We want to make sure you’re on the right side of the law when it comes to filing your taxes, so in this article, we explain what tax avoidance and tax evasion are, what the difference is between the two, and a few ways you can minimize your taxes legally. What Is Tax Avoidance? Tax avoidance is structuring your business transactions so you can lower your tax bill. Tax avoidable is legal and wise. A common example of tax avoidance includes maximizing your retirement contributions, such as IRAs and 401(k)s. What Is Tax Evasion? On the other hand, tax evasion is attempting to deceive the IRS in an effort to lower your tax bill. Tax evasion is illegal. Common examples of tax evasion are failing to report all or some of your income, concealing business assets, or pretending personal purchases were made for business purposes. The Difference Between Tax Avoidance and Evasion The primary difference between tax avoidance and evasion is the intent. The intent behind tax avoidance is to only pay what taxes you legally need to pay and not a penny more. The intent behind tax evasion is to commit fraud. How To Minimize Taxes Legally There are three ways to minimize how much you pay in taxes: Reduce your taxable income – Claiming deductions can lower your taxable income. You can also hire contractors instead of employees, donate to charity, create a retirement account, and more. Maximize tax deductions and credits – Credits reduce your tax bill dollar-for-dollar while deductions reduce your tax bill by a percentage according to your tax bracket. Time income and deductions appropriately – You may change tax brackets from tax year to tax year, so timing your income and deductions accordingly can help you save money. What if You Make a Mistake? Mistakes happen. That’s why we offer corrections filing for 1099, 1098, W‑2, and Affordable Care Act forms. The best course of action is to correct the mistake as soon as possible. If you make a mistake …
IRS Audit Triggers for Small Businesses
Your personal and business operations are too precious to be threatened by an IRS audit. Today, we wanted to talk about the biggest IRS audit triggers for small businesses. Mistakes Though there are few audits triggered by mathematics mistakes, the IRS has a computer trigger called the Discriminant Information Function (DIF) that scans tax returns and looks for certain things like duplicate information, and other mistakes. For example, a person or business with $100,000 in income likely won’t have $60,000 in charitable deductions, and DIF can catch that. Most mistakes that individuals and businesses make most often include writing Social Security and Tax Identification numbers incorrectly. Luckily, a good second look at your tax forms once they’ve been filled out can save you a lot of headaches. Home Office & Self-Employment One of the biggest audit triggers is the misrepresentation of home office items and self-employment expenses or income. Home office and home business deductions were difficult to navigate before the pandemic forced a lot of people to work remotely. There are a lot of rules you must follow for your expenses, equipment, and office space. It’s also important to note that your office and home business equipment must be used exclusively for your business for them to qualify for the deduction. Because of the complexity, the IRS often sees the home office section of the tax return as an opportunity for audit. If you plan to take advantage of these deductions for your business, you should also be prepared to prove that these items (from cars to tablets to other materials and utilities) were used solely for business purposes. Missing Income Gig workers are more prevalent than ever, which means the IRS is looking for unreported freelance and independent contractor income, either from your business payment perspective or the freelancer’s reporting. High Deductions Claiming deductions that seem disproportionate to your or your …
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Ultimate Guide to 1099s
There are lots of different 1099s and we wanted to help you better understand them, so we’ve put together this guide of eFile360 resources to help you grow your understanding. 1099s: The Basics First thing’s first – what is a 1099? It is, at its most basic form, a tax document that is used to report miscellaneous payments made to individuals who are not employed by your business. Any non-employee who receives more than $600 from you in any given tax year should receive a 1099 from you. There are more than a dozen different types of 1099 forms, the most popular include 1099-MISC (and now 1099-NEC), 1099-INT, 1099-DIV, 1099-K, 1099-B, 1099-G, and 1099-R. For a full list of 1099s and what each one is used for, check out this blog post. Typically, the deadline for filing 1099s with the IRS and also sending them to each independent contractor recipient is January 31. Here’s a quick resource on common 1099 questions. The New Kid: 1099-NEC In tax year 2020, the 1099-NEC was brought back to take the place of Box 7 on form 1099-MISC. The 1099-NEC did not replace the 1099-MISC, it was just reinstated to help streamline the process for filing non-employee compensation. Some examples of non-employee compensation include professional service fees to accountants, attorneys, architects, contractors, engineers, and more; payments for services like parts or materials used to complete the services, director’s fees, and other payments made to freelancers and independent contractors. For more about who fills out the 1099-NEC, click here. We also put together a great list of dos and don’ts as it pertains to the form 1099-NEC. You can read it here. 1099 FAQs The IRS has a ton of great insights into frequently asked questions about 1099s, including: What's the difference between a Form W-2 and a Form 1099-MISC or Form 1099-NEC? How do you determine if a worker is an employee or an independent contractor? I received a Form 1099-NEC instead of a Form W-2. …
Why You Should Hire a Tax Pro
