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Small Business Accounting, tax preparation

Tax Planning: Little-known Expenses that are Tax-deductible

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Tax returns are done for most US citizens. There are still millions of Americans and their accountants who are still working on their 2022 tax returns. ***

There are many deductions that filers forget or don’t even know are eligible. Billions of dollars are paid out by taxpayers that could have been saved. Your tax advisor is aware of these tax deductions as they are required to be updated on all new tax laws.

Here are some little-known expenses for your tax planning that may be tax-deductible:

1. Job Search Expenses: If you’re searching for a job in your current field, you may be able to deduct certain job search expenses, such as transportation costs, resume preparation, and employment agency fees. These deductions may be available even if you don’t get the job.
2. Professional Development Expenses: If you’re looking to improve your skills or education in your current field, you may be able to deduct the expenses associated with professional development courses, seminars, and conferences.
3. Jury paid. Most employers will pay employees’ salaries while they are serving on a jury but ask that they turn over their jury fees to the company. This income has to be reported as taxable income. If you gave that income to your employer, you could deduct the amount, so you aren’t taxed on that money.
4. Moving Expenses for Work: If you move for work-related reasons, you may be able to deduct certain moving expenses, such as transportation costs, storage expenses, and lodging costs. The distance between your new home and your new job must meet certain requirements, and there are other eligibility criteria to consider. If you’re an active-duty military member who is relocating, you can deduct these expenses as long as the government doesn’t reimburse you. The move must be permanent and ordered by the military. The deductions include gas, lodging, moving trucks, and shipping your cars and pets.
5. Home Office Expenses: If you work from home, you may be able to deduct certain home office expenses, such as utilities, internet expenses, and office equipment. The space must be used regularly and exclusively for work purposes to qualify for the deduction.
6. Investment Expenses: If you have investments, you may be able to deduct certain investment expenses, such as advisory fees, custodial fees, and other expenses related to managing your investments. If you have any mutual fund and stock dividends, they are automatically reinvested in extra shares, each reinvestment increases your tax basis in the stock refund or mutual fund. This reduces the amount of taxable capital when you sell your shares. 7. 7. Reinvested dividends which you subtract from the proceeds of sale to determine your gain means you will overpay your taxes.
8. State tax paid. If you owed taxes when you filed your 2021 state tax return in 2022, then you can include that amount with your state tax itemized deduction on your 2022 return. You may also include your state income taxes withheld from your paychecks or paid with quarterly estimated payments. Limited to a maximum of $10,000 per year.

These are just a few examples of little-known expenses that may be tax-deductible. However, there are many other deductions and credits available that can help reduce your tax bill. It’s important to do your tax planning with a qualified tax advisor to ensure that you are taking advantage of all the deductions and credits that you’re eligible for while also complying with all applicable tax laws and regulations.

A.K. Burton, PC, has been working with the IRS for our clients for many years. Our firm has experienced accountants who can help you plan your tax, file your tax returns, and represent you to the IRS. We do individual and business tax returns. Call us at (301) 365-1974 for a consultation.

We serve the Bethesda, Rockville, and Montgomery County, MD area.

*** You can find these deductions and other tax information on the IRS website.

Quickbooks, Small Business Accounting

How to Organize Your Small Business Accounting Using QuickBooks Services

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Tax Season ended at midnight on Tuesday, April 18, 2023. Tax Day is such a stressful time for citizens, businesses, and accountants. This year was no different though. When the numbers come out, there will probably be an increase in filing extensions by people and businesses.

Now that the smoke has cleared, business owners may want to consider using our QuickBooks services to do their accounting and tax preparation. QuickBooks is an accounting software developed by Intuit. QuickBooks is mainly for small and medium-sized businesses. The cloud-based software can accept business payments, manage and pay bills, and do payroll.

