9 Tax Rules to Consider If You’re Your Own Boss

Does the idea of being your own boss and being in business for yourself appeal to you? 

Many people who launch small businesses start out as sole proprietors. However, there are tax rules and considerations to consider if you’re a sole proprietor.

Here are nine things to consider if you are your own boss

1 – You may qualify for the pass-through deduction

To the extent your business generates qualified business income, you are eligible to claim the 20% pass-through deduction, subject to limitations. 

There are tax rules to consider if you're your own boss

The deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income.

However, you can take the deduction even if you don’t itemize deductions and instead claim the standard deduction.

2 – Report income and expenses on Schedule C of Form 1040 

The net income will be taxable to you regardless of whether you withdraw cash from the business. 

Your business expenses are deductible against gross income and not as itemized deductions. 

If you have losses, they will generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses, and losses in activities in which you weren’t “at risk.”

3 – Pay self-employment taxes

For 2020, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment of up to $137,700, and Medicare tax only at a 2.9% rate on the excess. 

An additional 0.9% Medicare tax (for a total of 3.8%) is imposed on self-employment income in excess of $250,000 for joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. 

Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income. 

4 – Make quarterly estimated tax payments 

For 2019, these are due April 15, June 15, September 15 and January 15, 2021. 

5 – You may be able to deduct home office expenses 

If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home. 

And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.

6 – You can deduct 100% of your health insurance costs as a business expense 

This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.

7 – Keep complete records of your income and expenses

Specifically, you should carefully record your expenses in order to claim all the tax breaks to which you’re entitled. 

Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits. 

8 – Requirements change if you hire employees

When you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes. 

9 – Consider establishing a qualified retirement plan 

The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re are withdrawn. 

Because many qualified plans can be complex, you might consider a SEP plan, which requires less paperwork. 

A SIMPLE plan is also available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements. 

If you don’t establish a retirement plan, you may still be able to contribute to an IRA. 

David Mills CPA, LLC has the expertise to assist small businesses

At David Mills CPA, LLC, we work with small businesses throughout the Central Illinois.

We have offices in Morton and East Peoria and can assist business owners with advice, bookkeeping, payroll, income tax planning and preparations, and business valuations

We can also help business owners understand the various business structures to ensure their business is structured to best meet their needs.

For more information, contact David Mills CPA, LLC today.

Business Cents-Per-Mile Rate Decreases for 2020

In 2020, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business decreased by one-half cent, to 57.5 cents per mile.

As a result, you might claim a lower deduction for vehicle-related expenses for 2020 than you can for 2019.

Calculating your deduction

Businesses can generally deduct the actual expenses attributable to the business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees.

In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.

The cents-per-mile rate comes into play if you don’t want to keep track of actual vehicle-related expenses.

With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date, and the destination.

Using the mileage rate is also popular with businesses that reimburse employees for business use of their personal vehicles.

Such reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes.

Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

Rules apply for cents-per-mile rate

If you do use the cents-per-mile rate, be aware that you must comply with various rules. If you don’t, the reimbursements could be considered taxable wages to the employees.

How is the rate determined?

The rate for 2020 Beginning on January 1, 2020, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 57.5 cents per mile.

It was 58 cents for 2019 and 54.5 cents for 2018. The business cents-per-mile rate is adjusted annually.

It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation.

Occasionally, if there’s a substantial change in average gas prices, the IRS will change the mileage rate midyear.

Factors to consider

There are some situations when you can’t use the cents-per-mile rate. In some cases, it partly depends on how you’ve claimed deductions for the same vehicle in the past.

In other cases, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

As you can see, there are many factors to consider in deciding whether to use the mileage rate to deduct vehicle expenses.

At David Mills CPA, LLC, our expert can help if you have questions about tracking and claiming such expenses in 2020 — or claiming them on your 2019 income tax return.

David Mills CPA, LLC has offices in Morton and East Peoria.

Doing Business Across State Lines? Reexamine Your Sales Tax Obligations

Does your company do business across state lines? If so, it’s a good idea to reexamine your sales tax obligations.

In its 2018 decision in South Dakota v. Wayfair, the U.S. Supreme Court upheld South Dakota’s “economic nexus” statute, expanding the power of states to collect sales tax from remote sellers.

