4562 —  you will need to fill out Section IV.  Section IV asks for the date you started using your vehicle for business purposes, the number of miles you drove your vehicle in the past year for business and commuting, whether you used your vehicle for personal reasons, and whether you have written evidence to support your deductions.

 Section V: Other Expenses

In Section V, you must itemize each business expense that is not accounted for in the previous four sections. Most sole proprietors do not need to fill out Section V.

Sole proprietorship tax benefits

There are a plethora of tax benefits for sole proprietors. Some of the more straightforward ones, such as pass-through designation, are automatically applied to your return. There are several more complicated or obscure benefits hidden in tax laws, however. Outsourcing your accounting and bookkeeping to professionals is the most efficient and most cost-effective way to save your business money come tax time. The small business accountants at FinancePal have helped thousands of sole proprietorships with their financials on a convenient subscription basis. FinancePal also has a team of small business tax preparation experts who are able to find the best tax benefits and savings for your sole proprietorship. Schedule a consultation today!

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All taxable income is subjected to federal or state income tax. Even income derived from fraud, theft, or other illegal activities is supposed to be taxed, although this is rarely paid for obvious reasons. The most common sources of taxable income are:

• Wages and salaries
• Interest and dividends
• Pensions and unemployment benefits
• Capital gains from property
• Social security and retirement plan (401(k))
• Distributions, business, and rental income

On the other hand, non-taxable income is income that is not subjected to federal or state income tax. Common sources of this type of income are child support payments, inheritances, gifts, life insurance paid to a beneficiary, worker’s compensation, garage sale proceeds, scholarships, and welfare benefits. 

 This article will talk about the taxable income formula, the calculation process, ways to determine taxable income, and more. Use the links below to jump ahead to a specific section.

• • • What is the Taxable Income Formula?
    • How to Calculate Taxable Income?
    • How to Determine Taxable Income
    • Taxable Income Formula in Action
    • The Bottom Line

   

What is the Taxable Income Formula?

Individuals and businesses use the taxable income formula to calculate the total income tax. Bear in mind that individuals and companies use the procedure differently, but the principle remains the same.

 For instance, individuals use the formula to deduct income tax from their total income earned. On the other hand, businesses use the formula to deduct expenses from their total revenues. Here is the taxable income formula for individuals.

 Taxable income formula = total income – exemptions – deductions

 It is a simple formula that requires you to calculate taxable income by deducting your total exemptions and deduction from your total gross income. Conversely, for companies, the process requires deducting different entities from the company’s gross sales.

 For example, you will deduct the cost of products or services sold, business operations’ expenses, and interests from your total revenue. Similarly, it is crucial to adjust your credit and tax deduction to achieve an accurate final income. Here is the formula modified for businesses:

Taxable income formula = gross sales or revenues – the cost of products or service – operating expenses – interest paid on debts – tax deduction/credit

How to Calculate Taxable Income?

All businesses, including small and medium-sized enterprises, file annual tax returns with the IRS. The purpose is to pay income taxes on the revenues generated or profits earned. It is important to note the filing requirements depend on your business status, the type of organization you run, and federal or state requirements.
 It is crucial to understand the process of taxable income calculation. Otherwise, you can’t determine the income taxes due, leading to various discrepancies and challenges. At the same time, when you fail to determine or calculate your taxable income, you can’t track or evaluate your company’s net profit. Here are the steps to calculate taxable income.

Step 1: Collect all Records and Documents

Calculating your taxable income requires careful planning and preparation, meaning you need to collect all necessary documents and records. The process begins at the start of the tax year, allowing you to gather the required information and make it available for the tax filing season.

You will need cash register records, bank statements, and sales receipts to document your company’s revenues. Remember, you will also need statements and receipts for expenses. In addition, gather payroll documents and records, such as employees’ mileage logs, if applicable.

Step 2: Determine Your Company’s Gross Revenues

Determining gross revenues is an essential step for calculating your company’s taxable income. It involves gross sales and allowances for products or services, including returns and discounts.

Add interests received and sales profits of investments and assets to this figure. For example, your company’s gross revenue is $2.6 million if you had sales of $2.5 million and received $100,000 interest on bank deposits.

Step 3: Subtract Costs of Goods Sold

If you run a retail company or business, you determine sales revenue from your suppliers’ resale of purchased goods. Remember, some companies sell products, while others offer both products and services. Likewise, some businesses, such as a web development company, an accounting firm, and a law firm, provide only services.

Some businesses, such as beauty salons and spas, offer both products and services. If your company sells products to customers, you must subtract your products’ costs from your gross revenue.

 For example, if you are a retailer and paid $500,000 for the products you sold, subtract this amount from your $2.6 million gross revenue. Your taxable income is the excess amount after the calculation.

Step 4: Deduct Allowable Expenses

The last step of the process involves deducting allowable expenses from the gross revenues, especially after subtracting the goods’ cost. Allowable expenses usually include interest on debts, rent, utilities, service fees, equipment repairs, payroll, and accounting processes.

