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How to Prepare for Tax Day

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How to Prepare for Tax Day

Paul Haimowitz

How to Prepare for Tax Day

Paul Haimowitz

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Lesson Info

1. How to Prepare for Tax Day

Lesson Info

How to Prepare for Tax Day

Thank everyone for attending today, it's really great to be able to speak to you. I think that I wanna level set a little bit before we really dig into things and just say that taxes are complicated, and we're gonna do our very best here to try to introduce you to the things you should be thinking about. Not necessarily giving you all the answers. Obviously we've got 300 plus people on this webinar. And so we're going to have to speak with generalities, there's gonna be some very location specific things. You're gonna want to think about that aren't gonna apply to some people and might apply to others. And so everything that we're gonna talk about today will hopefully, introduce you to the concepts that you're gonna want to think about in order to make sure that you are taking care of your tax obligations and responsibilities as best you can, and make you a little bit better prepared going forward to manage those responsibilities and the risks associated with them. So let's move along ...

with some slides, that's the introduction. So just very briefly, I'll begin by giving a little introduction about who I am, and and what we're gonna be doing here. We're going to cover taxation of income, and talk about some of the things you need to think about in regards to how income tax works, generally speaking. We're also gonna talk a little bit about sales and use taxes and what you need to know and what you don't need to know necessarily or need to do anything about. So that might be some good news in there. We'll also cover a little bit about business property taxes, 'cause that's a more obscure, but still important thing to know about. And then we'll mention a few other things which are less likely to be relevant, but I'm just gonna put it out there. And again, the agenda here is really just to get you guys a little bit more savvy, a little bit more informed than you were before, and asking the right questions and thinking about the right things, so that you can address your needs and goals. Before we dig into it, though, I do need to make this disclaimer that everything we're gonna cover here is intended to be for the basis of discussion, and should not be received as tax advice... And the tax rules are complicated. And so it really behooves everyone involved to go and seek professional advice for things that are complicated. And taxes, certainly no exception. And so to the extent that you're unsure about things, you think you might have a specific situation that's outside of the most general rules that we'll be discussing here. Or even if you're just not sure and you want a little bit of peace of mind, it's really helpful and really important to seek your own tax advisor, whether it's just a tax return preparer or somebody who's got some experience with dealing with these types of situations so that you can rest assured that you are covering everything you need to cover. But of course, hopefully, by the end of this conversation and this discussion, you'll know a little bit more about the right questions to ask when you talk to a tax advisor, or do your own research to try to figure all this stuff out. So that's the disclaimer, A little bit about myself, just because it helps to know where the information is coming from, and what right I have to be talking about all this. So I am a lawyer by trade and by profession, and by qualification. I've been working in various accounting firms, and now I'm working for CRO, which is a transactional firm, primarily advising clients on a wide range of tax issues. I've done time preparing tax returns, advising clients, and otherwise just living in tax. So I've seen pretty much everything at least a little bit, if not more than that. And I should mention one of the things that I'm doing especially right now, which is helpful to understand my perspective and what I'm gonna be talking about here is, right now I'm working for Kroll, and Kroll... What I do with Kroll, is primarily what we call Buy-side and some Sell-Side tax due diligence. And so my job right now, is to kind of pick apart the practices of various companies who are targets for acquisition, who have been trying their best to do their tax compliance, but may have made mistakes or remission, or whatever it is along the way. And so part of what I want to make sure to the best that I can, is that you're at least aware of some of the things which believe it or not, large sophisticated, relatively sophisticated companies, they often miss things, and they are just unaware of things and that's okay. You know, there's nothing wrong with that in the sense of, I don't know, morally or ethically wrong, there's just so much to know about. So I think a big goal for this discussion is just to at least introduce some of the topics that some people just don't even know exist. And hopefully, put you in a better position to track those things down and make sure that you are handling them in the appropriate way for you. Alright, so without further ado, we'll dig right into some of these topics. So we're gonna start off with a discussion around income taxation. And again, this is gonna be very general in nature, but I want you to walk