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The following are general recommendations when starting a small business or becoming self-employed:

Use a separate bank account (and optionally a business credit card). The stricter you are with separating business from personal transactions at the time of paying for something, the easier it makes record keeping and bookkeeping. Everything will be in one central place, and you don’t need to think back to separate business transactions from personal months afterwards.

Choose a business structure. Weigh the pros and cons of different options. Sole proprietorships are inexpensive options and generally have the same tax deductions available as other business types. LLCs allow flexibility to add additional owners or elect for different tax treatment down the road. An LLC can also offer limited legal liability in certain situations, though you should have appropriate insurance coverage for risks in your business. Annual fees for an LLC vary by state. Consider discussing the business structure with both a tax accountant and an attorney.

Tax payments – you are generally required to make estimated tax payments on your income. Generally, no one will withhold income tax from your business or self-employment income. The amount is an estimate. If you overpay the excess can be refunded. If you underpay, at least you reduced the amount owed. There are penalties for underpayment of estimated tax, so it’s generally safer to overpay than underpay. You don’t report to the IRS how much income you earned when making a payment. You simply make the payment for the amount you are ready to pay. For most business types (not c-corporations), your federal income tax payments should be made under your personal name and SSN.

Self-Employment Taxes – when you are a business owner or have self-employment income, your income is generally subject to self-employment taxes. Self-employment taxes are Social Security and Medicare taxes. For employees, your share of Social Security and Medicare taxes are withheld from your wages automatically and your employer pays the employer share of Social Security and Medicare taxes on top of your wages. When self-employed, you pay both the employer and employee share of Social Security and Medicare taxes. This is in addition to income taxes. The amount can be substantial and catch new business owners by surprise. Self-employment taxes are roughly 15% on the income (after expenses) from your business. Though there is a limit on income subject to Social Security tax ($168,600 for the 2024 tax year).

How to determine if something is a business expense: look at the purpose of the expense. Is it directly for business? For most business expenses, it’s clear whether it was a business expense (rent on an office space, paying wages to employees, website fees to advertise your business, etc.). If there is a significant personal component, it’s likely not a business expense or only a portion of the cost may be a business expense. Take meals as an example, were you meeting with someone for the primary purpose of networking for your business? That is likely a business expense. Or if the primary purpose is to satisfy hunger, that’s not a business expense, even if you have to eat to make it through the workday.

QuickBooks Online is the accounting system I recommend if you want to use software to track your business’ income and expenses. However, if you don’t expect much activity, you could get by with tracking transactions in a spreadsheet. I recommend the “Simple Start” QuickBooks Online subscription, which is their cheapest small business subscription (currently $35/month). If I start the subscription on my end, you’ll receive a 30% discount for 12 months. QuickBooks has a “Self-Employed” version and a “Small Business” version. I do NOT recommend the “Self-Employed” version as the features are extremely limited and it’s completely different from the “Small Business” plans that I have extensive familiarity with.

Payroll – payroll is only needed for paying wages to employees. Generally, business owners do not pay themselves via payroll (unless their business is taxed as an s-corporation or c-corporation). More than 95% of my clients that use a payroll service use Gusto.com for payroll. I’m happy to help with setting up Gusto’s payroll service.

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.

There are income limits on contributing to a Roth IRA. Taxpayers whose incomes are above these limits can get around these limits with the backdoor Roth IRA strategy. Using this strategy, a taxpayer contributes to their traditional IRA account and converts the amount to their Roth IRA account. There are no income limits on contributing to a traditional IRA account (though such a contribution may not be tax deductible). Under the current tax law, and for the past 10 years, there are no income limits on converting an amount from a traditional IRA to a Roth IRA, though this may result in recognizing income tax as discussed below.

It’s important to note, when you convert an amount from a traditional IRA to a Roth IRA account this is a taxable event that may result in recognizing taxable income.

If you have a traditional IRA, SEP IRA, or Simple IRA that has an existing balance, that balance is likely from making tax-deductible contributions and earnings in the account. When converting an amount to a traditional IRA to a Roth IRA, you must look at it as if you’re converting a portion of all the balances in your traditional, SEP, and Simple IRA accounts to the Roth IRA, even if the traditional, SEP, or Simple IRA accounts are held at a different brokerage. You’re not able to pick and say the amount you’re converting is only X amount from Y account.

As a result, the backdoor Roth IRA strategy is best suited for taxpayers that don’t have existing balances in traditional, SEP, or Simple IRA accounts.

