As we head into tax season it is beneficial to know about your itemized and standardized deductions. What is a standardized deduction? Your AGI or Adjusted Gross Income is the amount used to calculate what taxes you owe. To arrive at your AGI the sum of your earnings minus any deductions or tax credit is used. The standardized deduction is the minimum amount the IRS will allow you to deduct from the sum of your earnings to arrive at your AGI.
Itemized deductions & Tax credits
What is an itemized deduction? Itemized deductions are specific expenses that the IRS allows you to deduct from your income to arrive at your AGI. Tax credits are a dollar reduction in the overall amount you owe. For most people the amount of the standardized deduction will be more than the sum of all itemized deductions. You can take either the standardized deduction or the sum of your itemized deductions but not both.
2020 Standardized deduction List
Standard or Single deduction
Married Filing Jointly
Married Filed Separately
Head of Household
If you need someone to file your personal or business taxes feel free to email us at [email protected] or call 800-572-4419 for a free consultation. We specialized in virtual bookkeeping and accounting services and also offer tax preparation and filing.
The first round of stimulus during Covid included PPP loans for small businesses. PPP is short for Paycheck Protection Plan. This program was intended to help employers retain and pay employees during this pandemic. PPP funds were released to employers with less than 500 employees. Employers could only receive PPP funds for non-1099 employees. Employees had to be employed during the period specified in the loan application. The PPP loan is calculated based on the amount of payroll paid in an 8 week period during the beginning of 2020 or end of 2019.
PPP loans are special as they can be forgiven under the following guidelines:
Owners/officers of the company receiving PPP funds cannot be compensated above certain thresholds. If an owner/officer receives more than $100k in compensation annually, they may have restrictions as to how much they can be approved for in PPP funds.
To be eligible for forgiveness of the loan, 75%+ must be used to pay W-2 payroll employees and taxes.
25% of the loan can be forgiven if used for rent and or utilities and or transportation costs.
The loan will not be forgiven if used for business expenses other than those listed above.
Payroll must be run for 8 weeks following receipt of the PPP loan. Earlier PPP loans specified the 8-week period as the 8 weeks immediately following the receipt of loan funds. Recent changes to this requirement extended the time frame for running payrolls after receipt of the funds.
A loan forgiveness application must be filled out after the 8-week period has elapsed in order for the loan to be forgiven. A copy of the loan forgiveness application can be found here.
PPP loan funds will not be forgiven if used to pay 1099 workers. Under PPP guidelines, 1099 and self-employed workers are to apply for a sole-proprietor type PPP loan.
PPP loans should be classified for accounting purposes as other income per guidelines. PPP funds are currently not considered taxable income for a business. Any PPP funds that are not forgiven should be moved to an other current liabilities account as they will need to be repaid.
Since its inception, the PPP loan program has had hiccups and undergone a series of changes. The PPP program is still changing. Currently a blanket forgiveness is being considered for PPP loans under a specific dollar amount although this has not been approved. For further questions about the PPP loan program the SBA has set up an FAQ’s document which can be viewed here.
Business growth often means hiring employees. Since there is no manual for running a business, it can be difficult to know what type of employees to hire. Failing to pay an employee properly or issue the correct tax form can also have hefty financial ramifications. To help avoid any legal or financial issues knowing the difference between a 1099 versus a W-2 employee is a must.
1099 workers are a tricky subject in terms of employment. A true 1099 worker is considered a subcontractor or Independent Contractor. Subcontractors are not considered employees of a business. A subcontractor is typically a person or company hired to fulfill a temporary offsite role. Subcontractors can also be people like virtual administrators, IT or an answering service that perform the same functions for many businesses. These types of subcontractors are often self-employed, sole-proprietors or small businesses that offer one specific service.
1099 workers do not have payroll taxes withheld from payments for services. Payroll taxes are not withheld because 1099 workers are required to remit their own payroll taxes. Employers do not have to pay employer matching taxes on 1099 earnings.
A W-2 worker is the typical worker a business hires to help in the day to day operations of a business. If a worker is on-site meaning that they work every day at the physical business location, the worker is W-2. Other ways to know if a worker is a W-2 employee:
Employee works in a physical location used for business operations.
