Small Business Accounting: What is the difference between a contractor and an employee?


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

Summer is the Perfect Time to Do Tax Planning for Now and 2023


The summer is a good time to take a break. Head to the beach. Take a few weeks off. All of that is good and healthy.

However, summer is also a great time to do some minimal tax planning. It won’t take a lot of time to do it and you can still enjoy your summer. Trust us, you can take a few substantial steps now that will help you later.

So, before you pack the cooler and swimsuits, let’s do a few things:

  1. Retirement planning: You can still make plans by allowing for employer contributions to be made until the extended due date of the return. One way to do it is by making the maximum allowable contribution to your retirement plan. This year, 401(k) and 403(b) have a $20,500 contribution limit. There is also a $6,500 contribution for taxpayers who reach age 50 by 12/31/22. 
  2. Real Estate holdings: The DMV area has a hot real estate market. So §1031 can be used by rolling proceeds from a sale into the like-kind property within a timeframe. (It is specific and must be followed to the letter.)
  3. Capital gains: You may want to defer the tax liability with an Opportunity Zone investment. This is reinvesting capital gains in an Opportunity Zone within a 180-day window. Then defer the tax on the original gain until December 31, 2026. Opportunity Zone investments can be held for ten years as they will not be taxed by the IRS. 
  4. Depreciation: Depreciation, for business owners, need not be determined when the asset (business property) is used. Bonus depreciation is already automatic. “Out of bonus” depreciation can be claimed for each asset class. Attach a statement to the timely-filed tax return and then depreciate the asset over its life. 
  5. Required Minimum Distributions: Your brokerage can pay your RMD directly to the charity you designate. A qualified charitable distribution (QCD) is not recognized as income. It keeps your adjusted gross income lower, and it may even reduce Medicare premiums. You can still make the standard deduction but remember that you can only claim a total of $100,000 per tax year.
  6. Donor-advised funds: You are allowed to take a tax deduction in the year that cash or other assets are transferred to a DAF. They can be invested until you recommend the DAF distribute the funds to all of the charities you support. You are not taxed on interest, gains, and dividends generated by investments made by the DAF. It’s a great way to accomplish tax planning goals. You can also claim a deduction for the fair market value of the donated assets and not have to pay capital gains tax on the appreciation.

These are just a few of the ways you can plan for your 2022 tax returns and beyond. Be sure to consult the IRS, your tax advisor, or your accountant. ***

AK Burton, PC, knows the current tax laws and how to work with the IRS. 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 on tax preparation, visit the IRS website

Tax Advisor: What If You Missed the Deadline on Your 2021 Tax Returns?


As we write this blog today, April 18-Tax Day 2022, has passed. The deadline to file for most US citizens is over. 

You read this and say, “I missed the deadline. Now, what do I do?” 

The good news is that if you missed filing on April 18, then you have options. All is not lost and no, there won’t be any black helicopters landing in your backyard. You can still file, so all is not lost.

In fact, here are some steps you can take that will resolve your tax filing deadline miss situation:

  1. If you owe money on your 2021 tax return and have not filed an extension: You should file your tax return as soon as possible. The IRS hands down two penalties if you owe: failure-to-file and a late payment penalty. Failure-to-file penalty applies when your return is late. It is five percent (5%) of your unpaid tax bill for each month or partial month your return is late. It maximizes to twenty-five percent (25%). The late payment penalty is 0.5% of your unpaid tax bill for each month or partial month your return is late, up to a total of 25%. The bottom line is that the quicker you get your tax returns filed after the deadline and pay your bill, after being late, the smaller the penalty you will have to pay. However, if you are unable to pay your tax bill in full, you can request the IRS to put you on an installment plan. It doesn’t erase your late penalties, but it will protect you from the IRS garnishing your wages. Just keep in mind, that the longer it takes for you to file your return, the greater the late payment penalty.
  2. If you don’t owe money for your 2021 tax returns: You may be due a refund from last year’s returns, but you missed the April 18 deadline, anyway. Believe it or not: You’re safe. You will not be penalized. You will have to wait longer to receive your tax refunds, though. Nevertheless, file your tax returns soon so you can get your money back.
  3. Missed deadline unknowingly: That’s okay, too. Just submit your return as soon as you can. Next year, if it looks like you may be filing your tax returns late again, ask for a tax extension by the filing deadline. *** You then have six more months to file your return. If you request the extension and still don’t get your return completed by the deadline, a late payment penalty will apply to any unpaid taxes from the current tax year. You won’t be charged with the aforementioned failure-to-file penalty as long as that extension request is made on time. And you don’t even have to give a reason to be granted an extension. The IRS doesn’t ask why you need more time to file. 

