Taxes

What Does the Wayfair Sales Tax Ruling Mean for my Business?

wayfair decision

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What does Wayfair mean for Sellers?

In South Dakota v. Wayfair, Inc., the Supreme Court of the United States overturned the physical presence nexus rule for state sales taxes. Without the requirement of a physical presence to establish nexus, it is possible for solely virtual and economic contacts in a state to give the state jurisdiction to require an out-of-state retailer to collect and remit sales and use tax on sales to in-state customers.

The Court did not create another “bright line” test for determining when a retailer has nexus for sales and use tax purposes, but instead noted that the U.S. constitution prohibits states from placing an undue burden on interstate commerce. While the Court did observe that many aspects of the South Dakota nexus law and related factors indicated the law may not create an undue burden on out-of-state seller, it sent the case back to the South Dakota Supreme Court for further deliberations on whether an undue burden existed.  

In recognition of the overturning of the physical presence nexus rule and the requirement that state nexus rules may not overly burden interstate commerce, many states have introduced sales tax nexus thresholds based on factors such as receipts generated from customers in the state and a minimum number of transactions with customers in the state.  Below is a summary of the thresholds in place in a number of those states:

State by State Threshold & Effective Dates

Alabama: $250,000 and one or more nexus-creating activities

Effective Date: October 1, 2018

Connecticut: Regular or systematic solicitation of sales, plus $250,000 and 200 transactions

Effective Date: December 1, 2018 (previous standard in effect until December 1, 2018)

Hawaii: $100,000 or 200 transactions

Effective Date: July 1, 2018

 

Illinois: $100,000 or 200 transactions

Effective Date: October 1, 2018

 

Indiana: $100,000 or 200 transactions

Effective Date: TBD (pending resolution of state litigation regarding economic nexus law)

 

Iowa: $100,000 or 200 transactions

Effective Date: January 1, 2018

 

Kentucky: $100,000 or 200 transactions

Effective Date: October 1, 2018

 

Louisiana: $100,000 or 200 transactions

Effective Date: TBD (when US Supreme Court rules the SD statute constitutional)

 

Maine: $100,000 or 200 transactions

Effective Date: July 1, 2018

 

Maryland (proposed): $100,000 or 200 transactions

Effective Date: October 1, 2018 (pending adoption of emergency regulation)

 

Michigan: $100,000 or 200 transactions

Effective Date: October 1, 2018

 

Minnesota: Regular or systematic solicitation of sales, plus either 100 transactions or 10 or more transactions totaling over $100,000

Effective Date: October 1, 2018

 

Mississippi: $250,000 plus purposeful or systematic exploitation of the MIssissippi market

Effective Date: September 1, 2018

 

Nebraska: $100,000 or 200 transactions + meet “doing business” definition

Effective Date: January 1, 2019

 

Nevada (proposed): $100,000 or 200 transactions

Effective Date: TBD

 

North Carolina: $100,000 or 200 transactions

Effective Date: November 1, 2018

 

North Dakota: $100,000 or 200 transactions

Effective Date: October 1, 2018

 

South Dakota: $100,000 or 200 transactions

Effective Date: TBD (pending resolution of state Wayfair litigation)

 

Tennessee: $500,000 and regular or systematic solicitation

Effective Date: TBD (pending resolution of state litigation regarding state economic nexus rule and approval by General Assembly)

 

Utah: $100,000 or 200 transactions

Effective Date: January 1, 2019

 

Vermont: Regular, systematic, or seasonal solicitation of sales, plus either $100,000 or 200 transactions

Effective Date: July 1, 2018

 

Washington: $100,000 or 200 transactions

Effective Date: October 1, 2018

 

Wisconsin (proposed): TBD (likely $100,000 or 200 transactions)

Effective Date: October 1, 2018

 

Wyoming: $100,000 or 200 transactions

Effective Date: TBD (pending resolution of state litigation regarding economic nexus law)

The tax authorities or officials of various U.S. states have issued statements and guidance or otherwise responded to the U.S. Supreme Court’s decision in “South Dakota v. Wayfair, Inc.”

In Wayfair, the Supreme Court overruled the physical presence nexus standard of Quill and National Bellas Hess for state and local taxation of remote sales.

As soon as the Supreme Court issued its decision in Wayfair (on June 21, 2018), various states began issuing statements or guidance, or introducing bills in response.

wayfair sales tax ruling

The following provides a summary of state actions or responses to Wayfair to date.

State by State Breakdown

Alabama

The Alabama Department of Revenue on July 3, 2018, issued guidance providing that the state’s existing “economic nexus” rule (810-6-2-.90.03), effective January 2016, will be applied prospectively only for sales made on or after October 1, 2018. While this rule technically was effective January 1, 2016, its validity was in question pending the outcome of the Wayfair decision. Because Wayfair removed the constitutional impediments to the rule, it will be enforced going forward.

Remote sellers with annual Alabama sales in excess of the rule’s $250,000 small-seller exception need to register for the Alabama Simplified Sellers Use Tax (SSUT) program and begin collecting tax no later than October 1, 2018. The SSUT program requires a participating seller to collect a tax of 8% on all sales into the state and to remit all such collections to the Department of Revenue (rather than collecting and remitting in individual localities).

In addition to the collection requirements for remote sellers, Alabama law requires marketplace facilitators with Alabama marketplace sales in excess of $250,000 to collect tax on sales made by or on behalf of its third-party sellers or to comply with use tax reporting and customer notification requirements. Marketplace facilitators must start collecting or complying with the reporting requirements on or before January 1, 2019. The marketplace facilitator can choose to begin collecting under the SSUT beginning in October 2018, and if a remote seller can demonstrate that a marketplace facilitator is collecting and remitting on its behalf, the seller is relieved of the collection obligation.

Arkansas

A legislative tax reform task force recommended to the legislature that remote sellers with more than $100,000 in sales or at least 200 separate transactions in Arkansas be required to collect and remit Arkansas sales and use tax. It was not recommended that the requirement be retroactive.

Colorado

A spokesperson for the Colorado Department of Revenue, in a statement to the tax press, said “whatever we [Colorado Department of Revenue] do for Wayfair will have no impact on our noncollecting reporting requirements.” The spokesperson further noted, “If Colorado should do as most other states have done and require most remote sellers to collect and remit sales taxes,” the reporting law “will still be in effect for any vendors that choose not to collect sales taxes.”

Hawaii

The Hawaii Department of Taxation on June 27, 2018, announced how it plans to implement the state’s recently enacted “general excise tax” (GET) economic nexus provisions. This law was initially reported to apply to tax years beginning after December 31, 2017.

The Department of Taxation subsequently announced that it would not enforce the state’s economic nexus provisions retroactively to all tax years beginning after December 31, 2017, to avoid any constitutional concerns. Thus, taxpayers that lacked physical presence in Hawaii before July 1, 2018, but that met the $100,000 or 200-transaction threshold in 2017 or 2018, will not be required to remit general excise tax for the period from January 1, 2018, to June 30, 2018. However, taxpayers that meet these standards will be subject to general excise tax beginning on July 1, 2018 (or on the first day of the tax year beginning on or after July 1, 2018 if the taxpayer is a fiscal year taxpayer) and must file their first periodic returns by the statutory deadline for that period.

Idaho

The Idaho Tax Commission on June 28, 2018, issued a release stating that it was “...still studying how the decision affects out-of-state retailers, such as online sellers, that make sales to Idaho citizens" and that it is "closely watching any actions by the U.S. Congress on this issue.”

The Tax Commission also stated that it will implement a new law (House Bill 578) that requires out-of-state retailers to collect Idaho sales tax on their sales to Idaho customers when: (1) the out-of-state seller has an agreement with an Idaho retailer to refer potential buyers to the out-of-state seller for a commission; and (2) the total sales to the Idaho buyers exceeded $10,000 in the previous year. The effective date for the law is July 1, 2018. Any out-of-state retailer that is required or wants to collect the state sales tax for its Idaho customers can register online.

Indiana

The Indiana Department of Revenue announced that remote sellers are not obligated to register or collect Indiana sales tax until a declaratory judgment action is resolved (that is, while the Department is currently prohibited from enforcing the obligation to collect sales tax from remote sellers until the pending declaratory judgment action is resolved). The Indiana economic nexus law is substantially similar to South Dakota’s law.

In a “frequently asked questions” (FAQs) document (dated July 9, 2018 on the state website), the Department stated it will not seek retroactive enforcement of its economic nexus statute and has targeted October 1, 2018 as the enforcement date of Indiana’s economic nexus law in Indiana Code 6-2.5-2-1(c) (pending resolution of the declaratory judgment).

Under the FAQs, the Department of Revenue stated:

Indiana’s Department of Revenue is currently prohibited from enforcing the obligation to collect sales tax from remote sellers until a declaratory judgment action currently pending in Indiana is resolved. Moreover, remote sellers are not obligated to register or collect Indiana sales tax until the declaratory judgment is resolved.

Pending resolution of the declaratory judgment action, DoR will begin enforcing Indiana’s economic nexus law on October 1, 2018.

Iowa

The Iowa Department of Revenue posted a statement on its website simply confirming that the state’s recently enacted economic provisions (substantially similar to those of South Dakota) are effective January 1, 2019.

The Iowa Department of Revenue noted that “the Wayfair ruling does not change the effective date of Senate File (SF) 2417 and the Iowa Department of Revenue will not seek to impose sales tax liability for periods prior to January 1, 2019 for retailers whose only obligation to collect Iowa sales tax comes from these new laws.”

If a retailer should have collected Iowa sales tax under the traditional physical presence rule of Quill Corp. v. North Dakota and Iowa law that existed prior to SF 2417, those retailers are encouraged to participate in Iowa’s voluntary disclosure program.

Kentucky

The Kentucky Department of Revenue, on June 27, 2018, issued a statement noting remote sellers that meet the threshold transaction or receipt thresholds ($100,000 of gross receipts from Kentucky sales of tangible personal property or digital property or 200 or more separate transactions for delivery into Kentucky) need to prepare to begin the registration process for collection of Kentucky sales and use tax on a prospective basis.

Louisiana

Louisiana’s Department of Revenue reportedly has targeted January 1, 2019, for an update to its processing systems that would allow the Louisiana Sales and Use Tax Commission for Remote Sellers (created under Louisiana House Bill 17) to serve as the single collector of state and local sales and use tax for remote sellers, according to Louisiana’s Secretary of Revenue. The Department will be issuing further guidance from the commission on next steps for remote dealers to comply with Louisiana law going forward. In addition, the Louisiana Sales and Use Tax Commission for Remote Sellers will be discussing how to become compliant with the Streamlined Sales and Use Tax Agreement without adopting the agreement and whether legislation is needed.

