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Many tax provisions of The American Taxpayer Relief Act may affect you when we prepare your 2012 taxes and plan for 2013. Our Special Edition Newsletter highlights some of these major tax changes.

Archive for Tax Planning and Strategies

Tax Deductions for Landlords

One of the biggest advantages of personally owning a residential rental property is the tax benefits that they offer. Rental real estate properties provide more tax benefits than almost any other investment. These tax benefits are often large enough to make the difference between losing money and earning a profit on a rental property. Here are the most significant tax deductions for owners:

Interest – Deducting mortgage interest is often the single biggest deductible expense for owners of residential rental properties. Deductible mortgage interest includes mortgage interest payments on loans used to acquire or improve the rental property. It also includes interest on credit cards for goods or services used in the rental activity.

Depreciation – The deductible depreciation expense is equivalent to a portion of the cost of the property, spread out over several years. The actual cost of the rental property is not fully deductible in the year it is placed into service as a rental property.

Repairs – Homeowners are unable to deduct the cost of repairs they make to their primary residence. However, landlords can deduct the cost of repairs to rental properties. In order to be deductible, the repair must be ordinary, necessary, and reasonable. Rental expenses are deductible in the year the expense is incurred. Examples include fixing broken windows or purchasing parts for repair. Repairs, which are deductible, are easily confused with capital improvements, which must be depreciable. Contact a tax professional at StrataTax to help you identify the difference between a repair and a capital improvement.

Travel – Landlords who drive anywhere for their rental activity are allowed a tax deduction in the form of actual expenses or the standard mileage rate. Actual expenses include gasoline, car maintenance and car repairs. The standard mileage rate is 55.5 cents per mile, as set by the Internal Revenue Service (IRS). There are eligibility requirements pertaining to the standard mileage rate. Please see… Long distance travel, including airfare, hotel bills, and meals related to the rental activity may also be deductible.

Legal and Professional Services – Fees you pay to property management companies, attorneys, accountants and other professionals may deductible if the fees are paid for services related to the rental activity.
Most rental property owners can only deduct up to $25,000 in rental property losses each year. If you own a rental property, consult a tax professional to help you deduct losses arising from rental real estate ownership by identifying deductible real estate expenses. Keep detailed and accurate records of all expenses and financial transactions related to your rental activity.

TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

Categories Tax Planning and Strategies
Comments (0)
Posted by: StrataTax
March 1, 2013

Get the Most Out Of Your Meeting with a Tax Professional

Get the most out of your meeting with a tax professional by following these easy tips.
For tax preparation, schedule your tax appointment for early in tax season. Tax professionals usually have more time to spend with clients early in tax season. Towards the end of tax season, their free time may be scarce.

If you are interested in tax planning or tax consulting services, don’t wait until the end of the tax year to meet with a CPA or tax consultant. Gather the needed information as soon as possible and reduce your stress by getting things done early.

If possible, talk to your CPA beforehand to learn what he expects of you (and vice-versa). Having a clear understanding of each other’s time constraints can help you work together and meet the tax deadline. Make your tax preparer aware of any tax issues that you may have had during the year. This will help him be better prepared to handle your situation and address your concerns. Communication is key in building a solid foundation for the relationship with your new tax professional.

It is also beneficial to develop a list of questions for your tax preparer ahead of time. This will enable him or her to help you better understand tax law and the strategic tax planning options you can take. Browse the IRS website to familiarize yourself with tax terminology and basic tax laws.

If you have a business, provide your tax preparer with print outs or a data file of your profit and loss, balance sheet, and general ledger. List expenses by type, such as office supplies, rent, materials, etc. Do not provide it by month. Use a blank tax return to see the categories of expense, and group your expenses accordingly. If you have employees, provide the year-end tax package from your payroll company to your tax professional.

Most tax preparers charge per hour, so don’t provide them with a box of receipts. Most tax preparers will not accept the unorganized information, and those who do may charge you hourly for the time they spend totaling up your receipts.

