Posts Tagged ‘Tax’
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.
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.
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.
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|
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.
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.
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.
One of the biggest concerns that those in direct sales have is what all can they write off at tax time. The simple answer is lots of stuff! But I know that is not the most helpful answer. This article is going to focus on your vehicle and what you can write off and how to keep track of it. Please keep in mind that I am not a tax accountant and I live in Canada, so the rules where you are may be different. Talk to your favourite tax person to check the specific rules.
Mileage– The best thing you can do is keep track of the mileage that you use your vehicle for. I like to keep a notebook in my car alone with a pencil (pens freeze in winter) to keep track of this. It is really quite simple, create the following categories and fill them in each time.
Date Starting Mileage Ending Mileage Task
So for instance, I would write down “Christine Party” or “Parcel pickup” or whatever works for you. If you are doing errands, and some are business related and some aren’t, then you can estimate the ending mileage either from prior trips or what you think it is. No one is likely going to come to your house and drive the route to verify it. If I am going out of town, I will put down something like “Christine Party – Town name” so I remember why the mileage is that much higher.
At the end of the year, I use a spreadsheet to calculate my mileage for me. The only difference between my note book and this spreadsheet is that it has a column to calculate how far i drove.
Date Starting Mileage Ending Mileage Distance Travelled Task
Don’t forget, on January 1, write down what your mileage is as you are going to use that for starting mileage for the year and as the ending mileage for hte prior year.
Now, you may be wondering what to do with all this wonderful data. You are then going to use it to determine how much of your car expenses you are able to write off.
With the data we collected above, we know the following:
January 1 Mileage 103,000
Dec 31 Mileage 110,500
Mileage for business 3,000
Percentage used for business 40% (3,000/7,500)
So you can write off 40% of your vehicle expenses for the year.
Another option that you may have through your taxes is to claim a flat fee per kilometre/mile that you drove. Depending on how much you put into your vehicle in the year that may be the better way to go.
Basically, anything that you have put into your vehicle during the year is going to qualify for a write off, with a few possible exceptions.
You can write off
But, as in the example above, you can only write off 40% of these.
Hopefully this has helped to clear up some information about using your car as part of your direct sales business. If you have a question related to this, please post it in the comments and I will reply.
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.
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.
Did you sense the sarcasm in that title? Personally, I do not mind doing taxes, but I have done my own ever since I started working and I also work in accounting so they are not the scariest thing to me. But for many people, they are not comfortable with doing accounting or taxes for their direct sales business. Hopefully this guide will give you some ideas to take the scare factor away.
Revenues – You need to claim the funds that you made from your business. This is the proceeds that you made on your sales. For instance, if you made $100 on a sale but your cost was $75, then you need to claim that $25. If you had a team, then you may have made commissions on them which will also need to be claimed. Your company will issue you a tax receipt when the money they have paid to you is over $600, regardless of the mix between revenue from parties or team commissions.
Deductions – There are lots of deductions that you can take with a home based business. Various expenses to keep your house running, costs associated with your mortgage, expenses associated with your vehicle and of course, those that are encountered in the course of your business. For many people, these deductions make the difference between owing money and paying in. It is always best to consult your tax agency or tax accountant to find out what is and is not deductible and what you qualify for. The deductions that I get may not be the same as the people on my direct sales team.
Expenses – Not only do you get deductions from your home and your car, you have legitimate business expenses. Did you purchase postage to mail out catalogues? How about paid for advertising in the form of business cards or a car decal? Did you give away any product for raffles, hostess gifts or just to allow people to try the product? All of these are valid expenses and ones that you need to keep track of for tax time.
- What Are Itemized Tax Deductions? (turbotax.intuit.com)
- Can Cellphone Expenses Be Tax Deductible With a Business? (turbotax.intuit.com)
This is a loaded question that I cannot give you an answer on. Only you can make this decision. But here are a few things to consider.
Income – How much money do you need to make in your direct sales business each month to live on? Notice I don’t say to replace that income as that income may not be realistic or it may not all be needed.
Savings – Do you have an emergency fund in case you have a bad month and don’t make the money you need from your direct sales business? How long can this money get you through if you have a bad couple months with your direct sales business?
Taxes – Can you set aside money and not touch it? Remember, your direct sales company does not pull money from you to cover income tax, so you will need to pay this to the government when you file taxes. Of course, ideally you will not owe, but you never know.
Additional Costs – If your employer provides you with any type of benefits you need to consider if you still require these or if you can purchase these elsewhere. This would include, but is not limited to, items such as health care, pension or a drug plan. While you may not think you require these items, you never know when something will come up and you wish you had them.
The statistics for this are not very supportive though, but who doesn’t like to prove others wrong?
Average Yearly Income for Direct Sales Associates in 2008: $1,974
(Source: Direct Selling Association )
Are you one of those who wait until March to gather all of your bank statement, credit card statements, receipts, invoices, and bill statements? Do you wait until your accountant has called you repeatedly asking if you are going to make your appointment this year? Well stop. Chances are you might be missing something very important by waiting until the last minute. Being rushed puts stress on the body. Stress puts the brain into high access mode and you are not thinking clearly. No one wants to forget an expense or other important piece of tax information. Here are some simple tips for your business that you can get started on today to save you the stress headache during the next tax season.
Set up a file system
Most people don’t like to keep a paper trail. I can certainly understand why. It takes time to set up a file system and it takes up space to keep papers. In the world of taxes, it is always better to be safe than sorry. If an audit should ever arise you will want to be armed with your papers as proof of your deductions.
To quickly get set up you will need a file box or a filing cabinet for larger businesses. The first section should be invoices. It is up to you whether you want to write PAID and the date on them. It is also up to you to decide whether you want a separate folder for each client. The second section should be bills/expenses. It is here you want to keep the internet or cell phone bill as well as credit card statements (with the expense highlighted). Again it is your choice if you want to put these all in one folder or separate them by company. The final section should be for your bank statements. When a new one comes in you should highlight work income as deposits and business related deductions as expenses.
What about receipts?
Receipts can be a pain to keep track of but you need them as proof of payment. I carry an envelope in my purse and place my receipts in there. Every few weeks I empty the envelope. Receipts generally get stapled to the appropriate bill when using a credit card, or filed with the appropriate bank statement.
These are the things you need to pack up and take to your accountant at tax time. The better organized you are, the easier it is for everyone.
At the end of the year you can shred what you don’t need and the rest gets filed with your copy of the tax return.
Set up a form of recordkeeping immediately.
Do not wait until we are half way through the year to pick up a copy of Quickbooks , Quicken Home & Business, or any other accounting software you decide to use. Unless of course your business is new. In that case, start right away. Having a accounting program at your fingertips will serve as a backup copy to your paper trail and do all of your calculations for you. With accounting programs you can bill clients by sending them invoices, reconcile your bank and credit card statements, place expenses in the appropriate categories and prepare financial statements. With a software program all of your needed numbers are available with the click of a mouse.
Starting these few simple tasks today can put your business on the right track to avoiding any disaster that could occur later. Start with 10 minutes a day preparing your files, and then moving on to sorting the papers. Once those tasks are set up you only need to spend minutes a day entering the bills, invoices, checks, deposits, etc. as they cross your desk.
Chrystal Mahan resides in Michigan. Mahan is a current college student working on a (double major) Bachelors in Accounting and Business, with plans to continue forward with a Masters.
She has 20 years of experience in the Accounting industry and over 10 in the field of Tax.
Mahan has been writing short stories since the age of nine and professionally since 2005. Mahan owns her own freelance business and writing appears on various blogs and websites.