away knowing some of the concepts that you can think about, and maybe they will be relevant to you, maybe they won't, but you'll at least have a little bit more information to think about these things. So the first thing I want to make sure everyone understands with respect income taxation is that, for those who are operating on the Fiverr platform and in similar types of situations, the income that you're receiving from your activities, it's not treated for tax purposes the same way that wages would. So everyone's fairly familiar probably with how wages work. You work for an employer, that employer pays you wages, for some reason or another, those wages are never quite what you expected because there's some taxes that are gonna get withheld. But that all happens somewhat automatically. Obviously, you file a tax return at the end of the year, and you might even get a refund because the amount of taxes (indistinct) withheld, but all of that is relatively simple and straightforward. Business income... And you may not think about yourself this way, depending on how big of a... Let's say presence on this platform and other venues you might have, but business income is quite different, and quite a bit more complex, and a different approach should be taken to thinking about it. So, you know, wages... Those are just basically... You earn whatever it is you're getting in wages, and that's gonna be subject to a tax rate, whatever the marginal tax rate is, based on your income bracket. And you're gonna pay a certain amount of income tax on a gross basis. So for the entire amount. regardless of any expenses with some exceptions, there's some relatively small exceptions that apply to this, but for the most part, it's on a gross basis. There's no deductions, there's no reducing of your taxable income based on the expenses that you incur. By contrast, business income... Business income does allow for a number of different things. It allows for first of all, different methods of accounting, which I'll explain what that means in a moment. And it also allows for the claiming of business deductions, where you can reduce your taxable income. So, you bring in a certain amount of income from your activities, and then you have expenses that are deductible. And those deductions are gonna be a very important part of calculating your overall tax burden. And for many small businesses and other people who are earning business income, this is a very big deal. And so to the extent that you are not already familiar with that concept, it's certainly something to learn more about. So let's get a little bit more into the details on what these things mean. So first we'll cover cash versus accrual tax accounting. So what am I talking about when I talk about your tax method of accounting? And why do we care? Well, the reason is because there's some flexibility here and it can have different results. And this is something you want to think about depending on your situation, your personal situation. So, for people who are earning wages, it's very straightforward. You get a paycheck, at the moment you get that paycheck, you're subject to tax on it. So if you get a paycheck on December 30th of a given year, 2021, let's say, then you're gonna be taxed in... As a timing matter, you're gonna be taxed in that same year, in 2021. Whereas, if you got that same paycheck four days later, in January, then the liability for the tax is associated with that new year. And that's all based on when you receive that paycheck, that cash. But for businesses, there is a certain amount of flexibility here. And sometimes that flexibility can be helpful, and sometimes it can put you in a worse position. And so you wanna think about these things. The flexibility is instead of going by the cash method of accounting, which again is... I think what we intuitively understand, you get cash, you have to treat it as income in that moment. And by the way, that applies on the flip side as well. When you pay cash for expenses that are gonna be deductible... And again, we'll talk more about that in a moment, in a few minutes. Those are all gonna be dictated. The timing of those things are gonna be dictated by the timing of the cash movement. And that's I think very common, many businesses operate on that basis, but there's another approach. There's another option that's generally available. And that is the accrual method of accounting. This one defers in concept from cash, because the idea behind accrual method, the accrual of accounting and as it's applied to tax, is that you're going to time your income and your deductions based on... Well, the test here, it's all the events have occurred, which fix the right to receive such income. What that really means is, basically you've... You're legally entitle to be paid for something that you presumably have done already. So if you completed a job under the accrual method of accounting, then at that moment, you would say, "This is my money." Now, it might not be cash in hand, but it's your money. You're legally entitled to it. And then from both a... Well, it could be relevant if you keep your books under the accrual method of accounting, which is a separate thing. You don't have to necessarily do it the exact same way, for books and for tax purposes. If you do keep books for your business. But with the accrual method of accounting, you're gonna change the timing of the recognition of the income. So maybe you finished the job in late December, but you only got paid in in January. Or