Employee benefits, retirement plan costs, wages, and payroll taxes are other expenses you need to include in the allowable costs. For example, if you have $100,000 total business expenses, subtract the amount from gross revenue. If you fail to generate enough revenue, you may have a negative taxable income.

Related Reading: Balance Sheet vs. Income Statement

How to Determine Taxable Income

Calculation of your taxable income starts with gross income. After analyzing your gross income, you subtract excluded income, personal exemptions, and allowable deductions. You must determine your accounting method in determining the number of items of income and deductions for any taxable year.

For almost all individuals and business owners, the accounting method involves cash receipts and disbursement strategies. For example, you will receive the income and spend the deductions. According to the Internal Revenue Service (IRS), the following income sources are acknowledged as taxable income:

• Wage salary
• Security deposits
• Rental property income
• Union strike benefits
• Capital gains
• Alimony from your ex-spouse
• Lottery, gambling, prizes, and awards
• Freelance earnings
• License payments
• Royalty payments
• Interest and dividends
• Severance pay from a previous employment

According to the IRS, tax credits decrease your taxes, while deductions lead to reduced amounts of taxable income. For example, you can deduct items like alimony, retirement contributions, and certain medical or business expenses.

 If your total gross revenue is $50,000 and you claimed $17,000 in tax deductions, you will have $33,000 in taxable income. Bear in mind that this figure determines your tax bracket, meaning you will have to pay the amount you failed to pay in payroll taxes. Tally your total deductions and subtract this figure from your earnings to calculate your tax bracket.

In addition, the IRS offers a handy withholding estimator tool, which can help paint a clear picture of how much taxes will be withheld.

Taxable Income Formula in Action

Taxable income refers to your earnings after subtracting all types of taxes or liabilities from your earned revenue or income. The basic principle of the taxable income formula remains the same for individuals and businesses.

 The difference is the number of entities used in the formula. For instance, the formula is simple for individuals and slightly complex for businesses. Here is an example of the individual taxable income formula.

 A man derives income from three sources: a web development job, salon business, and rental property. From his regular job, he makes $100,000 in total income after all potential exemptions and deductions. His income from the salon business is $120,000. Likewise, the property rental income is $80,000. He has invested in the standard tax deduction for $12,400. He calculates his total gross income as:

 Gross total income = $100,000 + $120,000 + $80,000 = $300,000

Total Taxable income = 300,000 – 12,400 = $287,600

The Bottom Line

Taxable income is a legal way to keep your cash flow streamlined after determining and paying your tax liabilities. Individuals and businesses must know and use the taxable income formula to calculate their gross or total income and calculate their taxable income.

 Outsourcing your accounting and bookkeeping to professionals is the most efficient and most cost-effective way to save your business money come tax time. The small business accounting services and sales tax consulting services at FinancePal have helped thousands of small businesses with their financials and taxes on a convenient subscription basis.

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●  Direct payments: US nationals who are taxpayers will be eligible for a one-time direct deposit of $1,200. Married people will get $2,400 and an extra $500 for each child.

●   Unemployment: The bill offers $250 million for an unemployment insurance program with extended eligibility. It also provides an additional $600 per week for four months to employees besides the state program offerings.

●  Payroll taxes: The Act enables employers to pay their part of payroll taxes for 2020 until 2021 and 2022.

●  Hospitals and Healthcare: The bill provides more than $140 billion to support the US’s healthcare system. $100 billion will be offered directly to the hospitals. The remaining will be allocated to provide personal and protective equipment for healthcare employees, more workforce, testing materials, and other industry-specific investments.

●  401(k) Loans: The loan limit has been raised from $50,000 to $100,000.

●  RMDs: Required Minimum Distributions from IRAs and 401(k) programs (at age 72) is stopped.

●  Charity: According to a new clause, there is an above-the-line cut-off for charitable grants. Also, the limit for charitable donations has been revised.

●  Net Operating Losses: The Tax Cuts and Jobs Act (TCJA) net operating loss rules have been relaxed.

What is the Paycheck Protection Program Loan?

The Paycheck Protection Program (PPP) is a loan program designed to grant quick and direct access to small business loans with 500 or fewer workers. The PPP loan’s main focus was to support employers with payroll and operational costs during business interruptions that occurred because of the COVID-19 pandemic. Notably, borrowers could apply for PPP loan forgiveness.

The PPP has had a significant impact on small business owners struggling with their business during the coronavirus pandemic. In 2020 alone, over $500 million in loans were granted to eligible businesses.

Although the PPP offered considerable help to these businesses, the tax implications linked with these loans have left many business owners questioning what to do next. As a result of the CARES Act, the tax guidelines passed by the Small Business Administration (SBA) went through several changes.

Later the rules related to PPP and taxes were revised again in December 2020 since the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) passed in 2021.

The PPP loan application duration was prolonged from July to August, then December, and then March 31, 2021. Now the new extension date is May 31, 2021.

The PPP remains accessible for:

●  Small businesses with 500 or fewer workers or small businesses that fulfil the SBA’s size requirements

●  Restaurants or other businesses that lie within the North American Industry Classification System (NAICS) code 72, “Accommodation and Food Services,” — and employ fewer than 500 workers

●  Tribal businesses

●  501(c)(19) veteran entities

●  501(c)(3) nonprofit organizations

●  Sole proprietors, freelance contractors, gig economy workers, and otherwise self-employed people.

