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Corporate tax filing

Date: 08/22/2019 | Category: | Author: Jakub Vele

Corporate tax filing

Starting a business is not as simple as growing and earning money. There are a lot of things that you need to take care of as soon as your company gets into the working space. One such important thing is corporate income tax and the corporate tax filing. And each business type has its own advantages and disadvantages when it comes to taxes and the filing methods.

Regardless of the type of business entity, it is always a challenge to understand all about the filings that you would need. Keeping this in mind, we have put together some details that would help you with your corporate tax filings. This is to not miss out and to be sure about what to file.

For those who are about to start their companies, you can use this to help you make the right decision regarding the type of entity you choose for your business. Keep reading to understand more about the tax filings in details.

Business Types & Their Tax Advantages

To begin with, let us talk about the three main business entities. Each has its own perks and disadvantages. The following would give a detailed explanation on all of them along with their tax advantages:

#1 S-Corporation

An S-corp or a small business corporation, is a special class of corporation that is recognized by the federal tax code. There are two main characteristics of an S-Corporation and they are:

  • It offers limited liability to the shareholders/owners; and
  • It enjoys the flow-through tax treatment that is similar to, but not identical to LLCs and partnerships.

S corporations provide a few tax advantages in the employment sphere. One advantage is that owners can pay a lesser amount of self-employment taxes. Plus, the owners can act as the W2 employees who don’t have to file quarterly estimated taxes.

An S Corporation create some challenges for those businesses that are searching for or have investors. This is because by law, an S Corporation cannot have more than 100 shareholders/owners, all of them have to be individuals, and they cannot be another business entity, LLC or corporation.

S corporations are created by initially filling the company papers and fee with the Secretary of State. Once the company is filled as an S-Corporation, you would need to file an election to be taxed as an S-Corporation with the IRS. Just to be clear, the company does not pay its own income taxes. Instead, the shareholders or owners pay from their salaries and dividends that they get from the company, which is also called the flow-through taxes.

Tax Advantages of an S-Corporation

Since we are talking about the filing of income tax, you should know about the many tax advantages that come with an S-Corporation. Each has been shared and explained below:

  • Independent Entity – In terms of federal tax payments, S Corporations are considered as a normal corporation in many ways. This means that an S Corporation is its own entity, and is separate from its shareholders. Basically, if the shareholders leave, the company would not cease to exist. Another shareholder can take over and continue the business.
  • Tax Savings – Only the shareholders who are employees in the company are subjected to employment tax. The rest of the income “flows through” the business and is paid to the owners. This amount is then taxed at a personal level. Every state has their own tax rates, check with your attorney about your state’s rates.
  • Avoid Double Taxation – S Corporations offer the benefit of avoiding the double taxation issue. This means that unlike C Corporations, the shareholders and corporation is not taxed in an S Corporation. The corporate income taxes are only paid by the shareholders after they get their pay from the company.
  • Tax Credits for Business Expenses – A few of the business expenses that the shareholders have can be deducted from the corporate income tax return. But you would need to talk to your lawyer or accountant to know more and make the right choice.

#2 C-Corporation

The next business entity is a C Corporation, and is one of the most common types of company. A C Corporation is a corporation that does not elect to be treated as an S Corporation for federal tax purposes. The two main traits of this business entity is:

  • Offers limited liability to the shareholders or owners; and
  • Unlike S-Corporation, it is not a flow through entity. It is taxed at both the corporate and shareholder level. This causes double taxation which is usually a disadvantage of using a C Corporation.

C-Corporations are usually publicly-traded companies where private companies tend not to choose being a C-Corporation. But in all this, there are some tax advantages that C-Corporations offer.

Tax Advantages of a C-Corporation

As mentioned above, there are some great tax advantages that come with a C-Corporation. Each has been shared and explained below:

  • Lower Tax Rates – For the first $75,000 that a C Corporation makes, they are taxed at a lower rate than other corporation types.
  • Greater Financial Control – C Corps can use fiscal years for their accounting, only if they are not a personal service corporation. A fiscal year can be split into two different calendar years. This means that some tax deductions can be delayed to the next calendar year by declaring them at the end of the fiscal year. With this, the deductions that would lower the taxes can be claimed earlier in the fiscal year to reduce the taxes owed in the current calendar year.
  • Reduced Audit Potential – Profit and losses does not pass through a C corporation like in an S Corporation. So, any irregularities in reporting the pass-through income and losses for the IRS can be avoided. This means that the chance to have an audit by the IRS is lower in this respect for C Corporations.
  • Fringe Benefits – Fringe benefits can be tax deductible only if the shareholder who gets them is also an employee in the company.
  • Split Profits – The profits earned by a corporation can be split between the owners and the corporation. This would reduce the income claimed on the corporation tax filing, and also increase the amount reported on the taxes of the owner. You just need to be careful with this and take the help of a lawyer or your accountant.

#3 Partnership

A partnership is when two or more people come together to work as co-owners and share the profit. There are many different kinds of partnerships in the business world. One type is the general partnership where all partners have unlimited liability. In this case, it means that the partners of the company are separately and jointly responsible for the obligations of the company

The other kind is called a limited partnership, where the liability of each partner is limited to their investment. But this is only possible when they are not actively involved in the management of the company. On the other hand, in a limited liability company (LLC), every partner has limited liability. And even though limitations on liability can create some differences in the legal and tax obligations of the individual partners, all the partnership taxation is taken care by Subchapter K of the Internal Revenue Code.

Tax Advantages of a Partnership

Just like for every other business entity, partnerships have many tax advantages as well. Each has been explained below:

  • Pass-Through Entity – Deductions, income, and credits flow through to the partners. This means that there aren’t any taxation at the partnership level. In short, the tax is only assessed at the individual level.
  • Tax-Free Property Transfers – The distributions from and contributions to a partnership can normally be made without any income tax consequences.
  • Special Allocations – Partnerships have a great structural flexibility where the partners can easily split their income, voting and ownership rights as they wish as per Section 704(a) of the IRC, unlike a corporation. But for this, there has to be a partnership agreement on which it is distributed. Moreover, Section 704(a) requires that the allocation of the profit and loss should have substantial economic effect, which means that the splitting should not only be for reducing the tax liabilities of the individual partner.
  • Family Limited Partnerships – One main kind of partnership is the Family Limited Partnerships (FLP). It is one of the most popular structures and is used to reduce gift and estate tax obligations associated with transferring a business.

With all three main business types and their tax advantages covered, let us now move ahead and talk about the corporation tax filing and the corporate income taxes.

C-Corporation Taxes

As mentioned above, C corporations are regarded as a separate entity from their owners. This means that the owners don’t include the income tax of the corporation as a part of their personal income tax return. And there are a lot of tax forms that you will need to take care of and use for the C corporation taxes. Below are the forms that are needed for filing the corporate tax return of your C corporation:

Form 1120

The first kind of form that any C corporation will have to complete is the income tax form 1120. Basically, as C corporations are considered separate entities from their owners, the corporate income taxes are paid for separately from the owner’s income tax. And as per the IRS , every C corporation pays for their corporate income tax return using Form 1120.

There are three main parts of the form and the person preparing the form would have to know about:

  • Add in the basic details of the corporation income tax return and the C corporation.
  • Put in information of various credits, deductions, income, and other details that will determine the tax liability of the corporation.
  • Enter the complete balance sheet and if required, reconcile any losses.

Here are the different sections of Form 1120 that you will need to fill in for the C corporation taxes and filing explained in details:

Section 1 – Basic Information

This section will hold all the basic information of the corporation which includes, and is not limited to:

  • Name
  • Total assets
  • Incorporation Date
  • Address

Section 2 – Information About Corporation Income

Under this section when filing the C corporation taxes, you will need to add the information of the income of the corporation that includes:

  • Capital gains
  • Dividends and Interests earned
  • Cost of goods sold
  • Gross receipts

Section 3 – Deductions – Tax-Deductible Expenses

In this part of Form 1120 of corporate tax filing, you will have to access the financial information for the tax-deductible expenses that includes, but not limited to:

  • Depreciation of property, including any rental properties
  • Contributions to charity
  • Interest paid
  • Taxes paid and/or licensing fees
  • Compensation paid to officers

For this part, it is important that you take the help of your accountant or lawyer. Also, you should know that you do not need to share the proof of these expenditures. However, it is advised to keep them with you in case there is an audit by the IRS.

Section 4 – Tax, Refundable Credits, and Payments

This is another section that you will need your accountant and financial officer to complete, as they will have the needed details for this section. Also, there are some important details that you will have to add in this part including the balance sheet, which is important. Other than that, you will have to add in the information of those things that have been listed in the tax return form.

The following parts are the ones filled under this section for the corporate income tax return. Just note that not all the schedules might be required for the tax return of your corporation:

  • Schedule A: Cost of Goods Sold. (This should be filled only if the corporation sells good and not services.)
  • Schedule C: Dividends & Special Deductions. (It should be noted that this section is different from the Schedule C sole proprietors)
  • Compensation of officers
  • Schedule J – Information on tax rate computation.
  • Schedule K – Information about the method of accounting used by the corporation, the stock ownership, business type and shareholder information.
  • Schedule L – Balance Sheet Per Books for the tax year.
  • Schedule M-1 – Reconciliation of Income (Loss) Per Books with Income (Loss) Per Return.
  • Schedule M-2 – Analysis Unappropriated Retained Earning Per Books.

These are the parts of Form 1120 that you will have to take care of, and it is important that you take the help of a lawyer and your accountant. Once you have filled the form, remember to submit it before the deadline.

Deadline

The form has to be filed before the 15th day of the 3rd month following the close of your corporate tax year. This means that if the close of the tax year of your corporation is December 31st, you have to complete the form and submit it latest by March 15th to the IRS. If the date falls on a public holiday or weekend, the deadline will be moved to the following business day.

Also, regardless of if the C corporation has taxable income or not, it has to file the form 1120 every year.

S Corporation Taxes

The next kind of corporation is a small business corporation, also called the “S Corporation.” It is the special class of a corporation that is recognized under the federal tax code. And since this is a different kind of corporation, the forms needed for this corporate tax filing is different. Each has been explained below in detail for you to understand them better.

#1 Form 1120-S

Unlike Form 1120 that is used for C corporations, this form is called form 1120-S and is used only for reporting the net earnings of an S Corporation to the IRS. In short, every S corporation has to file form 1220-S and submit it to the IRS. Moreover, LLCs also need to submit the form in case they have elected to be taxed as an S Corporation.

To be clear, you will have to report all of the following on form 1120S:

  • Credits
  • Deductions
  • Income

Basically, the form 1120S will be used to report the dividends, income and losses of the shareholders in the company. In addition to this, the shareholders would also need to file the Schedule K-1 form for them to report their portion of the corporate income and losses (it will be discussed after this form).