Provide a copy of your previous year tax return to your tax professional. This will help him analyze the direction of your company’s growth and identify any audit red flags.

TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

Categories Tax Planning and Strategies
Comments (0)
Posted by: StrataTax
February 24, 2013

What to Look For In a Tax Preparer

The title or designation of a tax preparer isn’t the only qualification you should consider when searching for a new tax preparer. When hiring a new tax preparer, look at more than just the letters after his name. A tax preparer’s technical ability with the tax law and compatibility with your personality are important qualities to consider.

Technical Ability
Tax preparation includes more than just data entry. A well-qualified, highly technical tax preparer will be able to provide you with proactive tax planning strategies to minimize your taxes. In addition to being knowledgeable of the complex tax laws, he should be able to explain them to you in terms that you understand.

It is important to find a tax preparer who has the skills necessary to correctly handle tax situations that are unique to your facts and circumstances. If there are issues that make your tax situation unique or complex, ask potential tax professionals is they have a thorough understanding of those issue. If you own rental properties, find a tax preparer experienced at helping landlords prepare their tax returns. If you plan on staring a small business in the near future and will need business guidance, find a tax preparer who can provide with business consulting services as well as business tax preparation.
While the chance of being audited is pretty low (about 1 in 100), the chances of being audited or otherwise hearing from the IRS increase depending upon various factors, including being self-employed and taking large losses. If you fall in to this category, consider finding a tax professional skilled at audit representation as well as individual tax preparation.

Compatibility
Determine the compatibility of your personalities. Based on the complexity of your tax return, you may be spending a large amount of time with your tax professional. Learn about the tax professional’s style of working with his clients. Give the tax preparer a clear understanding of what you expect.
If you want to be involved through the preparation of your tax return, find a tax preparer who enjoys working with people. If you want to learn more, find a tax preparer who happily educates his clients on tax laws. Typically, the more passionate the professional is about taxes, the more likely he will be to take the extra time to explain things.

If you are the type of client who likes to call their tax professional a few times a month, find out whether he is that accessible and open to frequent communication. Some tax firms, such as StrataTax, are open all year.

If you absolutely dread tax season, you may be drawn to tax professional who will do your return with minimal communication or hassle. On the other hand, it may benefit you to find someone passionate who can add some character or enjoyment to your appointment.

To get the most value from a tax professional, enter into a relationship that will grow over time and adjust to your changing needs.

There are many tax preparers in the United States, but only a few that are right for you. Take your time when hiring a new tax professional and find one that fits your needs.

TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

Categories Tax Planning and Strategies, Uncategorized
Comments (0)
Posted by: StrataTax
February 17, 2013

Steps Newlyweds Should Take Now to Ease Stress at Tax Time


If you are newly married or planning a wedding, income taxes might be the last thing on your mind. However, here are a few steps for newlyweds to help reduce stress at tax time.

Change Your Name and Address
If you change your name, report the name change to the Social Security Administration. This is important so your name and Social Security number will match when you file your next federal income tax return. File a Form SS-5, Application for a Social Security Card, at your local SSA office. The form is available on SSA’s website at www.ssa.gov, by calling 800-772-1213 or at local offices.

If you have a new address you should notify the IRS. Use Form 8822, Change of Address, to update your address with the IRS. You may download Form 8822 from www.IRS.gov or order it by calling 800–TAX–FORM (800–829–3676). You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence or refunds.

You should also report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.

Check Your Withholding
You and your spouse’s combined income may place you in a higher tax bracket. You may need to adjust the amount of withholding appropriate for your new filing status by completing a new Form W-4, Employee’s Withholding Allowance Certificate. You can use the IRS Withholding Calculator to assist you in determining the correct amount to withhold and provide you with the information for the W-4. Give the new W-4 to your employer(s) so they update the amount that will be withheld from your pay. A link to the IRS Withholding Calculator can be found at http://www.stratatax.com/tools/links/.

Your tax preparer can provide you with guidance on adjusting the amount of your withholding. StrataTax, a tax preparation and consulting company, is available to assist you year-round.

