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Federal Tax Withholding Explained

March 24, 2016 by Zero Gravity Financial, LLC

W4“I got a big tax refund! My tax accountant is great!”

“I got a refund!”

“Why didn’t I get a refund? Why do I owe money?”

 

These are common things heard during the tax season. Why is it that some people get a big refund while others end up owing money? One of the biggest income tax myths is that refunds are a result of your tax preparer. Credit may be taken by some tax preparers who advise in tax planning and understand the tax code. However, tax refunds are mainly due to one core concept that people do not understand and get wrong when filling out W-4 payroll forms: Federal Withholding Elections.

Here is an illustration of 3 single employees who make $75,000 in 2015. Each employee selects different federal withholding- 0, 1, and 2. When they file their income taxes in 2016, all of them owe the same federal tax: $11,975. What is different?

Employee #1 elected 0 Federal exemptions and received less money in his semi-monthly paycheck of $2,300 because more money was being withheld for Federal taxes. When Employee #1 files their income taxes in 2016, they will get a larger refund of $1,985.

Employee #2 elected 1 Federal exemption and received more money in their semi-monthly paychecks of #2,347 and will get a smaller refund of $975.

Let’s take a look at Employee #3 who had 2 Federal exemptions. They were receiving more money in their paychecks, $2,389 because less money was being withheld for Federal Taxes. When they file their taxes next year, they will owe $45 in taxes.

This is important enough to repeat again: They all owe the same in Federal Taxes- $11,975.

What is the best Federal Withholding election? It depends on what your preference is. If you elect 0 exemptions, then you will have a smaller paycheck and will learn to live and save within your means. Then, when you have a larger refund the following year, you will be able to allocate some of that money towards your saving and retirement goals. On the other hand, some people prefer to elect 2 exemptions because they want larger paychecks to save and invest the money now. They also understand and are prepared to pay taxes owed the next year.

Understanding this concept will prevent tax surprises and help you understand that there is a mathematical reason for a large tax refund.

Fed Tax Withholding

Filed Under: Tax Tips

Free Tax Return Preparation for Qualifying Taxpayers

February 29, 2016 by Zero Gravity Financial, LLC

1040 Form: Income Taxes If you know someone who is age 60 and older, made less then $54,000, with disabilities, or limited English communication and needs assistance with their income taxes, the Volunteer Income Tax Assistance (VITA) program offers free income tax return preparation with electronic filing to qualified individuals. VITA volunteers are IRS-certified.

Another free program for those aged 60 and older offering free tax help is the Tax Counseling for the Elderly (TCE). TCE volunteers are IRS-certified and are often retired individuals themselves who are associated with non-profit organizations that receive grants from the IRS. The TCE program specializes in questions about pensions and retirement-related issues unique to seniors.

Click this link to get more information from the IRS’ website.

Filed Under: Tax Tips

Freelancers: How do you calculate your hourly rate?

May 13, 2015 by Zero Gravity Financial, LLC

DeathtoStock_Desk5As a freelancer, how do you calculate your hourly rates? Are you charging your clients enough money? Over at Beewits, there is a great online tool that will help you calculate how much you need to charge per hour based on your projected income and expenses. Don’t forget to add to the overhead expense list employee benefits for yourself, such as health insurance and a retirement plan.

Hourly Rate Calculator

Filed Under: Tax Tips

Nerd Wallet Post: Five Things Small-Business Owners Should Keep in Mind as Tax Day Approaches

April 16, 2015 by Zero Gravity Financial, LLC

officeI was honored last week to be part of an article on Nerd Wallet regarding things that small business owners should consider as April 15 approaches:

Tax day can be a dizzying experience for taxpayers, full of paperwork to gather and complicated tax rules to master.

That goes double for small-business owners, who have a completely separate set of challenges. NerdWallet surveyed financial advisors who work with small businesses to find out the top things small-business owners should be thinking about at this time of year.

Take advantage of depreciation
Under new IRS rules, if small businesses buy something for under $500, they can expense it. That’s a “big deal” for small businesses because it allows them to immediately write off small expenses related to improvements rather than having to depreciate those expenses over a period of years, says Craig Smalley, an Orlando, Florida-based tax expert.

“They have to claim ‘safe harbor’ on their tax return and have to have an accounting policy for depreciation in order to take advantage of this,” he says. “They have to have someone write the accounting policy. If they don’t claim safe harbor, they lose it.”

Offer a company retirement plan

“We see many small businesses that could take advantage of offering a company retirement plan, or who aren’t taking advantage of plans they currently offer,” says Ryan Neff, a retirement planner in Columbus, Ohio. “These plans can help owners lower their taxable income and also help them save for retirement.”