Sections of the Form 1120-S

Moving ahead, form 1120S has eight primary sections, as shared below:

General Section: Under this section, you will have to give the information of the corporation that includes:

  • Name
  • Address
  • Business Activity Code
  • Its effective date
  • Tax ID Number
  • Date of Incorporation

Gross Income & Expenses: This section helps in calculating the profit or loss of the company during the tax year. This information should be filled by your lawyer and accountant as they will be the ones who have your company’s profit and loss report.

Tax & Payments: Under this section, you will need to calculate the taxes that are applicable to your corporation if the corporation did a free-tax reorganization with a C corporation, or in case it was a C corporation.

Schedule B – General Information: Under this section, you have to answer 13 questions with a “Yes” or “No” answer. The questions here are to identify entities that might have an interest in the corporation.

Schedule B – Questions 10 A and B: If the answers to these two questions are “Yes” then the corporation needs to complete the Schedule L and Schedule M-1.

Schedule K: Under this section, you need to summarize the deductions, income and credits for the corporation.

Schedule M-1: This section is to be completed only if you answered any of the questions “No” in section B. This section is important as the IRS uses it to determine the differences between the reported taxable profits and the financial statements.

Section M-2: This section is used for the reconciliation of the net income of the corporation.

These are the details that you will need to file under this form for S corporation taxes. And once you are done with it, you will have to submit it before the deadline.

Deadline

The deadline for form 1120S is on the 15th day of the 4th month after the close of a tax year. So, if the close date is the 31st December, the deadline will be 15th April.

#2 Form 1099

The second form that you will need for your S corporation is Form 1099. This is used when contracting some outside help for your company. Form 1099 is an “information filing form” that is used to report any non-salary income to the IRS for tax purposes.

There are about 20 variants of this form, but the most popular one is form 1099-MISC. This is because, if you had a contractor and paid them more than $600 in a financial year, you will have to complete form 1099-MISC.

What is Form 1099-MISC?

Put simply, the 1099-MISC is one of the versions of form 1099 to let the IRS know when you have paid a contractor $600 or more (in a financial year) in the form of awards, prizes, rents, compensation, fees, or any other kind of income.

How to file a 1099-MISC form?

You need two copies of the form, say copy A and copy B. You will need to fill in the details of how much you paid the contractor in Copy A and submit it to the IRS. And you need to fill in the same information in copy B and send it to the contractor. This form is used by the contractor to then report the income in their personal income tax return.

To explain the process better:

Gather the required information: You will need the following details from the contractor before you fill the form:

  • Legal Name
  • Address
  • Amount your paid them in the tax year
  • Tax Identification Number (mostly the person’s Social Security Number if they are a US resident)

To be able to get these details, you will need the contractor to fill the form W-9. In fact, you should have a Form W-9 for each contractor. Using this form and the bookkeeping records, confirm the amount you paid them. And then use these details in the Form 1099-MISC.

Submit Copy A to the IRS: You need to send the first copy of the form to the IRS by January 31st by mail or electronically, if you are reporting the payments in box 7. On the other hand, the deadline is February 28th if you file on paper and April 1st if you file electronically.

Submit copy B to the independent contractor: The second copy should be sent to the desired contractor for whom you filled the form and shared with the IRS. It should be submitted by January 31st. The due date is extended to February 15th, in case you are reporting payments in box 8 or 14 of 1099-MISC.

Submit Form 1096: If you file the physical form 1099-MISC and submit to the IRS, you need to file the form 1096 as well. This will help you track the form. The deadline of this form is the same as the form 1099-MISC, which is January 31st.

You should also check if you need to file the form with your state. And in case you decide to file the form online, do remember to take the help of a corporate tax filing professional just like you need for the physical filing of the form.

Penalties to miss Deadlines

If you miss a deadline, don’t panic too much. But this means that you will have to pay the IRS with a penalty fee of:

  • $50 if you file within 30 days
  • $100 if you file more than 30 days late, but before August 1st
  • $260 if you file on or after August 1st

But if you intentionally fail to file, you will have to pay a minimum of $530 per statement. The amount depends on when you file the correct form. Also, in case you are not able to file on time, it is better to file for an extension using the form 8809. Just note that this does not extend the deadline for submitting the copy to the contractors, it is just for the IRS.

#3 Schedule K-1

The last form that you need to file for your S corporation taxes is Schedule K-1. As an S corporation has the rights to pass through the income to the owners, Schedule K-1 needs to be filled. It is a form that reports the amount that is passed through to each person who owns an interest in the company.

After the company reports their annual tax return on Form 1120S, the S corporation offers Schedule K-1s that reports the share credits, deductions, losses and income of each shareholder. The shareholders then use the details on the K-1 to report the same on their personal tax return.

In short, the K-1 form reports each shareholder’s income for the company. The K-1 information here is completely based on the shareholder’s share of the relevant income/loss items from the s corporation tax return (Form 1120-S).

And these are the three forms that you will need when filing for your s corporation taxes.

Partnership taxes

The last business entity and taxes we will cover is for a partnership. Partnerships are when two or more people come together to start a business and share the profits and losses among themselves. And since it is about earning, it is important for this kind of entity to also report the corporate income taxes to the IRS.

But before we can talk about the forms, it is important to note that the partnership is a pass through entity. This means that the income is passed through to the partners who then pay the tax on it through their person income tax return. There are two main parts of reporting taxes as a partnership:

  • First, the partnership reports total net income and all other relevant financial information for the partnership using Form 1065.
  • Second, each individual partner then prepares their own personal Schedule K-1. This form identifies the allocated profits and losses for each partner. And then, each partner’s Schedule K-1 becomes part of their personal tax return.

Let us talk about each form below:

#1 Form 1065

The very first form that you will need in a partnership is form 1065. This form is for filling the information return to the IRS as a partnership itself doesn’t file for an income tax return. This is what the form includes:

  • The first part reports the income of the partnership. This includes the calculation of cost of goods sold, only if the partnership sells products.
  • The second part lists deductions for business expenses.
  • Line 22 shows ordinary income for the partnership (that is the net income minus deductions).
  • The last part calculates taxes due.

Also known as the “Partnership Tax Return.” the tax form 1065 is how business partnerships report their financial information to the IRS. Just to be clear again, no taxes are paid through the Form 1065. All it does it report the total income and loss that the company has. Once this form has been filed for the partnership taxes, the partners have to fill Schedule K-1. It has been explained in the next part.

#2 Schedule K-1

Schedule K-1 is used to assign the capital gains, dividends, losses, and income of the partners. This is the reason why each partner has to file the Schedule K-1 separately. And each item that is reported on it is assigned to the individual partner’s personal income tax return. To explain better, a K-1 form is used to report individual partner’s income for a partnership.

Filling the form is easy since most of the information that you will need for your Schedule K-1 will come from the Income and Expenses section of Form 1065. Other than the normal profit and losses, Schedule K-1 also captures real estate income, foreign transactions, capital gains, royalties and dividends, bond interest, and any other guaranteed payments that you might have received as part of your involvement in the partnership.

Conclusion

With all this clear, you can now move ahead and begin your tax filings for your corporation. Using the information shared here, you know what filings you would have to take care of. And if you have not yet registered your company and need some help with it, you can connect with IncParadise today. We will help you in registering and incorporating your company in all U.S. States.

If you are interested in Corporate tax filing feel free to contact us via Contact Form below!





Self Employment tax filing

Date: | Category: | Author: Jakub Vele

Self Employment tax filing

Taxes aren’t just for employees and companies to pay; self employed individuals too have to pay business income taxes. And dealing with taxes has always been an overwhelming situation for most, especially for the self-employed. Just to be clear, the people who own their own company and work for themselves are known as self-employed or independent contractors.

In fact, there is a difference between the two. Every independent contractor is a self-employed individual, but not all self-employed individuals are independent contractors. And if you are a self-employed person then you should know that it will affect your tax liabilities. This article will explain all you need to know about self employment tax filing, and what the deductions are that you can enjoy on tax returns.

What is self-employment?

Self-employment means working for yourself as an employee. As per the IRS, a self-employed person is one who is running a business or a sole proprietorship, a member of a partnership, is doing business for himself/herself, or a person who is an independent contractor. In short, a self-employed person can be anyone from a mechanic to a sculptor or a doctor.

Just like every other employee in the world, a self-employed person has the responsibility to pay federal income taxes. But in this case, they do not have anyone to withhold taxes from their paycheck and send it to the IRS. Neither do they have anyone to share the burden of paying medicare and social Security taxes.

So, it is important for self-employed individuals to focus on their own tax return and filing completely. They need to keep track of their own income, determine how much tax they owe the government and in many cases, make estimated payments throughout the year.

So, what is a contractor?

As mentioned above, a contractor is different from a self-employed individual. An independent contractor is a person that uses their skills to perform a task for someone else on a contractual basis and not as an employee. For instance, if you are an electrician and a family hires you to repair some things at their home, you are not their employee. You are there to just help them for that time on a contractual basis, making you an independent contractor.

As the contractor doesn’t report back to anyone and works for themselves, they are known as self-employed individuals. On the other hand, a person who makes products and sells to the public is a self-employed individual, and not an independent contractor.

Business Income

If you are a person who works in a traditional company, you will get a W2 form from your employer that will let you know how much money you made throughout the year. But when you are self-employed, you have to take care of this on your own. This means that you need to keep track of all the money you earn from your business and how much you spend as well. After all, you are the boss and this recordkeeping is one of your responsibilities.

And when you reach your tax time, you will then have to use the Schedule C to report all your business income and expenses. You need to subtract the expenses from the income so that you can get the total profit earned from self-employment. This is then added to your personal income tax return.

In case you have worked as a contractor for clients, you should expect to get the 1099 forms that will report the amounts paid to you. This will help you file your business income as well. The next part would explain how to file the form and also what you can deduct from your tax return.

Common Business deductions

Being a person who is self-employed means taking on a lot of risks that you would not normally take if you work for someone else. You are the one who is responsible for providing value with your service for your customers. You are also the one who needs to pay all the bills and costs for keeping these customers. In short, there are a lot of things that you need to take care of and pay for.

To reduce the burden of taxes on the self employed, legislators have set in place a tax code that will help you cover many of these costs. You can do this by claiming various business cost deductions on your tax return. Some of the common business deductions that you can claim on your tax return as a self-employed have been explained below:

Home Office

The very first deduction you can take advantage of is the home office deduction. This is the deduction of the cost that you use on any workplace exclusively and regularly for your business, even if it is an owned office or just a rented space. Just remember that you should be able to defend the deduction in case of an IRS audit.

You have two choices for calculating your home office deduction: the standard method and the simplified option and you don’t have to use the same method every year. The standard method requires you to calculate your actual home office expenses. The simplified option lets you multiply an IRS-determined rate by your home office square footage. To use the simplified option, your home office must not be larger than 300 square feet and you cannot deduct depreciation or home-related itemized deductions.

