tag:blogger.com,1999:blog-28571618486569996362024-02-20T04:06:49.534-05:00Thom's Tax TalkA compendium of tax tidbits and information.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.comBlogger67125tag:blogger.com,1999:blog-2857161848656999636.post-69121094860688864972011-02-14T17:41:00.000-05:002011-02-14T17:42:12.112-05:00The IRS Wishes You a Happy Valentines DayIn December of 2009, Congress passed an extension of the Bush tax cuts. A number of the provisions impacted your 2010 tax return. It was mainly on Schedule A, itemized deductions, and education credits. Since the Act passed Congress so late in the year, the IRS needed time to integrate the changes into the tax processing system. They are now finished with that integration.<br /><br />At last, most individual tax returns can be e-Filed with the IRS. This means that you can file your return and finally get your refund in a couple of weeks.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-62138304348342828122010-12-27T09:57:00.000-05:002010-12-27T09:59:01.463-05:00You may not have caught the news that the rate used to calculate Social Security withholding taxes from your employees has been reduced for 2011. It goes back up on January 1, 2012. The rate is now 4.2% rather than 6.2%. So, in effect, your employees are getting a raise and you are not paying for it. The Medicare tax rate has not changed.<br /><br />The rate that a company contributes for Social Security taxes has not changed. It is still 6.2%. You should take this into account when you calculate the payment of taxes each month. You should multiply the gross payroll by 13.3% to calculate the Social Security and Medicare payment that you make.<br /><br />You don’t need to worry about this if you are using a payroll service. They should take care of it.<br /><br />The IRS is also changing the rules for paying the taxes. Starting January 1, 2011 you are required to pay the taxes using the Electronic Federal Tax Payment System (EFTPS). See my blog posted on December 21, 2011 for more details. http://www.thomstaxtalk.comThomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-75315903059745126982010-12-17T18:00:00.000-05:002010-12-17T18:00:03.944-05:00IRS Requirement to pay your business taxes electronicallyIf you are in business you probably got a notice from the IRS recently telling you that you must pay your taxes electronically. This new rule takes effect January 1, 2011. <br /><br />Up to now, businesses could pay most of their taxes by completing Form 8109 and paying their taxes at their bank. This system has been in effect for decades and worked well. The Internet has changed all that. It is now easier, and cheaper, for the government to have you use the Electronic Federal Tax Payment System (EFTPS) than to have you go to your bank to make the payments.<br /><br />Use of the EFTPS system is required for business taxes. So if you must remit payroll taxes, income taxes, and various excise taxes, this system must be used starting January 1, 2011. Individuals may use the system to pay their federal income taxes and estimates. <br /><br />Here is a link to some basic information about the system:<br /><br /> https://www.eftps.gov/eftps/direct/HelpAboutMain.page<br /> <br /><br />The system is fairly easy to sign up for and to use. Here is the link to sign up:<br /><br />https://www.eftps.gov/eftps/enrollment/new-enrollment-flow?execution=e1s1<br /><br />You can always go to the IRS website at http://www.irs.ustreas.gov/ and search for information.<br /><br />Massachusetts has required businesses to remit taxes electronically for several years. Information can be found at: <br /><br />https://wfb.dor.state.ma.us/webfile/business/Public/Webforms/Login/Login.aspx<br /><br />These systems are reasonably easy to use and will save you the time of driving off to the bank when you have to make these payments.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-40794040554045201422010-12-12T17:58:00.001-05:002010-12-12T18:00:35.738-05:00Health Insurance and Our S CorporationHealth insurance is a benefit that most companies offer. It is a great way to attract and keep good employees, and it provides some tax benefits as well. Even the share of the premiums that the employee pays can be treated as a pre-tax deduction and save the employee and the company significant money. What becomes a little more complicated is if you are the owner of an S Corporation and you participate in the health insurance program.<br /><br />IRS regulations require that you report the company paid portion of health insurance as compensation for anyone who owns more than 2% of the company stock. This is the case for more than 99% of owners of S Corporations. Massachusetts also follows this rule.<br /><br />Here is an example: Suppose your salary is $50,000 and you also paid $10,000 for your health insurance. (I know, you wish it were only $10,000.) Your W-2 should show federal taxable wages of $60,000. It also should show this amount as state wages in Massachusetts and probably others states as well. The Social Security and Medicare wages should only be $50,000. This add back to your income is not subject to Social Security or Medicare taxes.<br /><br />You might be about to panic because you think you will be paying more in income taxes because of this adjustment. I have good news. It is true that you will report $60,000 on line 7 of your personal tax return. But you will get to deduct the $10,000 on line 29 of your return and thus pay tax only on the $50,000 of salary.<br /><br />If it does not have any impact, why do it? Reason one: The IRS requires it. Why challenge them? Reason two: If you do not put the health insurance on your W-2, you will have to report it as income anyway and then you can deduct it as a medical expense on Schedule A of your return. Medical expenses are subject to a 7.5% of income floor and you may lose some or all of the deduction. It could cost as much as 40% of the cost of the health insurance in additional taxes. Now that’s a great reason to do it.<br /><br />I’d be happy to talk with anyone who has any questions about this.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com1tag:blogger.com,1999:blog-2857161848656999636.post-67755162842659448122010-10-12T14:31:00.003-04:002010-10-12T14:37:23.510-04:00IRS ScamsMy spam filter intercepted three emails allegedly from the IRS telling me that a payment to them had been rejected because of a problem with my employer identification number. I also have been receiving calls and emails from my clients on the same topic. <br /><br />The IRS does not use email to make initial contacts with taxpayers. These emails are a phishing scam trying to get information from you that can be used to steal your money. Do not respond and do not open any links. You will regret it if you do.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-57100336022267285432010-09-25T12:08:00.001-04:002010-09-25T12:08:00.277-04:00Where’s My Refund?Right about now I get a lot of calls from clients who have not received their federal refunds. There is an easy way to find out where it is. <br /><br />First, go to this link<br /><br />https://sa2.