Initially (soon after the decision in Wayfair), the Department of Revenue issued a statement noting that Louisiana’s nexus provisions are similar to those in South Dakota—that is, a threshold of $100,000 of Louisiana sales or 200 or more separate transactions for delivery into Louisiana.  In its statement on June 21, 2018, the Department of Revenue noted that because the U.S. Supreme Court remanded Wayfair, it will be some time before there is a final decision and the full impact of the decision is known.

Under current law, Louisiana’s sales and use tax collection requirements apply to all tax periods beginning on or after the date of a U.S. Supreme Court’s decision in Wayfair concluding that South Dakota’s economic nexus rules are constitutional.

Maryland

The Comptroller issued a tax alert (July 2018) explaining that taxpayers need to review the Supreme Court’s decision in Wayfair to identify how it affects them. The Comptroller, while indicating additional guidance will be provided, explained Maryland imposes a sales tax collection requirement as broadly as is permitted under the U.S. Constitution.

The state’s website indicates that the information provided under  “Nexus Information for Sales and Use Tax” is “under review in light of the United States Supreme Court decision in South Dakota v. Wayfair, Inc."

Massachusetts

The Massachusetts Department of Revenue on June 22, 2018, issued a statement that the existing regulation as applicable to vendors making sales via the internet “continues to apply and is not impacted by the Supreme Court's decision.”

Under the regulation, remote sellers that (1) have the requisite “in-state physical presence” (generally defined with references to having “apps” and “cookies” in Massachusetts or having relationships with in-state content distribution networks, and (2) meet a specific sales threshold of more than $500,000 in Massachusetts sales from transactions completed over the internet and delivery into Massachusetts of 100 or more transactions, are required to collect and remit Massachusetts sales and use tax.

Minnesota

The Department of Revenue issued a release indicating it plans on July 25, 2018, to announce the date by which it will require remote sellers and marketplace providers to collect and remit applicable sales or use tax on sales delivered into the state. In 2017, Minnesota passed legislation requiring remote sellers and marketplaces meeting certain thresholds to collect tax on sales into the state, with the statute becoming effective the earlier of an overturn of Quill by the U.S. Supreme Court or January 1, 2019.

Mississippi

The Mississippi Department of Revenue on June 21, 2018, issued a statement that:

The effect of the U. S. Supreme Court’s decision is that all out-of-state sellers who lack physical presence in [Mississippi] must now collect tax on sales to [Mississippi] residents. Mississippi requires any out-of-state seller lacking physical presence and who has sales greater than $250,000 for the prior 12-month period must register and collect the tax from its [Mississippi] customers.

Montana

The Montana Department of Revenue issued a statement noting the Wayfair decision generally will not affect sales to customers in Montana because the state does not impose a general sales or use tax. However, Montana remote sellers making sales into other states may be required to collect and remit depending on the respective state’s laws.

Nevada

The Nevada Tax Commission will hold a public hearing on Thursday, September 13, 2018 to receive comments on the state’s adoption of a regulation requiring remote sellers to collect and remit Nevada sales and use tax. The regulation proposes to adopt economic nexus for sales and use tax purposes with thresholds that mimic South Dakota's law (more than $100,000 in sales or 200 or more separate transactions for delivery into the state). Under the proposed regulation [PDF 145 KB], the retailer must register with the Department of Taxation no later than the first day of the first calendar month that begins 30 calendar days after the retailer meets the economic nexus threshold.

New Hampshire

A joint legislative task force has assembled draft legislation to be introduced in a July 25, 2018 special session. Although New Hampshire does not impose sales or use taxes, the legislation would impede other states from imposing a sales and use tax collection obligation on New Hampshire remote sellers.

The legislation would prohibit foreign taxing jurisdictions, as defined, from requesting information from, conducting examinations of, or imposing sales and use tax collection obligations on sellers in New Hampshire, unless the foreign taxing jurisdiction registers and provides notice to the New Hampshire attorney general. Before allowing such an examination to go forward, the attorney general of New Hampshire would be required to determine that the laws of the foreign jurisdiction meet the requirements of the U.S. and New Hampshire constitutions—including a safe harbor for small sellers; a prohibition against retroactive application of any collection requirement; and membership in Streamlined Sales and Use Tax Agreement (SSUTA) or substantial compliance with the individual provisions of the SSUTA. The legislation would also prohibit sellers in New Hampshire from providing private customer information to any foreign taxing authority for purposes of determining liability for collection of certain sales or use taxes unless the seller has provided a written notice of the request for such information to the attorney general. The legislation would, however, allow sellers to comply with any directive of a foreign taxing authority, while preserving the seller’s rights under the statute, if the seller determines that such compliance is in the seller’s best interest.

New Jersey

In each house of the New Jersey legislature, bills were introduced to adopt an economic nexus law identical to that under South Dakota law. The collection obligation would begin the first day of a calendar quarter 90 days following enactment. Assembly bill (AB 4261) and the companion Senate bill (SB 2794) were passed by the legislature, but the legislation has not yet been signed by the governor.

North Dakota

The Office of State Tax Commissioner created a webpage explaining the sales and use tax collection laws applicable in North Dakota.

If you do not meet the Small Seller Exception ...and you are not already registered and collecting North Dakota sales tax, you will need to be registered and begin collecting the tax in North Dakota on October 1, 2018, or 60 days after you meet the Small Seller Exception threshold, whichever is later.

North Dakota’s law is similar to South Dakota’s law, requiring remote sellers to collect North Dakota sales and use tax if the seller’s sales into the state exceed $100,000 or if the seller has 200 or more sales shipped to North Dakota.

The new webpage provides resources for taxpayers to register and apply for a North Dakota sales and use tax permit. The North Dakota tax commissioner announced that over the next few weeks, the tax office “will be working to implement this new law change.” The website indicates that it is a “work in progress” with information to be added as it is available.

Ohio

A Department of Taxation representative reportedly stated that the Wayfair decision did not have an immediate, direct impact on Ohio because the Supreme Court examined the law of South Dakota, rather than Ohio’s. 

Under Ohio law, an out-of-state vendor that uses in state software to make sales or that has relationships with a content-distribution networks in Ohio and has gross receipts in excess of $500,000 from sales of tangible personal property to Ohio customers is deemed to have nexus.

Rhode Island

Rhode Island’s Division of Taxation created a webpage to provide information for non-collecting retailers, referrers, and retail sales facilitators. In “frequently asked questions" (FAQs) revised July 20, 2018, the state confirmed that taxpayers still have the option to comply with the state’s use tax notice and reporting requirements instead of registering to collect and remit sales and use taxes following Wayfair.

Under a Rhode Island law enacted in 2017, any non-collecting retailer that has in the immediately preceding calendar year (1) over $100,000 of taxable sales of tangible personal property, prewritten computer software, or taxable services delivered into Rhode Island, or (2) over 200 of such sales transactions must comply with certain use tax reporting requirements or register to collect and remit sales and use tax.

South Carolina

The South Carolina Department of Revenue issued a draft revenue ruling that addresses nexus with localities. The Department of Revenue explained, effective October 1, 2018:

It is the Department’s position that once a retailer has established nexus with South Carolina for sales and use tax purposes, the retailer has nexus for sales and use tax purposes with every local jurisdiction in the state for which the Department administers and collects a local sales and use tax. As such, the retailer must remit local sales and use taxes for any local jurisdiction into which deliveries are made by, or on behalf of, the retailer.

The Department of Revenue created an extensive question and answer (Q&A) list to assist remote sellers. Public comments are due September 4, 2018.

South Dakota

The South Dakota governor has been meeting with legislators and state revenue officials to discuss legislation to be considered at a special legislative session the governor has called. According to the governor’s spokesperson, the proposed legislation is expected to be made available to the public next week.

Two proposals are likely to: (1) remove the injunction put in place by the state circuit court in Wayfair and (2) require marketplaces to collect and remit sales and use tax on sales made by marketplace sellers.

Tennessee

The Tennessee Department of Revenue issued a notice that reiterates that it is currently prohibited from enforcing the state's economic nexus rule (Rule 129(2)). The Department of Revenue makes clear that dealers (remote sellers) with no physical presence in Tennessee are not currently required to collect and remit Tennessee sales and use tax until the Department of Revenue issues a public notice specifying an enforcement date and under which circumstances dealers must collect and remit the tax. Rule 129(2) will not be applied retroactively.

Texas

The Texas Comptroller's Office met with its business advisory group and tax advisory group to discuss the state's approach in requiring remote sellers to collect and remit Texas sales and use tax. The Comptroller is considering amending the definition of “engaged in business” in Rule § 3.286(a)(4) and to adopt a safe harbor (e.g., a small seller exception). It is not yet known whether the safe harbor would contain both a dollar and transaction threshold. 

The current planned schedule for adopting and implementing the amended rule calls for distribution of a draft rule in September 2018 and submission of a final proposed rule in October. The current plan calls for the rule to become effective on January 1, 2019 with enforcement to begin in either July or October of 2019.

During the meeting, it was clarified that legislation is needed to require marketplace providers to collect and remit sales and use tax. There was also discussion of the possibility of amending current law (Tex. Tax Code § 151.059) so as to allow remote sellers to collect a fee equal to the weighted average local tax rate in lieu of the actual local tax due on each sale.

Utah

Senate Bill 2001 was approved by lawmakers in a second special session. The bill was sent to the governor for signature on July 19, 2018.

Once enacted, this bill would impose a sales and use tax collection and remittance obligation on remote sellers (1) receiving gross revenue of more than $100,000 from the sale of tangible personal property, any product transferred electronically, or services for storage, use, or consumption in Utah; or (2) has 200 or more separate transactions from such sales. The provision establishing the new thresholds for a collection and remittance obligation would be effective January 1, 2019.

Part of the expected revenue from the change will be used to expand the scope of certain aspects of the state’s manufacturing machinery and equipment exemption.

Vermont

The Vermont Department of Taxes issued a statement explaining that remote sellers meeting the state’s economic nexus thresholds of sales of at least $100,000 or 200 individual transactions during any preceding 12-month period are required to register to collect and remit sales tax beginning July 1, 2018.

Washington

The Washington Department of Revenue noted on its webpage that it is examining the decision in Wayfair and implications for businesses and taxpayers. As a reminder, the state noted that, beginning January 1, 2018, remote sellers making $10,000 or more in retail sales to Washington purchasers must either: (1) collect and remit sales and use tax on sales to Washington purchasers, or (2) follow the state's use tax notice and reporting requirements.