Additionally, you can also have the expenses like the business percentage of property taxes, utilities, home maintenance, homeowners insurance, mortgage interest and home depreciation that you pay in a year deducted. An accountant will be able to help you better in this case.

Internet & Phone

You can also deduct the business internet, fax and phone expenses. Just remember that you need to deduct the costs related only to your business and not personal ones.

Office supplies

Things you use in your office like the envelopes, paper, toner, etc., can be deducted in Part II of Schedule C. On a separate section, you can also deduct the things like calculators, printers, cameras, computers, etc. Just ensure that they are things you use in the office and not personally.

Permits & Licenses

You can also deduct the amount you pay for permits and licenses that you get for your business.

Entertainment & Meals

Another thing that you can deduct is 50% of the costs for business entertainment and meals. You can deduct the amount you spend to entertain a client or the meals you have while on a business trip. Also, remember that your meal cannot be lavish and you can only deduct 50% of the actual cost. The lunch you eat alone at your desk in your office is not deductible.

Health Insurance

In case you are a self-employed individual, and you have your own insurance premiums along with the insurance of your spouse and your children or dependents who are lower than 27, then you can deduct all the dental, health and qualified long-term care insurance in your tax returns.

Auto & Travel

For you to be able to qualify for this, the business travel has to be longer than a normal workday. In short, the travel deduction is for when you have lived outside the city or state in which your business or home is located. Moreover, you will need to mention the reason for the trip, which cannot be for say a bachelor party or a place where you simply went to hand out your business card and network.

You can also deduct the costs of transportation and automobile expenses under Line 9 on Schedule C. This is if you live far from your home and have to use a transport to get to your business. Parking fees and toll costs are also added to this.

To get the best out of the deductions, you can easily take the help of a tax accountant for your self employment tax filing.

Self-employment Tax

If you are still wondering what self-employment tax is, then here you go – it is the employer portion of the Social Security and Medicare taxes that self-employed people have to pay. To explain better, self-employed individuals have to pay the federal government with (self-employment taxes) taxes to fund Medicare and Social Security programs.

So, when a person is earning more than $400 in a year being self-employed, they have to pay self-employment taxes for their income in that tax year. The percentage for the self-employment taxes is 15.30% and here is how it breaks down:

  • 6.2% of the Social Security tax for each employer and employee on the first $128,700 in the salary.
  • 1.45% Medicare tax each for employer and employee with no wage limit.

Other than this, you will also owe an additional amount of Medicare tax for 0.9% in case any of the following conditions are true:

  • Married filing separately – $125,000
  • Married filing jointly – $250,000
  • Single – $200,000

The income threshold for this additional tax of Medicare is not just for self-employment income, but to combine self-employment income, compensation, and wages that you and/or your spouse gets.

For instance, if you are earning self-employment income of $100,000 and your spouse has a salary of $160,000, you will have to pay the additional 0.9% Medicare tax on the $10,000, the total amount over the income threshold of $250,000.

How do you pay self-employment taxes for yourself?

Well, since you are self-employed, it is your duty to take care of the self employment tax filing. And in this case, you need to withhold the Social Security from your taxes for contributing both the employers and the individual portions of Social Security. But many self-employed people do not withhold Social Security taxes from their paycheck as they don’t get regular paychecks. Instead, they pay all the taxes when they file their annual federal income tax return. You too can do this.

Schedule SE

The Schedule SE is used to report the profit or loss of your business as calculated on Schedule C for self-employment tax. The government then uses this to calculate the Social Security benefits you will get later on. Just to clarify, the self-employment tax consists of both the employer and employee position of the Social Security:

  • Medicare (1.45% + 1.45% = 2.9%)
  • Social Security (6.2% + 6.2% = 12.4%)

The total self-employment tax rate is 15.3% from the above. The form will be explained better in the next sections.

Self-Employed Tax Deductions

As mentioned above, you need to use Schedule SE to get the net profit or loss you earned as calculated on Schedule C by 92.35% before you can find out the amount of self-employment taxes you owe to the government. This means that if the profit on your Schedule C is $100,000, then you will only have to pay 12.4% of the Social Security tax on $92,350, which is $11,451.40 instead of $12,400. In short, you save about $948.60 on your taxes.

In fact, half of $11,451.40 is the employer’s portion of the Social Security tax, and this can be deducted as a business expense in your tax return. Other than this, there are many other deductions (as mentioned above) you can make when working on the self employment tax filing and your tax returns.

But you need to keep in mind that the lower your income is on the Schedule C, the lower you tax will be. And with this, you will get a lower amount of Social Security in your retirement plan. So, do remember to take the help of a lawyer so that you do not lose out on just trying to lower your taxes now.

New Pass-through deduction (20%)

There was a tax overhaul in the previous years, after which a new 20% deduction for small businesses was introduced. This has made things better for self-employed individuals. Just to be clear, if you are under a certain limit, you are good. But if you are above the limit, there are many complicated rules too if you qualify for a full or partial deduction.

To begin with:

  • You need to have a ‘pass-through’ business (such as a partnership, sole proprietorship, an s corporation or a limited liability corporation);
  • It is a deduction only for those who have a “pass-through income.” In short, it is for those who pay business taxes on their personal income tax return.

This deduction is only applied to the QBI, which is qualified business income. It is the total amount of your business profit. But not all businesses qualify for this. In fact, QBI includes:

  • Income earned outside the U.S.
  • Interest income
  • Dividends
  • Capital gains or losses
  • Certain wage and guaranteed payments made to shareholders and partners

So, in case you have a total taxable income which is below:

  • $157,500 – for single filers
  • $315,000 – for joint filers

That is when you can benefit from the 20% deduction on your taxable business income. And if you are wondering why, then if your income is above the limit, the pass-through deduction claim would depend entirely on the nature of your business. And after you find out that your business qualifies for this, there is a chance you might not be able to enjoy the complete tax break of 20% deduction. This is because it is phased out for a few companies.

Tests for pass-through businesses over the income limit

One such test to determine if you qualify for this deduction is to see if your business is a specified service business or trade. These are financial planners, actors, consultants, lawyers, doctors or any professional as such that gives high earnings. In this case, if your income is between:

  • $315,000 to $415,000 (joint filers); or
  • $157,500 to $207,500 (single filers)

Then there is a chance you can get this deduction. Just to be clear, it is the same for any non-specified business or trade as well where the taxable income is above:

  • $315,000 (joint filers); or
  • $157,500 (single filers)

In these cases, the deduction will be based on the amount of salary you paid to your employees, which also includes yourself. It is also based on the value of property that you own. The higher these figures, the more chance you have to qualify for the deduction.

How does the deduction work?

This deduction is not that easy. There are a few things that need to be kept in mind, including:

  • There are two figures of the 20% where the deduction is worth up to 20% of the business taxable income. But while you claim the pass-through deduction, it can’t add up to more than 20% of the business income that is taxable.
    Here is how you do it: You determine the income and expenses on Schedule C and get the adjusted gross income on form 1040. After this, you will be able to calculate this pass-through deduction. And this means that you have already had deductions, and there is no hard saying that you will be able to get the complete 20% deduction after that as well.
  • You are allowed to claim this even if you do not claim your itemized deductions. So, if you use the standardized deduction, you can still qualify for this 20% pass-through deduction.

To be clear on this, it is again advised to take the help of a professional lawyer or accountant for this.

Tax returns

Now that the basics are clear about the self employment tax filing and business tax returns, let us talk about the forms you will come across to file your tax returns as a self-employed individual.

Forms 1040SE

As also mentioned above, the form 1040SE (also called Schedule SE) is the form used by self-employed individuals to determine the amount they owe for the self-employment tax. So, if you earn more than $400, you need to file this form with the IRS. Here are some things you will need for filling in the form:

  • Total profit and loss that can be taken from the Schedule F, line 36. For partnerships, it is obtained from Schedule K-1 (Form 1065) box 14, code A.
  • Amount obtained in any Conservation Reserve Program from Schedule F, line 6b.
  • Net profit or loss from Schedule C, line 31; or Schedule C-EZ, line 3; or Schedule K-1, line 14, if the income is from one business contract; and Schedule K-1, line 9, code J1.

By taking all the information on these forms, you will have to file your Schedule SE to get the total amount you earned to pay the self-employment tax on. Again, do not forget to take the help of an accountant when working on the self employment tax filing as you might miss out on something or make a mistake.

Schedule C

It is understood that being a self-employed individual requires you to file Schedule C. This is to report the amount that you made in the business. It has to be completed and included with your income tax returns and the Schedule SE. To explain better, the Schedule C has 5 parts:

  • Part 1: For the income your business made and to calculate the total profit/loss.
  • Part 2: Subtract all the business expenses from the amount in part 1 and get the net profit/loss. This will be reported on your income tax return.
  • Part 3 to 5: These sections have to be completed only if your business need to buy inventory. In these parts, you will need to claim the expenses that you could not in part 2.

Form 2210

Regardless if you are a self-employed individual or an employee, you need to pay taxes throughout the year to the IRS. You can do this by withholding from your earnings and paying the estimated taxes every quarter of the year, which is the 15th April, 15th June, 15th September and 15th January. In fact, you need to pay estimated taxes if both of the following apply:

  • You expect at least $1,000 in taxes after subtracting your withholdings and credits; and
  • You expect your credits and withholdings to be less than the smaller of:
    • 100% of the tax shown on your prior year tax return (which is the last 12 months); or
    • 90% of the tax to be shown on your current tax return.

In case you are late to pay your estimated taxes, you will need to file the form 2210 for the federal penalties. This is the reason why it is important for you to always pay the estimated taxes properly and on time.

State tax returns

Other than paying federal taxes every year to the Internal Revenue Service (IRS), you also need to pay the state tax based on the state you live in. However, if you live in the states, Alaska, South Dakota, Wyoming, Washington, Nevada, Florida, and Texas, you do not have to worry about the state taxes.

If you live in any other state, you might need to pay additional state taxes. You will be able to learn more about the state taxes that you need to pay by checking with your lawyer or a government branch. You can also find out the details on the official website for your state’s Secretary of State. But do make sure you are following the rules well and paying the taxes in case you need to. The same is for your local government as well.

Conclusion

Unfortunately taxes are inevitable, and you will have to pay self-employment taxes if you are doing business on your own. But as shared above, you can overcome this by claiming all the deductions possible and making sure to properly fill in all the tax forms each year. Ensure your company is registered as the right business entity and can qualify for each relevant tax break. Also, do not forget to get the help of an account. In case you have not yet registered your business with the government, then IncParadise can help you out. Contact us to know more!

If you are interested in Self employment tax filing feel free to contact us via Contact Form below!