QuickBooks can be used to organize your small business accounting. Here are some steps to get started:

  1. Set up your company: Start by setting up your company in QuickBooks. This includes entering your company information, such as your business name, address, and tax ID number.
  2. Add your bank and credit card accounts: Connect your bank and credit card accounts to QuickBooks. This will allow you to automatically import transactions into QuickBooks, making it easier to keep track of your finances.
  3. Categorize your transactions: Once you have imported your transactions into QuickBooks, you will need to categorize them. This involves assigning each transaction to the appropriate account, such as income or expenses.
  4. Set up your chart of accounts: Your chart of accounts is a list of all the accounts you use in your business. This includes income accounts, expense accounts, and asset accounts. Setting up your chart of accounts is an important step in organizing your accounting.
  5. Create invoices and track payments: QuickBooks allows you to create and send invoices to your customers. You can also use QuickBooks to track payments and send reminders for overdue payments.
  6. Run financial reports: QuickBooks offers a variety of financial reports, such as profit and loss statements and balance sheets. These reports can help you understand the financial health of your business and make informed decisions.
  7. Get professional help: If you’re not familiar with accounting or QuickBooks, consider hiring a professional to help you get started. A certified accountant can help you set up QuickBooks and maintain your accounting records, so you can focus on running your business.

QuickBooks guides and assists you to organize your small business accounting. Using QuickBooks can save you time and help you make informed financial decisions for your business. Millions of business owners use QuickBooks as a daily part of their accounting. 

It takes time to learn and integrate into your business. However, with training and experience, many small and medium-sized business owners have come to depend on it. If you are considering QuickBooks to do your accounting, consult an accountant to get started. 

AK Burton, PC offers QuickBooks services for our clients. We can train you in QuickBooks and help you use it to run your business. Call us at (301) 365-1974 for a consultation. 

We serve Bethesda, Rockville, and Montgomery County. MD area.

*** For more information visit the QuickBooks website.   

 

Tax Advice, tax preparation

Why is My Tax Refund Smaller This Year?

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If you have been getting the same refund on your tax return every year for many years, this year may be a major disappointment for you.

Tax refunds will be smaller this year for millions of Americans. It’s sad but true. We have to return to the Covid pandemic in 2021 when the federal government gave out stimulus checks. While Americans were getting $1,500 per household member, Congress was working behind the scenes to rewrite the US Tax Code and eliminate many deductions.

But, as with everything else tax-related, it can be complicated. Let’s look at several reasons why your tax refund check may be smaller this year.

  1. The American Rescue Plan passed at the start of the pandemic in March 2021, gave some financial relief to millions of families. It increased the 2021 child tax credit from $2,000 to $3,000 per child, 17 years old and younger. It also added $600 for children under six years old. Because of this, many Americans will not like the smaller check they receive this year. These child tax credits may reduce an individual’s refund. They may have received too much of an advance credit and do not qualify when filing their tax return making their refund much smaller than in 2021.
  2. Unemployment assistance. In 2020, the federal government waived federal taxes on all unemployment income. For the 2021 tax year, however, that is no longer the case. Unemployment assistance during 2021 is categorized as taxable income. Millions of Americans were still collecting unemployment benefits into 2022. Because of this benefit, many will see lower refunds this year. When someone receives unemployment assistance, they can have their taxes withheld. Many millions of recipients did not have any money withheld; thus, they have to pay those taxes back making their tax refund much smaller. To claim unemployment income on a tax return, they would have received a 1099-G form from the state or District unemployment agency. This form has instructions on how to complete this form.
  3. Student loan debt. As the pandemic lockdown went into effect, the U.S. Department of Education froze public student loan payments and temporarily stopped interest from accruing on student loans. It may have helped many students struggling to pay their loans. However, the $2,500 above-the-line deduction was worthless during the freeze. That means that now they have more taxable income, so their tax refund (if any) will be much lower.

So, when filing your 2022 tax returns this year, your deductions may be complicated and potentially incorrect, meaning you may pay even more or less than you should. We would advise that you hire a professional tax advisor or accountant for your tax preparation so that you can maximize your refund. You may also consult the IRS website for more information on a tax refund schedule. ***

A.K. Burton, PC, has been working with the IRS for our clients for many years. Our firm has experienced accountants who can help you file your tax returns and represent you to the IRS. We do individual and business tax returns. Call us at (301) 365-1974 for a consultation.

We serve the Bethesda, Rockville, and Montgomery County, MD area.