the opposite could even be true. Let's say you got paid ahead of time, somebody prepaid for some sort of service that you're providing. And then the completion of that work, only happened in the following year. Well, the rules essentially say... And this is a bit of an oversimplification, I'll explain a little bit about what that means. But the rules basically say, that you're going to shift in one direction or another, the timing of the income. And when you're gonna have to pay tax on it. And so depending on your business and the type of service you're doing, this may or may not be something that can be relevant to you, and you might wanna think about how you're... What method of accounting you're using? And how it's gonna impact you. This is also relevant, and this can be important as well, on the side of deductions. Because if you incur an expense, but you haven't yet paid it, the deductions are generally going to be timed again, based on the time when the event happens, the economic performance happens, of the thing that you're paying for, and maybe you got invoiced and you're only going to pay the cash for that thing a month later or whatever it is. But under the accrual method of accounting, you would time it again, based on this concept of when the legal event that the action that created a legal obligation to pay occurred. And that's, you know... There can be nuances in what exactly that means, but it's most of the time fairly intuitive. So if you perform something for somebody at that moment, you're entitled to pay. And similarly, if somebody performs something for you, a service for you, at the moment that it's completed, they are entitled to a payment as well. And you're entitled to a deduction, if it's part of a business. I mentioned here that there might be some limitations, I should say, on deferring income, based on if you got prepaid, and then you only perform later. But that mostly applies for more longer term types of deferral, where maybe you got prepaid a two or three year service contract or something like that. So probably not as relevant in this form. That's accounting methods, so something to think about. Another thing, which is maybe more relevant, but certainly very important is business deductions. The rule for business deductions, the basic rule I should say is fairly simple. Ordinary necessary business expenses, in carrying on a trader business. That can be a lot of things. And so a lot of expenses that you carry... You have in the carrying out of a business. And again, as long as you're not an employee being paid wages, the money that you're earning for services being performed, that's a business from a tax perspective, and that's business income, and you're entitled to business deduction. So, lots of different types of expenses can be ordinary, necessary expenses. They have to be necessary for of the business, to be properly deductible. Couple of quick examples that are relatively common. If you pay wages to another person as part of your business, that is generally going to be deductible, not sure how relevant that'll be for this crowd, but if you have more than one person working in your group, that can be relevant. If you're renting a space to use, you know, you're renting a studio, the rental expense can be deductible. And a lot of other things can be deductible. So, definitely something to keep track of, make sure you're keeping receipts for all these types of expenses. And you're substantiating everything because it's a big part of your calculation, of your income at the end of the day. But I should mention importantly that a number of deductions have complicated rules around them. The main reason for that being either, Congress in its wisdom decided that it wanted to somewhat discourage those activities, or there's just a lot of potential for abuse. Historically, bigger businesses, not really the folks on Fiverr, of course, but bigger businesses in the past have used some of these deductions to reduce their income in ways that are somewhat artificial. And so, Congress has responded over the years by creating rules around the use of those deductions. Not getting rid of them in most cases entirely. So for example, interest expense is complicated to take a deduction on. If you take a loan out for your business, you may be able to deduct the interest expense, but there are complicated rules that you have to make sure you're navigating properly in order it to do that. Certain meals and entertainment expenses are not deductible either at all, or only half deductible. So that's another thing to think about. Bad debts, if you can't collect from somebody, the timing of bad debts can be difficult and complicated showing that you have no ability to collect from a customer. Or depreciation or amortization. If you buy a fixed asset like a computer or a desk, the tax rules say, you don't get to just take all of it upfront, necessarily all of the expenses as a deduction upfront. Sometimes you have to spread it out over a period of time. And so, that is is another complication in how you're gonna calculate your deductions when you buy those types of assets. Under current law, there's a lot of room for deducting it upfront because there's some rules that are currently in effect, but those are set to expire. I forget exactly when, I think in the next year or two, unless Congress decides to reenact them or extend them. So, we'll see. But in the meantime, you do get a lot of the deduction, but you should be aware of the concept because it