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3 Common Types of Tax That All Business Owners Must Understand

3 Common Types of Tax That All Business Owners Must Understand

In business, it’s essential to understand the different types of tax that you should be planning for and paying.

Why? Because as business owners, you’re responsible for ensuring that your financial affairs are in order, and that includes taxes.

We previously covered the common terms of tax, as well as gross versus taxable income.

Today we are focussing on three common taxes: self-employment tax, state income tax, and local income tax.

Each can vary, depending on the state you live in, however, most individuals will have to pay a combination of the three.

Let’s get started!

Self-employment taxes

Self-employed individuals must generally pay self-employment (SE) tax as well as income tax.

SE tax is social security and Medicare tax:

  1. 12.4% for social security (old age, survivors, and disability insurance)
  2. 2.9% for Medicare (hospital insurance)

This is usually taken out of your paycheck, but since you are no longer a W-2 employee, you’re now responsible for this yourself.

When you’re self-employed, you are paid the full amount you earn. Nothing is deducted for social security and Medicare tax but instead, you make estimated tax payments during the year to pay the self-employment tax and income tax. If you don’t make estimated payments, you pay the taxes when you file your return.

For anyone self-employed, it’s important to know your obligations so that you can avoid fees or penalties. It’s good to have an understanding of the various tax rules and regulations, including 1099s, quarterly tax payments, expense tracking, and home office deduction.

State income taxes

State income tax is a tax on income earned in that state. It’s similar to federal income tax, however, state income tax often funds state budgets rather than the federal government.

Every state is different when it comes to income tax. Some have progressive systems, while others have a flat tax, and eight states don’t levy a state income tax at all.

If you live and work in the same state, you likely need to file only one state return each year. However, if you have income-generating rental properties in multiple states, moved to another state during the year, or lived in one state and worked in another, you may be required to file more than one return.

Local income taxes

Local income tax is a tax that some local governments impose on people who live or work in a certain area. This local tax is in addition to state income taxes and federal income taxes.

Taxpayers are required to pay income tax in 41 states and many local municipalities. This tax funds public services such as education, parks, sewer maintenance, and garbage collection. Some local governments impose a school district tax, where all residents must pay the tax even if they work outside its boundaries.

As an employer, you must know about the local taxes where your employees work.

Masters of tax at your service

At Business And Accounting Partners, we know that dealing with taxes can feel overwhelming, and you may still have questions. Tax rules and regulations are complex, however as seasoned tax professionals, we are skilled at helping.

Just ask our satisfied clients who we have helped with business tax management, accountancy services, financial statement preparation, and financial advice.

If you need assistance creating a personalized plan for you and your business, let’s connect today. We will get started with a free strategy session.

As your business advisors, we will ensure that your business is on track, with no surprises when tax time comes! We will talk to you about optimizing your business income, maximizing deductions and credits, and minimizing self-employment taxes.

Gross vs. Taxable Income: What’s The Difference?

Gross vs. Taxable Income: What’s The Difference?

As a business owner, it’s important to know the basics of tax. In addition to running the business, you’re responsible for ensuring that both state and federal taxes are properly paid out.

We previously covered the common terms of tax. Today we’ve decided to focus on an essential topic: gross income versus taxable income, and the difference between the two.

We think you’ll find that it’s going to go a long way in helping you to grasp the tax and finance aspects of your company and keep your finances in check.

Tax is complex, but rest assured: at Business Advisory and Accounting Partners we are proud to tell you that we are seasoned tax professionals and we are here to help.

What is gross income?

Gross income is your income before taxes and deductions are removed. It is not just from your wages and can come in other forms that are subject to taxation including rental income, dividends, bonuses, business income, gain from the sale of stock or property, and other sources.

All income is taxable unless the law states that it’s not. Some good examples of things that are not taxable under the Internal Revenue Code (IRC) include gifts and inheritance, scholarships, life insurance proceeds, and most disability income.