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp<br /><br />You will need to enter the following information<br /><br /> * Your Social Security Number (or Individual Taxpayer Identification Number)<br /> * Your Filing Status<br /> * The exact whole dollar amount of your refund<br /><br />And VOILA you will get information on what is happening with your refund.<br /><br />Just remember, if the IRS says they mailed the check last Friday, it probably means that it actually got to the post office next Friday. This is a great argument for having the IRS do a direct deposit your refund.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-22764646355811261522010-09-21T12:23:00.003-04:002010-09-21T12:27:56.334-04:00Take Your Business ElectronicFor years the Commonwealth of Massachusetts has required businesses to pay their taxes electronically. The Department of Revenue has a web site designed to accomplish this. And the web site is actually fairly easy to use. Here is the website:<br /><br />https://wfb.dor.state.ma.us/webfile/business/Public/Webforms/Login/Login.aspx<br /><br />You take a few minutes to register and then it goes live a couple of days later. Then you can use its full capabilities.<br /><br />You would use this to pay essentially any tax that you owe to the Commonwealth. The most common ones would be state tax withholdings, sales and meals taxes collected, and corporate excise taxes. You are required to pay even the more obscure taxes electronically.<br /><br />The Massachusetts unemployment office has set up the QUEST system for employers to file and pay returns and process unemployment claims. It is located at<br /><br />https://wfb.dor.state.ma.us/webfile/business/Public/Webforms/Login/Login.aspx<br /><br />Again you need to register with them and this can be a difficult process. You need a user name and password and can call 617-626-5075 for assistance. Expect a wait.<br /><br />The QUEST system is not as user friendly as other government sites.<br /><br />The IRS is getting into the game of requiring direct payments rather than using paper checks. The system is relatively easy to use and it is required for all but the smallest business starting in 2011.<br /><br />Here is the registration site<br />https://www.eftps.gov/eftps/<br /><br />Good luck.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-81507080984269837532010-09-21T12:23:00.000-04:002010-09-21T12:23:29.792-04:00Why Have a Mortgage?Most people have a mortgage because that is the only way they can afford to own a home. Although the real estate market is having a very tough time right now, over the long run your house is often your biggest asset and will help fund your retirement. Plus you get a tax benefit from paying the interest on the mortgage.<br /><br />Some people are fortunate to have significant financial assets. One of the more important questions for these lucky people is “Why do you have a mortgage?” The answer often is “Its my only tax deduction.”<br /><br />That’s nice but is it worth it? If you have a $200,000 mortgage at 4% you are paying the bank interest of $8,000. The IRS will give you back about $2,000 in reduced taxes so $6,000 is coming out of your pocket. That is not a very good result for your pocket. <br /><br />Investment advisors argue that you can invest the money and earn more than 4% but they are hesitant to guarantee that you will earn more than the interest rate on your mortgage. My suggestion is to pay off your mortgage and then invest the monthly payment with your investment advisor. You will be amazed how quickly that money will pile up.<br /><br />You can’t pay it off? Add a little extra to the principle you pay every month so that you will pay your mortgage off in a shorter time period. This will save you a lot of money.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-59760284488710572142010-09-21T09:00:00.003-04:002010-09-21T12:21:15.615-04:00Convertin Your IRA to a RothA lot of clients have asked about converting regular IRAs to Roth IRAs. This is a complicated question.<br /><br />Let’s start with the basics. You usually get to deduct the money you contribute to your regular IRA while there is no deduction for contributions to a Roth IRA. You pay taxes on the money you take out of your regular IRA. There may be some adjustments but the distributions are a taxable event. If you meet the requirements for a Roth IRA you do not pay tax on money you take out of it. So Roth distributions generally are tax-free.<br /><br />You are allowed to convert a regular IRA to a Roth IRA. Here is the problem: you pay taxes on the amount you move from your regular IRA to a Roth IRA. You need to pay these taxes out of money that is not in the IRA. So if you have a $10,000 tax liability for making one of these conversions, it must come out of other investments or savings account. If you use the IRA money to pay the taxes you might end up paying some penalties and taxes.<br /><br />Why do a conversion? You do not have to pay taxes on future earnings in the Roth IRA assuming you meet the requirements of having it in the account for five years and being over 59-1/2. There are some exceptions to these rules.<br /><br />You are paying current taxes to save future taxes. If you left the money in the regular IRA you would eventually pay taxes on all the earnings when you withdrew it from the account. You do not pay these taxes on the Roth.<br /><br />Here is the big problem. You can pay as much as 40% in taxes on the value of the IRA that you convert to a Roth. This happens if you are in a high tax bracket. Even if your income were about $100,000 you would pay about 33% in taxes on the conversion. That’s a lot of money.<br /><br />I have analyzed this conversion for several clients. The results have consistently come in that doing the conversion does not result in significant savings for the client. After taxes were considered the clients would end up with the same amount of money whether or not they did the conversion.<br /><br />The one kicker that investment <span class="blsp-spelling-error" id="SPELLING_ERROR_0">advisors</span> keep throwing on the table is that tax rates are probably going up so pay the taxes now. I have a problem with paying a lot of taxes now based on what Congress might do in the future.<br /><br />A conversion like this could benefit a low-income taxpayer, perhaps someone who lost a job and had very low income this year but expects to re-enter the workforce soon. This could result in some future benefit. Analyze your situation carefully if you are thinking about doing this type of transaction.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-82696765584410620412010-08-06T09:02:00.001-04:002010-08-06T20:02:46.594-04:00If your business is organized as an S-Corporation and it pays for your health insurance you could have a problem.<br /><br />A corporation that has elected to have its profits or losses passed through to its shareholders, rather than paying its taxes directly, is an S-Corporation. If your corporation pays for your health insurance, you are required to add the value of any company paid premiums to the gross wages on your W-2 form.<br /><br />For example, if your wages are $100,000 and you pay health insurance premiums for yourself of $12,000 (you wish they were that low) your gross wages on the W-2 form should be $112,000. These premiums are not subject to Social Security or Medicare Taxes.