could impact what you end up having as your final taxable income. So again, things to think about. Another thing to think about is the choice of entity that you might be using to house your business. Now, you might not have an entity for your business that you're operating on Fiverr, but maybe you've decided for various reasons to create an entity. Or maybe you want to create an entity, or maybe I'm gonna convince you to create an entity based on some of the considerations around these things. So there's different ways to house your business, and they generally have... There's a lot of considerations that are outside of tax. And so I can't cover that, that's out outside my lane for today, but I'll mention a few tax considerations. If you want to put your business in an entity. And what sort of entities are... From a tax perspective, are generally available. The most, I guess, popular, well, maybe not the most popular, but certainly a high profile option is a corporation. You can put your business in a corporation. They are generally viewed as having a significant downside though. Corporations are themselves subject to tax. And then when you take the profits out of the corporation and you give them to the shareholders, right? you're gonna be the shareholder, and you're gonna want some money out of that. All that business activity you've been engaging in. Well, there's two levels of tax, one at the corporate level, the corporation itself is subject to tax, and then there's dividends that get paid. And those dividends are... If you've ever received a dividend from a stock that you own, you'll be aware that you have to pay tax on it. It's a lower rate generally, but it be the aggregate of the corporate level tax and the shareholder tax on dividends is usually higher than you would pay if you do one of the other options, which I'll explain in a second. So that's corporations. But one thing that can be beneficial is that corporations have some level of control on that second of taxation. You can choose not to pay out a dividend as long as you want, and then there's no tax at the shareholder level. And corporations do currently have a lower rate of tax by themselves, than individuals do. And for partnerships and disregarded entities, you're gonna be taxed at the individual rates. So corporations that have a lower rate, but on the other hand, you can defer half of the tax roughly, as long as you want. So there's a certain amount of flexibility there that allows you to manage your tax burden. The other two options... Partnerships are probably the most common as far as entities go, and disregarded entities are kind of a variation on partnerships. Partnerships, what they do is there's no tax at the level of the partnership. And so, any income that a partnership earns and... Remember, this is your work, you're doing all this, but we're just... It's a legal sort of fiction that the partnership is housing this activity, and that can have some non-tax benefits, like for example, certain types of partnership entities like limited liability corporations, allow you to limit the liability for your business so that you're not personally held responsible for a certain amount of liabilities above and beyond what you put inside of that entity, which can be nice. But anyway, partnerships are taxed as if they pass along the in income immediately to the partners. And I say partners, because this has to have more than one partner, and I'll explain what that means in a minute. And so you're taxed currently, and you're gonna be taxed at the normal rate that you would be taxed on any other income that you'd be earning. So for every dollar of income, ultimately that the partnership passes through, net of deductions, right? You're gonna be taxed at your individual ordinary tax rate, which gets as high as 37% less certain deductions. So, it's a higher rate. Corporations by the way, the top rate in the United States is currently 21%. And I haven't gotten to states, but we'll talk about that in a minute. So that's partnerships, they pass their income up to the partner and that's where the tax is paid in the same year in which the income is earned. Disregarded entities, they actually can be the same type of legal entities, a partnership, but they only have one owner. And so for tax purposes, they're treated as... Well, they're disregarded for tax purposes. Meaning, well, it's pretty much the same thing. The income is going to be taxed at the level of the owner, the real difference is almost one of aesthetics. You're not gonna file a separate tax return for the entity because a partnership has to file its own tax return. By the way, corporations do as well. And that can be a burden 'cause you might not wanna pay the fees to have to do yet another tax return. So something to consider. Disregarded entities though do not. Generally, the filer on tax return, everything is just aggregated up at your individual, at the owner, presumably you, your level, and you'll calculate your tax pretty much the same way as if it was not... The activity was not housed by an entity. So it's pretty much the exact same thing, but again, there might be some non-tax reasons to do this. Or non-income tax reasons to do it. So that's entity choice. Complicated, lots of non-tax things to consider as well. But those are some of the tax highlights that you should think about. And again, all of these things are choices that you have, you might not even be aware you have. And so it's good to know because you can start to ask