West Virginia

The governor on June 21, 2018, issued a press release following the Supreme Court’s decision:

When I took office and our state was struggling financially, at that desperate time, I might have considered supporting legislation to enforce West Virginia sales tax on out-of-state transactions. However, now I do not support adding additional taxes on our people in this manner. This is an issue for the Legislature, and legislation would have to be passed to authorize the state to enforce the collection of out-of-state sales taxes. With our state’s growing economy, I don’t want to reach into West Virginians' pockets when we don’t need to.

Wisconsin

In a July 2, 2018 memo sent to the Wisconsin legislature, the Wisconsin Legislative Fiscal Bureau stated that the statutory definition of a retailer effectively has been modified by the Wayfair decision because the physical presence standard is no longer constitutionally required.

Wisconsin defines "retailer engaged in business in this state" to include "any retailer selling tangible personal property, or items, property, or goods...or taxable services for storage, use, or other consumption in this state, unless otherwise limited by federal law." The memo notes, however, that unlike South Dakota, the Wisconsin statutes do not specifically provide for “an electronic nexus threshold," and it is unclear that requiring out-of-state vendors to collect tax without changes to statutes or administrative code would comport with the Supreme Court’s decision.

The Wisconsin Department of Revenue subsequently on July 5, 2018, issued guidance stating that beginning October 1, 2018, remote sellers will be required to collect and remit sales or use tax on sales of taxable products and services in Wisconsin. The Department of Revenue is developing a rule consistent with the Court’s decision in Wayfair for small-seller exceptions and other matters.

Wyoming

The Wyoming Department of Revenue reportedly stated that it is targeting October 1, 2018, as the enforcement date for remote sellers to be licensed to collect and remit sales and use tax.

Other states

Tax agencies or government representatives of other states including California, Florida, Nebraska, New York, South Carolina, and Tennessee—in general statements or in response to specific requests for statements from the tax press—have acknowledged the Wayfair decision and have noted that they are reviewing the decision to ascertain the implications for their respective states.

Wayfair Implications for Foreign Sellers

Wayfair did not distinguish between foreign and domestic sellers. This means that unless a state creates legislation that says otherwise, economic nexus standards will likely apply to foreign sellers. If a foreign seller has no presence in the state, this may complicate things and invite further clarification.

Sources:

More States Respond or Update Initial Reactions to “Wayfair” Decision

KPMG Report: Compilation of State Responses to “Wayfair”

More States Indicate Responses to Wayfair

TaxNews Flash

More States Respond or Update Initial Reactions to “Wayfair” Decision

The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


 

Why Your Small Business Needs an EIN (Even if you Don't Plan to Hire)

Does my business need an EIN number?

When it comes to an employer identification number, commonly referred to as an EIN, entrepreneurs often make the mistake of believing it is only necessary to have this ID when you want to hire employees. What if your business does not have plans to hire team members? Does your small business still need an EIN? The short answer is yes — here’s a look at the additional benefits that this federal tax ID number can provide your startup.

An EIN is less sensitive than a Social Security Number (but should still be protected).

Can you really use an EIN instead of an SSN on paperwork associated with your business? Absolutely. Legally, you are required to identify the entity of your business with either your SSN or EIN for government forms and documents. An EIN is a federal identification number issued by the IRS that identifies your business entity.

EINs are used as federal identifiers, which may help to safeguard against having your personal identity stolen. If you’d rather use precaution when it comes to your business, file for and use an EIN.

While an EIN has a reputation for being slightly less sensitive than your social security number, an EIN is still susceptible to identify theft. Both your social security number and employer identification number work to protect personal information, so take care to protect both numbers equally.

It’s difficult to get around running an incorporated business without an EIN.

There are certain documents that entrepreneurs may think they can wait to file. An EIN is not one of them. When a business has been incorporated, it becomes its own separate entity. You, the business owner, may technically be an employee of the company. The IRS will require your EIN in order to make sure the business collects payroll tax and stays in compliance.

Even if you are organized as a partnership, you must also file for an EIN. Partnerships mean there are two people or more involved with the business and they can’t use both of their social security numbers to identify the company.  

Where else can I use an EIN? 

Good question. Once an EIN has been issued, it never expires which allows small business owners to use it in the additional areas: 

  • If you plan to open a business bank account and establish credit. This is applicable to a wide variety of legal structures including sole proprietorships, general partnerships, limited liability companies (LLCs), and S Corporations.

  • If you decide to change your organization type.

  • For filing annual tax returns.

  • For establishing pension, profit sharing, or retirement plans.

While I highly advocate in favor of filing for an EIN, I also know the rules of the road differ for every kind of business. Before you file any paperwork, it is in your best interest to consult an attorney or accountant for assistance and to ask them any questions you may have about the process.

 

Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, EINs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.

 

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. Please note that Bookly’s sponsorship of this blog article not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services.

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

KPMG LLP does not provide legal services.

The Pros and Cons of Acting As Your Own Registered Agent

can i be my own registered agent

Most entrepreneurs know that when you incorporate your small business, whether your entity is an LLC, Corporation, or C Corporation, you’re going to need a registered agent. An RA serves as your point of contact between the business and the state, accepting official documents on behalf of the business and helping the company remain in compliance with state law. Your RA can be a third party service, or you may act as your own registered agent

While many small business owners work alongside an organization, some decide that they want to be their own RA — and that’s legally acceptable. Remember that with great power comes great responsibility, on top of all of your other existing entrepreneurial duties. If you’re planning to act as your own registered agent, keep the following pros and cons in mind before getting started.

Pro… It’s less expensive to designate yourself as an RA.

While we can’t quote you an exact price range, acting as your own RA is going to be much less expensive than paying an outside organization for assistance. If you’re on a tight budget, you might consider acting as your own RA for a bit.

Con… You’ll need to be available during general business hours.

Think Monday through Friday during general hours of operation, like 8 AM to 5 PM. Not only will you need to be available to accept service of process during these hours, but you will also need to be a resident of the state and present at your designated physical address. (Another requirement for registered agents since P.O. Boxes are not considered to be an acceptable form of address.) 

While much of this will depend on the entrepreneur’s circumstances and nature of their small business, I placed availability in the ‘con’ section simply for those ‘what if?’ moments. Even if you work from home, you may find there are days where you need to leave to take a meeting offsite or head on a business trip. If you’re not physically there during the hours you said you would be to accept the documents, it could spell trouble for your business.

Pro/Con… You’ll need to be extremely organized.

Some of the legal documents you may receive as an RA include, but are not limited to, general paperwork like annual reports, franchise tax forms, and renewal reminders. 

If you are naturally organized when it comes to paperwork and time-sensitive materials, then you’re likely to stay on top of everything as an RA. However, if you struggle with organization and worry important documents could slip through the cracks, you might want to designate a third party RA. They will be able to keep your paperwork organized and passed along to you in a timely manner so your business doesn’t fall out of good standing with the state.

Pro/Con… You’re comfortable receiving confidential paperwork publicly.

Every entrepreneur is different. Some aren’t phased at the thought of being served confidential legal notices, like a court summons or lawsuit paperwork, in public. Others might be extremely embarrassed and worried that the act could damage their reputation. If you fall into the latter category, working with a registered agent service provides an added layer of security. They will accept the documents on your behalf, so that no unwanted visitors show up at your designated address, giving you and your business some privacy and peace of mind.

 

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Twitter @mycorporation.

Please note that Bookly’s sponsorship of this blog article is not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services. This content represents the views and opinions of the author, and does not necessarily represent the views or professional advice of Bookly or KPMG LLP.

 

 

LLC vs Inc: Advantages + Disadvantages

llc vs incorporated

By Austin Miller, Content Marketing Manager

If you are setting up a business then one of the most important decisions you will need to make is the company structure you choose for that business. Two of the most popular business structures are corporations (also known as Inc., which is short for incorporated) and limited liability companies (LLC).

While both of these business structures offer limited liability that will protect your personal assets in case of a lawsuit against the company, they are unique from one another in terms of management, structure, and taxation. Understanding the advantages and disadvantages of each company structure will give you a better idea of which one is right for your business.

LLC vs Inc: Taxation

 Via  Giphy

Via Giphy

For many people, taxation will be the main driver behind whether they choose to establish their company as a corporation or an LLC. If you choose to form your business as an LLC then you will be subject to "pass-through" taxation. What this means is that the business itself will not pay taxes. Rather, those taxes are paid by the individual members of the LLC and the losses and expenses that the business generates will be reported on individual tax returns.

Corporations can be quite different depending on the type of corporation your business is. An S corporation is, like an LLC, a "pass-through" tax entity, so the corporation itself is not taxed and individuals can use business expenses as deductions on their personal tax returns. A C corporation, on the other hand, is a separate entity and is taxed separately from its shareholders, members, and directors. Corporate income splitting can also result in lower overall tax obligations for a C corporation. However, shareholders may also have to pay taxes on any dividends that are paid out to them by the corporation, leading to "double taxation."

LLC vs Inc: Structure

 Via  Giphy

Via Giphy

Aside from S corporations, which are limited in size and may be profitably used by self-employed individuals, corporations are generally suitable for large entities. Corporations are owned by the shareholders of that company and are operated by the officers. Officers are appointed by the board of directors and the board of directors are, in turn, elected by the shareholders. Because of the complex structure of a corporation and the fact that the directors and officers are accountable to the shareholders, there tends to be limited flexibility in how much control one individual can exert over the corporation. Furthermore, corporations are required to record minutes and hold annual meetings.

An LLC, on the other hand, is often a more appropriate structure for a smaller business entity. An LLC has members instead of shareholders. Members exert a great deal of control over the day-to-day operations of the company. Members may also appoint managers to limited terms who carry out various duties in maintaining and administering the affairs of the business. While members do enjoy greater flexibility in how they operate the company, LLCs cannot issue stock, which may make raising capital more difficult.

LLC vs Inc: Formation

 Via  Giphy

Via Giphy

Forming an LLC is generally easy and does not require a burdensome amount of paperwork. While requirements differ from one state to the next, in most states LLCs require a document called either the "rules of organization" or the "articles of organization." Some states may also require an "operating agreement," which stipulates how the company's income, management, membership, and general operations are to be structured.

Forming a corporation is more complicated and certainly more expensive than forming an LLC. A registration fee, which can run into the thousands of dollars in some states, will have to be paid. Additionally, the Articles of Incorporation will have to be filed and this document will lay out such vital information as where the corporation is located, what business activities it is engaged in, and how many stocks (and of what type) it will be issuing.