*** Visit the IRS website for more information about tax refunds.

Tax Advice, tax preparation

Tax Preparation: 2022 Laws That May Affect Your Tax Returns

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Every year brings a panoply of new tax laws, passed by the United States Congress. Some of these laws are easy to implement. However, some other new tax laws can be complicated. In any case, it can make tax preparation for most people even more difficult as most people don’t keep track of the laws.  

Accountants spend many hours studying the latest tax laws. We even attend webinars and conventions to learn more about these laws. It’s always a challenge! Some new tax laws make us scratch our heads while others seem to be commonsensical.  

Here are several notable new tax laws to keep in mind when doing your tax preparation: 

  1. Charitable Tax Credit increase. The America Rescue Plan deduction returns to the nonrefundable status of $2,000 per qualifying child and is limited to dependents under the age of 16.
  2. More charitable deduction changes. During COVID-19, taxpayers could take an above-the-line charitable donation tax deduction, meaning they are claiming the standard deduction and an additional deduction for a charitable donation. Single filers may deduct up to $300. Married couples filing jointly may deduct up to $600. 
  3. New reporting requirement for third-party settlement organizations. This deals with Paypal, Venmo, Cash App, and other third-party payment companies. TPSOs were required to file a Form 1099-K if customers processed 200 or more transactions and received a minimum of $20,000 or more in payments. This law deletes the transaction requirement and requires Form 1099-K for any account holder who receives at least $600 in payments for goods and services. Recently, the IRS delayed implementing the new law until 2023. Though not mandatory for 2022, you may get a Form 1099-K as these third-party payment companies prepare for the upcoming change.
  4. Child and Dependent Care Credit Decrease. These are deductions for qualified childcare services so that you can work, you can receive a childcare credit for some or all expenses. The IRS did reduce the child and dependent care credit cap in 2022. It decreased from a maximum of $8,000 in 2021 to a maximum of $2,100 in 2022. 
  5. Employer-sponsored retirement contributions increased. The contribution limit for elective deferrals to 401(k), 403(b), most 457 plans, and the Thrift Savings Plan increased to $20,500 for 2022. The total amount that can be contributed to a plan by you and your employer combined increased to $61,500. The catch-up contribution for taxpayers aged 50 and older stayed at $6,500.
  6. Clean Vehicle Credit eligibility change. If you bought a new electric vehicle after August 16, 2022, it had to have had a final assembly in North America to get the $7,500 credit. This requirement was added as part of the Inflation Reduction Act of 2021.

Some of these tax law changes may affect your tax preparation for your 2022 tax returns. If you have questions, you can consult the IRS. We highly recommend that you consult your tax advisor or accountant for your tax preparation and filing.

A.K. Burton, PC, has been working with the IRS for our clients for many years. Our firm has experienced accountants who can help you get the ball rolling with year-end tax planning for your small business. Call us at (301) 365-1974 for a consultation.

We serve the Bethesda, Rockville, and Montgomery County, MD area.

*** For more information on IRS Tax Brackets visits the Tax Foundation website.  

Small Business Accounting, tax preparation

Small Business Tax Preparation: Now Is the Time to Do Your Year-End Tax Planning

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There are less than two months left in 2022. If you are a small business owner, it’s more than likely, you are looking forward to 2023. With the holiday season in full swing, it’s easy to want to wind down, but now may be the best time to plan for taxes in the new year. There are many ways to optimize your taxes, but one of the most impactful things you can do is to consider changing your business’s legal structure.

There are 5 main types of tax entities in the United States:

  1. Sole proprietorship
  2. Partnership
  3. Limited Liability Company
  4. C Corporation
  5. S Corporation

Depending on the stage your business is in, one structure may make more sense than the other.

The IRS defines a sole proprietor as someone who owns an unincorporated business by himself or herself.

A partnership is when two or more people engage in a trade or business where each contributes money, property, labor, or skill and shares in profits and losses.

A Limited Liability Corporation or LLC is a slightly more complex structure than a proprietorship and partnership. It protects members’ personal assets from the organization’s debts and liabilities.

A C Corporation has shareholders exchange money or property for ownership of the organization.

