How to Choose a Cloud Accounting Provider

Putting your accounting in the cloud offers huge advantages, including speed, accessibility from anywhere, and reduced on-site storage needs. But first, make very sure that your provider meets your standards and requirements.

What a Cloud Provider Provides

You’re probably familiar with cloud storage for files; it simply means that this data is stored on a server (your company’s or one you contract with) and is accessible from any computer or other device with an internet connection. A cloud provider goes one step further and lets you run applications as well as storing files. It eliminates the need for keeping software on your own machine.

Must-Have #1: Digital Robustness

It’s critical to keep your financial data safe and secure. The cloud provider you choose should be able to demonstrate:

  • Its own data center – rather than outsourcing to some other company
  • Data encryption – to make data useless to hackers
  • Secured access
  • Good uptime – ideally 99.95%, or less than 1 hour of downtime per year
  • Backup systems
  • Disaster recovery plan

Must-Have #2: Financial Robustness

You want your provider to be around for the long haul, giving you uninterrupted access and support for your data.

Must-Have #3: Universal Compatibility

Your cloud service provider should work with a variety of devices, operating systems, and applications that might be used by various members of your team to access the files and software.

  • Apple iOS and Android mobile devices
  • Windows PC and Apple Mac desktop and laptop computers
  • 3rd-party applications (not just those the provider offers)

Must-Have #4: Data Exportability

Someday, you may want to change cloud providers. You should be able to export your data from their system whenever you want, in a file format that can be used by other software. (This is why you don’t want to get tied into one provider’s apps.)

Must-Have #5: Tech Support

You want to work with a provider that responds quickly and expertly to any problems that might arise. Read through the company’s online community forum to get an idea of how they value and interact with their customers.

Must-Have #6: Scalability

As your company grows, the accounting infrastructure must be able to handle your increased need for processing power and data storage. What’s more, your provider should schedule updates and upgrades with you in advance, so that you’re not hit with an unexpected downtime at the worst possible moment.

Must-Have #7: Clear Billing Plan

The pricing structure should be detailed enough that you won’t be stuck with any surprise charges. For example, will you be using your own internet provider which you’re already paying for, or will there be a dedicated data connection to the cloud that costs extra? Also, look beyond the lowball sign-up cost, which the provider may make up for down the road with steep increases after the initial period.

Enjoy Your Cloud-Based Accounting

Xendoo clients get access to Xero Accounting software, a best in class cloud accounting platform. Take advantage of the convenience and cost savings of accounting in the cloud!

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

Sales Tax on Services by State

When state legislatures in the United States implemented the first sales tax laws to boost revenues in the 1930s, the American economy depended on the manufacture and sale of physical goods. Typically, early sales tax laws allowed only the taxation of “tangible personal property” (TPP), rather than taxing services.

As the United States has shifted from a manufacturing-based economy to a service-based economy, many states started to impose sales and use tax on services as well.  Many businesses that provide services are still unaware of these statutory changes—some mistakenly believe they don’t have to pay any sales tax at all, even if they’re selling services all over the United States.

Every state is different

This guide is designed to provide an overview of the complexity of sales tax on services by state.

Five U.S. states (New Hampshire, Oregon, Montana, Alaska, and Delaware) do not impose any general, statewide sales tax, whether on goods or services.  Of the 45 states remaining, four (Hawaii, South Dakota, New Mexico, and West Virginia) tax services by default, with exceptions only for services specifically exempted in the law.

This leaves 41 states — and the District of Columbia — where services are not taxed by default, but services enumerated by the state may be taxed.  Every one of these states taxes a different set of services, making it difficult for service businesses to understand which states’ laws require them to file a return, as well as which specific elements of their services are taxable.

Categories of taxable services

No two states tax exactly the same specific services, but the general types of services being taxed can be divided roughly into six categories.

Services to TPP: Many states have started to tax services to tangible personal property at the same rate as sales of TPP. These services typically improve or repair the property. Services to TPP could include anything from carpentry services to car repair.

Services to real property: Improvements to buildings and land fall into this category.  One of the most commonly taxed services in this area is landscaping and lawn service.  Janitorial services also fall into this category.

Business services: Services performed for companies and businesses fall into this category.  Examples include telephone answering services, credit reporting agencies and credit bureaus, and extermination services.