Today, nearly every state with a sales tax has enacted a similar law, which makes it prudent for companies doing business across state lines to review their tax obligations.

What Does Nexus Mean?

South Dakota’s economic nexus statute was upheld, but what’s nexus? A state is constitutionally prohibited from taxing business activities unless those activities have a substantial “nexus,” or connection, with the state.

Even without a physical presence in a state, businesses could still be required to pay tax.

Before Wayfair, simply selling to customers in a state wasn’t enough to establish nexus. The business also had to have a physical presence in the state, such as offices, retail stores, manufacturing or distribution facilities, or sales reps.

In Wayfair, the Supreme Court ruled that a business could establish nexus through economic or virtual contacts with a state, even if it didn’t have a physical presence.

The Court didn’t create a bright-line test for determining whether contacts are “substantial,” but found that the thresholds established by South Dakota’s law are sufficient.

Out-of-state businesses must collect and remit South Dakota sales taxes if, in the current or previous calendar year, they have

  1. more than $100,000 in gross sales of products or services delivered into the state, or
  2. 200 or more separate transactions for the delivery of goods or services into the state.

What Are the Next Steps?

The vast majority of states now have economic nexus laws, although the specifics vary. Many states adopted the same sales and transaction thresholds accepted in Wayfair, but a number of states apply different thresholds.

And some chose not to impose transaction thresholds, which many view as unfair to smaller sellers (an example of a threshold might be 200 sales of $5 each would create nexus).

How are Illinois Businesses Affected?

In Illinois, Public Acts 101-0009 and 101-0604 “expanded nexus to include marketplace facilitators that meet certain thresholds effective Jan. 1, 2020.”

map of the United States
The nexus tax laws can vary by state.

According to state officials, marketplace facilitators who meet state nexus thresholds are required to register to collect and remit Illinois Use Tax for sales made through their marketplace.

Marketplace sellers selling through the marketplace are not responsible for collecting and remitting Illinois Use Tax on these sales. (Read more about Illinois nexus requirements)

What Business Owners Should Know

If your business makes online, telephone or mail-order sales in states where it lacks a physical presence, it’s critical to find out whether those states have economic nexus laws and determine whether your activities are sufficient to trigger them.

If you have nexus with a state, you’ll need to register with the state and collect state and applicable local taxes on your taxable sales there. Even if some or all of your sales are tax-exempt, you’ll need to secure exemption certifications for each jurisdiction where you do business.

Alternatively, you might decide to reduce or eliminate your activities in a state if the benefits don’t justify the compliance costs.

What if You Sell on Amazon or Ebay?

If you make sales through a “marketplace facilitator,” such as Amazon or Ebay, be aware that an increasing number of states have passed laws that require such providers to collect taxes on sales they facilitate for vendors using their platforms.

David Mills, CPA, LLC Can Help Small Businesses

If you need assistance in setting up processes to collect sales tax or you have questions about your responsibilities, call David Mills, CPA, LLC. Our experts can help answer all your small business tax questions.

Contact David Mills, CPA LLC’s Morton or East Peoria offices today.

Plan Your 2020 Q1 Tax Calendar Key Deadlines

Keeping track of key tax-related deadlines for your business is an ongoing concern. Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2020.

Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Key Dates to Know

January 31 is the deadline to File 2019 Forms W-2 “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.

Provide copies of 2019 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.

File 2019 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS. File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2019.

If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it.

However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.

File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2019.

If your tax liability is less than $2,500, you can pay it in full with a timely filed return.

If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)

File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2019 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs.

If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28 File 2019 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 16 If a calendar-year partnership or S corporation, file or extend your 2019 tax return and pay any tax due.

If the return isn’t extended, this is also the last day to make 2019 contributions to pension and profit-sharing plans.

Contact David Mills CPA for Small Business Tax Advice

If you have questions about meeting applicable deadlines or to learn more about filing requirements, contact David Mills CPA, LLC. We have offices in Morton and East Peoria or can arrange a video conference with you.

Small Businesses: It May Not Be Too Late to Cut Your 2019 Taxes

Don’t let the holiday rush keep you from taking some important steps to reduce your 2019 tax liability.