So, you see, it isn’t “Doomsday” after all. You do have options. Just be sure to act quickly to save yourself money and stress. 

AK Burton, PC, knows the current tax laws and how to work with the IRS. 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.

*** If you’d like more information on IRS Tax Return extensions, visit the IRS website.  

How to Avoid an Audit on Your 2021 Tax Returns

Audit!

That word sends shivers into any honest taxpayer. You do everything you know to do on your tax returns. Your CPA has signed it and filed it. 

However, despite all that, the audit notice from the IRS has arrived. You’re stressed.

It doesn’t have to be that way. You can avoid an audit on your 2021 tax returns if you take the right preventative steps to do it. Here are some smart and legal ways to do it: 

    1. Don’t lie or attempt to cheat the IRS: This is the first and foremost reason! SO many people try to cheat the IRS every year. Some get away with it but most do not. Besides that, it’s just wrong. Dishonest tax filers claim excessive or unreasonable tax deductions. They are so obvious, that the IRS flags them and begins investigating. Their agents will ask for additional information. If discrepancies are found, the agency may levy penalties. Instead, be truthful in all your deductions and credits.
    2. Keep accurate and detailed records: There is a boatload of different forms that are available based on deductions and income. They can be confusing and it’s easy to make mistakes or forget them. Thus, the importance of keeping accurate and thorough records during the year. Keep all expense receipts in a file labeled for that year. That file should be accessible at all times. File your taxes only when you have all the required forms so you won’t have to amend your tax return.
    3. Don’t overdo it with your home office deduction. Self-employed people who have businesses in their homes are considered independent contractors. The deductions designated for that should be “reasonable” as the IRS defines it or it may become a huge red flag, especially if the home office is where you derive most of your income. So, claim just a percentage of your mortgage or rent that is your true workspace. Other expenses, such as phone, AC/heat, supplies, and other expenses can be claimed as business-related.
    4. File electronically. A good way to avoid audits is to file them online. The IRS encourages this for one big reason: paper filing usually contains many more errors than electronic files. Hard copy errors are 21% as electronic filing is 0.5%. The IRS software has protections in place so that filers have fewer errors. 
    5. Hire an experienced bookkeeper, accountant, or CPA. Tax laws change every year. It’s almost impossible to keep up with them unless you are an accounting professional. So, protect yourself and hire an accountant or bookkeeper to file your taxes for you. Most good accountants will also represent you to the IRS, which can be invaluable to prevent an audit. 

Tax Day is April 18, 2022, which is only a few weeks away as we publish this blog. No one wants to be audited. It can be agonizing. If you have not done the above steps or wonder if you are going to be audited, please contact an accountant for a consultation. 

AK Burton, PC, knows the current tax laws and how to work with the IRS. 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.

How to Save Money on Your 2021 Tax Returns


Tax season has already started. Many people are scrambling to get all of their documents together for their 2021 tax returns.

