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Category Archives: Tax Tips

What the ERC Pause Means for Small Business Owners

Posted on September 26, 2023 - 2:52 pm by

When properly claimed, the Employee Retention Credit (ERC) is a refundable tax credit designed for businesses and tax-exempt organizations that continued to pay their employees while experiencing workforce disruptions due to the COVID-19 pandemic. Unfortunately, the intricate filing process associated with this credit inadvertently created an opportunity for corrupt specialty firms to prey on small business owners, making deceptive claims about eligibility. 

With the rise in fraudulent ERC claims, the IRS announced an immediate halt to processing new claims through at least the end of the year. IRS Commissioner Danny Werfel states, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in.”

Depending on your filing situation, we’re going to cover what to expect and what you should do next as a small business owner. 

What if I have already filed an ERC claim?

If you have already filed an ERC claim, the IRS will continue to process your claim, but at a greatly reduced speed. The IRS will be reviewing more than 600,000 claims, so expect processing times to be 180 days (about 6 months) or longer. The IRS may even ask for more information, so be prepared to receive this request. 

If you believe that your claim is fraudulent, the IRS is working on offering a withdrawal option for those who have filed an ERC claim but have not yet had it processed. As cited by the IRS, “This option, which can be used by taxpayers whose claim hasn’t yet been paid, will allow the taxpayers, many of them small businesses who were misled by promoters, to avoid possible repayment issues and paying promoters contingency fees.” However, if you have willfully filed a fraudulent claim, withdrawing it does not exempt you from potential criminal investigation. 

In the event that your ERC claim has already been processed and you have received an improper ERC payment, you are required to pay it back with possible penalties and interest. Per the IRS, they are “developing new initiatives to help businesses who found themselves victims of aggressive promoters. This includes a settlement program for repayments for those who received an improper ERC payment.” Remember, this program is not finalized, but the IRS plans to release more information in the fall. 

What if I am in the process of filing for the ERC?

The IRS encourages anyone being pressured by promoters to apply for the ERC “to immediately pause and review their situation while we (the IRS) look to add new protections and safeguards to stop bad claims from ever coming in.” Commissioner Werfel also states, “Businesses should seek out a trusted tax professional who actually understands the complex ERC rules.”

This would also be a good time to review the IRS list of red flags when it comes to aggressive ERC promoters as well as the IRS ERC eligibility checklist. 

What are my next steps?

Considering the complexity of the ERC, it’s never been more important to partner with a trusted tax professional. As small business owners ourselves, we know how scary this situation can be, but you don’t have to face it alone. At Padgett, we prioritize our relationships with our clients and are here to help you every step of the way. With over 50 years of collective experience and expertise in filing ERC claims, we’re prepared to answer any questions you may have regarding your ERC filing status. Connect with us today for reliable guidance and advice. 

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Tax Tips for Self-Employed Individuals

Posted on September 18, 2023 - 5:49 pm by

Being a solo entrepreneur or independent contractor has its perks – flexible schedules, creative freedom, and the ability to be your own boss. However, it also comes with its fair share of responsibilities, particularly when it comes to managing your finances and taxes. Self-employed individuals are generally treated as independent contractors, which include freelancers, gig workers, sole proprietors and the like when it comes to paying taxes. These workers often face unique tax considerations that can be quite different from traditional employees. In this blog post, we’ll dive into some essential tax tips that can help these individuals navigate the world of taxes with confidence and help ensure they are making the most of their income. 

Understanding Your Tax Obligations

One of the key differences for self-employed individuals is the absence of employer withholding. Unlike traditional employees who have their taxes deducted from their paychecks, self-employed workers are responsible for calculating and paying their own taxes. This means that understanding your tax obligations is crucial to avoiding any unpleasant surprises come tax season. 

1. Self-Employment Tax and Income Tax

If you are considered self-employed by the IRS, you are generally responsible for paying both the self-employment (SE) tax, which consists of Social Security and Medicare taxes, and income tax. Unlike individuals employed by someone else, self-employed individuals are responsible for the full 15.3% tax rate. But don’t worry, there is an SE tax deduction we’ll talk about that could be a big tax saver. 

2. Estimated Taxes

Since self-employed people don’t have taxes withheld from their income throughout the year, it’s important to make estimated tax payments on a quarterly basis. This prevents a significant tax liability from accruing at the end of the year. There are several ways to approach calculating estimated taxes, depending on the other activity expected on your return and what your tax goals are. Remember, underestimating your payments might lead to penalties, so it’s wise to consult a tax professional for accurate estimations.

3. Record-Keeping

Be sure to keep track of all your income, expenses, invoices, and receipts. This will make it easier to calculate your taxable income and claim deductions when the time comes. Numerous digital tools and apps are available to simplify record-keeping and expense tracking.

Maximizing Deductions

Self-employed individuals can take advantage of various deductions to reduce their taxable income, ultimately lowering their tax liability. Here are some common deductions self-employed folks should explore:

1. Home Office

If you use a portion of your home exclusively for business purposes, you might be eligible for the home office deduction. This deduction allows you to write off a percentage of your home office repairs, utilities, and other related expenses.  