<br /><br />There is some good news. After going through these gyrations you are allowed to deduct the health insurance premiums on the face of your personal federal tax return and Massachusetts tax return. In effect, it does not cost any additional taxes when you follow these rules.<br /><br />If it has no effect, why do it? First, it’s the law. Second, if you do not put the premiums on your W-2, you are not allowed to deduct them on your corporate tax return. Third, they become an itemized deduction on your personal return that is subject to a floor of 7.5% of your gross income. So you would not get the full benefit of deducting the health insurance premiums.<br /><br />Please note that this applies only to 2% or more shareholders. It does not apply to any employee who is not an owner.<br /><br />Please pay attention to this problem. The IRS is getting more and more active in reviewing these transactions and assessing penalties if you fail to follow them.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-14247108991242519372010-08-02T15:54:00.000-04:002010-08-02T15:55:42.418-04:00Question of the DayA client called to ask if the State of Massachusetts was willing to forgive penalties on sales taxes that were paid late. <br /><br />Here is one of the unfortunate facts about sales taxes. No matter what the business structure, the owner of the business is personally liable for sales taxes plus the penalties and interest on them. So the corporate structure will not shield the owner from paying these taxes out of personal funds.<br /><br />There is a possibility that the state will abate penalties if it is the first time they have been imposed and the person can give a good reason for not paying them on time. This abatement is requested using form CA-6. Here is a website where you can find the forms. http://bit.ly/MassForms<br /><br />It will take the state a minimum of two months to process the request, they will continue to bill you, and you will still accrue the penalties and interest on the balance due. <br /><br />The best policy is to pay your taxes on time.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-12165516005783521122010-04-02T07:40:00.003-04:002010-04-02T09:34:16.459-04:00More Time to File Your Tax ReturnFloods can be a good thing. The IRS and Massachusetts have extended the deadline to file and pay your 2009 income taxes to May 11. They also have extended the time to pay some of your payroll taxes. Here is a link to get all the details. That is still due on April 15th. However, they may change this as well. I will keep you posted.<br /><br />Correction 9:30Am 4-2-10 Estimates also are extended<br /><br />Click on the title to see the IRS notice.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-178676290113594332010-01-28T15:32:00.000-05:002010-01-28T15:33:28.316-05:00Whistle Blower PolicyWe had some big business scandals in the early part of the new millennium. Accounting fraud at companies like Enron and Worldcom, and theft from companies like Tyco were in the headlines almost daily. Business executives were treated to the “perp walk” on a regular basis, partly to prove that the government was doing something about them. The end result was a lot of people lost a lot of money because of a few arrogant #$%^&*.<br /><br />Non-profits were directly affected by these scandals. There is now more scrutiny of how non-profits do their work, and concern when any individual at the non-profit gets a salary over $150,000. (Maybe the big banks should get some of this scrutiny. But that’s off topic.) There has always been a concern when a non-profit spends more than 20% of its revenue on administration and fund raising.<br /><br />The law passed to deal with business ethics, Sarbanes-Oxley, now requires that non-profits have a Whistle Blower Policy. A Whistle Blower Policy details the organization’s response to someone who reports alleged inappropriate activity within the organization. It protects the Whistle Blower from retaliation and gives a process for reporting the questionable activity. Many organizations do not know that this requirement exists, but the new IRS Form 990 now has a question about this.<br /><br />What’s a non-profit to do? They can spend thousands of dollars with an attorney to create a customized policy. This is appropriate for large organizations like colleges and the United Way. There even are companies that enable an organization to outsource their response to people who report inappropriate activity.<br /><br />Smaller organizations have an alternative. They can use a template to establish a policy. Here is a good site where you can get such a template.<br /><br />http://www.blueavocado.org/content/model-whistleblower-policy-nonprofits<br /><br />Take a look and try it out.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-87212193331912463792010-01-26T17:34:00.003-05:002010-01-26T17:38:38.030-05:00Charity for HaitiWho says the government cannot move quickly? <br /><br />Congress passed a new law that allows you to deduct the charitable contributions you make to Haiti relief in 2010 on your 2009 tax return. President Obama has signed the bill into law.<br /><br />This means write the check now and get the tax benefit on the return you will file shortly.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-90613362413896080542010-01-20T12:41:00.002-05:002010-01-21T09:18:58.746-05:00File Free With the IRSThis is a repeat blog from a year ago. The only thing that changed was the dollar limitation.<br /><br />Do you have a simple federal tax return to file? You can do it on-line free through the IRS. You qualify if you receive a W-2 from your employer, and have some interest and dividend income. You even can own a home and qualify. The major restriction is that all of your income must be below $57,000.<br /><br />You can file your return through an IRS partner, or you can complete the tax forms found on the IRS Web site at http://www.irs.gov/app/picklist/list/formsInstructions.html This is a fast, easy, and free way to file your return. Would you like to have your refund in less than 3 weeks? You can have it deposited directly into your checking account. Have a personal check in front of you when you file your return so you have the numbers they require to take advantage of direct deposit. This system is appropriate only for uncomplicated returns.<br /><br />This link to the IRS Web site can help you file your return.<br /><br /><a href="http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=4">http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=4</a><br /><br />Massachusetts also offers a webfile alternative. Access it here<br /><br />https://wfb.dor.state.ma.us/income/Default.aspx<br /><br />If the link does not work. Please copy and paste it into your browserThomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com1tag:blogger.com,1999:blog-2857161848656999636.post-84953943021865445952010-01-10T18:19:00.001-05:002010-01-10T18:24:45.070-05:00The Estate Tax2010 is a great year to die.<br /><br />One of the Bush administration tax cuts enacted early in his presidency was a phase out of the Estate Tax. Each year the taxes collected by the estate tax was reduced as larger and larger estates were protected by a rising exemption. Well, this is the year of the final phase out.