If you’re one of those people gathering their tax documents, keep in mind some of the following four ways you can save, now, on your 2021 tax returns:

  1. Contributing to your retirement account, such as an IRA, may reduce your tax bill by reducing your taxable income (depending on your tax bracket). This works especially if you haven’t maxed out on your 2021 IRA contributions. Your tax deduction is determined by your total income and filing status. You or your spouse may be covered by a retirement account at work- which limits your tax deduction. You can contribute to your IRA until April 15, 2022, so you have time! The limits are $6,000 per year for 50 years old and under and $7,000 per year for people over 50 years old.
  2. Charitable donations: Donations to qualified charities last year may help you save on your 2021 tax returns. Taxpayers who don’t itemize can also benefit. For the tax year 2021, individual taxpayers may deduct up to $300 in contributions to qualified charitable organizations. Married couples filing together can deduct up to $600 in cash donations made to approved charities. Donations must be made by Dec. 31, 2021. This deduction may reduce your taxable income for 2021 and, in turn, lower your federal tax bill.
  3. Deduct eligible business expenses: Self-employed business owners must keep detailed business expenses. These expenses may include business meals, business travel, legal fees, computer purchases, subscription fees (Microsoft Word, etc.), accounting fees (QuickBooks, etc.), marketing/advertising costs, and other eligible business expenses. Business deductions lower taxable income, which results in a lower tax bill for 2021.
  4. Earned Income Tax Credit (EITC): this is available for the 2021 tax year dependent on your adjusted gross income (AGI). Income limits vary depending on your filing status, AGI, and the number of dependents. If you qualify for this credit, it may offer significant tax savings. 

As you prepare to file your 2021 tax return keep these 4 tax savings tips in mind. Please consult your tax preparer for more information.

AK Burton, PC, knows the current tax laws and how to work with the IRS. 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. Our office is open. Covid protocols if requested. We serve the Bethesda, Rockville, and Montgomery County, MD area.

The Expectations for the 2022 Tax Preparation Season


The holiday season has come and gone but “tax season” is always with us. This tax season may be as complicated as ever due to the pandemic and a flurry of new tax laws that came down from Congress. 

Your expectations for your personal and business tax preparation may have to be adjusted, particularly with working with the IRS (always a challenge) and the child and dependent tax credit. Here are some facts to keep in mind as you get your documents in order to file for 2021:

  1. The Internal Revenue Service (IRS): Delayed and behind 
  2. E-filing begins January 24, 2022: The IRS is already way behind in preparing for this tax season and is still working on 2019 and 2020 tax filings. These disruptions are blamed on the ongoing pandemic along with budget cuts, a shrinking workforce, and outdated technologies at the IRS.
  3. Delayed refund for returns claiming Additional Child Tax Credit (ACTC). The IRS cannot issue refunds before mid-February 2022 for returns that properly claim ACTC. This time frame applies to the entire refund, not just the portion associated with ACTC.
  4. The Child and Dependent Care Credit: 
    • Differences in credits for qualifying children and other dependents tax year 2021
    • Enhanced child tax credit. For 2021, the child tax credit applies to qualifying children who have not attained age 18 by the end of 2021. Also, the initial amount of the child tax credit is increased to $3,600 for each qualifying child who has not attained age 6 by the end of 2021 and $3,000 for each other qualifying child who has not attained age 18 by the end of 2021. The credit for other dependents has not been enhanced. 
    • In the know. Important abbreviations: ACTC means additional child tax credit.  ATIN means adoption taxpayer identification number.  ITIN means individual taxpayer identification number.  NCTC means nonrefundable child tax credit.  ODC means credit for other dependents.  RCTC means refundable child tax credit.
    • Delayed refund for returns claiming ACTC. The IRS cannot issue refunds before mid-February 2022 for returns that properly claim ACTC. This time frame applies to the entire refund, not just the portion associated with ACTC.
    • 2021 Child and dependent care credit information: The American Rescue Plan Act of 2021, was enacted on March 11, 2021, making the Child and Dependent Care credit substantially more generous and potentially refundable (up to $4,000 for one qualifying person and $8,000 for two or more qualifying persons) only for the tax year 2021, This means an eligible taxpayer can receive this credit even if they owe no federal income tax. Your federal income tax may be reduced by claiming the Credit for Child and Dependent Care expenses on your tax return. ***

If you have been frustrated the past filing your individual and/or business in the past, this year will not be any different. We are constantly hearing from clients who are having difficulty contacting the IRS to get important information or a consultation on a previously filed tax return. 

