It’s almost time to pay those quarterly estimated taxes for your self-employment income. What are your options?

EFTPS: The EFTPS, or Electronic Federal Tax Payment System, is available online for free. Registration takes about a week, so register ahead of the tax payment due date. The best thing about the EFTPS system is that you can look up your payment history at any time. Your tax preparer will be giving you a big hug when you can produce a neat, printed report of your estimated tax payments for the past year!

IRS.GOV: You can always download a PDF of the paper payment coupon (1040-ES) and send it in with a check via snail mail. Instructions and the mailing address are included on the PDF.

If you need to make a payment but will be putting it on your credit card, you can always check out OfficialPayments for payment options. Be forewarned, though, that this option incurs a fee of 2.35% of the payment amount.

Need additional information on estimated taxes? The IRS has a handy, dandy page just for you: Estimated Taxes

Also, don’t forget to send in your state’s estimated tax payment, too!

Just when it looked like the small businesses in this country might begin to bounce back, our elected representatives are working to close the “tax loopholes” used by small professional companies operated as S-Corporations:
H.R. 4213 American Jobs and Closing Tax Loopholes Act

At present, S-Corporation shareholders who are employees working in the business must take a “reasonable wage” via payroll. Any remaining profits may be passed through to the shareholders without being subject to self-employment tax (Social Security & Medicare). The new bill just passed by the House and on its way to the Senate will charge self-employment tax on the distributions that S-corporation shareholders take over and above payroll. It’s only for S-corporations providing “professional services” and only for those with three shareholders or less, but it’s a major hit to the small business recovery, nonetheless. According to the bill, “professional services” include “any trade or business if substantially all of the activities of such trade or business involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.”

Let’s just keep our fingers crossed that our Senators see the folly of applying this tax only to small service businesses and not their bigger competitors.

April 15th is almost here — time to send in your first quarterly estimated tax payment!

Do you need help remembering your quarterly tax due dates? Sign up for my quarterly newsletter. It comes out two weeks in advance of each quarterly tax due date and includes a short article about recent tax law changes. Sign up online.

The IRS just published their IRS Enforcement and Service Results for their fiscal year 2009.  Based upon this new data, the higher your income, the more likely that you’ll receive a letter from the IRS asking for additional information or tax payments.  A correspondence audit of this kind is often triggered when you forget to report all of your 1099 payments, including “freelance” payments that were reported to you on a 1099-MISC.

The statistics released by the IRS show:

• Individuals with income over $200,000 had an audit rate of 2.89%
• Individuals with income under $200,000 had an audit rate of 0.96%

For businesses the results were:

• S-Corporations had an audit risk of 0.40%
• Partnerships had an audit risk of 0.38%
• Sole Proprietorships were not broken out from individual results

For upcoming audits, the IRS has already announced that Sub-S Corporations that are not paying shareholder/employees “reasonable compensation” will be at the top of their audit lists.

It’s too late to try to save on your 2009 taxes, but it’s not too early to start planning your 2010 tax strategy.  What can a small business owner do to save on taxes in 2010?

• Find every legal way to reduce your taxable income.  Start an HSA plan for your medical expenses.  Make charitable donations.  Max-out your retirement plan contributions.
• Find an advisor.  Whether it’s your existing CPA or a local Enrolled Agent (“EA”) like yours truly, find someone who will give you a one-hour consultation on ideas for saving on your taxes.  These tax pros live and breathe this stuff and might know about tax deductions or credits that you’re missing.
• Save for your quarterly estimates and pay them on time!  If you’re paying self-employment tax on your business income, it would be a safe bet that 25% of your profits are going to go to taxes at a bare minimum.  So start setting aside that much each time you get a big check or monthly, at least.  Then you’ll have the money ready when it’s time to send in those quarterly estimate payments.
• Keep track of your expenses.  Save those receipts, keep a mileage log, and claim every deduction you’re entitled to.  If you think it’s not worth getting a receipt for that $2 parking fee, just remember that saving one of those receipts each week will net you an additional $104 in business deductions by the end of the year … saving you up to $40 in taxes!

Being prepared and maintaining good recordkeeping habits is your best defense against the tax man!

It’s December, which means you’re running out of time to trim your 2009 tax bill.  What can you still do?

Buy some assets! Any type of equipment that you buy for your business before year-end can be written off for a 2009 tax break.  The cost of computers, copiers, fax machines, printers and even software can be written off through depreciation.  Stock up on office supplies that you’ll need in the next couple months, but don’t go out and buy stuff that you don’t actually need!