questions, and start to think about your particular situation and what might work best for you. Alright, now I'm gonna tell you a little bit about state income taxes. This is where we're gonna get very general, and of course, I can't tell everyone too much that is particular to them. Because well, everyone lives in different states, and states have different rules. And they have different tax schemes, and different types of taxes, and the tax rates are different. So you really do need to check your local rules. You might be in a state that doesn't have any income taxes, in which case, I don't know, you can log out and log back in in a couple minutes. But so, different rules for different states, but there's a few concepts I wanted to familiarize you guys with, because I think especially, if you're trying to grow a business in the service area, these are things you should think about. Especially in the modern economy where you can be selling all over the place and it's no longer limited to your immediate location, right? So one of the things you should be aware of is what states have the right to require you to file a tax return, and maybe charge you a little bit of tax? Well, not every state does. They're limited by a test, which is generally referred to as nexus. Which means you have some sort of connection with the state sufficient to allow the state under various constitutional principles and other types of legal principles, that you have enough connection for the state to be entitled to require you to file a tax return, and pay a little bit of tax. Generally speaking, the most common type of connection would be physical presence. You're physically present, located in the state. It's usually not a fleeting amount of presence in the state in the case of state income. We'll talk about sales tax in a few minutes, and see that it's even lower bar here. But if you're certainly residing in a state, that state has the right to tax you. If you're physically present there, or if you're working in a state. So once upon a time, I used to work in New York city, and I was residing in New Jersey. And both New York and New Jersey had the right to tax me because I was physically present enough to meet these requirement. And New York had its own tax, New York's city had its own tax. And then, well, I got credited for a certain amount of that tax paid in New Jersey. And the rules around that can be complicated, and it's all part of preparing your tax return to calculate that stuff. But you should just be aware, physical presence can extend beyond these things. And if you grow a business, and you're physically present in other locations, there may be a filing obligation as a result. Another additional wrinkle is that recent law changes actually instigated by the Supreme court in 2018, have expanded the state's ability to impose filing obligations and tax obligations based on what's called Economic presence. So if you have a certain amount of activity in some states, not all states have these rules. But I gave the example of California. If you sell a fairly high amount of sales, depending on the size of your business, $600, $10,000 in change in a given year, California would say, "Okay, you need to start filing tax returns here." They're entitled to do that. And that's the law in California. So you may not really have any connection, certainly not a physical connection. You never go to California to do business, you're never really there, and maybe you live all the way across the country in North Carolina or Maine or wherever it is. But California, if they see that amount of activity, they claim the right to impose a filing obligation and may impose some tax on your activity in California. But it's not going to be that severe depending on the amount of activity you do, because states don't have just a blanket right to tax everything that you do. So, you may have a filing obligation somewhere, but depending on the amount of activity you have in that state, the filing obligation or the tax, I should say, arising from that filing obligation could be low, because every state's required to do a level of apportionment. Apportionment is generally a formula that's used to divvy up the amount of income that you have amongst all of the states where you have presence, and so it's gonna kind of take a percentage. Not many states use a sales factor formula. So whatever percentage of your total sales is attributable to California, let's say, or whatever other state, and you have an obligation to file there. That would be the amount that subject to tax, and so it can get quite small depending on the amount of activity you have. And one other point on that is, determining how to attribute sales to a specific state. There's also rules around that. There's something called sourcing, and it's mostly intuitive. So like for example, if you sell physical goods to somebody in a state that's usually... The sourcing is gonna be done. So you would say it's a California sale, or a North Dakota sale or whatever it is. Usually it's based on destination of the delivered goods. But for intangible goods and for services, it can get more complex because there's mostly two types of rules that states have used. And each state does something... May do one or another, or even something slightly different than each of these two common rules, which is, some will do similar to the physical goods rule, which is they'll source the sale of services based on where the customer is, that's market based. And some will