Sometimes people pay their taxes on time but the IRS says they didn’t. This is a result of the IRS not “posting” the payments correctly on their computer. You should always write on your checks your name(s) as they appear on your tax return, Social Security number(s), form you are paying for, i.e. “1040” if paying with your return or “1040ES” if making estimated tax payments, and the year you are paying for, i.e. “2009” if paying with your 2009 return or “2010” if making estimated tax payments with the 2010 voucher. That’s probably the biggest error in posting that occurs- the payment is applied to the wrong year.
So if you receive a notice from the IRS saying you owe taxes that you think you paid here’s what you do:
Call the IRS right away and tell them. Get the cancelled checks showing all of your payments. Make copies of the front and back of each check. Then send them to the IRS with a letter explaining what happened.
Showing posts with label tax. Show all posts
Showing posts with label tax. Show all posts
Tuesday, November 2, 2010
Monday, September 14, 2009
How to Use Your Corporation to Save Taxes
How to Use Your Corporation to Save Taxes
First of all the name of the game is to have the corporation pay for as much as it possibly can so you are using pre-tax dollars. That means just what it sounds like, you are using money that you haven’t paid tax on yet. The corporation takes in income then gets to deduct all business related expenses and pays tax only on what’s left over, net taxable income.
C Corporation
If you have a C corporation, then the corporation will pay the tax on the net income. If you can leave some of the money in the corporation (as opposed to taking it out in the form of wages to you) this will save taxes because the corporation pays only 15 % federal tax on the first $ 50,000 of taxable income.
If the corporation makes $ 93,300 and if you can leave $ 50,000 in the corporation you will pay 15 % tax on all of the income, that is, the combined tax between you and the corporation. Here’s how:
Corporation net income $ 93,300
Less: wages to you ( 43,300)
Net taxable income to corporation $ 50,000 taxed at 15 %
Wages to you $ 43,300
Less: standard deduction
& personal exemption ( 9,350)
Taxable income to you $ 33,950 taxed at 15 %
So you’ve paid 15 % tax on $ 93,300 of income!
Remember, if you or you and your spouse are the sole owner/employees of the corporation it doesn’t matter who is paying the taxes you or the corporation. It’s all coming out of your pocket. For example, when you pay yourself wages the corporation will pay the FICA Social Security and Medicare taxes by withholding 50 % from wages and paying 50 % itself. It’s still all coming out of your pocket because you own the corporation.
S Corporation
If you have an S corporation, then the net taxable income and certain other items, like interest income and capital gains, will be passed through to you to be reported on your individual tax returns. If you can leave some of the money in the corporation (as opposed to taking it out in the form of wages to you) this will save taxes because the net income from an S corporation is not subject to self employment tax.
This is the great advantage to using an S corporation instead of a sole proprietorship that reports its income on your 1040 Schedule C. All of the income on the Schedule C is subject to self employment tax. It’s a killer!
Now keep in mind, you are an employee of the corporation and you must pay yourself a “reasonable” wage for the services you perform for the corporation. This means it can’t be too high or too low. If you are the sole owner/employee then no wage is too high because all of the income was generated by your efforts. Under the same theory, if you don’t pay yourself all of the income in the form of wages, the IRS may say you didn’t pay enough.
If you do not take all of the income out in the form of wages you should be careful about taking other distributions. Although you are allowed to take distributions from an S corporation without paying tax on them, the IRS could recharacterize the distributions as wages and charge you payroll taxes on them.
These are just a few areas where you can save money by using a corporation. If you have any questions about your tax strategy call Law Offices of Patricia Rowe at 925-256-1000.
First of all the name of the game is to have the corporation pay for as much as it possibly can so you are using pre-tax dollars. That means just what it sounds like, you are using money that you haven’t paid tax on yet. The corporation takes in income then gets to deduct all business related expenses and pays tax only on what’s left over, net taxable income.
C Corporation
If you have a C corporation, then the corporation will pay the tax on the net income. If you can leave some of the money in the corporation (as opposed to taking it out in the form of wages to you) this will save taxes because the corporation pays only 15 % federal tax on the first $ 50,000 of taxable income.
If the corporation makes $ 93,300 and if you can leave $ 50,000 in the corporation you will pay 15 % tax on all of the income, that is, the combined tax between you and the corporation. Here’s how:
Corporation net income $ 93,300
Less: wages to you ( 43,300)
Net taxable income to corporation $ 50,000 taxed at 15 %
Wages to you $ 43,300
Less: standard deduction
& personal exemption ( 9,350)
Taxable income to you $ 33,950 taxed at 15 %
So you’ve paid 15 % tax on $ 93,300 of income!
Remember, if you or you and your spouse are the sole owner/employees of the corporation it doesn’t matter who is paying the taxes you or the corporation. It’s all coming out of your pocket. For example, when you pay yourself wages the corporation will pay the FICA Social Security and Medicare taxes by withholding 50 % from wages and paying 50 % itself. It’s still all coming out of your pocket because you own the corporation.
