TAX PREPARATION
HOW TO CHOOSE THE RIGHT TAX PROFESSIONAL TO PREPARE YOUR TAX RETURN
Choosing a tax preparer is a major decision and you should do so wisely. Paying taxes is a serious matter, so it’s important who you choose to handle your prpare tax return. While you only need to file your taxes once a year, it saves last minute stress by spending time now to find the right tax professional to prepare it for you.
CHOOSING THE RIGHT TAX PREPARER FOR YOU
There are a number of things to keep in mind as you select a quality tax preparer for your needs. The IRS has provided taxpayers with a list of criteria to keep in mind. Cazes Tax Law assures each of our clients receives the highest quality and level of legality possible.
The IRS suggests when looking for the right tax preparer to handle your tax return for the tax season:
– Choose an ethical tax preparer to trust with your personal data.
– Know their charges up front. Tax preparers who base fees on refund percentages or claim to earn larger refunds than other are bad news.
– Make sure they have a current Preparer Tax Identification Number (PTIN), which is required to prepare tax returns.
– Research the preparer’s history with the Better Business Bureau and IRS Office of Enrollment. For CPA's, verify with the state board of accountancy, and, for attorneys, check with the state bar association.
– Request an IRS e-file so that your tax return is filed electronically. This is already required of tax preparers who file more than 10 tax returns for clients.
– Provide records and receipts to your preparer. Avoid preparers who are willing to go against IRS e-file rules and claim they can and will e-file your tax return using a pay stub instead of Form W-2.
– Review and ask questions about your return before signing it. You are responsible for what information your tax return claims, even if a professional prepares it.
– Don’t sign a blank return. Make sure the tax return is filled out with the right information and that you’ve reviewed it prior to signing.
– Make sure the preparer signs the tax return and includes their PTIN. The tax preparer is required to give you a copy of the return.
Do you need to register your business? The answer is, generally, no. You may start a business at any time without registering it. There are a few exceptions. Certain businesses may require a license and/or a permit to operate. For example, a bar is required to obtain a liquor license. However, you don’t need to register a construction or lawn service business to start operating.
If you don’t need to register most businesses then why does everyone talk about LLCs and corporations? The main reason is liability protection.
LLCS AND CORPORATIONS PROVIDE LIABILITY PROTECTION
When a LLC or corporation is set up, the business is considered a separate entity from the owners of the company. Think of the business as a person separate from the owner. This split creates liability protection for the owners of the business. If the business is sued, then the owner’s assets are protected from the lawsuit. This also holds true for debts. Debts owed by the business are not owed by the owner. Vice versa, debts owed by the individual are not owed by the business. Of course this is a simple view. Business debts get a little more complicated if the owner pledges personal assets as collateral to secure the business debt.
OPERATE YOUR BUSINESS PROPERLY TO ENSURE LIABILITY PROTECTION
Creating a separate business entity doesn’t automatically create unlimited liability protection for the owners. Liability protection can be compromised by the owners. You need to treat your business like a business. This means creating an operating agreement; establishing a separate business bank account; don’t comingle personal and business funds; printing business cards, letterhead and flyers; establishing a separate mailing address or P.O. Box; keeping track of your business records using accounting software such as QuickBooks; and maintaining operation formalities. There is a legal term called piercing the corporate veil. This means if your business is sued, the opposing side will try to treat your business and you as one. If successful, your liability protection will no longer be valid. The opposing side will be able to include your personal assets in the lawsuit. It is important to properly maintain and operate your business as a separate entity to maximize liability protection.
Learn more about the different business entity structures: DBA, LLC, Partnership, S-Corporation, and C-Corporations.
Choosing the best business entity is an important decision for tax purposes. For most, this can be a daunting task. The following is an overview that can make your decision easier. The formation of your business starts at the state level, followed by the Federal. In most States, you can be a sole proprietor, a partnership, a Limited Liability Corporation (LLC), or a Corporation.
SOLE PROPRIETOR
The simplest business entity type is Sole Proprietor. You can start operating a business today. Your income and expenses are reported on Schedule C.
You may need to file with your county as a DBA (Doing Business As). You do not need to apply for an Employer Identification Number (EIN) with the IRS unless you plan on hiring employees. If you have employees, you will need to pay employment taxes, unemployment insurance, worker's compensation, etc.