You still have time to execute a few strategies, including:

1. Buying assets

Thinking about purchasing new or used heavy vehicles, heavy equipment, machinery or office equipment in the new year? Buy it and place it in service by December 31, and you can deduct 100% of the cost as bonus depreciation.

Although “qualified improvement property” (QIP) — generally, interior improvements to nonresidential real property — doesn’t qualify for bonus depreciation, it’s eligible for Sec. 179 immediate expensing. And QIP now includes roofs, HVAC, fire protection systems, alarm systems and security systems placed in service after the building was placed in service.

You can deduct as much as $1.02 million for QIP and other qualified assets placed in service before January 1, not to exceed your amount of taxable income from business activity.

Once you place in service more than $2.55 million in qualifying property, the Sec. 179 deduction begins phasing out on a dollar-for-dollar basis. Additional limitations may apply.

2. Making the most of retirement plans

If you don’t already have a retirement plan, you still have time to establish a new plan, such as a SEP IRA, 401(k) or profit-sharing plans (the deadline for setting up a SIMPLE IRA to make contributions for 2019 tax purposes was October 1, unless your business started after that date).

If your circumstances, such as your number of employees, have changed significantly, you also should consider starting a new plan before January 1.

Although retirement plans generally must be started before year-end, you usually can deduct any contributions you make for yourself and your employees until the due date of your tax return. You also might qualify for a tax credit to offset the costs of starting a plan.

3. Timing deductions and income

If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2019 and deferring income into 2020 (assuming you expect to be taxed at the same or a lower rate next year).

For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2019 even though you don’t pay the credit card bill until 2020.

In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2019.

As for income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.

Proceed with caution
Bear in mind that some of these tactics could adversely impact other factors affecting your tax liability, such as the qualified business income deduction.  For more information about small business tax liability or other business advisement services, contact the experts at David Mills CPA, LLC. 

© 2019

 

Calendar date circled in purple with the words pay day written

Why Should You Outsource Payroll?

On payday, your employees expect their paychecks to be correct. Errors or oversights on a paycheck can anger and unnecessarily stress an employee. Save the hassle and outsource your payroll.

Ensuring your employee payroll is accurate is vitally important, yet for many small business owners in the Peoria and Central Illinois area, the process is laborious, stressful and never-ending.

Calendar date circled in purple with the words pay day written

When you outsource payroll responsibilities to the experts at David Mills CPA LLC, you get more time to concentrate on your core business. You will have peace of mind knowing your payroll operations are being handled correctly and professionally.

Pay period follows pay period. Accurately completing your company’s payroll requires time and attention. 

Outsourcing Ensures Payroll Accuracy

By outsourcing payroll responsibilities, you can be assured that all special deductions, such as wage garnishments, savings, and health deductions are properly calculated.

Do you know the updated payroll regulations for 2020? With outsourced payroll services, the experts at David Mills CPA LLC ensure your firm is compliant with all current payroll laws.

At David Mills CPA LLC, payroll tax deposits are electronically filed and quarterly payroll tax forms are prepared and filed. They also complete year-end W-2 and 1099 forms as well as worker’s comp audits and any requests for payroll information.

Hiring experts to complete your company’s payroll helps avoid IRS mistakes and penalties. 

When you work with David Mills CPA LLC, you are able to establish a direct deposit option for your employees. Direct deposit saves employees a trip to the bank to cash their paycheck and has become a convenience employees expect.

Outsourcing Payroll Eliminates the Burden on Employees

Outsourcing your payroll eliminates the need to train or cross-train employees to handle payroll. When payroll is handled in-house, a burden is placed on the company every time the person responsible for payroll goes on vacation, takes a leave of absence or quits the company. 

When the payroll employee leaves or retires, they walk out with valuable knowledge that can be hard to regain.

Outsourcing your payroll responsibilities means a knowledgeable team is in place to seamlessly handle your company’s needs.

Contact the professionals at David Mills CPA LLC today to see how their payroll service can meet the needs of your business. David Mills CPA LLC has offices in both Morton and East Peoria.

Your Small Business Needs a Budget

five stacks of silver coins increasing in height from left to rightSmall businesses need budgets, but too often, they don’t have one. The staff at David Mills CPA, LLC can assist with your budgeting needs.