As an example if you have $100,000 in a traditional IRA account from tax-deductible contributions and earnings from prior years, and you contribute $7,000 to the traditional IRA for the 2024 tax year (which you don’t plan on deducting on your income tax returns), and convert $7,000 to your Roth IRA in 2024: the majority of the $7,000 converted to your Roth IRA is taxable. You should view this amount as a portion of the $100,000 of pre-tax contributions and earnings. The actual calculation to determine the taxable amount of the conversion is $100,000 / $107,000 X $7,000. The non-taxable amount of the conversion is $7,000 / $107,000 X $7,000. In this example, $100,000 is the ending balance of the traditional IRA account on December 31, 2024, which is used in the calculation shown, as well as the pre-tax balance and earnings prior to the most recent $7,000 contribution.

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.

There is a new information report required for businesses called the Beneficial Ownership Information (BOI) Report. This post contains general information applicable to small business owners to notify them and help them understand this new reporting requirement. Filing the report online on the US Treasury’s website is free, easy, and straightforward (it should take less than 10 minutes to complete), but if you require any assistance, please contact me.

Why do businesses need to file this?

To comply with federal law and avoid significant penalties, businesses are required to file this report with the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury. According to the FinCEN’s FAQ on the BOI Report, the reports will be used to “make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.”

What is Reported?

1. The business’ name, address, state of formation, and federal tax ID number.
2. Each beneficial owner’s name, date of birth, address, driver’s license or other ID number, and a photo of the ID. This applies to anyone with 25% or greater ownership or substantial control over the business.

Reporting Frequency:

Beneficial ownership information reporting is not an annual requirement. Unless a company needs to update or correct information, a report only needs to be submitted once.

Note that a change in beneficial ownership, or any relevant beneficial ownership information, such as a change to a reporting business’ address or an owner’s address requires an updated report. Similarly, if the beneficial owner’s driver’s license or other ID number changes, it requires updating the report.

Who Has to Report?

1. Corporations,
2. Limited Liability Companies, and
3. Other entities created by filing a document with a secretary of state,

Unless an exception applies…

Who is Exempt From Reporting?

1. Sole proprietorships (note that LLCs taxed as sole proprietors are required to file the report).
2. A business that meets an exemption on PDF page 11 of the Small Entity Compliance Guide. The next 10 pages of the linked guide provide clarifying details on who qualifies for the exemption.

How to Report:

File for free online at: https://boiefiling.fincen.gov/

It’s easy and straightforward to file. As indicated above, it requests basic information about the business and beneficial owners and should take less than 10 minutes.

Due Dates:

If your company was created or registered prior to January 1, 2024, you will have until January 1, 2025 to file a BOI report.

If your company is created or registered in 2024, you must file a BOI report within 90 calendar days after receiving actual or public notice that your company’s creation or registration is effective, whichever is earlier.

If your company is created or registered on or after January 1, 2025, you must file a BOI report within 30 calendar days after receiving actual or public notice that its creation or registration is effective.

Any updates or corrections to beneficial ownership information that you previously filed with FinCEN must be submitted within 30 days.

Additional Resources:

1. Brochure on the BOI Report from the US Treasury:

https://fincen.gov/sites/default/files/shared/BOI%20Informational%20Brochure%20508C.pdf

2. FAQ on the BOI Report from the US Treasury:

https://www.fincen.gov/boi-faqs

3. Small Entity Compliance Guide on the BOI Report from the US Treasury:

https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf

Unscrupulous individuals search public business listings to find business owners to scam. They will send you letters that, at first glance, appear to be official forms from your state, but are actually solicitations. Often these scams include offering state issued documents you may not need, including various certificates, for fees that are marked up significantly from what the state would charge you.

The secret to identifying what is legitimate and what is a scam?

Read the letter.

The letters will often include text saying that it is a solicitation from a private, for-profit business that is not affiliated with any state agency.

Another give away is they want to you make a check payable to an entity other than a state agency that you are familiar with. They will choose a name for their business that is vague and generic (Example: Corporate Processing Service) and hope you don’t recognize that it’s not a state agency.

Not sure if a letter you received is a scam?

Try searching online for the supposed document they’re offering as well as other information on the letter. Is the document something your state offers at a lower fee? Is it a document you actually need? Often states are aware of these scams and will include warnings on their websites to help you tell legitimate communications from the state apart from scams.

All taxpayers are required to pay taxes throughout the calendar year to avoid paying Underpayment Penalties.

Most employees have income taxes withheld from their wages to help pay in these taxes throughout the year, but depending on your overall tax situation, these payments may not be sufficient to avoid the underpayment penalty.

For self-employed individuals, if you’re not paid wages from your business, you don’t have the option of having income tax withheld from your income. Instead, you pay in your taxes by making quarterly estimated tax payments.

Step-by-step instructions for making individual federal and most state quarterly estimated tax payments can be found on my website here: How to Make Quarterly Estimated Tax Payments

There are two major guidelines to help determine how much you should pay in throughout the year. To avoid penalties, you should pay the lessor of:

Pay at least 90% of your current year’s tax liability

This requires you to know or estimate your current year tax liability. You can work with your accountant to determine how much your current year’s tax liability will be and/or use your prior year’s taxes as a guide.

