The Top Reason Taxpayers With Multiple Jobs Owe On Their Taxes

Did you know that it’s very common for an individual with more than one job to actually owe when they file their income tax return? That’s right, they owe! It’s not a hard and fast rule but often times when taxpayers in this situation owe money it comes as a surprise because they believed they had completed the forms correctly when they started their jobs.

Therein lies the problem, the forms…

The Math

Let’s use a hypothetical example. Assume Jimbo worked three jobs in 2016 and earned $25k at each job for a total of $75k. Jimbo is single with no “above-the-line” deductions, itemized deductions, or dependents. He also elects no tax-deferred options offered by his employers and does not contribute to an IRA. He shows up to work, gets paid, and goes home. Nothing fancy.

When he was hired at each job he was asked to complete Form W-4 and in doing so he assumed one dependent (himself) and completed the form as such. It made sense to him in his head and for the most part it seems reasonable. That is, except for one minor detail; he didn’t earn $25k, he earned $75k. You see, his payroll was calculated separately at each job based on Jimbo earning $25k. Without any other variables in this example, I can tell you that Jimbo will owe.

What Could He Have Done?

As I mentioned above, Jimbo’s taxes are being withheld separately by each employer assuming he only works that one job earning $25k. Jimbo actually earns $75k per year and therefore he should have adjusted his payroll withholding from each employer once he took on the additional jobs. Sure, he would have received less in each of his paychecks but he also would be less likely to owe come tax time.

How to Make Changes

The instructions to Form W-4 include a calculation that individuals can use to determine their withholding. Unfortunately most taxpayers ignore it which is one reason why tax returns are even a thing. At any point during the year an individual can obtain a new Form W-4 from their employer and make changes to their withholding. Most employers will probably never ask employees to fill one out (aside from when they first hire someone) or help complete the form. This might be where it pays to ask a trusted tax advisor to look over the forms before submitting to an employer, especially when there is a life event or additional employment. My clients frequently reach out to me throughout the year and ask me what they should do when they have life events such as having children, buying a house, or starting a retirement fund.

Does It Really Matter?

Kind of. In most cases, if a taxpayer owes more than $1k to the federal government at the end of the year then there is a penalty that is assessed for underpayment of taxes. Although the penalty is usually insignificant, owing taxes can come as a surprise in itself. Having to pay hundreds or thousands of dollars all at once without being prepared can prove burdensome to most people.

Who Else Might This Impact?

This situation is also commonly found when individuals change jobs during the year or for those who have side jobs which they report on their taxes. When there are significant changes in income taxes that are not considered then there is an increased likelihood that taxpayers might owe when preparing their annual return. This is another great reason why it’s a good idea to work with a trusted tax professional to help you receive every deduction possible each year.

Do you need help with your withholding? Or maybe you have a cautionary tale you would like to share about working multiple jobs. I would love to hear from anyone willing to share. Postin the comments section below!

10 Step Guide to Organizing a Business - Part 2

Welcome back to the second part of my 10 step guide to organizing a business. If you missed part 1 you can read that here, and just in case you need a refresher, below are the first five steps: 

#1 Decide what you want to do or sell
#2 Pick a business name
#3 Choose a structure
#4 Register your business
#5 Obtain a federal tax ID #

Before we move on to the final steps I want to reiterate that I am not a lawyer and no part of this guide should be considered legal advice. I wrote it so that new business owners can understand what to expect along the way when organizing a business.

#6 Obtain state/county ID #s – Cost may vary (usually $0)

Every state & county has different rules regarding its requirements for businesses to legally open its doors and start selling its goods or services. Depending on what you sell or the service you provide, you may need to obtain a business license, a state payroll withholding ID #, a state sales tax withholding ID #, and register with your state and/or county for business personal property filings. There may be more or less steps required by your state or county so be sure to check with your local authorities before moving forward. Additionally, if you sell food products or other regulated items (such as pharmaceuticals) you may need to obtain additional regulatory clearance before beginning business.

One item to note in particular would be a resale certificate for sales tax. If you plan to buy and sell goods then you will want to obtain one of these immediately. It will exempt your business from paying sales tax on items that you purchase to resell. An example would be if you sell DVDs, you can buy them sales tax free, and then collect sales tax from your customers, thus avoiding double-taxation. You cannot purchase supplies or other items to be used by the business with this exemption however. Depending on what you sell and where, this could prove to be a very beneficial exemption to claim.

#7 Setup a business checking account – Cost varies

At the very least, if you establish no other business banking accounts, get yourself a dedicated business checking account from a reputable bank. Try to find a bank that will best meet your needs and keep bank fees to a minimum. Banks are notorious for charging businesses fees and make loads of money doing so because most businesses never pay attention. I have worked with businesses that unnecessarily pay thousands of dollars per year in bank fees that could have easily been avoided with the help of a trusted advisor or better control over their financial records.

