Happy New Year, SUCKER!

The Fiscal Cliff package passed this week. Rhetoric aside, your payroll taxes and self-employment taxes will most likely increase by 2% of your income. This means that if your business makes $100,000 this year, you’re going to need to send an additional $2,000 to Washington that you didn’t have to send last year. If you have a salary (gross income) of $100,000, an additional 2%, or $2,000, will be deducted from your paycheck before you can spend or save it.  Happy new year!

It’s not so easy to gauge exactly how the new law benefits or hurts most taxpayers because tax law is insanely complex and intentionally obfuscated by political rhetoric. That said, the middle-class and budding entrepreneur class will probably pay more in taxes than they did last year (see previous paragraph). However, the tax increases could have been a whole lot more severe. The Alternative Minimum Tax (AMT) had threatened to slam most taxpayers with huge surprise tax bills this April. The new law indexes AMT for inflation – you probably don’t need to worry about it anymore. Furthermore, federal estate taxes, dividend taxes and capital gains taxes also increased. Count your blessings. These increases could have been more confiscatory.

I am puzzled how the government can cut projected revenues while postponing cuts in expenditures. Reasonable people, when faced with a drop in income, either find the money elsewhere or cut expenses. I don’t know how government defies this logic.

 

The Fiscal Cliff and AMT

Anyone who pays U.S. income taxes ought to be watching the fiscal cliff and AMT talks very carefully. Today’s Wall Street Journal summarizes what’s at stake:

All the other tax increases that you hear so much about, such as the “expiring Bush tax cuts” apply to income earned in the future–in 2013. But the AMT is different: If Congress doesn’t act, taxpayers will owe it on April 15, 2013, when they file tax returns on their 2012 income.

Don’t underestimate the potential size of AMT. If you have many deductions (own your own home, live in a high tax state, or have many exemptions), you’re right in the AMT’s crosshairs, and could wind up with a huge tax surprise this April if Congress doesn’t approve a “patch.” Huge: the average taxpayer who gets an AMT surprise would get hit with about $5000 in extra taxes.

Another especially dangerous area is FICA – everyone’s payroll tax could increase by 2% of their income in January. This will hit entrepreneurs in the form of increased self-employment taxes.

Changes in tax rates have huge consequences for entrepreneurs. After all, the IRS is our partner – it receives a share of our profits. I find it is somewhat discomfiting not being sure how much of a share of our profits the IRS is going to help itself to next year.

The WSJ has a nice web page set up covering the fiscal cliff and AMT talks. Keep an eye on it.

Update on fiscal cliff is here.

 

How much does that smartphone really cost you?

Your smartphone probably costs more than you think, according to the this infographic from accountingdegree.com. In 2010, the average smartphone cost $760 per year. Add to that $608/year in accessories, apps, and other costs, so that the average consumer easily pays well over $200 per month just for cell service. I don’t like monthly costs because you pay them, no matter what. Don’t be fooled by deals that give you an iPhone or Galaxy for $99. Over its two-year life, that phone may very well cost you over $2,000. It will lower your bank balance every month.

If can’t survive without a smartphone, then take advantage of discount cell phone providers. They usually use the same facilities as the “name brand” providers.  As for me, I use a stupidphone, er, I mean a feature phone, without any data plan. To get e-mail on the run, I carry an iPod touch, which catches a Wi-Fi signal most places I go.

 

Smartphone or Dinner Infographic

 

A simple accounting spreadsheet for Microsoft Excel

Wage dislikes spreadsheets

Wage dislikes spreadsheets by Dyanna Hyde, on Flickr

Click here to download the spreadsheet

Click here for YouTube video explaining how to use the spreadsheet.

Check out my new e-course, Accounting for Startup Businesses for 50% Off. Learn to do accounting using open-source software.

I designed the spreadsheet for a simple business that does 355 transactions a year or less. If you do more transactions, it shouldn’t be difficult to expand it. However, try using a more powerful tool, such as GnuCash, or one of the commercial accounting software packages.

Expense categories mirror those on Form 1040 Schedule C.

You’ll find instructions under the “Help” tab. Also, please keep your data secure.

Good luck!

Also check out my Simple Accounting Spreadsheet in Google Drive

June 2, 2013: Made minor revisions to the spreadsheet. Added YouTube video.

May 5, 2015: Made minor revision to spreadsheet, eliminating a bug that may cause an oops.