Choose the Most Beneficial Filing Status
A person’s marital status on December 31st determines whether the person is considered married for that year. Generally, the tax law allows married couples to choose to file either jointly or separately in any given year. It is generally more beneficial to file jointly, although you should figure the tax both ways to determine which filing status will result in the lowest tax.

______________________________________________________________________________
StrataTax wants to hear from you and encourages comments. You are invited to share your opinions or ask questions related to this topic by visiting us at www.StrataTax.com/tools/blog. Also, please visit our Tools section to explore our library of resources that offers tips and strategies on a wide range of tax and business related topics.

TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

Categories Tax Planning and Strategies
Comments (2)
Posted by: StrataTax
January 28, 2013

How Do I Treat My Other Sources of Income?

taxable incomeAre you supplementing your regular income with other sources of income?  If so, familiarize yourself with the special treatment and reporting methods of these forms of compensation to stay in compliance with tax laws. A tax preparer, such as StrataTax, can educate you on the various sources of taxable income. A tax preparer can also help you identify which sources of income will maximize your tax refund.

 
Childcare Provider. The pay you receive for providing childcare is taxable income and must be included in your income if you provide the childcare in the child’s home or in your home or other place of business.  If you are self-employed (not an employee) you must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Please contact your tax preparer or see the StrataTax article “Understanding the Self-Employment Tax” for more information about the differences of employee versus self-employed.

Babysitting. The rules for childcare providers typically apply to babysitting if you babysit for relatives or neighborhood children, whether on a regular basis or only periodically.

 
Bartering.  Bartering is an exchange of services or property.  You must include in your income, at the time received, the fair market value of services or property you receive in bartering. If you exchange services with another person and you both have agreed ahead of time on the value of the services, the agreed upon value will be accepted as fair market value unless the value can be shown to be otherwise. Generally, taxable income received from the exchange of services must be reported on Schedule C or Schedule C-EZ (Form 1040).

Rents from Personal Property. If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is generally determined by whether or not the rental activity is a business, and whether or not the rental activity is conducted for profit. If you are not in the business of renting property report your rental income on Form 1040, line 21. List the type and amount of the taxable income on the dotted line next to line 21.  If you rent personal property for profit, include your rental expenses in the total amount you enter on Form 1040, line 36. Also, enter the amount and “PPR” on the dotted line next to line 36. A tax preparer can help you understand rental income and related rental expenses.

Host or Hostess.  If you host a party or event at which sales are made and you receive a  gift or gratuity for giving the event, the gift or gratuity is considered a payment for helping a direct seller make sales and must be reported as income.  You must report this item as income at its fair market value. Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses and are deductible as miscellaneous itemized deductions subject to the 2%-of-AGI limit on Schedule A (Form 1040), but only up to the amount of income you receive for giving the party.

Outplacement services. Some companies offer employees reduced severance pay in exchange for outplacement services, such as training in interview techniques and resume writing.   If you choose to accept the reduced severance in exchange for these services, you must include the unreduced amount of the severance pay in income. However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040).

 
Your tax preparer can provide you with more information regarding the treatment of income on your income tax return. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning.  Call us at (858) 225-7720 to setup your free initial consultation or visit us at www.StrataTax.com for more information.

 

______________________________________________________________________________

StrataTax wants to hear from you and encourages comments.  You are invited to share your opinions or ask questions related to this topic by visiting us at www.StrataTax.com/tools/blog.  Also, please visit our Tools section (http://stratatax.com/tools) to explore our library of resources that offers tips and strategies on a wide range of tax and business related topics.

TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

Categories Tax Planning and Strategies
Comments (0)
Posted by: StrataTax
January 11, 2013

Tax Services Your Tax Professional Should Be Providing To You

tax servicesTax preparation involves more than just data entry. The level of complexity of your tax return largely dictates the extent of tax services that will be required for your tax return. However, there are certain tax services that your tax preparer should be providing regardless of your tax situation. Even if you don’t have an immediate need for these tax services, it will be comforting to know that your tax preparer can provide them should the need arise.