Something else to consider is opening a simple account at first and upgrading it later if you need to. I have found that small local banks are more than accommodating and offer just as good, if not better, service, than the larger institutions. Unless you have an exceptional relationship with the bank you choose, know that the next bank down the street will always be happy to take on your account. Don’t settle for shoddy business practices or poor service from your bank. If you play your cards right, you can possibly save thousands of dollars in bank fees over the course of a year.

#8 Decide on your accounting system – Cost varies

Before your first sale you need to decide on your accounting system. Are you going to track everything in Excel spreadsheets or on Google Sheets? Or maybe you want to have something a little more powerful like QuickBooks Online. Do your research, but make that decision and implement a system before your first sale. The last thing you want is to find yourself knee deep in a successful business with no formal system of accounting. It makes for a messy tax season and poor analysis of your business. It also commonly leads to unfavorable business practices and decision making.

On top of deciding on your accounting system, consider your level of comfort and availability with being able to keep your own books. If you’re relatively comfortable then it might make sense to do-it-yourself in the beginning days of your new business. Even if you are comfortable though, consider the trade-off of having a CPA or bookkeeper help you. A CPA will likely be more expensive but can also provide you insight that a bookkeeper may not. A CPA can also help you with your taxes and keep you compliant in other respects. A true professional will not only keep you out of trouble but also on track to reach your goals.

#9 Connect with an attorney – Cost varies

If you haven’t already done so you should seek out a legal professional that will be available at the first sign of trouble. An attorney, like any other professional, will keep you from making mistakes and will keep you out of trouble. Should you find yourself in a tough situation, they will be able to help you evaluate your options. You shouldn’t need to retain one right away, but it may be worth having a friendly introductory conversation with a few local attorneys that you can call on should issues ever arise. You are likely to get a better rate, and better service, if you take the initiative to seek out professional help before you need it. Show up after things get messy and you could find yourself at the mercy of high fees and packed calendars. You can’t plan for everything, but having a willing resource available is a great start.

A final note on legal counsel, there is usually no one-size fits all attorney. Depending on what your business offers, you may need one or several to help you. For example, an attorney that specializes in contract law may not be able to help like one that specializes in employment law. Consider this when forging relationships in the local legal community.

#10 Obtain insurance – Cost varies

YOU WILL NOT WANT TO SKIP THIS STEP! Despite whichever business structure you choose, if you or your business is negligent (even by accident), the owner(s) (you!) could be liable! Make sure you have insurance in case you ever find yourself on the wrong side of a legal dispute. There are several different kinds of insurance and all are meant to provide a different type of protection. You may not find value in life insurance for owning your own business, but if you have a store front, you might want to consider general liability to cover slip-and-falls. It could only take one uninsured incident to put you out of business and possibly bankrupt the owner(s). Seek out a local insurance agent that can help you with your needs. If you’re unsure of what you need, bounce it off your CPA or attorney for a second opinion before signing off on anything. There is such a thing as under-insured and over-insured so it may be worth the second opinion to save yourself from those pitfalls.

Final step – open your doors and start making money!!! Yes, I realize this might considered be an 11th step :)

I hope you have found this guide practical, easy to understand, and valuable. If you already own and operate a business you can always go back and fill in some of the gaps you may have left open. It’s always best practice to correct issues before they come back to haunt you.

Thanks to all my readers and supporters! Please leave any feedback in the comments section below.

10 Step Guide to Organizing a Business - Part 1

Lately, I have received numerous questions about how to formally organize a business. The inquiries have ranged from what is required to organize, to what products or services people should sell. I can help answer the former but if I had the answer to the latter, then I would be doing that myself :)

To keep this post easier to read I am splitting it into two parts. I did my best to write this in a logical order for first time business owners to better understand, but some may argue that the steps outlined can be performed in a different order. Your order may vary as requirements will differ from county-to-county and state-to-state.

Of course, I want to disclaim up front that I’m not a lawyer and I’m not giving any legal advice here, just basic information on the typical procedures to organize a business entity. You wouldn’t start a crazy diet or exercise routine without seeking medical clearance first, would you? I didn’t think so. Be smart on this matter and seek a licensed professional attorney before starting any business or organization process.

Below are the first 5 steps that any entrepreneur will want to know and understand before starting a business.

#1 Decide what you want to do or sell – Cost $0

This is probably the most critical component of any business. You can’t have a business if you don’t have a product or service to sell. Maybe you are phenomenal at underwater basket weaving and want to sell your baskets online. Or more practically, maybe you’re a killer golfer and want to offer training services. Either way, you need to decide what you want to sell. Every business is unique and will need to follow different rules in order to be compliant and successful.