A corporation will also need a name that is distinctive and which also describes the main activities of the corporation. In some states, the name will have to include "Inc." at the end to distinguish it from other business structures.

Final Thoughts

Setting up a new business or changing the structure of an existing business presents many unique and exciting opportunities in terms of your company's structure. Incorporation and LLCs offer similar benefits in terms of liability, but they differ substantially in terms of taxation, structure, and formation. It is crucial that you understand these differences as they could be the elements that determine the success and profitability of your business moving forward.

Other Articles You May Find Helpful:

What is Required to Setup an LLC?

How does an LLC Work?

LLC vs. S Corporation

PLLC vs. LLC: Which Entity Should You Incorporate as?

Do I need a Resident Agent for my LLC?

PLLC vs. LLC: Which Entity Should You Incorporate as?

PLLC vs. LLC

This title looks like a typo at first glance, doesn’t it? Entrepreneurs tend to be more familiar with the ins and outs of Corporations and LLCs, the two most common business formations, than they are with PCs and PLLCs. However, depending on what your profession is, a Professional Corporation or Professional Limited Liability Company might just be a better fit for how you do business. Let’s take a closer look at PLLC vs. LLC's.

Professional Corporation (PC)

Corporations have always erred on the more formal side than LLCs, which tend to be flexible. They still allow you to keep your personal assets separate from the business while providing a structure that enables your business to accept money from investors. And believe it or not, your career may be the deciding factor as to whether or not you should form a Professional Corporation. PCs are legal structures authorized by state law for selected licensed professions including doctors, accountants, architects, and lawyers.

Unlike a regular corporation, PCs do not absolve a professional for personal liability for their own negligence. The entity also doesn’t provide the same kinds of personal liability protection that an LLC or S-Corp would. However, if an associate files a malpractice claim against you, the PC steps in to protect owners. But many states require professionals to form this entity if they decide to incorporate — which we recommend doing since so many of these professions need a foundation in place that aids to, and protects, your practice.

Professional Limited Liability Company (PLLC)

To briefly recap what an LLC does, a Limited Liability Company keeps your professional and personal assets separated. It also provides liability protection in the event of unforeseen circumstances which could be anything from a lawsuit to on-site injury.

A Professional Limited Liability Company is quite similar to an LLC in that it is organized for the purpose of providing professional services for professions where a license is required to provide services. Some of these may include the aforementioned PC professions — lawyers, doctors, and architects. These legal structures are authorized by some states to limit personal liability for claims related to a co-partner's negligence or misconduct, ensuring that one partner is not liable for the entirety of these claims.

If you work out of a state where a license is required to provide services, you’ll want to form a PLLC. However, keep in mind that not every state provides PLLC legislation, so check in with yours first to see if they do.

 

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.

Please note that Bookly’s sponsorship of this blog article is not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services. This content represents the views of the author, and does not necessarily represent the views or professional advice of Bookly.

Top 10 Write Offs for Independent Contractors (2018)

Write Offs for Independent Contractors

By Austin Miller, founder of The Daily Hash—THE newsletter for foodies 🍔🍦🍜

"Write Offs for Independent Contractors are the Frosting on the Freelancer Cake" says us, right now.

Are you newly in business for yourself as an independent contractor? An independent contractor is defined as a person or business that provides goods or services to another entity under of a verbal agreement or specified contract. Some examples of independent contractors include truck drivers, writers, real estate brokers, and web designers. With the beginning of a new year and the dawn of a brand new tax season, it's important to know what tax deductions you qualify for so you can keep detailed records like receipts and invoices as proof for when it is time to file your itemized deductions.

Deductions for Independent Contractors

The IRS does not correct you should you fail to claim a deduction you are qualified for, so it's in your best interest to be aware of the items you can write off as a cost of doing business. Your deductions should include all necessary and ordinary expenses associated with your work. While there are many tax benefits of being an independent contractor, here are our suggestions as the top 10 write offs for independent contractors in 2018.

1. Occupational Operating Expenses

Tax Benefits of Being an Independent Contractor

The cost of advertising yourself, your services, or your product would fall into this category. Web hosting fees and the cost of internet services are also operating expenses. If you work from home, you can have a shared internet account for both home and business use and deduct a portion of the monthly cost, or you can have a separate business account. The same applies for a phone line. Business cards you have made are another write-off that falls under occupational operating expenses.

2. Supplies and Materials

Tax Deductions: Supplies and Materials

Any items you need to conduct business can be written off. All equipment, including items like a computer, camera, printer, or other office machinery, used on the job is tax deductible. Even the lesser items like paper, pens, and ink are a deduction. It's not commonly known that books, magazines, and newspapers related to your business are also deductible. Even greeting cards sent to clients can be a deduction. Supplies and Materials definitely lands a spot as one of our top write offs for independent contractors.

3. Home Office

Tax Deduction: Home Office

For an office in your home to be considered a qualified deduction, it must be used solely for business. It cannot also be used as a spare bedroom for out of town guests. The way it is deducted is based off its size relative to the rest of the house. For example, if your office takes up 15% of the house, you can deduct 15% of each utility, such as gas and electric, as office expenses. You can also deduct mortgage interest, homeowner's insurance, repairs, and painting. If you rent your home, you may also write off a portion of your rent.

4. Snacks and Coffee

Tax Deduction: Snacks and Coffee

A little known tax write-off often overlooked is the cost of providing yourself and any employees with snacks while working. The cost of caffeine can also be deducted. Meals for you are not included in this category. However, if there is a business reason for having any of your employees eat at work, their meals can be deductions. A good way to take advantage of this tax break is to have a weekly team lunch meeting.

5. Business Entertainment

Tax Deduction: Business Entertainment

While this deduction is only for half the cost of expenses related to entertaining clients, it can be used for business meetings and marketing efforts that take place at restaurants, sporting events, and golf courses. This is a commonly abused deduction, so keep in mind it is always best to consult a professional and follow the strict guidelines given by the IRS.

6. Travel

Tax Deduction: Travel

Travel is another category that is heavily scrutinized, but it is still a great way to keep more of your money come tax time next year. Hotels, air fare, and 50% of meals can be written off for business trips. You can even extend your trip for sheer pleasure as long as the number of days spent on business is longer that the number spent just for pleasure. Local travel is discussed further under car-related expenses. Just keep in mind that travel and deductions related to your vehicle are the items most likely to get you audited by the IRS.

7. Child Care

Tax Deduction: Child Care

You can offer your employees up to $5,000 in dependent-care benefits. If your spouse is your employee, that $5,000 can be used for child care for your own children. These benefits are excluded from wages, so they are deductible for you as the independent contractor. The dependent care benefits are tax free for the employee, even if the employee is your spouse.

8. Cleaning Services 

Tax Deduction: Cleaning Services

Whether you have a home office or rent office space, having it cleaned is deductible. A cleaning company, maid service, or janitor can be used. If you would like to get more creative, you can pay your child to clean. You must be sure to pay them reasonable compensation for the work done. Keep in mind your children can also be paid for data entry, answering the phones, or other business related activities. Children under 18 are exempt from Social Security tax. They also are not subject to federal unemployment tax until they turn 21. The other benefit of hiring your child is that you can make a contribution to an IRA or a Roth IRA for them based on the wages you're paying them. Unless your child has a lot of unearned income, they will not owe income tax on the wages you pay them. This is a great way to lower the family's tax bill by making taxable income of the parent into untaxable income for the child.

9. Car Related Expenses

Tax Deduction: Car Related Expenses

Depending on how much record keeping you like do, this can be a big deduction. Many choose to use the standard mileage rate as it is the easier method, but it is a lower deduction. If instead you use the actual expense method, it requires more individual bookkeeping but it allows for higher deductions. Using this method, you deduct the actual costs incurred each year operating your car for work, plus you use the tax code schedule for depreciation and repairs. Your deductible costs include gas and oil, license fees, repairs and maintenance, insurance, and car wash costs. Whether you use the standard mileage rate or the expense method, tolls and parking can also be deducted. Just keep in mind that transportation write-offs are often audited by the IRS, so keep very detailed records. If the car is also used for personal use, you must keep track of the percentage it is used for business when calculating expenses.

10. Medical Plans 

Tax Deduction: Medical Plans

As an independent contractor, your health insurance is deductible. Other medical expenses, such as acupuncture, chiropractor appointments, eyeglasses, and nonprescription medications not covered by your health plan can also be written off. While being able to write off 100% of your health insurance is great, it can be taken one step further. If you hire your spouse, as was briefly mentioned under the child care deduction, you can provide family health insurance coverage to your employee. Under these circumstances you will be covered on your spouse's insurance plan while further reducing your taxable income.

Write Offs for Independent Contractors: Final Thoughts

There are lots of tax benefits of being an independent contractor, make sure to do your own research when estimating your future tax burden. Proper tax planning with a professional is the safest way to reduce your tax liability while ensuring you comply with applicable tax codes. Also make sure you keep detailed records of any possible write offs. Most importantly, be sure to hire, or, at the very least, consult a tax professional familiar with all laws associated with preparing taxes for independent contractors. While utilizing a tax preparer may seem like an added expense, keep in mind that you can write off what you pay for their assistance on the business portion of your taxes. 

300+ Deductions to Help you Chuck Norris Your Small Business Taxes

tax deductions

If man's best friend is dog, thAn business owner's best friends Are tax deductions.  

As a cloud-based accounting solution, we see the sad tale of business owners during tax season who wish they could go back in time and implement the things they didn't know. Don't be one of them—BOOKMARK THIS PAGE RIGHT NOW and check it once a year, a month, a week—whatever the hell you have to do to make sure you're doing everything you can to maximize deductions. Because if there's one thing all business owners can agree on, it's that capital is the lifeblood of business. So here they are, 300+ tax deductions that will make 2017 your best year yet. 