Personal services: Personal services include a range of businesses that provide personal grooming or other types of “self-improvement.”  For example, tanning salons, massages not performed by a licensed massage therapist, and animal grooming services can be considered “personal services.”

Professional services: The least taxed service area, in large part because professional groups have powerful lobbying presences.  Professional services include attorneys, physicians, accountants, and other licensed professionals.

Amusement/Recreation: Admission to recreational events and amusement parks, as well as other types of entertainment.  Some states that tax very few other services, like Utah, still tax admission charges to most sporting and entertainment events.

How to use this chart

Remember that within each category of services, states can still have drastically different regulations.  For instance, both Florida and Iowa are marked as taxing “business services,” even though Iowa taxes a wide range of these services and Florida only taxes security and detective services.

For more details about the specific tax liability of your business in individual states, consult state Departments of Revenue for additional information.

 

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

W-2 or 1099: How Should You Report Your Workers’ Earnings?

Tax season has rolled around again — time to send your workers’ earnings reports to the IRS and the workers themselves. Which workers get which forms? Here’s what you need to know.

Employee or Independent Contractor

  • Use a W-2 for workers in your full- or part-time employment.
  • Use a 1099-Misc for freelancers and independent contractors.

Who Qualifies as an Employee

According to the ITS, the worker’s job situation must meet the following criteria:

  • Has hours or a set schedule assigned by you, the employer
  • Gets trained by the company in a certain method
  • Completes any and all work assigned to them by the employer
  • Is provided the tools and materials necessary to do the work
  • Has only one employer (usually)

Who Qualifies as an Independent Contractor

These workers are in business for themselves and contracted by you on a project basis.

Independent Contractors:

  • Set their own schedule.
  • Use their own personal method for doing the work
  • Accept tasks on a case-by-case basis, and can turn down offers of work
  • Supply their own tools
  • Have more than one client

It’s not necessary to meet every qualification on the list to be classified as an employee or an independent contractor; but there should only be one or two exceptions.

How Taxes Are Collected

  • For W-2 employees, you deduct payroll taxes from their paycheck and pay those taxes to the government.
  • For 1099-Misc contractors, they are responsible for calculating and paying their income tax.

Minimum Earnings Reportable

  • For W-2 employees, there is no minimum. All wages, salaries and tips, no matter how small, must be reported.
  • For 1099-Misc contractors, the minimum is $600 total for the year. If you paid them less than that, you don’t need to send a 1099.

When 1099s and W-2s Are Due

  • W-2 forms must be filed with the IRS and received by the employee no later than January 31.
  • 1099-Misc forms must be filed with the IRS by January 31 and received by the contractor no later than February 15.

In some cases, such as having more than 250 W-2 forms to file, you may be required to file electronically. If you have questions about this or any other aspect of tax reporting, your Xendoo tax expert is there to help you sail through the paperwork.

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

7 Don’t Miss Tax Deductions for eCommerce Businesses

Why settle for standard business deductions, when there are more opportunities to lower your tax bill, some of them seemingly tailor-made for eCommerce businesses? Before you prepare your return this year, check out this list of possible deductions.
Home office.

In order to qualify for this one, you must use at least one room in your home exclusively for business; working on your laptop in the living room doesn’t count. If you meet that requirement, you can deduct a percentage of nearly every house-related expense you can think of, including rent/mortgage, utilities, repairs/maintenance, and insurance premiums. (The percentage deducted is based on the percentage of the house’s total square footage that your office occupies.)

Office supplies, equipment, and software.

Furniture, computer, printer, camera gear (if used for photographing your merchandise), postage meter, inventory management software, paper clips — if it’s used in your office it’s usually 100% deductible.

Phone/internet.

You can deduct a portion of your phone and internet charges based on the percentage of time that you use them for business.

Transportation and travel.

Any car used for business purposes is eligible for deductions; even if it’s also your personal vehicle you can still deduct a percentage. There are 2 deduction options: a flat amount per mile or a total of actual costs such as gas and parking fees.

Other travel-related deductions include airfare, cab fare, tips, meals, and conference tickets.

Fulfillment costs.

You can deduct the costs of packaging materials and shipping to customers.

