Finance Tax Time

How Home-Based Businesses Can Avoid Giving Uncle Sam More than His Share

By Darren Oliver

With the rush to file your taxes by April 15th, you probably did not consider the possibility that you overpaid. According to the General Accounting Office, in 1998 alone, there was $311 million paid unnecessarily to the IRS. Do not count on the IRS to tell you if you have overpaid because they are not required to but you can file an amended return for up to three years.

Chances are, you either prepare your business taxes yourself or have your tax preparer or CPA does them. There a number of issues surrounding either tax preparation method, which can result in your tax liability being calculated as higher than it actually is including missed deductions, numerous changes in tax laws or being given incorrect advice.

As a home-based business professional, there are a number of deductions you are entitled to which many tax preparers often miss. For example, if you run a home office you are entitled to deduct expenses for the percentage of square footage the home office is occupying. Expenses include the combined total of mortgage interest, property taxes, utilities, repairs, etc. For example, if 250 square feet of a 1,000 square foot house is being used for a home office, you are entitled to deduct a quarter of your total expenses.

Although some deductions may seem minor, over an entire year, they can add up to thousands of dollars that you are unnecessarily paying the IRS. That is money that you could be using to grow your business.

Karen McClafflin, owner of home-based Secret Canyon Realty in Colorado Springs, CO, was able to recover $11,000 when her tax preparer failed to include home office and automobile deductions in her past returns.

Another area, which causes many business owners to overpay, is being given incorrect advice by their CPA, tax preparer or even the IRS directly. In a poll performed by Money Magazine, the average tax preparer, prepares an average of 480 returns between February 1^st and April 15^th, that is a lot of returns in a relatively short amount of time which makes it difficult for your return to get the time and attention it deserves. This same poll also found there was an average discrepancy of 300% between what the tax preparers said was due and what was actually due. Moreover, in a poll of 50 professional tax preparers, consisting of 10 basic tax questions, none answered all 10 questions correctly and only 34 got at least half correct.

This problem does not extend to just tax preparers or CPA’s. In the IRS’s 2001 assessment of their own 544 call centers, they found that 50% of the time, their representatives gave incorrect or insufficient advice. Whether you do your taxes yourself and had to call the IRS for clarification on an issue or your CPA did, odds are the answer was not accurate.

The United States tax law is one of the most complex in the world. Not to mention, tax laws change every year and have changed tremendously in the last couple of years. Even the best tax preparer, CPA or even IRS representative can easily make a mistake or, forget to use an exemption which could reduce your tax liability.

If you have not yet filed your taxes, it is a good idea to get a second opinion from an independent source. The extra money and time spent in doing this could save you thousands. Look for someone or a company who:

Tags: accounting, federal tax, overpaying tax, small business tax, tax, tax liabilityaccounting, federal tax, overpaying tax, small business tax, tax, tax liability

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As a regular employee of a company, you are required by the Internal Revenue Service to have withheld from you earnings FICA (Federal Insurance Contributions Act) and Medicare taxes. FICA is also known as the Social Security tax. You pay these taxes into the government and they are used for retired, unemployed, and disabled Americans and their dependants in the form of Social Security payments and Medicare benefits.

The Self Employment (SE) Tax is similar to these aforementioned taxes except that they are for self employed individuals and are imposed on self employed earnings. It allows those who are self employed to be eligible for these benefits later in life, just as an employee is.

The current rate for self employment tax is 15.3%. That percentage is broken down into two (2) parts: 12.4% is for Social Security and 2.9% is for Medicare. Even if you are receiving Social Security or Medicare benefits and no matter your age you are still responsible for the self employment tax.

In order to determine if you are responsible for this tax you must first know if you are considered self employed by the IRS. What exactly qualifies a person as self employed to the IRS you may ask?

According to the IRS you are self-employed if any of these apply to you:

- You carry on a trade or business as a sole proprietor;

- You are a member of a partnership or limited liability company that files a Form 1065, U.S. Return of Partnership that carries on a trade or business; or

- You are otherwise in business for yourself. (Examples: Independent Contractor, Direct Sales, etc.)

- You have a part-time business, in addition to your regular job.

For more information on whether or not you are considered self employed, visit the following link.

http://www.irs.gov/businesses/small/article/0,,id=98846,00.html

Ok, you have determined that you are in fact considered self employed by the IRS. Now, how do you know if you are required to pay the Self Employment Tax?

If you had net earnings of $400 or more in the year, or if you had church employee income of $108.28 or more, you are required to pay the self employment tax on those earnings.

How to pay the tax is the next thing you should know. In order to pay self employment taxes you must have one (1) of the following:

- A social security number or
- An Individual Taxpayer Identification Number (ITIN)

Since income tax is a pay as you go tax, you have to pay the tax as you earn your income during the year. If your expected tax liability is more than $1,000, including the self employment tax, and you have no taxes withheld, you must make estimated tax payments. Click here for more information on estimated taxes.

The following forms are a few that may be needed when dealing with the self employment tax: (Please note this is not an all inclusive list and other forms may be required by the IRS.)

- Form 1040 US Individual Tax Return

- Schedule SE Self Employment Tax: Figure your self employment net earnings. Be sure you figure your total earnings that are included in the self employment tax.

- Short Schedule SE: Some can file the shortened version of Schedule SE. Follow the guide to determine if this is possible in your situation.