Auditing and Accounting Deductions

Coffee on a desk

1. Auditing of your books and accounts

2. Costs of bookkeeping

3. Costs of tax strategy preparation

4. Costs of preparing & filing any tax returns

5. Costs of investigation of any tax returns

6. Costs of defense against any IRS or state agency audits or challenges

7. Accounts receivable, write-offs (accrual basis only)

 

Advertising + Sales Deductions

New York Times Square

8. Achievement awards (requires plan) 

9. Longevity award

10. Safety award

11. Sales award

12. Advances made to employees or salespeople where repayment is not expected

13. Advances to employees canceled as bonus 

14. Ad analytics

15. Premiums given away

16. Newspaper

17. Magazine

18. Radio

19. Other media

20. Prizes & other expenses in holding contests or exhibitions

21. Contributions to various organizations for advertising purposes

22. Cost of displays, posters, etc. to attract customers

23. Publicity - generally speaking, all costs incl. entertainment, music, etc.

24. Christmas present to customers or prospects - de minims rule

25. Alterations to business property, if minor

26. Amortization

27. Attorney's fees and other legal expenses involving:

28. Tax strategy

29. Drafting of agreements, resolutions, minutes, etc.

30. Defense of claims against you

31. Collection actions taken against others

32. Any other business - related legal activity

 

Auto Expenses for Business Purpose Deductions

volkswagon van

33. Damage to auto not covered by insurance

34. Gasoline

35. Oil

36. Repairs and maintenance

37. Washing and waxing

38. Garage rent

39. Interest portion of payments 

40. Insurance premiums such as fire, theft, collision, liability, etc.

41. Lease payment

42. License plate

43. Driver's license fee

44. Depreciation

45. Wages of chauffeur

46. Bad debts. – if previously taken into income

47. Baseball/softball/ soccer team equipment for business

48. Board & room to employee:

49. All meals and lodging if for employer’s benefit

50. Temporary housing assignment

51. Board meetings

52. Bonuses as additional compensation to employees.

 

Building Expenses Used for Business Deductions

Painting the wall

53. Repairs to building

54. Janitorial service

55. Painting

56. Interest on mortgage

57. Taxes on property

58. Water

59. Rubbish removal

60. Depreciation on building

61. Heating

62. Lighting

63. Landscaping

64. Burglary losses not covered by insurance

65. Business cost of operating office

66. Business property abandonment

67. Business taxes - except federal income taxes

68. Cable service – business use

69. Cafeteria plan - requires written plan

70. Capital asset sale - losses

71. Car & taxi fares

 

Casualty Damage Deductions

demolition building

72. Bombardment

73. Fire

74. Storm

75. Hurricane

76. Drought Forest fire

77. Freezing of property

78. Impairment or collapse of property Ice

79. Heat

80. Wind

81. Rain

82. Charitable contributions

83. Checking account bank charges

84. Child care - requires written plan

85. Children's salaries

86. Collections expenses incl. attorney's fees

87. Commissions on sales of securities by dealers in securities

88. Commissions paid to agents

89. Commissions paid to employees for business purposes

 

Contribution Deductions (Deductible if Made to Organizations Founded for the Following Purposes, Subject to Some Limitations)

University Campus

90. Religious-Charitable

91. Scientific

92. Literary

93. Educational

94. Prevention of cruelty to children and animals

95. Convention expenses, cost of attending conventions

96. Cost of goods

97. Credit report costs

98. Day care facility

99. Depletion

100. Depreciation

101. Discounts allowed to customers

Dues Paid Tax Deductions

tax deductions

102. Better Business Bureau

103. Chamber of Commerce

104. Trade associations

105. Professional societies

106. Technical societies

107. Protective services association

 108. Education assistance – requires written

109. Embezzlement loss not covered by insurance

 

Employee Welfare Expense Deductions

birthday cupcakes

110. Dances

111. Entertainment

112. Outings

113.  Christmas parties

114. Shows or plays

115. Endorser's loss

116. Entertainment expenses

117. Equipment, minor replacements

118. Equipment purchases - may require capitalization & depreciation

119. Equipment repairs

120. Exhibits and displays, to publicize your products

 

Expenses of any Kind Charged to Business Deductions

suit and tie

121. Renting of storage space

122. Safe deposit boxes

123. Upkeep of property

124. Books to record income and expenses or investment income

125. Experimental and research expenses

126. Factoring

127. Fan mail expenses

 128. Fees for passports necessary while traveling on business

129. Fees to accountants

130. Fees to agents

131. Fees to brokers

132. Fees to investment counsel

133. Fees to professionals for services rendered

134. Fees to technicians

135. Fire loss

136. Forfeited stock

137. Freight charges

138. Gifts to customers – limit $75

 

Gifts to Organized Institutions Deductions

iglesia capilla

139. Religious

140. Charitable

141. Scientific

142. Literary

143. Educational

144. Group term insurance on employees' lives

145. Guarantors loss

146. Health insurance

147. Heating expense

148. Hospitals, contributions to

149. Improvements, provided they are minor Insurance premiums paid

 

Interest on Loans for Business Deductions

Wallstreet Man in Suit

150. On loans

151. On notes

152. On mortgages

153. On bonds

154. On tax deficiencies

155. On installment payments of auto, furniture, etc.

156. On margin account with brokers

157. Bank discount on note is deductible as interest

158. Inventory loss due to damages

159. Investment counsel fees

160. Lawsuit expenses

161. Legal costs

162. In defense of your business

163. In settlement of cases

164. Payment of damages

165. Lighting

166. Living quarter furnished employee for business’s benefit

167. Lobbying costs

 

Loss Deductions (Deductible if Connected With Your Business or Profession) 

Japanese Restaraunt

168. Abandoned property

169. Account receivable

170. Auto damage caused by fire, theft, heat, storm, etc.

171. Bad debts.

172. Bank closed

173. Bonds

174. Building - damaged

175. Burglary

176. Business ventures Capital assets

177. Damages to property or assets

178. Deposit forfeiture, on purchase of property

179. Drought

180. Embezzlements

181. Equipment abandoned

182. Forced sale or exchange

183. Foreclosures

184. Forfeitures

185. Freezing

186. Goodwill

187. Loans not collectible

188. Theft

189. Transactions entered into for profits

190. Maintenance of business property

191. Maintenance of office, store, warehouse, showroom, etc.

192. Maintenance of rented premises

193. Management costs

194. Materials

195. Meals, subject to limitations

196. Membership dues

197. Merchandise

198. Messenger services

199. Moving costs

200. Musician expenses

201. Net operating loss - may be carried back to previous years' income for refund and / or forward against future years’ income

202. Newspapers

203. Office expenses, including:

204. Wages

205. Supplies

206. Heating and lighting

207. Internet service

208. Telephone

209. Repairs

210. Refurnishing, minor items

211. Decorating

212. Painting

213. Office rent

214. Office rent - portion of home used for business

215. Passport fees

216. Pension plans - must be properly drawn

217. Periodicals

218. Physical fitness center

219. Plotting of land for sale

220. Postage

221. Professional society dues

222. Property depreciation

223. Property maintenance

 224. Property repairs

225. Publicity expenses

Real Estate Expenses of Rental or Investment Property Deductions

Real Estate

226. Taxes of property

227. Insurance

228. Janitorial services

229. Repairing

230. Redecorating

231. Painting

232. Depreciation

233. Supplies

234. Tools

235. Legal expenses involving leases, tenants, or property

236. Bookkeeping

237. Property management

238. Utilities

239. Commissions to secure tenants

240. Maintenance - heating, lighting, etc.

241. Advertising for tenants

242. Cost of manager's unit, if on site and at employer's convenience

243. Rebates on sales

244. Refunds on sales

245. Rent settlement – cancel lease

 

Rental Property Expense Deductions

san fransisco homes

246. Advertising of vacant premises

247. Commissions to secure tenants

248. Billboards & signs

249. Rent collection expense

250. Business property

251. Parking facilities

252. Safe deposit boxes

253. Taxes paid by tenant for landlord

254. Warehouse and storage charges

 

Business Property Repair Deductions

construction site

 

255. Alterations, provided they are not capital additions

256. Casualty damages, replaced, provided they are not capital additions

257. Cleaning

258. Minor improvements

259. Painting

260. Redecorating

261. Repairing of furniture, fixtures, equipment, machinery, and buildings

262. Roof repairs

263. Royalties

264. Safe deposit box rental

265. Safe or storage rental

266. Salaries

267. Sample room

268. Satellite service – business use

 

Selling Expense Deductions

business meeting

 

270. Commissions and bonuses

271. Discounts

272. Entertainment

273. Prizes offered in contests

274. Publicity and promotional costs

275. Rebates

276, Services, professional or other necessary

277. Social Security taxes paid by employers

278. Software

279. Stationery and all other office supplies used

280. Subscriptions to all trade, business, or professional periodicals

281. Supplies, office or laboratory

282. City gross receipts tax

283. City sales tax

284. State gross receipts tax

285. State sales tax

286. State unemployment insurance tax

287. Federal Social Security tax

288. State income tax

289. State unincorporated business tax

290. Real estate tax

291. Tangible property tax Intangible property tax

292. Custom, import, or tariff tax

293. License tax

294. Any business tax, as a rule

295. Auto registration tax

296. Safe deposit tax

297. Membership dues tax

298. Gasoline tax

299. Admission tax

300. Telephone

301. Traveling expenses (includes: meals, taxi fare, rail fare, airfare, tips, telephone, telegrams, laundry and cleaning, entertainment for business purposes)

302. Unemployment compensation taxes paid by employer

303. Uniforms furnished to employees

304. Wages

305. Website hosting expenses

306. Workmen's compensation fund contributions

 

Disclaimer: This is not an all inclusive list. None of these statements are meant to be taken as guarantees for your tax returns. The IRS is its own institution with its own discretions and powers of interpretation. This information is not intended to provide specific accounting advice tailored to your unique situation, or to address specific tax strategies. Please consult with your tax advisor to supplement and verify what would be best for your circumstances. 

 

 

 

 

 

The Science Behind Payroll Taxes

Payroll

If you’ve ever looked at your W2, you’ve probably noticed the boxes on the right that record the taxes withheld from your wages.  After you spend a few moments daydreaming about what you could have done with that extra cash, you may wonder how those amounts are calculated.  Is there even a calculation?  Or are those amounts just arbitrary numbers the IRS generates to further baffle taxpayers?  

Of course, for as much as we’d like to take a cynical view of the IRS, there is in fact a science behind the numbers. By better understanding payroll taxes, you'll be able to better understand your obligations as a business owner or employee. We will start with the 3 main withholding taxes. (A withholding tax is what you as a business owner is obliged to withhold from employees and pay to the IRS.)

The 3 Main Withholding taxes 

  • Federal Income Tax withheld
  • Social Security Tax withheld
  • Medicare Tax withheld

(The last two of these make up what’s known as the FICA withholding amounts.) 