Related Reading: Accounting Cycle

Are PPP loans taxable?

The short answer: no — if they are spent correctly.

Section 1106 (i) states, “the CARES Act provides that any amount that would be includible in the gross income of the recipient by reason of forgiveness of a PPP loan shall be excluded from gross income.”

One factor that makes the PPP appealing for businesses is the forgiveness provision. This provides loan forgiveness if the amount is used on the following expenses:

●  Payroll expenditures

●  Mortgage interest

●  Utility bills

●  Rent

●  Operational expenses

●  Property damage costs (because of public disruptions in 2020)

●  Supplier prices

●   Worker protection expenses

Businesses aren’t liable for taxes on the forgiven loan fund, according to an IRS Guide. It is expected that such loans might be forgiven. Businesses should plan strategies with their accountants for disbursing PPP loans on approved items. Notably, a small business could be eligible for a second loan if they employ fewer than 300 workers and suffered a 25 percent decrease in revenue during any quarter of 2020.

Is PPP loan forgiveness taxable?

As previously mentioned, Paycheck Protection Program loan forgiveness depends on whether the PPP loan has been spent on qualifying expenses. The Treasury Department has offered several PPP Loan Forgiveness Applications, which businesses can fill and submit to the private lender who offered the loan. After passing the CRRSAA in December 2020, Congress declared that a PPP loan that has been forgiven would not be taxed — it is not categorized as taxable income.

This implies that you don’t have to pay taxes on the amount you obtain. This loan focuses on helping businesses with the cash to keep operating and paying workers. Congress specifically avoided causing tax stress for businesses receiving PPP loans.

Related Reading: Balance Sheet for Small Businesses

How does the PPP Loan Program work?

The Paycheck Protection Program’s main objective is to keep employees on the payroll and provide cover for utilities, rent, supplier expenses, mortgage interest, and other necessary business expenditures.

The borrower can spend the loan paying any allowable costs obtained during their covered time. A financial organization can ensure that the borrower was operational as of Feb. 15, 2020. The Paycheck Protection Program has been responsible for offering forgiven loans to small-scale businesses.

At first, the loan plan had assigned $350 million in March and $320 billion in April. In December 2020, Congress allocated $284 million for new and second-time loan withdrawal for small businesses. Private lenders offer these loans, and the Small Business Administration (SBA) supports them.

Can PPP loans be used to pay business taxes?

Although the Small Business Administration (SBA) offered an extensive array of uses for PPP loans, they can not be used to pay business taxes. Small businesses not eligible for the PPP can still use other financing methods and carefully consider all logical sources.

The recent round of the CARES Act provides more room for small businesses to use PPP loans. Protective equipment, asset deterioration, and business software are among the latest costs covered in the PPP loan program. However, business taxes are still not included in that list. Business owners cannot pay income tax, sales tax, or any other tax with the PPP loan funds. Hence, the amount of PPP loan being used for paying business taxes will not be forgiven.

Business owners can opt for the Employee Retention Tax Credit if they fulfil the criteria. But they can not claim salaries paid with a PPP forgiven loan. To be eligible for the tax credit, a business must pay wages to workers regardless of a temporary halt due to the coronavirus lockdown or going through a 20% reduction in total receipts compared to the last year.

Employee Retention Credit and PPP loan interplay

In 2020, many business owners failed to qualify for the Employee Retention Credit due to the credit being mutually exclusive with the Paycheck Protection Program. This is no longer the case; you can now receive an Employee Retention Credit even if you took out a PPP loan.

Eligibility requirements were also loosened; last year, businesses needed to prove a 50% reduction in income compared to the same quarter in 2019. That threshold has been lowered to a mere 20%.

The potential amount of the Employee Retention Credit has increased as well. The initial credit only covered up to 50% of qualifying wages for businesses with up to 100 active employees. The updated credit covers up to 70% of qualifying income — plus health benefits cost — for businesses with up to 500 employees.

If your business didn’t claim the ERC in 2020 due to ineligibility, you can claim the credit retroactively based on the new requirements.

Need help with your business taxes?

If your business took out a PPP loan and you are unsure whether you can leverage it into tax savings, contact the professionals at FinancePal today! Outsourcing your accounting and bookkeeping to professionals is the most efficient and most cost-effective way to save your business money come tax time.

For many small business owners, the bookkeeping process can be a nuisance at best — and uncharted territory at worst.  Most business owners started businesses because they were experts in providing a good or a service, not at balancing a book. Nevertheless, proper bookkeeping is necessary to ensure your business remains in good standing with the IRS.

The small business accounting services and small business bookkeeping services at FinancePal have helped thousands of small businesses with their financials and taxes on a convenient subscription basis. Schedule a consultation today!

