Even though tax season is over, it will return again in future years and the same issues may pop up as in the past. If you do your own taxes, you can ask yourself the same questions when you prepare them to see if any of the ideas apply to you. This article serves as a handy reference of things to have at your fingertips for any tax season.
There are some assumptions being made here which will be stated in this paragraph. The tax rules being assumed here are the Canadian Tax Code, using Ontario as the province levying the taxes. These ideas can be applied to the other provinces of Canada, but always check with the Canada Revenue Agency or applicable tax agency for changes, which occur frequently. These concepts can be applied to other countries, but the same caveat applies. The situation referred to here as a personal income tax situation. For self-employment or any kind of business, some of the rules may be different.
Does my refund depend on the income taxes I have paid throughout the year? The answer is yes. The government will only give you money as a refund if you have paid income taxes during the year, or you paid more than the amount of income taxes you "should pay" according to the tax calculations. The refund is calculated only on your taxable income, and not on other money you receive from the government. Examples of money that would not be taxed are lottery winnings or gifts. Other monies that are not taxed are credits like the GST/HST credit, Ontario Trillium Benefit, or the Child Tax Benefit. What this means is that if you are thinking of claiming a credit, or putting money into an RRSP, you should check the money you earned during the year and see how much taxes you have actually paid. The taxes in question here are only the income taxes - not property taxes, HST or taxes in the form of registrations or fees. How do you know if you are paying income taxes? Your pay stub will show the taxes being deducted. If you have a casual job, a temporary job or self-employment, there may not be any taxes deducted because you are either not expected to make much money, or you are expected to pay all the taxes when you file them at the end of the year. If you haven't paid any income taxes throughout the year, do not expect a refund at tax time.
Can my tax return be changed in a following year? The answer is yes. When would you do this? If you discover a credit that you could have claimed after the fact, but did not claim it, you can file for an adjustment and have the return recalculated at any time. Many people believe that once a tax return is calculated that it is carved in stone. This simply is not true, however it is easier to claim credits in the current year versus going back into previous years. The rules sometimes change if you are going back to previous years versus claiming in the current year because adjustments may affect credits that you received, or because the income used to calculate the credits would be changed. You can also file for an adjustment if you made a mistake, or if you something happened in a later year which affects the tax returns of prior years. An example of this would be a tuition amount from going to school that was not claimed in the year in occurred.
Do I have to file taxes by the April 30th deadline if I am getting a refund? The answer is no in most cases. If you are receiving a refund, you can usually file after the deadline and not have any issues with paying interest or penalties. This is because interest will not be charged when the government owes you money. The ideal thing to do however if you are getting a refund is to file taxes well in advance of the April 30th deadline. You will get the money sooner, not be in long lineups, will not have as many mistakes on your tax return, and will likely receive the money faster because the government is not as busy processing returns. If for some reason you cannot file taxes by April 30th such as being out of town for example - you can file them after April 30th, but you may have to pay interest or penalties if you owe money to the government.
Should I file taxes if I don't owe any money and I am not getting a refund? The answer is generally yes. If you are not paying taxes or getting a refund, filing taxes on time would be advantageous for you if you are receiving credits from the government. Examples of these credits are the GST/HST credit, the Ontario Trillium Benefit, and the Canada Child Tax Benefit. Whenever you receive money from the government, you should keep your records with them up to date and accurate. If you file taxes late, or have issues with your records, credits may get withheld or reduced because if there is a possibility that you may owe the government money, you will have delays receiving the money.
Should I keep track of carry forward amounts? The answer is yes. A carry forward amount is a credit that would allow you to get taxes paid back in a future year. Examples of this are tuition fees or RRSP contribution room. If you go to school in 2010 as an example, and you did not earn much money in 2010, you can carry forward that tuition credit to the following year. You can use the credit in 2011, 2012 or any other year until the credit is used up. The same applies for RRSP contribution room. If you do not contribute to an RRSP in 2010, the room is still available. You can put money in 2011, 2012 or future years until the room is used up. Keep the documents that show what you have left until the room or situation has been used to offset taxes that you would have paid. Bring this information to your tax preparer so they can update whatever tax credit was started in previous years. The good news is that the government keeps track of carry forwards in the Notice of Assessment statement that is given to you after filing your taxes. Therefore, it is not mandatory that you have to keep track of these carry forwards, but it is easier for you if you do.