#2 Pick a business name – Cost $0

This may not seem like a critical step, but in reality it is. A name can carry so much weight with it. It can represent goodwill, present a professional image, or even become so catchy it becomes a household name (think Band-Aid). You can be as creative or generic as you choose. My personal opinion is to keep it simple in the beginning; you can always upgrade or expand in the future. There is a catch here though; the name you choose cannot be used by another entity. I won’t go into too much detail, but clearly you won’t be able to start a company called “Microsoft”, because not only is the name taken, I’m fairly confident it’s a registered trademark. Most states will not let you use a name that has already been taken (at least in that state). Although a name may be available in your home state, if for some reason it is trademarked, you’re likely to receive a letter one day asking you to stop using the name and/or likeness. You can do a more extensive name search nationwide, but that's usually not necessary in your early years.

#3 Choose a structure – Cost varies

Now that you have something to sell, and a business name to go with it, you will want to decide on a business structure. The most common business structures are:

1) Sole Proprietorships
2) Partnerships
3) Corporations
4) S Corporations
5) Limited Liability Company (LLC)

The IRS has done a fantastic job of explaining each different structure so I have provided the respective links for each structure for your reference. The type of business you own and operate will largely help decide what structure makes the most sense for your business. There is no one-size-fits all approach here and you will reap significant reward by consulting with a licensed attorney, as well as a licensed CPA, to discuss the legal & tax benefits and drawbacks to each structure.

Once you have determined your business structure, there will be some administrative paperwork to file. The amount of paperwork mostly depends on the structure you elect. I can’t stress enough the value and benefit of having a legal expert guide you through the process to ensure nothing is missed. Do-it-yourself services such as LegalZoom are perfect for those familiar and comfortable with the process. If this is your first time though, consider the expense of professional help as an investment in your learning and understanding of the business world.

#4 Register your business – Cost varies (usually about $25)

Next you will want to register your business with your local county. You will need to obtain a DBA or “Doing Business As”; aka “Certificate of Assumed Name” here in Georgia. This certificate allows you to legally represent yourself under your business name. It is a fairly simple process, but it differs slightly for every county and state so check with your local authorities regarding what you need to do to satisfy this requirement.

#5 Obtain a federal tax ID # - Cost $0

Are you starting to see the bigger picture yet? You have a product, a name, a corporate structure, you registered with your local authorities, and now, you are finally ready to register with the federal government. Let me be very clear, no matter what, YOU SHOULD OBTAIN A FEDERAL TAX ID # (also known as an EIN). Without this number you will not only potentially be handing out your social security number to everyone you do business with, but you will not be considered anything other than a Sole Proprietor. If you do nothing else, file an SS-4 for an EIN. It’s ridiculously easy and can be done online instantly here.

That’s all I’m sharing this week. Check back next week for the final 5 steps on how to organize a new business!

Did I miss something or ignore a critical step? Or was I immensely helpful and inspiring? Either way, leave your comments and questions below!

5 Myths About Tax Returns

If you follow me or have read any of my blogs in the past couple of months then you know I have been writing quite a bit about taxes. I want to share five myths I consistently hear about tax returns.

Myth #1 – I Can Do It Myself

This is less of a myth and more of a question of one’s ability. Everyone is entitled to prepare their own tax return, that’s no secret. But there is much to consider when doing it yourself, primarily, the complexity of your return. That is where the “myth” comes in. There will come a time when you will have a complicated return and really shouldn't do it yourself.

I have seen self-prepared returns from the impoverished to multi-millionaires and I can tell you everyone makes mistakes. It's very rare that I do not find mistakes on self-prepared tax returns. Vendors like TurboTax and H&R Block Online do a great job with their products, but even I have had to cobble my way to the right answer when using their software. There are parts of the tax code that are highly subjective to interpretation, and unless you are well versed in everything tax, then you stand a fair chance of being wrong in your interpretation. This could mean you are leaving money on the table or might have to pay back some of your refund down the road. Know your limits and when it makes sense to bring in a CPA to assist you.

Myth #2 – I Always Get a Refund

Nobody is ever guaranteed a tax refund. Your tax return is an annual reconciliation between what you should have paid and what you actually paid throughout the previous year. If you paid too much then you get a refund, but if you didn’t pay enough, well, then you owe. Some taxpayers treat refunds like found money, but the reality is that it is money overpaid throughout the year. Yes there are credits available to certain taxpayers who meet specific criteria, but they are not available to everyone and a taxpayer’s situation can (and usually does) change each year. If you prepare your own taxes you may not even be aware at how much you are overpaying into the system each month. Again, this is why it’s important to consider working with someone that can explain the results to you each year.

Myth #3 – Tax Preparers are Responsible for the Return

Not true! If you are working with a reputable preparer then you should be receiving an engagement letter or agreement each year. Somewhere in that letter or agreement it should clearly state that the preparer is not responsible for the return and that they only used the information provided by the taxpayer to prepare the return. This is also clearly stated on your return.