The main disadvantage of operating as a Sole Proprietor is the separation of liability. There is no separation of liability. You are your company. If your business is sued, you are personally liable. There is no separation to protect your income or assets.
Learn More About Doing Business As (DBA)
PARTNERSHIP
A partnership is established if you and another person start a business together. You and your partner/partners share in the profits/losses. A partnership is considered a flow-through entity. This means the partnership does not get taxed. The income and losses of the partnership are reported on your personal tax return. The partnership does file a tax return to report the profits and losses to be split among the partners.
When it comes to separation of liability, this is dictated by the type of partner you are. There are two types of partners: General Partner and Limited Partner. A partner active in the business is considered a General Partner. A partner that is not actively involved but invests in the business is considered a Limited Partner. The Limited Partner is like a silent investor. If your business is sued, each General Partner is personally liable. The income and personal assets of the General Partners are not protected. The Limited Partner’s liability is capped at their amount of investment in the business.
You do have the option to set up the business as a Limited Partnership. There has to be at least one General Partner and one Limited Partner to set up a Limited Partnership.
LIMITED LIABILITY COMPANY
A Limited Liability Company (LLC) is formed by filing Articles of Organization with the state. Owners of the LLC are called members. An LLC is separate from its members. If the LLC is properly set up and managed, you will not be personally liable for debts incurred by the LLC. Management of the company can be member-managed or manager-managed. This will be dictated by the Articles of Organization
Unlike a corporation, an LLC doesn’t have required operating formalities. This makes an LLC easier to maintain compared to a corporation. For example, a corporation must establish a Board of Directors, corporate officers, corporate shareholders, corporate resolutions, and corporate bylaws.
Most States don’t require an operating agreement to be filed for an LLC. However, it’s highly recommended an operating agreement is executed. The operating agreement establishes how the LLC will be managed, the duties of members, distribution of profits and losses, how members are added or terminated, and members’ limitations of liability. The operating agreement is important to preserve liability protection. Learn more about the reasons to set up an LLC or corporation
YOU CAN DECIDE
- Single Member LLC – You are the only member of the LLC. By default, a Single Member LLC is treated as a disregarded entity (sole proprietor). The income and expenses of a disregarded entity are reported on Schedule C.You can elect to treat a Single Member LLC as a corporation. You can elect to be treated as a Corporation by filing IRS Form 8832. You may elect to be treated as an S-Corporation by filing IRS Form 2553. There may be tax advantages for filing this election. There are strategies for minimizing 15.3% self-employment taxes by paying reasonable wages to the owners and distributing profits. Distributed profits are not subject to 15.3% self-employment tax.
- Multi-Member LLC – There are at least two members of the LLC. By default, a Multi-Member LLC is treated as a Partnership. The LLC will be required to file Form 1065, Partnership return. A partnership is considered a flow-through entity. Profits and losses of the partnership are reported on the owner’s 1040 tax return. Generally, all profits of a partnership are subject to self-employment taxes. Although, owners considered limited members may not pay self-employment tax on profits. You can elect to treat a Multi-Member LLC as a corporation. You can elect to be treated as a Corporation by filing IRS Form 8832. You may elect to be treated as an S-Corporation by filing IRS Form 2553. Again, there may be tax advantages for filing this election.
It’s important to choose the right business structure. We recommend you review your options with a tax professional before making the decision.
CORPORATION
A corporation can be started by one or more persons by filing Articles of Incorporation with the state. A corporation starts when the owner/owners have a shareholder meeting electing the Board of Directors. The corporation then needs to be properly set up by establishing a Board of Directors, corporate officers, corporate shareholders, corporate resolutions, and corporate bylaws. Typically, you need the help of an attorney to establish a corporation.
A corporation provides separation between you and the business. If the business gets sued, your personal liability is limited to your financial contribution.
There are operating formalities for corporations. The corporation must maintain an accurate record of all board meetings. Corporate funds must not be commingled with personal funds. The Board of Directors must meet annually. The Board of Directors must agree to corporate-level contractual agreements.
