Trying to start 2016 out on right foot with taxes (small business)
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    Default Trying to start 2016 out on right foot with taxes (small business)

    Quick and dirty, I have a successful small service business, that I have had for more than a decade now. We've gone through several tax people along the way (some good, some bad). For the last three years or so, we thought we'd just file and manage this ourselves, and it has cost us a massive tax debt with the IRS. My wife has recently been promoted with a good, but more stressful professional career, and doesn't have the time to assist, or help me with my small business taxes/ organization or filings.

    I am absolutely illiterate when it comes to this side of the business. We are currently not setup on quarterly payments, or filings at this time (but will be looking into this very shortly). What I am looking for right now, is a rough guestimate on an approx % that I should be withholding, or setting aside monthly in a separate account for my taxes.

    Another question, when you're self-employed, or a sole proprietor like I am, in a service oriented business. When you get paid from clients on say Paypal or any credit card, or service. To you set aside takes off that payment from the gross amount? Example customer pays say $65.00 via my website/ app paypal feature. Paypal keeps approx 3.5% of this as their "fee" for the transaction. So I'm left with a net of $62.81 from this transaction. When I pay taxes off this money earned, to I tax the % to the government, off of the whole $65.00? or the $62.81? and at approx, or what rule of thumb of a % should I set aside of that money? I've heard people say 1/4? and some say 40%? I've even heard people say %50 and I am really unsure.

    As it sits right now, I owe the IRS about $68K for two years of taxes, because I completely don't know what I'm doing, and I absolutely don't want to make these mistakes going forward. Thanks in advance for any help or suggestions.

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    Registered User NikoSan999's Avatar
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    Forgive my question here and not knocking your initiative to do it yourself but.... why in the world would you want to tackle something that involves the IRS to that magnitude when you don't know what you're doing and don't have the time for?
    Our accountant at the end of the year even has the payment quarter forms with the close to amount to send every quarter for the next year based on the year just completed.
    Their fee isn't any worse than penalty and interest and they know what they're doing.
    Ours used to do the bookwork all year long and also do paychecks taking taxes etc out every week. She didn't do workers comp but I believe if you are the only employee you don't have to do comp.

    Just my thought and we're self employed.
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    Quote Originally Posted by NikoSan999 View Post
    Forgive my question here and not knocking your initiative to do it yourself but.... why in the world would you want to tackle something that involves the IRS to that magnitude when you don't know what you're doing and don't have the time for?
    Our accountant at the end of the year even has the payment quarter forms with the close to amount to send every quarter for the next year based on the year just completed.
    Their fee isn't any worse than penalty and interest and they know what they're doing.
    Ours used to do the bookwork all year long and also do paychecks taking taxes etc out every week. She didn't do workers comp but I believe if you are the only employee you don't have to do comp.

    Just my thought and we're self employed.
    No problem, sorry if my post doesn't make sense. But basically we had a guy doing our taxes about three years ago, every year, with deductions and such, we would owe money, but very minimal. His fees were also very expensive, but we didn't batt an eye at his fees, because he always got us pretty close to the break even mark, after counting kids daycare, mortgage, business expenses etc..etc..

    Sometime in the middle of 2013, he sends us a letter stating, he's no longer going to do small business, and is only going to focus on taxes for businesses with 50-200 employees. So since my wife and I didn't have a tax person lined up, or figured out, we didn't file and just let everything pile up for 2013. We found a very good tax person late in 2014, and he filed our 2013 & 2014 taxes, but said the previous guy was not doing our taxes correctly, for lack of better terms. He basically had missed and screwed us on some items/ categories (again I know little about this) and after the dust settled, we ended up owing a massive amount for 2013/ 2014, on top of even heftier fines & penalties.

    So fast forward to today, and our current tax person, has said we need to set up quarterly payments/ estimates starting for 2016. (I have not made these arrangements yet with them) but plan to, but I have no idea how much, or what a rule of thumb is for a % of income, most small businesses that are sole proprietorship like mine, set aside each month in anticipation.

    I know it's a difficult question to ask, and everyone I personally know that are small business owners, seem to have a completely different answer from the next. I'm just trying to get a baseline on how much I need to set aside, so that I can start getting on a routine, quarterly payment system? I guess, in a hypothetical situation, if a business grosses $6200/ month, what % of that number should said business pile a away in a separate fund, to insure they were not under funded for their quarterly tax obligation.