Employee is solely employed by one business.
Employe works from home and fulfills the same role, daily or weekly that is vital to the day to day operations of the business.
Employee is not self-employed.
Employee is the owner of an S-Corp or single member LLC.
Employers are required to pay employer matching taxes on employee wages when an employee is a W-2 worker. W-2 employees are also eligible to receive benefits like paid time off (depending on the state) and disability, worker’s compensation and unemployment.
Maintaining employees can be costly. When employing an on-site worker, employers are required to carry coverage like worker’s compensation that cover an employee if they are injured on the job. Employer matching taxes can also add up. Employers are required to match the funds withheld from employee paychecks for social security and medicare taxes. Employers are also required to pay additional state payroll taxes which are a direct expense to the business. Paid time off can sometimes be required by the state. For these and other reasons, some employers will try to classify employees as 1099 workers. There are many different ramifications for employers that misclassify workers. Employers send reporting quarterly to state and federal entities. Business also have to file payroll and income tax returns. Any independent contractor or subcontractor with earnings of more than $600 in a calendar year is required to receive a 1099 at year end. W-2 workers will receive a W-2 at year end showing earnings and taxes withheld.
Common issues that employers that misclassify employees will encounter:
Employee does not realize they have been classified 1099. Sometimes employees are unaware of the consequences of filing 1099, even if an employee asks you to classify them as a 1099 employee. Some employees only hear that they will not have taxes deducted from each paycheck. Unfortunately, the old adage nothing is certain but….is completely true. It is a terrible surprise to find that taxes are still due on an entire year’s worth of earnings at tax time.
Employee reports employer to state authority. Not all employee relationships end well. If an employee feels mistreated or angry they may lash out. All states have an employment agency that helps maintain employee/employer relations. If reported to a state agency, the agency may decide to audit your payroll records. If it is determined that a business failed to report W-2 employee wages, the business may be subject to payment of payroll taxes, penalties and interest. It should also be noted that the interest and penalties can go back years even if an employer is reported years later.
Employee is not eligible for disability or unemployment when needed. In light of recent world pandemic events, benefits like unemployment are critical. Additionally, a worker can be injured on the job any time any place. Misclassifying an employee can cost the employee necessary benefits during difficult times and the result…see #2. An employee reporting an employer is not the worst thing that can happen. An employee can sue at a later date for any number of reasons. The end consequences of a lawsuit can be devastating to a business and the owners of a business.
Loopholes close and laws change just ask Uber. Because Uber’s drivers are considered independent contractors, Uber saves millions per year in insurance and payroll tax costs. Uber drivers are also responsible for things like insurance, fuel and maintenance of their vehicles. Whereas a taxi company would be responsible for all of the above, Uber avoided this by deeming their drivers to be independent contractors. Recently the state of California sued Uber and Lyft. The result of this landmark lawsuit may cause sweeping legislation across many states to ensure that employers don’t abuse 1099 loopholes.
Overpaying taxes to the state and Fed. While it does not happen often, an employer may misclassify an employee in the other direction. Paying a subcontractor or independent contractor as a W-2 employee benefits only the subcontractor.
You will receive a tax document from your mortgage company if this applies.
If you had out of pocket medical expenses including co-pays and medication, you may be able to write these off.
Whether you donate money or items, charitable contributions are tax deductible. If you donate, make sure to get a receipt from the organization you donated to for tax preparation purposes.
If you made investments that you had to pay interest on you should receive a tax document from your investment firm that you can use to write off the interest on your returns.
Property, state and local income taxes
Talk to your tax preparer to find out if you can write off any of these type of expenses.
Self-employed business expenses
If you run a small business but have not yet incorporated, you can write your business expenses off on your tax return provided you have accurate documentation.
Business use of home
If you use a portion of your home to run your small business and are not incorporated, you may be able to write off a portion of your home expenses like rent and utilities.
Business use of vehicle
Similar to business use of home, if you use your vehicle for business purposes and are not incorporated, you may be able to write off your mileage or vehicle expenses.