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As the name implies, double taxation involves paying taxes twice on a single source of income. The double taxation principle most commonly occurs in international business due to multiple countries assessing tax on the same item. Double taxation can be levied on income as income tax, assets as capital tax, or transactions as sales tax. Double taxation is a common target for tax code critics, most likely due to the unintended nature of its origin.
Double taxation arose out of competing for tax legislations and tax jurisdictions, likely due to early efforts to decentralize the post-independence federal government and the United States’ rapid growth.

How does double taxation work?

Domestic double taxation occurs commonly when business profits are taxed at both the business and personal levels. Corporations must pay income tax at the predetermined corporate rate before profits are disbursed to shareholders. Then, each shareholder will pay a dividend tax on these profits according to their income tax rates. The double taxation of dividends is one of the most common cases of domestic double taxation. Other common examples include the estate tax — where tax is paid on an income and the transfer of that income via inheritance — and 401(k) loans.

S-corporations and smaller businesses are not always subject to double taxation in the way larger corporations are. S-corporations differ in this regard as they can pass profits directly to shareholders without paying dividends in the interim. For small businesses, shareholders are typically also employees. They can avoid the dividend tax by receiving their portion of the earnings as wages.

Double taxation examples

To show the double taxation principle in action, let’s take a hypothetical corporation, X Industries. This year, X Industries achieved a profit of $10,000,000. Of this profit, it retains $6,000,000 in earnings, which are disbursed to shareholders. One shareholder, Mr.  Johnson, received $200,000 in dividends. The $10,000,000 profit is taxed at the 2020 corporate tax rate of 21%. After this, Mr.  Johnson must still pay income tax on his $200,000 dividend income according to his tax rate.

What types of businesses deal with double taxation?

The businesses that deal with double taxation the most are C-corporations and international companies. As previously mentioned, S-corporations and small businesses can avoid double taxation, the former being due to its classification and the latter due to earnings being paid out as wages.

Much like S-corporations, sole proprietorships, partnerships, and LLCs get to avoid double taxation due to classification. Sole proprietorships and single-person LLCs file their business taxes on Schedule C; the income is then accounted for on the owner’s personal annual tax return.

Double taxation in international business

In principle, when a corporation earns income in a nation other than their home country, they will have to pay taxes twice: earnings taxes in the nation where it made the income and income taxes in its home nation.
There are several exceptions to this rule. For instance, to encourage trade between specific nations, national governments may enter trade agreements with preferred partners to reduce or eliminate double taxation entirely. Some visible trade agreements or trade treaties are the OECD (Organisation for Economic Co- operation and Development) — which contains 37 nations — and NAFTA (North American Free Trade Agreement), which was replaced by the USMCA (United States-Mexico-Canada Agreement) in 2020.

How to avoid double taxation

Larger corporations can often not avoid double taxation through straightforward means, but small and medium- sized businesses can. As previously mentioned, business classification matters. Small businesses classified as S-corporations, sole proprietorships, partnerships, and LLCs are exempt from double taxation. These classifications are known as “Pass Through Entities” because they avoid or “pass-through” the double taxation snags that large businesses cannot avoid.

If you cannot achieve the “pass-through entity” designation for any reason, there are still options. For example, to avoid paying double taxes on dividend disbursal, you can add them to shareholders’ existing salaries.
Salaries are considered deductible for corporations, so this may lead to more savings come tax time.
Some corporations find creative ways to game the system. For example, a corporation owner may set up an independent LLC that purchases assets from the corporation and leases them back. The LLC is exempt from double taxation due to its classification, and the corporation can use this situation to create deductions.
However, this can be risky and may not stand up to IRS scrutiny should an audit be incurred.

The most effective, least risky way to avoid double taxation is hiring an expert team of accountants and bookkeepers, such as the finance professionals at FinancePal. FinancePal’s team is well-versed in small business tax preparation, freelance taxes, sales tax consulting services, finding tax savings, and more, with expertise across industries. Experienced accountants can help your business find ways to circumvent double taxation while still maintaining IRS compliance and best accounting practices. This is especially important when it comes to withstanding IRS scrutiny in the form of audits. Failed audits can critically damage the financials of any unprepared business.
It is easy to think of accounting and bookkeeping as necessary evils to keep the IRS off your back. But an experienced financial team can provide essential business insights, find tax and payroll savings, and allow business owners to spend less time stressing the financials and more time running the business. Get a custom quote for FinancePal’s professional financial services today.

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What are supplemental wages?

All supplemental income is subject to tax rules that vary from regular income tax. According to the IRS, supplemental wages include compensation outside the realm of regular wages. These can come either from your employer or from a side job. Supplemental income from your employer includes taxable fringe benefits, severance, vacation pay, overtime — and of course, bonuses.

Supplemental wages can also come from sources besides your employer. These can come from side jobs such as independent contract work (driving for a ridesharing service, teaching, consulting, crafts, etc.) or rental income from real estate.

How much are bonuses taxed?

There are two different ways to tax bonuses: the percentage method and the aggregate method. The percentage method is more straightforward; it assesses the flat 22% tax rate standard to all supplemental wages for all bonus income up to one million dollars.

