It’s that time again … time to send your estimated taxes in to Uncle Sam.

So what are estimated taxes and why would you have to pay them? When you bring home a paycheck, your employer has withheld income taxes from your paycheck. But when you’re self-employed, a landlord, or even an investor, you are earning income that has never had taxes withheld. Rather than settling up all at once on April 15th, the government wants you to turn over 25% of your estimated tax liability at four points throughout the year. In fact, you will have to pay an “estimated tax penalty” if you fail to do so and owe Uncle Sam $1,000 or more when you do your taxes in April. So, start making those quarterly estimated tax payments and save yourself from all those nasty penalties!

Need help remembering those due dates? Sign up for my quarterly newsletter here. It comes out just four times a year, just in time to help you remember those quarterly due dates!

Starting July 1st, 2011, your business miles are going to be a lot more valuable. For every mile you drive, the IRS will let you write off 55.5 cents, up from 51 cents for January 1st through June 30th. What does this mean for you?

• Capture every deductible mile!  Yes, that means keeping a mileage log and using it regularly, but think about all those trips that you might be missing.  Running deposits in to the bank, dropping off mail at the post office, even making an office supply run.  Track all these trips in your mileage log and you’ll be adding $55.50 of deductible business expenses to your books for every 100 miles you drive.
• Speaking of mileage logs, be very careful to track mileage for January 1st through June 30th separately from mileage for July 1st and beyond.  The bump in the deductible mileage rate is only applicable to miles driven on July 1st and later.
• While you’re tracking your mileage, be sure to capture miles driven for charitable purposes.  These might include miles driven to PTA meetings or other nonprofit groups, miles driven to donate used household goods, or even miles driven to volunteer for a benefit walk or a Habitat for Humanity event.  For example, if you drive to your church to provide volunteer office work once every week, you can deduct the round-trip mileage at the “Charitable Contribution” rate of 14 cents per mile.

The IRS stated that the increased mileage rate was a direct result of the increased gas prices that we’ve experience this spring and summer.

Too hip for a paper mileage log?  The App Store on iTunes lists several mileage apps, including MileBug, MileTracker and Trip Cubby, all for less than $5.

On April 14, 2011, President Obama signed the long-awaited repeal of the new 1099 reporting requirements.  A minor provision in the new healthcare law, the new requirements would have included corporations and vendors of both services and tangible goods in the 1099 reporting net.  While it was intended to be a major revenue-raiser for Washington, the requirements would have meant an unmanageable avalanche of paperwork for the nation’s small business owners.

It’s a Tax Day miracle!  Both sides of the aisle managed to cooperate long enough to accomplish something for small business … finally!

UPDATE: New 1099 Requirements Repealed!

On Groundhog Day, the Senate passed an amendment to repeal the crazy new 1099 requirements set to go into effect next year.

While several amendment attempts have been made by Senator Mike Johanns of Nebraska, the winning amendment was introducted by Senator Debbie Stabenow of Michigan.  Virtually identical to the Johanns amendment, the approved amendment will be attached to a widely-supported piece of legislation to re-authorize the Federal Aviation Administration.

It should be noted that the repeal enjoyed broad bipartisan support, passing with a vote of 81-to-17.

Of course, it’s not officially passed into law yet, but this new amendment is the first real hope that we’ve had that the crazy-making expansion of 1099 reporting might be repealed before it even takes effect.  Stay tuned!

A new report by the Treasury Inspector General for Tax Administration has recommended that the IRS take a closer look in sole proprietorship audits to find any unreported income.

IRS auditors already do a number of checks to look for unreported income, such as examining the “cost” of the sole proprietor’s lifestyle to see if his/her reported income would be able to support it.  If you’re driving a brand-new BMW but reporting $20,000 in net business profit as your sole source of income, you should expect a lot of tough questions!

The new test being recommended includes a more sophisticated analysis of tax return data and the proprietor’s reported personal expenses to determine if they are roughly equal. With these new tests, the IRS stated they would have collected an additional $8 million in taxes from sole proprietors in 2008! This new focus on sole proprietors follows the IRS’s National Research Program estimate that sole proprietors are cheating the government of $68 billion each year.