Subcontractors.

Whenever you use independent web developers, graphic designers, photographers, content writers, bookkeepers, temporary office staff — anyone not on your payroll — their fees are 100% deductible.

Merchant processing fees.

You probably use one or more credit card processors such as PayPal, Stripe, or Square. But did you know you can deduct their fees?

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

Accounting 101 for eCommerce businesses

Every small business needs a solid bookkeeping and accounting system. Tracking your financials helps you understand the health of your business and ultimately allows you to make decisions based on real numbers, not just feelings.
E-commerce businesses face their own unique set of challenges — retaining customers and finding the right mix of technology, to name a few. So whether your business is exclusively online, or you sell products online and in a brick-and-mortar shop, read on to learn how accounting for e-commerce can help you streamline and grow.

Get your head in the clouds

If you run an e-commerce business, there is absolutely no reason why you should be using anything other than a cloud-based accounting software. If you’re still using Excel or a desktop-based software, it’s limiting you in more ways than you realize:

  • Limited access: you can only access your data from the one computer where the software is licensed.
  • Infrequent, costly updates: whenever there’s a bug in your accounting software, you may have to shell out cash to update it.
  • Hard to back up: If something were to happen to the device where your information is stored…well, say goodbye to all of your financial records..

Cloud-based accounting software can:

  • Be accessed 24/7 from any device with Internet access, by more than one person
  • Restrict access for different users so they only see the information needed to do their jobs
  • Link directly with bank and credit card accounts, inventory, and payroll systems
  • Offer the peace of mind of always being backed up

Online inventory management

By connecting your cloud-based accounting software with a cloud-based inventory management system, you can streamline your process and make sure that financial information is updated automatically as inventory changes.

Traditional inventory management is complicated usually a tangled web of ordering, receiving stock from suppliers, storing and tracking that stock, and monitoring sales. This means lots of manual data entry into a number of systems.

By integrating a cloud inventory management software with a cloud accounting software, data flows automatically from one to the other, recording revenue and tax, and saving you time and money.

Bookkeeping with a purpose

Bookkeeping is the process of accurately recording all of your business transactions. Accounting professionals then use that information to file taxes and generate reports that help you understand the past and plan for the future.

E-commerce businesses need to approach their bookkeeping with future goals in mind. By setting up your chart of accounts to be tax-ready from the start, you set yourself up for success with sales tax compliance and can identify opportunities for deductions.

Tracking sales tax

If you sell products online or have multiple fulfillment locations, keep in mind that various Internet sales tax rules may apply to your business. And if you also sell your products through a brick-and-mortar location, separate sales tax regulations will apply to those transactions.

Sales tax can also be a tricky business for Amazon FBA sellers. If you store inventory in an Amazon Fulfillment Center, you will owe sales tax in that state.

Make sure your software and accountant or advisor is up to date on all of the particular sales tax rules that apply to your e-commerce business so you can stay compliant and avoid costly penalties.

At Xendoo, we understand the unique challenges e-commerce businesses face. That’s why our Xendoo CPAs stay up to date on all the latest regulations so you don’t have to.

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

Income Tax Q & A: IRS Form 1120 for Corporations

What is Form 1120? This is the tax return form for U.S. corporations. It reports the company’s income, gains, losses, deductions and credits to the IRS.

Certain organizations may be required to use a special return. They include:

  • Form 1120-S for S Corporations
  • Form 1120-C for Cooperative Associations
  • Form 1120-L for U.S. Life Insurance Companies

Who must file Form 1120?

Unless exempt under section 501, all domestic corporations (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income.

A domestic disregarded entity (DE) wholly owned by a foreign person or corporation, even though not subject to U.S. taxes, may be required to file a pro forma Form 1120 with Form 5472 attached.

When must Form 1120 be filed?

The due date is the 15th day of the 4th month following the date your tax year ended or the 4th month after the corporation dissolved.

Exception: A corporation with a fiscal tax year ending June 30 must file by the 15th day of the 3rd month after the end of its tax year.

If your due date happens to be a Saturday, Sunday, or legal holiday, file by the next regular business day.

Can I get an extension?

Yes. Use IRS Form 7004 to request an extension of the filing deadline, but it must be submitted by the regular due date of the return. It can be submitted electronically.