source based on cost of performance, which is another way of saying where the service is actually performed. Where you are when you're performing the service. So the rules around all this get pretty complicated. If you have a significant footprint, and significant sales, these are things that you're gonna want to think about to make sure that you're not missing anything in terms of your obligations. But very complicated rules. And it really depends on your location, and important to bring your personal facts in front of a tax advisor if you think that this might be relevant to you. Well, I'm just gonna interrupt you and say, we have about 10 more minutes before the QA session. Alright, so let's get this thing moving. I'll just mention really quickly. Some cities have their own taxes like New York city, city of Los Angeles, and some taxes are calculated based on gross receipts rather than net income. So Washington has one, Ohio has one, and you should be aware that is a possibility. Alright, now I wanna move into information reporting. There are rules around when you get paid by somebody as in let's say a business. You may be familiar with wages, you receive a W-2 from your employer on an annual basis, summarizing the wages that you received. Well, that's not the way it works. If you're not a wage earner, or you're not an employee, but you may receive instead of 1099, and there's lots of different types of 1099s. I wanted to focus briefly on one particular one, because there was a law change which you may or may not have heard about in the news, but that's with respect to something called a 1099-K. The 1099-Ks, they're similar to 1099 Miscellaneous or NECs, which are the ones that you would normally... Or you may have seen in the past with respect to providing services for an unrelated... In a non-wage situation, I should say, you might have received the 10... If you did that in the past, you might have received the 1099, NEC or Miscellaneous, but 1099-Ks apply when you're being paid through a payment processor. And that covers a lot of marketplaces. And the rule for that was different than for 1099 Miscellaneous and NEC, because the threshold for when this had to be reported for 1099 Miscellaneous and NEC, was only $600 a year, but for 1099-K. And so this year, the rule was, it had to be 20... At least $20,000 in annual payments, and 200 separate transactions. And so if you got $18,000, then you would not be subject to any reporting to the IRS, and to you. And importantly, this reporting when it happens, you're not just receiving a copy of this. The IRS is as well. Well, the law changed and now they've reduced that threshold to $600. It's no longer $20,000 in 200 separate transactions. And so a lot of businesses are aware of these rules, including Fiverr, and are going to be complying with these new reporting thresholds. And just so you're aware 1099-NECs generally, what's gonna apply if you're not in a situation where you're doing something, but through a payment processor that's the reporting for that sort of situation. So you may receive that if you provide services to somebody, not on a platform. And there's also, when payments are made, there's often a requirement to provide a W-9 or W-8, depending on whether you're US, or if you're not a US person, that may be required to be provided to the payer, so that they can pay you properly. Alright, a little bit about sales taxes. Sales taxes are complicated, and sales of services can be subject to sales tax. It's not gonna necessarily be an obligation for any given business though, because first of all, you have to have nexus kind of similar to what we said before, with respect to income taxes. And your product or service has to be subject to tax. And that's in the state, and many products... Many services, I should say, are not subject to tax in many different states, but it's very state specific. So you really need to look up the rule in the particular state in which you're selling to. That all being said, I'm gonna kind of skip along here. We talked a little bit about nexus. Nexus is a lower threshold with respect to sales taxes. And again, taxability of services is complicated, just leave it at that. But when you're selling on a marketplace, the good news is, that marketplaces as of starting in 2018, most states have adopted rules that shift the obligation to collect taxes from the seller, to the marketplace, when a sale is done through the marketplace. So the eBays of the world, the Amazons of the world, and indeed Fivver, when they're required to collect tax on a given transaction. If the service is taxable, then the marketplace has to go ahead and tax it. So that's kind of the good news in the sense that sellers through marketplaces are generally not responsible for sales taxes. But I want you to be generally aware of this for situations outside of marketplaces. And another thing that I should also mention on the next slide, is use taxes. Use taxes are a tax that could apply if you don't pay sales taxes. Because for some reason, the seller didn't collect taxes, well guess what? The state's imposed a sort of mirror obligation on you to pay use taxes. I know many people probably have in the past, not paid use taxes when they perhaps were required to, individuals do this routinely. But it's something to just be aware of. It's less of an issue now because more businesses are collecting sales taxes when you buy something from them. But just be aware that if a state came along and wanted to audit you on sales