Business Tax Articles

As a small business owner, you probably know that willfully avoiding paying taxes will lead to severe problems with the IRS; however, IRS problems aren’t always a result of a business owner’s intentional actions. These are five ways business owners can get into trouble with the IRS that they might overlook or not realize.

1. Under-Reporting Income

All business income must be reported to the IRS. Even if you are a freelancer, receive contract payments, or are paid in cash, you must let the IRS know or risk hefty fines and penalties on top of the tax you owe on that income. Some individual self-employed people fail to pay taxes – either due to lack of knowledge about tax laws or evasion – and do not realize they are responsible for up to six years of back tax returns. Take note that if you do need to file back tax returns, many deductions are not claimable on more than the most recent three returns. Additional years, up to six, must be filed; however, the benefit of deductions is lost beyond three years.

2. Over-Reporting Expenses

Keep business expenses separate, preferably paid from a separate account and with a separate credit card, so that your expenses do not get mixed in with those for your business. The most common over-reported expenses are private travel being claimed and business travel and private miles driven and claimed as business miles. If you’re not sure what qualifies as an actual business expense, consult with your tax preparer or accountant. For a business expense to be deductible, it must be ordinary and necessary. An “ordinary” expense is common and accepted in your business; a “necessary” expense is helpful and appropriate for your business. Expenses like the cost of goods sold (for manufacturing businesses) and capital expenses (costs that are part of your investment in your business) are figured separately from business expenses.

3. Failing to Report “Trust Fund Taxes”

As an employer, you must withhold taxes from employee earnings. Those taxes are not paid to employees as wages and are held “in trust” until paid to the U.S. Treasury. Thus, the name “trust fund taxes.” These are income tax, Social Security, and Medicare taxes (aka “withholdings”). Sales tax is also considered a “trust fund” tax since it is collected from someone else like a customer or client and held until paid to the Treasury. These taxes must be paid and reported to the proper taxing authority and cannot be used for operating or financing a business. If they are, and they are not reported, it is considered tax fraud.

4. Forgetting the Self-Employment Tax

Just like an employer must withhold Social Security and Medicare taxes from employees, if you are self-employed, you must pay self-employment (SE) tax, consisting of Social Security and Medicare taxes, to the Treasury. The SE tax is 15.3 percent (12.4 percent for social security (old-age, survivors, and disability insurance) and 2.9 percent for Medicare (hospital insurance) of net self-employment income in addition to income taxes. That means it is calculated after expenses are deducted. Note that SE tax does not include any other taxes that self-employed individuals may be required to file, so these individuals must consult their tax preparer or accountant to be sure they are paying all the required taxes. Also, self-employed individuals can deduct the employer-equivalent portion of the SE tax when calculating their adjusted gross income (AGI). Also, keep in mind that the tax is paid only on net self-employment earnings, that is, income after expenses are deducted.

5. Not Paying Estimated Quarterly Taxes

As a small business owner, you do not have taxes withheld from a formal paycheck as wage-earning employees do. However, that does not mean there are no taxes due to the IRS. If a small business owner anticipates a tax liability of $1,000 or more, they must send estimated quarterly tax payments to the IRS. Not doing so can lead to a whopping end-of-year tax bill with penalties, too.

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Again, as mentioned above, consult your tax preparer or trusted accountant to help you make sure you stay in the clear with the IRS.

Crowdfunding — or funding a project through the online contributions of many different backers — is becoming increasingly popular. If you are considering raising crowdfunding revenue or contributing to a crowdfunding campaign, you will need to address the many tax issues that can arise.

Background

While crowdfunding was initially used by artists and others to raise money for projects that were unlikely to turn a profit, others have begun to see crowdfunding as an alternative to venture capital. Depending on the project, those who contribute may receive nothing of value, a reward of nominal value (such as a T-shirt or tickets to an event), or perhaps even an ownership/equity interest in the enterprise.

Is It Income?

In an “information letter” released in 2016,1 the IRS stated that crowdfunding revenues will generally be treated as income unless they are:

• Loans that must be repaid
• Capital contributed to an entity in exchange for an equity interest in the entity
• Gifts made out of detached generosity without any “quid pro quo”

The IRS noted that the facts and circumstances of each case will determine how the revenue is to be characterized and added that “crowdfunding revenues must generally be included in income to the extent they are for services rendered or are gains from the sale of property.”

Frequently, the IRS learns of the activity because crowdfunding entrepreneurs have used a third-party payment network to process the contributions. Where transactions during the year exceed a specific threshold — gross payments in excess of $20,000 and more than 200 transactions — that third party is required to send Form 1099-K (Payment Card and Third-Party Network Transactions) to the recipient and the IRS. Payments that do not meet the threshold are still potentially taxable.

If It’s Income

“Ordinary and necessary” business expenses are generally tax deductible, but deductions for expenses are limited if the IRS deems the activity a hobby rather than a trade or business. Generally, the IRS applies a “facts and circumstances” test to determine if you have a profit-making motive, which is necessary for a trade or business.