Tax Services You Deserve

Your tax preparer should be asking you questions regarding your tax situation. These questions may lead to extra deductions or tax planning strategies. Your tax preparer should take a genuine interest in your situation to help guide you towards opportunities for growth or better management of your tax liabilities.

A qualified tax preparer should know how to identify an audit risk or red flag. They should also know legal strategies for making your tax return fully compliant with tax laws. Ideally, your tax preparer should be qualified and experienced in audit representation and preparation.
Major life events can occur any time during the year, so your tax preparer should be available to you all year. He or she should be responsive to you all year, not just during tax season.

Tax planning is an important part of tax preparation and should be provided by your tax preparer. Tax planning includes identifying proactive tax strategies to better manage your tax liabilities in the future.

While it is impossible for a person to know everything, your tax preparer should be able to provide you with basic knowledge about tax-related, financial, or business topics. For example, a tax preparer is not a financial planner, but they should be able to explain the differences between a Roth and a traditional IRA. As an added bonus, a good tax preparer may be able to refer you to a financial planner who he has established a working relationship with.

Our tax laws are the most complex in the world, so don’t get discouraged if your tax preparer can’t immediately answer all of your questions in detail. However, your tax preparer should know where to look to find the answer and should be able to back up that answer with the appropriate tax law. More importantly, your tax preparer should be able to explain taxes to you in simple terms. He should provide you with examples that pertain to your situation.

Some tax preparers focus mainly on personal income tax returns. While that is acceptable, a tax preparer should be able to explain to you the basics of how owning your own business could benefit you financially. They should be able to guide you to the next step, even if it means you’ll advance past his level of expertise and require a more experienced tax preparer.

A tax professional who prepares business tax returns should be able to provide basic business consulting. It is possible to find a tax services professional who has an in-depth understanding of tax laws and business management principles. If you are a business owner, consider finding a tax firm that can provide you with both services under one roof. StrataTax provides a unique combination of tax preparation and business consulting for small business owners.

As with any relationship, communication is key. If your current tax preparer isn’t providing the tax services you require, talk to him. Make sure he understands what you want. If he is still unable to meet your needs, it might be time to find a new tax professional. For guidance on find a new tax preparer or tax professional, see our article How to Find a Qualified Tax Preparer.

TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

Categories Tax Planning and Strategies
Comments (0)
Posted by: StrataTax
November 26, 2012

Tax Tips: How to Find a Qualified Tax Preparer

Qualified Tax PreparerFinding a tax preparer can be as easy as asking a friend. However, finding a qualified tax preparer can prove to be more challenging.

Find Your Tax Preparer

What works best for your friends might not work best for you. For example, if you own a business and your friend doesn’t, his tax professional might not be familiar with business tax returns. When asking friends for recommendations, try to find one whose situation is similar to yours. If you are a small business owner, ask other small business owners for recommendations. They may be able to provide you with the name of a firm that specializes in business tax preparation.

Some tax preparers are industry-specific and can provide their clients with detailed information pertaining to their industry. For example, there are some tax preparers who focus on providing tax services to the real estate industry. If you are in a specific industry, ask fellow industry professionals for recommendations.

There are many online resources for finding a tax professional. Some online directories list contact information for accountants and tax professionals. There are websites that list all of the Enrolled Agents (EAs) and Certified Public Accountants (CPAs). Other resources, such as Yelp.com, allow users to leave reviews for professionals. For example, http://www.yelp.com/biz/stratatax-san-diego-2 shows client reviews for StrataTax.

Other professionals can be a valuable resource for recommendations. StrataTax, a San Diego tax preparation and business consulting firm, has a network of professional contacts across a wide spectrum of specialties.

Professionals in tax-related industries often work closely with other tax preparers. Typically, they have seen their work first hand and can vouch for the quality of their work. If you use a payroll company to do your payroll, they may have close connections to tax preparers. Likewise, a bookkeeper might have existing relationships with tax professionals and can guide you in the right direction.

