Looking out for #1 – Self-Employment Taxes & the Deduction

Looking out for #1 – Self-Employment Taxes & the Deduction

by | Aug 13, 2021 | Business Tax, Individual Tax

Being a self-employed individual has unlimited earning potential and flexible schedules, but of course comes with some extra responsibilities. For our purposes, we’re referring to what’s understood as “self-employment taxes.” In tax speak, that refers to the Social Security and Medicare payroll taxes that would normally be withheld by an employer for their employees.

Self-Employment Earnings

As a self-employed worker, the individual now becomes responsible for both the “employer” and “employee” portions of the tax, currently at a rate of 15.3 % (12.4% for Social Security and 2.9% for Medicare, 2020) on combined earnings. The first $137,700 (2020) of earnings is subject to the Social Security portion of the tax, while the remaining 2.9% Medicare portion is not subject to a limit.

Self-Employment Deduction

You may have heard of a “Self-Employment Tax Deduction” that allows self-employed individuals use for their taxes. To clarify, this is a business deduction available to self-employed individuals that allow them to deduct the employer portion of their “employment tax” towards their federal income tax. In simpler terms, you’re using a portion of what would be your payroll taxes as a business deduction towards your income tax. Check out our article on the different tax types for more info.

File & Pay

Self-Employment taxes are reported on Schedule SE for the Form 1040. The self-employment tax deduction is reported on line 13 of Schedule SE and on Schedule 1, line 14 of the Form 1040. The deduction goes towards your adjusted gross income and can ultimately help lower your income tax.

 

Self-employment taxes are just an additional responsibility for the independent worker. However, individual business owners often have a full plate running their business and tax concerns may be on the backburner. Having some backup to handle those issues can free business owners to focus on their main goal, growing the business! Count on us here at MiklosCPA, a CPA firm focused on helping small and emerging business clients with their tax and accounting needs through the latest in “virtual office” operations. Give us a call to learn how we can help your business succeed, and don’t forget to subscribe to our social media pages.

Writing Tips to Polish Your Email Messages

Writing Tips to Polish Your Email Messages

by | Jul 12, 2021 | Individual Tax

The other day, I glanced at a social media ad promoting a webinar that would provide attendees “piece of mind.”  Tax season recently ended and I’m pretty sure my mind is (mostly) in one piece! Corny jokes aside, reading that message reminded me of the importance of proofreading and concise communication. Email messaging has become the main communication form for many professionals, especially as remote work becomes a permanent option. It is more important than ever to make sure your emails are clear and concise.

Writing from the foundations

In writing, it helps to think of it as a building process rather than one driven by spontaneous “a-ha” moments. So start from the foundations. Before you start to write, ask yourself who is your audience? Your support staff? A client? Start tailoring your email to the appropriate audience. Don’t put them in the “To:” box yet. If you intend to write a detailed email, try jotting down an outline of main points on an empty word document page, then build the details from the outline, and finally transfer it all to your email and link those points together with words. It’ll help keep your email on track and not turn into a rambling wall of text.

Review & Send Off

Once you’ve built your email draft, it’s time to refine it through review and edits! The old saying “good writing comes from re-writing” remains true. Re-read what you’ve written so far to yourself, aloud if possible, and think if it makes sense. Bring in another pair of eyes and ask a co-worker to read it over, if appropriate. After revisions, give it another re-read and whittle down any ambiguities or odd word choices. Once you feel what you have written is the best it can be, go ahead and hit that send button.

Common Errors to Avoid

  • Be wary of workplace jargon. It may help in quick messages within your team, but that habit may spill into emails to your clients or 3rd parties, leading to miscommunication.
  • Don’t try to bury your audience with thesaurus-picked words, you’ll lose your audience’s attention quickly. Remember to keep it simple.
  • On that note, make sure the words that you use are real words. In my earlier years, a co-worker once replied to a supervisor’s idea as “atriguing”
  • Don’t rely on spellcheck. Words like “they’re”, “their”, “piece”, and other often misused words can go undetected, so re-reading your email before sending is essential.

