The upcoming tax season causes even seasoned people to break out in a cold sweat. It can be scary if you are a sole proprietor and ready to file your first income tax return.
Moreover, filing taxes entails more than simply handing over a portion of your earnings to the government. It also qualifies you for various tax benefits and deductions. We provide you with a list of credits and deductions that you can claim if you are an Indian filing taxes for the first time in the United States. In addition, you will get some money back from your ITR (Income tax return).
The Best Way to Filing As a Sole Proprietor
As a first-time tax filer, you should begin the procedure as soon as possible to get the most out of it. The sooner you begin, the less complicated it will be for you. As a result, it is suggested to get started in January, as the federal tax deadline is April 15.
Here’re some critical prerequisites that will help you stay ahead of the tax returns curve:
1)Determine your eligibility: It is critical to determine whether you satisfy the IRS’s income criterion for filing taxes. If your income falls within or above the threshold, you must pay taxes.
So add up your gross income from your job and other sources such as interest, dividends, property rent, etc. After certain deductions, this is the amount on which you must pay tax.
2)Have your documents ready: You will receive a W-2 form from your employer if you’re employed. Clients will issue 1099-NEC forms to freelancers and contractors. For paid tuition, grants, fellowships, and other awards, students will get form 1098-T. As a student, you can also claim the tax credit. Keep the paperworks mentioned above on hand from January to February for filing taxes quickly.
3) File all receipts and papers: Get organized and file all medical bills, receipts, investment papers, and other important documents as soon as they arrive. It will assist you in completing your ITR and claiming deductions where applicable. The IRS requires that you keep these data for three years.
12 Tax Credits and Deductions You Can Claim When Filing Taxes
Why not pay your taxes with a smile if you are eligible as a taxpayer?
Here is a list of tax credits and deductions to help you save money on your taxes. In addition, it can assist you in claiming an IRS refund (Internal Revenue Services):
1) Retirement savings: This credit is available to part-time students who contribute to a retirement plan. If you aren’t a claimed dependent, you can apply for this deduction.
2)Charitable donations: Being a philanthropist can help you save money on taxes. A donation to your preferred charity can be deducted for $300. Single filers pay $300, while joint filers pay $600.
3) Student loan interest: Paying for your own or your family’s education qualifies you for this tax break. The interest you paid on a student loan for yourself, your spouse, or a dependant can be reduced to $2500. If you are married and filing jointly, you can claim it.
4)Deduction for tuition and fees: You can deduct up to $4000 in tuition expenses for yourself, your spouse, or a dependent. This deduction is only available to single filers with a gross income of $80,000 or less. For joint filers, it’s $ 160,000 or less. You will need to fill out Schedule 1 and Form 8917 while filing taxes to claim it.
5)Child tax credit: If your children are under 17 and you pay a significant amount of their expenses, you can claim the deduction. It is $3600 per child under the age of five and $3000 for a child between 6 and 17 years.
6) American Opportunity Tax Benefit (AOTC): This credit covers your higher education expenses. This category allows you to deduct the amount you spent on tuition, classroom materials, and books.
It costs $2500 per student and pays for the first four years of college. When your gross income reaches $90,000 for single taxpayers and $180,000 for joint filers, it decreases.
8) Home office deduction: You can claim this deduction if you run a small business or freelance from home. You can claim a maximum of $1500 for a home office of 300 square feet. Visit the IRS website for more information (irs.gov).
9)Unemployment benefits repayment: Your honesty may help you receive a tax credit from the IRS. You can claim the overpaid amount in your deduction if you got an overpayment of unemployment benefits and pay it back to the IRS.
Please claim it within the year in which you were overpaid. Otherwise, claiming it later, while legal, may become inconvenient.
10) Renewable energy credit: Going green to help save the environment can now help you receive resident energy-efficient property credit. You can claim this credit on your ITR if you use solar energy to heat water, have geothermal heat pumps, or harness wind energy.
11)Family leave for the self-employed: You can claim this credit if you are self-employed and tended to family members during Covid in 2021. This deduction is available even if you were ill due to COVID-19.
12)Recovery rebate: If you didn’t receive your third coronavirus stimulus check or a portion of it last year, you could claim it as a recovery rebate credit. The amount for singles is $1200, married couples get $2400, and each dependent receives $1200.
As a first-time taxpayer, you can take advantage of these tax credits and refunds on your final tax bill. In addition, you might get a rapid refund from the IRS if you are filing taxes online.
