Tag Archives: direct sales and taxes

How to Prevent Audits at Tax Time

Filing your federal tax return is probably either your favorite time of year or a tedious task that depletes your savings account. If you’re self-employed, you may have already figured out that you can deduct all sorts of things when April rolls around. Independent contractors who work in direct sales enjoy many different benefits at tax time, including deductions for business-related expenses and the ability to write off debts from self-employment. Make sure that you only deduct applicable expenses if you don’t want to find your tax return on the local auditor’s desk.

Don’t Get Greedy

Make sure you’re only claiming real deductions as you fill out your federal return. It’s okay to claim meal expenses and mileage for some professions, but review current IRS rules first. Auditors are said to have a strong interest in returns filled with deductions, so keep that in mind before you take off a few bucks for that lunch at Applebee’s.

Don’t Tell Them More Than They Need to Know

When you file a federal return, there’s no reason to mail in receipts or a copy of your self-employment earnings.  If the IRS wants this info, they’ll ask for it.  Don’t trigger an audit by offering extra documents or information.

Don’t File Too Early or Too Late

Self-employed folks should avoid filing on the first day of tax season or preparing a return long after April 15th has passed. Play it safe and file in February or March with the majority of the other taxpayers.  Avoid doing anything to call attention to your return, like requesting extension after extension or amending it at the last possible minute.

Final Thoughts

Tax time is never fun, but it’s even more stressful if your expenses are audited.  Play by the rules and keep an eye on your deductions to avoid receiving an unexpected letter from the IRS months after submitting your return.

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Tax Review for Direct Sellers

It’s the New Year!  While I know you are busy working on getting sales going again and keeping those resolutions, one thing that you should be thinking about is getting your taxes ready.  I know some people like to file as soon as they possibly can in February so here is some past articles about taxes to help you either finish off your 2012 year or to get 2013 started on the right foot.   Tax

These articles cover all sorts of topics from what you can and cannot use as a business write off, how to keep track of everything through the year so you are not as overwhelmed and how to get the most bang for your buck.  Of course, please remember that I am not a tax accountant and that you are best to talk to your personal accountant to know what will work best for you and your situation.

A Quick Tax Overview – Direct Sales
Keeping Track of Papers for Tax Time
Tax Information – Advertising Write Offs
Tax Information – Vehicle Write offs
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US Small Business Owners – How and When to Pay Estimated Taxes

If you’re in direct sales, you won’t have an HR department taking Federal taxes out of your paycheck for you – you’re on your own! In most cases, you can’t put off paying taxes until the end of the year or you’ll get hit with an underpayment penalty. To keep business owners and the the self-employed from racking up a huge tax bill, and to keep the money flowing into the IRS coffers on a regular basis, the IRS and many states require you to pay estimated taxes on your profits four times a year.


Tax (Photo credit: 401(K) 2012)

The name “estimated tax” comes from the process you’ll need to go through four times per year in order to know how much to send in. It can be a little annoying but if you stay on top of your accounting, making sure to enter your expenses and income on a regular basis, most accounting programs will make it pretty simple for you. Because of the progressive tax system, you’ll owe less in the first quarter than in the fourth quarter even if you had the same profit in each quarter. If you would like to spread it out, you can always pay more than you currently owe – making estimated tax payments is just intended to make sure you don’t end up paying too much less, or you’ll get hit with an underpayment penalty.

When Are Federal Estimated Taxes Required?

Generally, if you plan to make at least a $1000 in tax for 2012 after subtracting any withholding or refundable tax credits, then you must make estimated payments. To avoid the underpayment penalty, the IRS must have at least 90% of the tax shown on your tax return at the end of the year or 100% of the tax shown on your 2011 tax return, whichever is smaller. If your adjusted gross income is $150,000 or more, then substitute 110% for the former 100% figure.