<br /><br />What is the estate tax? It is a tax on the value of all your assets less any liabilities, such as your home mortgage, when you die. So if you have a house worth $400,000 and a mortgage of $100,000 (you wish), plus some investments worth $500,000, you have an estate worth $800,000. Check my math if you wish.<br /><br />Once you figure out the value of your estate, you go to a chart and calculate what your estate tax will be. Someone dying in 2009 would need a net estate of $3,500,000 before they would pay any estate tax. (Don’t you wish you had an estate that large?)<br /><br />2010 is the year that the estate tax goes completely away. So no matter what the size of your estate, there will be no estate tax on it. For anyone with a taxable estate, that is good news. For someone with an estate less than $3,500,000, it is bad news.<br /><br />Let me explain. Up until 12/31/09, assets you inherited got a step up in tax basis. Supposed your grandfather paid $1 per share for 1000 shares of IBM stock back in 1955. It now sells for about $130 per share. So the stock that your grandfather bought for $1000 is worth $130,000. If your grandfather died on 12/31/09and you inherited his stock, your tax basis would be stepped up from $1 per share to $130 per share. So if you sold it for $140 per share you would only pay tax on $10,000 ($140 per share minus the ‘cost” of $130 per share times 1000 shares). Under current tax law your tax would be about $2000.<br /><br />If he died on 1/1/10 your tax cost would be what he paid for it or $1 per share. So you would pay tax on a $139,000 gain if you sold it for $140 per share. The tax would be about $28,000. This is quite a difference.<br /><br />Back in the middle of the Great Health Care Debate, Congress considered changing the law to freeze the Estate Tax at the 2009 level. The change got lost in the GHCD. I expect some sort of change to occur this year but who knows what form it will take. Watch this blog for updates.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com1tag:blogger.com,1999:blog-2857161848656999636.post-14473050874432014132009-12-23T07:45:00.001-05:002009-12-23T07:48:08.892-05:00Year End Tax PlanningThe best motivation for planning your taxes is to legally minimize how much of your money goes to the IRS. Many years ago, Judge Landis of the U.S. Supreme Court declared that everyone has the right to legally minimize his or her taxes. To do this, you need to have an idea of what your income and deductions are now, and what you expect them to be next year. You must then move income and deductions in a way that minimizes what you pay in taxes this year. Sometimes it is worth paying taxes now in order to save even more in taxes next year.<br /><br /> However, ” take the money and run” is a valid alternative. In this case you worry about tomorrow tomorrow. You delay as much income as possible to next year and accelerate as many of your deductions as you can to this year. This way, you pay the least taxes possible. <br /><br />Step One: Analyze your situation. Will you be paying taxes this year? If so what is your tax bracket? Are you in the 15% bracket or the 35% bracket? If you are in the lower tax bracket you will only get back $15 for every $100 you lay out for a deductible expense. If you are in the 35% bracket then the deduction gets more attractive. <br /><br />Step Two: Determine where you think you will stand next year. Will you be in a higher or lower tax bracket? With the way the economy went in 2009, many people will have a better year in 2010.<br /><br />Step Three: Set your goal. Do you want money now or later?<br /><br />Delaying income is tough when you have a job, a house, and no other tax complications. You get your salary each week and it is hard to push it off to next year. It might happen if you get a year-end bonus that might get paid in 2010. Your interest income or dividends is paid on a set schedule, so you cannot postpone them to next year. <br /><br /> Here are some ways to legally delay income to next year:<br /><br />· Weigh your options if you are thinking of selling some common stocks. If you have gains, you may want to wait until January to realize them. That way you are not liable for the taxes for a year. If you have losses, then take them this year. However, always make a good investment decision first. If it’s time to sell then don’t worry about the tax consequences.<br /><br />· If you are self-employed you can delay billing your customers so that you receive the income next year rather than this year. Please note, if you receive the money this year, you are legally required to report it this year. Keeping a drawer full of checks that you get in December and then deposit in January is illegal. You should report all your income in the year you receive it.<br /><br />Here are some ways to accelerate your expenses<br /><br />· Pay your mortgage before Christmas. That way the bank will include the interest you normally would pay in January on their annual statement for this year, making it easier to deduct it. <br /><br />· If you are making donations to your favorite charity, make them by the end of December, rather than in January. If you mail the check on December 31st, you can deduct it on your 2009 tax return.<br /><br />· If you have a lot of junk, (oops, I mean valuable furniture and other items), you can consider donating them to charity and getting a tax deduction for it. You must get a receipt if it is worth more than $250, and you must provide additional information on your return if it is over $500. Really valuable items might require an appraisal. Be careful, the appraisal might cost more than the tax benefit of making the donation. Generally charities will not value the items for you. They will just say that you gave them seven bags of clothing.<br /><br />· If you were looking for a job in 2009, keep track of your job search expenses. They can be used as itemized deductions to reduce your taxes. Some examples of these expenses would be the cost of printing your résumé, fees for help in your job search, or hiring a career coach to help your efforts. However, the total must be above 2% of your income to reduce your taxes. <br /><br />· Often the biggest job search expense is the use of your automobile for your search. Keep track of the mileage for getting to the printer, going to various employment agencies or job fairs, and traveling to interviews. Write it all down to make sure you get the benefit of all the mileage.<br /><br />· If you pay your real estate taxes yourself rather than through a bank’s escrow account, you can pay them in December rather than January. That way you can deduct them this year.<br /><br />· Medical expenses must be more than 7.5% of your total income to be deductible. Look at your income and medical expenses and pay any outstanding medical bills this year if you are over this limit. If you are paying for your own health insurance, you should not have a problem exceeding this limit.<br /><br />Here are some suggestions for the Self-Employed: (These only should be used if you have a good business purpose in spending the money. New “toys” like the newest fanciest computer, don’t make good financial sense.)<br /><br />· You can write and mail the checks for your business expenses on December 31st and deduct them on your 2009 return. This includes expenses like rent or office supplies.