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U.S. Tax Tips
Individuals and small businesses dealing with tax
Options and practical tips
Alexandre Leturgez-Coianiz (LL.M), Esq.
KBL Roche | Partner
February 2022
This quick overlook on taxation for individuals and small businesses will help if you are starting your business or file a more complex tax return for the first time.
I. Different Tax Return this year?
For many reasons due to life events, your tax situation might have changed and you don’t know how to handle your tax returns.
Whether you move to a different State or moved abroad, acquired a new real estate property, invested in cryptocurrencies, you will have to deal with additional tax reporting.
Federal and state reporting can be cumbersome, and we are here to help you foresee your tax liability and prepare your financial documents. We will take time to educate you on your tax situation to help you make your own decisions. Here to contact us.
II. Estimated tax
Payments and foresee SE tax; alternative S-Corp and paystub
One of the most important parts of tax planning for small businesses (LLC, partnership) or sole proprietor lies in estimated tax payments. It is both a tax compliance requirement from the IRS and state tax departments and a business and financial planning tool. The recommendation here for small business or sole proprietor is to do a quarterly assessment of your gross income and expenses to then compute your estimated tax for both federal and state if applicable.
Why is it important to pay your tax each quarter? The IRS and the States will charge penalties for underpayment of estimated tax. It represents extra savings you could invest back to grow your business.
A practical tip here is to understand that your net income as a sole proprietor or small business is subject to an additional 15.3% self-employment (“SE”) tax. It is a significant additional tax, and it must be foreseen, and money set aside to avoid bad surprises when the time to file your tax return comes.
It also applies to partners in a partnership receiving K-1s.
Don’t want to deal with the self-employment tax and want to be an employee? If you are conduction business with an LLC, you might consider a tax election to be taxed as an S Corporation and run payroll for yourself. You will still pay the 15.3% tax shared equally between you and your LLC on payroll and the net profits of the S Corp will be considered as income to you, but no extra self-employment tax – as long as your salary is reasonable (you don’t want to defraud the IRS and wait to cash out the net profit of your company without paying the self-employment tax – it’s all about balancing your account).
If you want to discuss more about your options, you can contact us.
III. Tax deadlines
Federal and state and local; Partnerships have a different deadline!! Why? K-1
Every year, the most important tax deadline at the Federal level is April 15th. States are generally following the same deadline mainly because most states use the Federal adjusted gross income for income tax reporting purposes. If for any reasons you are not able to file your return by then, you can request an extension of time to file (usually 6 months).
Deadlines for the estimated tax are April 15th, June 15th, September 15th, and January 15th. They are the same for Federal, New York State and New York City.
Generally, when a tax deadline falls on a Saturday, Sunday, or a Holiday, it is pushed forward to the next business day. This year, Tax Day will be on April 18, 2022.
For New York, if you have an LLC, your will also file form IT-104-LL on March 15th.
Partnerships will file their tax return on March 15th, to be able to send out K-1 forms to the partners.
Do not wait to start preparing your tax documents and tax returns. If you need help, please contact us.
IV. Information returns
How and why — W-9!!
Businesses and sole proprietors: if you paid contractors or third parties more than $600 in aggregate during the year you will likely need to send them 1099 forms. Before making payments, request a form W-9 form from your payee, that will tell you if you must report the payments you’ve made on a form 1099. W-9 forms are your back up; hence it is important to document it and keep it in your archives.
The IRS released a new form 1099-NEC which stands for non-employee compensation and has a tight deadline on January 31st. The other forms 1099 such as 1099-MISC are due in paper version on January 31st, and electronic filing by March 31st.
Form 1099s can easily be filed online.
V. Sales tax and Use tax – New York perspectives only
Do you charge your clients? Do you have to pay use tax?
The sales tax is a tax due on tangible property and some services due by the end user/consumer. In New York State (NYC area) the sales tax is 8.875%. There is a wide range of categories, rules, and regulations and this is not the subject of this note.
As a business owner, you might be liable for collecting sales tax on the goods or services you are selling.
You might also be liable for use tax. What is use tax? It is the counterpart of the sales tax. While sales tax is collected by a business from the customer on behalf of the state, the use tax is self-assessed and paid by the consumer who bought a taxable good or service where the sales tax was not collected at the time of the transaction. New York State runs use tax audits on businesses. The statute of limitations is 3 years from the date of the return. More information here: https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/use_tax_for_businesses.htm
VI. EIN or no EIN? That is the question
Why do we recommend it? Protect your SSN, easier to get business banking services
You might run your business as a sole proprietor or a sole member LLC. In that case, you don’t have to sign up for a business tax id (Employer Identification Number or EIN) with the IRS. However, there are many perks of applying for an EIN. You will not have to share your Social Security Number with third parties, and therefore, will diminish the risks of identity theft. You will have a better credibility with third party service providers and will have access to a business bank account along to business loans applications. You will also have a better line of credit as a business. Most of all, the EIN will be a must to hire employees and run payroll. How to apply? Fill out form SS-4 with the IRS ( https://www.irs.gov/forms-pubs/about-form-ss-4).