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June 2019

These Are Some Self-Employment Tax Advantages of S Corporations 

Self-employment taxes tend to be one of the biggest challenges for freelancers, startups, and anybody working from home or on a business of their own and are usually subject to higher Social Security and Medicare taxes. However, one great way to deal with these taxes and make them more manageable is by setting your business as an S Corporation. This way, the IRS will look at your taxes from a different perspective, which could result in lowering the amount of taxes you would pay as self-employed.  

One of the most relevant advantages of filing as an S Corporation is that it can help us reduce the amount of FICA taxes that we pay, which include Social Security and Medicare taxes. When we file our taxes as self-employed, we must cover the entire amount of FICA taxes, yet when we are employees, our employers cover a part of that. When we file as S Corp, though, we can report a part of our annual gross revenue as a net profit as long as we take a portion of the AGR to cover our salary. This way, instead of paying the 15.3% of FICA taxes from our profits, only the part of our salary is subject to taxes, and the rest net profit will be taken as a distribution from the business.  

Working as an S Corp allows us to classify a portion of our income as our salary, and another portion as a distribution. As we mentioned above, the portion that is meant to cover our salary will still be subject to self-employment taxes, while the portion that qualifies under distribution will be subject to ordinary income tax. Therefore, this is a great way to lower our FICA taxes balance, which could end up representing a significant reduction.  

On the other hand, we must be cautious when we are filing as an S Corporation since this type of incorporation will make the IRS take a closer look at our income tax return. S Corps structures have been used to abuse the system and avoid self-employment tax, which will result in a more careful review. Therefore, we need to make sure we are designating a reasonable amount of our company’s income as our salary so that we don’t end up being subject to an IRS audit. For example, if our business is making an annual gross revenue of $50,000, a reasonable salary would be around $25,000 to $30,000. 

It is important to do our corresponding research before deciding to turn our company into an S Corporation, since there may be some additional costs we might not be aware of. For example, S Corps will require legal and accounting costs, both for the start-up and once we have our operations running. Also, some states require S Corps to cover additional taxes and fees, just like the case of California, where S Corps are required to cover tax of 1.5% on its income, with a minimal annual amount of $800.  

These Are Some of the Tax Deductions Corporations Can Take Advantage Of 

Being a business corporation comes with many advantages, including several tax deductions that the IRS allows for expenses that are needed to keep our operations going. There are different types of expenses that can be deductible, including current expenses and capital expenses. Current expenses are the expenses needed to keep our corporation fully operational, while capital expenses refer to investments made in order to generate income for our business. So, if your business is a corporation, or you were thinking about incorporating your business, these are some of the tax deductions you can take advantage of.  

For every business and corporation that is looking for tax-deductible expenses, operating expenses are customary. These expenses include all those on which businesses rely on to make sure their day to day operations are not interrupted. Some of the most common operating expenses corporations must cover include payroll, office supplies, rent, accounting services, insurance policies, legal fees, and utility costs.  

Corporations are also allowed to deduct all the employee-related expenses they need to cover, which turns out to be a great benefit for both employers and staff members. This is because such deductions can allow businesses to give more perks and benefits to their employees. Some of the most common employee expenses include health benefits, salaries, performance bonuses, sick leave, and vacations. Also, any work-related travel expenses for employees like travel or use of their personal vehicle for business matters are deductible as well.  

When we are in charge of a business, we must make sure we take care of everything and everyone and having an insurance policy that offers the protection we need is essential. However, covering insurance premiums can become one of the biggest expenses for corporations. Luckily, insurance expenses can be tax deductible, which works as a great incentive for businesses to purchase comprehensible and extensive coverage. Insurance premiums for theft and fire damage, liability and worker’s compensation, even malpractice or errors and omissions insurance premiums can qualify for tax deductions.  

Every corporation is different, but many need to cover travel expenses whenever they are visiting a client, looking to expand their business, or attending conferences and trade shows. Regardless of our travels being local or long distance, the expenses generated also qualify for corporate tax deductions. Whether we are traveling by air, by train, or land, we can deduct these expenses. Also, meals and gratitude expenses qualify for these deductions, too.  

If you have any questions regarding tax-deductible corporate expenses, don’t hesitate and get in touch with us. We’ll be more than happy to give you the guidance and assistance that you need for your business.  