Individual Tax filing

Date: | Category: | Author: Jakub Vele

Individual Tax filing

At some point early every year, everyone begins scrambling to figure out which tax forms they need to file for their income tax. Some people may even be confused about what to do when the deadline is on a weekend or public holiday.

There is a lot about the individual tax filing process that you should be aware of before you file your tax return. This guide will help you understand all about the tax filing and income tax. But before we can move on to talk about the individual tax filing and forms, let us first understand what an individual tax return is.

What is an Individual Tax Return?

The individual tax return is the form submitted to the local, state or federal government agency for reporting personal income, and calculating and paying income tax. This tax filing is a kind of income tax return filed by an individual, both single and married taxpayers, and with or without dependents.

In short, any individual who earns a certain amount of income has to file an income tax return. The form that the individual uses for tax filing is a version of the Form 1040 which includes the Form 1040, Form 1040A, and Form 1040-EZ. As soon as the taxpayer completes the form, they will need to submit it to the IRS by April 15th every year. The selection on the kind of tax form is based entirely on the filing status, deductions they wish to claim, their income, and any credits the individual may receive.

You will learn all about the various parts, the requirements for filing and understand all about the individual tax filing below:

Requirements for filing individual tax returns

There are lots of things that would determine if you need to file a federal individual income tax return. It is determined based on:

  • your gross income
  • your federal tax filing status
  • whether you received a specific credit or owe a tax liability
  • whether you are claimed as a dependent on another individual’s income tax return

To explain better, here is a simple table to help you understand who needs to do individual tax filing based on their income and status.

Filing Status / Gross Income (at least)

  • Single – $12,000
  • Married filing Jointly – $24,000
  • Married filing Separately – $5
  • Head of Household – $18,000
  • Qualifying widow(er) with dependent child – $24,000

Gross income here means the total income that you get in the form of cash, services, property and goods. This also includes any income that comes from outside the United States. Also, if you do not live with your spouse at the end of the year or when your spouse may have died, and your gross income was a total of $5 in the whole year, you need to file a return regardless of your age.

The above criteria is only the beginning of how and if you should file for your tax return or not. There are many other requirements that can help you understand better.

Additional Filing Requirements

Other than the requirements mentioned in the previous table, you also need to file a return if any of the following applies to you:

  • You owe taxes like Medicare and Social Security, on tips, or on wages you got from your employer who did not withhold the taxes;
  • You owe the alternative minimum tax or recapture taxes;
  • You owe taxes like Medicare, Social Security or RRTA tax on group term life insurance, on a health savings account or on tips reported by your employer;
  • You owe household employment taxes (If you only owe this tax, you can just file the Schedule H alone);
  • You owe additional tax on a qualified plan which includes an individual retirement account (IRA), or other tax favored account (If you only owe this tax alone, you can just file the Form 5329 only);
  • You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes;
  • You had net earnings from self-employment of at least $400;
  • You or your spouse (if you both are filing jointly) received:
    • HSA, Medicare Advantage MSA, or Archer MSA distributions; or
    • Advance payments of the health coverage or premium tax credit were made for you, your spouse, or a dependent; or

It is advised that you still file for the income tax return if you can get some money back. For instance, you should file your tax return if the following applies to you:

  • You qualify for the health coverage tax credit;
  • You qualify for the premium tax credit;
  • You qualify for the refundable American opportunity educational credit;
  • You qualify for the additional child tax credit;
  • You qualify for the earned income tax credit;
  • You made estimated tax payments for this year or you have overpayments for last year’s estimated tax; or
  • You had income tax withheld from your pay.

In short, if any of these apply to you, then it is important for you to file an income tax return.

Federal Income Tax Brackets

With this clear, let us now talk about the federal income tax bracket. You might be aware that the state and federal government have different tax rates and rules. Here we will discuss about the federal income taxes. There are seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. And these brackets are based on the filing status and taxable income.

The federal tax rates keep changing every year and you can easily find out about it on the IRS website or take the help of a lawyer. To help you better, we have gathered the information for the year 2019-2020 and shared them below.

The tables shared below shares the brackets and rates that apply in the 2019 tax year and relate to the tax return you will file in 2020.

Single Filers

Tax RateTaxable Income BracketTax Owed
10%$0 to $9,70010% of taxable income
12%$9,701 to $39,475$970 plus 12% of the amount over $9700
22%$39,476 to $84,200$4,543 plus 22% of the amount over $39,475
24%$84,201 to $160,725$14,382.50 plus 24% of the amount over $84,200
32%$160,726 to $204,100$32,748.50 plus 32% of the amount over $160,725
35%$204,101 to $510,300$46,628.50 plus 35% of the amount over $204,100
37%$510,301 or more
$153,798.50 plus 37% of the amount over $510,300

Married, filing jointly

Tax RateTaxable Income BracketTax Owed
10%$0 to $19,40010% of taxable income
12%$19,401 to $78,950$1,940 plus 12% of the amount over $19,400
22%$78,951 to $168,400$9,086 plus 22% of the amount over $78,950
24%$168,401 to $321,450$28,765 plus 24% of the amount over $168,400
32%$321,451 to $408,200$65,497 plus 32% of the amount over $321,450
35%$408,201 to $612,350$93,257 plus 35% of the amount over $408,200
37%$612,351 or more$164,709.50 plus 37% of the amount over $612,350

Married, filing separately

Tax RateTaxable Income BracketTax Owed
10%$0 to $9,70010% of taxable income
12%$9,701 to $39,475$970 plus 12% of the amount over $9700
22%$39,476 to $84,200$4,543 plus 22% of the amount over $39,475
24%$84,201 to $160,725$14,382.50 plus 24% of the amount over $84,200
32%$160,726 to $204,100$32,748.50 plus 32% of the amount over $160,725
35%$204,101 to $306,175$46,628.50 plus 35% of the amount over $204,100
37%$306,176 or more$82,354.75 plus 37% of the amount over $306,175

Head of Household

Tax RateTaxable Income BracketTax Owed
10%$0 to $13,85010% of taxable income
12%$13,851 to $52,850$1,385 plus 12% of the amount over $13,850
22%$52,851 to $84,200$6,065 plus 22% of the amount over $52,850
24%$84,201 to $160,700$12,962 plus 24% of the amount over $84,200
32%$160,701 to $204,100$31,322 plus 32% of the amount over $160,700
35%$204,101 to $510,300$45,210 plus 35% of the amount over $204,100
37%$510,301 or more$152,380 plus 37% of the amount over $510,300

How tax brackets work?

From the above, you might understand that the US has a progressive tax system, where a person who has a higher income will pay higher federal income tax rates and those with lower income will pay lower tax rates. But before you get confused, being “in” a tax bracket does not mean that you have to pay that federal income tax rate on everything you make.

The government decides on how much tax you owe by dividing the taxable income into chunks, which is also called the tax bracket, and each of these chunks get taxed at the corresponding tax rates. This is the beauty of it and you will not be paying tax on your complete income. To understand better, check out the examples below.

Example #1

Let us take an example where you are a single filer who has a taxable income of $33,000. This means that you are in the 12% tax bracket in the year 2019. But do you need to pay tax on all the $33,000 that you earn? Actually, you will only have to pay 10% on the first $9,700 and 12% on the rest of the income, which will be on $23,300. In short, you will pay $970 plus $2,796, for a total of $3,766 as tax.

Example #2

Let us take another example to explain and say you earn about $60,000 in a year. In this case, you will have to pay 10% on the first $9,700, which is about $970. And then you will have to pay 12% on the chunk of income between $9,701 to $39,475 (which will be $3,572.88) and you will have to pay 22% on the rest of the income (which is $4,515.5) because a part of the taxable income will fall under the 22% tax bracket. This means that you will have to pay a total of $9,058.38. This is about 15% of your total income, even though you fall in the 225 tax bracket.

Note: It should be noted that this is the deal only for the federal income taxes and not for your state taxes. Every state has a different tax bracket and it is difficult to explain all here. So, you will need to connect with an accountant to understand what your state taxes are.

How to get into a lower tax bracket?

If you are looking for a way through which you can get a lower tax bracket and pay for a lower federal income tax, then here is what you can do:

  • Become eligible for tax credits. This can help in reducing the tax you owe. Although, it does not affect the bracket you are in.
  • Use tax deductions properly on your tax return. This helps in reducing the amount of income that is subjected to taxes. In short, you can fall into the lower bracket if you are able to deduct from your income with tax deductions. (You will find out more about deductions in the next sections.)

In short, take all the deductions and try to be eligible for any tax credits. This will help you pay lower taxes to the government. Just ensure that it is as per the rules of the IRS and tax laws. Seek advice from a tax professional or a lawyer if you have questions when filing your income tax return.

Income Sources

Did you know that about 80% of the US federal government revenue comes from individual income tax payments and payroll taxes? In short, you are contributing to the largest source of revenue for the country. Regardless of this, you will be getting and filling a lot of forms during the tax period every year. Below are the forms that you will receive and which will help you in your individual tax filing:

Form W2 (if you are an employee)

Form W2 is a tax form that shows the amount of state and federal income taxes withheld from your paycheck by your employer. This form is then used by the employee to file their federal and state income tax returns. As per the IRS, every employer needs to report the salary and wage information to their employees on form W2. After this, the employer send the form to the employee and to the IRS before January 31st.

Form 1099 (if you are an independent contractor or self-employed)

Form 1099 is a tax form used to report the income received by self-employed and independent individuals. This is then used to report the income on their personal income tax return. The payer needs to fill the form 1099 and send one copy to the contractor and one to the IRS. There are different kinds of form 1099, including the 1099-K and 1099-MISC. Each one is used to report different kinds of income.

When you prepare your income tax return, you will need to report all your taxable income that you received in a year using any of the above forms that you get based on what you do.

Schedule D, Form 8949

This form is used for those people who have sold or bought any additional assets like stocks, property or any other assets. But both the forms are not used. Before 2011, all the transactions for capital gains and losses were reported on Schedule D. But now, these transactions need to be reported on form 8949. And the total from this form is then carried to Schedule D.

The IRS needs all the brokers to report the cost or other basis for capital asset transactions like the sale of mutual funds, bonds, or stocks. In short, you need to file this form if you have sold any assets in the last tax year mentioning the capital gain or loss you incurred. This is done before you can complete the Schedule D.

There are two sections in the form: One for short term capital gains and the second for the long-term capital gains. Plus, you will need to check three of the following options in both sections:

  • Check the Box A if the broker reported the basis of your capital asset transaction(s).
  • Check the Box B if the broker did not report basis.
  • Check the Box C if you had capital asset transactions that weren’t reported to you on Form 1099-B or substitute statement

You will need to check the three options shown in part 1 and part 2 of form 8949. Also, you might have to prepare more than one form 8949 if you have sold different kinds of assets. Each form will be for each kind of asset. You will then use this information to fill in the Schedule D in the form 1040 (individual income tax return) which will be explained in detail below.