taxes, for whatever reason, they would want to get some substantiation that you did in fact, pay sales taxes upfront. So it's good to keep some documentation, you know, receipts and things like that. Alright, now briefly about business property taxes, as we start to run out of time. Just to be aware, many people are familiar with property taxes on real estate, but there can also be in some states property taxes that are imposed on business, personal property. And so you should just be aware that that is a possibility, and you should check the local rules in your location. Whether or not this applies, is gonna sometimes depend on the type of property based again, on the location that you're in, and the local rules, but this is something that can be out there and you want to make sure that you are taking care of it, to the extent that you need to. And generally, what this just means is that if you have a business, then some of the value of your property which may be relatively limited for the sorts of businesses that operate on Fiverr, like laptops, things like that, There could be a very small tax on it, it's usually pretty small. Alright, and now I'll mention just quickly some other taxes that exist, that are less likely to be relevant, but I'll just briefly mention them. We have real property transfer taxes. You may be familiar if you've ever sold real or bought real property, that there could be transfer taxes imposed by states on those transactions. There can be other types of transactional taxes. Automobile transactions, for example, can sometimes be subject to tax, which is not it's not necessarily a sales tax. Hotel stays often have their own types of taxes, things of that nature. Payroll taxes. If you're paying... If you are a sole proprietor, then there's a possibility that you may need to pay your own payroll taxes. Or if you have an employee, you're gonna have to pay payroll taxes, both. You're gonna have to collect payroll taxes, and you're also gonna pay a certain amount as the employer, and there's federal and state obligations. So just something to be aware of. And most people get some sort of provider like ADP, or other types of to handle that for them. But if that's relevant to you, you should make sure that you're handling that. And also mention unclaimed property. This isn't actually a tax, but it's kind of lumped in with taxes routinely. And it basically is about an obligation that if you have money, or property that belongs to somebody else. So for example, maybe you paid a check to somebody that never got cashed, or you have a customer credit that never got utilized. You don't actually get to just keep that according to many state laws. Instead, you're supposed to, after a certain amount of time, remit and sheet it to the states who are gonna hold it. And they have a database. You can look up your local state's database on unclaimed property, and you can see if there's anything in your name, believe it or not, that's very common. Small amounts of money are just held, for various amounts of time by the states. And that is something that a business might have to consider that they have to hand over some amount of property that's technically owned or belongs to somebody else, it would have to hand it over to the states as unclaimed property. Alright, and that brings us to the end of the presentation. So hopefully, I didn't rush through the last bit too much. And hopefully, you got something out of it, and are a little bit more aware of some of the things that business owners have to take care of potentially, depending on where you are and what your situation is. Paul, we have time for a few questions. I sent them to you by via email, 'cause there were a bunch. So I tried to take the common ones. If you have time for maybe... We have 10 minutes for maybe three, four questions. Yeah, okay let's pull that up. Alright, let's in no particular order, just gonna go through a few of these. So, there's a question about entities. When would I suggest a business should move from sole proprietor to a corporation? So again, with respect to entity choices, there's so many non-tax considerations. So like for example, one of the biggest reasons historically, has been limiting your liability. If you are concerned that you don't want something to happen in your business where the a customer is unsatisfied, or maybe there's some sort of tort or whatever that could apply to you. That you wanna limit the ability of people to go after your personal income, your personal assets, aside from the business, outside of the business. An entity would be helpful, and a corporation will do that for you. Or you can go with a non-corporate entity like a limited ability company. And that that can be treated for tax purposes as either a partnership or a disregarded entity, and might accomplish the same thing. So that could be relevant to you. For corporations again, if you think that you're gonna leave a lot of money, let's say pooling in the corporation, you can reduce your short term tax impact on the income that you earn, by reducing your immediate tax rate through the corporation potentially. And that might work out for you. It really depends on your circumstance. Alright, let's see. Can I expand on what meals and entertainment expenses are deducted? So yeah, the rules... Let's put it this way. If you're doing certain types of meals and entertainment expenses are fully deductible, but ones that are not for the... I think the standard is for the convenience of the employer