 

Even When Filing Season Is Over, Tax Scams Are Still A Real Danger 

With the summer being so close, one of the last things on our minds would be tax season, since most of us took care of our income tax report a couple of months ago, and don’t plan to start working on next year’s later this year. However, scammers are not known for taking vacation breaks, and they are still active, trying to surprise unsuspecting taxpayers. This is why we must remain alert and be on the lookout for any suspicious email, letter, or phone call we might receive.  

One of the scams the IRS is warning taxpayers is what they have called the SSN hustle, a new variation of already known scam practices. This refers to situations on which scammers call taxpayers and tell them their Social Security Number will be suspended, deactivated, or deleted because of a number of reasons. Fraudsters try to catch taxpayers off guard, having them give out personally identifiable information like SSN or bank account numbers.  

In some cases, these calls are performed by automated systems that will make taxpayers call a particular number and provide their Social Security Number and other information in order to avoid severe consequences. The message taxpayers may hear will state that their SSN has been “suspended for suspicion of illegal activity”, urging them to get in touch in order to avoid having their assets or benefits frozen or deleted.  

According to the IRS, phone call tax scams are a real threat to taxpayers, so you should remember that SSNs do not expire or need to be confirmed or reactivated. Besides, when we have an outstanding tax balance, this wouldn’t affect your SSN. If you happen to receive a phone call that sounds like a scam, remember you can report the number to the IRS on their website 

Another common scam we need to be aware of is one known as the Fax Tax Agency Scam. During the last couple of years, many taxpayers have become more informed regarding phone call tax scams, and now know that the IRS will never demand an immediate payment over the phone. Scammers know this, and they have developed other ways to trick taxpayers into sharing personal and sensitive information.  

Now, scammers will first mail or fax a tax bill signed by the “Bureau of Tax Enforcement”, which is a completely fake agency. They will say there is a balanced owed to the IRS, and that immediate payment is required before legal action is taken against the taxpayer. These documents may use the IRS logos and emulate their formats in order to look more convincing. Therefore, you shouldn’t engage or provide any kind of information, and contact the IRS directly instead.  

 

Do You Need to Amend Your Tax Return? Here’s What You Should Do 

Tax season ended a couple of months ago, and many of us have started to think ahead and prepare for next year’s taxes instead. However, we might want to go back to our tax return and make sure we submitted everything properly and without errors. Even when the IRS processes and corrects and math error they might come across, we shouldn’t wait for them to make their adjustments and double check our income tax report. This is what you need to do in order to submit an amended tax return.  

First of all, we need to understand which scenarios would require us to submit an amended tax return to the IRS. The most common scenarios that require amending our tax return include filing our taxes using the wrong filing status, claiming credits or deductions that we were not eligible for, and forgetting to claim a credit or deduction to which we were actually entitled. If we find ourselves in any of these situations, we need to submit an amended tax return.  

We shouldn’t have to worry about this too much, though, since the process of submitting an amended tax return is quite simple. The IRS has made available a specific form we need to fill especially in these situations. This is Form 1040X Amended U.S. Individual Income Tax Return, which you can find in the IRS website. You will find the instructions to follow, and in most cases, supporting information might be needed from you. So, make sure you have every paper and document you need before proceeding.  

One of the most common concerns for taxpayers who submitted their income tax return with an error is being subject to an IRS audit. However, we need to remember that they use software that is designed to spot any red flags on tax returns but amended tax returns are reviewed by IRS agents personally. Therefore, the chances of being subject to an audit might be slightly higher.  

Nonetheless, when we submit an amended tax return because of an accuracy situation, we shouldn’t really worry about being audited. Say you forgot to report investment income as part of your original income tax return, and then submit an amendment to correct this error. The IRS would see this but wouldn’t really subject you to an audit. On the other hand, if we didn’t include taxable income and didn’t submit an amended tax return, the IRS might flag you and an audit would happen.  

Whichever the case may be, we recommend going over your income tax return and making sure everything is correct and complete. If you have any questions about it, contact your tax advisor and go over the report together. Otherwise, we might find out we had a pending balance once the IRS notifies us, which would make us subject to penalty fees and interest charges.