Business Management

It’s not just self-employed individuals who must pay estimated taxes. Here’s what you need to know.

W-2 income tax withholding isn’t perfect. You’ve probably had years when you owed more than you expected to on April 15. Or you were pleasantly surprised to receive a sizable refund. The idea, of course, is to try to come out as even as possible. You can usually do this by adjusting your withholding when you experience a life change like taking on a mortgage or having a baby.

Income taxes are also pay-as-you-go for self-employed individuals – or at least they should be. If you’re striking out on your own by starting your own small business in 2022 or you’re simply taking on a side gig to improve your finances, your tax obligation will change dramatically. Your income will not be subject to employer withholding every week or two. In most cases, you’ll get it all. But the IRS expects you to pay estimated taxes on that income four times a year.

Who Else Must Pay?

There are other situations where you’ll be expected to make quarterly payments. In fact, the only individuals who aren’t required to pay estimated taxes (besides W-2 employees whose withholding is on target) are those who meet all three of these conditions:

• You owed no taxes the previous tax year (line 24 on your 2021 1040—total tax—is zero, or you weren’t required to file a return).
• You were a resident alien or U.S. citizen for all of 2021.
• Your 2021 tax year covered a 12-month period.

There are numerous situations where individuals who have payroll taxes regularly withheld on their income may still be required to submit quarterly estimated taxes. For example, did you receive income from rents or royalties? Dividends or interest? Income from selling an asset? Gambling?

If you have an employer who withholds taxes, but you don’t think you’ll be paying enough given the deductions and credits you might receive, you need to plan for estimated taxes. Self-employed individuals are almost always required to submit them.

Special Rules for Some

As with all things IRS, there are many exceptions to the rules regarding estimated taxes. For example, there are special rules for:

• Fishermen and farmers.
• Some household employers.
• Certain high-income taxpayers.
• Nonresident aliens.

How Do You Estimate Your Quarterly Taxes?

That’s the hard part, especially if you’re new to the world of estimated taxes. There is no magic formula, no way to calculate to the penny what you’ll owe. You’re basically making an educated guess. Since you won’t know for sure what changes to the tax code will be put in place until the end of the year, you can’t be absolutely certain that you might get a particular credit or deduction.

But you know roughly what your income will be for a given quarter once you’re nearing the end of it. Do you have a lot of business-related expenses? Keeping track of those is critical, as they’ll offset your income. If you don’t, you’ll have to budget for a heftier quarterly payment. And you must keep in mind that you’ll be paying self-employment tax – that portion of your income taxes that your employer used to pay.

Once you’ve been self-employed for a full tax year and have seen what your tax obligation was, it will be easier to estimate in subsequent years. But you may have a difficult time your first year.

How Do You Pay Estimated Taxes?

 

If you’re self-employed and you anticipate owing $1,000 or more in taxes on your 2022 income, you’ll need to file quarterlies using IRS Form 1040-ES vouchers (available on the IRS website) along with a check or money order. There are also ways to pay online using a credit or debit card or direct bank withdrawal. Corporations would file the Form 1120-W if they expect to owe $500 or more.

Estimated taxes for the 2022 tax year are due:

April 18, 2022 (January 1-March 31, 2022)

June 15, 2022 (April 1-May 31, 2022)

September 15, 2022 (June 1- August 31, 2022)

January 16, 2023 (September 1-December 31, 2022)

A Challenging Task

Estimated taxes are not precise. And it may be difficult to set aside money for them if your income is not where you’d like it to be. But as you might expect, the IRS will levy penalties on you if you don’t.

Year-round tax planning can help you in this critical area. We’ll be happy to set aside time to consult with you about estimated taxes. We’re also available to do tax preparation and to look at how your taxes fit into your overall financial situation. Contact us soon to get a jump on the 2022 tax season — or to finish up 2021.

Do you invest in mutual funds? Unless you hold your investment in a tax-deferred account, you’ll want to consider taxes when you look at a fund’s returns. After all, it’s not what your fund earns but what you keep that counts.

Distributions of Fund Income

Mutual funds are required to distribute almost all of their income — including realized capital gains, dividends, and interest — to their shareholders each year. The tax bite from these distributions reduces the fund’s total return to the investor.

Capital gains. The tax rate on long-term capital gains is capped at 15% for most taxpayers, and 20% for those with higher incomes. However, if a fund sells a security at a gain before meeting the more-than-one-year holding period for long-term capital gain treatment, the gain is considered short term and is taxable to you when distributed at your regular tax rate. Regular individual tax rates currently range as high as 37%.

Dividends. The tax rates on qualifying dividends mirror the long-term capital gains rates. These rates apply to qualifying dividends a mutual fund receives on stocks in its portfolio and distributes to shareholders. Dividends that don’t qualify for a favorable rate are taxable to you at your regular tax rate.

Interest. Distributions of interest a fund earns on bonds, certificates of deposit, and other interest-bearing investments are generally taxable to you at your regular tax rate. However, interest you receive from a municipal bond fund is generally exempt from federal income taxes (and possibly state taxes as well).

Note that a 3.8% surtax on net investment income may also apply to your capital gains, dividends, and interest from mutual fund investments if your income exceeds a tax law threshold. And you must pay taxes on taxable fund distributions whether or not you reinvest the distributions in additional shares of the fund.

Sales of Fund Shares

When you sell shares in a mutual fund, you’ll typically have a gain or loss to report on your tax return. If the securities in the fund’s portfolio have gone up in value during the period the fund has owned them, this appreciation is reflected in the share price. Similarly, if the value of the fund’s holdings has dropped, the share price will reflect the loss in value.