Safe Harbor

Using this method you would determine how much you’re required to pay in for the current year using amounts from your prior year’s taxes. Depending on your income and filing status, you would pay either 100% or 110% of your prior year’s total tax amount towards your current year’s tax liability. This rule is common referred to as Safe Harbor.

Any remaining tax is due with your tax return by April 15th. An extension to file your tax return does not extend the due date for paying any tax due with your return.

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.

A major tax benefit available to self-employed individuals and business owners are retirement plan contributions. Contributions to retirement plans can save a significant amount of tax and allow you to save and invest for your retirement. Employer retirement plans have significantly higher contribution limits than traditional and Roth IRA accounts.

If the business has other full-time employees, the owners’ retirement plan contributions may be limited by the extent other employees participate in the retirement plan. Additionally, employer retirement plan contributions must be made on behalf of all eligible employees, not just the owners.

Common employer retirement plan options include 401k plans and SEP IRA accounts.

The amount and timing of contributions varies depending on a number of factors including how the business is taxed, wages to owners and other employees, and the net income of the business.

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.

For the 2021 tax year, taxpayers are able to deduct up to $300 of cash charitable donations ($600 if married filing jointly) even when taking the standard deduction.

Prior to 2020, taxpayers were only able to deduct charitable donations if they itemized their deductions. As a result of the increased standard deduction amounts, fewer taxpayers benefit from itemizing their deductions and are less incentivized to contribute to charities. To help incentivize taxpayers, even while taking the standard deduction you’re able to deduct a limited amount of cash charitable donations for the 2020 and 2021 tax years.

Cash charitable donations include donations via cash, check, credit card, or electronic payment methods to qualified charities.

Additional Reading: IRS Newsroom Release

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.

If you have a profitable business, it likely makes sense to work with an accountant for year-end tax planning. Your accountant can provide an estimate of the bottom-line numbers for your current year’s taxes before year-end to avoid surprises, plan accordingly, and discuss tax saving opportunities.

Some large end-of-year purchases and deductions that business owners often consider to help minimize their tax liabilities include:

–Vehicle Purchases – SUVs and trucks with a gross vehicle weight over 6,000 pounds may be deducted in full in the year of purchase, to the extent the vehicles are used for business based on mileage.

–Retirement Plan Contributions – view my post on retirement plans.

–Computer and other Equipment Purchases

–Furniture Purchases for a home office or office outside of your home.

Your accountant can model out these purchases and deductions in your business to help determine the tax savings to be realized from these types of investments.

With the exception of retirement plan contributions, these types of purchases and investments only make sense when you’re considering these investments in your business as the tax savings from these investments does not outweigh the cash required to make these purchases.

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.

Self-employed individuals and business owners that use an area of their home for business may be able to take a tax deduction for costs associated with a home office.

In order to claim the home office deduction, the area in your home must be used exclusively for business on a regular basis. The area does not need to be physically separated from areas used personally. A dinning room table use for both personal and business use would not count as the area must be used exclusively for business.

To claim the home office deduction, you’ll need to determine the square footage of the area used for business and the square footage of your entire home. A portion of the costs of your home can be deducted in proportion to the business square footage relative to the total square footage of your entire home.

Common Home Office Expenses Include:

-Rent payments or mortgage interest and real estate taxes if you own your home

-Utilities (electric, water, and gas)

-Homeowners insurance or renters insurance

-Homeowners association or condo dues

-Depreciation if you own your home – a portion of the cost of your home allocated to the area used for business is deducted over a number of years.

Don’t include: amounts where the business use is not representative based on the square footage of the home office relative to the entire home, such as internet access, telephone, etc.

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.

Part of the Coronavirus tax relief for the 2021 tax year includes changes to the federal Child & Dependent Care tax credit.

Generally, this credit allows taxpayers with children under 13 years of age to reduce their tax liability for expenses they incur for the cost of care for their children that allow the taxpayers to work. Qualifying expenses do NOT include private school for children in grades K through 12.

Here is a list of major changes to the Child & Dependent Care Credit for the 2021 tax year:

-Eligible expenses for care are increased from $3,000 for one child ($6,000 for two or more children) to $8,000 for one child ($16,000 for two or more children).

-The credit is refundable, meaning that if your federal income tax liability is reduced to zero, the credit can create an overpayment on your tax return that can be refunded to you.

-There are income limits on receiving the credit. The amount of the credit is reduced for a taxpayer with adjusted gross income between $125,000 and $438,000. If your AGI is above $438,000, you’re not eligible to reach the credit.

Additional details on the 2021 Child & Dependent Care Credit are available on the IRS’ FAQ page here: https://www.irs.gov/newsroom/child-and-dependent-care-credit-faqs

Contact me to discuss this topic in further detail

Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.