Is getting a refund a good thing at the end of the tax year? The answer is that it depends. In a given tax year, for whatever money you make, you will pay a given amount of taxes by April 30th. You may pay more taxes during the year and then get some of it back at the end of the year, or pay less in taxes during the year and then have to pay more at the end of the year. Either way, the same amount of money is paid throughout the year, but the timing is different. You can influence the refund by paying taxes earlier, or getting more deductions which will be accounted for later in the year. You can get more deductions using popular methods like RRSP contributions, tuition credits, medical expenses or business expenses. If this option is not available for you, you can ask your employer to take more taxes off each pay cheque, thereby paying taxes in advance. This would generate a refund if you paid more taxes than you should by the end of the tax year. Why would you do this? The majority of people like to get a refund instead of paying taxes at the end of the tax year. Two reasons for this are that saving money is difficult, or if it is difficult to anticipate how much money will be needed to pay the tax bill at the end of the year. If this is your situation, you can essentially get the government to hold money for you until tax time, and then get some of your money back as a refund. If saving money is not an issue, you are better to pay as little tax as possible and pay more at tax time, because you can invest the money during the year.
Taxes are on ongoing exercise, and the more you know what will happen, the better prepared you will be when doing taxes.
Do you want to:
Learn how the world of money really works without the need of a time consuming or expensive course of study
Discuss what you want to achieve according to your horizon
Restructuring your finances to achieve your goals
Advice that is not affiliated with any institution or any product - an independent opinion
If you answered yes to any of these questions, contact me at: Contact me, Joe Barbieri by email at joetheinvestor.today@gmail.com, my web site at http://www.joetheinvestor.ca or by telephone at 647-286-8020 for an independent consultation on what your options are. Note: This article is intended for people who want to learn about the world of finance and how to research for themselves. If you would like to buy or sell investment products, or specific advice on investment products, tax or legal issues, please consult your investment advisor, accountant or legal counsel.
By: Joe Barbieri
Sunday, September 30, 2018
Saturday, September 29, 2018
5 Strategies for Your Business: Taxes and Their Payment Schedules, and Maintaining Records
Payroll accuracy and tax record-keeping is vital to your business' bottom line. Here are 5 Strategies to help you.
Strategy - Withhold payroll taxes on all commission dollars paid.
Commissions represent tax deductible dollars that are paid out to individuals based directly on their performance. These include Sales Commissions, based on the value of sales revenue generated, and Piece Rate Commissions, based on manufacturing units produced. Although commissions are usually variable in nature, they nevertheless represent wages or salaries to the individuals to whom they are paid. For this reason, your business must treat commissions paid as "Payroll", and deduct payroll taxes as applicable, pay employer's matching portion of social security (up to the applicable limits), pay federal and state unemployment (up to the applicable limits), and all other payroll tax related costs.
Strategy - Keep a federal tax forms due date schedule handy as a guide to timely tax filing.
Some of the federal taxes for which a Sole Proprietorship, a Corporation or a Partnership may be liable are listed below on the "Federal Tax Form(s) Due Date Schedule" included for your use. If a due date falls on a Saturday, Sunday, or legal holiday, it is postponed until the next day that is not a Saturday, Sunday or legal holiday (a statewide legal holiday delays a due date only if the IRS office where you are required to file is located in that state.)
You may be liable for the following taxes:
-Income
-Self-employment
-Estimated
-Annual Return of Income
-Social Security (FICA) and Withholdings
Strategy - Make all required Federal "Estimated Tax Payments"
The rationale behind the Internal Revenue Service's (IRS) rules regarding estimated payments is their desire to provide a vehicle for the current payments of federal income and self-employment taxes, not collected through withholding. In general, estimated payments equal the dollar amount of income and self-employment tax that it is estimated will have to be paid, in excess of any outstanding tax credits from previous years, plus current withholding's.