Where can I get a Form 1120?

Your tax preparer can take care of all that for you.

Or you can download the forms, instructions, and other publications you may need at irs.gov/forms-instructions. Order paper forms to be mailed to you at irs.gov/forms-pubs/order-products.

Who signs Form 1120?

  • The president, vice president, treasurer, assistant treasurer, chief accounting officer; or
  • Any other corporate officer (such as tax officer) authorized to sign

How do I file Form 1120?

Certain corporations with total assets of $10 million or more that file at least 250 returns a year are required to e-file Form 1120; all others have the option to mail a paper return.

  • Postal mail: Send it to the IRS address listed on the Form 1120 Instructions for your applicable location and total assets.
  • Electronic filing: Instructions for filing electronically are available at irs.gov/e-file-providers/form-1120-1120s-1120-f-e-file.

Private delivery service: The IRS authorizes the use of certain services, including DHL, FedEx, and UPS, to meet the “timely mailing as timely filing/paying” rule for tax returns. Go to IRS.gov/PDS for the current list of designated services. You must use an IRS mailing address that’s specifically for PDS deliveries, as listed in IRS.gov/PDSStreetAddresses, not the address listed for postal mail. Be sure to get written proof of the mail date from your delivery service.

This brief overview does not cover all the complexities of filing Form 1120. For expert advice, please consult your Xendoo tax advisor.

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

Instant Health Check for Small Businesses: the Balance Sheet

Quick — what shape is your company in? You’d be surprised how many entrepreneurs have no idea, or think they know but are wrong.

Take Jack, for example. His business provides shoreline cleaning services to waterfront property owners. He carefully costs out every job based on labor and transportation costs, to make sure it will earn a profit. Yet, he’s deep in debt. And the money he borrowed to buy additional equipment, went instead to debt repayment.

If only Jack had done a complete balance sheet, he would have known that he was forgetting to factor in some long-term overhead costs.

The balance sheet gives you a snapshot of your current position, and an early warning sign of trouble to come unless you change something.

Assets to Liabilities Ratio

The formula: Current Liabilities ÷ Current Assets = Debt to Equity Ratio

This shows you the company’s solvency: its ability to pay its bills. Ideally, you should have more current assets (which you expect to be converted to cash within the year) than current liabilities (which you must pay within a year).

If the ratio is 1 (assets are the same amount as liabilities), you’re breaking even.

If it’s less, you’re bankrupt, even if you think you’re making a profit. Paper profits won’t give you the cash you need to keep the doors open. A negative ratio may be a particularly acute problem for businesses that are cyclical in nature and thus subject to widely fluctuating cash flow.

First, take immediate action, such as putting off some debt payments or stepping up the collection of receivables. Then you’ll need to plan a long-term strategy for adjusting the ratio. (Hint: borrowing more money is not the answer.)

Debt to Equity Ratio

The formula: Total Liabilities ÷ Total Equity = Debt to Equity Ratio

This compares the amounts of company financing that come from creditors (such as a bank) vs. investors (stockholders). A high debt to equity ratio might indicate financial instability or signal future problems in repaying debt.

Each industry as its own norms; some just tend to use more debt financing. In general, though, a business with a higher ratio would be considered a more risky investment. Plus, it’s often more expensive since you have to pay interest and debt servicing costs on the loan.

Asset Turnover Ratio

The formula: Net Sales ÷ Average Total Assets = Asset Turnover Ratio
(Net sales is found on the income statement; average total assets should be calculated from the beginning and ending balance sheets of the last 2 years)

This efficiency ratio measures how effectively your business generates sales from its assets. Again, some types of business inherently have better turnover than others; so a necessary step is to compare your ratio with what’s standard for your industry.

In general, though, a low ratio is a red flag to potential investors or lenders. For example, if your average total assets are $100,000 and net sales are $20,000, your ratio is .2 (20%). In other words, for every dollar in assets, you are only generating 20 cents in sales. A low asset turnover ratio often points to problems with management or production processes.

With these and other accounting ratios, the balance sheet can be used to take the “temperature” of your company’s health. That’s why it’s one of the essential bookkeeping reports you should get from your accountant.