Learn more about the form 8949 and capital gains here!

Standard deduction vs itemized deduction

As mentioned above, you can claim many deductions while you file your income tax return. These deductions are categorized into two categories: standard and itemized. The standard deduction lowers your income by a fixed amount, while the itemized deductions are made up of a list of deductible expenses. You can choose which one you want to claim based on which lowers your tax bill the most.

Let us understand each of these two kinds of deductions better.

Standard deduction

As mentioned above, the standard deduction is a fixed amount that is reduced from your income on which you are then taxed. And the standard deduction is based on your filing status. The currently standard deduction values are:

  • For head of household — $18,000
  • For married filing jointly or qualifying widow(er) — $24,000
  • For single or married filing separately — $12,000

The standard deduction also increases if you are blind or are 65 or older. Additionally, if you are the head of the household or single, it is increased by $1,250 and if you are a qualifying widow(er) or married, it is increased by $1,550. In fact, two out of every three income tax returns claim the standard deduction. The standard deduction:

  • Permits you to get a deduction even if you have no expenses that qualify for claiming itemized deductions.
  • Lets you avoid keeping receipts and records of your expenses in case you are audited by the IRS.
  • Removes the need to itemize deductions, such as charitable donations and medical expenses.

Itemized deductions

Itemized deductions also reduce your taxable income. For instance, if you are in the 12% tax bracket, every $1,000 in the itemized deductions would knock about $120 off your tax bill. In fact, you can benefit from itemizing your deductions on Form 1040, Schedule A in case you:

  • Had large, unreimbursed miscellaneous expenses;
  • Made large contributions to qualified charities;
  • Had a large, uninsured casualty (wind, flood, fire) or theft losses;
  • Paid mortgage interest and real estate taxes on your home;
  • Had large, out-of-pocket medical and dental expenses; or
  • Have itemized deductions that total more than the standard deduction you would receive.

Nonetheless, your itemized deductions can be less than your standard deduction, and you can still choose to claim the itemized deductions. This can take place only if you itemize on your state and federal income tax returns and get a larger tax benefit than what you would get if you claimed the standard deduction on your income tax returns.

But do not assume there is no limit to it. In case your adjusted gross income (AGI) from Form 1040, Line 37 was more than a certain amount, some of your itemized deductions would be limited. Currently, you limitation applies if you AGI is more than:

  • $313,800 if married filing jointly or qualifying widow(er)
  • $287,650 for head of household
  • $261,500 for a single taxpayer
  • $156,900 if married filing separately

Common Itemized Deductions

With all this clear about what standard and itemized deductions are, you can now fill out your federal income tax return. Once you get your total deduction value, you need to subtract that from your AGI to get your taxable income value. But if you decide to go with itemized deductions to reduce your tax, you need to know about the options that you have open.

Below are the most common expenses that qualify for itemized deductions.

Medical Expenses

This is an obvious one. Almost everyone knows that you can deduct medical expenses from you AGI. But this is only possible in a limited way. The medical expenses that exceed 10% of your AGI can be deducted (and 7.5% if you are over 65 years old). The things you can deduct under this include necessary surgery (not cosmetic) costs, physical handicap costs, insurance premiums, doctor’s fees/co-pays, prescriptions, and transportation to a medical facility. In fact, you can deduct 24 cents for every mile you traveled for medical care.

State taxes

Another thing that you can deduct if your local and state taxes that you paid on your income during the year. This is a great way to reduce your tax. Just know that you can only deduct the taxes if you claim itemized deductions.

Home Mortgage interest

In case you have a mortgage running for a property you just purchased, the interest on the mortgage is deductible as an itemized deduction. A lot of people qualify for this because it is permitted on up to the first $1,000,000 borrowed on a mortgage. This deduction is allowed for two residences per taxpayer. Additionally, you are also allowed to deduct the interest on a home equity loan only if the loan is less than $100,000.

Charity contributions

In case you are a person who gives out money or property to a charity, you can deduct these gifts as an itemized deduction. Tithing to your church also falls under this. Just to be clear, contributions to needy families and political parties are not included.

Miscellaneous deductions

Other than the deductions mentioned above, there are some miscellaneous deductions that you can claim. But keep in mind that you can deduct them only if they exceed 2% of your AGI. These expenses include job-hunting expenses, subscriptions to professional journals, business use of your home, tax preparation fees, expenses for uniforms, qualified educational expenses, and unreimbursed business expenses. These are just a few to mention. You need to consult an accountant to know more about it.

Forms 1040

Now that you know all the parts that will help you in your individual tax filing, let us get to the main point – filing form 1040. And with this said, it is high time you get acquainted with Form 1040. You should know things like – who needs to file the form and how to file it? So, let us get into it.

What is Form 1040?

Form 1040 is for individual tax filing given to the IRS. It is used to report the total income that a person earns in a year. You would also find out how much of this income is taxable after all the personal exemptions, deductions, and credits. This will help you find out how much tax you owe or how much refund you get from the government.

In fact, this form can handle many sources of income and more complicated tax situations that arise for a freelancer or an independent contractor. But if you are a sole proprietor, you need to fill out the Schedule C to report your income or loss in your company.

Other than this, not everyone needs to file the form 1040. You are supposed to file the form only if:

  • You want to itemize your deductions
  • You earned self-employment income (greater than $400)
  • You have taxable income of at least $100,000
  • You earned income as a shareholder in an S corporation, in a partnership, or as a beneficiary of a trust

With this clear, do you know what to do if you make a mistake in a form and have already submitted it? Well, in this case, you need to send an amendment form and this cannot be done on the same form or a new 1040. For this, you need the form 1040X. Form 1040X is used for correcting the errors you made in the main form.

But this is not the only variant of the form 1040. There are two more that you might have heard of which have been explained below.

1040EZ and 1040A

Before 2019, there were different versions of Form 1040 which included the form 1040EZ and 1040A. Nonetheless, these forms no longer exist. The IRS now wants everyone to use the redesigned Form 1040.

How to file Form 1040?

You need to download the form from the IRS website and fill it out. There are various sections in the form where you need to report your income and deductions to calculate the tax you owe to the government. As mentioned earlier, you will need the forms W2 and 1099-MISC, whichever is applicable to fill additional details in the form.

The process to fill the form is pretty simple, as below:

  1. On the first page, begin calculating your adjusted gross income (AGI). This will be done by reporting all the sources of income you got in the year, unless the source is tax-exempt. The sum of each source is your total income. Moreover, if you received a form 1099-MISC, you will have to fill in the Schedule C of the form 1040.
  2. Now, you need to claim your deductions. You can easily itemize your deductions using the form 1040 or just take the standard deduction for your filing status by completing Schedule A of the form. Once you make your deductions, you can reduce the taxable income for yourself and one for every dependent you claim.
  3. Other than this, every taxpayer is entitled to a fixed exemption every year. The amount changes every year. So, subtract your exemptions to get your AGI which will then be subjected to the income tax.
  4. Using the tax bracket and the form 1040 tax table, you can then determine the amount of tax you need to pay or get as refund on your income. After that, sign the form and file it online or through the mail. Do not forget to add the amount, in case you haven’t paid the complete tax yet.

The Deadline

Just remember that you need to submit form 1040 for your individual tax filing to the IRS by April 15th every year. You can ignore this date only if you have filed for an extension, but still need to pay the withholding tax on your income.

Conclusion

With this clear, do not forget to take the help of a professional accountant or lawyer with your individual tax filing. Without the help, you might lose the chance to get some deductions and also might make some mistakes filing for the income tax return. If you are a person who wants to start a sole proprietorship and need some help in registering your business or need some mentorship, IncParadise can help you. Contact us to know more!

If you are interested in Individual Tax filing feel free to contact us via Contact Form below!





Accounting

Date: | Category: | Author: Jakub Vele

Accounting

Starting a business doesn’t just involve getting all the legal papers ready, hiring staff and then sitting down for the company to run on its own. There are a lot of responsibilities that come along the way. And before you can focus on hiring or even operating your business, it is important to think about the accounting system in your company.

There are lots of businesses out there that spend their precious time and money in recording their financial transactions. And if you are in doubt if these painstaking efforts are actually worth it or not, then this article will help you understand all about accounting and why you need to spend a little time in the beginning to set up an accounting system.

What is Accounting?

To begin with, let us get an idea on what accounting is all about. Basically, accounting is the practice of systematically maintaining the financial records of a company. This is done to summarize the records for compiling the financial statements of the company.

With this said, here are some of the reasons why you would need an accounting system:

  • Bank & Lenders: If you are looking for a loan, the bank or lender would ask for your company’s financial statements. With a proper accounting system in place, you would be able to offer them with what they are asking you.
  • Planning Your Budget: With a budget, a company can focus on saving money for expansion. Budgeting helps in letting you know when you are spending more than you can afford. Accounting would help you keep all the historical records in creating a budget for your company.
  • Reporting Profits: The main aim for any company is to earn profits. And for the earnings in a company, there is a mandatory income tax paid to the government. For a company to be able to report profits for the tax calculation, accounting is needed.
  • Information for the Investors: When you are looking for funding for your company to expand, you would have to show your company financial report to outside investors. Keeping your financial records with accounting is what would need.

It is normal for everyone to keep track of the day to day account of their expenses and income. It helps us manage things in our lives better. Businesses need this too to become successful.

Let us now get deeper into the concept of accounting and budgeting.

Difference of Accounting vs Bookkeeping

There are many business owners out there that are still not sure about the difference between bookkeeping and accounting. But it is an important difference that everyone should know about and would help you hire the right professionals for your business.

The Basics

In the business world, we can find many people who use the words bookkeeping and accounting interchangeably. This is mostly because these two work together to fulfil the clients needs. As a matter of fact, both have to work with the financial reports and statements in the company.

Both accountants and bookkeepers often do not get any time off between January and April. Although their goal is the same – which is to keep the financial health of the company good, they are not in charge of the same tasks in a company. There are a few key differences between them.

The development in the industry where bookkeepers have started performing accounting tasks, and accountants have begun to take care of their client’s complete financial situations, has made things more blurred. This is the main reason why people are not able to differentiate between the two easily. And that is why we have gathered everything to help you understand all the key differences between them.

What Does A Bookkeeper Do?

Normally, a bookkeeper manages all the daily financial transactions in the company and records them. They are the ones who are responsible for recording the transactions in accounting software like Quickbooks, creating the preliminary financial statements, and reconciling the bank statements at the end of the month for the company.

Additionally, bookkeepers normally take care of the complete back-office support which includes paying bills, invoicing clients and processing the payroll. In short, a professional bookkeeper is a person who would have at least two years of experience along with a degree in accounting of an associate. Some of the other tasks that a bookkeeper takes care of include:

  • General record keeping
  • Cash flow forecasting & management
  • Advising clients on recordkeeping methods and requirements

What Does An Accountant Do?