- Schedule C Profit or Loss from Business: Enter your business income and expenses, cost of goods sold, and/or vehicle and mileage information.

- Form 8829 Expenses for Business Use of Your Home: Figure the area used for your business and any allowable expenses that may pertain to your home.

A listing of available forms and instructions can be found at the IRS website:

www.irs.gov

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Tags: accounting, bookkeeping, income tax, se tax, taxes, telecommute, wahm, work at hom self employedaccounting, bookkeeping, income tax, se tax, taxes, telecommute, wahm, work at hom self employed

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For most self-employed people, bookkeeping is about as much
fun as a root canal. But like it or not, it must be done,
otherwise you’ll end up overpaying your taxes big time.

Perhaps this article will help you see this tedious task
in a new light. Follow along with me and I can turn
your bookkeeping nightmare into the best paying part-time
job you ever had.

First, a question:

How much money do you make right now — per hour — at your
“regular” daytime job or in your business?

Is it $15 per hour? $25 per hour? $50 per hour? Make a
mental note of that amount, ok?

Now, let’s say by “keeping the books” this month, you
record $1,000 worth of deductible expenses.

Let’s also assume you are in the 35% tax bracket (15%
federal income tax plus 15% self-employment tax plus
5% state tax).

So, for every $1,000 of deductions, you save yourself about
$350 in taxes ($1,000 x 35% tax rate).

One more assumption: it takes you about 2 hours to properly
record and document that $1,000 of deductions.

Hmmm. You spend 2 hours and save $350 bucks.

How much money did you just make for yourself — per hour?

$175 per hour! Whoa — now, compare that to how much you
make per hour working in your business or at an
employee job. Which “job” paid you more?

Even if it takes you 4 hours — it’s like having a job that
pays you $87.50 per hour. Still a pretty good hourly wage,
don’t you think?

How does that make you feel about bookkeeping? Not such a
bad deal after all, is it?

So here’s a simple six-step bookkeeping system that will put
thousands of dollars of tax savings in your pocket and keep
the IRS out of your life.

1. Maintain a separate bank account for your business
or self-employment activity.

Never use your personal bank account for business expenses.
Having a separate bank account automatically creates the
“shell” for the perfect documentation system.

If you don’t have a separate business bank account, now
is the time to get one.

2. Maintain a separate credit card account for your
business. Same deal as the bank account — pick one credit
card that you use exclusively for business expenses.

3. These 2 accounts (one bank account and one credit card
account) should only be used for business! Never “co-mingle”
business and personal financial information.

The only income that goes into your business bank account
is business income. The only expenses that are paid from
the business bank account and business credit card account
are business expenses.

4. For each major income and expense category, create a
simple filing system each calendar year — one file folder
for each major category. Every time you write a
check or use the credit card for a business expense,
you assign that expense to the appropriate expense category
and file the supporting documentation (receipt, invoice,
cancelled check, or whatever) into the corresponding file
folder.

5. Keep a separate file folder for all monthly bank account
statements and credit card statements.

6. Use a simple bookkeeping software program to record all
deposits, checks, and credit card charges. Once a week or
once a month, input all transactions and assign each
transaction to the appropriate income or expense category.

The importance of this “categorization” process cannot
be stressed enough — it’s the key to the whole system!

There are any number of software programs out there
for this purpose. I’ve used them all: Quicken, Quickbooks,
Money, etc. Spreadsheet programs like Excel can also be used
to automate business record-keeping.

But my favorite bookkeeping program for the Small Business
Owner or Self-Employed Person is InternetTaxHelper — it is
by far the easiest to learn and simplest to use. If your
business grows, you can always invest in a more
sophisticated program later. For any small business owner,
especially if you’re just starting out, this is the best
program I’ve ever seen.

Using a software program is a tremendous time-saver. Once
you’ve input all your individual income and expense
transactions, and assuming you’ve assigned each transaction
to the appropriate category and filed the paperwork, you’ve
already completed all the work necessary to audit-proof your
income tax return!

For more information on InternetTaxHelper, go to:
http://www.internettaxhelper.com/g.o/wmdctp

One final comment: If you aren’t “computer-savvy”, that’s
OK. You can still use good ole pencil and paper to
categorize your business expenses.

I have clients who use nothing more sophisticated than a
spiral notebook. Each year they buy a new notebook and
label each page with a particular income or expense
category.

Every transaction gets written down in the notebook on
the appropriate page. At the end of the year, they add
up the totals for each page, and presto, they give me an
annual recap of all major income and expense categories.
Get the picture? It doesn’t have to be fancy. It just has
to be in writing, accurate, and supported by actual
paper documents.

Whether you use your computer or not, the end result is the
same: Every single transaction has been assigned to the
appropriate category, and every transaction has the
corresponding “paper trail” — every receipt, invoice,
cancelled check and credit card charge has been
filed into the appropriate file folder. Should the
IRS question any income or expense amount on your return,
you’ll be ready!

Wayne M. Davies is author of 3 tax-slashing eBooks for small
business owners and the self-employed. For a free copy of
Wayne’s 25-page report, “How To Instantly Double Your
Deductions” visit http://www.YouSaveOnTaxes.com

Tags: accounting, bookkeeping, taxaccounting, bookkeeping, tax

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