The aggregate method is slightly more complicated. Using this method, your bonus is added to your regular income and taxed at your income tax rate. If your income tax rate is below 22%, the aggregate method allows you to pay a lower tax rate on your bonus. Conversely, if your income tax rate exceeds 22%, you will have to pay a higher tax rate on your bonus; however, you may recoup the difference via a tax refund.

Bonus Tax Rate Examples

For an example, let’s take a look at three employees; Employee A earns $35,000 per year, while Employee B earns $100,000 per year. Their manager, Employee C, earns $165,000 per year. Employees A and B both receive a bonus of $2,000 during a specific year, while Employee C receives a $10,000 bonus.

Under the aggregate method, the bonus amount is added to their existing incomes; their yearly compensations sit at $37,000, $102,000, and $175,000 respectively. Using the 2020 guidelines for income tax rates, Employee A would only need to pay a 12% tax on their $2,000 bonus, or $240. They take home $1,760 after tax.

Employee B, however, would have to pay double — a 24% tax on their bonus, due to their income bracket. This amounts to $480; they take home $1,520. Employee B could potentially save money by using the percentage method and only paying 22% tax on their bonus, or $440. Because the difference is fairly small (only $40), they may choose to use the aggregate method and hope for a tax refund instead.

Employee C would need to pay an income tax rate of 32% on their $10,000 bonus. This amounts to a total of $3,200 — almost a third of the amount. Employee C would probably not rely on a tax refund to make the difference and would instead ask their boss to have the bonus taxed using the percentage method. For Employee C, the difference between the two methods is $1,000; they would take home $7,800 using the percentage method compared to $6,800 using the aggregate method.

If bonuses are high enough, special taxation rules apply. Let’s say the CEO of the company that employs Employees A, B, and C received a bonus of $3 million for the year. This is not unheard of; many CEOs at big companies may receive bonuses in the seven figures. If this is the case, the first $1 million is subject to the 22% flat tax. Any amount above the initial one million is then subject to the progressive bracketed income tax model.

So the CEO in this example would pay 22% of $1,000,000 plus 37% of $2,000,000 — based on the 2020 income tax guidelines. This amounts to $960,000 in taxes paid on the bonus alone.

Related Reading: Sales and Use Tax

Are there any exceptions?

Even if your bonus is in cash, gift cards, a vacation, or some other benefit, you will need to give the IRS their cut.

However, if your bonus qualifies as an employee achievement award, you can avoid paying federal taxes if the award does not consist of cash, a cash equivalent, and the total value of the award is not greater than $1,600.

What is the difference between a bonus and an incentive payment?

The main difference between bonuses (supplemental income) and incentive payments is that incentive payments are actually not considered regular income on a form W-2; they are not subject to regular income tax. However, they are included on your annual tax return alongside your wages.

How can I lower my tax liability?

There are several loopholes within the tax code that taxpayers can use to their advantage. For example, if you receive a bonus, you can utilize it in an IRA or 401(k) to receive a tax break.

You can also lower your tax liability by hiring expert accountants and bookkeepers who are familiar with the monolithic tax code and all the benefits and savings within. At FinancePal, our accountants and bookkeepers have helped thousands of individuals and small businesses reach their financial goals. Schedule a consultation today!

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When is it too late to file my taxes?

A common saying goes, “The best time to file your taxes was the week filing opened. The second best time is right now.” But if you insist on procrastinating, the federal tax deadline for the 2020 tax year is April 15, 2021. In most circumstances, any taxes filed after the deadline are filed too late and open up the possibility for penalties, fines, or substitute returns. However, if you file for an extension, the deadline is pushed back to October 15, 2021. We will go over filing for an extension in more detail later.

What happens if you miss the tax deadline?

The consequences vary depending on whether you owe the IRS taxes or the IRS owes you a refund.

Either way, the IRS will file a Substitute for Return (SFR) on your behalf. A Substitute for Return is based solely upon information the IRS already has and is often not optimized for the best return; you will not be eligible for any exemptions, credits, or favorable deductions. If the IRS owes you a refund, you can still file a return to replace the SFR to obtain this refund — and it is better to do this sooner rather than later to avoid additional penalties.

If you owe a balance to the IRS based on the SFR, things can get a little dicey. There is a late penalty of 0.5% per month until the balance is paid — up to 25% of the total amount due. You will also owe interest on the outstanding balance at the time of the deadline.

Should I file for an extension?

As previously mentioned, filing for an extension will push the deadline back to October 15, 2021. If filed before the tax deadline, you will not have to pay penalties or fees unless you miss the October 15 deadline.

While it is always best to file your returns by the original deadline, extenuating circumstances may make this problematic. If you cannot physically meet the original deadline, please file an extension before April 15, 2021.

You can read more tax information here.

Related: Sales Tax Consulting Services

What if I cannot pay my taxes?

Nobody falls behind on their taxes on purpose; owing the IRS is often the result of several unfortunate circumstances coming to a head simultaneously. The most common reasons for owing back taxes are changes that make it challenging to pay off your original balance, such as divorce, reduction in income, or job loss. And once the notice comes in the mail, it can seem like just another blow in a losing fight.

