Category Archives: Tax Preparation

Estimating Estimated Quarterly Tax Payments

Something all businesses have to think about is the reality of quarterly estimated tax payments. In essence, this is the government’s way of trying to get you to pay a part of your taxes quarterly based on figuring out how much you believe you’ll owe by the end of the year in total. The IRS has this thing out there that says they can charge an interest rate of around 3% if you are underpaying your taxes quarterly; it’s “around” because they can change the rate each quarter.

That covers the federal taxes, but what if you’re in a state that has an income tax as well? Although the amount will be much lower that you might be requested to make it seems that each state has different rules on whether they’ll penalize you or not and what the rate will be.

If your business income is pretty similar each year, this becomes a fairly easy calculation. All you really have to do is look at what you make the previous year, how much in taxes you had to pay, divide that by 4 and you know how much you should be paying. Nice, clean and simple.

But life isn’t always like that. Consulting businesses, seasonal businesses, and many other home businesses don’t have that kind of regular money coming in. Some are doing very well while other have periods of struggle, sometimes even lasting the entire year. Even if you happen to be incorporated, the normal rules of engagement might not quite fit what your tax liability might be. After all, there are expenses you get to write off that might impede your own ability to know whether you should even have to pay any quarterly taxes. Your accountant can help you if you have major worries about this.

Here are some tips to help you along, with a caveat that you follow these tips at your own risk because there’s no way we can know everything about your particular situation. It’s a place to get started though, based on research and track records, that might help guide you in some fashion.

First, if you believe your tax liability will be less than $1,000 for the year as an individual or $500 for a corporation, you don’t have to think about quarterly taxes at all. You probably won’t have to deal with any taxes at all, but it depends on your expenses and other things associated with your business.

As a point of clarification, this isn’t saying if you make less than $1,000 or $500. You know the withholding booklet you look at after you’ve calculated your income to see how much tax it says you should have paid for the year? It’s all based off that, and after you’ve estimated your expenses. Thus, if you look at the withholding booklet after you’ve done a calculation and your tax liability is under those numbers, you’re probably good.

You need to remember to look at this as if it’s your yearly income if that’s possible, or else you’ll run into the same problem some people have in not making sure they have enough money taken out for state taxes if they work part time jobs. And you have to also remember to base your calculation off your normal tax filing status; the amount if you’re married will be different than if you’re single.

Second, what if you want a quick down-and-dirty figure to go off? Based off research, there are 4 recommendations:

1. If your gross income is more than $10,000 and your state has income taxes, pay at least half of your state’s rate. Therefore, if your state’s income rate is 4%, pay at least 2%. That’s not much overall so if you want to err on the side of caution go ahead and pay a bit more.

2. If your gross income is between $10,000 and $20,000, pay at least 10% in estimated federal taxes. The withholding book for married would show $446.30 plus 15% of any amount over $6,538, so the figures will be close.

3. For any amount between $20,000 and $40,000, start your thinking from 15% and go up from there. Thus, if you believe your yearly gross will end up being $20,000, think of paying at least $3,000, which quarterly would be $750. For every $5,000 increase add 1-2% to your payment. Now, if you believe your liability will be closer to that $20,000 figure you can probably think of lowering your payment some and still get a refund; if it’s closer to the $40,000 be ready to pay more.

4. If your gross income gets to being at least $57,000 a year, that’s when you have serious thoughts on paying more in estimated taxes. At a minimum your income tax liability will be around $12,500, and you’ll want to continue looking at that 1-2% estimated increase per $5,000.

This is just the down and dirty. There are ways to bring your liabilities down that, if you use a tax professional or accountant, can help to save you money on your taxes. If you’re in a business where you might have to deal with estimated tax payments, obtaining the services of a professional is worth the trouble.

Are You Taking Enough Money Out For Your Taxes?

By now most people should be getting their taxes done. If you knew you were getting a refund you’ve probably already done them and received your money back; lucky you.