Organize your receipts! Now’s the time to start tracking down receipts for all of your deductible business expenses, not the first week of April!  Are you missing some mileage records?  Reconstruct them while you still remember where you went.  Missing some receipts for online purchases?  Download duplicate copies while they’re still available.  And if you’re going to be claiming a home office, you can start collecting all of your utility bills, homeowners’ insurance bills, and records of other deductible expenses.  In fact, if you pay your January mortgage or rental payment before the end of this year, you’ll have a little extra mortgage insurance or rent to deduct, as well!

Open a solo 401(k) retirement plan. If you still have profits that you want to protect from the tax man, check out the wide range of solo 401(k) plans available to self-employed business owners.  You can stash away a maximum of $49,000 in 2009: $16,500 plus 20% of your net business income.

Get your paperwork organized now, shop the Christmas sales for good, cheap office equipment, and pat yourself on the back for being so organized for the upcoming tax season!

According to a new report by the Government Accountability Office, about 25% of all sole proprietors reported losses in 2006.  Most of these business owners used their self-employment loss to offset other taxable income, leading to a significant loss of tax revenue for Uncle Sam.

According to the IRS, approximately 70 percent of those losses were at least partially a result of taxpayers incorrectly applying the tax laws.  So how is the IRS going to go after these missing taxes?  Two suggested approaches are:

• The IRS could limit the amount that sole proprietor losses could be used to offset other taxable income.  While the IRS is concerned that this move could limit the ability to claim legitimate losses, it would certainly limit bogus losses.
• The IRS could go after “hobby” businesses, or those business that are not engaged in for profit.  Basically, these businesses have to claim the net sales revenue generated, but are not allowed to claim expenses except as itemized deductions.  The IRS seems to be leaning heavily toward this option.

Is your business really a hobby?  According to the IRS, if you haven’t made a profit in three of the last five years, then it very well may be!  You should be prepared to prove that you’re trying to make a profit and have a legitimate business, not just a money-making hobby.

The IRS is presently conducting a tax return preparer review aimed at developing new tax preparer performance standards.  By year-end, the IRS Commissioner will propose a comprehensive set of recommendations to ensure uniform and high ethical standards of conduct for tax preparers.  It is very likely that the end result will be a new form of regulation of tax preparers.

Here in the state of Pennsylvania, you need a license to practice law, work as a hair stylist, or be a dog groomer … but anybody can prepare taxes for you! This lack of regulation has inevitably led to some pretty shabby tax work by “professional” tax preparers.

Until this new IRS legislation passes, how can you be sure your tax preparer knows their stuff?  While some states have tax preparer licensing (like Oregon), most states do not.  At present, there are two Federally-recognized groups that would already qualify for any tax-licensing standards that the IRS comes up with:

• CPA, or Certified Public Accountants.  While they may go on to specialize in any number of accounting functions that have nothing to do with individual and small business taxes, all CPAs have passed a test that requires proficiency with Federal tax law.
• EA, or Enrolled Agents.  These tax professionals are licensed by the IRS, unlike CPAs who are licensed by the individual states.  EAs have a solid technical expertise in the field of taxation and have also passed a rigorous test to prove their knowledge of tax law.   They must pass an extensive background check before being licensed and must complete ongoing professional education each year.

By selecting a CPA or EA for your tax preparation, you will know that your tax preparer has the solid training and ongoing education necessary for staying up-to-date with the ever-changing tax laws.  And when tax preparer regulation passes into law, you can rest assured that the CPAs and EAs will still be here, while other tax preparers will have to scramble to meeting education requirements and pass proficiency tests.

Disclaimer — it’s only fair to mention that I am one of the 40,000 Enrolled Agents in this country.  As the Chairman of NAEA’s Government Relations Committee puts it, “it is the Wild West out there right now, and we need to bring the sheriff back to town.  EAs believe that in order to be successful, any return preparer program must significantly increase taxpayer access to competent and ethical tax preparation services.”

Did you take a pass on the April 15th deadline last spring and file a six-month extension with the IRS?  If so, your new deadline is fast approaching.  All personal income tax returns on extension will be due on Thursday, October 15th.

Remember that the IRS has given you an extension of time to file, but not an extension of time to pay.  If your final return shows taxes due, be prepared for some interest and penalties for sitting on those taxes an extra six months!

If you’re self-employed, the IRS will expect you to have sent in your taxes through quarterly estimated tax payments throughout the year.  If you need help remembering those quarterly due dates, sign up for my quarterly email newsletter.  This newsletter is specifically targeted to self-employed business owners who have to send in quarterly estimated tax payments.  It comes out four times a year, just before each of the quarterly tax due dates.  In addition to a reminder to send in your estimates, it includes a short article regarding small business taxes.