Work related education
You must be self-employed, a qualified performing artist, a fee-based state or local government official or a disabled person with impairment-related education expenses in order to claim this itemized deduction.
Casualty, disaster and theft losses
If you live in an area that had a federally declared disaster such as a hurricane or tornado or if something was stolen from your property, you may be eligible for this deduction.
If you are looking for tax preparation services feel free to contact us [email protected]. We offer tax preparation for businesses and individuals.
Many business owners are unaware that incorporation requires corporate compliance. When you incorporate you become a legal entity. Becoming a legal entity requires registering with state and federal agencies. Federal agencies will require a Federal Tax Identification number. State agencies will require employment ID numbers. Registration with any state or federal entity will require different forms of upkeep to keep your corporation compliant.
State Corporate Compliance
When you incorporate, you register the name you want to use with the state. The state approves your entity and assigns a corporate identification number. Once registered, the state will require you to file an annual report. Annual reports are part of corporate compliance. Annual reports are intended to update the state on changes to your corporation. If an annual report is not filed, you may be subject to penalties.
If you have employees, the state will require you to pay payroll taxes. Keeping compliant with state regulations for operating a business will also require compliance in the following areas;
Workers Compensation insurance coverage in case employees get injured
Registration for a sales tax ID number if subject to sales tax
Registration for an employer ID number if subject to payroll taxes
OSHA requirements for workplace and jobsite safety
Registration with state entities for specialized industries such as law, accounting, construction and health care
Reporting of newly hired employees to state employment agencies
Obtain a business license or occupational permit from your local city or county allowing you to conduct business in that area
Paying W-2 employees the required minimum wage
File annual income tax return for corporation
Federal Corporate Compliance
The federal government will not require you to file an annual report. The federal government will require the following to keep your corporation compliant;
File annual income tax return for corporation
Registration for FEIN (Federal Employer Identification Number)
Maintain accurate and detailed records of expenses and income
File annual employment tax forms 1099’s and W-2’s
File quarterly and annual employer payroll tax returns
When you incorporate it is a great idea to research corporate compliance in your state. Part of many incorporation services is help and advice regarding corporate compliance. Avoid fees and penalties from late filings by understanding what your state and government require to maintain your corporate protections.
If you need help with incorporation don’t hesitate to call us at 1-800-572-4419 or email [email protected] to get a quote for incorporation services. Feel free to subscribe to our blog for more accounting, tax, bookkeeping and HR tips.
Over the next few posts we will discuss different corporate structures. Many wonder what corporate structure is right for them when owning a business. These posts will discuss each corporate structure available and when they should be utilized. In this post we will discuss Sole Proprietorship.
A Sole Proprietorship is not a legal entity as far as the state and federal government are concerned. This type of corporate structure is used often for businesses that are just beginning. If you have a side gig that earns you income. If you will only be working a small amount of hours on your business to start. If you aren’t quite sure what corporate structure you should use yet, you will probably use Sole Proprietorship.
Legalities of running a Sole Proprietorship
First you will probably want to register your business with the county you will conduct business in. This is called a DBA or “Doing Business As”. If you plan to conduct business in a name other than your own you will want to register the name you want to use. Registering your business name will enable you to operate using the business name you wish in your county.
As a Sole Proprietor you will be eligible to file a schedule C on your 1040 tax return. A schedule C is a schedule of business expenses that are deductible on your taxes. Not all expenses are tax deductible and some have certain regulations. You may also be eligible to write off vehicle expenses and business use of home.
A corporate veil is the legal protection operating a legally registered corporation provides. As a Sole Proprietor you do not have a corporate veil. If someone initiates legal action against you, your personal assets are unprotected. Only legally registered corporations offer protection of your personal assets.
If you are considering incorporation or need help with accounting or bookkeeping, please feel free to call us for a free consultation at 800-572-4419 or email [email protected]. Subscribe to our blog today for more bookkeeping, accounting and HR tips!
When you begin hiring employees you are required by government entities to have them fill out paperwork. This is often referred to as new-hire paperwork. The paperwork you have your employee fill out will depend on what type of employee you hired.
