Self-Employed and the Holidays

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Being Self-Employed in the holidays can be very hard if you don’t have a plan. This time of year sales aren’t doing as well  or there stagnant and you just aren’t prepared for the additional cost. Disappointing your family again with a cheap Christmas can make you feel like a failure in your business.

Don’t let Christmas be an expense you didn’t prepare for. Create a budget that includes the holidays as a line item. A lot of times we have a budget in are head that has to do with Monthly expenses and when an unforeseen cost comes we are not prepared and it can become devastating. Here some tips to help you prepare:

Take a look at what you spent on Christmas last year.

Start by plugging in your normal monthly expenses like gas, utilities, insurance and groceries. Then, enter your more flexible spending budget groups, like dining out and fun money. What’s left? Will that be enough for Christmas? If not, you may have to adjust some of that flexible spending to make it work.

If you typically spend $300 on restaurants in a month, why not cook a few extra meals at home and stash an extra $200 toward Christmas savings? Or if your fun money is sitting pretty at $150 a month, why not hold off (temporarily) and put an extra $100 into your Christmas fund? Smart budgeting now can free up more money for what you want later—like Christmas presents!

Separate your Christmas budget into categories

Gifts are usually the largest Christmas budget expense, just remember you need to budget for all things Christmas—including decorations, wrapping paper, travel, festive meals, charitable donations, and anything else you’re planning to do over the holidays.

Once you’ve figured out how much you can spend on Christmas, do some simple math. Take your number—let’s say $500—and think over your seasonal expenses. You’ll need money for travel ($50), a tree and trimmings ($70), a few potluck parties ($30), and some extra giving ($50). Then there’s the big one: Christmas gifts ($300). Make a goal amount and stick to it! You’ll be amazed at how quickly you can pile up a stash of cash when you just make a point to save.

Now that you have your Christmas budget all set, you know how much you’ll need to add to your Christmas fund. As long as you plan where your money will go before you spend it, there’s no right or wrong way to split up your Christmas budget.

Next Year Plan ahead with a Christmas fund.

You know Christmas is in December every year, so there’s no reason to act like it suddenly snuck up on you. Start putting away money for Christmas now!

Once you’ve determined the total you want to spend on Christmas, determine when you want to start saving and divide it by the number of weeks left until Christmas.

Top 10 Tax Tips for the Self-Employed

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  1. Open a separate bank account for your business
  2. Save and Organize your receipts by Category for easier record keeping
  3. Keep track of all of your business income, at least on a monthly basis
  4. Make Quarterly Estimated tax payments.
  5. Create and maintain a spending plan or budget and try to stay on target as much as possible. Change budget as circumstances change.
  6. Always track mileage
  7. Track your time spent on different client types
  8. Keep a calendar or other type’s appointment setters to keep record of your routine. This will make it easier to prove business deductibility like business lunches.
  9. Save all your tax documents for at least 7 years
  10. Limit spending for business on your personal bank accounts, if needed, transfer money to business account then make the business purchases. This will make it clearer for you to recognize what is business and what is personal.

For a list of Business Categories or tips on how to maintain business records, click the contact us link at the top of the page.

Should I incorporate? For Self-employed individuals, 1099-misc employees, independent contractors, Sales agents, etc.

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If you’ve been self-employed or are starting as a self-employed individual, you’ve probably have come across the dreaded SELF-EMPLOYED TAX. Getting paid in full is not as fun as you thought once it comes to tax time. So what is the Self-employed Tax, it basically both the employee and employer portion of Social Security and Medicare taxes. On the cuff, it would seem that you get paid less than if you were an employee, however, you are your own boss and you simply have to price your services accordingly or achieve your sales goals accordingly.

Even after you strategize your goals, you reduce your profits with expenses, and you put yourself on a consistent budget to eliminate surprises. The IRS does give you a way to minimize your SE tax and this is to incorporate. Now there are different types of entities your could elect, LLC, LLP, C-Corp, partnership, S-Corp, but for the purposes of minimizing the SE tax we will discuss the most common Pass-through entity, the S-Corp.

The Internal Revenue Service may take a close look at your taxes if you choose this route, as you could end up lowering your overall tax liability while generating the same net income.

S-Corp distributions

If you decide to incorporate as an S-corporation, you can categorize some of your income as salary and some as a distribution. You’ll still be liable for social security and medicare taxes on the salary portion of your income as well as the Employer portion, however, the benefit on is that you’ll just pay ordinary income tax on the distribution portion. Depending on how you divide your income, you could save a considerable amount of self-employment taxes just by converting to an S-corporation.

IRS view of S-Corporations

The IRS tends to take a closer look at S-corporation returns since the potential for misuse is so large. For example, if you make $200,000 in one year but only designate $30,000 of that as salary income, you might trigger an IRS inquiry, since you are avoiding so much self-employment tax. The guiding principle is that you must designate a “reasonable” amount of your income as wages, rather than a distribution. What constitutes “reasonable” can often be a gray area, but if you push the envelope too far, you put yourself at risk for an IRS audit and potentially penalties and interest on any back taxes assessed by the IRS.