How to Pay Federal Estimated Taxes

  • 1. You’ll need to estimate your profit up to that point in the year. Most accounting programs such as Quickbooks can produce a profit statement for year-to-date. Remember, this is an estimate, so as long as you’re not off by much, this profit statement will be useful.
  • 2. Alternatively, you can use this IRS Worksheet on page 5 to figure out what you owe each quarter in taxes. If most cases, if your state has an income tax you will need to do estimated payments as well.
  • 3. Then, register with the Electronic Federal Tax Payment System or manually send it a check with a voucher. It’s very easy to set up but does take a week or so to complete your registration. Make your payment from your bank account. (You can even set up withdrawals up to 120 days in advance, if you’re the planning type.) If you’re a paper-and-pen sort of person, you can also send them a check, along with a voucher (which I do) on page 9 of the former link for the first quarter or page 11 for quarters 2, 3, and 4.
  • 4. Keep a record of the tax payments you make during the year. The last estimated tax payment of the year is due January 15th of the next year. When you file your taxes, you’ll apply all those payments against your tax owed, and you should be pretty close!

Avoiding the underpayment penalty

The main reason to send in estimated tax payments is to avoid the underpayment penalty, which the IRS assesses when you haven’t kept current in paying taxes. While most of us think of April 15th as the day to write the big check, you’re actually required to send in taxes on the money you earn as you earn it, which most people with wages or salaries will have done for them by having money withheld from their paycheck. The IRS won’t be amused if you send them a lump sum of your taxes owed for the entire year on April 15th, and as with many other situations, they’ll express their displeasure with whopping fines. There’s no need to panic, however, because you’ll only get hit with this penalty if you’ve seriously underpaid. The IRS is mainly interested in getting its money, and as long as your estimates were done in good faith, you’ll be fine. You can do a more thorough job at the end of the year and make up any shortfall with the last payment on January 15th.

Payment Dates

Each quarterly estimated tax payments is intended to cover the taxes on profit from that quarter. Here are the payment dates for your estimated tax payments for 2012:

  • 1st Quarter (January 1st-March 31st): Estimated taxes due April 17th 2012
  • 2nd Quarter (April 1st-May 31st): Estimated taxes due June 15th 2012
  • 3rd Quarter (June 1st-August 31st): Estimated taxes due September 15th 2013
  • 4th Quarter (September 1st-December 31st): Estimated taxes due January 15th for 2012

For 2013 the dates are as follows:

  • 1st Quarter (January 1st-March 31st): Estimated taxes due April 15th 2013
  • 2nd Quarter (April 1st-May 31st): Estimated taxes due June 17th 2013
  • 3rd Quarter (June 1st-August 31st): Estimated taxes due September 16th 2013
  • 4th Quarter (September 1st-December 31st): Estimated taxes due January 15th for 2014

For information on self-employed IRS tax tips visit TaxDebtHelp.com’s Blog by clicking here.

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Keeping Track of Papers for Tax Time

Come tax time, if you cannot find the paperwork, then it is hard to claim it.  You can, but if you get audited, they are going to want to see the paper to back up your claim.  For this reason, it is a good idea to keep organized through the year so when the tax season sneaks up, you are ready for it.

Image by Getty Images via @daylife

Envelopes/Folders – You can organize your direct sales paperwork in a variety of ways. For me, I have found that having a large brown envelope is a great way to do it.  I have one envelope per month for sales and have it organized as such – party summary (from my company’s backoffice) and receipts relating to the party attached.  I also write the order number on the receipt just in case they get disconnected.  As I do not have a lot of expenses beyond what I purchase from my direct sales company, I have just one envelope for expenses.  I could easily itemize these out by month or by type.

Electronic Files – Just like my paper files, I have a folder on my computer for all my electronic invoices.  I have them sorted out by type of invoice (party, supplies, long distance, credit card) and sort them into those folders and make sure each file is labeled by date.  A few clicks and I am able to find anything that I need.

Excel Spreadsheet – I do all my accounting via Excel spreadsheet as I find it easier than using software.  But, software definitely has its advantages such as being able to prepare a report for you at yearend to use for your taxes.  That said, if you are not comfortable with either option, a spreadsheet with a list of various expenses is a good idea to prepare for your tax accountant.  I recommend a few columns though:  Item, Purpose, Date, Amount less tax, Tax.  This will help your accountant classify the expenses and record them in the correct spot.

One of the best things you can do for yourself is keep on top of your paperwork and have it sorted out.  This creates less stress later on and you will likely find it helpful throughout the year.

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