January 2012
W-2 & 1099 Information

Small Business Blog

Brought to you by Steve Strauss

January 2012

Tax Tips

Well, it's that time of year again. Time to lose some weight? Well, yes, that too. But no, it's time to start thinking about taxes. Of course my friends here at Greatland are tops when it comes to helping you sort out your 1099 and W-2 tax needs, so instead of diving deep into that area, what I want to do instead this month is offer some general tips and strategies on business taxes to help you as you get your returns in order.

Most small business people in fact do not have a great handle on taxes, even if taxes are so important to their business. I just read a story in the paper this morning, talking about a large local mattress dealer with 11 stores who was going out of business. Why? They failed to pay sales taxes that they should have been collecting but didn't and owed the state $2 million in back taxes.

So lets start with the basics. Here are four tax rules all small businesses should know:

  1. Deductions. As you likely know, you can deduct all "ordinary and necessary" business expenses from your revenues to reduce your taxable income. Some deductions such as business travel, equipment, salaries and rent are obvious. Others are not. Don't overlook these potential deductions:
    • Trips that combine business and pleasure. If more than half your trip is devoted to business, you can deduct the cost of travel, as well as other business-related expenses.
    • Business losses. Depending upon your legal structure, business losses may be able to be deducted against your personal income to reduce your taxes.
    • Purchases financed by business loans or credit cards. You can deduct such costs this year even if you won't pay off the loans until next year. You can also deduct the interest on the loans themselves.
  2. Employee Taxes. If you hire employees, you need to pay, or withhold from their salaries, a variety of taxes, including:
    • Unemployment. Federal and state unemployment taxes must be paid.
    • Withholding. Social Security (FICA), Medicare and federal and state income taxes must be withheld from employees pay.
    • Employer matching. You must match the FICA and Medicare taxes and pay them along with your employees.
  3. Quarterly Estimated Taxes. This area trips up many an entrepreneur. Failure to keep up with your estimated tax bill can create a slew of IRS penalties. You should pay quarterly estimated taxes if you expect your total tax bill in a given year to exceed $500. How much should you pay? By the end of the year, you must pay either 90 percent of the tax you will owe or 100 percent of last year's tax.
  4. Sales Taxes. Most service businesses are exempt from sales tax, but most product based businesses are not. If you do sell a product or service that is subject to sales tax, you must register with your state's tax department. Then you must track your taxable and nontaxable sales and include that information on your sales tax return.

In my next blog, I am going to share some tips on procedures that can make your tax life easier, and which can help you avoid an audit.

(For even more business tips and strategies, check out the new podcast on iTunes that I am doing in conjunction with Greatland called Small Business Success with Steve Strauss, Powered by Greatland.)

Tax Procedures and Audits

In my last blog, I discussed basic tax rules that any small business can use. Today let's look at some procedures and ways to keep your taxes in order and hopefully avoid an audit.

Do not comingle money. You need a separate business checking account, and you need to deposit all money from the business into that account. Money can then be transferred to your personal account. This helps maintain an accurate record of business income for tax purposes.

Get a business credit card. Designate one credit card as a business card and use it only for this purpose. The card does not need to be in the business' name, but it is better if it is. Business credit card interest is 100% deductible.

Keep logs: Retain every year your appointment book or calendar. Notations can provide backup information for things like business mileage, telephone expenses, and business trips.

Keep all receipts: Keep every receipt related to your business. Similarly, make sure to keep all cancelled checks. In the event of an audit, you will be asked to provide them.

Keep your independent contractor records up to date: Because you need to issue a 1099 to anyone to whom you paid $600 or more during the year for business services, it is important to keep accurate records all year long. Don't wait to get their address and social security number, both of which must be included on the 1099 form. It is best to get that information when you hire the person.

While all of these procedures can help you avoid an audit, the fact is, small businesses are nevertheless audited regularly. How then do you avoid an audit? First of all, don't over-deduct. Be careful of deducting every possible expense, no matter how tangential.

Moreover, you should try to avoid showing a loss. Now, losses do happen and they must of course be reported. But a business that shows a loss for several years in a row is a business that should be out of business. If it's not, something's fishy.

Finally, be careful about how you use the home office deduction as that is one deduction that is ripe for scrutiny. Before you can deduct expenses for using part of your home in a business, you must meet three stringent requirements:

  1. You must "regularly use part of your home exclusively for a trade or business." As long as you are using part of your home for business on a continuing, rather than haphazard, basis, you qualify.
  2. The use must be exclusive. Exclusive means just that — exclusive. Any personal, non-business, use would disqualify you.
  3. Your home must be the principal place for your business, or you must meet patients, clients or customers there, or you must use a separate structure on your property exclusively for business purposes.