On the other hand, an accountant has more of an advisory role with the business owners. An accountant is the one responsible for creating the financial reports and statements in the company, used for government agencies and banks. In short, accounting involves offering quarterly or monthly insights into the financial health of the company.

Utilizing the financial statements prepared by a bookkeeper, the accountant can work on preparing strategies that would help the company grow. Not to mention, CPAs (certified public accountants) are accountants that are regulated by their state board of accountancy and are also accountants.

These professionals have to meet the minimum experience and educational requirements and complete any ongoing annual continuing education so that they can stay at the top of all the new regulations and laws. Some of the other tasks that are done by CPAs and accountants are:

  • Income tax planning
  • Verifying the completeness and accuracy of the accounting records
  • Advice on tax law, key financial decisions, and entity structure

In short, both accountants and bookkeepers offer strategic advice to clients. The difference is that a bookkeeper would tell you how to streamline your accounts process or in budgeting your business, while the accountant would suggest different ways to minimize your tax liability or if you should incorporate a business or not.

Here is a summary of what each professional can offer you:

Bookkeepers

  • Bookkeepers normally have on-the-job training experience. Some also get training and certification through bookkeeping training programs.
  • They are knowledged with a variety of software solutions which enables them to make recommendations on the technology for the company, employees, as well as the bookkeeper.
  • Bookkeepers cannot perform independent audits or attestations.
  • They normally know all about the daily details of the business.
  • They are increasingly taking on the business strategy and advising roles.
  • Bookkeepers normally are only aware of the finances of the business.
  • They normally do not file tax returns other than payroll and sales tax.

Accountants

  • Accountants normally have an accounting degree. A lot of accountants are CPAs, though all do not pursue this designation.
  • They often (not always), use mid-level accounting solutions designed for accountants. These solutions help them offer tax planning and all the other financial insights in the company. The company’s owners typically do not work within these programs.
  • CPAs and certified auditors can perform attestations and audits. They can also create certified financial statements.
  • They normally have a much higher-level of view of the client’s business.
  • Accountants are increasingly taking on roles in tax resolution, tax coaching, and financial planning.
  • They normally have insights of the business owner’s personal and company’s finances.
  • Accountants normally file the business and personal income tax returns.

With this clear, let us more ahead and talk about the parts of accounting.

Financial reporting

Financial reporting is a huge part of accounting and corporate governance. It involves the disclosure of financial information to the management of the company and the public, if the company is publicly traded. This would show how the company has been performing for a particular period of time.

Not to mention, the financial reports are issued on an annual and quarterly basis. And so that you do not confuse yourself, financial reporting is not the same as management reporting, that is the disclosure of financial information to make decisions for the company.

Let us get deeper into the idea.

The Purpose

Financial reporting, which is a part of accounting, has two main purposes. First, it assists the management to undergo effective decision-making related to the overall objectives and strategies of the company. Basically, the data in the reports can assist the management detect the strengths and weaknesses, and the overall financial health of the company.

Secondly, the financial reporting offers important information regarding the financial health along with the activities that take place. These details are given to potential investors, government regulators, consumers, and shareholders. The financial report is a way of making sure that the company is being operated properly.

In fact, proper interpretation and the analysis of cash flow statements, income statements, and balance sheets to analyse the investment qualities of the company allows investors to make smart investment choices. Nonetheless, it is important for everyone, especially the owners and investors, to be familiar with certain financial statements that the accountant would prepare.

Below are the statements that you would get from your accountant:

Income Statements

The income statement is also called the Profit and Loss Statement. This statement reports the financial performance of the company. In short, it tells us about the net profit or loss that the company has had in a particular period. There are two things that make up the income statement:

  • Income: This is what the company has earned over a period of time, such as sales revenue, dividend income, etc.
  • Expense: This is the cost that the business incurred over a period like the purchases, wages and salaries, rental charges, overhead, etc.

Just to be clear, the Net profit or loss is determined by deducting the expenses from the income.

Balance Sheet

The balance sheet is also called the Statement of Financial Position and displays the financial position of the company at a given date. There are three things in the balance sheet, as below:

  • Assets: The things that the business controls and owns, like the plant and machinery, investory, cash, etc.
  • Liabilities: This is the amount that the business owes to someone, which includes bank loans, creditors, etc.
  • Equity: This are the things that the business owes to the owners of the business. It is the total amount of capital that is left after all the company’s assets are used to pay off its outstanding liabilities.

General Ledger

The next thing is a general ledger, which is used to store the financial data of the company, along with the credit and debit account records that is validated by a trial balance. The general ledger offers the record of every transaction that has taken place since the company was incorporated until the current period. It has all the financial details of the business needed to prepare the financial statements of the company. But before this can happen, the data is divided into various accounts – revenues, owner’s equity, liabilities, assets, and expenses.

Statements of Cash Flows

Another financial statement that makes the list is the cash flow statement. This displays the movement of cash and the bank balance over a period of time. There are three segments that the movement of cash is classified into, as below:

  • Operating Activities: This is the cash flow that comes from the primary activities of the company.
  • Investing Activities: This is the cash flow from the sale and purchase of assets other than those in the inventories. For instance, it can be the purchase of a factory plant.
  • Financing Activities: This is the cash flow that is generated or spent on repaying and raising share capital and debt along with the payment of dividends and interest.

Statement of changes in equity

Also known as the Statement of Retained Earnings, the Statement of Changes in Equity is the detail of the movement in the equity of the owners over a period of time. The movement in the equity of the owners is derived over time from the following:

  • Dividend payments
  • Share capital repaid or issued during the period
  • Total loss or profit during the period is noted in the income statement
  • Effects of a change in accounting policy or correction of accounting error
  • Gains or losses recognized directly in equity (e.g. revaluation surpluses)

Management accounting

Moving ahead, there is a large part of accounting that has to be understood – it is called management accounting.

Management accounting is the process of preparing the accounts and reports that offer timely and accurate statistical and financial details. This is given to the managers of the company to make short and long-term decisions. In short, it has to work on identifying, measuring, analyzing, interpreting and communicating the information to enable the organization to pursue their desired goals.

To be clear, management accounting is very different from financial accounting. While financial accounting offers information to people normally outside the company, the management accounting is usually aimed to help the managers in the company with making any decisions.

Role of Management Accounting in a Company

To help you understand better, below are the different roles of management accounting:

  • Helps in Understanding the Performance Variances: The business performance discrepancies are the variation about what was forecasted for the company and what was achieved. The management accounting process assists the management to build on the positive variances and manage the negative ones with the use of analytical techniques.
  • Forecasts Cash Flows: It is important to predict cash flow and the forecast of cash flow in a business. How much would the company incur in terms of costs in the future? Where will the revenue come from? Will the revenue decrease or increase? Management accounting means designing the budget and trend charts, and is used by managers in deciding how to distribute the resources effectively.
  • Helps in Forecasting the Future: Predicting the future costs in the company, helps in decision-making and to answer some questions like: Should the company purchase another business? Should it diversify into different markets? Should it invest in more equipment? Management accounting helps in answering these questions and making the right decisions.
  • Helps in Make-or-buy Decisions: It helps the management in deciding if the company can easily produce the raw materials in house for cheap or get it from a third-party. The productivity and cost availability are the deciding factors in this choice that the management accounting helps with.
  • Analyzing the Rate of Return: Before you can move into a project that would need an investment, it is important for the company to decide the expected rate of return (ROR). Between two investment choices, which one should the company choose? How long would the company take to get cover the amount put into the project? All these things are answered with the help of management accounting.

In short, management accounting is an important part of every company and hence, cannot be ignored. It is what helps a company grow and get better.

The Basic concepts

With the above clear, let us now talk about the other basic concepts of accounting and financial reports. Each part has been explained below briefly for your knowledge:

#1 Fixed vs Variable Costing

The first thing that you should know about in accounting is the difference between variable and fixed costs. Variable costs are those that change with the production volume or activity in the company. On the other hand, fixed costs are something that remains constant regardless of if there is any activity or product volume increase or not.

If you want to determine if a cost is a fixed or variable cost, you should ask whether or not the cost will change if the company stopped any primary business activities or its production. In case the company would continue to incur the cost, it is a fixed cost. And in case the company no longer incurs the costs, it is a variable cost.

Let us take an example to understand this idea better. A telephone company charges a per-minute rate, this is a variable cost. This is because a 30 minute call would cost more than a 10 minute call. On the other hand, an example of a fixed cost is rent. When a company rents a warehouse, they will have to pay the rent regardless of if the warehouse has inventory stored in it or not. In addition to this insurance expenses, depreciation, interest expenses, and executives’ salaries are also fixed costs. And examples of variable costs include direct labor and direct materials costs.

#2 Budgeting

The next term that you need to know about is budgeting. A budget is an outline of expectations for what a company wants to achieve for a specific period. This is normally a one year period. The main characteristics of budgeting are:

  • Expected debt reduction
  • Expected cash flows
  • Estimates of revenues and expenses

Budgeting represents the financial position, goals and cash flow of the company. And the budget is mostly re-evaluated once every fiscal year based on how the management wants to update the information. Once a budget is prepared, it is compared to the actual results for calculating the variance between the two figures. This helps in difference in the performance allowing the company to improve if it is low.

Plus, although many of the budgets in a company is prepared for the complete year, It is not a hard and fast rule that every company has to update the budget after a year only. In some companies and situations, it might be much more important to be flexible by allowing the budget to be adjusted throughout the year as business conditions change.

#3 Forecasting

The third term that you need to know about accounting and financial reporting is forecasting. Financial forecasting estimates the financial outcomes in the future for the company by examining the historical data. The characteristics of financial forecasting include:

  • This is used for understanding how to allocate the budgets in the company for the future.
  • The forecast is regularly updated mostly when there is a change in the business plan, operations, and inventory.
  • It can be both long-term and short-term. If a customer is lost due to competition, revenue forecasts might need to be updated.
  • The management team can easily take the financial forecasting data and take any needed action using it.

All in all, financial forecasting can help the management department to adjust the levels of inventory and production in the company. In addition to this, the long-term forecast can help the company prepare its business plan and reach its goals as well.

Accounting Software

With all the main points clear about what accounting is and what the various things that affect a financial report are, let us move ahead and understand how you can handle the accounting part of your company. Not all companies have the funds to hire a professional accountant. And for such companies, accounting software can help.

From sending out invoices, having them paid, forecasting the cash flow in the company, along with obtaining detailed financial records, there are some accounting software that can be the best accountant for your company. In fact, many are cloud-based services allows you to monitor your business from anywhere and stay worry-free.