May 6, 2015: Made additional revisions to the spreadsheet, eliminating more “oops”-related bugs.

 

Organizing your start-up business finances

It is absolutely imperative to ensure that a new business keeps on top of all the paperwork from the beginning.  Putting away expense receipts and other documentation in a drawer and hoping it will make sense when IRS filing time comes around is only going to make life more difficult.

Accounts

Accountants love Microsoft Office Excel and for good reason.  It’s relatively easy to use and if the spreadsheets are filled in on a daily basis it’s a very useful tool for monitoring the financial health of the start-up business.  Setting up a new company can prove costly, so make sure that all receipts for computers, telecom links, travel, gas and any other expenses that relate to the business are detailed, entered onto the spreadsheet and the physical/paper receipts are filed away neatly.  Another method of dealing with the business accounts is to use the services of an umbrella company, and let these firms take over the running of accounts and other administrative functions, including payroll.

IRS

Efficient accounting will save time when filling in IRS forms once the year-end tax deadline comes around.  In fact, getting in touch with the IRS when in the process of setting up the new business will be really helpful as they will be able to advise about all the necessary paperwork and exemptions, and if you have employees they will inform about all new employer responsibilities.

It is important to file tax returns on time, as penalties will be charged if the IRS hasn’t received the return by the due date.  The IRS website is well worth a visit.  Even if the business is classified as ‘tax exempt’, this applies to those companies that file a turnover of $50,000 and under, it will have to fill in form 990 or an ‘e-postcard.’

Banking

It’s very important to keep business costs and expenses separate from a personal checking account.  Make an appointment with your chosen bank and set up a bank account for the new business. At some stage the business may be in need of a loan so it’s worthwhile looking at the different banks and see which best suit the needs of the new company.  Not all banks offer financial advice, so this is another point to bear in mind when looking for the right bank for your start-up.

Importantly, never treat the business account in the same way as a personal account; this can only lead to problems.  Carry out some research into the different bank charges; these do vary from one institution to another.  Some companies choose banks that offer an online facility; others like to ensure that their bank has national ATMs.  Alternatively there is a move in the US for small businesses to be encouraged to support their community banks under the ‘Local Self Reliance New Rules’ project and the ‘Move your Money’ initiative.  Community banks are often more flexible compared with the large international institutions.

 

8 Compelling Reasons for Honest Filing of Business Taxes

800px-USPS-Mail-Truck-1

Mail that return out today! (800px-USPS-Mail-Truck-1 by David Guo’s Master, on Flickr)

Paying your business taxes on time and accurately needs to be one of the top priorities when running your business. Failing to meet your annual or quarterly tax obligations can lead to a number of serious consequences including heavy fines and a tax audit. Working with a professional and experienced accountant can help you keep finances organized and ensure your business taxes are getting paid on time.

Here are eight compelling reasons to file your business taxes honestly:

1. Avoid filing penalties and fees. If the government finds that your tax payments were inaccurate, you will be responsible for paying the full tax liability amount, as well as any late penalties and fees associated with the late-filing status.

2. Reduce a risk of an audit. Your company may be at risk of an audit now, and in the future, if there is any evidence that your company did not pay the appropriate amount of taxes in a given tax year. You can reduce your risk of an audit by making sure you are filing on time and by working with a certified accountant.

3. Avoiding an investigation. The government can perform a thorough investigation of your business and accounting practices if they detect your company is not paying the appropriate amount of taxes.

4. To avoid prosecution. Small business owners or self-employed businessmen may be subject to prosecution if they knowingly evade taxes.

5. Not carrying a tax debt. If you don’t want to worry about a tax burden as part of your business liabilities, make sure you’re filing your taxes as accurately and honestly as possible.

6. Preventing a tax debt from being reported to the credit bureaus. If the government finds that you actually do owe more taxes than you originally paid or reported, you will be carrying a tax debt that needs to be repaid within a certain time frame. If it doesn’t get paid,  the government can report the incident to the credit bureaus.

7. Creating a track record of tax evasion. Once you have been found guilty of tax evasion, the government will take a much closer look at your future business activities, accounting practices, and tax reporting records.

8. To avoid legal fees. If you are found to be guilty of tax evasion, you may be subject to prosecution and will also be responsible for paying any legal fees associated with the situation.

Krisca Te works with Open Colleges, Australia’s leading provider of TAFE courses equivalent and accounting courses. When not working, you can find her actively participating in local dog show events – in support of her husband.