<br /><br />· Items you charge on a bank credit card can be deducted when they are purchased rather than when you pay the charge card bill. So those office supplies you bought in late December on your Visa card are deductible in 2009. If you charged it on your Staples card, then they are not deductible until you pay Staples. The theory is that Staples has not gotten their money yet so you cannot deduct it.<br /><br />· Upgrade your equipment. This is only a good idea if it will help you run your business better, lower your future costs, or increase your revenue. Again, fancy toys don’t make financial sense.<br /><br />Careful tax planning can help you keep some of your money at a time when every dollar counts.<br /><br />If you pay the dreaded Alternative Minimum Tax (AMT), then you have to be careful what you move deductions from year to year. Generally it does not help you to pay your real estate or other deductible taxes or things like job search expenses in December if you are subject to the AMT. The AMT would take a several blogs to explain. I might tackle it in a future blog.<br /><br />These are general ideas that can help reduce your taxes. If you plan to implement any of these suggestions, it is well worth it to consult a tax professional.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-26695133609861128802009-12-14T20:26:00.000-05:002009-12-14T20:26:00.179-05:00Final Tips<strong>Self Employment Blog #7<br /><br />Quick Hitters<br /><br />Tax Professionals</strong><br />Owning your own business can be confusing and lonely. Legal and tax obligations appear at any time. If you hire a tax professional, they can help with your tax return and estimates. A good tax professional will also advise you on running your business and work with you to make it more profitable. They also can advise you on legal ways to reduce your taxes. Don’t depend on your friends and family when you are self-employed.<br /><strong><br />Checking Accounts </strong><br />It is best to set up a separate business checking account for your business. Pay all your business bills from the business account and all your personal bills from your personal account. Transfer money from the business account to your personal account so your checks won’t bounce<br /><br /><strong>Health Insurance </strong><br />You can get health insurance from several sources. Chambers of Commerce offer health insurance options and there are various other organizations that offer this benefit. Your payments for health insurance are not deductible on Schedule C as a business expense, but could be deductible on the first page of your Form 1040.<br />Massachusetts requires that you offer health insurance to your employees if you have more than 10 employees. Most group health plans state that anyone working more than 20 hours a week must be covered under your plan unless they are covered under a spouse’s plan. The expense for covering your employees is deductible on your business tax return.<br /><br /><strong>Employees </strong><br />At some point you may need help in running your business. Often the first person hired is an administrative person to do all the things that keep you away from your clients and customers. You should talk with your tax preparer before you hire someone so that you understand your obligations. I’d recommend a payroll service to take care of all the myriad of details that go along with paying an employee.<br />Employees are expensive. You must have worker’s compensation insurance, match their taxes, and may even need to cover them with health insurance. Be careful who you hire and that you really need the person to help your business progress.<br />A quick bit of advice. If you view your employee as an expense rather than an asset, get rid of them and hire someone else.<br /><br /><strong>Sales taxes</strong><br />Be aware that if you sell a product you must collect and pay sales taxes in most states. Some states, such as Connecticut, have a sales tax on services.<br /><br /><strong>Partnerships</strong><br />Talk with your CPA before starting a partnership. They are harder to keep together than marriages. Generally partnerships break up because the various partners do not agree on the direction they are going in and how to get there.<br /><br /><strong>Registrations </strong><br />In Massachusetts you are required to register with the town or city clerk where you live if you use a fictitious business name. That would be any name other than your own. If you are an LLC or corporation you are required to register. If you do register, you can expect that the city or town will eventually show up at your door and want to tax your business assets. Other states probably have similar requirements.<br /><strong><br />Pensions</strong><br />There are many different pension plans available to business. There is no perfect type for all business. A sole proprietor often wants to use a SEP plan because it is simple and inexpensive. Large companies use the 401(K) plan because it shifts the burden of funding the plan to the employee. There are many alternatives in between. You should discuss the options with your CPA as well as your financial advisor.<br /><br /><strong>Management</strong><br />There is an old Vermont saying, “The eye of the farmer fattens the stock.” Of course, now there are very few farmers. What this means is that the business will run better when you are there. Too many things can go wrong when you are not there. To minimize this problem, you need to have procedures in place that help your employees understand what is expected of them.<br /><br /><strong>Customer Service</strong><br />The measure of customer service is not what happens when things go right. It what happens when things go wrong. It is critically important to deal with complaints and problems quickly and effectively. The proper handling of a complaint can turn a problem into an asset. If someone is happy with your service they will tell one person— if they are unhappy they will tell ten.<br /><br /><strong>S Corporations</strong><br />This is a special tax designation for corporations. A regular corporation pays taxes on its net income.<br /><br />An S corporation does not pay taxes on its income. It transfers the income to the personal tax returns of the owners. This prevents the double taxation of the income and provides some tax-reducing benefits to corporate owners. You need to make a special election to be allowed this privilege. Check with your CPA as soon as you set up the corporation to see if this is an appropriate thing to do.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-6356934262166455702009-12-09T20:22:00.000-05:002009-12-09T20:22:00.706-05:00Paying your taxes<strong>Self Employment Blog #6<br /><br />Important details #3<br /><br />Paying your taxes</strong><br /><br />Your goal should be to pay a lot of taxes, but the least amount legally required. The government would like to take all your money but have not yet found a way to accomplish this.<br /><br />Be sure you are sitting down. The taxes on the income from your business can be as high as 40 to 50% of your net profit. It all depends on what other income shows up on your tax return. Your spouse’s salary can push you into this level of taxation, as can investment income, unemployment compensation, or rental income. Here is how it breaks down:<br /><br />The Social Security Administration gets about 15% of your wages or net income from self-employment to cover your Social Security benefits and Medicare. When you are an employee, you pay half and your employer pays half. When you are self-employed you pay the whole 15%. Your itemized deductions, such as mortgage interest and real estate taxes, do not affect what you pay for Social Security taxes.