Xendoo provides our clients with balance sheets and other financial statements that answer all the questions about their company’s financial health. Then they can focus on growing their core business with confidence that they’re making the right moves.

 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

6 Ways Profit & Loss Statements Help Small Businesses Succeed

The most obvious benefit of your monthly P&L statement is that it shows whether you made more money than you spent — in other words, your net income (or loss). But that’s just the beginning.

Here are 6 more ways to use that accounting report to keep your business on track for success.

1. Check up on company expenses.

Like most accountants, we believe that operating and administrative expenses should not be more than 20% of gross revenues. To find your percentage, subtract expenses (not including cost of goods or sales) from revenues, then divide that amount by revenues.
Example:
Step 1. $100,000 gross revenues – $80,000 expenses = $20,000 difference
Step 2. $20,000 difference ÷ $100,000 gross revenues = 0.2 (20%)
If your percentage is too high, you’ll need to look closely at every line in your expenses column, from advertising to utilities, for cost-cutting opportunities.

2. Analyze the cost of goods or sales (COGS).

Many business experts say that COGS should not be more than 75% of your gross revenues. With both cost of goods and gross revenues shown on your P&L statement, this percentage is easy to calculate.
If it’s more than 75%, the next step is to do something about it. Look for ways to reduce COGS by cutting production costs, finding better prices on supplies, and so on. Conversely, consider increasing gross sales, perhaps by raising prices.

3. Prepare for tax season.

By regularly updating your P&L statements, you’ll also be keeping your books current. Everything will be ready to prepare your return, and you’ll spare yourself the giant headache of trying to catch up on months’ worth of backlog all at once.

4. See how much you can reinvest in the business.

Is it the right time to move to a larger facility, add more staff, expand your product offerings? The answers are right there in your bookkeeping reports, such as the profit and loss statement.

5. Prove you’re a success.

When the day comes that you need a business loan, a new investor, or a buyer for your business, your P&L statements will be a valuable negotiating tool. They provide concrete, chronological record of exactly how well the business has done since its beginning.

6. Compare yourself to your industry standard.

Two important ratios show how you stack up against your competitors.
Gross Profit Ratio reveals how much income your business generates on sales. A high ratio means you have a healthy profit margin, and won’t be wiped out by unexpected increases in expenses.
  • The formula: Gross revenues – COGS  ÷ gross revenues = GPR
Return on Equity measures how much investors have gotten back from what they put into your company, and is a good predictor of future returns for anyone thinking of investing in you.
  • The formula: Net income ÷ shareholder’s equity = ROE
As you can see, the profit & loss statement is essential to making informed, timely decisions. That’s why Xendoo guarantees delivery of P&L statements to our clients on the 5th business day of every month. It’s all part of our real-time bookkeeping service that moves at the speed of business and lets you get back to doing the work you love.

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

Behind on Your Bookkeeping? Here’s How to get ahead

The receipts are piling up, you don’t remember which customers have been invoiced or suppliers paid yet, and none of it has been entered in your bookkeeping system. Right now it looks like a mountain you don’t have the time or energy to climb — and that mountain gets bigger every day.
Your easiest solution would be to hire an accounting company like Xendoo to get your books caught up. But if you’d rather try to DIY it, here are some essential steps you’ll need to take.

Organize the paperwork.

Get out all those receipts, invoices, bank statements, tax forms, and so on. Now you’re ready to deal with them efficiently.

A smart way to do this is by digitizing them — they’ll be a lot easier to sort and find on your computer than in a desk drawer. Choose from a variety of apps including:

• FileThis photographs and stores documents online
• Shoeboxed scans receipts and creates expense reports
• EverNote captures pictures, voice, and notes

Pay and record supplier invoices.

Check all your vendor accounts to be sure you’ve received bills for every purchase. This is especially important when it’s close to the end of your business’s tax year and the vendor might be slow in sending invoices. You won’t be able to prepare an accurate year-end financial statement or your tax return without them.

Update customer payments and debts.

Enter paid invoices in your books. Review all customer accounts for delinquent payments and send reminders. If the debt is extremely overdue or otherwise uncollectible, make a note to write it off on your tax return as a bad debt.

Record tax-deductible expenses.