Creating a business budget can seem overwhelming. One survey found as many as two-thirds of all small businesses don’t have a budget.

Without a budget, though, your company’s financial health is at risk. Small businesses face challenges every day. A budget helps mitigate those difficulties.

The experts at David Mills CPA will show you how budgeting can grow your profits. Interpreting the numbers is key, but we understand making sense of those figures can feel overwhelming.

We can help you answer the critical questions:

  • Do you really know where your money is going?
  • What does it cost you to open the doors each day?
  • What are your most profitable services or products?
  • When you have vendor price increases how much more do you need to sell to remain at the same profit levels?

A smartly planned budget will include flexibility to help you navigate any troubled waters your business may face.

close up of black calculator keysA budget should be more than just a yearly chore. It’s a tool to help you tackle short-term obstacles while planning for the long-term future.

Experts can help answer budgeting questions

We will teach you the questions to ask when looking at your budget versus actual numbers. In this way, your budget becomes a valuable tool to manage cash flow and build your business.

Budgets help make your business more efficient. They can help keep your company out of debt while developing a roadmap for future growth or expansion.

Planning your business budget will make it more efficient to operate your company.

Let the staff at David Mills CPA assist you with all your business budgeting needs. Contact us today for more information.

Accounting Firms in Peoria, Illinois

One of the Best Accounting Firms in Peoria, Illinois

accounting firms in peoria illinois

If you have been looking for a professional and reputable accounting firm in the central Illinois area, you have come to the right place. David Mills, CPA, LLC is an accounting firm with years of experience in tax preparation, budgeting, payroll services, bookkeeping, business structure, and more! If you need help with finances, we have your back. From personal to small and medium-size businesses, we have the knowledge to provide you with the services you need to get ahead with your finances.

Benefits of Working with an Accounting Firm

When you work with an accounting firm you have the experience and knowledge behind you to make large (and small) financial decisions. This is vital for both personal finances and for business finances! As a person, a large financial decision like a home or a car can majorly impact you and your income. Budget planning can help you decide what options are best for you. As a business, growth and profit are two of the most important outcomes. If you don’t have proper bookkeeping, transactions may be inaccurate and cause financial issues down the line. This could limit profits and growth!

We can also help businesses with setup, training, and troubleshooting of QuickBooks! On top of that, our payroll, controller & CFO services, business structure, and tax preparation services can help you make informed decisions about your business. Leave the technical financial work to us so you can focus on what really matters; your business.

Out of the accounting firms in Peoria, Illinois, choose us to help you get your finances going in the right direction. Give us a call today and tell us how we can help you! We are eager to help you with your personal and business finance needs!

Bookkeeping and its Importance to Businesses

Every business should be keeping track of their finances. And while nearly all large businesses or corporations have someone–or maybe even a team of people–bookkeeping for their business, small to medium size businesses tend to lack in this department. It is often due to the fact that the staff is too busy with the revenue generation activities like marketing or public relations. Bookkeeping keeps a record of purchases, sales, and receipts. Without it, financial transactions could be incorrectly recorded and future business planning could be compromised. This is why you should consider using our bookkeeping services. We offer both monthly and quarterly so you can focus on what’s important: your business.

Benefits of Outsourcing Bookkeeping:

bookkeeping

  1. No Need to Train your Staff: Our staff is always up-to-date and proficient in Bookkeeping and Payroll Laws, so you won’t have to waste time and money training your own staff.
  2. Timely Information: We make sure any important updates are given to you as quickly as possible so you can make sound financial decisions.
  3. No Costly Penalties: We electronically file your payroll forms and taxes so can avoid costly fees.
  4. Open Communication: There’s always a professional accountant here ready for your questions.
  5. Problem Identification: We will be able to identify problems before they become major issues.

Each month or quarter–depending on your chosen service–you will have access to all the files and information you might need for your business’ finances. It’s easily retrievable as well from a Quickbooks file so you can quickly and easily access any information you might need. Outsourcing your bookkeeping is a great way to approach finances for small to medium sized businesses, so make sure to give us a call. Our team of professionals is ready to help you and your business