What does this mean? Well, if you provide facts and circumstances that are inaccurate, you are on the hook for additional taxes as well as penalties and interest if you are ever audited. But if your return preparer misinterprets the law using accurate information you provided, then the liability might be shared. One thing I can assure you is that the IRS is indiscriminate with their notices and audit selection and it is usually unrelated to who prepared the return. Speaking of the IRS…

Myth #4 – I Received a Notice from the IRS, it’s my Preparer’s Fault

In most cases, you didn’t receive a notice because you changed who was preparing your tax return. More likely, you may have received a notice requesting additional information to validate a tax return line item. Typically it has something to do with earning significantly more or less money, or not paying enough taxes.

There is little correlation between who receives notices based on their tax return preparer. That being said, the IRS looks favorably upon CPAs and tax attorneys because they usually possess an advanced understanding of the tax code versus their peers. An IRS agent reviewing a return may choose to forego any further action if they see that a return has been prepared an individual with one of those designations.

Myth #5 – Tax Elimination Plans

This myth is by far my favorite because hands down it is a complete lie. I have heard industry experts claim they can eliminate your tax liability and I know how they do it. Rather than have you pay the government what is owed, they have you invest the money into a tax-deferred investment account such as an IRA (or SEP if you’re self-employed) so that you don’t have to pay taxes on that money today. Well, it’s true that you may not owe today, but your tax bill hasn’t actually been eliminated. Any tax due on the money you invested is just deferred until 70 1/2 when Required Minimum Distributions “RMDs” kick in. You're also still out of pocket that cash so you still have to come up with the money, you're just sending it elsewhere for the time being. The term tax elimination is misleading and if you ever encounter someone who tells you they can do it then you should be skeptical.

Share Your Thoughts!

I’m really interested to hear what other taxpayers (and preparers) think or have heard about taxes. As part of my service I try to educate my clients to understand how the system works so they are better informed for the future. Leave your comments in the section below.

 

5 Mistakes Small Business Owners Make

Happy New Year everyone! I’m sure there are many aspiring entrepreneurs out there looking to start their own business in 2017. To help them get started, I am sharing five of the most common mistakes I have observed small business owners make.

#1 Improperly Organizing Their Business

Every business needs to be legally organized somehow, whether as a sole proprietorship, an LLC, a partnership, or some other way. My advice is to keep it simple, at least in the beginning. Consider what you are going into business to do. Are you a young guy mowing lawns on the side just to make a couple of extra bucks? Or are you a seasoned attorney looking to provide legal advice to clients? Every business is different and therefore would benefit from a different legal structure.

Often times, businesses benefit from keeping things simple in the beginning. Certain structures carry significant administrative requirements which can be time consuming and costly, outweighing the benefits they provide. Instead of picking an overkill option from day one, consider drawing out a one-year, two-year, and three-year plan so you know when it might make sense to have an elaborate business structure. You can always reorganize your business down the road without sacrificing what you have worked so hard to build. Spend the time and money to consult with a trusted attorney to help you evaluate all of your options and make the best decision.

#2 Doing Everything Themselves

All small business owners are guilty of this at some point, me included. They want complete control over everything and do everything themselves because they think no one else can do it as well; but that’s just not true. You should do as much as you can for as long as you can, but once you start to feel the pressure, you should consider hiring someone to help you out. Even using a virtual assistant or part-time administrative assistant can save you stressful hours of work that are not usually related to building your business or making you money. It’s also a wise decision to find a trusted attorney and CPA to assist you with your business, no matter how small your operation is. Face it, you don’t know everything and the more help you can get in the beginning the fewer mistakes you will make in the long-term.

#3 Not Setting Up Accounting From Day One

Not to be biased, but every small business needs an accounting system. Even if it’s just a spreadsheet in Google Sheets, it’s better than nothing at all. Preferably, every small business owner would use an accounting platform like QuickBooks Online or Wave. I commonly find that owners are too busy to even setup accounts with these services, let alone do the work. How can you make informed decisions if you don’t know the financial status of your company? You can’t. You will only get so far before you come to the realization that an accurate accounting of your business’s financial activity is a common theme of successfully run businesses. Do yourself a huge favor and start with an accounting platform from the first day. Spreadsheets are a good Band-Aid, but eventually you will need to upgrade.

#4 Misunderstanding Business Taxes

Business taxes and individual taxes are two different worlds. The rules are often completely different, and the IRS has done a stellar job at preventing taxpayers from being able to abuse the code in either world. There are circumstances where your business taxes may be just an extension of your personal taxes, but when they are not, you must file the appropriate forms on-time. Failing to file, or filing late, can bring very stiff penalties.