New Businesses

Favorable deduction rules may be available for certain types of expenses incurred in starting a new business. If eligible, the business may elect to expense up to $5,000 of those costs (subject to phaseout) in the year the business becomes active, with the remainder of the start-up expenditures deducted ratably over a 180-month period.

For Contributors

Campaign contributors should not assume that their gifts qualify as tax-deductible charitable contributions. Tax-deductible contributions must meet certain requirements, including that they be made to a qualified charitable organization. If gifts are made to an individual or nonqualified organization, you will generally need to file a gift tax return for gifts to any one recipient that exceed the gift tax annual exclusion ($15,000 for 2020).

These are just some of the potential tax issues that may arise. Consult your tax advisor regarding your specific situation.

An employer’s SUTA tax rate is susceptible to fluctuation. If yours is escalating, contrary to popular belief, you actually might be able to reduce it! Check out these five strategies to curb your SUTA tax rate.

Because the State Unemployment Tax Act – or SUTA – tax is mandatory, you may think you have no control over your SUTA rate. But to some extent, you do. The first thing to remember is that each state sets its own criteria for state unemployment tax, and rates vary by employer.

Typically, new employers are assigned a standard “new employer” rate. Over time, they receive an “experience rating,” which can be higher or lower than the new employer rate. The experience rating mainly depends on how many former employees have drawn unemployment benefits on the employer’s account. The more benefits claimed on an employer’s account, the higher its SUTA tax rate. Other determinants may include whether the employer is in the construction industry and the employer’s payroll size.

You may be powerless against some of these influencers – such as your business’s age and industry — but there are other ways to lower your SUTA rate. Here are five tactics.

1. Hire only when needed

Letting employees go because you don’t need them anymore likely renders them eligible for unemployment benefits. If they file for unemployment benefits, your SUTA rate is likely to increase. So, make sure you truly need an employee before hiring him or her.

2. Help your employees succeed

Employees terminated for gross misconduct typically do not qualify for unemployment benefits. However, employees fired for poor performance – such as due to lack of skills – may be eligible. To reduce the likelihood of terminating employees for poor performance, give them the resources they need to succeed, including proper tools and training.

3. Use independent contractors

You can avoid unemployment claims by legally hiring independent contractors instead of employees. If you decide to take this route, ensure all mandatory requirements for independent contractor status are met, including the Internal Revenue Service’s “right-to-control” test and applicable state tests.

4. Contest dubious unemployment claims

Dubious unemployment claims may involve former employees providing the state workforce agency with false information to obtain benefits or filing a claim even though they were rightfully terminated for gross misconduct. Before you fight an unemployment claim, consult with an unemployment benefits expert to gauge the strength of your case. Also, make sure you have supporting documents to back up your version of events.

5. Make voluntary contributions

Many states allow employers with an experience rating to voluntarily make a “buydown” payment, which cancels all or part of the benefits charged to their account, thereby reducing their SUTA tax rate.

More tips

Consider alternatives to layoffs, such as reducing employees’ work hours via your state’s work-sharing program.

Offer departing employees a solid severance package as well as outplacement services to help them quickly find a job. This way, they will be less inclined to rely on unemployment benefits.

Keep an eye on your SUTA tax rate. If it’s spiking for unknown reasons, contact your state’s workforce agency for an explanation.

Want to learn more about our small business accounting services? Give Jeff Martin a call at 912-634-7722 today to schedule your free initial consultation.

The Social Security Administration has released new numbers for those paying Social Security and those collecting it. Check out the new maximum taxable earnings amount as well as COLA and other key adjustments.

Every year, the Social Security Administration takes a fresh look at its numbers and typically makes adjustments. Here are the basics for 2020 — what has changed, and what hasn’t.

First, the basic percentages have not changed:

• Employees and employers continue to pay 7.65% each, with the self-employed paying both halves.
• The Medicare portion remains 1.45% on all earnings, with high earners continuing to pay an additional 0.9% in Medicare taxes.
• The Social Security portion (OASDI) remains 6.20% on earnings up to the applicable taxable maximum amount — and that’s what’s changing:

Starting in 2020, the maximum taxable amount is $137,700, up from the 2019 maximum of $132,900. This actually affects relatively few workers; the Society for Human Resource Management notes in an article that only about 6% of employees earn more than the current taxable maximum.

Also changing is the retirement earnings test exempt amount. Those who have not yet reached normal retirement age but are collecting benefits will find the SSA withholding $1 in benefits for every $2 in earnings above a certain limit. That limit is $17,640 per year for 2019 and will be $18,240 for 2020. (See the SSA for additional information on how this works.)

Cost-of-living adjustments

Those collecting Social Security will see a slight increase in their checks: Social Security and Supplemental Security Income beneficiaries will receive a 1.6% COLA for 2020. This is based on the increase in the consumer price index from the third quarter of 2018 through the third quarter of 2019, according to the SSA.