The requirements for making "estimated tax payments" fall into two categories:
1. Individuals -Note: The rules for individuals include:
-Sole Proprietors
-"S" Corporation Shareholders
-Partners in a Partnership
This is true because under each of the above forms of business ownership, the business' profit or (loss) flows directly to each owners "individual" income tax return. There is no "business entity" tax liability for a Sole Proprietorship, an "S" Corporation, or a Partnership.
2. "C" (Regular) Corporations
Each of these two categories will be discussed in turn.
1. Individuals:
No penalty for failure to pay estimated taxes will apply to an individual (business owner) who qualifies under one of the following exemptions:
Exemption # 1:
If the tax due for the current year, after any applicable credits and withholding, is less than $500.
Exemption # 2:
If the taxpayer has no ($0) liability for the preceding tax year provided that the preceding year was a 12-month period. Individuals who do not qualify for either of these two above exemptions may avoid the penalty for failure to pay estimated tax under the following two scenarios, by paying:
-At least 90% of the total tax liability shown on the current year's tax return. or
-100% of the total tax liability shown on the prior year's tax return. Note: A "Special Rule" applies to individuals with "Adjusted Gross Income" (AGI) for the previous tax year equal to, or in excess of $150,000 ($75,000 for married individuals filing separately). In order for these high income individuals to qualify for "prior year safe harbor" thereby avoiding any penalty for failure to pay estimated tax they must pay the lesser amount of:
-At least 90% of the total liability shown on the current year's return.
- OR 10% of the total tax liability shown on the previous year's tax return instead of the 100% required of other individual taxpayers.
All required payments may be made either through withholding, or estimated tax payments. The due dates for individual estimated tax payments are:
Installment Due Date
1st April 15th
2nd June 15th
3rd September 15th
4th January 15th (of the following year)
If this due date falls on a weekend, or Federal holiday, the payment is due on the first following business day. The 4th Installment for a tax year need not be made, if the taxpayer files his or her Form 1040 return, and pays the balance of the amount owing on or before January 31st of the following year.
For the payment of estimated taxes, an individual is to attach the appropriate payment to a Form 1040-ES Voucher (one for each estimated tax payment [installment] owed.)
2. "C" (Regular) Corporations
If it is anticipated that your "C" Corporation will have a current year-end Federal income tax liability (a bill) of $500 or more, this corporation must estimate its Federal income tax liability for the current year, and pay four quarterly "estimated tax installments" (using Form 8109-B) during that current tax year.
"C" Corporations may avoid a penalty if each estimated tax installment equals at least 25% of the lesser of: 100% of the total tax liability shown on the corporation's current year's income tax return or 100% of the total tax liability shown on the corporation's income tax return for the previous tax year, (provided: A positive tax liability was shown and the previous year consisted of 12 months)
Strategy - Keep IRS records for three years - five years if payroll tax information.
You are required to keep business tax records for three years from the due date of your business' return, or from the date the return was filed, whichever is the later. This three year requirement coincides with the IRS's statute of limitations on tax returns. You are required to keep payroll records five years.
Once your business passes the three year statute of limitations (5 years for payroll tax returns), it is immune from IRS audit, unless:
-Your business understated its income by more than 25% in which case, the statute of limitations is extended to six (6) years. or
-You committed tax fraud, in which case a statute of limitations is not applicable.
-You are prohibited from filing an amended tax return after the statute of limitations has expired.
-Your business records include, but are not limited to the following:
TAX RECORDS: Tax returns, financial statements, any financial papers/bank statements, check stubs/canceled checks, sales invoices, purchase invoices and expenditure receipts (checks and cash).
PAYROLL TAX RECORDS: Payroll records (such as time sheets) and payroll tax forms.