Be prepared to back up anything you do say in your tax return just in case you are audited. And again, keep every receipt. They can go a long way to getting you out of a jam should an audit arise.

(For even more business tips and strategies, check out the new podcast on iTunes that I am doing in conjunction with Greatland called Small Business Success with Steve Strauss, Powered by Greatland.)

Saving on Taxes Part One

All small business owners want to save on their taxes. The question is, how? There are many different strategies you can adopt to help you reduce your tax bite. The important thing is to not wait until December 31 before deciding to take action. Some pre-planning can go a long way to reducing Uncle Sam's take come tax time.

The first and main strategy of course is to set up a tax-free retirement account if you don't have one. Here are your choices:

  1. KEOGH Plans. A KEOGH retirement plan allows self-employed taxpayers to contribute significant sums (it varies) every year into a tax-free account. KEOGHs are fairly complicated to create and the assistance of a financial advisor is required. There are several benefits to starting a KEOGH retirement plan:
    • Contributions are deducted from gross income.
    • Taxes are deferred until the money is withdrawn.
    • Interest earned is also tax deferred until withdrawn.
    • Contribution amounts are more liberal than with IRAs.
  2. Solo 401(k). This plan is great because of its high contribution limits. Like a KEOGH, a solo 401(k) allows you to contribute up to $49,000 a year into your retirement account ($54,500 if you are 50 or over).
  3. SEP IRAs. A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a plan that allows you to contribute and deduct up to 20 percent of your income into a tax-deferred retirement account. SEPs are indeed simple: They can be created in a few minutes at a bank or brokerage house with no professional help required and no annual government reports are required. They beat regular IRAs because they allow for larger contributions.

ROTH IRAs: You may be tempted to also set up a traditional ROTH IRA. While that may be good for retirement purposes, it does little for you business-wise as contributions are not tax deductible.

One thing to understand about your retirement plan: If you do set up a SEP, Solo 401(k) or KEOGH, you have to offer it to your employees as well. This means you will likely need to make contributions that don't just cover you. Because of this, you should consult with an employee benefits pro before setting up any sort of retirement plan for you and your employees.

One last bonus for creating a business retirement plan: You can get a tax credit of up to $500 for the first three years of the plan if you have less than 100 employees.

In my next blog we will look at some other ways to save on taxes.

(For even more business tips and strategies, check out the new podcast on iTunes that I am doing in conjunction with Greatland called Small Business Success with Steve Strauss, Powered by Greatland.)

Saving on Taxes Part Two

Here are even more ways to reduce your tax bite:

Lease your property to your business: If your business uses property that you personally own, you can save on business taxes by leasing the property to the business. The lease expense to the business is tax-deductible, and the income you generate personally from the lease income is not subject to Social Security tax. You can then take any applicable depreciation allowance for the leased property.

Use the law: In the past few years there have been a slew of tax changes that can help small business – everything from the Bush tax cuts to the stimulus law and more. This would be a good time then to check with an accountant or other tax professional.

Re-examine your business structure: If you have been in business for a while and are profitable, it may be smart to change your legal form of business. For instance, a growing S corporation may want to become a C corporation so as to take advantage of benefit programs limited to C corporations, such as group-term life insurance and various health-plan options. A newly-profitable sole proprietor may want to form an LLC to get personal liability protection, or form an S corporation to reduce the self-employment tax.

Be aware of deadlines: Make sure that you are paying your estimated taxes on time and in sufficient amounts to avoid penalties and interest down the road. Deadlines of which to be aware:

  • Corporations must file their returns within two and a half months after the end of their fiscal year
  • Quarterly estimated taxes are due four times a year: April 15, June 15, September 15, and January 15
  • Sales taxes. Sales taxes are due quarterly or monthly, depending upon what state you are in
  • Employee taxes. Employee taxes may be due weekly, monthly or quarterly, depending upon the number of employees you have

Delay your receivables and accelerate your expenses: At the end of the tax year, if your business expects to have significant income from accounts receivables, consider delaying those receivables until after the first of the year. Doing so will reduce your business' net taxable income for that year.

Similarly, if you anticipate a large tax bit at the end of the year, you might consider accelerating some expenses into the current tax year. Expenses that can be accelerated include corporate charitable contributions, a significant percentage of health insurance premiums for you if you are a self-employed individual, year-end employee bonuses, or any other tax-deductible expenses you are planning on making.

Here is one final tip: The IRS has an excellent site devoted exclusively to small business, with industry specific information, audit guides, links and more. Go to www.irs.gov/businesses/small/.

(For even more business tips and strategies, check out the new podcast on iTunes that I am doing in conjunction with Greatland called Small Business Success with Steve Strauss, Powered by Greatland.)