What are deductions?

Deductions are business expenses or deductions, and personal deductions such as state income taxes, mortgage interest, charitable contributions, student loan interest, etc.

What is taxable income?

Taxable income is the portion of your gross income on which you’re required to pay income taxes. Generally speaking, an amount included in your income is taxable unless it is specifically exempt by law. Taxable income must be reported on your return, and it is subject to tax.

Here’s the golden rule:

Gross income – deductions = taxable income

This means that your taxable income is your gross income minus all of the deductions allowed.

When you file your federal and state income tax forms, you’ll use your gross income as your starting point and then subtract deductions to deWtermine how much you’ll owe.

Your taxable income is also known as adjusted gross income (AGI), and after calculating this you’ll decide whether to take the standard deduction or itemize your taxable deductible expenses.

Worldwide income

Here in the US, we have a “worldwide” or “citizenship-based” individual tax system. Any income earned by US citizens or permanent residents (in other words green card holders) is taxed by the US government, no matter where it is earned.

Taxes paid to other countries may be credited against US taxes.

Tax rates

When it comes to tax rates, these will be different for ‘individuals’ and those who are ‘married filing jointly’. Also worth noting is that state income tax differs in every state, with some having a progressive system, others a flat tax, and a few with no state income tax.

Guiding you toward success

To run a business that thrives, you’ll need to optimize your business income, maximize deductions and credits, and minimize self-employment taxes. Our clients in the Tampa Bay area depend on us for this expertise. When you need an expert to guide you through the financial maze and toward success, we are here to help. 

We have expert knowledge and vast experience in business tax management, accountancy services, financial statement preparation, and financial advice.

So, you focus on the past, present, and future of your business and we’ll be your business advisors. Send your questions our way and let’s get started with a free strategy session.

Setting Up a Business? Let’s Talk About Business Structure & Entity Planning

Setting Up a Business? Let’s Talk About Business Structure & Entity Planning

So, you’ve decided to ditch the employee badge and become your own boss. Good for you. But now that you’re taking that big, bold, leap, have you weighed up the business structure options? 

When you’re a business owner, you’re always trying to see around the next corner. Choosing the right business structure is one of the most important decisions you’ll make in the early days of your company. So, take the time to learn what the business structure options are, which is best for your business, and why. 

As always, At FMA, C.P.A. we’re happy to explain it all…

What is a business legal structure?

A business legal structure is also known as a business entity, and it’s a government classification that regulates some aspects of a business. On a state level, it determines the liability, and at a federal level, it determines the tax burden. 

The most common types of business structures are sole proprietorships, partnerships, limited liability companies (LLCs), corporations, and cooperatives. 

Why is choosing the right business structure important?

Making sure that you choose the right legal business structure is an important step because there are certain consequences to consider: It will determine your tax rate, paperwork and management requirements, fundraising abilities, and more.

  • Tax: some businesses (sole proprietors, partnerships, and S corporations) will class their business income as personal income. Others (C corporations) class their business income as separate from the owner’s personal income. Your choice of structure will impact your tax burden
  • Liability: The business structure determines if your business faces liability if it ever faced a lawsuit. Some options (sole proprietorships and partnerships) are pretty easy to start however they may lack protection. Others (corporations) may be trickier to start but offer more liability protection. 
  • Paperwork: each of the business structure types has different requirements when it comes to filing tax forms. Corporations are required to submit articles of incorporation and government reports.

There are other consequences such as hierarchy, registration, and fundraising – all depending on which business structure you chose. 

Factors to consider

It’s not always obvious which business structure to choose when you start a business, so it’s a good idea to meet with an expert to weigh up the options, give it careful analysis, and look at the long-term consequences. 

Bear in mind also that if you feel that your initial choice of business structure was a mistake, you can change your business structure in the future. 

