By : Oscar Ornelas
Source : http://www.elpasoinc.com
Category : Small Business Grant
Last week, we discussed five tax tips that small businesses can use to reduce their tax bills in 2012.
They were: organize as an entity, keep track of business expenses, invest in equipment, document attempts to collect on past due receivables, and avoid financing your business with payroll taxes.
This week we'll talk about another five tips that should help your business with its year-end tax bill.
Classify workers correctly
Saving on your business taxes is as much about taking advantage of tax breaks as it is about avoiding tax problems in the first place.
We ended last week's column discussing how to avoid problems by not using federal payroll taxes to finance business operations. Continuing that line of thought, we can avoid nasty payroll tax surprises by properly classifying workers as either employees or independent contractors.
As we all know, businesses not only have to withhold payroll and income taxes from employee wages, but also have to pay their share of payroll taxes on employee wages. Workers classified as employees are also eligible to participate in any fringe and employment benefits offered by a business.
In contrast, independent contractors are not - as a general matter - subject to payroll or income tax withholding, and are not eligible to participate in any benefit plans offered by the business. So from a tax perspective, independent contractors are generally less expensive for a business to hire than employees.
Whether a worker is an employee or independent contractor for tax purposes, however, depends on the amount of control a business exerts on the manner in which the worker performs their task, how the worker earns their living, and the business relationship between the business and the worker.
If a business misclassifies an employee as an independent contractor, then the IRS can seek to collect unpaid payroll taxes from the business, and assess a number of penalties on the business for failure to file payroll tax returns and deposit payroll taxes.
A business's benefit plan could also be affected if the misclassified employee would have qualified for employment benefits.
Invest in health plan
Did you know that self-employed persons can deduct as a business expense the cost of health insurance premiums for medical coverage for yourself, your spouse, and your children?
This often-overlooked benefit is very valuable because insurance premiums for medical and long-term care would otherwise qualify as an itemized medical-expense deduction on an individual's Form 1040 - the deductibility of which is subject to a hurdle equal to a 7.5 percent of a person's adjusted gross income.
Since this hurdle is so high, most taxpayers can't take advantage of the itemized medical-expense deduction unless they or a dependent is seriously ill.
However, the 7.5 percent doesn't apply to the deductibility of health insurance premiums for a self-employed person. There are certain requirements, of course, to the deduction - we are dealing with tax law after all. They are: children older than 27 years of age can't be covered by the health-insurance plan, and no deduction is allowed if the self-employed taxpayer is covered by another health insurance plan maintained by the person's other employer, or their spouse's or child's employer.
Invest in retirement plan
Did you know that self-employed persons can also establish a retirement plan for their employees and deduct contributions made to such plans?
Again, you don't have to be running a company like Western Refining or Helen of Troy to be covered by an employer-subsidized retirement plan. These plans come in different flavors - like SIMPLE 401(k)s, SIMPLE IRAs and SEPs - but they use individual retirement accounts that are subject to special, and complicated, tax rules. In general, employees can contribute more toward these kinds of IRA accounts than to traditional IRAs, and businesses are required to make matching contributions.
For these limited purposes, self-employed taxpayers are treated as employees of their own businesses but can't deduct their own contributions as business expenditures - they are reflected as an adjustment to gross income on page 1 of Form 1040.
Paperwork, paperwork
As readers of this column know by now, I often highlight the benefits of a thorough and organized records system.
Such a system contributes to a lower tax bill by allowing businesses to keep track of deductible expenses and reducing the cost and stress associated with IRS examinations. The IRS normally has three years to examine a tax return from the date a business files the return. This statute of limitations increases to six years if the IRS believes that a business-owner substantially understated their tax liability.
A taxpayer "substantially" understates their tax liability if the difference between the amount of tax reflected on their return and the correct amount of tax exceeds the greater of either $5,000 or 10 percent of the correct amount of tax.
Businesses should keep their records for as long as the IRS can examine a tax return - which is at least six years.
Budget, budget
Organization does not stop with our business records. The real benefits of a good records and accounting system is the ability for us to track our business's operating costs and profitability.
Taking this one step further, budgeting anticipated business expenses and profits allows us to plan for the unexpected, rather than forcing us to make difficult decisions when problems arise - like tapping payroll or sales tax deposits to finance business operations in a pinch.
Seneca, the Roman philosopher, once said, "Luck is what happens when preparation meets opportunity." So it is with taxes - the more we prepare our business to avoid tax traps and take advantage of opportunities, the lower our tax bill and related stress.
Look for my seminar discussing these and other ideas in greater detail towards the end of February.