At the same time, there are a lot of people, probably half the population, that’s either already received or will be getting the biggest shock of their lives when they find out that they actually owe taxes, and not just a small amount. The main culprit? Your part time job.

This isn’t necessarily true in all states by the way, as a few states don’t have income tax. However, in states like New York that not only has a state tax, but a relatively high rate, people are surprised often because there are a few things they don’t know about.

Even though I said the rate is high, that’s only compared to other states. It’s drastically lower than federal rates. Thus, if you don’t make a lot of money, as in full time income, there’s a possibility that your weekly pay might not be high enough for whomever you’re working for to take anything out for state taxes. As it applies to federal taxes, you’ll have something taken out, but very little.

As it applies to state taxes, when it’s time to file you’ll have this lump sum of income showing that no taxes were taken, which means now you’ll have it applied to the lump sum. The amount you owe will probably supersede any full time taxes that were taken out, thus you’ll end up owing taxes of at least a couple hundred dollars if not more, depending on how much your part time job was paying you.

As it applies to federal taxes, the same kind of thing will occur, even if some money has been taken, because of how low it is. Depending on how much you were making per week, your liability could be in the high hundreds or even low thousands; trust me when I say this, because we see it often.

Does this mean you shouldn’t work any part time jobs? We’re not going to go out on that limb. What we will say is that instead of claiming so many more dependents you have your employer take out a lump sum dollar amount for both federal and state taxes. A general recommendation is to have at least $10 taken out of your weekly check for state taxes.

Federal taxes are harder to figure out, so there’s two responses for it. Either have the employer take out $15 on top of whatever they’re already taking or, if you’re also working a full time job, lower the amount of dependents you’re claiming. Many people don’t know that you can claim a negative number of deductions, which takes more money out of your check. If you’re investing the extra bit by claiming more deductions then you could end up ahead. Since most people don’t do this, you might want to explore whether going -1 to -3 can offer you some benefit.

Unless you’re prepared to pay a bit lump sum tax payment, it’s better to err on the side of caution. If you believe you can’t afford even $25 per paycheck coming from your part time job, you might have to reconsider whether it’s beneficial to you in the end, or whether you need a part time job that pays more money.

At least now you know.

The Four States Of Taxpayers

How do you prepare for your taxes? Strange as this may seem, it’s not necessarily true that people who are expecting big refunds are always the people who file their taxes fast and early. It’s also not true that people who feel that they might have to pay something are always waiting until the last minute either.

Dealing with taxes is a much more mental process than that. As it is with business and employees, you find that not everything concerning taxes has to do with money. It has a lot more to do with personality and the perception of it all. Let’s take a quick look at the four states of taxpayers.

1. Energetic. Those people who are energetic are ready to get things out of the way, no matter if they’re getting a refund or not. Those who are getting refunds look forward to their return and how they’re going to spend the money. Those who aren’t sure or know they’re not going to get a refund want to know what their liability is and also want everything to be over so they can get on with life. There’s no hiding with these folks; good for them.

2. Distracted. Distracted people mean well, but they keep putting things off because they have other pressing matters to deal with. Sometimes those pressing matters are as minor as getting something to eat, but who doesn’t think eating is more important than taking care of their taxes?

3. Stressed. Just like the energetic people, it doesn’t matter whether they’re getting a refund or not. They see the entire process of taxes in the first four months of the years as a major challenge. Numbers are confusing to them, or maybe past history has put them on edge. If you’re married, you might have had problems getting refunds so many times that this is an unpleasant time of year, no matter how much in taxes you paid out.

4. Laid back. These folks don’t really care one way or another; they’re just not in the mood to be bothered by any of it. I’ve known people who didn’t file their taxes for a couple of years in a row who, if they had, would have reaped thousands in refunds, and even after they eventually file and learn about the penalties, they’re not bothered by any of it. I know others who haven’t filed taxes, ended up owing money, and set up payment plans and got on with life.