Owners who offer a 401(k) can contribute $18,000 as an individual, then can make employer contributions up to 25% of their company’s total compensation, Neff says. “When properly designed, the majority of the employer contribution will go to the owner’s 401(k) account(s). This means an owner could save $53,000, and if over age 50, an additional $6,000 as a catch-up contribution.”

Kansas City, Missouri-based financial planner Mathew Dahlberg counsels business owners to consider setting up a small-business retirement plan such as a SEP IRA (Simplified Employee Pension-IRA). The setup and funding deadline is the due date of the tax return for the SEP including extensions, he says (other plans have different deadlines).

“Also, very importantly, the setup costs are minuscule and the contributions, while they must be the same percentage to each eligible employee, are completely discretionary from year to year,” he says.

The last and arguably best reason to set up such a plan, Dahlberg says, is that the business may be able to take a small-business pension setup tax credit, which can cover 50% of the costs (up to $1,000 in costs) for up to three years, should the business qualify.

Talk to your accountant

The small-business owner’s biggest mistake as the tax deadline nears is “not engaging their tax professional in the conversation,” says Wan McCormick, a financial advisor in Fairfax, Virginia.

“The 2014 tax year is a year of changes, with the small business health care tax credit last updated in February. Small-business owners should inform their tax professional how their business has evolved and what they envision for their personal finance and business in the coming year so that the tax professional can advise the owner on any changes needed and educate the owner on future opportunities, such as deductions eligible.”

Brooklyn-based financial advisor Lori Dietzler says getting a good tax preparer is paramount. “Make sure they are honest, answer your questions, and understand your unique tax situation, such as freelancer income, Airbnb rental income, etc.,” she says. “I see too many clients who are being audited, their former accountant is in jail, and they owe back taxes with interest and penalties. Look at your taxes and make sure the information is accurate.”

Get organized

Dietzler says basic organization and keeping track of income and expenses is crucial to avoid tax confusion.

“Some people use the envelope method, where they put receipts in envelopes for each expense category. Then, at the end of the year, they total up each envelope for income and expense category totals,” Dietzler says. “Others use spreadsheets or a Web/mobile app and update it throughout the year. Whatever the method, make sure you choose a system that doesn’t frustrate you at the end of the year when you need to total up your income and expense categories.”

Choice of entity

“Revisit the type of business entity your tax or legal advisors may have recommended you do business as and be sure it is still the best choice to help you meet both your business and personal goals,” says Jeff Vistica, a Carlsbad, California-based financial advisor. “Each entity comes with its own pros and cons. Consider how simple the entity will be to manage, what liability and protection it may provide, and how practical it may be to help you with tax planning. For example, an S corporation allows you some flexibility in determining how and when to receive income, while an LLC comes with ease of setup and maintenance, but it may also leave you subject to higher self-employment taxes.”

Filed Under: Entrepreneur, Tax Tips

AMA: Etsy Tax ID

November 30, 2014 by Zero Gravity Financial, LLC

sockysocks on Etsy
sockysocks on Etsy

Etsy Tax ID

Question: When do I have to file for a tax ID number? I’m selling hand-woven socks on Etsy and possibly expanding into other crafts?

Answer: Generally speaking, you will use your Social Security number as your Tax ID number if your business is not a corporation, partnership, and you don’t have employees. This IRS link will help you determine if you need an EIN:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Do-You-Need-an-EIN?

Filed Under: Entrepreneur, Tax Tips

Product Review: Wave Apps

May 22, 2014 by Zero Gravity Financial, LLC

If you are an entrepreneur, consultant, startup or small business, Wave Apps is a great accounting solution. The setup to add business accounts is easy, and you can quickly run reports. The invoice system is simple and beautiful: add your logo, personalize content, and send via email from Wave App to your clients! Best of all, when clients receive the invoice in their inbox, the email is HTML formatted and they can pay by credit card provided by clicking the invoice link.

I can’t say enough wonderful things about Wave. If you have less than 10 employees and are a US based company, you should try Wave now and switch!

Wave App Info

  • Cloud Based Software
  • iOS and Android apps
  • Small Business Accounting
  • Cost: Free!

Why Wave Apps?

  • Easy Accounting for non-accountants
  • Send invoices by HTML formatted email, customized with your logo, colors and content
  • One-click Invoice payment by credit card linked to Invoice
  • Simple setup and integration with banks to import transactions automatically
  • Automate reminders on late payments
  • Secure 256-bit SSL encryption

Filed Under: Entrepreneur, Tax Tips

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