A subcontractor is also known as a 1099 employee. For more about what a 1099 employee is please visit our post here: https://www.genesisaccountingsolutions.com/w-2vs1099/ 1099 employees must fill out at W-9 Form. You can find the federally required 1099 form here: https://www.irs.gov/pub/irs-pdf/fw9.pdf Make sure that if you search for the W-9 form online, you obtain it from the IRS website. Many other sites will sell you a pdf fillable form when you can get it for free from the IRS. Subcontractors do not need to fill out any state forms.
W-2 employees tend to be any workers that work in your physical place of business. Employers are required to pay matching taxes on W-2 workers. Employers are also required to run pay for W-2 employees through payroll. W-2 employees must fill out paperwork according to federal requirements. Proper employee paperwork establishes an employee’s citizenship and identity. The US Federal government requires employees to fill out a W-4 which you can find here: https://www.irs.gov/pub/irs-pdf/fw4.pdf and an I-9 which you can find here: https://www.uscis.gov/i-9
Other paperwork that your W-2 employees should submit within three days of being hired;
Either a copy of the employee’s drivers license and a copy of the employee’s social security card/or a copy of the employee’s birth certificate or a copy of the employee’s passport will cover both the requirement to establish citizenship and identity.
A copy of the employee’s insurance policy card if the employee will drive a company vehicle.
Research your state, they may have a special tax calculation that will require its own form.
An authorization from the employee to conduct a background check if your company handles sensitive information or requires background checks.
An employment application that shows the employee’s background information and employment history and 1 to 2 emergency contacts.
Offer letter if your company wants to outline the position and terms of employment.
If you have further questions about employee paperwork or need other bookkeeping and accounting services, please feel free to contact us for a free consultation at 800-572-4419 or email [email protected]. Subscribe to our blog today for more useful information about accounting and HR.
You may be wondering if it is time to take your small business to the next level. Maybe you’ve been self-employed and your business has grown. Maybe you secured funding for your business venture from investors. Maybe you’ve been freelancing and want to expand operations. Knowing when to incorporate can save a lot of headache and unnecessary expense.
Being a self-employed owner is often expensive. Paying for costs out of your pocket can add up. Maybe it seems like incorporation would save you money. It doesn’t. Incorporation often makes the cost of running a business go up. State filing fees can range from the 100’s to the 1000’s of dollars depending on your state. Incorporation also puts you on the radar with many state and federal agencies making you liable for taxes and corporate compliance.
Who is Liable?
This is a good question to ask if your business operations involve others. When you are self-employed and are the sole employee of your business you are responsible for only yourself. When you begin hiring employees, open a physical location or start taking on investors, you become liable for others involved in your business as well. When you incorporate you create an entity outside yourself that is liable for your business operations. Any assets like buildings and equipment for your business are owned by your business. Your personal assets such as houses and vehicles remain your own. If someone sues your business, your personal assets are protected and remain your own so long as your corporation is compliant. If you are concerned about liability, hiring W-2 employees or taking on investors, incorporation is a good way to protect yourself and your assets.
When you incorporate your business is required to file its own tax return with the government and the state you operate in. While this is an additional expense, filing taxes as a corporation can also save you money. If your self-employed business is making more than $100,000.00 per year, it may be time to look into incorporation. As a self-employed business owner you are subject to self-employment taxes. Self-employment taxes mimic corporation taxes which can be higher than corporate taxes depending on your income and deductions. You may also be able to deduct more as a business than you can as self-employed. Certain business expenses are not tax deductible unless you file a corporate tax return.
No Longer Flying Solo
If you are taking on a business partner incorporation is probably the way to go. Becoming a corporation, LLC or General Partnership will protect all people involved in the business. Incorporation also involves detailing the percentage ownership and corporate responsibility of each owner. Having a partnership agreement in place does not require incorporation but is almost always a part of incorporation. If you will be accountable to investors, especially investors that own part of your business, incorporation will help protect your personal assets. Keeping your assets separate from your business assets is essential to your personal financial health.
If you have more questions about incorporation and whether it is right for you, feel free to call us at 1-800-572-4419 for a quote and free consultation. You can also email us at [email protected].