AK Burton, PC, knows the current tax laws and how to work with the IRS. 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. Our office is open. Covid protocols if requested. We serve the Bethesda, Rockville, and Montgomery County, MD area. 

*** For more information on Child and Dependent Care Tax Credit, visit the IRS website.   

 

How to Set Your Financial Goals for 2022


When is a good time to set financial goals? The time is now; in December, when one year is ending a new year is on the horizon. This is the best time to set a few financial goals for the New Year. 

So, after the holidays, before you get caught up in work, school, and other busy parts of your life, you can meet with your financial advisor. They can review your current plan and make recommendations. 

Before you meet with them, there are several things you can do to improve our financial outlook for 2022 and beyond:

  1. Set short-term goals: In planning for the coming year, it is best to look at the short-term. You will not accomplish your retirement goals in one year. Make goals that you can accomplish in a few months. 
  2. Create an emergency fund: Hopefully, you will not have some type of emergency and need an emergency fund. An emergency can present itself in a multitude of unexpected ways; it may be medical, unemployment, or automobile related. Ideally, a good emergency fund has 3-6 months of money to pay the bills. This may seem impossible. However, you can start saving a small percentage of your paycheck by placing it into a bank account which you do not touch unless the emergency occurs. (Use this emergency fund calculator to figure out how much to save.) Over time, an emergency fund will accumulate and help you and your family if an emergency occurs.   
  3. Retirement savings: Even though there is Social Security, you may still want to enroll in a retirement savings plan. If your employer supports a 401(3) (k), you should consider signing up for it. Your employer may pay matching funds toward it. If you are self-employed, see your financial advisor for information on the array of retirement accounts that you can enroll in. 
  4. Pay off high-interest debt: Credit card debt and interest are a savings killer. Make it a goal to pay them off as soon as possible and cut up cards that are not needed. Begin with the debt that has the largest percentage of interest and whittle it down. Once you have erased your credit card debt, it will be surprised as to how much money you have available each month.
  5. Set a budget: This is the last point and, perhaps, the most difficult. Setting a family budget can be agonizing. It calls for discipline and restraint. So, to make it easier, create a spreadsheet with income and expenses. This budget will help you track your spending and saving. It is essential as you check off your goals and make progress. 

Setting financial goals can be daunting. But with these financial planning suggestions. They can be accomplished with resolve and hard work. Start now and get on the road to financial freedom. 

A.K. Burton has licensed and experienced financial advisors on staff. If you have questions concerning your financial goals, call us at (301) 365-1974 for a consultation. We serve the Bethesda, Rockville, and Montgomery County, MD area. 

Year-end Retirement Planning Strategies


As we come to the end of 2021, as you are making plans for the Thanksgiving and Christmas holidays, you may want to take some time out and look at your retirement plans, too. No matter what your age, your career advancement, or where you live, it’s not too late to begin, or add to, your retirement plans.  

In fact, this is a good time to assess your progress in planning and see if there are any gaps that need to be filled. So, here are several tips on how you can do retirement planning. You need to be informed. You need to know all the retirement options available to you. Discuss your available retirement planning options through your work. Do some quick web research. Consult your financial advisor and tax advisor.

Not enough? The following are possibilities for your retirement plan: 

    1. Taxable brokerage account: These are accounts funded with after-tax dollars. There are no contribution limits. Just remember that capital gains and investment income are taxable.
    2. Tax-deferred accounts:  These include the following: Traditional, SEP, & SIMPLE IRAs, 401(k)s, and 403(b)s. There are contribution limits depending on the plan. Also, depending on your tax bracket a tax deduction for the year that the contribution was made may be applicable (check with your tax advisor). Don’t forget about the required minimum distributions! The IRS requires withdrawals once you reach the age of 72 if your 70th birthday is July 1, 2019, or later. Roth IRAs do not require minimum distributions.
    3. Medicare: Medicare is a benefit for seniors 65 and older; however, it still has costs to it. Medicare doesn’t cover certain medical expenses like hearing aids, vision care, dental care, and long-term care. It also has large gaps in prescription coverage. In your retirement planning, you may want to budget supplemental medical insurance that goes beyond Medicare. Medicare Advantage and Medigap policies have premium costs and copays that supplement Medicare.
    4. Consider your cash reserves: Cash reserves help ride out stock market down cycles covering expenses while allowing time for investments to hopefully recover from the downturn.
    5. It is truly not too late: Don’t be discouraged! If you are 55 years or older without a retirement plan, it is not too late. Jump on the retirement planning bandwagon. It is possible to do! 