Contact AOTAX for assistance if you are an Indian filing taxes for the first time in the United States. We’ve assisted over 2 million Indians in the last 15 years in becoming tax-compliant and saving money.
With less than a month to go before the tax filing deadline, taxpayers are steeling themselves for last-minute changes, checks, and balances.
One group of individuals in particular always tend to be groping in the dark when it comes to tax return season. Given the fluidity of their situation, sole proprietors often face many challenges while preparing their tax documents.
Sure, the perks of being your boss are fantastic, but the downsides can be pretty nasty if you’re not well-versed in the taxation side of things. Below, we explore some common problems sole proprietors can face while filing their tax returns and how to overcome them. Read on to know more about the mistakes you should avoid and work around them.
Who are Sole Proprietors?
Before we dive into what they could potentially do wrong, let’s first look into who precisely sole proprietors are and what filing as a sole proprietor entails.
To begin with, sole proprietorships are one of the most common business structures in the US, owing to their flexible structure and potential for easy establishment.
Essentially, there is no difference between the individual and the business for taxation purposes: The IRS considers the business owner a legal business entity and an individual.
Individuals can receive the entirety of their business profits but are also equally liable for all debt and expenses incurred by the business. Business income passes through the business to the business owner, who then reports on their tax returns. This drastically reduces paperwork but can often complicate matters if figures are not declared correctly.
Additionally, sole proprietors are likely to be individuals whose professions allow them to either work remotely or require traveling to customers.
This entity is typically devoid of the traditional ‘brick-and-mortar’ structure. Typical professions that may fall under sole proprietorship include:
Home healthcare service providers
Freelancers (content creators, photographers, web developers, etc.)
Business consultants or public speakers
What Problems Do Sole Proprietors Face?
Sole proprietors have to be extra careful about handling tax obligations, especially since the consequences could be an IRS audit or simply leaving money on the table.
Common issues include:
1. High tax bills and low refunds
Most self-employed taxpayers tend to lose out on sizable refunds and the opportunity to lower their tax bills. This is simply because sole proprietors are unaware of the deductible expenses they can claim against their income.
Running one’s own business can be challenging enough, so having to pay hefty tax bills shouldn’t be another burden that sole proprietors take on.
It is advisable to keep accurate and detailed records of all expenditures and maintain separate checkbooks for business and individual purchases. Doing so can simplify providing proof of deductible expenses and significantly lower one’s taxable income.
Common deductible expenses include:
Start-up costs: includes operational costs and expenses incurred to get the business up and running, such as repairs, advertising, and purchasing supplies.
Transport and automobile costs: money spent on keeping a vehicle roadworthy, especially helpful if one’s business is dependent on traveling by cars, such as bakery and parcel-delivery businesses.
Insurance premiums: expenses incurred while covering oneself and one’s workspace from possible losses.
Legal and professional fees: money spent on hiring financial and legal consultants for their expertise in the field.
Educational fees:particularly useful for business owners that have attended classes that foster professional development in their field.
2. Increased risk of penalty charges
No taxpayer wants trouble with the law, especially not with the IRS regarding taxation and discrepancies in the amounts filed.
Sole proprietors are exposed to a higher risk of paying penalty fees since other taxes mustbe paid over and above income and personal taxes.
Being aware of these taxes and their payment deadlines is critical to keeping everything kosher in tax documentation.
Sole proprietors should watch out for the following taxes:
Federal and State estimated taxes:sole proprietors are responsible for estimating their annual tax bill for all income earned and making quarterly payments to the IRS.
Federal and State income taxes: sole proprietors must accurately declare all business profits and losses and any other personal income. Business owners should be aware that their tax bracket is decided based on both personal and business income and must be prepared to pay taxes accordingly.
Self-employment taxes: sole proprietors needn’t wait for traditional employers to withhold portions of their income for FICA contributions. Instead, they should be making these Medicare and Social Service contributions while paying their taxes.
3. Delays in refunds & problems with incomplete tax documents
It’s no secret that backlogs inundate the IRS, but processing times are worsened by a lack of ‘open and shut cases. In addition, going back and forth with taxpayers about errors in their forms, missing documents, and invalid proofs makes life difficult for both parties.
To ensure that you present a textbook tax filing case, you must submit all required forms and documents and triple-check every information you’ve provided—right down to crossing your I’s and dotting your T’s. Silly errors and forgetfulness can delay refunds, which can be avoided by being well-prepared.
