Happy Tax Day!
You’ll note that this year, it was today, Tuesday, April 17th, as the 15th was a Sunday and the next day was Monday, April 16th, which is also the Emancipation Day holiday, when Washington DC celebrated the day that President Lincoln freed slaves in the nation’s capital.
Hopefully, you’ve already filed, but if you haven’t, you can file an extension TODAY and you will have until October 15, 2018, to get everything completed. Remember, there won’t be any penalties if you file the extension, but you do need to pay at least an estimate of the amount you owe. You don’t get any relief in that respect, and you will still need to pay interest when you actually do file, but it basically buys you a little more time to complete the forms.
The best rule here: pay what you can. Something is better than nothing at all. The IRS may work with you on payment options after you file the return.
And while we’re on the topic of the IRS, a few things to remember. The IRS will NEVER call or email you. The only way they will contact you is via snail mail. Don’t fall for any scams or give any information out via email or phone. It is NOT them.
IRS.gov is the only valid website and if you need to research something or download a certain form, go there.
I thought we’d look at some of the lesser-known facts around taxes this month, in case any of these scenarios became realities in your future.
Meet Tom. Tom is from Philadelphia, PA and he’s working in marketing for your company. Yep, you’re the boss. Your business is booming and you decide to open a location in another state. Congrats! Now, here are a few things to consider:
Tom moves to the new state halfway through the year. Now that Tom has lived and worked in two different states in the same year, you need to provide him with separate W-2’s and withhold proper state income tax. And you need to register your new location in the new state because every state has specific tax laws. If you pay rent on the building, have employees (and state tax withholdings or unemployment taxes), pay sales tax; you need to be licensed to do business in that state. Note that this does not mean that you incorporate in that new state – you need to register to do business.
If you are a partnership and members reside in numerous states, the business may need to register in each of those states. Do your research and due diligence or this can be a messy problem.
This is where accountants and virtual CFOs (like us) can help!
Tom needs to file a part-year return for each state in which he lived and worked during the tax year.
Some states have reciprocal taxes. So let’s say that Tom is going to continue living in PA, but work at your new location that happens to be in Ohio. Well, these states have an agreement with one another that a person can live in one state and work in another without having to file non-resident tax returns. PA has agreements with Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia.
Another part to this, let’s say your new location is in Delaware and Tom is going to continue living in PA. Well, PA does not have an agreement with DE (or NY for that matter), so Tom would file state returns in each state, and get a credit on his PA return from what he paid in Delaware, so it can get complicated!
This is also why it’s so important to work with a payroll company. The payroll company will provide the proper W-2’s and will withhold (and pay!) the proper taxes. You do not have time to worry about this stuff, but it’s also something you can’t ignore.
This is where accountants and virtual CFOs (like us,) can help!
Meet Kate. Kate is a freelance graphic designer and she’s worked on projects for a variety of clients. Many of those payments were under $600 so she did not receive 1099s from the clients. Great news, right? WRONG! Kate must report ALL income, even if a client does not send a 1099. Remember, integrity!
Kate was annoyed because some of her clients that did pay her over $600 didn’t send her a 1099. She reported the income, so she’s golden, but what happened to the clients?
If you as the client paid a contractor over $600 you must send them a 1099. What happens if you don’t? If you get audited (and you know I did, you can read about that here) you will be charged a fee for every single one you didn’t send and if you don’t send them within 30 days, the fee increases. The client business has the responsibility to know what tax forms are required to be submitted each year.
This is where accountants and virtual CFOs (like us) can help!
Meet Dave. Dave sells furniture online and he charges sales tax. He never keeps record of what the tax amount is; he just puts everything into his business account. He’ll figure it out later, right? NOPE. Always have a separate account for sales tax. It’s not Dave’s income. The taxes paid by the customers goes straight to the state government. Based upon the volume and the state and the rules in each state, the state sales tax must be paid weekly, monthly or quarterly and the state taxing authority requires it to be paid with a reconciliation. Dave will need to report sales (both taxable and non-taxable) at the end of the period and submit the taxes.
This is where accountants and virtual CFOs (like us) can help!
Meet Nancy. Nancy is from the IRS and she wants to give you some tips on what raises red flags when it comes to a potential audit:
Nancy was reviewing Kate’s tax return above (the freelancer) and she noticed that her 1099s totaled 10K, yet she reported an income of 8K on her Schedule C. RED FLAG.
Nancy looked at Dave’s tax return (the online furniture seller) and noticed he drove almost 5,000 miles more this year for business than last year. His operating expenses also increased from 15K to 50K. Those variants equal RED FLAG. (Even if these are legit changes, be aware it could raise questions and just be prepared and organized if audited).
Nancy looked at Tom’s employer’s tax return (the company that opened an office in Ohio) and she noticed that the client-type expenses were super high. Tom tried to write off Super Bowl tickets, lavish lunches, hotel stays, trips and that caused a RED FLAG. (If the company is writing off expenses, keep records and next year, many of the items that WERE company deductions may not be accepted any longer, so check it out now).
Tax time gets overwhelming but with the support of people that can help you with your numbers and with the knowledge of how to be prepared for any potential audits, you can continue with business as usual. If you want to chat finances, I’m here.