If you operate your business as a sole proprietorship, your best defense against an audit is thorough documentation of both your gross revenue and your business deductions.  The following posts can help you get started:

• How Good is Your Documentation?
• Do You Use Freelance Workers In Your Biz?
• Should It Stay or Should It Go?
• Top Audit Issues for Sole Proprietorships

Every year I run into a couple brand-new business owners who really, truly don’t understand the importance of recordkeeping and retaining documentation of business deductions.  Quick as I can, I straighten them out and teach them the basics of what they can deduct, what receipts to keep and so forth.

Much more surprising, however, is the number of small business owners that I meet that think they’re keeping great records, but aren’t.  See if this scenario sounds familiar:

A self-employed business owner deducted his expenses on Schedule C (of the Form 1040). His proof for many of the write-offs was his American Express credit card statements, which listed the payee, date and amount of the transaction. The IRS denied many of his expenses for lack of documentation.

The U.S. Tax Court ruled in favor of the IRS, leaving the business owner with a significant tax due bill. They held that the credit card statement is not proof of the business purpose of an expense.  The business owner should have had receipts or other evidence to prove the exact items purchased. Just showing that a payee is an office supply store like Staples is not enough. [Fessey v. Commissioner, T.C. Memo. 2010-191]

Sound familiar?  I’ve had clients who thought a PayPal statement was adequate documentation.  Other clients swear that the Visa statement proves that the money was spent at Staples, so it has to be business-related.  Not according to the IRS!

Each business expense deduction should be backed up by a receipt or other documentation that shows the payee, date, amount and details of the items or services purchased.

Worried about all the space those receipts are going to take up?  Check out my earlier post on digital receipts.

As part of the Small Business Jobs Act of 2010 (full text here – see section 2042), the nation’s self-employed small business owners finally got a tax break they can use.  Previously, those health insurance premiums were not considered a business deduction when calculating self-employment tax, the self-employed person’s version of Social Security and Medicare, even though they could deduct the premiums when calculating income tax.  This was a significant difference from how regular employees were taxed and put the self-employed at a significant disadvantage.

Now, for the year 2010 only, self-employed business owners who pay for their own health insurance can fully deduct those health insurance premiums when calculating self-employment tax.  For every $100 of premiums, this represents a tax savings of $15.  It’s not a windfall, but we’ll take whatever we can get!

As with everything deduction-related, save that paperwork!  Be able to prove the amount paid for health insurance premiums with a bill or policy from the insurance provider and proof of payment on your end, such as canceled checks.  And keep saving those receipts in 2011, as I’m keeping my fingers crossed that the deduction might be renewed for next year, as well!

UPDATE: New 1099 Requirements Repealed!

Two separate attempts to repeal the new 1099 reporting requirements failed this week as the two political parties continued their endless bickering:

• The Johanns amendment sponsored by Mike Johanns of Nebraska (a Republican) would have repealed the new requirements outright. This amendment was defeated 46-52 because it would have “paid for” the repeal by exempting more people from the new health insurance mandate by lowering the affordability exemption for individuals.
• The Nelson amendment sponsored by Bill Nelson of Florida (a Democrat) would have “fixed” the problem by raising the reporting threshold from $600 to $5,000 and exempting businesses with 25 or fewer employees from the new requirement.  How all the poor bookkeepers of this country would have kept track of all that is still a question in my mind!  Thankfully, this “fix” was defeated 56-42, as it failed to reach the 60-vote threshold.

Meanwhile, Treasury Secretary Timothy Geithner and Health and Human Services Secretary Kathleen Sebelius have joined the IRS’s own Taxpayer Advocate, Nina Olsen, in calling for Congress to scale back the new 1099 requirements.  Thankfully, Senator Johanns isn’t giving up, stating “It is wrong to have paid for the president’s health care plan on the backs of small businesses. My amendment would have truly helped small businesses and I am committed to continuing this fight until this provision is appealed.”

Good luck, Senator!  I’m keeping my fingers crossed for you … and all of us!