<br /><br />Your federal income taxes depend on your taxable income and marital status. This blog cannot provide all the alternatives. A large majority of taxpayers end up in either the 25% or 28% tax brackets. Your actual percentage will vary with your return.<br /><br />Most states have an income tax. Even some states that do not have an income tax have a business tax that applies to self-employed people. New Hampshire is one of those states. Massachusetts has a tax rate of approximately 5%.<br /><br />Using the numbers above you would be paying either 45% or 48% in total taxes. Now that you are totally depressed, let me back off from that statement a bit. The taxes you pay depend on how your tax return goes together. High mortgage interest and real estate taxes will reduce your federal taxes. A non-working spouse reduces your taxes. Many of my self-employed clients only pay Social Security taxes because their income is low.<br /><br />My advice to my clients is to put 40% of their net income into a savings account to pay their taxes. Maybe there will be enough left over after paying the taxes for a cup of Starbuck’s coffee.<br /><br />The IRS and state departments of revenue require you to pay your taxes during the year, not when you file your return. So you must pay estimates each quarter to avoid being penalized. The due dates are April 15th, June 15th, September 15th and January 15th of the following year. There are vouchers that must be sent in with your check.<br /><br />The final blog is a glossary of terms you will need to complete the processThomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-85783258782400092722009-12-04T20:19:00.001-05:002009-12-04T20:19:00.170-05:00Tax Deductions<strong>Self Employment Blog #5<br /></strong><br /><strong>Important details #2<br /></strong><br /><strong>Tax Deductions</strong><br /><br />The reason you need a bookkeeping system is so that you can deduct all the expenses possible to minimize the taxes you will be paying.<br /><br />There are a couple of expenses that you will not collect in your bookkeeping system.<br /><br />The first is your <strong>automobile expense</strong>. You have two choices in calculating your deduction for your automobile. With either choice you need to keep a log of your business miles and know the total miles you drive your car during the year.<br /><br />You could record every expense, (gas, insurance, repairs etc.) you incur using your automobile. Once you get a total cost you multiply it by your business-use percentage. (Business-use percentage is your business miles divided by your total miles.) Alternately, you use the IRS automobile mileage rate of $0.55 per mile for 2009, times the business miles. The vast majority of my clients use the IRS standard mileage rate. It’s simpler to work with and the IRS adjusts it every year.<br /><br />The second one is the <strong>deduction for a home office</strong>. To legally deduct the cost to maintain an office in your home, you must use the area exclusively for business. Thus you cannot deduct the expense if you work at your kitchen table. You are allowed to deduct the business-use percentage of all the expenses to run the house. This would include mortgage interest, real estate taxes, utilities, heat, insurance, and general repairs. You cannot deduct repairs to the non-business use portion of the house, like your kitchen. As this is a complex deduction, it would benefit you to hire a tax professional to help you figure it out.<br /><br />Here is a partial list of the other categories you should use to collect your expenses together:<br />• Advertising<br />• Insurance<br />• Interest<br />• Professional Fees<br />• Office Expenses<br />• Rent<br />• Repairs<br />• Supplies<br />• Taxes<br />• Licenses<br />• Travel<br />• Meals<br />• Entertainment<br />• Utilities<br />• Telephone<br />• Bank Charges<br />• Dues<br />• Subscriptions<br />• Computers<br />• CleaningThomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-69382955783335381022009-11-30T20:15:00.000-05:002009-11-30T20:15:00.502-05:00Record Keeping<strong>Self Employment Blog #4 </strong><br /><strong><br />Important details #1<br /><br />Record Keeping</strong><br /><br />The IRS requires that you keep accurate records of your income and expenses. Unfortunately, they don’t tell you how to do it. You want to establish a system that is simple, accurate, and easy to maintain. It can be a paper system or computerized, whatever works best for you. It is important to do your record keeping regularly. Do it at every week or at least every month. The goal of record keeping is to collect information together into the categories of income and expenses to determine your net income.<br /><br /><strong>Do not</strong> throw your receipts under the seat of your car, in the basket on your counter top, or in a box under your bed. <strong>Do not</strong> take a big box of receipts to your CPA to prepare your return. <strong>Be organized</strong>. You need to know how you are doing as the year progresses, but you can also save yourself a lot of money in tax preparation fees when you come prepared.<br /><br />One of the simplest systems on the market is the Dome Bookkeeping system. You can buy it at most office supply stores. It is a paper and pencil system and is smaller than a crossword puzzle book. With this system you record your income and expenses as they are incurred. So when you make a sale today, write it down. When you pay a bill, write it down. At the end of the month you summarize your expenses by category and tally up your year to date activity. At the end of the year you hand the book to your CPA to have your taxes prepared. Quick, simple, accurate, cheap, and it saves you money with your accountant.<br /><br />Another paper system is called a One-Write System. You buy checks and a check register from a company like Deluxe (https://www.deluxeforms.com). A check register is created at the same time you write checks and makes a permanent record of each transaction. It also keeps your checkbook in balance. The check register has columns to “spread” your expenses. So every time you buy office supplies, you put the amount paid in the office supply column. At the end of the month you tally up the sheets. At the end of the year you summarize your activity for the full year to prepare your tax return.<br /><br />You can use Excel or another spreadsheet program to collect your records. This would be set up like the One Write Systems mentioned. It can get very cumbersome if you have a lot of transactions. A power-user could come up with a higher-tech solution to doing the summary.<br /><br />Quicken (http://quicken.intuit.com) or a similar personal finance program can do a good job of collecting the information together for you. It forces you to select a category and then prints reports telling you how the business is doing. You write your checks through the system and can then track what is owed to you. You should set up a data file for the business that is separate from your personal data file to reduce the confusion. These programs are fairly simple and accurate, and reconciling your checkbook is a breeze after the first month.