Regardless, the results of your business taxes are typically reported on your personal return somehow. If you ignore filing for your business you may find yourself having to amend previously filed individual returns just to report business income. In addition, many business owners get caught up with constantly trying to minimize their tax liability year-after-year and never plan, failing to consider the long-term effects of their decisions.

Questions about depreciating assets in full in their first year, reasonable salaries for the owners, and business tax credits for specific industries are just a few examples of how a tax professional can help you. Doing it yourself may not be the wisest choice and working with the right CPA may seem costly in the beginning, but if they are a true business partner, then the mistakes they prevent you from making will more than make up for their fees and likely save you more in the long run.

#5 Failing to Network/Market Properly

Networking is critical from a business development standpoint. If you fail to network or market your product or service effectively to the right audience, then you’re wasting your time and losing out on precious revenue. Take some time to read up on industry-related marketing strategies and listen to podcasts to gain insight on how you can best package and sell what you offer to the right audience. Learn from those who came before you to save time and money. Reach out to those you follow in your community for business advice. You can have a million dollar idea but if you’re in front of the wrong target audience it’ll never sell well. Remember, you are in business now and at the end of the day that also makes you a salesman. Perfect your pitch and make sure you’re spending the right amount of time with the right people.

I would love to hear what mistakes other business owners have made, or have heard about in the business community. Post your stories in the comments section below!

Stock Wash Sales

Have you had a bad year in the stock market? Are you still holding on to losing investments in the hope that they will rebound and make you rich? Or maybe you just can’t bear to “take the loss” by selling them. I could make a case to hold, sell, or buy more, but I’m not writing about that this week. Instead, I’m writing to warn you about something called wash sales.

A wash sale occurs when you sell an investment at a loss, and then buy a substantially similar investment within 30 days after the sale. Notice the word substantially, a term not clearly defined by our friends over at the IRS, so I’ll do my best to explain. Wash sales can occur for investments other than stock, but for the purpose of this article, I will focus specifically on stock related wash sales.

Let me explain

Imagine it’s December 30, 2016 (the last trading day of 2016), you have some poorly performing investments, and you decide that “2017 will be a better year”, so you bite the bullet and dump your shares of fictitious entity, XYZ Corp. You know you’ll get a tax deduction for your losses (up to $3k) so you’re not 100% down and out. Until January 3, 2017 (the first trading day of 2017), when XYZ Corp announces a revolutionary breakthrough and suddenly their stock price surges. You could have been in good fortune if you had only held on to your shares, but because you sold, you’re stuck with that 2016 stock loss. You decide to buy back your shares and ride the upward trend.

Not so fast…

If you choose to buy back your shares, the tax loss you thought you would receive in 2016 will vanish. The IRS would prefer that taxpayers don’t game the system year-after-year by recognizing stock losses for tax benefits just to buy the shares back right after the New Year. This rule applies all year, not just at year-end (when this buy/sell strategy is more commonly found).

Substantially similar

In our example we used the same investment, which is blatantly a similar investment. But what if XYZ Corp is in the medical devices sector and competes directly with ABC Corp? You think the sector has potential, but maybe XYZ Corp has had some bad news in the press and is specifically not doing as well as its peers. You could stay invested in the sector by swapping your investment in companies and probably survive an IRS auditor. You couldn’t sell your XYZ Corp shares and pick up call options on XYZ Corp without risking a wash sale though. No one will stop you from actually placing the trades, and your broker may not catch the wash sale, but doing something like this is probably not going to pass under an audit or review. They are substantially the same.

They’re watching

The wash sale rule can dramatically reduce your allowable tax loss from stock sales. Your broker is required to designate wash sales on broker statements issued each year, so yes, the IRS knows about each wash sale that occurs in your account. Even if you open two separate brokerage accounts and buy & sell the same securities in each, the wash sale rule still applies. The two brokers would not know you are doing this and thus not report it, but that doesn’t make it any less of a violation of the rule.

Although the wash sale rule is in place, losses that are disallowed are rolled into the basis of the re-purchased investment until that investment remains sold for longer than 30 days. This means you don’t outright lose the tax benefit of stock losses, but you do not get to recognize the benefit until the appropriate amount of time has passed.

Conclusion

This is a sticky area of the tax code, especially when you get outside of stock related wash sales. There is no definitive ruling in place about what constitutes a substantially similar investment; so much is left to judgment. Obvious violations of the rule will be caught and enforced. Work with your broker to understand what will be flagged as a stock wash sale so you don’t lose expected tax losses at year-end.

Do you have a strategy for the end of the year to avoid wash sales? Feel free to share or comment below.

5 Apps for Entrepreneurs

As an entrepreneur it’s important to run your business cost and time efficiently (work hard not smart). You’re most likely a one-man, or woman, shop, and all business owners starting out know you’ve got better things to do than to pour endless hours into the mundane and administrative tasks of your business. Hiring someone can be expensive and in the beginning unpractical. That’s where apps come in.