 

“Good writing comes from good reading”

A former professor of mine would often say this while explaining why we had to read a heavy stack of books for a writing class. The goal was that by reading those books, we would understand good examples of writing and incorporate them into our own styles. Similarly, reading good examples of emails and other communication in your workplace can help you develop your “voice” that will help your email communication.

If you’ve been following our posts for a while, you’re probably familiar with MiklosCPA’s focus on sharing accounting and tax-related articles put into simple, accessible bites of knowledge for our readers and clients. Once in a while though, it’s nice to touch upon other relevant subjects which our readers may find useful. If you’d like to know more how MiklosCPA can help your business, let’s have a chat. Also follow us on our social media pages for more future articles and other useful tax tidbits.

 

Some Useful Exclusions from Gross Income

Some Useful Exclusions from Gross Income

by | Jun 16, 2021 | Business Tax, Expat Tax, Individual Tax

Gross income, at the start of the federal income tax formula, includes many types of income. A whole assortment of income is considered taxable by the federal government, such as wages, gains made on property sold, interest income, and alimony received. Fortunately, some income items may be excluded from the gross income calculation. It’s safer to say the list of gross income exclusions is shorter than what is taxable. Utilizing exclusions properly may help in your income taxes. Below is a list of several notable exclusions from gross income.

Principal Home Sale Exclusion – The capital gains made on the sale of a residence may be excludable up to $500,000 (married filing, jointly). However, several criteria must be met to be excludable, such as the property must be the principal residence of the taxpayer and certain occupancy timeframes must be met (check our article for more info).

Foreign Earned Income Exclusion – Income earned while working abroad may be excludable from gross income, but it must meet either the bona fide residence test or the physical presence test for earnings and other income made overseas to be excludable.

Gifts & Inheritances – Gifts received are generally considered excludable from gross income. However, if the gifted item is later used to produce income, the gift may be considered taxable. Donors of gifts may be required to pay a gift tax if the value of the gifted item passes a certain threshold.

Life Insurance Proceeds – Proceeds received by a beneficiary are generally not included in gross income if the amounts are paid due to the death of the insured person.

Retirement Income (such as social security) – A portion of retirement income may be excluded from gross income, but the amounts may depend on your filing status and sources of income. For social security benefits, up to 85% of it may be taxable.

The option to exclude certain kinds of income can help lower your gross income, and ultimately what you may owe on your tax bill. Utilizing exclusions and tax credits can help both individuals and businesses keep their tax bills reasonable. As a CPA firm focused on helping clients with their accounting & tax needs, MiklosCPA also enjoys sharing these “good-to-know” articles for our visitors and those wanting to learn more of our services. Follow our social media pages for future articles like this one and other interesting tax tidbits.

Expensing It All with the Section 179 Deduction

Expensing It All with the Section 179 Deduction

by | May 14, 2021 | Business Tax

Recently, we took a look at depreciation and its income tax-required relative, MACRS depreciation. Typically, assets like computers and vehicles purchased for a business are capitalized and depreciated over a set number of years through specific MACRS requirements for federal income tax purposes. However, Section 179 of the Internal Revenue Code allows a taxpayer to elect to treat the costs of certain business assets and expense them entirely in a single tax year, popularly known as the Section 179 Deduction. This deduction is often useful for businesses who would rather entirely expense assets like furniture and computers, rather than depreciate them over several years. It can help with their books & records, or even help qualify them for additional tax credits or deductions. Startup businesses often can benefit from Section 179 Deductions.

Qualifying Property for Section 179

To qualify as Section 179 property, the business asset must be:

  • Tangible property (furniture, computers, etc.)
  • Purchased for business use
  • Used more than 50% in the business
  • Not acquired from a related party

Additionally, the asset must be used in the tax year to be claimed for the deduction, not the year it was purchased. Let’s look at an example.