S Corporation
If you have an S corporation, then the net taxable income and certain other items, like interest income and capital gains, will be passed through to you to be reported on your individual tax returns. If you can leave some of the money in the corporation (as opposed to taking it out in the form of wages to you) this will save taxes because the net income from an S corporation is not subject to self employment tax.
This is the great advantage to using an S corporation instead of a sole proprietorship that reports its income on your 1040 Schedule C. All of the income on the Schedule C is subject to self employment tax. It’s a killer!
Now keep in mind, you are an employee of the corporation and you must pay yourself a “reasonable” wage for the services you perform for the corporation. This means it can’t be too high or too low. If you are the sole owner/employee then no wage is too high because all of the income was generated by your efforts. Under the same theory, if you don’t pay yourself all of the income in the form of wages, the IRS may say you didn’t pay enough.
If you do not take all of the income out in the form of wages you should be careful about taking other distributions. Although you are allowed to take distributions from an S corporation without paying tax on them, the IRS could recharacterize the distributions as wages and charge you payroll taxes on them.
These are just a few areas where you can save money by using a corporation. If you have any questions about your tax strategy call Law Offices of Patricia Rowe at 925-256-1000.
Tuesday, September 1, 2009
Estimated Tax Payments
Individuals:
There are two ways to pay your income taxes- through withholding, like on wages, or by making estimated tax payments. Estimated tax payments for individuals are due kind of quarterly on April 15th, June 15th, September 15th and January 15th of the following year.
If Your Income Is Less Than Last Year
The amount of estimated tax you are supposed to pay is 90 % of what you “estimate” you will owe for that year, say 2009. You compute how much you think you will owe, then divide by four and pay that amount. Just use your tax return software for last year and put in your numbers for this year. This is a good method to use if your income in 2009 is a lot less than that of 2008.
If Your Income Is the Same or Higher Than Last Year
But if your income is about the same or higher than last year you should use one of the “exceptions” to penalty for underpayment of estimated tax. That is, pay an amount equal to 100 % of prior year’s tax. (You can pay less but I don’t recommend it- it’s temporary and you never know what they’re going to do with the tax code.) Take the tax on your 2008 1040 line 61, divide by four and pay that each quarter. Then you’re covered- even if you owe $ 1 million on April 15, 2010 you won’t get a penalty. If your prior year’s tax was zero, then that’s all you have to pay for estimated- zero. But be careful, you’ll have to include form 2210 with your return to prove it.
Corporations:
The rules for estimated tax payments for corporations are a little bit different from those for individuals. For a calendar year corporation (one whose tax reporting year ends on December 31) the estimated tax payments are due on April 15th, June 15th, September 15th and December 15th of the current year.
So, use the same rules as above for individuals, i.e., estimate the corporation’s actual tax if income is less than prior year or pay an amount equal to 100 % of prior year’s tax if income is equal to or greater than the prior year.
Unfortunately the “exception” to penalty for underpayment of estimated tax that allows you to pay zero if prior year’s tax was zero is not available to corporations. Attach completed form 2220 to the corporate return to prove your exception.
There are two ways to pay your income taxes- through withholding, like on wages, or by making estimated tax payments. Estimated tax payments for individuals are due kind of quarterly on April 15th, June 15th, September 15th and January 15th of the following year.
If Your Income Is Less Than Last Year
The amount of estimated tax you are supposed to pay is 90 % of what you “estimate” you will owe for that year, say 2009. You compute how much you think you will owe, then divide by four and pay that amount. Just use your tax return software for last year and put in your numbers for this year. This is a good method to use if your income in 2009 is a lot less than that of 2008.
If Your Income Is the Same or Higher Than Last Year
But if your income is about the same or higher than last year you should use one of the “exceptions” to penalty for underpayment of estimated tax. That is, pay an amount equal to 100 % of prior year’s tax. (You can pay less but I don’t recommend it- it’s temporary and you never know what they’re going to do with the tax code.) Take the tax on your 2008 1040 line 61, divide by four and pay that each quarter. Then you’re covered- even if you owe $ 1 million on April 15, 2010 you won’t get a penalty. If your prior year’s tax was zero, then that’s all you have to pay for estimated- zero. But be careful, you’ll have to include form 2210 with your return to prove it.
Corporations:
The rules for estimated tax payments for corporations are a little bit different from those for individuals. For a calendar year corporation (one whose tax reporting year ends on December 31) the estimated tax payments are due on April 15th, June 15th, September 15th and December 15th of the current year.
So, use the same rules as above for individuals, i.e., estimate the corporation’s actual tax if income is less than prior year or pay an amount equal to 100 % of prior year’s tax if income is equal to or greater than the prior year.
Unfortunately the “exception” to penalty for underpayment of estimated tax that allows you to pay zero if prior year’s tax was zero is not available to corporations. Attach completed form 2220 to the corporate return to prove your exception.
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