Federal Income Tax

When an employee is first hired, many companies require them to fill out a W4. The W4 asks for things like filing status, dependents, child care expenses, additional taxes. The information taken from the W4 is what impacts your W2 federal income tax calculation; which is more like an estimation. Just like businesses are supposed to make estimated tax payments throughout the year, employees pay their estimated income taxes through their W2 income tax withholdings.  It’s not exact because the true income tax withholding amount is only set in stone when the tax return is finished and submitted.  It’s possible your W2  income tax withholding was too low throughout the year, meaning you’d owe taxes. Or maybe it was too high, meaning you’d get a refund. You can always adjust this amount by contacting your payroll specialist.  

FICA Taxes

FICA stands for Federal Insurance contributions Act.  It includes the taxes paid by both employees and employers toward Social Security and Medicare which provide benefits to the disabled, retirees, old-age, disability insurance among other groups and health programs.  15.3% is the number to remember regarding FICA tax.  Below you’ll see how that percentage is broken down.  

Social Security Tax Withheld  

6.2% of an employee's gross wages is paid to social security by the employee.  Another 6.2% is paid to social security by the employer.  Together, they make up a 12.4% contribution to social security.  The employers obligation to pay this portion of the tax ends when the employee earns total wages of more than $118,500 annually.  

Medicare Tax Withheld

Similar to social security, payments to Medicare are split up between the employee and the employer.  1.45% is paid by the employee and 1.45% is paid by the employer.  Together this makes up 2.9%.  There is no ceiling on this tax.  Regardless how much an employee earns, Medicare will always be separated.  

Adding the 12.4% so social security and the 2.9% to medicare equals the magic number 15.3% FICA tax mentioned earlier.  

Next time you look at your W2, you’ll be able to use these percentages to see just how the amounts were calculated.  

Payroll Taxes relating to Contractors and Employees

Knowing the payroll calculations can help you understand other important issues relating to 1099 contractors or W2 employees.  If you have paid a non-employee more than $600 to perform work for you, then you must send him/her a 1099 that will be used as documentation for the contractor’s tax return.  You get to deduct this entire payment on your taxes and you don’t need to share the FICA obligation.  The contractor is fully responsible to pay the 12.4% Social security and the 2.9% Medicare.  From a tax perspective, it is more beneficial for the employer to hire contracted work to avoid extra FICA taxes.  However, there are strict guidelines that enforce the designation of employee or subcontractor which you can view here.  

Why Do We Pay Taxes?

reasons why we pay taxes

A Brief Overview of the American Tax System

We all pay them and we all dread them—but how many of us really understand why we have to pay taxes? 

Article 1 Section 8 of the United States Constitution states, “The Congress shall have the Power to lay and collect Taxes, Duties, Imposts and Excises to pay the Debts and provide for the common Defense and general Welfare of the United States.” 

What falls under the definition of “general welfare” has been hotly debated. Republicans and Democrats often disagree as to why we pay taxes, and what taxes should be used for. Even the constitutionality of taxes has been in dispute.

The IRS counters this on their website, stating, “There have always been individuals who argue taxes are illegal. They use false, misleading, or unorthodox tax advice to gain followers. The courts have repeatedly rejected their arguments as frivolous and routinely impose penalties for raising such frivolous arguments."

"Why do we pay taxes?”—A Timeline.

  • Originally the US government relied upon internal taxes on certain items (similar to the VAT in Europe). The cost of the War of 1812 required a federal sales tax on certain luxury items. But all internal taxes were dropped in 1817 in favor of tariffs on imports to support the federal government. 
  • The first federal income tax came about in 1862 in order to fund the Civil War. Along with it came the inheritance tax. And although all citizens have to file their federal taxes—not all states require them. 
  • The inheritance tax was later removed (1872) and a few years later the Supreme Court declared income tax unconstitutional. However, in 1913 the 13th amendment was passed, making the income taxes both permanent and legal. 
  • Since then rates have gone up and down several times since 1913. The highest raters ever were in 1945 at 94% That’s 94 cents of every dollar! (The lowest rate that same year was 23%.) 

"Why do we pay taxes?”—A Philosophy. 

There are some who would argue that Filing Form 1040 violates the Fifth Amendment which states:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

To which the IRS responds, “The courts have consistently held that disclosure of the type of routine financial information required on a tax return does not incriminate an individual or violate the right to privacy. Also, courts have consistently found that the First and Thirteenth Amendments do not provide rights to refuse to comply with federal tax laws."

Originally the Federal Government was created with the idea of serving the singular purpose of protecting the rights of the people. With a complex international community that has to consider such things like nuclear warfare, cyber attacks, terrorism, viruses and other such threats—you'd be be hard pressed to find many that would find disagreement with the necessity of taxes to this end. However, the real dispute occurs when government uses taxes to pay for things that ride the line (or fall outside) of protecting our rights. Healthcare, social services, education to name a few—all end up on the debate ticket come election season. 

The dividing point to many of these questions comes down to one thing—philosophy. Do you believe that government should account for more than is seen as “essential” to protect our rights? And if you don’t, what do you believe falls under the definition of “essential” or “constitutional rights”? 

 Adam Smith

Adam Smith

Whoever said philosophy has no effect on the real world, is sorely mistaken. Adam Smith (who is thought to be one of the forefathers of the American Tax System) studied social philosophy at the University of Glasgow and Oxford. His infamous book “The Wealth of Nations” is the work that introduced the concept of the “Invisible Hand”. The Invisible Hand is a philosophical concept that the whole (nation) unintentionally benefits from the self-interest of the individual (the citizen). This and his other famous dictum “The Four Maxims” have *big suprise*—also been hotly debated topics in regards to intent. 

The Four Maxims are as follows: 

Equity: The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
Certainty: The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.
Convenience: Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it.
Economy: Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the publick treasure of the state.

“Why do we pay taxes?”—Schools of thought.

When it comes to the ethics of taxation there are three main approaches that underly American ideology and help us understand why we pay taxes". They are as follows:

Utilitarianism, which tells us to aim for the greatest total happiness across the population. In the economic sphere, we can interpret ‘happiness’ as the satisfaction of our desires; and so utilitarianism as aiming for maximum satisfaction of desires.
Deontology, which bases ethics on the idea of duty.
Virtue ethics, which focus on the virtues we should have, and on what constitutes a virtuous life. A broad conception of the virtues must be used here, encompassing not only virtues such as honesty, but also virtues such as using one’s talents and leading a fulfilled life.

Conclusion:

As the world becomes increasingly dangerous, the need for funds to “protect” the rights of the constitution will become increasingly complex. Simply put, there will be few who argue against the necessity of modern taxation. However, there are a plethora of verticals for which our income is used that do not clearly fall under the definition of "necessary".

This point of cataclysmic divide boils down to a matter of perspective. It’s this very ambiguity that politicians use to their advantage when it comes time to head to the voting booth. The answer to “why we pay taxes” is rather simple—in order to survive as a nation. But the answer to “What should ethically be funded with tax money?” and “How much should we pay?” are entirely different questions that boil down to philosophy, perspective, and an understanding of the US constitution.  

Tax Evasion vs. Tax Avoidance

tax evasion

In the world of finances, tax evasion and tax avoidance are two terms that often get confused and yet have completely different meanings. 

Tax Evasion

Simply put, the term tax evasion means not paying the taxes that you owe. Penalties for this type of infraction can range anywhere from fines to jail time depending on intent. Intentionally foregoing the payment of your taxes will most likely result in hefty punishment.

Don’t believe us? Go read about actor Wesley Snipes' recent 3 year stint in prison after opting out of paying his taxes. 

Important things to remember when trying  to “Avoid” Tax Evasion

  • Declare your independent contractor’s income
  • Don’t inflate business expenses
  • Report income earned in other countries
  • Don’t declare personal expenses as business expenses

Tax Avoidance

Tax avoidance on the other hand, is when you arrange your income in a manner that legally allows you to pay the lowest amount of taxes. And yes, this is legal. In fact, there’s an entire industry built around this concept—it’s called tax consultancy—something we love helping clients with here at Bookly

Speaking on the constitutionality of the matter, Judge Learned Hand said:

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands. 

In most cases, tax avoidance is more applicable to higher income earners. There are less ways for low income individuals to avoid payment of taxes. This fact has been at the helm of much political debate—something we’ll leave to the pundits. 

Methods of Tax Avoidance

  • Deferring income (401k)
  • Getting income through Capital Gains
  • Using the primary residence capital gain exclusion to its full effect

Federal Regulations & Your Business

federal regulations

The federal government does not regulate every industry, however, some companies may have to satisfy some requirements at the federal level. To ensure that your business complies with government rules, it is a good idea to familiarize yourself with the requirements in your industry. 

Here are some links to help you get started: 

Tax Obligations for Business Owners.

Small business owners need to understand their federal tax responsibilities. The IRS publishes tax information for businesses

Labor Laws.

If you plan to hire employees you will be responsible for complying with numerous labor laws regarding wages, benefits, working conditions, and more. To help understand these requirements the U.S. Department of Labor publishes an Employment Law Guide

Posting Requirements.

As a business you must also display certain posters, disclaimers and information regarding worker's rights published by the Occupational Safety and Health Administration, the Employment Standards Administration, and various other departments. The U.S. Department of Labor details the posting requirements

Industry Regulations, Licensing & Permits.

Typically specific industries (Transportation, Construction, Farming, etc.) have special requirements for conducting business. If a federal agency governs your business activities, check with that agency for more information about your requirements. For an alphabetical listing of federal agencies, visit www.usa.gov

4 Things you Should do NOW to Prepare for Taxes Next Year

woman with glasses

Tired of always being stressed about taxes? Coming to the realizing that “There IS a better way” is the first step to taming tax time. The next step is to figure out what you can do now, months ahead, to build up to a stress free April 15th. 

Getting ahead of the game can lead to a less taxing tax time with fewer mistakes, meaning your business and you are much happier. Here are a few easy things you can do now for a less taxing tax time in 2017: 

1. Organize Your Paperwork

You typically wait until April 14th to even think about gathering all your necessary materials. After all, you don’t file until April 15th, so why rush things? The trouble with this thinking is you’re setting yourself up to have problems right off the bat. Instead of waiting around and rushing at the last minute, get all your paperwork together right now, well before the New Year hits. Find a good spot that works for you – a folder system, or by digitizing all your receipts and forms with a company like Shoeboxed. Of course you won’t receive tax forms from clients or banks until next year, but getting your system organized now will make it a snap to fit those forms in! 

2. Brush Up on Deductions

There are undoubtedly a ton of deductions you need to be taking at tax time. The problem is you wait so long to do your taxes you don’t have time to properly research them, so you just skip this section. This is literally like leaving money on the ground and walking away. Take time now to brush up on these deductions. Home office, mileage, office expenses – there are so many for you to take that it’s worth it to look at everything way before it’s time to file. This way you don’t miss anything and you can save a ton of money! 