Collect receipts from equipment purchases, business travel, and other expenses that you can use to lower your tax liability. Check out our list of small business tax deductions for more expenses you should be keeping records of.

Reconcile your bank account.

This is where you make sure the balance on your bank statement is the same as the one in your books. If there’s a discrepancy, check each transaction to see what happened. It could be a simple data entry error, a credit/debit you forgot to write in your checkbook register, or worst-case scenario, your account has been hacked. Whatever it is, you need to know ASAP.

Update income tax forms.

For regular employees, you’ll need to file IRS Form W-2. For independent contractors, You’ll need to submit Form W-9 and Form 1099-Misc.

Make sales tax remittances.

You must register to collect sales tax in every state where you have customers. E-commerce businesses, be aware that the rules are changing rapidly and the old “nexus” of having a physical presence in the state is no longer true.

Remit the taxes you collected within the state’s specified deadlines to avoid late penalties.

If you’ve made it this far, congratulations! You now have a clearer picture of the state of your business. On the other hand, if you’re thinking this is all too much work when you need to be running your business, let Xendoo take care of it for you.

Our catch-up service can get your books current usually in just a couple of weeks. We’re reasonably priced for small businesses. And won’t it feel good to have that mountain off your back?

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

How to Reduce Self-Employment Taxes

If you’re like most small business owners, you started out as a sole proprietor. And if you came from being employed by someone else, you were totally shocked the first time you saw on your income tax return what you owe in self-employment tax.

“What is that huge amount?” you asked. You were answered, it’s the Social Security and Medicare taxes that used to be taken out of your paycheck by your employer.

“But I never paid that much before.” That’s because your employer paid 50% of it. Now you’re paying all 100%, because you are both the employer and the employee. Welcome to the wonderful world of the self-employed!

Now for the most important question of all: “How can I get it reduced?” There are several strategies you can use. We’ll talk about them here, starting with the one that can save you thousands of dollars.

Register Your Business as an S Corporation

When you are the owner of an S Corporation, you are classed as an employee of the company, meaning that you personally pay 50% of the employment tax and the company pays the other 50%. (Of course, your company must pay you a regular salary in order to take advantage of this.)

As the owner of the corporation, you’ll still have to pay the entire employment tax on your salary: half through payroll deductions and half through personal income tax. However, you don’t have to pay it on distributions or dividends (earnings and profits) that you transfer from the company to your personal account. That’s why many S corporation owners choose to take the majority of their salary in the form of dividends and put the least amount possible on their paycheck.

In case you’re wondering, you can’t avoid the tax completely by not paying yourself any salary at all. The IRS requires you to pay yourself “reasonable compensation” — basically what you would have to pay someone else to do your job. However, as we’ve seen, there are better ways to take your salary than a simple paycheck.

Registering as an S corporation is simple: just file Form 2553 with the IRS by March 15. There are some qualifications you have to meet; read about them here.

Take More Deductions

Self-employment tax is calculated as a percentage of your income after deductions. So the more deductions you can find, the lower your taxable income — and hence the self-employment tax — will be. Here are some places to look:

  • Business travel (including driving to client’s homes or businesses)
  • Product supplies
  • Office supplies and equipment
  • Internet and phone services
  • Interest paid on business loans and credit cards
  • Business-related education costs
  • Marketing expenses
  • Service professionals such as accountants, lawyers and website developers
  • Home office: a percentage of home repairs, maintenance and improvements

The Tax Cuts & Jobs Act

There’s nothing you have to do for this one, except enjoy the tax break! Beginning with your 2018 tax return (filed in 2019), there’s a new deduction for pass-through business entities such as sole proprietorships, partnerships, LLCs and S corporations. (Pass-through means the business income is reported on your personal income tax.)

Until now, that pass-through income was taxed at standard rates; there were no special treatments as there are for big C corporations. Under the new law, you’ll get a deduction of 20% of qualified business income (QBI).

QBI is defined as income, gain, deduction and loss that are effectively connected with your business. It does not include certain investments, reasonable compensation paid to the owner, or guaranteed payments to a partner or LLC member.

Want to learn more about becoming an S corporation, increasing tax deductions or other ways to reduce your self-employment tax? Please consult your Xendoo tax advisor to find the right solution for your business.

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.