necessarily are not gonna be fully deductible. So for example, if you do... If you throw an event for your employees, that's gonna be subject, I believe to the 50% reduction. But I believe if you take out a client to a potential client to a meal, that might be fully deductible. But it depends on the circumstances. So, you know, it's... If you're in the situation where you're doing a lot of meals through the company, then you wanna consult with somebody and make sure that you're doing that in a way that maximizes your deductions, and you're not on the hook for something you don't expect. Do I need to operate to inform the clients that I'm operating under an LLC? I don't think so, but I'm not sure that's a tax question. Yeah, generally speaking, if you're gonna create an entity, you might just be proud of the fact that you have an entity. You're gonna give it a name, right? But not from a tax perspective. There's not a reason to inform anyone of anything. Although, I guess I should add, if you're gonna be receiving payments from somebody, they might ask you for a form called the W-9, And that might require the name of your LLC. If the legal contract is with the LLC, you're gonna provide them with the name. But that's not something that's happening necessarily on Fiverr's platform, may not have to provide those W-9s on the platform. Um, let's see. The federal tax rate. The maximum tax rate for corporations is currently 21%. You may have heard in the news and a lot of the Build Back Better Proposals, they were talking about raising it as high as 28%. That's corporations though. For individuals, the maximum bracket is 37%, which you have to be... I forget what the cutoff is for that bracket. But I think it's like $450,000, or something like that, maybe I'm misremembering that. But in any event, yeah, the 21% is with respect to corporations, and the 37% top bracket is for individual income. (exhaling) Let's see here. If I live in one state and my businesses in another state, which state should I file? So that's gonna depend again, on how your business is organized, if it's in an entity. You may end up only filing for the business... If it's let's say a corporation, you might only file for that corporation in the state in which it's operating. But then for your individual purposes, you might... Because you're only gonna be earning dividend income from the corporation, you're gonna file only in your state of residence. If you're doing it through... If you're operating through a partnership, it usually flows through. And so it's almost as if you're an individual operating in that other state, and so again, it goes back to my example of residing in New Jersey and working in New York, similar concept would apply there as well. That your income would be subject to tax first... Generally, this is a little bit of an oversimplification, but first, in the state where you're earning the income in New York, and then generally speaking, your residents state will credit you for the tax paid in New York. So you won't be paying the full amount of tax in New Jersey, that if you calculate your tax, you would have to as a resident. And that would apply if you're I earning the income through a partnership or disregarded entity, that you would have that sort of situation. Similar to if you were just earning wages in a different state than where you resided. Where can I find the list of acceptable deductions? So, a lot of information out there. I would say... For me to be safe, I would say, go with something authoritative, like the IRS websites have a lot of information. And I used it routinely in my practice. You know, we check IRS publications, and see what the IRS has to say about a long list of things. And if you Google IRS list of deductions, you'll get a bunch of information, and it's coming straight from the source as it were. So I think that's a pretty good choice. Other private businesses that are in the business of dealing with taxes, also provide a lot of stuff, but like so many things, Google is your friend, or your search engine of choice. And you can find a lot of information out there fairly easily. But of course be a little careful about where you're getting that information, IRS seems like a good choice. And try to look for the stuff that's intended for the general public and not for practitioners. Because obviously, you're not interested in something that's overly technical or complicated. And if they are able to say something in a way that is relatively simple and straightforward, hopefully that reflects the fact that the rule in that case is relatively simple and straightforward. I will again, caveat all that by saying, I still recommend you to speak to an experienced tax advisor because well, that's how I make my living.

Class Description

WATCH THIS RECORDED WEBINAR TO LEARN ABOUT:

  • Structuring your business income
  • Maximizing deductions
  • Choosing the right business entity
  • Proper filing and reporting procedures

ABOUT THIS WEBINAR:

It’s never too early to get a head start on your taxes, and it’s not too late to catch up on our exclusive webinar.

Hear from veteran tax advisor Paul Haimowitz on insider tips for freelancers and SMB owners for the upcoming tax season.

ABOUT YOUR INSTRUCTOR:

Paul Haimowitz is a Director in Kroll’s Transaction Advisory Services group with expertise in tax due diligence and structuring. He has more than twelve years of experience advising clients on tax issues.

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