S-Corporations have additional costs

While an S-corporation may save you in self-employment taxes, it may cost you more than it saves. As with larger corporations, an S-corporation has both start-up and ongoing legal and accounting costs. In some states, S-corporations must also pay additional fees and taxes. For example, in California, an S-corporation must pay tax of 1.5 percent on its income with a minimum annual amount of $800. This tax is not required for sole proprietors.

Expenses, Assets & Depreciation

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Most business owners are familiar with the Profit & Loss Report, to most money you make is income and money that goes out is an expense. But that’s not always the case, an expense is something that gets used up rather quickly and therefore the benefit is used up quickly.  Some examples are office supplies, you purchase during the year and they get used up during the year. But there are other purchases that tend to hold up business owners record keeping because even though money is being spent, it is not fully expensed the year they you use it. This can give you a incorrect analysis of your business and not match up when it comes to taxes.

Assets

Sometimes when you make a purchase it’s not an expense, it’s actually an asset.  An asset is something where the usefulness is used up over the course of several years. It provides a benefit over a longer period of time.  Examples include equipment, vehicles, or a computer.

As an example, when you purchase a vehicle and use it to deliver products, it’s providing a benefit to you over the course of much more than just one year.   That’s the difference between an asset and an expense.  Does the purchase benefit you over the course of a long period of time?  An asset will help you continue to earn revenue over the course of several years.

Matching Revenues and Expenses

In accounting rules, revenue and its associated expenses should be recorded in the same period.  This is called matching.  Let’s say you purchased a camera and recorded the entire purchase as an expense in the year you purchased it — 2015.  But the camera helps you earn money in 2015, 2016, 2017, 2018, 2019 . . . a long time.  So the expense and the revenue aren’t matched up together.   You’ve got revenue produced by the camera recorded over the course of several years, but the expense of the camera is only recorded in one year.  The revenue and expense are not matched.

Matching is a very important accounting principle, the revenue and associated expense need to be matched together.  This is where depreciation comes into play.  The way you get the revenue and expense to match up, is to depreciate that asset over the course of several years.

Depreciation

Lets say you bought a $5,000 computer, that expense needs to spread out over how long you think you will have that computer.  In other words, The expense needs to spread over the computer’s useful life – the period of time that it will be of benefit to you.  Often for small equipment that’s 3-5 years.  Let’s say you think the computer will last you 5 years, (i.e. it has a useful life of 5 years) you take $5,000/5 years=$1,000 of depreciation you should take each year on that computer.

In this way you are spreading out the expense to match the revenue you earn in future years.

Depreciation also serves to show that the asset you purchased is losing value every year.  Let’s say you are a florist who purchased a vehicle to deliver flowers.  It’s only used for business.  You purchased the vehicle for $20,000 and you think it will last you for 10 years, so that’s $2,000 of depreciation every year.  The car is helping you earn your revenue over the course of 10 years.   When you take that depreciation each year, you can see that that car is losing value every year.  After the first year of depreciation the asset is valued at $18,000, after the second year $16,000, and so on.

That makes sense in our heads.  A car loses value every year.  As the years go on, your asset is losing value.  Depreciation shows that declining value.

Do you know what the people of Murrieta do when they receive an IRS tax notice?

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Do you know what the people of Murrieta do when they receive an IRS tax notice?

  • It may come as a surprise to you but they’ve been knowing about this for a long time?

When people of Murrieta receive an IRS tax notice they decide to visit Summerhill Tax Services. Clients of ours think about it long and hard and interview several tax professionals before choosing Summerhill.

And when clients make the decision to address their tax matters, they can have peace knowing they understand their situation while having game plan to resolve. Receiving a Tax Notice can be stressful, each year the IRS sends millions of letters and notices to taxpayers. Although some people may feel anxious when they receive one, many are easy to resolve. Here’s what to do if you receive a letter or notice from the IRS:

  1. Don’t panic. Follow the instructions in the letter.
  2. The notice usually covers a specific issue about your account or tax return. It may request payment of taxes, notify you of a change to your account or ask for additional information.
  3. If you receive a notice about a correction to your tax return, you should review it carefully. You usually will need to compare the information in the notice to the entries on your tax return. Having a preparer explain will make the situation easier:
    If you agree with the correction, you usually don’t need to reply unless a payment is due.
    If you don’t agree with the correction the IRS made, it’s important that you respond as requested. Allow at least 30 days for a response from the IRS.
  4. There is no need for you to call or visit an IRS office to answer most IRS notices. If you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the notice available.
  5. Keep copies of any correspondence with your tax records

Summerhill offers free consultation and reviews of Tax Notices at no-cost, you are invited to stop in or if you know anyone who is seeking tax help, be sure to tell them about our free consultations. If you can’t make it in-person simply call and ask for a phone appointment. In the meantime we would appreciate it if you kept your eyes and ears open for individuals seeking help with their tax issues.