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The 20-20 Vision

20-20 Vision – April 2016

They say April showers bring May flowers… well April also brings us the end of tax season.  Woo hoo!  We are almost there.  But if you have not filed your taxes or gotten the process started with 20-20, it’s time to either get on it… like now… or start thinking about extending.  We’d love to help you make the deadline, or we can file an extension for you to take a little pressure off.  If you would like some last minute tax help, let us know!  You can reach us at info@20-20accountingsolutions.com or by phone at 205-434-1272.

Should You Extend?

We get a little extra time this year to file our taxes.  Thanks to the District of Columbia’s observing Emancipation Day on 4/15/16, the deadline has been extended to the following Monday, 4/18/16.  But for some, that won’t be enough time.  So what do you do?  Extend!  Roughly 7% of Americans file for an automatic 6 month extension on their taxes each year.  This can be done easily with the IRS using Form 4868.  The state of Alabama grants an automatic extension without filing any additional forms.  All taxpayers who are required to file a return but will not be able to by the deadline should file for an extension.   Keep in mind that this is an extension to file, only, and not an extension to pay.  All payments are still due by the due date.  If you cannot pay, the IRS may work with you on setting up an installment agreement that works for you or you can apply for a 120 day extension to pay.  There is a 5% per month penalty for late filing which can easily be avoided with an extension, so it’s silly to incur the late filing penalty when you don’t have to just because of a cash crunch.

5 Things All 1099 Contractors Should Know

 

Have you made a career switch where you are no longer considered an employee but rather a 1099 contractor?  Are you an insurance agent, independent sales consultant, real estate agent, or something else in the mix?  If so, your taxes are no longer as simple as reporting what your boss puts on your w-2—not at all, however, CONGRATS, you are now a business owner!!  Rather than a W-2 you will now be getting a 1099-Misc that shows you how much denero your business brought in each year. Being a business owner has many perks, but with the perks come the responsibilities. Check out our 5 tips to help you better understand both the benefits and responsibilities of being a 1099 contractor.

You get to write off all your business expenses.  As a contractor, you get much more leniency in what qualifies as a business expense.  For example, as an employee you don’t get to write off your commuting costs.  But if you’re a contractor and primarily work from a home office, any commutes to client offices are considered business miles. 

Writing off all your business expenses is the easiest way to save money as a contractor.   

But don’t write off personal expenses or double count expenses.  Do you use the same cell phone for personal and business use?  Some people try to write off the entire expense as a business expense, which the IRS frowns upon. So how do you write off this expense? You have to estimate how much of the cost is related to personal versus business use, and can only write off the business portion. The IRS allows you to use some judgment here, so just make sure you can tell a compelling story for why you’re writing off X% of that cell phone bill. 

And don’t double count your expenses.  The most common culprit is car expenses. Most people use the Standard Mileage Rate ($0.575/mile for 2015). This rate includes gas, repairs and maintenance, lease payments, insurance, depreciation, and registration. Many people use the Standard Mileage Rate to write off their mileage, but then also write off individual gas or repair receipts (this is a separate method called the Actual Costs Method). This means you’re double counting the expense! 

Keep adequate records.  The IRS requires you to keep proof of all business receipts, mileage, and the like to prove that the transactions actually happened. If you don’t have these, they might refute the expense – meaning that you now owe back taxes and penalties

You may need to pay quarterly taxes, now.  As a W-2 employee, this was something you never had to worry about.  Your taxes were withheld from your paycheck each pay period and you never even saw it.  Now you need to set aside money each month and send it to the IRS each quarter to cover your taxes.   

In general, if you expect to owe more than $1,000 in taxes for the year, you have to pay quarterly estimated payments.  This may seem unfair but  think of it like this: the government’s income comes from taxes.  What would you do if you only got paid once a year in April? 

Don’t sweat self employment tax.  One of the largest differences in taxes between an employee and a contractor is how we pay to support Social Security and Medicare.  An employee pays what is called FICA taxes.  As an employee, you pay half and your employer pays the other half (7.65% each).  

 As a contractor, this tax is called Self Employment tax and you pay the full amount (15.3%). So your taxes are ~7.65% higher than an employee. But, you also get more leniency in writing off expenses as a contractor, so if you are smart about your business, you should be able to offset this with additional business deductions and may be able to more than offset that 7.65% difference. 

So why do people think contractors pay more in taxes than employees?  Because as an employee, your employer has already withheld taxes from your pay – so you never see it.  As a contractor, you receive the money then have to pay it back out in taxes, so you feel the pain a little more.  But just heed our advice in this article and it shouldn’t hurt at all. 

Please reach out to 20-20 if you have any questions about your tax situation as a 1099 contractor. 

Tax Due Dates for April 2016

Monday, April 11th

Employees who work for tips – If you received $20 or more in tips during February, report them to your employer.  You can use Form 4070.

Tuesday, April 18th

Employers – No payroll withholding. If the monthly deposit rule applies, deposit the tax for payments in March.

Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in March.

Household Employers – If you paid cash wages of $1,900 or more in 2015 to a household employee, file Schedule H (Form 1040) with your income tax return and report any employment taxes. Report any federal unemployment (FUTA) tax on Schedule H (Form 1040) if you paid total cash wages of $1,000 or more in any calendar quarter of 2014 or 2015 to household employees.

Partnerships – File a 2015 calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner’s Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1. If you want an automatic 5-month extension of time to file the return and provide Schedule K-1 or a substitute Schedule K-1, file Form 7004. Then file Form 1065 by September 15.

Electing Large Partnerships – File a 2015 calendar year return (Form 1065-B). If you want an automatic 6-month extension of time to file the return, file Form 7004. Then file Form 1065-B by October 17. See March 15 for the due date for furnishing the Schedules K-1 to the partners.

Corporations – Deposit the first installment of estimated income tax for 2016. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.

Individuals – If you are not paying your 2016 income tax through withholding (or will not pay in enough tax during the year that way), pay the first installment of your 2016 estimated tax. Use Form 1040-ES.

Individuals – File an income tax return for 2015 (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic 6-month extension of time to file the return, file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, or you can get an extension by phone if you pay part or all of your estimate of income tax due with a credit card. Then file Form 1040, 1040A, or 1040EZ by October 17.

Wednesday, April 18th

Alabama Businesses – All state Sales and Use taxes are due.