The factors you and your advisor should weigh up include:

  • Tax implications
  • The future direction of your business
  • The operational complexity of your business
  • The level of control you need
  • Whether you’ll obtain capital investment
  • The protection the business needs against lawsuits
  • Licenses, permits, and regulations

Business strategy gold

Make sure that your business is benefiting from its structure and maximizing its profits. 

Talk to the seasoned tax experts. We want your business to flourish, and avoid the tripwires. We work with clients in the Tampa Bay area to assess the ideal business structure needed to maximize cash flow. It’s all about weighing up the operational and tax considerations and minimizing the risk exposure.

At FMA, C.P.A. we are your business advisors. This means that we’re the ones to talk to about all things business strategy, tax management, accountancy, and financial advice. The testimonials, written by the business owners that we have worked with, show that with our guidance, a business can go from surviving to thriving.

It all starts with us sitting down together at a free strategy session. So, let’s dive in!

Is Your Pastime a Hobby or a Business? 11 Factors to Consider

Is Your Pastime a Hobby or a Business? 11 Factors to Consider

What do you do with your downtime? Most of us have a pastime, whether it’s baking, home maintenance, or crafting.

But how do you know if it’s a hobby or a business? And does it matter?

The thing about a business versus a hobby is that with a business you have tax, insurance, and legal obligations.

Suddenly, that little side hustle seems a little more complicated than you’d previously thought. Well, don’t worry. FMA, C.P.A. can explain the difference between a hobby and a business, reveal the top things to consider, and advise on what steps to take.

How to spot the difference

The golden rule is that an activity is considered a business if you pursue it with continuity and regularity, and your primary purpose is to generate income or profit.

The IRS said that “A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business intending to make a profit. Many people engage in hobby activities that turn into a source of income.”

Now that we know the difference, let’s look at 11 factors that taxpayers must consider when determining their activity to be a hobby or a business, according to the IRS.

11 Factors to consider

  • The taxpayer carries out activity in a business-like manner and maintains complete and accurate books and records.
  • The taxpayer puts time and effort into the activity to show they intend to make it profitable.
  • The taxpayer depends on income from the activity for their livelihood.
  • The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
  • The taxpayer has enough income from other sources to fund the activity.
  • Losses are due to circumstances beyond the taxpayer’s control or are normal for the start-up phase of their type of business.
  • There is a change in methods of operation to improve profitability.
  • The taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
  • The taxpayer was successful in making a profit in similar activities in the past.
  • The activity makes a profit in some years and how much profit it makes.
  • The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.

Let’s remember that all of the above factors, facts, and circumstances relating to the activity must be considered, with no factor being more important than the other.

You must declare all income

It’s important to understand that if you make an income from an activity that’s completed with no intention of making a profit, you must report the income you receive.

The IRS state that “whether it’s something they’ve been doing for years or something they just started to make extra money, taxpayers must report income earned from hobbies on next year’s tax return.”

A partner in your business growth

The area of tax can be complicated. If you need more guidance, we can happily answer all of your questions.

We serve the Tampa Bay Area and specialize in tax management, accountancy services, financial statement preparation, and financial advice. We help our clients to reach their future goals by becoming better organized and more efficient in managing the financial aspects of their business.

We believe that it’s all about tax planning, not tax preparing. Let’s set up a free strategy session to talk about what steps you can take to ensure a compliant and secure financial future.

We’re your business advisors, and we’re ready to unlock the potential of your business.

8 Reasons the IRS Might Audit Your Business

8 Reasons the IRS Might Audit Your Business

An IRS Audit: How to Avoid the Red Flags

Although the chances of an audit are rare, the fact is tax audits are a fairly routine business for the IRS. That said, audits can be especially scary for small business owners. After all, there are certainly horror stories in which IRS audits have resulted in company closures.

Fundamentally, an IRS audit is an evaluation of your business’s financial accounts and information. As such, you’ll find most audits are a result of discrepancies on tax returns. The IRS is simply reviewing your entries to ensure everything is in order. Sometimes an audit is random, and other times it can be based on suspected suspicious activity.