Strategy - Avoid creating unintentional taxable business income.
Avoid "Constructive Receipt" of income. One way to implement tax planning for your business is to delay billing your customers, but you must have a "defensible business reason" to do this (other than tax planning) or the IRS will claim your business had constructive receipt of the income during the current tax year, even though these dollars were not actually received until the following tax year. Furthermore, if your business received a check on the last day of the tax year, but held it over until the next "tax year" for deposit, the IRS would consider that your business had "constructively received" the income during the current tax year.
Avoid imputed interest on loans your business owners make to your business and/or loans from your business to its owners.
If you fail to indicate a reasonable interest rate on any of these business-related loans, the IRS will "impute", or assign an interest rate to the loan. This means the individual or entity who makes the loan could have income tax liability on interest that was never received, but rather was imputed by the IRS, in order to create taxable income.
Do not show investment income on a Schedule "C". Investment income, such as interest, dividend, and/or capital gains income is not subject to self-employment tax. All Schedule "C" (Sole Proprietorship) income is subject to self-employment tax unless it is received in the course of your trade or business income as a dealer in stocks or other securities.
If you showed this investment income on a Schedule "C", you would be paying self-employment tax on income that is normally not subject to the tax. Use Schedule "B" instead.
http://Bradgillies.com
By: Brad Gillies
Strategy - Withhold payroll taxes on all commission dollars paid.
Commissions represent tax deductible dollars that are paid out to individuals based directly on their performance. These include Sales Commissions, based on the value of sales revenue generated, and Piece Rate Commissions, based on manufacturing units produced. Although commissions are usually variable in nature, they nevertheless represent wages or salaries to the individuals to whom they are paid. For this reason, your business must treat commissions paid as "Payroll", and deduct payroll taxes as applicable, pay employer's matching portion of social security (up to the applicable limits), pay federal and state unemployment (up to the applicable limits), and all other payroll tax related costs.
Strategy - Keep a federal tax forms due date schedule handy as a guide to timely tax filing.
Some of the federal taxes for which a Sole Proprietorship, a Corporation or a Partnership may be liable are listed below on the "Federal Tax Form(s) Due Date Schedule" included for your use. If a due date falls on a Saturday, Sunday, or legal holiday, it is postponed until the next day that is not a Saturday, Sunday or legal holiday (a statewide legal holiday delays a due date only if the IRS office where you are required to file is located in that state.)
You may be liable for the following taxes:
-Income
-Self-employment
-Estimated
-Annual Return of Income
-Social Security (FICA) and Withholdings
Strategy - Make all required Federal "Estimated Tax Payments"
The rationale behind the Internal Revenue Service's (IRS) rules regarding estimated payments is their desire to provide a vehicle for the current payments of federal income and self-employment taxes, not collected through withholding. In general, estimated payments equal the dollar amount of income and self-employment tax that it is estimated will have to be paid, in excess of any outstanding tax credits from previous years, plus current withholding's.
The requirements for making "estimated tax payments" fall into two categories:
1. Individuals -Note: The rules for individuals include:
-Sole Proprietors
-"S" Corporation Shareholders
-Partners in a Partnership
This is true because under each of the above forms of business ownership, the business' profit or (loss) flows directly to each owners "individual" income tax return. There is no "business entity" tax liability for a Sole Proprietorship, an "S" Corporation, or a Partnership.
2. "C" (Regular) Corporations
Each of these two categories will be discussed in turn.
1. Individuals:
No penalty for failure to pay estimated taxes will apply to an individual (business owner) who qualifies under one of the following exemptions:
Exemption # 1:
If the tax due for the current year, after any applicable credits and withholding, is less than $500.