Apps can act like micro workers. They can automate portions of your business and pick up the slack where you can’t, or don’t particularly want to. Most apps (and recurring monthly subscriptions) offer a free version or are very inexpensive. Considering the immense work output you gain from using apps, I highly recommend implementing them in your business. Even with the use of multiple apps, you can get all that you need for significantly less than the cost of hiring someone and you will save precious hours each month.

Here is a list of some of my favorite apps:

#1 QuickBooks Online

I use QuickBooks Online (QBO) for all my bookkeeping needs and prefer it among the competition. It handles all of my banking transactions, invoicing, and reporting. QBO can also handle payroll but I have found they are more expensive than other service providers. The mobile app let’s you see your business’s current financial condition and you can take pictures of your receipts and attach them right to the corresponding transaction for sound record keeping. The category recognition is pretty accurate and the reconciliation tool makes reconciling accounts fast and easy. QuickBooks is the most widely used accounting software in the world among small businesses and if you ever need help with it there is an extensive network of ProAdvisors in place to help you (like me). It’s the best you can get and you can’t go wrong.

#2 Google Applications Suite

Anything Google can be considered best-in-class. The Google Suite of Applications is like the lite version of all Microsoft Office applications. I wish I could replace my Microsoft Office software with Google's, but Google isn’t quite there yet. That being said, for any new entrepreneur, the free suite offered by Google is more than plenty. Unless you’re preparing overly complex spreadsheets, or really need to step up your presentations, it should suffice. In addition, Google Drive is the perfect cloud storage solution for all your files and the efficiency of being able to collaborate with others is truly amazing.

#3 Scanning App

I have no specific recommendations but any scanning app that can efficiently scan documents and upload them quickly to your cloud drives is a winner. You could even use the camera app pre-installed on any smartphone and that would be good enough. I use Office Lens, which is free, and scans up to 10 documents at once. I love the quality but it is not the fastest. Scanning apps often crop out background imagery that you don’t need (like the table you scan your documents on) and are typically clearer than the camera apps pre-installed on most smartphones. Whether in the office or on the road, you need a scanning app for efficient paperless document management.

#4 E-Signatures

In today’s technologically driven world we need to be able to get our work done from anywhere. Gone are the days of mailing documents back and forth or e-mailing, printing, signing, scanning, and e-mailing documents back and forth. Consider the use of apps such as Adobe DC or DocHub to get your documents signed (legally binding) fast, easily, and within compliance standards. Professionals all over the world swear by the efficiency you gain from using such platforms and regardless of which one you choose the cost will be well worth it.

#5 Zapier

Last but not least is one of my favorites, Zapier. This app lets you make Zaps. A Zap brings together two or more apps by triggering events. For example, if a client were to upload a file to my cloud directly, then I could setup Zapier to work between my cloud provider and my e-mail provider to send me an e-mail notification that a file had been uploaded. This is a very basic example of what Zapier can do. I have only scratched the surface of what it can do in my own business, but from what I have experienced, I know it can do so much more to keep my business humming along efficiently. I highly recommend looking into this app for anyone seeking to automate parts of their business.

Get Downloading!

This list is certainly not all encompassing, but rather some of the highlights of my favorite and recommended apps for any entrepreneur. Your time is valuable and these apps will help you make the most of it, especially in your early days. Check them all out by clicking on the links throughout the post. Most are available across platforms including iOS, Android, Mac, and PC.

What are some of your favorite apps for productivity and efficiency? I would love to hear them in the comments below!

Independent Contractors: A Definition and Some Tax Insight

I’m excited to write about a subject that I come across far too often – the independent contractor status and the tax impact of being one.

Many people may associate the term independent contractor with that of someone who works on a house (think of a plumber, an electrician, or handyman). Although these individuals may fall into this category, the reality is that anyone can be an independent contractor. The IRS has pretty clear guidance on how to determine if an individual is an independent contractor. Simply stated, an individual is considered an independent contractor if the payer has the right to control or direct only the result of the work, and not what will be done, or how it will be done.

What does this mean?

Well, let’s use an example. Let’s say I hire someone to help me with my social media. She is hired with the understanding that she has full access to my social media accounts using her own devices (computer, smartphone, or tablet) and all that I have explained to her is that I want her to respond to questions and actively market my firm. How, when, and from where (geographically) she does this is up to her. We establish some rules such as no profanity or bias, but other than the rules we set, it’s all within her control. She gives me daily reports of her work but that’s about it. She’s likely considered an independent contractor for tax purposes. I control only the results of her efforts (responding to questions and actively marketing my firm), but how she does it or by what means is out of my hands. Of course, if I don’t like how she does her job I can always terminate our agreement.

What about employees?

