Yes. You are responsible for reporting all of your income, regardless of whether it is reported on a W-2 or 1099. This includes work you perform for cash. Failure to report all income could result in penalties.
The law says that a taxpayer is required to pay either 110% of the previous year’s tax or 90% of the current year’s tax in equal payments throughout the year. There are two ways to pay income tax. You can choose to withhold payments through your payroll checks, or you can pay quarterly estimated income tax payments with Form 1040-ES.
Payroll tax withholdings are paid equally throughout the year regardless of when the actual withholdings occurred. Quarterly payments must be made equally before each deadline to avoid penalties.
Self-employed individuals usually make estimated quarterly tax payments based on 110% of the previous year’s tax because 90% of the current year’s tax is more difficult to predict.
Yes. If you are ever audited, the IRS will ask you to produce a contemporaneous record documenting where you drove, when you drove, the mileage and the purpose of the business trip. This requirement exists for both vehicles owned by the business and vehicles that you personally own that were reimbursed using the standard mileage rates. You can read our blog or contact us to learn more about tax audits and what to do if you’re facing one.
Like many tax situations, the circumstances and financing terms available dictate the net benefit or cost of leasing versus purchasing a vehicle. Generally, trucks and SUVs are more tax-friendly when purchased because they depreciate faster. Smaller vehicles like sedans may be better to lease since the lease payments can be deducted and may be larger than the allowed depreciation. You should also keep in mind how many miles you plan on driving the vehicle, since putting on too many miles on can depreciate the value.
We recommend negotiating the best lease and purchase price with the dealer. Then, consult with our team at CMP to help you make the best decision for you.
Audits can occur for many different reasons. One of the best things you can do is contact a trusted tax professional to help you understand the reason and how to prepare for the tax audit. You will also want to read about audit red flags & how to avoid one in the future.
Generally, you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out. The period of limitations is the period of time when you can amend your tax return to claim a credit or refund, or when the IRS can assess additional tax. For individuals, we recommend keeping records for three years. However, in certain circumstances, documentation should be kept longer as the state and IRS can open prior periods for review.
For more information, please visit http://www.irs.gov and type “how long should I keep records?” in the search bar at the top right of the screen, or see Publication 552: Recordkeeping for Individuals.
For 2023, the amount of elective deferrals that you can contribute to your traditional 401(k) plan is $22,500. Those who are 50 or older are allowed to defer an additional $7,500 a year, for a total of $30,000. These limits are subject to cost of living increases. The limit for contributions to an IRA has increased to $6,500. Read more about limits and changes here.
These limits apply to all 401(k) plans that you participate in (i.e. add all contributions in all the plans you participate in to determine if you exceeded the limit). Simple IRA plans and IRAs have different deferral limits.
When you file for an extension, your returns will be due six months from the original filing deadline. For corporations and partnerships, the extended due date is September 15th. For individuals, the extended due date is October 15th. Remember that any tax liability is still due on the original filing deadline.
Health insurance premiums for self-employed individuals are deductible on individual tax returns. There are certain requirements that must be met, so it is essential to discuss your situation with us to determine the appropriate tax treatment.
The IRS has recently increased its efforts to raise tax revenue by increasing compliance. Unfortunately, there are times when the IRS imposes taxes and penalties due to lost documentation or internal errors. Many people are intimidated by the IRS and pay these bills out of fear.
Our recommendation is for you to forward any notices or bills you receive to us so that we can review the matter and draft a response. In most cases, it will not take long for us to determine the legitimacy of the bill.
No. The IRS never communicates or requests personal information via e-mail. Do not reply, open any attachments, or click on any links. Please report the scam to the IRS by forwarding the e-mail to the IRS at firstname.lastname@example.org.
Please forward the IRS notice to us immediately, as the IRS almost always requires an immediate response. We need as much time as possible to evaluate the notice and draft a response. Most issues can be resolved quickly, but it is never a good idea to wait until the day of the deadline to take action.
College savings plans, like 529 education plans, are very appealing because of their tax implications. Many states offer tax breaks or credits to those who contribute a certain amount into a college savings plans.
Is it better to take the mileage deduction or take actual car expenses for my business auto expenses?
It depends on how many miles you are driving in a year and the type and cost of the vehicle you drive. Ultimately, we want to choose the method that gets you the larger deduction. Generally, people who drive a lot of miles and have a small vehicle will choose the mileage method. On the other hand, people who drive trucks and SUVs usually choose to deduct actual costs.
In the first year that you own a vehicle, we do a simple calculation to determine which method will work best for you. Once you choose a method, you are required to maintain that method for the life of the vehicle.