Lastly, an S corporation elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.

Each structure has its advantages and disadvantages. So, it’s important to consider the following when deciding to change your business structure:

If you are a sole proprietorship

    1. Benefits include:
      1. Pass-through entity status (passing income straight to the owners)
      2. Fewer reporting requirements
      3. No corporate business taxes
    2. Disadvantages include:
      1. Lack of protection for personal assets separate from business
      2. No perpetual existence (Owners, for legal and tax purposes, are directly linked to their business)

If you are a partnership

    1. Benefits include:
      1. Pass-through entity status
      2. No corporate business taxes
    2. Disadvantages are:
      1. Lack of protection for personal assets separate from the business
      2. No perpetual existence

If you are a Limited Liability Corporation

    1. Benefits include:
      1. Protection for personal assets separate from the business
      2. No corporate business taxes
      3. Flexibility to be taxed like a corporation, partnership, or sole proprietorship
    2. Disadvantages are:
      1. No perpetual existence
      2. Subject to state laws 

If you are a C Corporation:

    1. Benefits include:
      1. Protection for personal assets separate from the business
      2. Perpetual existence
    2. Disadvantages are:
      1. Double taxation (Taxes are paid for corporate income and an owner’s income)
      2. More reporting requirements

If you are an S Corporation

    1. Benefits include:
      1. Protection for personal assets separate from the business
      2. Pass-through entity status
      3. Perpetual existence
      4. No corporate business taxes
    2. Disadvantages are:
      1. Not available in all states
      2. Strict standards to qualify

Depending on your situation, it’s worth considering changing your business structure to maximize tax benefits.

While there are many other areas to ponder when doing year-end tax planning including estimating your net income, analyzing possible deductions for this and next year, and many more, determining whether to keep or change your business structure can make a significant difference.

Before making this decision, it’s best to consult an accountant for proper guidance.

A.K. Burton, PC, has been working with the IRS for our clients for many years. Our firm has experienced accountants who can help you get the ball rolling with yearend tax planning for your small business. Call us at (301) 365-1974 for a consultation.

We serve the Bethesda, Rockville, and Montgomery County, MD area.

Sources:

  1. https://www.forbes.com/sites/davidrae/2022/11/03/7-smart-year-end-tax-planning-moves-for-small-business-owners/?sh=6b5bc47d47f3) 
  2. https://www.irs.gov/businesses/small-businesses-self-employed/business-structures
  3. https://www.netsuite.com/portal/resource/articles/business-strategy/business-structure.shtml 
Non-Profit Accounting, tax preparation

Tax Preparation: Estimated tax payments due and 990 extended deadlines

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Being tax-exempt doesn’t mean your organization is exempt from filing an annual tax return. 

For most tax-exempt organizations, the deadline to file Form 990 would’ve been May 15. If you’ve filed an extension, you’re extended filing date may be fast approaching next month.

Not sure where to start? 

Step 1 – Collect all your information 

While each organization is different and may require different things, it’s best to have the following information on hand

  • IRS tax-exempt status and type
  • EIN
  • Estimated tax payments made (amounts and dates)
  • Organization’s mission and why it is exempt
  • List of program accomplishments
  • Information for each officer current and former (name, address, title, compensation, benefits, hours worked per week, etc.)
  • Financial Records (unrelated business income, revenue, balance sheets, fundraising reports, supporting organizations, records of contributions, records of grants, audited financial statements, 1099s, W2s, and more)
  • Assets (depreciation schedules, asset purchase dates, cost, proceeds, mileage on business vehicles, and more)

Step 2 – Select and fill out the right form

There are multiple versions of Form 990 and what form you choose largely depends on factors such as your organization’s gross income and assets.

Here are different 990 variations that you may need to file:

  1. Form 990-N
  2. Form 990-EZ
  3. Form 990
  4. Form 990-PF
  5. Form 990-T

If you have a tax-exempt organization and haven’t filed yet, it’s best to file now.

Still, lost? A.K. Burton, PC is here to assist in all your tax preparation needs. Please contact our office with your tax documentation organized and we can help you file your tax return based on your organization’s needs. Call us at (301) 365-1974 for a consultation.