Our perceptions of the IRS are mostly shaped by word of mouth. Many Americans perceive the IRS as an inexorable, monolithic organization bent on getting their due one way or another. In truth, they are a fair creditor and want nothing more than delinquent taxpayers to return to good standing. To facilitate this, they have instituted several programs over the years aimed at getting down-on-their-luck taxpayers back on their feet. Chief among these programs is the Fresh Start Initiative.

How do you qualify for the Fresh Start Initiative?

The IRS has several restrictions for who is and isn’t eligible for the Fresh Start Program:

•     Self-employed taxpayers must demonstrate proof of a 25 percent decrease in net income.
•     Individual taxpayers cannot earn more than $100,000 per year (or $200,000 for married couples filing jointly)
•     The tax debt in question must be below $50,000 by the end of the tax year.

Having your books in order is imperative for any small business owner. However, it can also be tedious, complicated, and time-consuming. Additionally, the IRS can be unforgiving when it comes to mistakes — filing your payroll taxes just one day past the deadline incurs a 2% penalty. These penalties can add up, too — up to a hefty 15% of the initial amount owed.

Outsourcing accounting and bookkeeping to an outside firm is a relatively simple and rewarding process that allows business owners to spend less time worrying over books and more time running the business. Expert accountants can take care of tax preparation, payroll, tax consulting, and more. Every day, more and more small businesses make the switch to outsourced bookkeeping and accounting with FinancePal.

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This article breaks down the marginal tax rate, how it is calculated, and how it differs from other taxes.

• What is marginal tax?
  • What is the marginal tax rate?
• Marginal tax rate formula 
• Marginal tax rate vs.Flat tax rate
• Marginal tax for small businesses

What is marginal tax?

Put simply, the marginal tax rate is tax paid on every additional dollar of income over a set threshold. It is an example of progressive taxation, meaning the tax rate increases as income increases.

To assess marginal tax, the IRS divides taxpayers into tax brackets based on taxable income. Taxpayers whose income falls within a certain bracket must pay the tax rate set for that specific bracket as income is earned.

To visualize this, imagine a kitchen measuring cup demarcated by fluid ounce. Now imagine each space between the demarcations as a tax bracket. To represent a lower-income taxpayer, fill the measuring cup with a small amount of water so that the level rests between one and two fluid ounces. The lower-income taxpayer is taxed a low rate for the water until the first fluid ounce and a slightly higher rate for the water between the first and second fluid ounce.

To represent a higher-income taxpayer, fill the measuring cup so that the water level rests between the five and six fluid ounce mark. For the first two fluid ounces, this taxpayer pays the same rate as the lower-income taxpayer. But the tax rate gets progressively higher for fluid ounces three, four, and five.

What is the marginal tax rate?

With a new presidential administration, this could very easily change. But as of January 2021, there are seven brackets.

Since 2018 — when former President Trump signed the Tax Cuts and Jobs Act (TCJA) — the tax rates for each bracket are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, respectively. Prior to the TCJA, the rates stood at 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

Marginal tax rate formula

The following is a table showing the marginal tax rate for singles, married joint filers, and heads of household, broken down into the seven brackets:

For the sake of explanation, let’s take a single-filing taxpayer with a taxable income of $90,000. He is taxed a rate of 10% for income between $0 and $9,950. Since he makes more than $9,950, he is charged the maximum amount for that bracket, or $995.50.

His income surpasses the 12% bracket, so he is taxed the maximum amount for that bracket. Because you can’t get taxed twice, he owes 12% of ($19,900 – $9,950). This amount stands at $3,669.00. Factoring in the amount he owes for the 10% bracket; he now owes $4,664.50.

His income surpasses the 22% bracket as well, so he owes the maximum amount: 22% of ($81,050 – $40,525) = $10,087.00. Added to the previous amounts, he owes $14,751.50.

Because he makes less than $172,000 per year, he does not owe the maximum amount for the 24% bracket. Rather, he just owes 24% of income owed over the $86,375 threshold. 24% of ($90,000 – $86,375) is $870.00.  When added to the totals for the previous brackets, he owes a grand total of $15,621.50

Marginal tax rate vs. Flat tax rate

The widely-recognized alternative to marginal tax is flat tax. Some states assess income tax using a flat tax rate. Flat tax is much simpler; everyone is charged the same tax rate regardless of income. In addition to some U.S. states, flat tax is often used in developing nations.

Related Reading: Bookkeeping for Small Businesses

Marginal tax for small businesses

Many small businesses fall under partnerships, sole proprietorships, and LLCs — all of which do not pay a business tax. Instead, owners of these types of businesses file their taxes on their personal tax return. Because of this, you will pay marginal tax on some of your business income. To help lower your tax burden by finding deductible business expenses, you can work with a dedicated small business accountant.

The post Marginal Tax Rate Defined (with Rates) appeared first on financepal.

But don’t worry, we have you covered. We’ve put together a comprehensive guide on the ins and outs of filing independent contractor taxes. This way, you can make sure you stay in good standing with the IRS and have plenty of time to plan ahead.

We’ve answered your most pressing questions about paying independent contractor taxes so you can feel confident about what and how much you need to pay. Let these links be your guide:

What is an independent contractor?