<br /><br />QuickBooks (http://quickbooks.intuit.com) is the premier small business bookkeeping program and it is related to Quicken. It can handle sophisticated business transactions and complex companies. The key to QuickBooks is to not over-think it. Use it to track your receivables, keep your checkbook balanced, and write your checks.<br /><br />A one person sole proprietorship or LLC can generally keep good records with Quicken or Money (from Microsoft). QuickBooks is appropriate if you have a lot of clients you are billing or have a more complex business. If you are incorporated, QuickBooks or some similar program is the best choice. Excel is cumbersome, and the paper systems will become tedious.<br /><br />Just remember to <strong>keep it simple</strong>.<br /><br />The next blog will cover the tax implications you will face.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-60468838456109831312009-11-25T18:35:00.000-05:002009-11-25T18:35:00.228-05:00Corporations, LLCs, and Sole Proprietorships<strong>Self Employment Blog #3 </strong><br /><strong><br />Corporations, LLCs, and Sole Proprietorships</strong><br /><br /><strong>Corporations</strong><br /><strong></strong><br />Incorporating your business requires filing long and formal documents with the Secretary of State and the spending of a lot of money on filing fees, legal fees, accounting fees, insurance, etc. just to set up the corporation. Then you have to pay $4,000 annually in various expenses just to keep the corporation alive.<br /><br />The major benefit of a corporation is to limit your liability in case something bad happens. All your business assets are on the line if the business is successfully sued, and you could be put out of business. However, the corporate structure should protect your personal assets from being seized in a judgment. I only know of one of my clients who was successfully sued and that was because they neglected to deal with a complaint.<br /><br />There is a marketing benefit to being incorporated. You appear to be bigger than you are. With today’s technology, you can look like a big company with vast resources, when in fact you are one person sitting in your spare bedroom. Appearance of size matters. Unfortunately, some big companies will not deal with you unless you are incorporated.<br /><br />Finally, there can be a tax benefit to being incorporated. You need to be earning a significant income to take advantage of these opportunities. My rule of thumb is the benefits start to be available when you are earning over $50,000 per year and you break even when you reach $100,000. If you are losing money, a corporation just costs you more money.<br /><br />To accomplish this you must observe all the niceties of having a business. You will need a separate business checking account in the business name. You should always use business stationery in the company name and sign as president, not just your name. Everything you do for business should be in the Corporation’s name.<br /><br /><strong>Limited Liability Company (LLC). </strong><br /><strong><br /></strong>Like a corporation, you are required to register your LLC with the Secretary of State and pay a filing fee. The fee varies by state. The registration process is easy and generally just a one page form. Then you have to keep the LLC alive by filing an annual report each year. There is of course another filing fee for the annual report.<br /><br />There are two benefits to an LLC. First, it limits any liability that arises within the business from affecting your personal assets. For example, you start a business painting houses. The first house you paint catches fire and burns to the ground. An LLC will hopefully protect you from losing your house and other assets.<br /><br />There is more good news about the LLC. If you are the only member you do not need to file a separate tax return for the LLC. The income and expenses of the business go on Schedule C of your personal 1040 tax return. It is also less expensive to run because you are not paying a tax preparer to prepare an LLC return and your personal return.<br /><br />An LLC has the same marketing benefits as a Corporation but none of the tax benefits.<br /><br />Like the corporation, you need to be careful to transact all business in the LLC’s name.<br /><br />Finally there is the <strong>sole proprietorship</strong>.<br /><br />Essentially when you stand in the middle of your living room and declare yourself a business you have become a sole proprietor. The niceties of the LLC or corporation do not have to be observed. You can run the business through your personal checking account. You do not have to register with the Secretary of State. You do your work, collect your invoices (hopefully), pay your bills, and keep the rest of the money. At the end of the year, your business activity is reported on Schedule C of your 1040 Form.<br /><br />The plus side... It is simple to start and close a sole proprietorship. You end it by standing in the middle of your living room and saying, “I’m out of business!” Your record keeping requirements are much simpler. (Record keeping will be explained later.) The cost to stay in business is much lower than a corporation or LLC.<br /><br />The downside... If something goes wrong, all your personal assets are on the line. They can take your house and all your assets. A homestead exemption will help protect your home. Under federal law, retirement assets are generally not available to creditors.<br /><br />More bad news… Many large companies will not deal with you as a sole proprietor.<br /><br />The next blogs will cover the details of business ownership.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-60098226514170071162009-11-22T18:31:00.001-05:002009-11-22T18:31:00.278-05:00Franchising and Multi-Level Marketing<strong>Self Employment blog #2</strong><br /><br />These are two quick ways to get into your own business.<br /><br /><strong>Franchises:</strong> One option for starting your own business is to buy a franchise. This can be a great way to get a business going and, if you get the right one, it can be a great financial boon. The big benefit of a good franchise is that all the set up work and on the job training has been taken care of. A good franchise will give you great training in their proven system of doing things and then help and monitor you as things progress. They will help with a location and get you going. If you do it their way you are almost guaranteed to succeed. One problem is that the franchises you can afford are the ones who don’t do any of these things. They take your money, mail you a Xeroxed copy of their manual and say “Where’s my royalty check?” There are exceptions of course but generally you need the big bucks to get a good franchise.