On the fence about hiring a tax professional, buying tax prep software, or just filing taxes yourself? Let’s compare them! Pros and Cons of Tax Prep Software Tax preparation software is a great way to do your own taxes in a way that offers subtle guidance. So let’s talk about the pros and cons. The pros: tax software is affordable, speedy, and (if you got a good one) easy to use. Purchasing software will always cost less than hiring a real-life CPA or another tax pro. And this price is tailored to your tax needs. If you have an easy return, without lots of property dependents, and business accounts to reconcile, you will pay much less than someone who does have assets in all of these areas that need to be accounted for. As for speed, once you’ve collected all the necessary information, doing your taxes using tax prep software should very rarely take you more than an hour. And most software is straightforward, instructional, and user-friendly. Many of the cons of tax prep software will be pros for hiring a tax professional and vice versa. Using tax prep software means that you are going it “alone” in a sense – while the software may have helpful tools and insights if you get stuck, it doesn’t have the human touch and knowledge that a trained tax preparer will. Tax prep software also isn’t as well-equipped to handle more complex questions. And with all the COVID aid and new tax rules present in tax years 2020 and 2021, it’s much more likely that you’ll need some extra help navigating those changes. Pros and Cons of Hiring a Tax Pro Hiring a tax pro comes with its own unique perks. One pro of paying someone else to do your taxes is that you don’t have to do them! But besides that, professional tax preparers often have much more advanced (and expensive) tax software they use to make sure your taxes, corrections, and TIN checking are done correctly and accurately. Arguably the biggest pro to hiring a tax preparer is the human touch element. When …
What is Form W-9 and How Does It Help Me With Form 1099?
As a business owner or accountant, you understand how important TIN checking is, but how do you get TINs in the first place? What is Form W-9? To request a TIN from an employee, freelancer, or contractor, you can use Form W-9. According to the IRS: Use Form W-9 to provide your correct Taxpayer Identification Number (TIN) to the person who is required to file an information return with the IRS to report, for example: Income paid to you. Real estate transactions. Mortgage interest you paid. Acquisition or abandonment of secured property. Cancellation of debt. Contributions you made to an IRA. Why is Form W-9 Important? If you pay full-time employees, you likely have procedures established where you collect their personal information, including their TIN. But what about your freelancers and contractors? It’s important to have a procedure for collecting their TINs, too. Form W-9 makes this easier. Mark J. Kohler explains the importance of Form W-9 well: The W-9 is your “best friend.” Some of you may be frustrated that you don’t have the information you NEED to issue Form 1099. One of the smartest procedures a business owner can implement is to request a W-9 from any vendor you expect to pay more than $600 before you pay them. Using this as a normal business practice will give you the vendor’s mailing information, Tax ID number, and also require them to indicate if they are a corporation or not (saving you the headache of sending them a 1099 next year). Having a contractor’s W-9 on file before tax season will make filing 1099s much easier. What to Do if You Receive a W-9 If you receive a W-9 from a company or person, it’s important that you complete the form accurately and return it to the company that sent it to you. That company or individual will likely keep that form on file to reference during their end-of-the-year accounting, so be prepared to receive a Form 1099-NEC or similar form from them next …
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Deductions 101 for Small Business Owners
Every small business owner knows that they need to take advantage of deductions around tax time, but what are deductions? And how are they beneficial? Deduction Basics A tax deduction is a reduction of taxable income based on certain business-related expenses that you can claim on your taxes, such as rent, business-related subscriptions, and travel. Put simply, deductions can reduce your business’s total amount of taxable income. By claiming a deduction on your business taxes, you end up paying less to the federal government. Tax deductions are also called “tax write-offs” or “write-offs.” Deductions vs. Tax Credits A tax credit is an incentive for a business to strengthen the economy, enhance people’s lives, improve society, and improve its industry in some way. Tax credits are offered by the government in an effort to reward businesses for doing good in their community and in the U.S. at large. In short, deductions are based on expenses while tax credits are based on societal improvements. Deductions reduce the total amount of income that your business is taxed on while tax credits reduce your tax bill. Tax credits benefit businesses dollar for dollar, while deductions benefit businesses by a percentage depending on your tax bracket. In general, tax credits are more valuable to businesses in lower tax brackets, while deductions are more valuable to businesses in higher tax brackets. Both deductions and tax credits can help your business pay a smaller tax bill, so it’s important to work with a tax preparer to ensure you’re taking advantage of all of your options. Unsure where to start? We cover that here. To learn more about tax credits, read this article by FreshBooks. Is There A Master List of Deductions? Surprisingly, the IRS does not have a master list of small business tax deductions. Instead, they provide a general rule of thumb for small business owners: To be deductible, a business expense must be both ordinary and …
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