Professionals outside of the tax world may be able to provide you with recommendations for some of the best tax preparation firms as well. In fact, they may even recommend their own tax preparer or one that they have worked closely with in the past. Attorneys often have a few tax preparers in their professional network.

Tax preparation does not come up often in most conversations and people tend to not be vocal about their tax preparation experience. However, they may have a wealth of information regarding tax preparers, so don’t be afraid to ask.

TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

Categories Tax Planning and Strategies
Comments (0)
Posted by: StrataTax
November 26, 2012

Find a Tax Preparer That Meets Your Needs

Tax Preparers that Meet Your NeedsWith tax season approaching, now is the time to ensure that you have the proper tax professional lined up to prepare your tax return. Find the proper tax preparer by understanding why you should switch and what to look for in the new tax preparer.

Why Change?
If your tax situation became more complicated, such as if you bought a house or a rental property, it might be time to upgrade to a more experienced tax preparer.

Owning your own business also brings new and unique tax challenges. If you used to do your taxes yourself or your current tax professional focuses on individuals, it might be best to find one that focuses on businesses. A tax professional who specializes in businesses can help you identify deductible expenses for your business.

Understand Your Options
Generally, there are three different levels of tax preparers: Registered Tax Return Preparer (RTRP), Enrolled Agent (EA), and Certified Public Accountant (CPA).

Registered Tax Return Preparer (RTRP) – A Registered Tax Return Preparer is the most basic type of tax professional. They are designated by the Internal Revenue Service (IRS) to prepare income tax returns. They receive their designation by taking tax related courses and passing a test. They are typically qualified to focus on simple individual tax returns. A Registered Tax Return Preparer should generally be used if your tax situation is standard and simple.

Enrolled Agent (EA) – An Enrolled Agent is designated by the IRS to represent clients before the IRS, such as during an audit. Enrolled Agents are admitted to practice and represent taxpayers in all fifty states at all levels with the IRS. EAs receive their designation by taking and passing a series of exams or by working at the IRS for at least 5 years. EAs tend to be more qualified than RTRPs in handling more complex tax issues. They are typically qualified to handle complex individual tax returns and basic business tax returns.

Certified Public Accountant (CPA) – A Certified Public Accountant is typically the highest qualified, experienced, and educated of the three types of tax preparers listed here. A CPA passed an extensive test focused on taxes and accounting. They are most appropriate for handling complex personal tax issues and business tax returns. Due to their level of training and experience, a CPA will typically charge more than an EA. Like an EA, a CPA is allowed to represent clients before the IRS.

Tax attorneys maintain a high understanding of tax laws. Typically, most tax attorneys will work with people on tax issues, but outsource the actual preparation of the tax return.

The title or designation of a tax preparer isn’t the only qualification you should consider when searching for a new tax preparer. If possible, talk to your tax preparer before your initial meeting. If there are issues that make your tax situation unique or complex, ask if he has specific experience handling those issues.

Some tax preparers also provide tax planning services. If you want to use a tax professional to help you strategize and make financial decisions throughout the year, search now.

For convenience, look for a tax firm or tax professional that provides all of the services you require. For example, StrataTax provides a unique blend of tax preparation, tax planning, and business consulting services.

You should feel comfortable working with your tax professional, so personality is often an important qualifying factor. Typically, the complexity of your tax return dictates how much time you will spend working with your tax professional. For simple returns, such as a W2 employee who doesn’t own a home, it is possible that your return will be completed within an hour. For more complex returns, including landlords and business owners, be prepared to spend considerable time with your tax preparer. For this reason, it is important that you find a tax preparer you are comfortable working with.

Start shopping for a tax professional early. You’ll be more successful at finding the best tax professional when you’re not up against a tax filing deadline.

TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

Categories Tax Planning and Strategies
Comments (0)
Posted by: StrataTax
November 26, 2012

Don’t Miss These Requirements for Estimated Tax Payments

estimated tax paymentsQuestion:  How Do I Know If I Have To File Quarterly Individual Estimated Tax Payments?