3. Take Advantage of Tax Breaks

We mentioned deductions earlier, and hopefully you already have some to utilize. Even if you don’t, though, you have a couple months before the end of the year. It’s time to take advantage of the tax breaks available to you. For instance have you given to charity this year? If not, there’s still time. There are also tax breaks for things like making your home “green” or when you contribute to a retirement account. Now’s the time to make these changes so you can get some help in 2015. 

4. Remember There’s an App for That

Feel like everything is getting away from you? Wish you could get organized but having trouble keeping up with your basic recordkeeping, much less your taxes? Luckily, you have options. Bookly can help you with your small business accounting. 

By freeing this up you have more time to do other things like get your tax documents together and figure out deductions. This can also aid you going forward and instead of always worrying about your finances you can concentrate on growing your business. Bookly is here to help get your books in order, discover those hidden tax deductions, and keep you up to date so that tax time doesn’t sneak up on you. Try us today and make tax time less taxing!

Can I Deduct my new Armani Suit as a Business Expense?

can I claim a suit as a business expense

Now that you’re a small business owner, it’s time to step up your game when choosing clothing. After all, you can’t meet potential clients for coffee wearing break-away sweat pants. So you head out to the mall to pick up an Armani suit or two. Since you’re doing this for your business, it’s tax deductible. Right? Sadly, the IRS small business deduction for clothing doesn’t work like that. 

Can I deduct Clothes as a Business Expense?

It's true that you can deduct the amount you spent on the purchase and upkeep of work clothes, but your clothing must meet two requirements before you can claim the costs as an “other expense” on the Schedule C tax form where you report self-employment income and expenses: 

• You must wear them as a condition of your employment. 

• The clothes cannot be suitable for everyday wear. 

Taking a look at these conditions, it looks like you won’t be able to write off those designer suits, since they wouldn’t be distinctive enough to meet these requirements. So no, you can’t write them off. Are your clothes a requirement for your job? But wait, there’s more. Just because some clothing might be distinctive, that is not enough for the write-off. Your employer must specifically require you to wear it as part of your job. 

Additionally, you cannot make the claim that since you do not wear the clothing away from work, you should be able to deduct its costs. Part of the distinctiveness test is that the clothing must not be suitable for taking the place of your regular clothing. Say, for instance, that you are a real estate agent. You probably dress up a bit to show properties to your clients and to attend open houses. If you were walking down the street wearing the Armani suit you wore to a showing earlier in the day, would someone be able to tell you’re a real estate agent for a particular agency? Probably not -- so the clothing would not be deductible. But let's say you’re in the medical profession and wear scrubs. You probably wouldn’t wear your scrubs (given a choice) out to dinner or to the movies. And other people would likely identify you as a member of the healthcare field because of your clothing. So, read on… Yes, this is clothing you can deduct. 

Final Thoughts on Claiming Clothes as a Business Expense

The cost of some types of protective clothing worn on the job -- like safety shoes or boots, safety glasses, hard hats, and work gloves -- can be deducted on your return. You would have to list your profession on your return as the type of work that requires this kind of clothing, such as if you were a carpenter, electrician, steamfitter, someone who works with chemicals, or a fishing boat crew member. The rules on when you can deduct the cost of work clothing can be confusing. If you do run across something that you don’t understand, check with a good accountant who can advise you. It is better to understand all your options rather than making a rash decision about a potential tax deduction.

Why to Turn to a Professional When the Tax Man Comes Calling

work crew

A note from Bookly CEO Zach Olson:

I remember how naïve I was my first year in business. As a sole-proprietor, I thought I could handle my small business taxes all by myself. It was just filling out a Schedule C along with my form 1040, right? How hard could that be?
Well, as it turned out, a lot harder than I thought. I did end up filing my own taxes that year, but I have a feeling that if I went back and looked at that old form 1040, I wouldn’t be too happy with myself. I’m sure I missed a lot of deductions I could have taken, and I’m sure Uncle Sam is happily spending money that could have come back to my pocket. 
These days, I turn to a certified public accountant to take care of my taxes. Why hire a professional? These are just a few of the good reasons I’ve found: 
1.) Peace of mind – With a professional you know that your taxes and other accounting duties are going to be taken care of right, and on the first go round. If left to my own devices, I’ll procrastinate until April 14th to start fumbling around for my tax paperwork. I have peace of mind knowing my tax return is in a pro’s hands. 
2.) Tax breaks – When’s the last time you randomly read about a new tax break for small business owners? (Or parents? Or students?) You may have seen something in passing on the news, but who has time to delve into the annals of the IRS and really dig out the nitty gritty? Your accountant, that’s who! A professional keeps abreast of the tax breaks available to their clients, so you can spend your time doing other things – like running your business. 
3.) Mistakes are costly – Have you ever made a mistake on your taxes? …Are you sure about that? I, for one, have had to shame-facedly file a 1040X on at least one occasion. A pro, though, will be less likely to make a mistake on your taxes. And if, for some reason they do, they will often fix it for you at no charge. No more wasting your time making your tax return and checking it twice. 
4.) In case of audit – If the government does come calling, you want someone on your side who knows what she’s doing. Mistakes you make during an audit – such as providing too much information – could compound your trouble. Turn to a professional should you ever find yourself the subject of an audit. 
5.) Keeping up with changes – “The mileage rate is 55 cents per mile right? That sounds about right,” you think to yourself as you jot down a note in your bookkeeping app. Except that the amount you can deduct per mile driven for business actually changes per year, and sometimes more often than that. (In fact, the current standard mileage rate is 56 cents!) Little things like this change up from year to year, but they can add up to big mistakes on your taxes. This is why I let an accountant take care of it. 
Personally, I think hiring a professional to help me with my taxes beats tearing my hair out over esoteric IRS instructions and obscure tax law changes any day. Do you use an accountant, enrolled agent or other tax preparer to help with your taxes? Tell us in the comments!

Tax Deductions you Probably Aren't (but Should be) Taking as a Freelancer

hipster photographer girl

Paying taxes as a freelancer can be a particularly painful affair. In addition to paying all of the income taxes that regular employees have to pay, freelancers have the additional burden of paying the approximately 15.3 percent “self-employment tax”, which consists of the social security and medicare taxes that normally get paid by an employer. In some states, this means that freelancers can pay more than 40 or even 50 percent of their income in taxes!

Fortunately, freelancers have the ability to offset these taxes by deducting “legitimate business expenses.” While some of these expenses, like office supplies, are obvious, there are many others that are less apparent, and often go unused by freelancers. Remember, taking advantage of these business deductions is not in any way immoral or illegal; they are legitimate deductions that you should be taking.

Phone bills

Most freelancers are aware of the fact that businesses can deduct landline and mobile phone bills for their employees. However, many freelancers are unaware of that fact that they can deduct a portion of their personal phone bill as well. If you use (and can prove that you use) your personal cell phone for business purposes, you can deduct a portion of the bill that is equivalent to the amount the device is used for business (business use percentage). Depending on your phone plan, this can easily add up to hundreds of dollars per year.

Electronics Purchases

If you need to use a tablet, laptop, or other electronic device for business (and again, can prove the legitimate business need), you can deduct some or all of the cost of the device. For some devices, you can choose to deduct the entire cost of the device in one tax year (section 179 deduction) or deduct the depreciation over a set number of years. Either way, you’ll be able to cut your tax bill and stay one step ahead of the competition. 

Industry-specific 

If you’re like most freelancers, what you do for a living is probably closely related to your personal interests. You might already have (or be considering) subscriptions to websites, SaaS tools or other subscription-based services. All you have to keep in mind is how the IRS defines a deduction, an expense is ordinary if it is common and accepted in your trade, business, or profession. An expense is necessary if it is appropriate and helpful to your business. So, if the service in question is directly related to the industry you freelance in, you can deduct the entire cost from your taxes.

Safe Harbor home office

Last year the IRS released a "safe harbor" method that may make home office deductions more accessible. The new procedure, outlined in Revenue Procedure 2013-13, lets you deduct a flat rate of $5 per square foot, for up to 300 feet of qualifying office space. You'll still deduct your mortgage interest and property tax attributable to the space on Schedule A as usual. But you won't have to calculate any actual expense or depreciation deduction for the space. On the downside, if your simplified home office deduction reduces your income below zero, you can't carry if forward to future years, as you can with the regular deduction but you can determine year-by-year which home office deduction method to use. You don't have to elect one and lock yourself into it for the future. 

These are just a few of the ways you can offset the tax burden of being a freelancer. As a small business owner there are hundreds of potential tax deductions, that is why it is crucial to take the time to better understand what you can or can't do before you do it. 

Make sure to speak with a tax professional about whether or not you qualify for these deductions, and if there are any other deductions you may be missing out on. 

Beware! Tax-Related Scams Small Business Owners Should Watch Out For

hackers

The holiday season isn’t only the most wonderful time of the year for you, it can be the time when scammers and spammers come out to play. 

I recently read an article from TaxGirl Kelly Erb on a new phone scam targeting U.S. taxpayers. This detailed scam involves a series of phone calls purportedly from the IRS telling the taxpayer that his identity has been stolen and asking for identifying details to aid in the investigation. Of course, the scammers then use that identifying information… to steal the unwitting taxpayer’s identity. 

This new version on the same old scam got me thinking about other financial frauds I’ve seen over my years writing about small business and taxes. 


Why Financial Scams Work 

According to a 2013 survey by the FINRA Investor Education Foundation, 8 in 10 survey respondents were approached about some kind of financial fraud. And 11% of respondents actually lost money to fraud. 

Most of the time, fraud occurs because of totally understandable ignorance. If you’ve never had to deal with the IRS in your entire life, how would you know that they normally contact you with important information via U.S. mail and not a phone call? Or if you’re fairly new to email, that message from your bank asking you to click a link and give them your private details could be very tantalizing. 

Fraudsters also play on fear. There’s a reason that they use email subject lines like “Your identify has been stolen!” They want to get your guard down and panic you so that you throw your good sense out the window as they lure you farther into the scam. 

Sadly, scammers also feed on desperation. In a bad economy, a good person struggling financially can be tempted by offers of money that seem too good to be true and that they normally wouldn’t look twice at if not in a place of financial need. 

Be suspicious of easy money and anyone who asks for your identifying information out of the blue and you’ll be inoculated from most fraudsters. 