Someone told me that I have to buy a truck over 6,000 lbs. in order to depreciate my vehicle. Is this true?
Any vehicle used in a business can be depreciated (expensed over time). However, the depreciation deductions for passenger automobiles are limited to a certain amount each year. The definition of “passenger automobiles” is misleading because it includes trucks, vans and SUVs built on a truck chassis if their loaded gross vehicle weight is 6,000 pounds or less.
Certain vehicles are outside the passenger automobile definition because they weigh more than 6,000 pounds. These vehicles are not subject to the special depreciation limits placed on passenger automobiles. Very few (if any) cars will escape the depreciation limits because they must have an unloaded gross vehicle weight of more than 6,000 pounds. However, trucks and vans (including minivans and SUVs built on a truck chassis) are not passenger autos if their loaded gross vehicle weight is more than 6,000 pounds. Purchasers of these “heavy” vehicles may enjoy an increased depreciation deduction in the year the vehicle is placed into service.
The primary advantage to an S-corporation is that the business’ income can be distributed to the owners free from a self-employment tax. However, S-corporations are required to pay their officers “reasonable” salaries for their time and effort. What constitutes a “reasonable” wage is open to interpretation and the subject of several court cases. Salaries and wages paid to officers are subject to the same employment taxes as a sole proprietorship’s income, but the corporation pays the employer’s portion. The income of the S-corporation then “flows through” to the owners and is taxed at the individual level as ordinary income. This income is not subject to self-employment tax.
100% of sole proprietorship profits are subject to self-employment tax, which currently is 15.3% (2023). A sole proprietor can deduct one-half of the self-employment tax as an “above the line” deduction on a 1040.
Tax savings are typically realized on the amount of S-corporation income that exceeds the reasonable salary or wage paid. However, S-corporations also have increased reporting and recordkeeping requirements and may not be appropriate in all situations. Read our blog to learn more about the different types of business entities. Please get in touch with us to discuss your options and to determine the best entity choice for your business.
What if I’m making more or less money this year than last? Should I increase or decrease the amount of my estimated tax payments?
Individuals are subject to an underpayment of estimated tax penalty unless the total withholding and estimated payments equal the lesser of 90% of the current year’s tax liability or 110% of the previous year’s tax liability.
The underpayment penalty does not apply if the tax due after subtracting withholding and refundable credits in less than $1,000, or if there was no tax liability shown on the previous year’s tax return.
It is difficult to determine exactly how much you need to pay in estimated taxes each quarter. The best solution is to contact a team member at CMP to discuss your current situation. We can then run a tax projection to determine the correct amount that you should pay. A little bit of planning can go a long way to help you pay the correct amount.
Form 8879, the IRS e-file Signature Authorization, authorizes us to e-file your return. We are required to obtain and keep a signed Form 8879 before we e-file your return.
Corporate tax returns are due on March 15th and individual and partnership tax returns are typically due on April 15th (the actual due date may vary annually based on holidays or if the due date falls on a weekend).
You may also file for an automatic six-month extension to file your taxes. However, any tax liability is still due on the original filing deadline regardless of extension.
The standard mileage rate is an optional rate that taxpayers can use to calculate their deduction for the cost of using an automobile for business purposes. The IRS usually sets the rate annually. In 2023, the standard mileage rate for business-related travel is $.65.5 and $.14 per mile for charity purposes.
There simply isn’t a comprehensive list that can apply to every business. The basic list that applies to numerous businesses includes rent, office supplies, business travel and vehicle expenses. However, the tax law allows us to be creative. The law says that in order to deduct a business expense, the expense must be ordinary and necessary for the business. So, there is not an all-encompassing list. We have some good insights as to what this means and would love to share. Please give us a call to discuss.
Individual estimated tax payments are due on April 15th, June 15th, September 15th and January 15th. Those individuals who pay estimated taxes and also owe tax at the time of filing their return for the previous year may find themselves paying two tax payments on April 15th.
In some cases, you may be able to take money out of your 401(k) plan. However, it does depends on your unique circumstances and the policies that your employer has set up. Generally, employees cannot withdraw funds from a 401(k) until they leave the company or until they reach the minimum age for withdrawal (currently 59 years and 6 months). Despite these rules, you may be able to secure a loan against your 401(k) or you may be able to withdraw funds if you can show that there is an “immediate and heavy financial need”.
When you terminate employment, you can withdraw the funds from your 401(k). However, you must deposit the money in your new employer’s 401(k) plan or IRA within 60 days of receipt to avoid penalties or income taxes. An exception applies for employees who have reached age 55.