Sole proprietors must submit the following documents:
Schedule SE: must be submitted if your business earned more than $400 worth of revenue
Form 1040, Schedule C: provides details about business income, expenses, and inventory.
Being the owner of a small business is an exciting experience. You are the captain of your ship, and you have complete control over when and how you set sail.
However, as the April 15 tax deadline approaches, your confidence may fade, given the unfamiliarity with US tax laws. As a result, filing your taxes as an Indian who owns a sole proprietorship in the United States might be stressful.
This article will show you how to avoid such eight blunders while filing as a sole proprietor and do your taxes swiftly.
Who is a Sole Proprietor?
A sole proprietor is an individual who owns and operates their own business. For instance, you are a sole proprietor if you work as a freelance writer. However, you must obtain the necessary licenses and permits by industry standards. Your business income is your income, and you are responsible for paying taxes.
Eight Pitfalls to Avoid While Filing as a Sole Proprietor
If you are a sole proprietor, you’ll need Form 1040 to pay your taxes and declare your earnings on Schedule C. Self-filing taxes might be intimidating. However, it’s much more daunting if you file as a sole proprietor.
We have compiled a list of eight common blunders sole proprietors make while filing taxes:
1) Ignoring quarterly tax payments
In the United States, businesses must pay estimated taxes every quarter. The IRS will penalize you if you wait until April 15 to pay the taxes in full.
As a result, it is more prudent to account for your profit and loss and pay your taxes every quarter. You can withhold a portion of your business income as taxes each month and send the IRS a quarterly tax payment.
2) Failure to meet tax deadlines
If you fail to pay your taxes on time, you will be subject to a penalty of 5% of your monthly taxable income. Furthermore, the IRS has the authority to fine you up to 25% of your total tax bill.
They can also charge you a 0.5% late fee for each month you don’t pay after the deadline. Request a personal tax extension if you are unable to meet the deadline. However, you must pay a portion of the outstanding balance by the initial date.
3) Cheating on your tax bills
According to an IRS survey of 2001, sole entrepreneurs underreported $68.5 billion in business income. As a result, you must provide an accurate tax estimate while filing as a sole proprietor.
If you earned more than $600 in the current fiscal year, the company that paid you is obligated to send you a 1099-MISC form and your paycheck.
They also provide a copy of the same to the Internal Revenue Service. As a result, you must accurately disclose your earnings to the IRS. Even if you don’t receive the 1099-MISC from the client or if it’s incomplete, make sure it’s updated before the tax deadline.
4) Failing to claim home office deductions
You are eligible for home office deductions while filing as a sole proprietor if you work from home. You can work from home in an office or a designated place.
Many business owners are hesitant to take advantage of this tax break. However, if you file as a sole proprietor, you can claim this deduction and save money on your taxes.
The IRS uses two formulas to compute the deduction amount: standard and simplified. Keep track of electricity bills, repairs, and other expenses for the standard deduction.
You can also claim $5 per square foot using the simplified formula. Therefore, the most you can receive for a 300 square foot home office is $1500.
5) Failing to claim deductions for business gifts
The gifts you offer your clients for branding purposes can help you save money on taxes. A $25 per person business gift deduction is allowed under the tax laws.
As a result, if you claimed $1000 in this category, including receipts and proof that the gifts were given to the required number of persons, you’re up for a rebate.
6) Confusing equipment and supply deductions
Business supplies include pens, paper, printer ink, notepads, etc. Equipment includes computers, software, and office furniture. Supplies should be reported on Schedule C, and equipment should be listed on a separate form 4562.
The IRS may not consider a deduction if you record supplies as equipment or vice versa. Furthermore, you can deduct the total cost of the equipment in one go. Alternatively, you might claim a portion of it each year.
7) Failure to track your expenses
If you keep track of every dollar you spend on your business, you can claim some of it as a deduction from the IRS. Hence, keep receipts and documentation to back them up.
For example, you can deduct not only your phone bills and travel insurance premiums but also web hosting, online courses, educational materials, and so on.
Thus, instead of scrambling to find receipts right before April, make it a practice to file them and keep track of your expenses.
8) Registering your firm as a wrong entity
If you end up paying more taxes as a sole proprietor, it’s wiser to change your business entity to an S-corporation. Similarly, if it lowers your tax burden, you can choose an LLC or C-corporation. Always consult your CPA or tax professional before making a decision.