C CORPORATION
By default, a corporation is treated as a C Corp for IRS taxes. There is double taxation with C Corp. The C Corp pays taxes on profits earned, tax #1. The C Corp profits are paid to shareholders in the form of dividends. The shareholders then pay taxes on dividends received on their personal tax return, tax #2. Due to increased tax rates over the last few years, there may be tax advantages for establishing a C Corp even with double taxation.
S CORPORATION
A corporation may qualify to be treated as an S Corp for IRS taxes. There are a few eligibility requirements. An election to be treated as an S Corp must be filed with the IRS. The advantage of an S Corp is the elimination of double taxation. An S Corp is considered a flow-through entity. This means the S Corp is not taxed on the profits. The profits flow-through to the shareholders. The shareholders report the profits on their personal tax return. This results in the profits being taxed once on the shareholder's personal tax return. There may be tax advantages for choosing an S Corp compared to other business structures.
The decision for establishing a C or S Corporation is specific to your circumstances. We highly recommend consulting with a tax professional for guidance.
CORPORATION OPERATING FORMALITIES
The owners of the corporation are considered shareholders. The Board of Directors is elected by the shareholders. The Board of Directors acts as a governing body and directs the overall direction of the company on behalf of the shareholders. Corporate officers are chosen by the Board of Directors. At a minimum, there should be a President, Treasurer, and Secretary. In most states, one person is allowed to hold all of the offices. The president is responsible for the day-to-day operations of the business.
The business must establish corporate bylaws. The bylaws are the internal rules for the corporation. For example, formalizes the date and time for the annual board meeting, the shareholder voting requirements, and the description of officer duties.
Failure to maintain operating formalities may result in weakening liability protection.
There are two main types: C Corporation and S Corporation. By default, an incorporated business is set up as a C Corporation. You may elect to be treated as an S Corporation by filing Form 2553. The main disadvantage of a C Corporation is double taxation. The C Corporation pays tax and you personally pay taxes on dividends received by the C Corporation. An S Corporation is considered a flow-through entity. The S Corporation does not pay tax. The profits and losses of the S Corporation are reported on your personal income tax return.
Generally, you can start a business at any time without registering the business with the IRS or your State. A good example would be establishing a consulting service. You held top level management positions for the last 20 years. You can utilize your wealth of experience by helping small businesses succeed and grow. You decide it’s time to start your own consulting business. There are no requirements to register your business. You can start your business at anytime as Doing Business As (DBA).
A ‘DOING BUSINESS AS’ BUSINESS IS NOT A SEPARATE ENTITY
A DBA is not considered a separate entity from you. This is the main disadvantage for operating your business as a DBA. You will not have liability protection from the business. If your business is sued, your personal assets are not protected. Both your business and personal assets are at stake to cover potential damages in a lawsuit. Learn more about liability protection.
A DBA IS REPORTED ON SCHEDULE C
The DBA is reported on your personal 1040 tax return. The business income and expenses will be entered in Schedule C. All profits from the DBA are subject to self-employment tax.
SELF-EMPLOYMENT TAX
If you are leaving a wage-paying job to start a business, we recommend you review self-employment tax and quarterly tax deposit requirements. As an employee of a company, you get a paycheck. Your employer automatically takes out taxes from your gross pay. The taxes are federal withholding, state and local withholdings, Social Security, and Medicare. The other name for Social Security and Medicare is FICA. Your employer will withhold 7.65% from your paycheck for FICA. Then your employer will pay 7.65% for FICA taxes on your behalf. When you are self-employed, you don’t have an employer. Therefore, a self-employed person will pay 15.3% for FICA taxes on profits. (7.65% + 7.65% = 15.3%) The other name for 15.3% FICA taxes paid by self-employed individuals is self-employment tax.
PAYING QUARTERLY ESTIMATES
Paying an estimated quarterly deposit is important for DBA businesses. The profits of your DBA will pay two taxes: income tax and 15.3% self-employment tax. Unlike normal wages, taxes are not automatically withheld from your pay. This means taxes are paid quarterly to the government on April 15th, June 15th, September 15th, and January 15th. Form 1040-ES is used to pay estimated quarterly deposits. It is important to pay quarterly deposits throughout the year to avoid getting a significant tax bill when filing your taxes.
It’s important to choose the right business structure. We recommend you review your options with a tax professional before making the decision. Learn more about different business entity types.