But which of the software is actually worth your money? From a pool of multiple applications available online, we have gathered the best ones and listed them below with their features. These would help you get started with the accounting part of your company:

1. Intuit QuickBooks

The most popular accounting software is Intuit QuickBooks which has been in the market for more than a decade. A very easy to use cloud based application that is great for every small business. Here are the plans (subject to change):

  • Simple Start – $10 /mo
  • Essentials – $20 /mo
  • Plus – $35 /mo
  • Advanced – $60 /mo
  • Self-Employed – $5 /mo

If you decide to choose the essentials plan, it has many features including expense tracking, invoicing, payment handling (with a 2.9% + 25c transaction free), and it also permits you to easily track and calculate VAT. In addition to this, you can manage payroll and pensions for an extra $2 per employee per month.

Other than this, you can add more power to the app with other services like CRM, job scheduling, Shopify integration, inventory management, and more. QuickBooks also offers mobile apps for iOS and Android. If you feel that this application is calling to you, you can give it a try here at – https://quickbooks.intuit.com/

2. Xero

The second best accounting software that can help you with your company’s budgeting and financial statement is Xero. In fact, it is the application with the lowest price of $9 per month Starter account. And yes, the low price does bring in some restrictions. But for those who want full support can choose the Standard or the Premium plan.

Here are the plans for this accounting software (subject to change):

  • Xero Starter – $9/mth
  • Xero Standard – $30/mth
  • Xero Premium 10 – $70/mth

This application is almost the same as the ones mentioned above. But the only disappointment with this is that it does not support multiple currencies. You can learn more about it here or sign up for it here – https://www.xero.com/

3. FreshBooks

The third accounting software we will cover is FreshBooks. The best part about it is that it is completely cloud-based. There are a lot of features that the application offers including time tracking, expense tracking, invoicing, host of business reports, and also an option that allows credit card payments (for a 2.9% plus 30 cents transaction fee). And it is the best accountant any small business can have.

Here are the packages for application(subject to change):

  • FreshBooks Lite – $15/mth
  • FreshBooks Plus – $25/mth
  • FreshBooks Premium – $50/mth

Not to mention, the application is very easy to use. You can bill customers in any currency through their credit cards, and set up invoices from any device. And if you want to add more power, you can integrate other services like Zendesk, Gusto, WordPress, Basecamp, MailChimp, PayPal and many more.

In case you want to give it a try, you can choose the first subscription – FreshBooks Lite for 30 days. You can handle invoices, estimates, time tracking, expenses, and have the option to accept credit card payments while you import expenses from your bank account. The only thing in this $15/month plan is that you would only be able to cover 5 clients.

On the other hand, the plus plan with $25/month gives you the support of 50 clients along with the ability to send proposals. It also saves your time by offering recurring invoices, and automatically send any payment reminder to clients. Learn more about it here – https://www.freshbooks.com/

Conclusion

With this clear now, it is time for your set up your company’s accounting system. One of the best ways is to use one of the mentioned softwares mentioned above. Also, hire a bookkeeper to handle all the recording keeping. All this would help you in staying ahead of all the accounting tasks then.

And if you have not started your company and need some help in incorporating your company online, IncParadise can help you with it. Not only this; we also offer virtual office services and mail forwarding services.

If you are interested in Accounting feel free to contact us via Contact Form below!





Bookkeeping

Date: | Category: | Author: Jakub Vele

Bookkeeping

With your business all set up and ready to run, it is crucial for you to know that your work to nurture the business in the right way hasn’t come to an end. It is now time to look into the bookkeeping part of your company along with the tax recordkeeping.

To begin with, bookkeeping is one of the basic things that runs the firm’s accounting system properly. Recordkeeping in small businesses is essential as these records are used when the company has to file their taxes or show information during an audit of the company. And a bookkeeper is the one who is responsible for recording and arranging the various accounting transactions.

This means that being a business owner, you would have to set up an accounting system for your business or hire someone to do it for you. In this article, we are going to get into bookkeeping and all the aspects of it. Keep reading to understand all about bookkeeping and why you need a bookkeeper for your business.

Bookkeeping overview

So, let us start from the beginning, starting from what bookkeeping is all about. From the introduction, you know that bookkeeping is the process of recording and arranging the financial transactions of a business. Basically, the bookkeeper manages all the accounts in the company, makes payments, sends invoices, prepares the financial statements for the company and records all the transactions that take place during the year.

In fact, bookkeeping and accounting are slightly the same, but bookkeeping is more of a base for the accounting process. To understand both, you would have to learn about each separately. This article would help you out in understanding bookkeeping in details, while you can learn all about Accounting here!

Moving ahead, if you are thinking of hiring a bookkeeper, then you need to know that more than 1.8 million Americans work as bookkeepers in the industry where each person earn around $39,000 per year. From this, it can clearly be seen that bookkeeping is an essential part of any company’s accounting system, and a business founder might not be able to fulfill all these duties on their own.

So, why exactly is bookkeeping important?

Bookkeeping is highly crucial for any company that hopes to have a long life in the industry and for long-term success. Fundamentally, to work out the accounts part of your company properly, bookkeeping acts as the most accurate picture of all the ins and outs of your company.

This means that you would need to have the details on all the debts that you owe along with the amount of cash you have in hand. And not only would this help in the accounting aspects and for filing your taxes, but it would also help you in making better plans and decisions for the future of your business.

Proper bookkeeping helps in protecting your company in case of any dispute. Let us take an instance where you are having some trouble with a vendor or the IRS has come for an audit of your company. In this case, if you have all your financials set properly and kept in records, you will be able to get out of the situation without any trouble. On the other hand, if you do not have any clean financial records, you can fall under the risk of paying penalties/settlements to the vendor and tax penalties to the IRS for financial errors that you could have avoided otherwise.

Bookkeeping will also save you a lot of time. From managing the invoices to payroll taxes, an effective bookkeeping service smoothens all the processes for the financial tasks in your business. In short, with this process, you would not have to manually sit down and waste time later on tracking every dollar that came in and out of your business.

What is the process of Bookkeeping in a Business?

Now that you know all about bookkeeping and why it is important for your small business, let us get into the details further. There are four simple steps for recordkeeping in small businesses:

  • Set up & manage accounts
  • Record every financial transaction
  • Balance & close the books
  • Prepare financial statements

With all this clear, let us dive deep into all the processes and facts that you need to know about bookkeeping, beginning with record keeping.

Record Keeping

Recordkeeping means that you need to keep the records of all the transactions for tax purposes. And good tax recordkeeping is a very important thing. This is because the IRS needs you to keep specific tax records for certain periods. Moreover, by performing good tax recordkeeping, you would not have to panic when the tax time comes around.

In fact, you would be able to use the record keeping to easily record your tax deductions that you might not have otherwise if the records weren’t kept. Also, in case of an audit, bigger problems can come your way. In short, with recordkeeping, you overcome a lot of troubles and are prepared for the many things that comes your way.

But before we can get deeper into this, you need to understand the basic accounts of bookkeeping and tax recordkeeping system – Assets, Income & Expenses. Let us start with assets, liabilities and equity.

Assets, Liabilities & Equity

Let us understand all that comes under assets, liabilities and equity.

To explain each of the three terms:

  • Assets: Assets are the things that the company owns like the accounts receivables, cash and inventory. After that, you can see the accounts for the inventory and fixed assets like buildings, land, plant, and equipment. All these are also called tangible assets, which means that you can touch them. On the other hand, firms also have intangible assets like trademarks, patents, and even computer software.
  • Liabilities: The liabilities in the company are things that the company owes like the accounts payable to suppliers, mortgages, business, bank loans, and any other debt that the company has. The balance sheet that holds the liability details hold both long-term and current liabilities.
    • Current Liabilities (Accruals) – What the business owes in the short term.
    • Long-Term Liabilities – These are typically long term loans, such as mortgages or bank loans over one year.
  • Equity: Equity (company securities) is the ownership that the shareholders have in the company. The statement for this includes who owns how many securities, how much it costs, along with how much investment they have made in the company, if any.

Balancing the Books

Now that you are clear with the three terms, it is time to balance the books. This means that you would have to track all the items (transaction details included) and carefully record them in the right place. A formula that is used to balance the book is the accounting equation which is:

Assets = Liabilities + Equity

As per the equation, everything that the business owns (assets) is balanced against the claims against the business (which is the liabilities and equity).

Income statement

The income statement is another part of the tax recordkeeping for small businesses which includes the revenue, cost and expenses. To explain each:

  • Revenue is the income that the company gets for selling its services and products.
  • Costs is the money that the company spends to manufacture or purchase services or goods that would be used to sell your products or services to the customers. It is also called the cost of goods sold.
  • Purchases recordkeeping tracks all the goods that have been purchased by the company.
  • Expenses account recordkeeping holds all the money that is spent for operations. It is mostly about the things that are not necessarily related to the product or service sold.

How long to keep records?

Now that you know what recordkeeping is needed in a business, you also need to know that these documents have to be kept for a specific period of time. As per the Internal Revenue Tax Code, you should keep the records always and not discard your records, as it might be needed for the administration of any part of the tax code in the future.

To be clear, if you have employees, it is important to keep the record keeping for more than 4 years. In case you owe any taxes, you should have the records for at least 3 years. In case you own any property, you would have to keep all the associated records until the period of limitations expires for a year where you dispose of the property. In case you have any reportable income and you do not report it, plus it is more than 25% of the total income on the tax return, you would have to keep the records for at least 6 years.

Payroll

Payroll is an important part of tax recordkeeping in small businesses who have employees. It is the act of recording all employee compensations, keeping track of all the withheld money from the paychecks of the employees, and calculating the employer and employee share of benefits and taxes. And the process of payroll can be completed in four simple steps:

  • Hire Employees
  • Gather all the important employee documents
  • Calculate & record the paychecks
  • File and pay the taxes on time

Also, calculating the payroll incorrectly can cause conflict in the workplace. It can cause up to more than one-third of the businesses to face penalties during the tax period. This is one reason why it is important to have the payroll done right so that the taxes you pay to the government is as accurate as possible. It would also help you in enjoying the proper deductions when filing the tax return.

What is Payroll Tax?

Payroll tax is withheld taxes from the paychecks of the employees in a company. There are a lot of tax deductions made from paychecks in the US, but the most common ones include income taxes, Social Security, and Medicare Taxes. These taxes are withheld by the company from their employees paychecks. And when the time comes, the company pays these taxes to the government on behalf of the employees.

The government then uses these payroll taxes to fund programs like workers’ compensation, unemployment compensation, health care, and Social Security. A few local governments also collect the small payroll tax to maintain or improve the local programs and infrastructure.