    Believe me, I do not want to mess with, or deal with the taxes myself. I'm only asking these questions now, and here. As I don't have much extra to pay someone for tax or consulting advise, as we are basically living pay check to paycheck trying to pay the IRS on a payment plan.

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    Registered User lisaflex's Avatar
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    i vote for pay up for a legitimate great tax person to do it for you and explain all the ins and outs to you.

    being self employed can be good....can be great or can be bad if not done right in terms of taxes. imho

    good luck to you

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    Start with irs.gov.

    Go to "filing", then "small business, self employed".

    Next mark your calendar (preferably on a digital system that will give you reminder alerts) the following calendar:

    For the period:.............Due date:
    Jan. 11 – March 31........April 15
    April 1 – May 31............June 15
    June 1 – Aug. 31...........Sept. 15
    Sept. 1 – Dec. 31..........Jan. 15, next year

    You MUST make this schedule. The IRS gets really irked if you don't.

    The form(s) you need to file will be in the instructions. The RATE that you will pay (and the amount you will withhold) will be calculated each quarter and it depends on how much you earn, your deductions and your family status. In short, you need to withhold 12% for Social Security (because you pay both the employer and employee portions), plus 1.45% for Medicare. Example: If you earn $50,000 in the first quarter, you'll pay $6000 for SS and $725 for Medicare. And according to the tax table, you will also assume your annual income is $50K x 4 or $200,000 a year so your tax for the first quarter will be $12,465 (approximately 25% net tax).

    After the first few times you fill out the quarterly statement, it will become MUCH easier. I highly recommend you either (1) pay someone to do this for you or (2) buy QuickBooks and do it all electronically. You also get to make adjustments along the way. So let's say you earn really good money in one quarter but another quarter is down, the tax filing all evens out as you adjust your annual income.

    Always figure worst case so estimate your tax set-aside on your gross. The 3% PayPal charges you is a business expense and will become a deduction which will reduce your overall taxes but set aside based on the $65 anyway. Not having to send your entire "set aside" to the IRS is nice. Not having enough in your set-aside is a royal pain. Again, it'll all even out after the first few months.

    When you file, you file PAPERWORK and a PAYMENT. Even if the payment is zero, you still have to file paperwork so ALWAYS file! Payments are usually made electronically and your bank may be able to help you with that.

    Lastly, DO NOT take tax advice solely from an internet discussion board. Get your own expert advice from someone who knows your situation and can speak directly to your circumstances.

    Good luck! Let me know if you have more questions.

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    Quote Originally Posted by CookieLee View Post
    Start with irs.gov.

    Go to "filing", then "small business, self employed".

    Next mark your calendar (preferably on a digital system that will give you reminder alerts) the following calendar:

    For the period:.............Due date:
    Jan. 11 – March 31........April 15
    April 1 – May 31............June 15
    June 1 – Aug. 31...........Sept. 15
    Sept. 1 – Dec. 31..........Jan. 15, next year

    You MUST make this schedule. The IRS gets really irked if you don't.

    The form(s) you need to file will be in the instructions. The RATE that you will pay (and the amount you will withhold) will be calculated each quarter and it depends on how much you earn, your deductions and your family status. In short, you need to withhold 12% for Social Security (because you pay both the employer and employee portions), plus 1.45% for Medicare. Example: If you earn $50,000 in the first quarter, you'll pay $6000 for SS and $725 for Medicare. And according to the tax table, you will also assume your annual income is $50K x 4 or $200,000 a year so your tax for the first quarter will be $12,465 (approximately 25% net tax).

    After the first few times you fill out the quarterly statement, it will become MUCH easier. I highly recommend you either (1) pay someone to do this for you or (2) buy QuickBooks and do it all electronically. You also get to make adjustments along the way. So let's say you earn really good money in one quarter but another quarter is down, the tax filing all evens out as you adjust your annual income.

    Always figure worst case so estimate your tax set-aside on your gross. The 3% PayPal charges you is a business expense and will become a deduction which will reduce your overall taxes but set aside based on the $65 anyway. Not having to send your entire "set aside" to the IRS is nice. Not having enough in your set-aside is a royal pain. Again, it'll all even out after the first few months.

    When you file, you file PAPERWORK and a PAYMENT. Even if the payment is zero, you still have to file paperwork so ALWAYS file! Payments are usually made electronically and your bank may be able to help you with that.

    Lastly, DO NOT take tax advice solely from an internet discussion board. Get your own expert advice from someone who knows your situation and can speak directly to your circumstances.