Exemption # 2:
If the taxpayer has no ($0) liability for the preceding tax year provided that the preceding year was a 12-month period. Individuals who do not qualify for either of these two above exemptions may avoid the penalty for failure to pay estimated tax under the following two scenarios, by paying:
-At least 90% of the total tax liability shown on the current year's tax return. or
-100% of the total tax liability shown on the prior year's tax return. Note: A "Special Rule" applies to individuals with "Adjusted Gross Income" (AGI) for the previous tax year equal to, or in excess of $150,000 ($75,000 for married individuals filing separately). In order for these high income individuals to qualify for "prior year safe harbor" thereby avoiding any penalty for failure to pay estimated tax they must pay the lesser amount of:
-At least 90% of the total liability shown on the current year's return.
- OR 10% of the total tax liability shown on the previous year's tax return instead of the 100% required of other individual taxpayers.
All required payments may be made either through withholding, or estimated tax payments. The due dates for individual estimated tax payments are:
Installment Due Date
1st April 15th
2nd June 15th
3rd September 15th
4th January 15th (of the following year)
If this due date falls on a weekend, or Federal holiday, the payment is due on the first following business day. The 4th Installment for a tax year need not be made, if the taxpayer files his or her Form 1040 return, and pays the balance of the amount owing on or before January 31st of the following year.
For the payment of estimated taxes, an individual is to attach the appropriate payment to a Form 1040-ES Voucher (one for each estimated tax payment [installment] owed.)
2. "C" (Regular) Corporations
If it is anticipated that your "C" Corporation will have a current year-end Federal income tax liability (a bill) of $500 or more, this corporation must estimate its Federal income tax liability for the current year, and pay four quarterly "estimated tax installments" (using Form 8109-B) during that current tax year.
"C" Corporations may avoid a penalty if each estimated tax installment equals at least 25% of the lesser of: 100% of the total tax liability shown on the corporation's current year's income tax return or 100% of the total tax liability shown on the corporation's income tax return for the previous tax year, (provided: A positive tax liability was shown and the previous year consisted of 12 months)
Strategy - Keep IRS records for three years - five years if payroll tax information.
You are required to keep business tax records for three years from the due date of your business' return, or from the date the return was filed, whichever is the later. This three year requirement coincides with the IRS's statute of limitations on tax returns. You are required to keep payroll records five years.
Once your business passes the three year statute of limitations (5 years for payroll tax returns), it is immune from IRS audit, unless:
-Your business understated its income by more than 25% in which case, the statute of limitations is extended to six (6) years. or
-You committed tax fraud, in which case a statute of limitations is not applicable.
-You are prohibited from filing an amended tax return after the statute of limitations has expired.
-Your business records include, but are not limited to the following:
TAX RECORDS: Tax returns, financial statements, any financial papers/bank statements, check stubs/canceled checks, sales invoices, purchase invoices and expenditure receipts (checks and cash).
PAYROLL TAX RECORDS: Payroll records (such as time sheets) and payroll tax forms.
Strategy - Avoid creating unintentional taxable business income.
Avoid "Constructive Receipt" of income. One way to implement tax planning for your business is to delay billing your customers, but you must have a "defensible business reason" to do this (other than tax planning) or the IRS will claim your business had constructive receipt of the income during the current tax year, even though these dollars were not actually received until the following tax year. Furthermore, if your business received a check on the last day of the tax year, but held it over until the next "tax year" for deposit, the IRS would consider that your business had "constructively received" the income during the current tax year.
Avoid imputed interest on loans your business owners make to your business and/or loans from your business to its owners.
If you fail to indicate a reasonable interest rate on any of these business-related loans, the IRS will "impute", or assign an interest rate to the loan. This means the individual or entity who makes the loan could have income tax liability on interest that was never received, but rather was imputed by the IRS, in order to create taxable income.
Do not show investment income on a Schedule "C". Investment income, such as interest, dividend, and/or capital gains income is not subject to self-employment tax. All Schedule "C" (Sole Proprietorship) income is subject to self-employment tax unless it is received in the course of your trade or business income as a dealer in stocks or other securities.
If you showed this investment income on a Schedule "C", you would be paying self-employment tax on income that is normally not subject to the tax. Use Schedule "B" instead.
http://Bradgillies.com
By: Brad Gillies
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