Schultz Startup purchased $2,000 worth of computer equipment for its employees at the end of 2019. However, the business does not start operations until January 2020. Schultz Startup cannot claim the Section 179 Deduction for their 2019 income tax return. They will have to wait until the 2020 filing is due in 2021 to claim the deduction.

The Section 179 Deduction can be claimed on Part 1 of Form 4562, the same form used for MACRS Depreciation.

Some Limitations Apply (Of Course)

The maximum deduction for Section 179 property is $1,040,000 (2020), with a phase-out limit of qualified property expenses beginning at $2,590,000 (2020) and ending at $3,630,000 (2020). Going over the phase-out limit means the deduction will decrease, ultimately shrinking down to zero if the total of purchased qualified property hits $3.63M. The limit is also tied to the net income of the business. Basically, you cannot deduct more in the Section 179 deduction that your business made.

Vehicles receive special treatment in Section 179. SUVs and certain other vehicles are allowed a maximum deduction of $25,900 for each qualified vehicle used for the business.

 

Startups and emerging businesses can benefit greatly from claiming the Section 179 Deduction. The ability to entirely expense assets like office equipment can help mitigate income tax in the early years as the business grows. Properly planning and claiming the Section 179 Deduction may require some assistance from seasoned tax help, such as us here at MiklosCPA. We are a California-based tax and accounting firm that helps businesses with Section 179 deductions and other tax and accounting issues that emerging businesses often face as they grow. Want to know how we can help? Let’s take some time to chat. In the meantime, check out our social media pages for some additional “good-to-know” tax tips and tidbits.

The Child Tax Credit – Tax Relief for Working Families

The Child Tax Credit – Tax Relief for Working Families

by | Apr 19, 2021 | Individual Tax

The Child Tax Credit (CTC), first enacted through the Taxpayer Relief Act of 1997, has helped provide tax relief for many qualified families over the years. It currently offers a credit of up to $2,000 (2020) per qualified child and persons who may not meet the requirements of a qualified child may qualify for an alternative Other Dependents Credit (ODC) with a smaller credit limit of $500 per qualified person. The credit until recently was nonrefundable, but new legislation has enabled it to be partially refundable, up to $1,400 per child. To claim the credit, a taxpayer must have a qualified child dependent. Who qualifies?

Qualified Child Credit & Other Dependents Credit

For a child dependent to qualify for the Child Tax Credit (CTC) for a taxpayer’s return, the dependent must meet all the following conditions:

  • The child must be a relative of the taxpayer (e.g., son, daughter, stepchild, eligible foster child, or even a younger sibling or nephew in some cases).
  • Child must be under the age of 17 at the end of the tax year.
  • The child does not provide for over half of their own support during the year.
  • The child lived w/ the taxpayer for more than half of the tax year.
  • The child was a citizen, national, or resident alien.
  • The child has a valid Social Security Number (SSN).

In some cases, a dependent may not meet all the criteria, such as a college student who goes to school part time. In that case, they may qualify for the Other Dependents Credit (ODC). To qualify:

Limitations

Naturally, some limits exist on claiming the Child Tax Credit. Currently, taxpayers cannot claim CTC if their modified adjusted gross income (AGI) exceeds $200,000 (2020) if single, or $400,000 (2020) if married, filing jointly. They also cannot claim it if line 18 (which consists of various taxes from other forms) on the Form 1040 is less than the total number of CTC & ODC credits.

Recently, the Child Tax Credit and other tax credits have seen some overhauls in legislation that will affect the upcoming tax year. Business owners should be savvy to such sudden changes, but sometimes running a business can be a labor in itself. Which is why owners rely on the “business health” advice of trusted accounting firms, such as us here at MiklosCPA. We are a California-based CPA firm that supports many small and emerging businesses with their accounting and tax needs. Want to know how we can help your business? Let’s talk. Also follow our social media pages for future articles and other useful “good-to-know” tax tips.

 

.

Skip to content