Source : http://www.elpasoinc.com/news/border_business/article_b03bbcda-566b-11e1-9d00-001a4bcf6878.html
Source : http://www.elpasoinc.com
Category : Small Business Grant
Last week, we discussed five tax tips that small businesses can use to reduce their tax bills in 2012.
They were: organize as an entity, keep track of business expenses, invest in equipment, document attempts to collect on past due receivables, and avoid financing your business with payroll taxes.
This week we'll talk about another five tips that should help your business with its year-end tax bill.
Classify workers correctly
Saving on your business taxes is as much about taking advantage of tax breaks as it is about avoiding tax problems in the first place.
We ended last week's column discussing how to avoid problems by not using federal payroll taxes to finance business operations. Continuing that line of thought, we can avoid nasty payroll tax surprises by properly classifying workers as either employees or independent contractors.
As we all know, businesses not only have to withhold payroll and income taxes from employee wages, but also have to pay their share of payroll taxes on employee wages. Workers classified as employees are also eligible to participate in any fringe and employment benefits offered by a business.
In contrast, independent contractors are not - as a general matter - subject to payroll or income tax withholding, and are not eligible to participate in any benefit plans offered by the business. So from a tax perspective, independent contractors are generally less expensive for a business to hire than employees.
Whether a worker is an employee or independent contractor for tax purposes, however, depends on the amount of control a business exerts on the manner in which the worker performs their task, how the worker earns their living, and the business relationship between the business and the worker.
If a business misclassifies an employee as an independent contractor, then the IRS can seek to collect unpaid payroll taxes from the business, and assess a number of penalties on the business for failure to file payroll tax returns and deposit payroll taxes.
A business's benefit plan could also be affected if the misclassified employee would have qualified for employment benefits.
Invest in health plan
Did you know that self-employed persons can deduct as a business expense the cost of health insurance premiums for medical coverage for yourself, your spouse, and your children?
This often-overlooked benefit is very valuable because insurance premiums for medical and long-term care would otherwise qualify as an itemized medical-expense deduction on an individual's Form 1040 - the deductibility of which is subject to a hurdle equal to a 7.5 percent of a person's adjusted gross income.
Since this hurdle is so high, most taxpayers can't take advantage of the itemized medical-expense deduction unless they or a dependent is seriously ill.
However, the 7.5 percent doesn't apply to the deductibility of health insurance premiums for a self-employed person. There are certain requirements, of course, to the deduction - we are dealing with tax law after all. They are: children older than 27 years of age can't be covered by the health-insurance plan, and no deduction is allowed if the self-employed taxpayer is covered by another health insurance plan maintained by the person's other employer, or their spouse's or child's employer.
Invest in retirement plan
Did you know that self-employed persons can also establish a retirement plan for their employees and deduct contributions made to such plans?
Again, you don't have to be running a company like Western Refining or Helen of Troy to be covered by an employer-subsidized retirement plan. These plans come in different flavors - like SIMPLE 401(k)s, SIMPLE IRAs and SEPs - but they use individual retirement accounts that are subject to special, and complicated, tax rules. In general, employees can contribute more toward these kinds of IRA accounts than to traditional IRAs, and businesses are required to make matching contributions.
For these limited purposes, self-employed taxpayers are treated as employees of their own businesses but can't deduct their own contributions as business expenditures - they are reflected as an adjustment to gross income on page 1 of Form 1040.
Paperwork, paperwork
As readers of this column know by now, I often highlight the benefits of a thorough and organized records system.
Such a system contributes to a lower tax bill by allowing businesses to keep track of deductible expenses and reducing the cost and stress associated with IRS examinations. The IRS normally has three years to examine a tax return from the date a business files the return. This statute of limitations increases to six years if the IRS believes that a business-owner substantially understated their tax liability.
A taxpayer "substantially" understates their tax liability if the difference between the amount of tax reflected on their return and the correct amount of tax exceeds the greater of either $5,000 or 10 percent of the correct amount of tax.
Businesses should keep their records for as long as the IRS can examine a tax return - which is at least six years.
Budget, budget
Organization does not stop with our business records. The real benefits of a good records and accounting system is the ability for us to track our business's operating costs and profitability.
Taking this one step further, budgeting anticipated business expenses and profits allows us to plan for the unexpected, rather than forcing us to make difficult decisions when problems arise - like tapping payroll or sales tax deposits to finance business operations in a pinch.
Seneca, the Roman philosopher, once said, "Luck is what happens when preparation meets opportunity." So it is with taxes - the more we prepare our business to avoid tax traps and take advantage of opportunities, the lower our tax bill and related stress.
Look for my seminar discussing these and other ideas in greater detail towards the end of February.
Source : http://www.elpasoinc.com/news/border_business/article_b03bbcda-566b-11e1-9d00-001a4bcf6878.html