Hence, by filing as a sole proprietor in the United States, you can take advantage of over 28 tax deductions. You can also put your tax savings to good use and go for business expansion.
If the IRS comes knocking on your door, prepare the necessary receipts and documentation to back them up. If you correct the aforementioned errors, you may soon find yourself staring at a sizable return.
With the tax season in full swing, people are scrambling to file their tax returns by April 18th in the US. If you are reading this, then the chances are that you, too, are looking to do your taxes, specifically your W-9. For instance, if you’re an Indian residing in the US as a resident alien for tax purposes, you’re liable to file your income taxes, even if you’re a freelancer. This piece aims to dissect the W-9 form to its core to help you understand how to fill out W-9 for individuals.
Are you busy? Or missed the deadline? Fret not, check out this article on how to file for a tax extension.
What Is a W-9 Form?
The W-9 is an official request form for the taxpayer’s Taxpayer Identification Number (TIN) and certification by the employer. The W-9 also records personally-identifying information such as your name, address, and account numbers.
Essentially, the form functions as a contract that you, as a contractor or freelancer, take responsibility for withholding taxes from your income generated with the business.
While a full-time employee doesn’t need to worry about this form as their employer deducts income and FICA taxes right out of their paycheck, it isn’t the case with freelancers.
Tax forms are vital to you and the government; check out this article to avoid making mistakes on your tax forms.
The W-9 Form is for Whom?
You must fill out the W9 form with your employer if you have made over $600 in that financial year without being hired as a full-time employee.
When you begin working for a business as a freelancer or contractor, you will be issued a W-9 form by the enterprise to report your earnings.
While you still need to record your income directly to the IRS, the W-9 form serves as a secondary reporting source done through the business that employs you.
Unlike the W-4 form, W-9 is intended solely for contract workers, freelancers, and self-employed individuals working in the US.
Your employer exclusively uses the details you fill out on your W-9 form to complete a 1099-MISC form to file with the tax authorities by the end of the financial year. This form outlines all the payments made by the company to you as a contractor/freelancer.
Financial institutions sometimes also require you to report capital gains, dividends, interest earned. Hence, as a part of the onboarding procedure, most companies or financial intuitions will send out a W-9 form when you are employed. If you aren’t sent one, you can download a W-9 form straight from the IRS website.
How to Fill Out W-9 for Individuals?
Okay, here we get to the crucial part: how to fill out W-9 for Individuals? Filling out the form is pretty straightforward; however, you have to be careful as it’s easy to mess up.
The six-paged form is pretty short if you exclude all the instructions. Your employer will partially fill out the form, leaving only half of it for you to fill.
Your employer fills out their registered name and your designated Employee Identification Number (EIN), and the rest is all yours.
Below is a breakdown of all the crucial sections of the W-9 form that you, as an independent contractor/freelance, must fill:
Write down your full name matching your official documents, preferably in block letters.
You can use this field if you have a business name, disregarded entity name, or a DBA; you can also leave this blank if you wish to do so.
Federal tax classification
Here, you can see seven different categories.
For example, you can check the first box if you are an individual or a sole proprietor of a limited liability company (LLC).
A sole owner business works under the proprietor’s social security number and won’t come under any other type of business. Therefore, taxes too apply to single-member LLCs in the same format.
Next would be the C-corporation, S-corporation, Partnership, and Trust/estate businesses.
You can check these boxes if you belong to any corporations, partnerships, or trustees professionally.
Finally, we get to the Limited Liability Company box. This box is meant only for those part of Partnerships or LLC businesses with multiple members.
Unless you are part of a business or an entity tax exemptions, you won’t need to fill this field.
However, if you are a part of a business or entity, you’ll need to provide a designated code that offers the authentication.
Most businesses are exempt from backup withholding and will fill out a code.
However, in a rare case where your employer is not, they will have to deduct a flat 24% off as income tax from your paycheck.
If you are an individual who has an account outside the USA, you may be exempted under the Foreign Account Tax Compliance Act (FACTA); refer to page 3 of the form to check if you qualify; else, leave it blank.
Address, city, state, and ZIP code
You can utilize this field to fill up your current address. Ensure that you fill-up the same address where your employer mails you for communication.
You can choose to share an account number; it is optional.
Taxpayer identification number (TIN)
Here you have two options; you can identify yourself with your state-issued social security number (SSN) or TIN. If you are a resident alien, you can also use your Individual Taxpayer Identification Number (ITIN) issued by the IRS.