If you are facing a severe economic hardship, you may be able to use a limited amount of funds for the following purposes:
- Medical expenses, including expenses not yet incurred
- Purchase of a principal residence
- One full year of tuition for secondary (college) education for yourself, your spouse, children, or dependents
- To prevent eviction or mortgage foreclosure on your principal residence
- To cover anticipated federal and state income taxes (including the 10% early withdrawal penalty)
- Cost of burial or funeral expenses for yourself, parent, child, or other dependents
- Certain expenses to repair damage to your principal residence qualify for the casualty loss deduction
Please note that hardship withdrawals are likely subject to income tax and penalties. Therefore, you will pay your applicable income tax rate and a 10% early withdrawal penalty on any amounts withdrawn.
Exceptions to the early withdrawal penalty exist, but generally, they apply to distributions made due to permanent disability, death, or IRS levy.
First, you will need to create an account by visiting https://www.eftps.gov/eftps and clicking on the “Enroll” tab. After completing the questionnaire, you will receive a PIN in the mail in five to seven business days. After receiving your PIN, you will need to return to the EFTPS website to set-up your account and enter your bank information.
Please make note of your internet password as you will need it each time you make payments through EFTPS.
Our team at CMP will be happy to assist you in setting up an EFTPS account.
Penalties may apply if required deposits are not made on time, not deposited through EFTPS or if the deposit made is less than the amount required. For payments 1 to 5 days late, you will be charged a 2% penalty. For payments 6 to 15 days late, the penalty increases to 5%. For payments made 15 days or more past the due date, a 10% penalty will be charged.
Form 940 is used by an employer to report their annual federal unemployment tax information and to calculate the amount of federal unemployment tax due. Form 940 is due each January 31st for the previous calendar year. If the liability reaches $500, the tax must be paid by EFTPS deposits during the year. Please note that there are certain industries and wage limits that may exempt an employer from being required to file this form.
EFTPS, the Electronic Federal Tax Payment System, is a free tax payment system provided by the United States Department of Treasury. You can use EFTPS to pay federal taxes electronically via the internet or by phone. You can also schedule tax payments in advance. For more information, please visit: https://www.eftps.gov/eftps.
Payroll tax forms and deposits are due by the last day of the month following the end of the quarter. However, if your federal tax liability is $2,500 or more, the taxes are payable by the 15th of the month following the end of the quarter. Working with a CPA firm can help you stay on top of quarterly taxes and increase your overall productivity and profitability.
To ensure that your payroll tax returns are prepared prior to the filing deadline, we need to receive your information as soon as the last business day of the quarter has passed (i.e. March 31, June 30, September 30, and December 31). Leverage our payroll experts to help you meet your quarterly payroll tax deadlines.
If you need an additional copy of your tax return, you have several options. First, we store copies of your tax returns in your ShareFile account. You can access your ShareFile account here. If you would like a copy of your return sent to you or a third party, you will need to complete a release form. After we receive the form, we can send you a copy by e-mail, fax or you may pick it up at our office.
We strive to complete all returns within 14 days of receiving your tax information. However, missing information or incorrect records may delay the completion of your return. In addition, you will need to review your return, sign Form 887 and submit the signed Form 8879 to us before we can e-file your return.
The cost to prepare financial statements can vary greatly based on the type of statements needed, the scope of the engagement, and the time required to complete the project. No matter the cost involved, the benefits to your business will be tenfold. Please contact us to discuss your needs!
Yes, to ensure your heirs receive what you intended, it’s essential to have your estate plan in place. This article can help you learn more about the estate planning basics.
Before creating your plan, you should know the goals that you hope to achieve with your estate plan. Our team can help you define your goals and start planning for the future.
As of 2023, the maximum amount that can be given to another individual each year without having to file a gift tax return is $17,000. Married couples may gift up to $34,000 without a filing requirement. You may give up to the maximum amount to as many separate individuals as you like each year without being required to file a return or pay gift tax. Please note that there are no tax deductions for gifts other than for donations to charities.
However, the annual exclusion and other gift tax deductions are irrelevant for people who will remain under the lifetime gift tax exclusion, which for 2023 is $12.92 million. For example, if a single individual makes a $18,000 gift in 2023, they will have used up $1,000 of their lifetime limit (i.e. the amount of the gift that exceeds $17,000) and no gift tax will be incurred (although they will be required to file a gift tax return).
Gift and estate tax planning can become complicated as the law changes frequently. Please contact us if you’d like to discuss the options available to you.