We serve the Bethesda, Rockville, and Montgomery County, MD area.

Sources:

https://www.nonprofitexpert.com/nonprofit-questions-answers/unrelated-business-income-tax-return/ 

https://www.taxact.com/tax-information/tax-planning-and-checklists/990

https://www.expresstaxexempt.com/form-990-due-date/#:~:text=If%20your%20organization%27s%20accounting%20tax,deadline%20is%20October%2017%2C%202022.

Tax Advice, tax preparation

Tax Preparation: Estimated Tax Payments Due and 990 Extended Deadlines

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If you were granted a tax filing extension and want to pay more than you need to…this blog is not for you. For anyone else, who was granted an extension, this post will help you to avoid the failure to file a penalty and also guide you on everything you need to make your tax filing go as smoothly as possible.

The extended individual tax filing deadline is October 15. If you have not filed your 2021 taxes yet, you have less than a month to complete this task or risk facing steep penalties.

The fine for missing the deadline is known as the failure to file a penalty. This penalty equals 5% every month you don’t file up to 25% of what you owe.

To put this in perspective, if you owe $10,000 in taxes, and fail to file on time, you’ll owe an extra $500 a month up to $2500. In many places, $2500 is a month or two of rent.

The best way to avoid this penalty is to meet with a tax preparer as soon as possible. When you do meet with your tax preparer, here’s what you should bring to be prepared:

Forms of identification including

  • Photo ID
  • Social Security Cards
  • TIN assignment letters for you, your spouse, and dependents (if applicable)
  • Bank account information if receiving direct deposit for return (voided check can also work)
  • Last 2 years of tax returns

Income documents including

W-2 form(s) for all jobs last year

  • 1099-NEC and/or 1099-K 
  • Records of income not reported on 1099 forms
  • Records of expenses including receipts, credit statements, etc.
  • Record of estimated tax payments
  • SSA-1099 form for Social Security benefits (if retired)
  • 1099-R for pension/IRA/annuity income (if retired)
  • 1099-G (if you received unemployment income or refund of state/local income taxes)
  • 1099-R (if you received disability income)
  • Documents for income or loss from the sale of stocks, bonds, or real estate (if applicable)
  • Documents for alimony received (if applicable)
  • Statements for prizes or lottery/gambling winnings (if applicable)
  • Documents for any other income

Expense documents to claim tax deductions including

  • 401k or IRA contributions
  • Taxes paid on the state and local level
  • Mortgage and property tax bills
  • Receipts for charitable donations
  • Records for supplies used as an educator

Everyone’s situation is different. It’s best to call a tax preparer as soon as possible to know precisely what is needed for your appointment.

Don’t spend 25% more on taxes by missing the deadline. Book an appointment with a tax preparer today and be prepared by gathering all the documents you need to make your appointment go smoothly.

Don’t pay more than you need to.

File today.

A.K. Burton, PC, has been working with the IRS for our clients for many years. Our firm has experienced accountants and lawyers who can represent you before the IRS and resolve any issues you may have. Call us at (301) 365-1974 for a consultation.

We serve the Bethesda, Rockville, and Montgomery County, MD area.

For more information, visit the Tax Outreach website. 

Small Business Accounting, tax preparation

Extended business tax deadline 1065, 1120S: What information do you send your tax preparer?

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If you are reading this, chances are you are a business owner, who filed an extension, getting ready to file, but you need guidance on what to do next.

Also, you may be worried because the extension deadline is approaching, and want to be prepared.

You’ve come to the right place. 

With the extension deadline quickly approaching, it’s best to file our return as soon as possible.

The original deadline passed (March 15, 2022) for partnerships, S corporations, or LLCs taxed as partnerships. If you filed an automatic six-month extension, your deadline is September 15, 2022.

When you do meet with your tax preparer, here’s a list of items to get you started as to what you need to bring:

If you have it:

  • a copy of your books (for example accountant’s copy of QuickBooks)
  • applicable spreadsheets

Income documents including:

  • Receipts from sales and services (example: forms 1099-k, 1099)
  • Accounts receivable records
  • Business checking/savings accounts interest (forms 1099-INT)
  • Investment income documents (including form 1099-DIV)
  • Additional income (including rental income, tax credits, etc.)

