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
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