 

If you meet both of the following criteria, you must make estimated tax payments for the current year:

  • You expect to owe at least $1,000 in tax for the current tax tear, after subtracting your withholding and credits
  • You expect your withholding and credit to be less than the smaller of:

a)      90% of the tax on your current year’s tax return, or

b)      100% of the tax on your prior year’s tax return.  (Your prior year tax return must cover all 12 months)

 

The percentages above may be different if you are a farmer, fishermen, or higher income taxpayer.

 

Your tax preparer can provide you with more information regarding estimated tax payments and your income tax return. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning.  Call us at (858) 225-7720 to setup your free initial consultation or visit us at www.StrataTax.com for more information.

 

______________________________________________________________________________

StrataTax wants to hear from you and encourages comments.  You are invited to share your opinions or ask questions related to this topic by visiting us at www.StrataTax.com/tools/blog.  Also, please visit our Tools section (http://stratatax.com/tools) to explore our library of resources that offers tips and strategies on a wide range of tax and business related topics.

 

 

TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

Categories Tax Planning and Strategies
Comments (0)
Posted by: StrataTax
April 6, 2012

Special Tax Obligations for the Self-Employed

self-employedIn determining tax obligations for the self-employed, it is important to first define who is considered self-employed.  Generally, you are self-employed if you carry on a trade or business as a sole proprietor or an independent contractor, are a member of a partnership that carries on a trade or business, or you are otherwise in business for yourself.

 

Self-Employed Tax Obligations.  As a self-employed individual, generally you are required to file an annual return, pay estimated tax quarterly, and pay self-employment tax.  Self-employment tax (SE tax) is tax primarily for individuals who work for themselves and consists of social security and Medicare tax.  It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.   You are generally liable for self-employment tax if you had net earnings from self-employment of $400 or more.  Self-employment tax is a percentage of your net earnings from self-employment.  Net earnings are calculated as the gross income you derived from your trade or business less ordinary and necessary trade or business expenses.   For more information regarding the self-employment tax, see the StrataTax article “Understanding the Self-Employment Tax”

 

You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions.

 

Quarterly Payments.  Because you do not have an employer withholding Social Security and Medicare taxes and income tax for you, you use estimated tax to pay these taxes.  Use the worksheet in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax and if so, the amount of the taxes.  You will need information from your prior year’s tax return to complete this form.  Use the blank vouchers in Form 1040-ES when you mail your estimated tax payments.  Payments are also accepted using the Electronic Federal Tax Payment System (EFTPS).

 

In your first year of being self-employed, you will need to estimate the amount of income you expect to earn for the year.  Simply complete another Form 104-ES if during the year you find that you estimated your earnings too high or too low.  This will adjust your payments for the next quarter.

 

Filing your Annual Return.  Use Schedule C  or Schedule C – EZ to report your income or loss from a business you operated or a profession you practiced as a sole proprietor.  File this schedule along with your annual tax return.   Use Schedule SE (Form 1040), Self-Employment Tax  to report your Social Security and Medicare taxes.   Use the income or loss calculated on Schedule C  or Schedule C – EZ to calculate your Social Security and Medicare tax liability for the year.

 

Your tax preparer can provide you with more information regarding tax obligations for the self-employed. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning.  Call us at (858) 225-7720 to setup your free initial consultation or visit us at www.StrataTax.com for more information.

 

______________________________________________________________________________

StrataTax wants to hear from you and encourages comments.  You are invited to share your opinions or ask questions related to this topic by visiting us at www.StrataTax.com/tools/blog.  Also, please visit our Tools section (http://www.stratatax.com/tools) to explore our library of resources that offers tips and strategies on a wide range of tax and business related topics.

 

 

TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

 

 

Categories Small Business Tax Strategies, Tax Planning and Strategies
Comments (0)
Posted by: StrataTax
April 1, 2012
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