Okay, now we get to the final step of the process.
Here, you sign and date the form verifying that the information provided is authentic and consensual. Then, ensure that you go through all the fields once again for the final time and sign the document.
Whether you are a contract worker, freelancer, or even self-employed, a W-9 form is vital for staying tax-compliant with the IRS. The W-9 serves you as an agreement to allow you the freedom to do your taxes.
Unlike a W-4 or 1099, you don’t need to send the W-9 form to the IRS; rather, you send it to your employer. Ensure you double-check all the details before signing and sending it.
And finally, always make sure you send it through secure channels and to certified professionals to prevent any misuse of your data.
While you are here, check out our article on bookkeeping secrets here.
How AOTAX Can Help you Get Through the Tax Season
At AOTAX, we strive to make tax-filing hassle-free. Here’re some ways we can make filing your tax a breeze:
If you are someone who requires support staying organized, you may benefit from AOTAX’s seamless 100% Online Process.
Our financial advisors are available 24*7 to provide you with high-quality services.
Better yet, you can get a free tax draft within 24 hrs before choosing to file with us.
If you are a freelancer or a contract worker and get paid more than $600 a year, ensure that you get 1099 before the 31 of January to avoid issues.
If you have a tough time tracking all your taxes, you can also opt for a tax filing software like TurboTax to keep up.
With that, we conclude this article on W-9s and how to fill out W-9s for individuals. We hope that this article clarifies what W-9 is, how it functions, and helps you fill up your W-9 in the future.
Whether you file your tax return using tax software or work with a professional, a tax prep checklist will help you organize and retrieve the documents and information you’ll need to complete your tax return. Therefore, this article helps you understand the necessary documents and papers you need to file your tax to avoid typical mistakes and errors, allowing you to keep as much of your own money as possible.
Checklist You Need to Follow If You Are Filing Your Taxes Yourself
Not every category of this checklist will apply to you. However, when you are ready to file your tax return, you’ll be surprised how much time you will save by organizing your information in advance.
Remember that if you are married and filing a joint return, you will need to include the following information for your spouse as well.
The following is a list of the tax documents and information you’ll require:
The IRS and state taxation authorities use your personal information to determine who is filing a return, how to contact you, and where to deposit your tax refund. Your personal information will include:
Your full legal name, as it displays on your Social Security card
Year of birth
Social Security number
A copy of state and federal tax returns from the previous year
To receive your refund by direct deposit, you’ll need your bank account number and routing number.
You’ll need the following information to claim someone else as a dependent:
Names, dates of birth, and Social Security numbers of dependents (as they appear on their Social Security cards) (or tax ID numbers)
If the custodial parent of your dependent child is relinquishing their right to claim the child as a dependent, fill out Form 8332.
Sources of income
You may receive many different forms documenting your income. Among the most common are:
W-2s (Wage and Tax Statements) from your company (s)
Form 1099-G to report unemployment benefits and state or local tax refunds.
Documentation for home office expenses, including the square footage of the home and the area used only for business.
Records for depreciating business equipment, including cost and date of installation.
Record of business-related miles traveled
Deductions can help you reduce your taxable income and maximize your refund by lowering your tax liability. In general, you can either take the standard deduction (a fixed amount based on your filing status) or itemize your deductions.
If you itemize your deductions, you’ll need information on the following:
Expenses for medical care paid from pocket
Long-term care insurance premiums that have been paid
Any mortgage insurance premiums, mortgage interest, and charges you paid during the tax year are listed on Form 1098.
Taxes on property
State, local taxes, including sales tax.
Taxes paid with the registration of your vehicle
Documentation of casualty losses (if you owned/lived in a property situated in a federally declared disaster area)
Even if you do not itemize, if you have the following deductions, referred to as adjustments to income, you can claim them.
It may take some time to gather all of this information before filing your return, but it will ensure you have everything you need to claim every tax deduction and credit.
After you submit your taxes, it’s a good idea to keep them in a safe place in case you’re audited. If the IRS or your state tax authority audits your return, they may request records to back up your income and tax benefits. In addition, having all of this information in one location can help you save time and avoid losing any deductions or credits.
With over 15 years of experience, AOTAX is the experienced team you need. We at AOTAX have taken care of the finances of numerous Indian IT professionals. We have assisted in reducing tax burdens and simplifying year-round tax preparation. So, if you’re going to trust a pro, go with AOTAX and sign up for free today!