A detailed fact sheet about the changes is available on the SSA site.

Having your children work in the family business is a great way to teach your kids about work ethic and money management, and to kick-start their retirement or college savings plan. Click through for tips on bringing your children into the family business.

Is having your children work in your family-owned business a blessing or a curse? Here are five tips for making it a blessing and preventing it from being curse:

Have them work elsewhere for at least five years. They need time to mature, becoming their own individuals, and to gain confidence learning and doing things as distinct human beings rather than just children of successful parents. Kids need to learn how to work, to be punctual, to earn their own money and to be held accountable. Everyone wins when potential successors have excellent training and gain skills and confidence outside the nuclear family.

Consider this scenario: A family-owned restaurant in a small town occasionally has three generations working together on a Friday night. The children are under the age of 16. Assuming that child labor laws have been taken into account, the family is content that they are passing on a tradition and family trade. The kids work one or two nights during the weekend.

In this example, the family is limiting the number of hours, and their expectations are reasonable. It’s a way for children to learn the family business and helps them gain self-respect. Indeed, one adult who remembers working with his mother in a greenhouse when he was 12 and 13 recalls that the job was hot, dirty and exhausting. However, he recalls he got paid for the work he did, and it gave him a greater appreciation for the work his parents did to support their family.

Understand generational differences. Today’s young people are far more likely to want to work to live rather than adopt their parents’ “live to work” attitude. That’s why your adult children don’t want to work 80-hour workweeks. Younger children and other employees are most probably looking for a different workplace experience.

Give psychometric assessments to make their personalities/capabilities fit their jobs. One child may be temperamentally unsuited for a position demanding detail and strict deadlines; he or she may be more of a big-picture, laissez-faire personality. Assessing such things will go a long way to improving both business function and family harmony.

Hold them accountable, but not to an unreasonable standard. Give your kids crystal-clear roles and responsibilities and regular reviews so they know whether they’re living up to their job descriptions. The biggest morale killer in small businesses is underperforming or dysfunctional family members who are allowed to meander through various roles with virtually no accountability and to inflict themselves on others in your organization. In that case, pruning the family tree almost always results in improved business productivity.

Communicate formally and regularly with a third-party facilitator. Virtually every family employee thinks he or she works harder and contributes more than anyone else and stews over this. Family businesses have a greater need for formal communication to resolve perceived contribution issues, especially if you decide a family member is ill-suited to working at your company. You need to be able to discuss volatile topics constructively and productively. Seek the help of a talented facilitator to get the most from your family business.

It can be a wonderful experience for all involved to have your children work with you. Just remember that it’s a delicate balancing act that needs your attention.

Call us now at 912-634-7722 to learn more or request your free consultation online to get started.

If you made or received a payment in a calendar year as a small business or self-employed individual, you most likely are required to file an information return to the IRS. Click through to learn what this means.

If you engaged in certain financial transactions during the calendar year as a small business or self-employed (individual), you are most likely required to file an information return to the IRS. Below are some of the transactions that you have to report.

• Services performed by independent contractors — those not employed by your business.
• Prizes and awards, as well as certain other payments — termed other income.
• Rent.
• Royalties.
• Backup withholding or federal income tax withheld.
• Payments to physicians, physicians’ corporation or other suppliers of health and medical services.
• Substitute dividends or tax-exempt interest payments, and you are a broker.
• Crop insurance proceeds.
• Gross proceeds of $600 or more paid to an attorney.
• Interest on a business debt to someone (excluding interest on an obligation issued by an individual.
• Dividends and other distributions to a company shareholder.
• Distribution from a retirement or profit plan, or from an IRA or insurance contract.
• Payments to merchants or other entities in settlement of reportable payable transactions — any payment card or third-party network transaction.

Being in receipt of a payment may also require you to file an information return. Some examples include:

• Payment of mortgage interest (including points) or reimbursements of overpaid interest from individuals.
• Sale or exchange of real estate.
• You are a broker and you sold a covered security belonging to your customer.
• You are an issuer of a security taking a specified corporate action that affects the cost basis of the securities held by others.
• You released someone from paying a debt secured by property, or someone abandoned property that was subject to the debt or otherwise forgave their debt to you (1099-C).
• You made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than in a permanent retail establishment.

Keep in mind that information is for businesses. You will not have to file an information return if you are not engaged in a trade or business. You also will not have to file an information return if you are engaged in a trade or business and 1) the payment was made to another business that’s incorporated, but wasn’t for medical or legal services or 2) the sum of all payments made to the person or unincorporated business was less than $600 in one tax year.

This is just an introduction to a complicated topic, and the mechanics of filing such a return are filled with essential details. If you’re running a business, even a small one, be sure to discuss the details with a qualified professional.

Call us now at 912-634-7722 to learn more or request your free consultation online to get started.