The main point here is that even if you are older and retirement is on the horizon, you can still make smart and logical decisions for your retirement. Consult with your financial advisor and tax advisor to make the changes you need to before the New Year begins.  

 A.K. Burton, PC, can help you do your retirement planning. We have experienced staff who can prepare your retirement accounts. Call us at (301) 365-1974 for a consultation. We serve the Bethesda, Rockville, and Montgomery County, MD area. 

How to Beat a Small Business Tax Audit

The Internal Revenue Service IRS) has ratcheted up its small business audits this year. *** These audits include the mom-and-pop retail stores, tech startups, and investment funds such as cryptocurrency.

The infrequent checks from the IRS for small businesses are over for now. So, you as a small business owner, need to be ready when the tax-man cometh. Here are several tips on how you can beat the small business tax audit:

  1. Keep good records: The main question we accountants get is, “How far back do they go to do the audit?” Typically, you will need to keep copies of filed returns and documents for at least three years from the filing date or the return’s due date, whichever is later. This is the period of time that the IRS has to audit most returns. This process can go out as long as six years if the income was misreported by 25 percent or more. (There is no statute of limitations on fraudulent tax returns.)
  2. Make a case for unsubstantiated income: The IRS has an aggregate or algorithm of the typical income/expense ratio for any type of business. If they see a higher-than-average expense list, extremely low income, or a major loss, it may trigger an audit. If you have truthful and legitimate reasons for that data, such as insurance claims that show losses after a natural disaster (such as the floods in the Southern US) or advertising promoting more services, you may be able to survive the audit. You must have detailed records of it. This would include travel expenses, receipts, calendars, and mileage logs. 
  3. Investigate your records for possible audit red flags. You must do your due diligence to protect yourself from an audit. It’s actually pretty simple to do. Review your income records. Did you write the correct amount? (No transposed numbers.) The IRS cross-references your wages with other tax records. Also, be sure you have reported all of your income. Lastly, double-check your business deductions, particularly meal and entertainment expenses, a major bugaboo with the IRS. 
  4. Don’t lose your head. An IRS Audit does not mean you are going to prison, your home will be seized and your business(es) closed.  Actually, field audits are rare. If an IRS agent visits your location, then it would have to be an audit substantial enough to pay for the audit. In fact, most IRS audits are done online or with mail correspondence. The IRS, once it reviews the documents that you have sent, may only recalculate the return and bill you for the corrected amount. So, you can be calm about it and no need to look for agents in dark suits hopping out of SUVs with briefcases, showing you their IDs, and bargaining into your home. It makes for interesting television, but it is quite rare in real life.
  5. Bring in a professional accountant. Your tax records may be much more complicated than just transposed digits. When that is the case, you should consult with a professional, licensed, accountant. They can review and check all your numbers and documents to see if there are any discrepancies. Additionally, they can represent you to the IRS and make sure you are not unfairly or inaccurately audited. 

Audit. It is not a pleasant process but there is no need to hyperventilate and lock yourself in your basement. But, before tax season begins on January 1, 2022, do the necessary tasks to best protect yourself from a letter from the IRS requesting a small business tax audit. It can be done and you can survive it. Millions do every year. 

A.K. Burton, PC, can do all your income tax preparation. We have experienced staff who can prepare and file your tax return and represent you before the IRS. Call us at (301) 365-1974 for a consultation. Our office is open. We serve the Bethesda, Rockville, and Montgomery County, MD area.  

*** For more information on IRS Tax Audits see this website