<br /><br /><strong>Multi-Level Marketing:</strong> This type of business is also called Network Marketing. Here is Wikipedia’s definition of MLM: <a href="http://en.wikipedia.org/wiki/Multi-level_marketing">http://en.wikipedia.org/wiki/Multi-level_marketing</a><br /><br />The basics of MLM are fairly simple. MLMs are usually centered on a consumer product. The product is always top quality (according to the company) and more expensive than similar products you can buy at your local store. You are recruited to be a distributor of this product by someone who is already in the business. This might be a friend or colleague. You are encouraged to sell the product and to recruit distributors. You earn money on your own sales and a commission on the sales of the people you recruit and those that they recruit, ad infinitum. This organization is called your “downline”. The more people in your downline, the more you earn.<br /><br />MLMS are generally inexpensive to enter. They also entail much more work than you are led to believe. The success rate in this type of business is no better than starting any other small business and is probably much smaller. You can be fabulously successful but that is a rarity. Most participants plod along and then drop out. My observation is that companies in MLM pop up, are very popular, and then settle into a maintenance mode. Then someone decides that you can MLM dog biscuits and folks jump on this bandwagon. I have had some clients who have generated some income from this business model but most have dropped out within a year of joining. For an MLM to work, everyone needs to sell product as well as recruit more people to sell. Setting up a wholesale club by recruiting distributors and using the products but not selling will not work.<br /><br />Next time, I will discuss corporations, LLCs, and sole proprietorships.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0tag:blogger.com,1999:blog-2857161848656999636.post-71709117695655113982009-11-18T18:26:00.004-05:002009-11-20T07:26:15.899-05:00Starting Your Own BusinessThis is the first blog in a series about starting your own business.<br /><br />Many people dream of being in business for themselves. They think about the financial rewards, the independence of being their own boss, and the freedom you get when you do not have to answer to someone else. It all sounds wonderful. Doesn’t it?<br /><br />Let me fill you in on an alternate reality.<br /><br />We all know the urban legend about Bill Gates. He dropped out of Harvard to start Microsoft. He worked hard, made some good decisions, (except Vista of course) and is now the richest man in the universe. Well, that rarely happens. The financial fact of small business is that 80% fail. Most of the remaining 20% struggle to get by and a rare few end up with the big bucks.<br /><br />It is true that you are your own boss (except maybe for your spouse, clients, and employees). The (big or small) buck stops at your desk. That means that when something goes wrong, you also do not have anyone to pin the blame on. All the decisions rest on your shoulders and you can’t ask for advice from your friend in the next cubicle. It can be very lonely having your own business.<br /><br />You now have the freedom of working all day and then doing estimates, billing, record keeping in the evening. Oh and don’t forget those phone calls you need to make and the supplies you need to pick up. Oh and paid vacation. Who are you kidding? When you go on vacation, there is no one back at the shop to earn money for you.<br /><br />We are going to explore the world of options you have for starting your own business. To end this section, I want to share some definitions with you, which will be expounded on in subsequent blogs:<br /><br />Break Even – This is the point where the revenue from your work equals the expenses to accomplish that work.<br /><br />Contractor – This is a person who is working for your company and does not have any taxes withheld from their pay.<br /><br />Corporation – A well-established form of business with shareholders, stock, and well-defined limits of liability and operating characteristics. It is a separate organization and must file its own tax return.<br /><br />Employee – This is someone who works for you and has taxes withheld from their pay and receives whatever benefits your company offers.<br /><br />Franchising – A quick way to get into business. You pay to be part of a large company with established policies procedures. Dunkin Donuts and MacDonalds are well known franchises.<br /><br />Homestead Exemption – A document you can file at the registry of deeds that protects you from being forced to sell your home to satisfy creditors. Consult a lawyer for more specifics.<br /><br />Limited Liability Company (LLC) – A form of business that provides some protection from liability. An LLC may or may not file its own tax return.<br /><br />Liability – In this context, liability is defined as having a business problem spill over into your personal life and assets.<br /><br />Limiting Liability – This means keeping your personal assets safe from business problems. The idea is that if the business gets sued, you get to keep your house and personal checking account.<br /><br />Multi-Level Marketing – Another quick way to get into business. MLM is almost always selling consumer goods. You are compensated for your own sales and earn a commission on the sales of people you recruit into the business.<br /><br />Self-Employed Individual – That would be you. This is a person who runs their own business and takes on the risks associated with it. Even if you have only one client you are still self-employed. You must run the business, do the work, pay the bills, collect the money, and pay your own taxes.<br /><br />My next blog will discuss Franchising and Multi-Level Marketing.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com2tag:blogger.com,1999:blog-2857161848656999636.post-40465181403729765022009-11-07T17:07:00.002-05:002009-11-07T17:20:11.897-05:00New Homeowner’s Tax Credit – Part TroisWell, well, well. The federal government has extended the new <span id="SPELLING_ERROR_0" class="blsp-spelling-error">homeowner's</span> tax credit to cover purchases that close on or before June 30, 2010. They have also added another important date--you must sign the contract to purchase the home by April 30, 2010. I guess a little more of the stimulus money will be going to everyday people.<br /><br />The Feds have also changed the rules a bit. You still must have not owned a home for at least three years to qualify for the full $8,000 new <span id="SPELLING_ERROR_1" class="blsp-spelling-error">homeowner's</span> tax credit. However, the amount of income you can have to qualify for the full credit was raised to $125,000 if you are single, and $225,000 if you are married and file a joint return.<br /><br />They also added a new wrinkle. If you have owned a home for five of the previous eight years you can qualify for a credit of up to $6,500. This expands the pool of potential house buyers substantially.<br /><br />Now for the bad news. The new <span id="SPELLING_ERROR_2" class="blsp-spelling-error">homeowner's</span> tax credit is not retroactive. The new rules are effective for sales that happened on or after November 6, 2009. All those folks who have owned a home for more than five years and closed on their new home on November 5, 2009 are out $6,500. The same goes for buyers who exceeded the income limits and thus did not qualify for the new <span id="SPELLING_ERROR_3" class="blsp-spelling-error">homeowner's</span> tax credit earlier in 2009.Thomhttp://www.blogger.com/profile/11951923601498618389noreply@blogger.com0