How do you know if you have to pay independent contractor taxes?

What taxes do independent contractors pay?

Tax deductions for independent contractors

How to file taxes as an independent contractor

How do you pay taxes as an independent contractor?

Other independent contractor tips

What is an independent contractor?

Not sure what it means to file your taxes as an independent contractor? Before you start preparing your taxes, you need a clear understanding of where you stand in the eyes of the IRS. So, first things first, how do you know if you qualify as an independent contractor?

An independent contractor is defined as an individual (or entity) who has been contracted to perform work for another entity without becoming an employee. So basically, it boils down to contracted work where the entity or individual who has hired you has control over the end result of your work or services, but not how you go about doing it (when and how you choose to work).

For example, let’s say you run a small construction business and a local school hires you to make an addition to their building for more classes. The school district will control what you build (the addition with the new classrooms), but you’ll have control over how and when you’ll build it (the hours and methods of building the addition).

Independent contractors are often referred to as freelancers or self-employed workers. However, it’s important to note that independent contracting is just one of the ways you can be self-employed.

While you might automatically assume that you’re not an independent contractor because you’re not a freelance writer or graphic designer, think again. Many common professions fall into this definition, including doctors and lawyers.

Why business structure matters for filing taxes

The way your business is structured will factor into how you complete your independent contractor taxes, including which forms you should use. While you might not think of yourself as a business per se, you are classified as one by the IRS. Typically, independent contractors are categorized as either a sole proprietorship or LLC (limited liability company).

How do you know if you have to pay independent contractor taxes?

If you made over $400 from your independent contracting activities, you’ll have to pay taxes.

You might be thinking, “but wait, isn’t the minimum tax threshold of $12,000?” Unfortunately, that only applies to income made as an employee. However, one positive way to look at it is that your business is making money, and that’s always a good thing.

What taxes do independent contractors pay?

According to the IRS, independent contractors are required to file an annual income tax return and make quarterly estimated payments.

Independent contractors are expected to pay two main taxes:

A. Income tax: Incomes taxes are taxes paid on the income made by your business.

• • Income tax rates depend on your filing status and your total taxable income. Currently, independent contractor income taxes are the same as any other income taxes, with rates ranging from 10% to 37%.

B. Self-employment (SE) tax: Independent contractors are required to pay self-employment taxes because Social Security and Medicare taxes are not being withheld from paychecks throughout the year.

• • The self-employment tax rate is 15.3%. This is made up of two taxes: Social Security, which accounts for 12.4% and Medicare, which accounts for the other 2.9%.
  • While this might sound like a lot, you can deduct a portion of your self-employment taxes, which we’ll cover shortly.

You will have to pay both of these contractor taxes on both the federal and state levels, which require separate forms and filing.

Are there any additional state taxes that independent contractors need to pay?

As an independent contractor, you may also need to pay sales and use taxes. Sales and use taxes are the taxes that consumers are required to pay on many goods and services. Often, businesses are responsible for collecting them from customers. This makes keeping accurate records of business transactions even more important. Additionally, you’re responsible for paying them when you make purchases for your business.

However, you may be in luck. The following states don’t impose a sales tax:

• • Alaska
  • Delaware
  • Montana
  • New Hampshire
  • Oregon

If you do operate in a state (or states) that impose sales and use taxes, FinancePal can help you ensure that you’re fulfilling your obligations and avoid any trouble with your taxes. Thanks to our smart online bookkeeping for small businesses, you can easily track taxable and non-taxable transactions.

What are estimated payments and how do you make them?

If you expect to owe more than $1,000 on your tax bill, you’ll need to make estimated taxes. When it comes to making estimated payments, here are the key things you should know:

• Estimated payments are made in four equal parts for your total tax liability.
• Form 1040-ES should be used to calculate your estimated payments.
  • You need your prior year’s tax return to complete this form. If it’s your first year working as an independent contractor, you’ll need to estimate how much your income will be for this year.
• Payments are made quarterly on: April 15th, June 15th, September 15th, and January 15th.
• Mail in a voucher for each estimated payment.
  • You can find quarterly estimated payment vouchers attached to Form 1040 ES.

Note: Because no one is withholding your taxes for you, you’ll be responsible for making sure you have the available funds to make these estimated payments. This can be a major pain-point for many who are new to independent contracting, so make sure you prepare in advance.

Tax deductions for independent contractors

What are tax deductions and why should you care about them? Tax deductions are incentives that allow you to save money on your tax bill. Deductions are subtracted from your gross income, directly lowering your taxable income.

Self-employment tax deduction

As we mentioned earlier, there is a pretty substantial deduction allowed for the self-employment taxes you paid. Currently, you can claim a deduction of up to 50% of what you paid in self-employment taxes.