    Good luck! Let me know if you have more questions.
    Thank you very much for the detailed explanation. This is exactly what I needed to know.

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    January, or the 1st of the year is always one of my worst or slowest months. (March-Aug) typically my better months. I stand to gross probably $6800-7,200 total income from the business this month (January).

    I'm projected to spend roughly:
    $448 for supplies
    $176 for fuel, for the truck I use for my business
    $118 for Liability Insurance for the business (paid monthly)
    $ 60-$100 possibly in misc. supplies for the business throughout the month

    What would be a good estimate, of this amount of gross income, should I set aside. Not looking for exact, just rough guess?

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    One more thing. My wife says that we need to file our taxes jointly, because it helps us in some kind of way (obviously its not though right?). And yet on the other hand, I hear people that have similar business to mine, say that I should incorporate, or switch from a sole proprietorship to an LLC for tax savings/ leverage.

    Again I am completely snowed by what all that means, the only thing I have heard or read, is that incorporating or LLC's only helps businesses or people (and I can be completely wrong) that make or earn in excess of $200K an year or more. Last year my total taxable income was $108K gross for this business. So I don't know if it makes sense to look into either incorporating or going LLC as I'm not really bringing in that much income to justify it?

    The part that bothers me, as mentioned in this thread, and also by a close friend. My current situation is causing me to be taxed as both an employee and as the business, which is effectively killing me.

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    Registered User pinetree's Avatar
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    The best advice I can give you is find someone you trust to do your taxes, there are So many different things That My business does that yours doesnt, States are different, You will know each year what your taxes will be and when they are due.

    The way I am set up I dont need to pay estimated taxes, but thats how I am set up, I think everyone is different. I am a partnership, but might have to change as our lives change, I needed to be able for someone to take this over if something happened to me.

    Talk to a few of the tax accountants before you let them have your business.

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    Great comments above. Most small business entrepreneurs that I know have gotten bitten with taxes early in the process. It's unusual for it to hit 10 years in, but with all the changes in tax preparers, it is what it is at this point. You know what you need to do and you move on from there. I assume you have set up a payment plan with the IRS.

    In my case, I have a full time day job and a part time side business (which has income that has grown to about equal the full time job). I have a small extra amount taken out of every paycheck on my full time job (to even out the payments) and then I set aside 25% of income from paypal every month into a separate account for the quarterly estimated taxes. In my case, I guestimated how much total income I would bring in with both jobs and then checked that tax bracket to determine the % to withhold. Remember you also have to pay the employer FICA taxes on that income.

    Have you been making your payments this year? In your case, you might find it easier to sign up for one of the IRS efile services where you can pay your estimated taxes monthly (so they are in smaller bites). When you don't pay estimated taxes, if you end up not paying a certain amount (90% or 100% depending on your income and taxes from the prior year - your accountant will track that), you'll incur additional penalties and late fees, which is probably a big part of what bit you from your past years.

    For reporting of the income, I report the full amount of the income and then I report the paypal fees as a business expense on the deductions. I also have a spreadsheet where I list all of my expenses for the year and I keep it updated every time I spend money. In my case, my business is small with very few expenses (especially relative to income), so it's easy for me to maintain this way.

    I would strongly encourage you to consider adding a VA (virtual assistant) who specializes in bookkeeping/accounting to your staff. You could just pay them by the hour or do a retainer per month and have them do your daily accounting items such as tracking expenses, incoming revenue, etc. They could put together the materials for the accountant to streamline that process.

    Good for you for facing up to this and recognizing that you need a better plan and implementation.
    Last edited by MsMarieH; 08-25-2016 at 08:27 AM.
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    As far as the LLC/incorporation goes... There are many factors to consider for if it is the right step for you.

    The best reason to do one is to protect your personal assets. I don't know what kind of service business you run, but let's say it is a lawn mowing service as an example. If you accidentally run over the homeowner's toe with your lawn mower, they can sue you for medical expenses, etc. If you are incorporated, they can sue the business and the business assets have exposure, but your personal assets don't (well unless they claim you did it deliberately and come after you individually). If you are a sole proprietor, they can file against your home, your car, etc. Your personal assets can be up for grabs potentially.

    The incorporation builds a wall between the two for protection.

    There are many other factors to consider and different incorporation options increase the complexity of filing your taxes, so this is definitely something to consult both an accountant and a lawyer on.
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