It never ceases to amaze me how many small business owners are unclear on the rules regarding independent contractors. Just this past month, I discovered two of my new clients are paying “assistants” as independent contractors and another client was planning on hiring one! Sure, freelancers are great because they save you the cost and hassle of employees. You can add them as your business activity demands it and cut back when necessary. But if you are treating freelancers too much like employees, watch out for the IRS to penalize you for “worker misclassification.”

Just this past February, the IRS announced a new initiative targeting worker misclassification in small businesses. For the first three years, they’ve already randomly selected 6,000 businesses for audits! These National Research Program (NRP) audits will stretch across all industries and company sizes. The Treasury Department is anticipating additional employer tax revenues of $14 billion annually. President Obama is also anticipating additional revenues from this effort, as his 2011 budget proposal includes additional funding for 100 new Department of Labor employees to chase down cases of employee misclassification.

What happens if your “freelancer” is deemed to be a misclassified employee? The IRS will go after all of the employer taxes that you should have been paying, including Social Security, Medicare and Unemployment Insurance. These retroactive changes can go back several years and include significant penalties and interest. Once the IRS raises the red flag, the Department of Labor can jump in and assess minimum wage penalties and determine if you complied with overtime rules.

The audits are likely to focus on those industries most likely to engage in misclassification, including restaurants, construction, trucking, business services, child care services, landscaping and janitorial businesses. But if your business submits a large number of 1099 forms each year, you could well be on that audit list.

Are your freelancers really employees? The IRS has some standard guidelines on the subject on their Web site. The basic determining factor, though, is control:

• Do you tell your worker where, when and how to do their work?  Do you provide training for your worker? Do you require them to use your tools or computers?  These are all behavioral guidelines that identify a worker as an employee.  An independent contractor will generally supply their own tools and equipment, manage their own training, and do the work in the manner that they see fit.
• Do your contractors have an investment in their freelance business?  Do they advertise for other customers and make their services available to the public?  An independent contractor will have a profit motive in accepting work from you and will be able to make a profit — or lose money — on the job they perform.
• Do you have a contract with your contractor?  Do they work at your place of business or off-site?  If your worker is performing routine work in your business, at your business location, and expects an ongoing relationship, then you have an employee on your hands, not an independent contractor.

Are you unsure whether your worker is an employee or an independent contractor?  First visit the IRS web site and review their information; it really does explain the issue quite well. To help tip the balance towards an independent contractor classification, be sure your freelancer:

• Invoices you, instead of turning in a time card.
• Has other customers or is actively pursuing other customers.
• Has invested in their freelance business by buying business cards, advertising their business, buying liability insurance or paying for their own training.
• If possible, works off-site and is paid by the project rather than by the hour. You may not dictate work schedules, though requesting reports on project milestones are appropriate. The independent contractor is to determine how the work will be accomplished.
• Signs a written agreement. The agreement should include the tasks to be performed and the expected results, consistently identify the worker as an independent contractor, and specify the project’s duration without an automatic rollover.

If you realize that your worker best fits the “employee” description, then it is in your best interest to find a new freelancer who truly operates as an independent contractor or put your existing worker on payroll … pronto!

UPDATE: New 1099 Reporting Requirements Repealed!

Recently passed legislation requiring a massive overhaul in the 1099 reporting system has met with passionate opposition from small business owners, the accounting community and even the IRS Taxpayer Advocate. In response, two efforts are underway in Washington to reduce the requirement or repeal it outright.

The least likely effort was put forward by Senator Mike Johanns of Nebraska, proposing an outright repeal of the new reporting rules. Unfortunately, the Democratic support is unlikely because the proposal would also repeal a preventative medical care fund for the uninsured.

By mid-September, debate should begin on a Democratic proposal put forward by Senator Bill Nelson of Florida. This version would add several exemptions to the new reporting requirements, including an outright exemption for businesses with fewer than 25 employees. Furthermore, the Treasury Department would be authorized to exempt payments for common purchases such as airline tickets and office supplies.

Everyone keep your fingers crossed that the two parties can come together to save our nation’s small business owners from this crazy new reporting requirement!!