Business expense deductions

Wondering what you can write off as an independent contractor? The most common expense-related deductions used by independent contractors include:

• Advertising: From running Google ads to adding a wrap to your car, advertising costs are tax deductible.
• Insurance: Depending on the type of work you do, you may need one or several types of business insurance (general liability, etc.). Fortunately, you can deduct the cost of your premium on your taxes.
• Home office: If you work from home as many independent contractors do, you may be able to deduct home-office expenses. However, it’s important to note that in order to take advantage of this deduction, the space must be used regularly and exclusively for business purposes.
• Vehicle costs: For independent contractors who rely heavily on a vehicle to conduct business, this write-off can be a significant savings point. Not only can you deduct mileage expenses, but you may be able to include depreciation and repairs too.
• Client entertainment: If you take clients out to discuss business, you can deduct a portion of your expenses. Typically, you can deduct up to 50% for business meeting meals.
• Supplies: While many independent contractors don’t rely on traditional office supplies anymore, this category is actually quite broad. From purchasing yourself an ergonomic chair that makes typing the day away much more comfortable to packaging supplies for delivering your home-made products, you might be able to write off more than you expect.
• Equipment: Purchasing tools of the trade is often a necessity for independent contractors, and thankfully, you can often write them off. From laptops to heavy machinery, investing in your business is advantageous when it comes to your taxes.
  • Note: If you’re investing in expensive equipment that will likely last years, there is a way to deduct a portion of the expenses each year of its useful life, instead of all at once.
• Business travel: If part of your work requires you to attend events around the nation or even the globe, you can write off a portion of your hotels, airfare, and meals.

While these are the primary business expenses many independent contractors take advantage of, there are others you might qualify for. The main thing to keep in mind is that you will need the receipts to back up your claims. So, make sure you hold onto everything in a secure place, whether that be a folder in your inbox or on your desktop (or even with old-school files).

Note: Keep in mind that there’s a distinct difference between business use and personal use, so be sure to only claim items that are used specifically for your business.

Beware of abusing deductions

While it might be tempting to fudge the numbers a bit, complete honesty is the best policy when it comes to dealing with the IRS. If you take the risk and claim some deductions that you might not fully qualify for, you may regret that decision if they decide to conduct an audit. If they find that you’ve been dishonest about any aspect of your taxes, or if you made a major mistake, you could be on the hook for some serious penalties.

How to file taxes as an independent contractor

So, let’s get down to how exactly you go about filing your independent contractor taxes. Here are the steps you’ll need to follow:

1. Gather all the documentation you’ll need to complete the required forms.
2. Download, pick up, or have the forms delivered.
3. Fill out your forms as detailed in the instructions provided.
4. Verify that all of the information is correct, especially any calculations.
5. Submit your forms online or mail them in by April 15th.

Once you understand the basics of independent contractor taxes, it’s a fairly straightforward process. However, as your business grows, completing your taxes will likely become increasingly complex. In many cases, it could be advantageous to work with a tax professional to ensure they are prepared correctly and on time.

What forms do independent contractors need in order to do their taxes?

As an independent contractor, you will not receive W2s. Instead, you’ll receive Form 1099-MISC from each of the clients you worked with during the past year. This form will detail all the income you received while working for them throughout the year.

Note: You will only receive a 1099 if you earned more than $600 from a client.

There are several forms you’ll need in order to complete your independent contractor taxes:

• Form 1040: for reporting your income
• Form 1040 Schedule C (or Schedule C-EZ): for reporting profits or losses
• Form 1040 Schedule SE: for reporting self-employment taxes
• Form 1040-ES: for estimating your tax bill and payments
• Form 7004: for applying for an extension to file

In addition to these federal forms, you will need the applicable forms for your state taxes.

How do you pay taxes as an independent contractor?

You can either pay your independent contractor taxes online or by mail. It’s important to keep in mind that if you’re paying by mail, you still need to ensure that your payment arrives by the due date.

To pay your contractor taxes online, you can use your debit or credit card or do direct pay using your checking account. The Electronic Federal Tax Payment System (EFTPS) is the recommended method for large payments.

To pay by mail, you can use a check or money order. You cannot pay cash by mail. If you want to make your contractor tax payments in cash, you may be able to do so through a retail partner or at an IRS office.

Other independent contractor tax tips

Filing your independent contractor income taxes can be difficult, especially the first time around. Here are a few other tips to help make it as easy and stress-free as possible:

• Put money aside throughout the year: By putting aside a portion of your income specifically for taxes, you’ll save yourself from financial stress when it comes time to make estimated payments.
• Stay on top of your bookkeeping. If you need help to catch up on bookkeeping, we can work with you to get your books up to date.
• If you have employees, set up payroll. If you don’t know how to set up payroll, we have a helpful guide that will walk you through it.
• Use the tools at your disposal: The IRS provides many resources for taxpayers, including a virtual workshop on small business taxes.

When going through the filing process, make sure to take your time and double-check everything. While it might seem like a lot of work, you’ll be thankful you did it correctly the first time around.

Now you’re prepared to file your independent contractor taxes

When tax season comes around, you’ll be ready to complete your independent contractor or freelancer taxes with confidence. And, if you don’t want to tackle your taxes all by yourself, FinancePal also offers small business tax preparation to take this burden off your plate. With our sophisticated online technology and expert finance team, you can rest assured that your independent contractor taxes are in the best of hands.

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