These deductions are itemized on the pay stub of the employee, allowing them to know how much has been withheld by the company for taxes. Let us talk about the main payroll taxes that are withheld to understand better:

  • Income Tax – This is the tax on the earnings made by the individual. As per law, each person (employee) has to file an income tax return annually to figure out their tax obligations. The company mostly has to withhold federal income taxes for the employee and pay it to the government. In case there is any state income taxes, the company would have to withhold the state income taxes as well.
  • Social Security Tax – The tax withheld from this goes into the Old-Age and Survivors Insurance (OASI) Trust Fund that is used for paying the survivor and retirement benefits. It also goes into the Disability Insurance Trust Fund that is for disability benefits. It is important for every employee to pay this tax, which is why it withheld from their paychecks by the company.
  • Medicare Payroll Tax – This tax is also given to two trust funds – Supplementary Medical Insurance Trust Fund that covers expenses like lab tests, ambulance service and so on, and the Hospital Insurance Trust Fund which takes care of the administrative costs in Medicare.
  • Federal Unemployment Tax – This tax is based on the Federal Unemployment Tax Act (FUTA) that permits the government to tax businesses to collect revenue that would then be the state unemployment agencies. The tax is then used to pay unemployed workers who have the eligibility to claim unemployment insurance. As per this Act, the businesses have to file the IRS form 940 (explained below) annually along with paying the applicable tax.

Payroll Tax Forms

Once you have withheld the taxes in the payroll process, the next step of the bookkeeper is to file the respective files for these taxes. To help you understand better, each form that you might need has been briefly explained below:

  • IRS I-9 Form – This form is to be filled out by the employer to verify that every employer they have is a US citizen or has the right to work in the USA. This form is filed along with supportive documents like driver’s license, birth certificate, visa, or Social Security card.
  • IRS Form W-2 – This is a form filled by the company and given to the employees by letting them know the summary of the wages they received and how much was deducted from it. It has to be given to them by 31st January every year along with the Social Security Administration (SSA).
  • IRS Form W-3 – This form is a summary of all the W-2 forms that have been given to the employees. You would also have to give the Social Security Administration along with the form.
  • IRS Form W-4 – The W-4 form is for employees to fill and share details on their marital status and number of allowances they want to take for their children and any dependents. Using these details, you would then have to calculate the total amount of income tax that you need to take from their paycheck.
  • IRS Form 941 – This form is used to report the Medicare and Social Security Taxes (FICA – Federal Insurance Contributions Act) that is withheld from the employees.
  • IRS Form 940 – This is used to file the Federal Unemployment Tax as per FUTA. In this, the employer would have to pay a 6% on the first $7,000 that every employee earns with the form to the government.
  • IRS Form 944 – This form is used to report federal income tax along with the FICA tax (Social Security and Medicare taxes) on employee wages. In fact, not all businesses are supposed to file this form. If you are eligible, the IRS would notify you about filing the IRS Form 944. With this form, you notify yourself as responsible to pay the taxes on behalf of the employees once a year and not quarterly (which is filed with the form 941).

Duties of a bookkeeper

From the above, you might have become clear on many things about a bookkeeper. But to help you understand better, a bookkeeper can do anything from:

  • Setting up a budget for the company
  • Reconciling bank accounts
  • Handling quarterly/monthly tax payments and payroll tax payments
  • Verifying the credit card statements
  • Checking Receipts
  • Sending the invoices to vendors and clients
  • Categorizing personal and business transactions and expenses
  • Preparing the financial reports and taxes for a CPA
  • Monthly processing & reporting of Profit & Loss statements and Balance Sheets

In short, all the recordkeeping you can think of is handled by a bookkeeper. To help you understand in detail what tasks are performed by a bookkeeper, the next section will give you a detailed checklist of the duties of a bookkeeper.

Bookkeeping Checklist

Now that you are clear about what a bookkeeper needs to do, let us take a look at the checklist of the bookkeeping tasks that has to be handled in a year by a bookkeeper.

Daily Bookkeeping Tasks

Following are the daily bookkeeping tasks that the bookkeeper would have to perform:

  1. Check the amount of cash that you have on hand for the business. It is important to know how much you have as every business has to spend money every now and then on little things.
  2. Keep tabs on all the incoming and outgoing payments.

End of the Month Bookkeeping Tasks

The following are the tasks that are taken care of at the end of every month:

  1. Payroll – For small businesses, payroll is a must. You can also take the help of an application like Quickbooks or any other accounting software.
  2. Pay Federal Payroll Taxes – With all the payroll taxes and the payroll withholdings that has been taken care of, you need to pay taxes to the federal government. The forms that you would need includes the form 941 which has been explained above.
  3. Pay State Withholding Taxes – If you have taxes withheld for the state, you would need to pay them as well. Remember to use the proper forms as per your state.
  4. Big 3 Financial Statements – Ensure that you keep all the 3 main financial statements ready in the tax recordkeeping file. These would include:
    – Cash Flow Statement: This is to determine the financial health of your business.
    – Profit & Loss Statement: This is also known as the income statement or the P&L statement. It shows the amount of money you made or lost in the last month.
    – Balance Sheet: This shows the detailed list of all the equity, liabilities and assets in the company.
  5. Review Your Cash Flow & Adjust your Goals – At the end of the month, have a look at how much you have grown and achieved. Set new goals where needed.

End of the Quarter Bookkeeping Tasks

When you reach the quarter of the year, you would need to take care of some additional tasks that include:

  1. Evaluation of all loss & profit estimates – You need to know where your company stands and eventually plan how to take care of any errors that have been made to make your business better.
  2. Distributions – Based on your company structure, you might want to take distributions as a supplement with the regular paycheck. But before you decide to do this, ensure that you take advice from a professional.
  3. State Quarterly Tax Return – Based on the rules of your state, you might have to file quarterly returns. Ensure that you comply with any important rules, if there are any.
  4. File Form 941 – Although you have the monthly withholding payments, you will still have to file the form 941 (Employer’s Quarterly Tax Return).
  5. Pay State Unemployment Taxes (SUTA) – Check with your state and pay (if needed) the State Unemployment Taxes on a quarterly basis
  6. Pay Federal Unemployment Taxes (FUTA) – In case your company has employees, you would have to pay unemployment taxes on a quarterly basis to the federal government through the file IRS Form 940. The details on this tax has been shared above.
  7. Personal Estimated Taxes – In case you work for yourself, then you would have to pay estimated quarterly income and FICA taxes to the government (that is if your business is not withholding taxes from your salary).
  8. Pay Quarterly Sales Taxes – Another tax requirement that you might have to fulfil. You can find out more about the taxes that you need to pay from your state government office or lawyer.

End of the Year Bookkeeping Tasks

As soon as the year comes to an end, these are the tasks that you would need to take care of:

  1. Analyze the Year-end Inventory – Review how the year went for you and plan for the next year.
  2. Close Your Books – As soon as you have reviewed all the financial details, balance and close your books for the year. Also, ensure that you print a copy of all the 3 big financial statements of your company for the year.
  3. File W-2s and 1099s via Form W-3 – It is important to file these with the Social Security Administration before March 31. You can register for an account and file at – SocialSecurity.gov/employer.
  4. Send W-2s and 1099s – In case you have paid contractors or employees in excess of $600 for the year, you need to send them either a 1099-MISC form or a W-2 before January 31 each year.
  5. File W-2s and 1099s with State – Another form you would need to file with the state is the W-2s and 1099s forms. Check the due date on the form to know more.
  6. File Business Income Taxes – Based on the business structure, you would have to file the form 1120 (as a corporation), while the S-Corporations should use IRS Form 1120S for the income tax return. Just ensure that you file the forms before the deadline.

Cost of Hiring a Bookkeeper

Let us now talk about the cost of hiring a bookkeeper. Just to be clear, the cost of hiring a bookkeeper would be based on many different variables. Some of things that would be considered is the lifecycle of the company, the company size, number of balances sheets to reconcile, number of employees, how payroll is processed, number of monthly transactions, and many more.

Let us take a look at the four kinds of bookkeepers that you can hire and how much you would spend in hiring each:

1. General bookkeeper

A general bookkeeper is a person who handles all the financial transactions and postings of the company. This person would be able to work either on easy single-entry bookkeeping or more detailed double-entry bookkeeping. Basically, the general bookkeeper has the task of just recordkeeping, posting invoices and payments and handling the monthly bank reconciliations. Hiring a general bookkeeper would cost you about $15-25 an hour, or about $28,000 annually.

2. Full Charge Bookkeeper

The full charge bookkeeper has the same responsibilities like the general bookkeeper. But along with those duties, this person also handles the payroll and financial statements in the company. The salary of this person can be around $30-40 an hour or $35,000 annually, based on the location.

3. Certified bookkeeper

The certified bookkeeper is much more knowledgeable person in bookkeeping and tax recordkeeping for small businesses. This person handles all that the full charge bookkeeper handles and many other daily tasks. The only difference is that the certified bookkeeper must have at least 2 years of proven experience working in the accounting field. Additionally, they should have passed a four-part national exam. The salary of this person again depends on the location. You can expect to pay around $45-75 an hour, or $44,000-$85,000 annually.

4. Outsource your bookkeeping

The last option is to hire a bookkeeper remotely, that is outsource your bookkeeping. As a matter of fact, you would not have to pay them a salary and it would cost you much lower than otherwise. Being a small business, you do not need a full time bookkeeper. By outsourcing your bookkeeping at just $200 or more for a month, you would be able to save money and get much more professional services. Just ensure that you cross-check all about the firm you are hiring for the services.

Having an inhouse or outsourced bookkeeper – Which is better?

From the above, it is a good option to have your bookkeeping taken care of by outsourcing your bookkeeping. This is the best option for small and medium sized businesses as hiring a full time bookkeeper means spending a lot of money. This person would not have worked for most of the week, other than handling the payroll and tax recordkeeping.

Until your company grows and the number of employees increases, it is better to outsource your bookkeeping. Here are some of the reasons why:

  • Greater Financial Expertise – You would be able to hire a highly qualified firm to handle the bookkeeping. This would give you the best results you need and you would not have to worry about the bookkeeping.
  • Accuracy and Timeliness
  • Cost Savings
  • Focus on Your Business – With the time & money saved by outsourcing your bookkeeping, you would be able to spend it on your business and grow.

Conclusion

Having a business means that you would have to focus on things that would help you make money. Nonetheless, it is crucial that you do not ignore the need or hiring a bookkeeper for your business. As underpaying or missing deadlines can trigger fines that would eat a lot out of your company’s budget and profit.

We hope that this article helps you to understand all about bookkeeping enough to hire the best candidate for the job. And do not forget, if you are just a startup, the best way to do so is by outsourcing the bookkeeping tasks. It would help you save both time and money. And in case you have not yet started your business and need help with registering it, IncParadise can help you with it. Contact us to know more or visit to learn more about our services!

If you are interested in Bookkeeping feel free to contact us via Contact Form below!





Partners

Date: 05/01/2019 | Category: | Author: Jakub Vele

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