Forms related to Costs of Goods Sold (if applicable)

Expenses documents include:

  • Advertising
  • Phones (landline, fax, or cell phones related to business)
  • Computer & internet expenses
  • Transportation and travel expenses (include taxi fares, tax, tips, food, gas, and all expenses incurred to facilitate any business trips)
  • Commission and fees
  • Labor expenses paid to subcontractors and independent contractors
  • Depreciation
    • Cost and first date of business use of assets
    • Any records for using assets for personal activities
    • Documentation of prior year depreciation
    • Sales price and disposition date of any assets sold
  • Intangible assets (copyrights, etc.)
  • Business insurances
  • Interest expense (can include mortgage, business loan, or any investment expense)
  • Professional fees (lawyers, accountants, consultants, tax preparers, etc.)
  • Office supplies expenses
  • Rent expenses (if applicable)
  • In-home Office expenses (if applicable)
  • Payroll including wages, benefits, and other employee expenses
  • Repairs, maintenance of office facility, etc.
  • Total mileage 
  • Business mileage
  • Estimated taxes paid
  • Other business-related expenses

Every business is different, so it’s best to contact a tax preparer to know if there are any items not listed you may need.

Of course, if you don’t file by the extended deadline, there is a Failure to File penalty. The basic penalty is 5% of the unpaid taxes for each month a filing is late. The maximum penalty is 25%. If the return is more than 60 days late, the minimum penalty is the lesser of $435 or 100% https://cpa-maryland.com/services/tax-preparation/of the tax required to be shown on the return.

Late filings can also be charged interest. Visit the IRS website to get an exact calculation https://www.irs.gov/payments/interest. 

Be prepared. File today.

AK Burton, PC serves small businesses with all of their tax needs. Our experienced tax preparers can file your business and personal tax returns and represent you to the IRS. Call us at (301) 365-1974 for a consultation. 

We serve the Bethesda, Rockville, and Montgomery County, MD area.

Sources:

https://www.irs.gov/payments/failure-to-file-penalty 

https://www.blockadvisors.com/tax-preparation-checklist/ 

https://www.irs.gov/payments/interest 

https://turbotax.intuit.com/tax-tips/tax-planning-and-checklists/important-tax-deadlines-dates/L7Rn92V1d 

tax preparation

Income Tax Preparation Update: What to do if you receive a Correspondence Form from the IRS

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There are few things scarier than a letter with “IRS” stamped in bold on the envelope addressed to you. What next black helicopters? Trial? Prison? 

All of those worst-case scenarios may run through your mind as you begin to open the envelope. The good news is this: Millions of tax-paying citizens get these same letters every year. You will not be handcuffed and taken by helicopter to prison.

There may be several reasons that the IRS has contacted you. They could be any of the following:

  1. Inquiring about a change of address.
  2. Requesting payment for income taxes.
  3. Notifying you about changes to your account.
  4. Request for additional information.
  5. Sending you a tax refund. 

All of those reasons are fairly typical. Most correspondence is a request for more information. It is quite innocent. ***   

However, when you do get a Correspondence Form from the IRS, there are several things you should do:

    1. Open it immediately. Don’t put it off. The letter needs to be read immediately as most correspondence from the Internal Revenue Service has a deadline date for you to respond. Do not delay as delaying could be costly.
    2. Contest the item if it is incorrect. Humans run the IRS and all humans are capable of mistakes. For instance, and this is common, you had a balance due on your tax returns. You paid that amount after you were billed by the IRS. Six weeks later, you receive the same bill from the IRS even though you know you paid it. Send them your bank statement showing it or call them to get it resolved. That is just one example but if they are wrong, you have the right to contest it.
    3. Most correspondence from the IRS can be handled just by calling the 800- number at the top right-hand corner of the notice. When you call, take notes of the date, the name of the person you spoke to and their ID number, and the details of the call. But if you call, keep a record of who you talked to, their ID number, and the next steps that need to be taken. Always keep copies of all IRS correspondences and your responses.  