So, here are some red flags that could trigger an IRS audit of your business.

1. Data Entry Errors

The more manual your accounting and expense management functions are, the more likely you are to make errors when filing your taxes. Your accounting system is crucial to understanding business performance and is also vital to tax preparation.

While most accounting functions are digitized nowadays, data entry blunders like treating expenses as income or duplicating an entry could trigger a letter from the IRS. An audit can be triggered by something as simple as misspelling your business name. This is where e-filing comes in handy because you can load vital information from past tax returns.

If your math is a little shaky, soliciting the services of a tax preparer near you could save you the headache of an IRS audit.

2. Failing to Report Some Income

Underreporting your income on your tax return is a top audit trigger. The IRS compares your income from one tax year to the next. A noticeable discrepancy without supporting information can make Uncle Sam sit up and take notice.

The IRS wants what it’s owed and will go to great lengths to verify the reported amount of tax is correct according to tax laws. So, it’s only a question of when before it spots your omission. This is especially true for cash-heavy businesses like barbershops and nail salons.

3. Questionable Business Deductions

It’s not uncommon for small business owners to have itemized deductions on their returns, like home office deductions. While these tax deductions can reduce your taxable income, they can also raise red flags when they don’t measure up to your income. Same case if you’ve made significant contributions to charity.

The IRS also compares your tax returns to those of other businesses in your industry – anything that’s out of the ordinary may subject you to further scrutiny.

4. Excessive Business Expenses

The IRS stipulates that a business expense has to be both ordinary and necessary to qualify as a deduction. For instance, a professional painter could claim paint and paintbrushes as business expenses, but a software engineer who paints as a hobby cannot.

If you have large expenses, it’s pertinent to keep all your receipts in case you are asked for verification. However, matters get a little more complicated when it comes to entertainment, travel, and meal expenses, as they may blur the lines between personal and business expenses.

5. Earning Substantial Income

One in 100 businesses get audited each year, and usually the ones that earn more than $1 million per year, especially if they report a significant change in income. It’s not unheard of for companies to start raking in millions in revenue seemingly “out of the blue”, particularly in the age of social media when branding has a direct impact on your bottom line.

Don’t be surprised if you hear from an IRS agent when you start showing a substantial increase from year to year. That’s also a great time to bring in a business advisor to develop a growth strategy.

6. Reporting Too Many Losses on a Schedule C

If you claim a business loss each time you file a tax return, you may be due for a tax audit. While it’s not uncommon for small businesses to have losses, having many years of Schedule C losses could have the IRS questioning the legitimacy of your business. If you don’t turn a profit, the IRS may consider your business a hobby which could limit your tax deductions.

Keep all your business documentation that shows your company’s revenue and expenses throughout the year to cover all your bases.

7. Being Self-Employed

Unfortunately, the IRS tends to scrutinize self-employed individuals, especially if they fail to report a profit for at least three out of five years. This applies to freelancers and anyone working in the gig economy as well. Yet again, the IRS could claim your business to be a hobby, which would disqualify you from claiming certain business deductions.

As a small business owner, you should consider forming an LLC to lower your audit risk. Consult a tax professional near you to determine which entity would work best for you.

8. Misclassification of Employees

Some businesses intentionally misclassify employees as part-time workers or independent contractors for several reasons:

  • To lower labor costs
  • To avoid paying certain small business taxes
  • To reduce business insurance expenses

It’s important to classify your employees appropriately and keep documentation of any independent contractors you hire.

Avoid the Dreaded IRS Tax Audit with FMA CPA

Talk to FMA CPA about your accounting practices, income, or deductions to determine what could trigger an IRS audit. We’re a CPA firm in Clearwater offering business advisory services designed to help you understand your business better and keep you on Uncle Sam’s good side.

Contact us for comprehensive tax preparation services and any questions you might have.