But what if we changed a few things. Instead of working with her own devices she instead agrees to meet me at my office a few hours per week and uses my firm’s computers to access my social media accounts. She can only do her work from my office, no remote access is allowed. In addition, I establish a standard set of guidelines for marketing my firm including how, when, and about what to post. I give her the exact words I want used on my social media accounts. She’s really only there to go through the process of posting on my accounts. Since she’s at my office though, I also have her answer the phone, prepare client deliverables, and even reply to my e-mail. She’s working under my direction, having been told what to do, and how to perform tasks. She is now more likely considered an employee for tax purposes.

Why is this a big deal?

The tax difference between an employee and an independent contractor could be significant. At the time of this writing, employers are responsible for 50% of the FICA tax which is 7.65% (Social Security tax of 6.2% plus Medicare tax of 1.45%) on each employee's first $118,500 of salary and wages. The employee covers the other half. You may never even notice this if you receive a steady paycheck because it’s all taken care of through the payroll processor.

On the other hand, if you’re an independent contractor, you’re on the hook for the whole amount of 15.3% (Social Security tax of 12.4% plus Medicare tax of 2.9%). It may not sound like much but on $10,000 in earnings one would owe $1,530 just in Social Security & Medicare taxes, not to mention the federal and state (if applicable) income taxes to be paid. The payer has no responsibility to assist independent contractors with withholding. What’s worse is that inexperienced individuals who are considered independent contractors don’t know they have been classified as one until they receive a 1099-MISC at tax time. By then it’s too late to file estimated taxes on the income and the taxpayer receives a crushing year-end tax bill that they may not be prepared for. Luckily you can write-off expenses against income earned as an independent contractor, but there are rules and limitations around that too and poor planning may mean lost deductions or hours of work to recreate expense statements.

Ask questions.

Whenever you agree to work for someone you should always ask if the position is contract or employment. Some telltale signs are if you are asked to complete a W-4 or a W-9. A W-4 is typically requested for employees and a W-9 for independent contractors. Your social security number is required for your employer to file the necessary forms for tax reporting purposes. Don’t provide any information or sign anything until you understand the consequences of what you’re getting into. If you are signing on as an independent contractor, it’s best to begin the habit of paying estimated income taxes. Check back soon for a post on filing estimated income taxes.

Confused? Have an opinion? Leave a comment below or give me a call.

Trump's Tax Plan

With the 2016 presidential election behind us I thought it would be a good idea to address the sudden 800lb gorilla in the room; Trump’s tax plan. Trump has released an aggressive tax plan that his administration believes will stimulate economic growth in the United States. Although the question remains whether part, or all, of the proposed changes will be passed into law, it’s best to be prepared and understand the consequences.

Given the number of changes in the proposal, I am only highlighting those that could have an impact on the average taxpayer and business owner.

This article is a good read but it does get a bit technical at points so brace yourself.

Individuals

Tax Bracket Changes
There are currently seven income tax brackets starting at 10% and topping out at 39.6%. Trump’s plan condenses those seven brackets into three; 10%, 20%, and 25%.

Deductions & Personal Exemptions
Trump’s plan would increase the standard deduction from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for joint filers. This would result in fewer taxpayers itemizing their deductions. For those able to itemize, single filers would be capped at $100,000 in itemized deductions and joint filers would be capped at $200,000. An allowance for personal exemptions and the head-of-household filing status would also be eliminated as a result of the plan.

Childcare
Under Trump’s plan, taxpayers would be entitled to an above-the-line deduction for children under the age of 13 for childcare expenses, but the proposed deduction would be capped at the state average for the age of each child. For example, if a taxpayer lived in GA and the average cost for childcare were determined to be $4,000 for a 10-year-old child in GA, a taxpayer with a 10-year-old child would be entitled to a deduction up to that amount. Any excess costs would presumably not be deductible. The childcare exclusion would not be available to single filers with total income over $250,000 or joint filers with total income over $500,000, and would be limited to four children per taxpayer per year. Additionally, any deduction for an eldercare dependent would be capped at $5,000 per year.

Something interesting to note is that this proposal would also be provided to taxpayers who use stay-at-home parents or grandparents as caregivers (as well as those who use paid caregivers).

Businesses

Tax Rate
Under President-elect Trump’s plan, the current corporate tax rate of 35% would be reduced to 15%, and the corporate alternative minimum tax rate would be eliminated. As a result, most business deductions would be eliminated. This rate would become available to all businesses, regardless of size, primarily to encourage them to retain profits within their business (and in theory stimulate more spending within the business).

Perhaps the biggest change to corporate tax rates would be for LLCs, partnerships, and S corporations, commonly known as “pass-through” entities. The proposal would make the pass-through portion of income taxable at the new corporate rate of 15% as well. This could have a huge impact on business owners depending on their income bracket.