For all of these states, it can help to have an accountant who knows you and is prepared to get you through the process. Accountants obviously prefer to get everything early, and if they know your pattern they’ll work with you for your benefit and theirs as well. Many people need the extra boost, and they like knowing that their accountant cares about their needs. It’s something to think about at tax time when you have to decide between one of those tax agencies or an accountant you’ve worked with before.

Preparing For Tax Season

True, it’s still 2012, but that doesn’t mean that you need to wait until the last minute to prepare for your 2013 tax returns. Before we get into that, we’d like to remind you of our previous posts Trip Expenses You Can Deduct and Are You Preparing For Next Years Taxes Yet.

Here are some highlights we’d like to remind everyone about:

Child Tax Credit is $1,000 per child now, but decreases to $500 in 2013.

Earned Income Credit up to 3 children has a maximum credit of $5,891. This year there’s certain proof you have to provide to qualify for the credit which includes school records, medical records, utility bills, and property tax records. Check out the new form to see what’s specifically required of you.

Business mileage for 2012 is 55.5 cents a mile, and in 2013 it goes up to 56.5.

There’s no increase in capital gains taxes for 2012, but in 2013 it increases to 20%.

Student loan interest gives a deduction up to $2,500.

The electronic filing date has been pushed back until January 22nd in 2013; no real idea why, but last year some people waited longer than normal for their refunds so maybe it’s related to that.

If you had a lot of medical expenses and kept all your receipts, make sure to bring them in to see if you might qualify for some write-offs.

More changes for 2013? No one knows yet. You’ve probably heard “fiscal cliff” until you’re sick of it but no one knows what’s coming just yet. We know that someone will have increased taxes but unsure of who. We also know that more changes will come to health care in 2013, though the bill officially doesn’t kick in until 2014, and we’re unsure what that might mean financially right now either.

Overall, just be prepared for anything, and of course don’t wait until the last minute to get your information to your accountant or tax professional, as corporate taxes this year are due on March 15th.

Are You Preparing For Next Year’s Taxes Yet?

I hear you now saying “It’s only September; why would I be ready for next year’s taxes already?”

Many people think that they should wait until the new year has begun to start getting ready for the next year’s taxes. As an accounting firm, we tend to disagree with this for many reasons.

One, what we find is that people will put things off until the last possible moment, and then suddenly start scrambling around trying to pull everything together at the last minute and are unable to find everything they need. Remember, you get to write off your business expenses, but if you’re unsure of all of them you’ll miss out.

Two, if you’ve been writing your mileage down but not properly logging it, if you do it ahead of time that’s one less task you’ll have to deal with later on. Keeping track of it monthly helps you to remember which part of travel was for business and what wasn’t business travel. For instance, if you took a quick trip to an office supplies store and bought something you’ll use in your business, in six months you’ll have forgotten that you did that and missed the opportunity to claim that mileage.

Three, sometimes you forget what items were business expenses after awhile. For instance, if you’re a corporate consultant your business clothes are a legitimate write off, and if you remembered to keep the receipt and write something on it so your accountants know, that’s a good thing. But if you just tossed it into a receipts folder and now it’s months later, you might not remember what that purchase was for unless you went to a specialty shop specifically for clothes.

Four, you might want to think about paying some of your estimated quarterly taxes if your income was high enough so that it’ll reduce some of your tax payments for the new year. This means you’ll have had to be tracking your income as well to make sure you don’t pay too little or too much. And you’ll want to make sure you’ve indicated in some fashion on your bank statements which payments went to that.

Five, bank statements. Sometimes it’s not enough to have them, as you know. For your business account, if you make money in multiple ways and you want to track it all then you probably go through the process of pulling out your statement and going through it marking everything. If you do it ahead of time you’ll save yourself the frustration of coming to certain items and wondering what they were.

These are only some of the things you probably want to think about ahead of time, and with only 3 months left in the calendar year, getting a jump on things would probably ease your mind a bit.