2. Business Expenses

For a business expense to be deductible, it must be both ordinary and necessary to the business. Per the IRS, “An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.” It’s important to keep in mind that even though some expenses may be both ordinary and necessary, they may not be eligible for a deduction. That’s why it’s essential to maintain receipts and document the business purpose of each expense. It can be tempting to overestimate your eligible expenses, but there may be consequences for doing so. Not only do you risk underpaying your taxes, but it could also distort your overall financial picture. This could have an impact on things like getting a mortgage.

3. Self-Employment Tax

As mentioned earlier, self-employed individuals are generally responsible for the SE tax, which includes both the employee and employer portions of Social Security and Medicare taxes. The good news is that you can deduct one-half of the SE tax when calculating your adjusted gross income.

4. Self-Employed Health Insurance

With the Small Business Jobs Act self-employed individuals may deduct up to 100% of their insurance premium. This includes premiums that cover the self-employed individual and their families. Be careful, not all premiums will be considered tax deductible so reach out to your advisor for guidance. 

Consulting a Tax Professional

Given the complexity of being self-employed when it comes to taxes, it’s wise to work with a tax professional. A tax expert can help you navigate the intricacies of tax law, help you take advantage of all available deductions, and provide guidance on estimated tax payments. 

As a recap, being self-employed offers a world of opportunities, but it also requires diligent financial management, especially when it comes to taxes. By understanding your tax obligations, making timely estimated tax payments, keeping meticulous records, and maximizing deductions, you can set yourself up for financial success. Remember, consulting a tax professional can provide personalized guidance tailored to your unique situation, making tax season a less daunting experience. If you’re on the other end of the spectrum as a small business owner and are looking to hire a freelancer or independent contractor, we also have a guide to help you make the right choice! Remember to prepare for tax season today with your local Padgett advisor. Find your local office here!

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Tax Audits Demystified: How to Prepare and Respond as a Small Business

Posted on August 16, 2023 - 7:17 pm by

As a small business owner, the term “tax audit” might strike fear into your heart, conjuring images of auditors poring over your financial records with a fine-tooth comb. While tax audits can be intimidating, understanding the process, being proactive in your tax compliance, and knowing how to respond can help ease the stress. In this article, we’ll demystify tax audits, provide tips to reduce audit risk, and guide you through steps to take if your small business is audited.

What is a Tax Audit?

A tax audit is an examination of your financial records and tax returns by the Internal Revenue Service (IRS) or state tax authorities to ensure the accuracy of your reported income, deductions, and credits. Per the IRS, audits can be conducted randomly, but more often they are triggered by certain red flags, discrepancies, or patterns that catch the attention of tax authorities. 

Reducing Audit Risk

While audits can happen to anyone, there are steps you can take to minimize your audit risk: 

  1. Accurate Recordkeeping: Maintain thorough and organized records of your financial transactions, including receipts, invoices, bank statements, and expense reports. This transparency can provide a clear trail of your business activities. 
  2. Consistency: Ensure consistency in your reported income and deductions from year to year. Drastic changes can raise eyebrows and trigger audits. 
  3. Classify Expenses Correctly: Properly categorize your business expenses. Misclassifying personal expenses as business expenses can lead to an audit.
  4. Reasonable Deductions: Claim only legitimate business deductions. Exaggerated or questionable deductions can invite scrutiny. 
  5. Hire a Professional Accountant: A certified tax professional can help ensure accurate tax filing and adherence to tax laws, reducing the chances of errors that might trigger an audit. 
  6. Report All Income: Ensure you report all income, including cash payments. Omissions can lead to serious consequences if discovered. 

Steps to Take If Audited

Even with precautions, audits can still occur. If your small business receives an audit notice, follow these steps: 

  1. Stay Calm: Don’t panic. An audit notice doesn’t necessarily mean you’ve done something wrong. It’s a routine procedure to verify your records. 
  2. Read the Notice Carefully: The notice will outline the scope of the audit, the years under review, and the specific documents requested. Understanding the requirements is crucial. 
  3. Gather Documentation: Collect all requested records, including financial statements, receipts, invoices, and relevant tax returns. Having organized records will make the process much smoother. 
  4. Consult a Professional: If you don’t already have a tax professional, hire one now. They can guide you through the process, help you understand your rights, and represent you before the tax authorities. 
  5. Cooperate and Respond Promptly: Respond to the audit notice within the specified timeframe. Cooperation with the auditor is key. Provide only the requested information but be thorough and honest. 
  6. Be Prepared to Explain: Be ready to explain any discrepancies or unusual entries in your records. A logical and honest explanation can go a long way in resolving issues. 
  7. Understand Your Rights: Familiarize yourself with your rights as a taxpayer during an audit. These rights include the right to representation, the right to appeal decisions, and protection against unfair treatment. 
  8. Appeal if Necessary: If you disagree with the audit findings, you have the right to appeal within the IRS or through the courts if necessary. Your tax professional can guide you through this process.

How Padgett Can Help

While tax audits may seem daunting, they are a part of maintaining a fair and accurate tax system. At Padgett, we can help you maintain accurate records and prepare you for the process, enabling you to navigate audits with confidence. Contact us today to find your local Padgett advisor.

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