Depreciation
There has been some discussion in the tax community about Trump’s proposal to eliminate depreciation, but I’m skeptical. Such a revolutionary change to a long-standing accounting principle seems unlikely. There is, however, a proposal in his plan, which would allow manufacturing firms to expense capital investments entirely in the year of purchase, but at the same time forgoing a deduction for interest expense on the same asset(s). Essentially, you would not be able to finance an asset, deduct the entire asset in the year of purchase, and continue to receive an interest expense deduction for the same asset.

How things shake out on the subject of depreciation will be interesting for sure.

On-site Childcare
If your business offers on-site childcare then you are aware of the tax credit that currently provides your business up to $150,000 for a portion of the costs associated with providing the childcare. Trump’s proposal would raise this credit to $500,000. Amounts paid to employees for childcare would still be considered business deductions, but would not be used to calculate this credit.

Concluding Remarks
I hope readers have found this article insightful. Tax changes are never easy to navigate or understand but my goal was to make readers aware of some of the changes that could potentially be coming to us in the near future. There will undoubtedly be tax changes, which will have an impact on individuals and businesses beginning in 2017.

Confused? Concerned? Unsure? Feel free to comment below or send me a message to keep the conversation going.

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Why You NEED a Budget

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I have a client I met about 5 years ago, and at that time she was broke. Worse then that, she was in a bad relationship, and without her other half she would not have been able to pay her bills.

The first thing I noticed when we met to talk about her finances, aside from her lack of funds, was that she had no budget or system to create one. So we put one together.

Needs

The budget was simple. We started by setting up a spreadsheet (think Google Sheets) using her weekly paycheck amount and her average weekly grocery and gas bill. Then came her average monthly expenses: cellphone, TV & Internet, mortgage payment (which included escrowed expenses for property taxes and insurance), car insurance, and utility bills. She went through her bank statements to get actual amounts so we knew we had real information to work with. What good is a budget if the amounts aren’t accurate?

It turns out she was earning barely enough to cover her necessary expenses.

and Wants...

Then we covered the less critical expenses such as dining out, movies, clothes (for her and her two school-aged children), and pet expenses for her dog. Forget vacations, she hadn't traveled in years and knew it wasn't in the cards. But she did admit to buying herself new clothes about once a month (the kids more so when they needed them). She also had a relatively healthy dog that only needed an annual visit to the vet so his expense was minimal (aside from food which was also negligible).

Once we added her wants and needs into her budget, it was clear she could not afford everything on her own. However, with the extra support of her not-so-great boyfriend, she could more than afford her current lifestyle.

But she wanted out of the relationship.

Small Potatoes

After we put it all together, I was able to step in and do what I do best; analyze. The first thing to go was her monthly habit of clothes shopping. We agreed she would need new clothes from time to time, but not every month. By cutting this monthly habit she was able to save money and also became more aware of seasonal sales to get really good deals (Black Friday anyone?).

Dining out and going to the movies were also off the table. For the cost of taking her kids to the movies every month, she could sign up for Hulu and Netflix and have endless content choices for less. She also cut her TV package down to internet-only because she now had Hulu and Netflix for TV & movies. Some might argue the lack of content choices so we added a few bucks per month for a weekly visit to her nearby Redbox.

Big Ticket Items

Despite these cutbacks, we still hadn't made the progress she needed. So next, we reviewed her insurance policies. Guess what? She hadn't thought to combine her home & auto policy. As soon as she did (and changed insurers) she started seeing big savings.

Where it gets better is on the mortgage. She had been paying pre-recession interest rates (think 6.5%) but during our meeting (circa 2011), rates were at about 3%. We worked with a local bank to refinance her mortgage and dropped her payment hundreds per month. We even cut the mortgage from a 30-year term to 15-year term and the payment was still less with the added benefit that her house would be paid-off much faster.

Make It Happen

Not soon after her mortgage was refinanced she was able to give Mr. Not-so-Wonderful the boot. Even without him she was able to pay her bills and save a little for emergencies. The greatest part of this experience was that she was able to declare her personal and financial independence by changing some of her habits implementing a budget. Today she is doing very well; she has established college funds for both of her children and has built up a nice emergency fund. She has even been able to re-introduce some of her wants back into her lifestyle and is less stressed out about finances because she now uses a budget to plan.

What are some methods you use to budget and stay in the habit of budgeting? Add them in the comments section.

Hello All!

Well, I finally did it. I left the corporate world to launch my own practice! To kick things off I wanted to share the news with you. My plan is to update my blog each week (or two if I get that busy) with an informative post about finances, taxes, accounting, and even occasionally lifestyle habits. I want to keep my topics fresh and interesting so if you have a topic you would like me to write about send me a message and I’ll do my best to accommodate!

Until my first official posting, have a peak around my site and if you have any interest in talking or meeting with me just send me a message.

Jared S. Eliseo, CPA