Your gain or loss on a sale of fund shares is figured by comparing the amount you realize on the sale to your cost basis in the shares you sold. If you sell all the shares you own, figuring your taxes is easy. You just add up all the investments you’ve made, including reinvested dividends and other distributions, and compare that amount to the net sale proceeds to determine whether you have a gain or loss. However, if you don’t sell all your shares at once, you must use an IRS-approved method for figuring your cost basis.

Taxes can have a significant effect on your mutual fund returns. Be sure to consider them in evaluating your investments.

Finding the best candidate to hire is often costly and time consuming. But, if your new hire turns into a loyal, hardworking, long-term employee, your investment may be worth every cent and minute.

Locate Candidates

How do you find good people? In the past, people who were job hunting would look in the “help wanted” section of the newspaper or go from store to store filling out applications. Today, most people use a computer and a mouse and search the Internet for jobs. So if you’re not posting your openings on online job boards and industry blogs and websites, you may be missing talented candidates. Note: Running classified ads may still be a good way to reach out (especially to fill jobs requiring local candidates) since many local newspapers also have an online job board for posting classifieds.

Another way to attract candidates is to add a recruiting page to your website. In addition to posting job openings, you can use the page to attract qualified candidates by highlighting the benefits of working for your company.

And last, but certainly not least, you can use social media to announce openings and solicit job applicants. There’s no better way to reach a large number of people almost instantaneously.

Make an Attractive Offer

If you’re hoping to hire top talent, you’ll want to make sure the benefits you offer are competitive — or better. Many  full-time workers have access to employer-provided medical care and/or access to a retirement plan.

Keep Employees on Board

Once you’ve assembled a group of valuable employees, an attractive and competitive benefit package will help ensure they stay. Your financial professional can provide insights and help you review your firm’s benefit package for cost efficiency and competitiveness.

For more tips on how to keep business best practices front and center for your company, give us a call today. ValueMetrik CFO is a valuable resource for new business owners in all industries and specialties. Contact us today at 479-242-1236 or request a complimentary consultation through our website to get started now.

Much like a map or a GPS provides clear directions to your destination, a business plan can help define your goals and spell out the steps your business must take to achieve them. It can also establish a set of benchmarks to measure your progress. A business plan is critically important when it comes to obtaining financing. Here are the key sections that a business plan should include.

Executive Summary

Your executive summary outlines the primary points in the subsequent sections and touches on your company profile and goals.

Company Goals/Mission Statement

This section summarizes your company’s purposes and goals. It defines who you are and what you want to achieve.

Market Analysis

Here you can demonstrate your industry knowledge and present conclusions based on your assessment of the industry, your potential market and its demographics, and your main competitors.

Company Description

Provide information on what you do, how you do it, the markets your business serves, and what differentiates your business from the competition. You can include examples of recent projects that were completed and, if advisable, the names of some of your major clients.

Organization and Management

Here you can outline your business’s organizational structure and identify the company owners, management team, and board of directors.

Service or Product Line

This section provides the opportunity to explain what you sell and how your products or services benefit customers.

Strategy and Implementation

It’s important to summarize how you plan to market your business and what your sales strategy is. This section should include information on how you will reach target customers and penetrate the market and should provide details about pricing, promotions, and distribution.

Financial Plan

This is where you present an overview of your finances. It is where you lay out your assumptions about revenue growth, operating costs, and cash flows. Include balance sheets, income statements, and cash flow schedules as well as details about capital requirements.

Discover how our insights and experience can translate into a better bottom line for your business. Call ValueMetrik CFO today at 479-242-1236 to learn more or request a consultation through our website and we’ll reach out to you to set up an appointment.

What if disaster strikes your business? An estimated 25% of businesses don’t reopen after a major disaster strikes.¹ Having a business continuity plan can help improve your odds of recovering.

The Basic Plan

The strategy behind a business continuity (or disaster recovery) plan is straightforward: Identify the various risks that could disrupt your business, look at how each operation could be affected, and identify appropriate recovery actions.

Make sure you have a list of employees ready with phone numbers, email addresses, and emergency family contacts for communication purposes. If any of your employees can work from home, include that information in your personnel list. You’ll need a similar list of customers, suppliers, and other vendors. Social networking tools may be especially helpful for keeping in touch during and after a disaster.

Risk Protection

Having the proper insurance is key to protecting your business — at all times. In addition to property and casualty insurance, most small businesses carry disability, key-person life insurance, and business interruption insurance. And make sure your buy-sell agreement is up to date, including the life insurance policies that fund it. Meet with your financial professional for a complete review.

Maintaining Operations

If your building has to be evacuated, you’ll need an alternative site. Talk with other business owners in your vicinity about locating and equipping a facility that can be shared in case of an emergency. You may be able to limit physical damage by taking some preemptive steps (e.g., having a generator and a pump on hand).

Protecting Data

A disaster could damage or destroy your computer equipment and wipe out your data, so take precautions. Invest in surge protectors and arrange for secure storage by transmitting data to a remote server or backing up daily to storage media that can be kept off site.

Protecting Your Business

If you think your business is too small to need a plan or that it will take too long to create one, just think about how much you stand to lose by not having one. Meet with your financial professional for a full review.

Discover how our insights and experience can translate into a better bottom line for your business. Call ValueMetrik CFO today at 479-242-1236 to learn more or request a consultation through our website and we’ll reach out to you to set up an appointment.

Source/Disclaimer:

¹Source: U.S. Small Business Administration, www.sba.gov/content/disaster-planning.