How a Business Advisory Benefits Your Business Development Strategy

How a Business Advisory Benefits Your Business Development Strategy

Business Development Strategy: Boost Your Performance & Optimize Your Processes

Having a business development strategy is critical to the growth and success of your business. It’s a process that ensures everyone in your company is working toward a common goal and is used to identify and nurture new business opportunities.

Most small businesses, no matter how niche-specific their products and services, operate in a competitive business environment. Working with a strategic business advisor can help align your short-term operations with your long-term vision to drive growth and profitability. Although most organizations have the same overarching goals of increasing revenues and building strategic partnerships, the scope of business development is wide-ranging and varies from one corporation to another.

In brief, business development is all about identifying the initiatives and business operations that will make your business better. Not all businesses get strategic planning straight away. It’s a complex process that spans a multitude of departments, from sales and marketing to project management and vendor management. A business advisory firm will help you develop a framework that aligns the different departments to create a competitive advantage and prevent your teams from losing sight of the company’s objectives.

Grow Your Business with Small Business Advisory Services

Small business owners wear many hats and take on many different roles, including that of chief executive officer, hiring manager, and sales representative. Taking on these roles and dealing with the occasional crisis can take up too much of your time and, in turn, derail the growth and the sustainability of your enterprise. This is where business advisory services come in.

Business advisors are experts in financial planning and forecasting and can provide the insights needed to guide your operations and decision-making. They do this by identifying redundancies and inefficiencies in the way you do business and providing strategic solutions to unlock growth and elevate your business to the next level.

That doesn’t mean you should only bring in a business advisor when you have a fire to put out; their advice and expertise are fundamental for business growth, whether you’re just starting out or looking to expand your business.

Here’s what you stand to gain from small business advisory services.

  • Understand Your Competitive Landscape

The success of your business is dependent on far more than your internal processes. You must have a solid understanding of the competitive landscape in your industry and keep up with a constantly evolving business environment. Getting a crystal-clear perspective on the changing factors in your market and industry is how you differentiate your brand and gain an edge over your competitors.

For business advisors, keeping up with changing trends, methodologies, and business strategies is just part of the job. Leveraging their services means you’ll always have the latest research at your fingertips.

  • Strategic Planning

The day-to-day requirements of running a business don’t leave enough time to plan for the future. Without a clear plan, you risk stagnation or, worse, obsoletion. A business advisory firm provides you with a board of experts from diverse industries and fields whose aim is to help you develop a strategic plan and roadmap for the future.

They can advise on how to enter a new market, acquire a new business, or whether to drop a certain department or product from your portfolio.

  • Accounting and Bookkeeping services

Typically, businesses seek advice from a CPA firm at least once a year when organizing their books. However, an accountant can provide advice on a myriad of matters, including tax filing and audits, business investment strategies, payroll management, and financial legal advice.

With a business advisor, you get a clear and unbiased perspective on your finances as well as the best possible advice that will help you achieve your business objectives.

  • Financial Planning and Forecasting

From tax planning to improving cash flow and financial modeling, a business advisor helps you better understand your financials and take measures to improve your company’s financial health. Financial planning allows for increased productivity and stronger business decisions. Having a financial plan sets forth a process to ensure your business goals are achievable from a financial point of view.

  • Create a Social Media and Digital Marketing Strategy

It takes a lot of research to keep pace with the latest marketing trends. Today, every business needs a business marketing strategy to remain competitive. A business advisor can equip you with the knowledge and tools to launch and maintain a successful marketing strategy.

Working with a business advisor helps in creating an organizational plan and marketing strategy that caters to the needs of your customers. It also allows you to prioritize your products and services in a way that maximizes profitability.

Contact FMA CPA for Business Advisory Services and Business Development Strategies 

FMA CPA is a CPA firm in Clearwater specializing in helping small businesses create business development strategies to increase their bottom-line revenues and sustain long-term growth. Contact us today to schedule your free consultation for our business development strategy services.