Common Scams Small Business Owners Face 

Email Phishing Scams – Beware of emails that appear to be from your bank or the IRS asking for personal information. Most times, these emails will tell you to click on a link and enter identifying data, like your social security number. Of course, the link usually goes to a site set up by the fraudster, who then uses it to collect the data he can later use to steal your identity. If you ever receive a communication from the IRS or a financial institution through email, don’t click any links. Instead contact the purported sender yourself to find out if the communication is legitimate. 

Tax Preparer Fraud – This scam occurs when a less-than-professional tax prepare claims she can get you a huge tax refund. Often, you’ll notice that she receives a percentage of your return, so, of course, it’s in this fraudsters best interest to take every outrageous deduction and tax break she can find. She’ll also often fail to give you a copy of the return, or insist that the refund be deposited into her bank account first. Make sure your tax preparer is a professional and beware of too-good-to-be-true tax refunds. 

For more info about these and other common scams check out the IRS’s common scams page or their Dirty Dozen Tax Scams list for 2014. 

 

What to do When Your Tax Extension Comes Due

man in cafe

Every year many Americans find that they simply don’t have time to gather up last year’s information by April 15th, and they file for a 6-month tax extension. Small business owners, especially, may ask for a tax extension because they have to gather up income, expenses, various 1099’s, and other vital information before filing. 

If you were one such busy small business owner this year, watch out! That six months that seemed so far away back in April is quickly approaching. 

The deadline to file your taxes if you filed for a tax extension is October 15th! Are you ready? 

Your Taxes Are Due. Now What? 

Fortunately, you’ve now had extra time to gather your 2013 income and expenses, clarify any mistakes and make sure that all of your books are in order. Go over your business’s numbers one last time, and make sure you’ve gathered all pertinent paperwork. If you do your taxes on your own, now is crunch time! 

Accountants aren’t nearly as busy this time of year as they were in April, though they may be dealing with other clients like who filed an extension. If you have an accountant prepare your books, you should call him or her right away to make sure you’ll meet your deadline. Unfortunately, this six-month extension is the only one you get! If you’re any later, you’ll see fines and penalties. 

Also, while you didn’t have to actually file your income tax return in April, you did have to pay the amount you thought you owed. So when you finish calculating your returns you may find that you either owe more in taxes or you will get a refund. 


How to Avoid Tax Extensions in the Future 

There’s no shame in filing for a tax extension. Many small business owners’ taxes are complicated, and it takes time to get them in order. That said, isn’t it nice to get this yearly burden over with without it chasing you almost to Halloween? 

To help you prepare for next year, start a system to get your own books in order. Use a service like Bookly to help you keep track of all of your income and expenses. 

Establish a relationship with an accountant and meet with him or her at least annually to go over your books and any changes that might affect your tax situation. Set yourself a deadline – such as March 15th, to get your taxes in order and to your accountant. 

By the time 2015 rolls around, you’ll be less stressed about your income tax situation! 

Audited? Don't Panic! Here's How to Handle it.

startup hub

Nothing strikes fear into the hearts of small business owners quite like the a-word. Whether it’s the IRS or state taxing authorities, having someone tell you they want to audit your records is a fraught time even for the most organized business owner.

You think you filed your tax returns correctly, but what if you made a mistake? Could you have to pay a huge penalty? Could you even go to jail? 

Unfortunately, small business owners are a bit more likely to be audited than the general public because they self-report info on the Schedule C. It’s tempting to panic when you see the word “audit” but don’t. Just like with many big, bad boogeymen, this one isn’t as scary as it seems once it knocks on your door. 

A FEW TIPS TO HELP YOU HANDLE YOUR AUDIT WITH FINESSE... 

READ THE LETTER CAREFULLY

Think of an auditor as a man in a black suit and dark sunglasses whisking you away to a non-descript office complex to go over your entire life? Believe me! It isn’t as bad as all that. 

In fact, the vast majority of audits are carried out via the U.S. mail. In fact, the IRS will never call or email you, so if someone claiming to be from the agency contacts you in any form other than a letter, be wary. 

If you do get a letter, keep in mind that most times, the IRS is only auditing a portion of your tax return. That said, read the letter carefully. In most cases, the IRS simply wants clarification on one part of your tax return. Once you have answered their request they will let you know in writing what they’ve decided, and you even have a chance to appeal. See, that wasn’t so scary? 

Gather Documentation 

If the IRS or your state’s taxing authority comes calling, be prepared to back up your tax claims with documentation. If the audit is mileage related, for example, be prepared to show an auditor your mileage log. 

Do be careful about what you show an auditor. Only give them enough information to answer the question they asked. If you offer up more information, such as your whole “Taxes 2012” file, they are allowed to expand the scope of the audit. And nobody needs more trouble!
From there, be sure to send in any requested documentation by the deadline listed on your letter. 

Watch for Red Flags

If you must meet with an auditor, do not meet with him or her at your home. Instead request to meet at a local tax office or even, if you have retained one, your tax attorney’s office. 

Before you meet the auditor, know your Taxpayer’s Bill of Rights. If you feel at any time like the audit is going badly, you can request to pause and consult with an attorney. If the auditor mentions serious crimes, such as “tax fraud” then it’s in your best interest to consult an attorney. Fortunately, when you’re a small business owner simply trying to do the right thing you likely won’t run into such a dire predicament. 

 

Transform Sales Tax From an Hours Long Ordeal to a One-Click Move

hipster startup

If you were to put together a sales tax filing to-do list, it would probably look something like this:

1.) Figure out which states you have sales tax nexus in (for Amazon sellers, this can be 14 states and counting plus your home state) 

2.) Register for a sales tax permit in those states 

3.) Make sure you’re collecting sales tax from buyers in each of those states within all the platforms you sell on 

4.) Figure out when to file in those states 

5.) Figure out HOW to file in those states – paper? Internet? 

6.) Compile how much sales tax you collected in each state over each period. This could include pulling and compiling reports from all the platforms you sell on, from FBA to eBay to your own website 

7.) For destination-based sales tax states, figure out how much sales tax you collected in each jurisdiction in that state, plus deal with any special jurisdictions 

8.) Actually file sales tax! 

This is an 8-step checklist, and none of these steps are any fun. Worse for a business owner, none of these steps are making you money! Luckily, there is now a much easier way to deal with sales tax with TaxJar. 

1.) Easily integrate one time with the platforms you sell on, like FBA, eBay, Square, PayPal, Bigcommerce, Shopify, and others so you can see how much sales tax you’ve collected at a glance. 

2.) Show you how much sales tax you actually collected vs. how much you should have collected 

3.) Allow you to tell TaxJar when you started having sales tax nexus in a state so you don’t remit too much sales tax to any given state 

4.) Remind you when your sales tax filings are due 

5.) Give you a handy report with all the information you need to fill out your sales tax returns. Even in those pesky destination-based states!

But today, we’re happy to introduce something even better–we'll file sales tax for you.
That’s right, as of today TaxJar will now file your sales tax returns for you in 26 states and counting.

You enroll in AutoFile from TaxJar and we do the rest. 

This includes:

1.) Emailing you and letting you know how much you owe to each state 

2.) Filing your sales tax return for you 

3.) Paying the amount you owe directly from your bank account 

4.) Confirm when your AutoFile is complete 

This means no more logging into your state’s department of revenue, filling out long sales tax returns, whipping out your credit card, and in general spending hours doing what TaxJar can do for you in minutes. 

Let us handle filing your sales tax for you so you can get back to doing what you do best. Try a 30-day free trial of TaxJar and see how much time you save on sales tax!

Quarterly Estimated Tax Payments Explained

white board instructor

There are a lot of upsides to being a small business owner–fun, flexibility, the chance to pocket your profits. But there are also downsides, and one of those is that you (unlike your neighbor with the plain ol’ W-2 job) get to deal with Uncle Sam multiple times per year for fun things like quarterly tax payments

What are quarterly estimated taxes?

The U.S. is a pay-as-you-go tax system. This is why, when you worked for an employer, you probably noticed that they probably took taxes out of every paycheck. The problem is, when you’re self-employed, you no longer have an employer to take the taxes out of your check, but Uncle Sam (and, if you live in a state with an income tax, your state’s taxing authority) still want their money. 

Because of this, the government asks that small business owners pay quarterly tax payments four times a year.

Quarterly Tax Payment Due Dates:

1st Quarter: April 15th 

2nd Quarter: June 15th

3rd Quarter: September 15th

4th Quarter: January 15th

How much do I owe for my quarterly tax payments? 

Ideally you will pay, throughout the year, the exact amount in taxes you will ultimately owe on April 15th. Of course, exactly how much profit you will make is almost impossible to determine, so that’s why these are “estimated” taxes. 

First off, if you don’t expect that you will owe more than $1,000 in taxes in April, then you don’t have to make quarterly tax payments. This may occur because your business isn’t profitable yet, or because you or your spouse also have taxes withheld from a W-2 job which covers your tax burden. 

The IRS provides form 1040-ES to help you figure out just exactly how much you owe each quarter. Don’t worry if you’re a little off – you’ll either have to pay a little more or a little less at the end of the year. If you pay far too little, though, you can be penalized. 

How to Pay Your Quarterly Tax Payments

 Via  Giphy

Via Giphy

If you are self-employed and think you'll have to pay at least $1,000, or a corporation who thinks you'll owe at least $500 in taxes you will most likely have to make quarterly tax payments. 

According to the IRS website:

If you are filing as a sole proprietor, partner, S corporation shareholder and/or a self-employed individual, you should use Form 1040-ES, Estimated Tax for Individuals (PDF), to figure and pay your estimated tax. For specific information on how to pay online, by phone, or by mail, refer to the section of Form 1040-ES titled "How to Pay Estimated Tax." For additional information on filing for a sole proprietor, partners, and/or S corporation shareholder, refer to Publication 505, Tax Withholding and Estimated Tax.

If you are filing as a corporation, you should use Form 1120-W, Estimated Tax for Corporations(PDF), to figure the estimated tax. You must deposit the payment using the Electronic Federal Tax Payment System. For additional information on filing for a corporation, refer to Publication 542, Corporations.

What happens if I don’t pay quarterly estimated taxes? 

If you don’t pay quarterly estimated taxes, or pay far too little, you can be penalized. 

One smart way to avoid penalties on quarterly tax payments is to pay at least the same amount you owed in taxes form last year. For example, if you owed $2,000 in taxes last year, if you make four quarterly estimated tax payments of $500 throughout this year, you should not be penalized. Do keep in mind that if you make much more in profit this year than last year that you still might find yourself paying a large tax bill in April. 

 

This is not an all inclusive treatise of quarterly tax payments. For further reading we recommend you visit the IRS's Estimated Taxes page.