If it is a correction notice, review the information and compare it to the information on your tax return. You have two options: 

  1. If the correction is accurate, don’t do anything unless a payment is due. 
  2. If you disagree with the correction, send a detailed, written explanation. Include appropriate documentation to support it.   

As you see, a letter from the IRS is not the end of the world as we know it. You can correspond with the IRS and not be concerned with any ramifications.

A.K. Burton, PC, has been working with the IRS for our clients for many years. Our firm has experienced accountants and lawyers who can represent you before the IRS and resolve any issues you may have. Call us at (301) 365-1974 for a consultation. 

We serve the Bethesda, Rockville, and Montgomery County, MD area.

*** For more on IRS correspondence, visit the IRS website.  

    

Small Business Accounting

Small Business Accounting: What is the Difference Between a Contractor and an Employee?

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Many people have chosen to leave their job and become self-employed. They now work remotely from their home.  

This is a popular trend in today’s economy. It’s exciting but there are tax implications, of course, that should be considered. 

If you are planning to start your own small business, you need to know the difference between a contractor and an employee. Let’s start with definitions: 

  1. Employee: On the company payroll and receives wages and benefits in exchange for doing their job correctly.
  2. Contractor: An autonomous, independent worker who does not receive health insurance and paid time off. 

If you are now a “contractor” or self-employed, note the following: 

  1. A contractor is compensated by form1099-NEC. Form 1099-NEC, Nonemployee Compensation, is a form that solely reports nonemployee compensation. Form 1099-NEC is not a replacement for Form 1099-MISC. Form 1099-NEC is only replacing the use of Form 1099-MISC for reporting independent contractor payments.
  2. A self-employed contractor needs to pay the Self-employment (SE) Tax. The SE tax consists of Social Security and Medicare taxes for individuals who work for themselves. This tax is both Social Security and Medicare taxes for individuals who work for themselves. The tax rate is 15.3% and consists of 12.4% for social security and 2.9% for Medicare. 
  3. Retirement: There are five self-employed retirement plans: Traditional or Roth IRA, Solo 401(k), SEP-IRA, SIMPLE IRA, or Defined benefit plan. Working for yourself, you need to set up your retirement plan. Interested in potential tax implications as to which plan suits your needs best?  – contact your tax advisor. 
  4. Health insurance: Self-employed individuals must choose their health insurance plan. It could be Blue Cross, HMO, PPO, Signa, United Health Care, or any one of many options. *** 
  5. Estimated tax payments: This is a method used to pay income tax and is not subject to withholding. This income includes income from self-employment, interest, dividends, rents, and alimony. Self-employed individuals who do not have taxes withheld from other taxable income should make estimated tax payments. Other income may include unemployment compensation and the taxable part of Social Security benefits. 

Individuals who are employed by a business or organization typically have the following:

  1. Compensated by Form W2. As an employee, your wages and your share of Medicare and social security tax are reported on your W2.
  2. Retirement: Businesses may offer a retirement plan such as a 401(K) and/or Roth for employed individuals. Employers may even match the employee contribution up to a certain percentage (depending on the plan set up by the employer). 
  3. Medical insurance: The most common employee benefit is medical or health coverage. It covers medical appointments, checkups, ER visits, basic medical procedures, and surgical procedures.
  4. Prescription benefits: Lower co-pays for medicines and no-cost prescriptions are included. There is a list of the available medications with tiered pricing for prescription drugs.
  5. Life Insurance: Usually it is group-term life insurance. The employer extends life insurance coverage to all staff members and is in effect for a set period. It lasts for the time that the employee works for their employer. It costs less than individual insurance policies. 

In addition, there are many more benefits that can be included in a company employment package such as paid time off, paid sick leave, paid vacation time, extended leave, family leave, disability, and worker’s compensation.    

AK Burton, PC can help define what becoming an independent contractor means to you and the steps needed to set yourself up for successful tax preparation. Our experienced tax preparers can file your business and personal tax returns and represent you to the IRS. Call us at (301) 365-1974 for a consultation. 

We serve the Bethesda, Rockville, and Montgomery County, MD area.

*** For more information, visit the IRS website.