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Estimated Tax Payments: What Entrepreneurs Need to Know

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Estimated tax payments can be confusing. It’s easy to say, “I’d rather just pay them all at once, so I’ll wait until tax time next year to do them.” But missing those payments can be costly for your business, and no small business owner has time for extra expenses right now. What Are Estimated Tax Payments and Who Pays Them? Estimated tax payments are something every small business and self-employed individual has to worry about. Because income taxes and others are not automatically taken out of these types of employees’ paychecks, the amounts that the business or individual will need to pay is estimated, and then paid quarterly throughout the year. Typically, sole proprietors, partners, and S corporation shareholders are responsible for paying estimated tax, if they expect to owe tax of more than $1,000 (or $500 for corporations) when their return is filed. This includes any income that isn’t subject to withholding tax, like interest, dividends, capital gains, business earnings, and more. Estimated Tax payments are made quarterly, on or around the 15th of January, April, June, and September of each year. Here are the 2022 due dates: April 18, 2022 June 15, 2022 September 15, 2022 January 17, 2023: Please note that you do not have to make the last January payment if you file your 2022 tax return by January 31, 2023, and you pay the entire balance due with your return, according to IRS Instructions. You do not have to pay estimated tax if you meet all three of the conditions below: You had no tax liability for the prior year You were a U.S. citizen or resident for the whole year Your prior tax year covered a 12-month period Why Should I Keep Up with Estimated Tax Payments? The taxes that are applicable to this rule include things like federal income tax (ranging anywhere from 10 to 37%), state and municipal tax (typically between 0 and 14%), and self-employment tax. Many businesses lose their way during this part of the …

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Tax Implications of Business Structures

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Let’s look at the tax differences between different business structures, including sole proprietorships, partnerships, LLCs, S Corps, and C Corps. Sole Proprietorship A sole proprietorship is one of the easiest businesses to form and you, as the sole proprietor, carry all the assets, liabilities, and responsibilities of your business. However, you can't sell stock in your business as a sole proprietor, and banks are hesitant to lend to you. With sole proprietorships, you don’t even need to register the business with the IRS. You can just use your personal Social Security number for the business tax ID. The profits from the business are not “paid” to the sole proprietor in wages, they are just included in the total amount of personal income tax that is applicable on the taxable profits of the business. Many freelancers, independent contractors, and consultants fall under this business structure, which means that if you are a business that operates as or uses contractors, you will need to request or file the proper forms, like the 1099-NEC, when reporting income. Partnership A partnership is formed when two or more individuals want to create a business together. They can either be limited partnerships (LPs) or limited liability partnerships (LLPs). Limited partnerships have one general partner with unlimited liability, while the other partners have limited liability pertaining to the business. The partners with limited liability also generally have less control over the business. With limited liability partnerships, everyone has limited liability. It protects everyone from debts against the partnerships and actions of other partners. In regard to taxes, partnerships are very similar to sole proprietorships, with a few additions for the multi-owner status. The profits don’t have to be split equally between partners (something you should discuss before entering a partnership agreement). This also means that, like sole proprietorships, all …

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The Effects of Inflation on Business & Tax Trends

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Tax brackets for 2022 will likely be adjusted for inflation. Inflation Effects & Causes Inflation raises prices across all industries, businesses, and everyday purchases. But not all assets and tax classes are affected by inflation equally. According to Investopedia, inflation: Erodes purchasing power Encourages spending and investing Can cause more inflation Raises borrowing costs in the United States Can reduce unemployment Can also cause other complex effects Much of the current inflation problem has been caused by government regulations as well as spending and borrowing trends within big business and federal channels. Because the COVID-19 mandates were unprecedented, it disrupted global supply chains. These disruptions then caused the cost of living expenses to increase drastically and slowed economic growth. Inflation & Business Taxes What does that mean for businesses? You’re likely experiencing lower profits, higher supply costs, and reduced purchasing power. Each dollar you spent on your business has less impact overall when inflation is this high. And that puts a huge strain on operations, especially for smaller businesses. The increase in supply cost and decrease in business revenue will likely mean that your 2021 and 2022 business taxes look a little different than in past years. While your revenue and expenses fluctuate every year, inflation makes those fluctuations more drastic. Not having enough supplies to complete your products or services may mean adjusting business or shop hours, changing your inventory and supply buying processes, and more. If you are a business that regularly uses freelancers or independent contractors, these supply shortages may mean restructuring who you work with and how often. That affects your 1099 form filing, among other things. Inflation is addressed in certain parts of the tax code but ignored in others. For example, tax brackets only increase based on the change …

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Tax Advisor Qualities to Look For

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When you choose a tax advisor, you are not just choosing a contractor or service provider, you are placing all or part of your company in another professional’s hands. Here are some top tax advisor qualities to look for. They Work from Your Perspective As much as we’d all love for taxes to be more straightforward, they’re just not. And a good tax advisor will work to understand and create a tax prep strategy that takes your specific industry and business needs into account throughout the tax prep process. Since most tax laws are written to explain how you can reduce your taxes, having someone who understands these laws and how they can benefit your own taxes is a must-have trait when it comes to choosing the right tax advisor for you. One of the best ways to tell if a tax advisor is going to dive in eagerly and be committed to seeing the tax world from your business’s point of view is to ask them about their approach. If they want to know everything about you and your business, the ins and outs of your products, services, and operations, they are definitely off to the right start! They Want to Share Their Knowledge Gatekeeping may be a way to separate the experts from the amateurs, but this should not be a practice your tax advisor puts a lot of stock in. The eagerness to understand your situation is one-half of a coin that also includes an eagerness to educate. Your tax advisor should feel very comfortable sharing their expertise with you. This does two things: it helps you better understand what they are doing and what your taxes will look like, and it helps the tax advisor understand where you are at from a comprehension standpoint. Why does comprehension matter? If your tax advisor can help teach you how your taxes work, it will create opportunities throughout the year for you to implement initiatives that improve your tax outlook for the future. Availability, Availability, Availability A phenomenal tax advisor isn’t worth much to you if you …

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IRS Audit Triggers for Small Businesses

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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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Evaluating Withholding at Year-End

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The last quarter of 2021 is a great time for evaluating withholding for the year. New Items for Tax Year 2021 This year, your tax prep schedule and operations – both for personal and for business taxes – looked very different from past years. There were some good parts and some not-so-good parts. And the tax process next year will likely also be abnormal. The best practice for that is to get started early. Here are some items of interest for the coming tax season. There are several COVID-related tax items, first and foremost. The American Rescue Plan Act (ARPA) expanded the Advance Child Tax Credit and updated certain qualifications and payment management procedures. As of October 9, 2021, there were still more than 7 million unprocessed individual tax returns, which include tax year 2020 returns with errors and other returns that require special handling. Under ARPA, employers are entitled to tax credits if they provide paid leave to employees who take time off related to COVID-19 vaccinations. You can find more information on that here. Tips for Evaluating Withholding The IRS has an Income Tax Withholding Assistant for Employers tool that can help small and medium-sized businesses determine the amounts they should be withholding. The tool is available in the form of an Excel spreadsheet. Everything from regular pay to commissions and vacation pay is subject to withholding standards. Regardless of the time of year, here are some of the main instances where your business should be evaluating withholding: Early in the year to set your business on the right track Late in the year to be sure you are still on target as you head into tax prep season When the tax law changes (like with the American Rescue Plan Act changes, and other COVID-related changes) When wages change When itemizing deductions or tax credits If your business has seen a change in the percentage of employees versus gig workers being hired Types of Taxes …

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