As tax season nears, you may ask what the alternatives available for filing a tax return are. You have three options to file your tax: filing your taxes, filing using online tax software, or filing by hiring a professional. You must have certain information readily available when filing taxes, no matter which method you select. This article will see how to file your taxes, which options are available, and which tax filing methods are best. But before you start to look for ways to file your taxes, you must know:
Even if you aren’t required to file taxes, you should consider doing so anyway: If you qualify for certain tax credits or have already paid some federal income tax, the IRS might owe you a refund that you can only get by filing a return.
In the early months of the following year, “tax season” for the previous tax year begins. For example, the Internal Revenue Service (IRS) will begin receiving and processing returns for the 2021 tax year on January 24, 2022. Also, due to some public holidays in certain states/districts, the deadline for filing taxes is April 19, 2022.
Choose How to File Your Taxes
You can file your taxes in several ways. Hiring the service of a tax professional, using online tax software, or filling out the forms yourself are the three primary options for tax preparation. Take a closer look at these methods below:
1. Filing taxes online with tax software
You already know how to prepare and file taxes online if you’ve used tax software in the past. Many big tax software companies also provide access to human tax preparers.
For example, some companies provide software or support packages that include on-demand, on-screen, or online access to human tax specialists who can answer questions, evaluate your return, and even file your taxes.
With a complicated federal tax code that is more than 74,000 pages long, it’s no surprise that more than half of all taxpayers in the United States need a professional to assist them.
If you choose this method, make sure the tax preparer has a Preparer Tax Identification Number (PTIN) from the IRS, and also ensure you ask about the fees upfront. Please note that the IRS requires your tax return to be filed electronically if your tax preparer submits 10 or more returns in a year.
If you do not wish to meet in person with the tax preparer, in that case, there is another way of filing taxes. You can share documents electronically with a tax preparer via a secure channel. Typically, the preparer will send you a link to the portal, where you will create a password and then submit photos or PDFs of your tax documents.
Another option is filling out the forms online and submitting the return with a credit card payment. Using the Forms, Instructions, and Publications Search engine, you can find all the federal tax forms. In addition, state income tax forms are usually available on your state’s official website.
There is no cost or fee associated with submitting your taxes. Filing taxes on your own helps you understand and know your financial situation since it compels you to monitor and keep track of your transactions, earnings, and spending.
The majority of people who file taxes on their own have a simple tax status, an unaltered tax situation, or a genuine interest in the topic. If you have the necessary forms on hand, it can take only a few minutes.
If you file a paper return, it can take six to eight weeks to obtain your refund, however, you must submit it by mail in the below cases:
You’re married and live in a community property state but filing a separate return.
Social Security numbers for yourself, your spouse, and any dependents, if applicable.
W-2 form, showing how much you earned in the past year and how much taxes you have already paid. (If you worked multiple jobs, you may have received multiple W-2 forms).
1099 forms, record money given or paid by someone other than your employer. That is non-employment income such as dividend income, interest income, etc.
Contributions to a retirement account
Mortgage interest and property taxes
Donations to charity
Local and state taxes you paid
Expenses related to education
Medical bills that have not been reimbursed
Federal and state tax returns from the previous year
Collect Income Data
Getting your tax forms together for you and your spouse is a great start, however, keep in mind that you may have income that isn’t listed on your W-2. Remember to include any income you received over the year, such as:
Money earned through investments
Winnings from the lottery or a casino
Itemized Deductions and Credits
The total amount of taxable income is reduced due to tax deductions. Hence, keeping track of everything you can deduct is necessary. The following are some common deductions:
Child care costs
Interest payments on a mortgage
Donations to charity
Most deductions necessitate receipts and other documents, so double-check with your tax expert to ensure you have all you need.
Track of Taxes Paid
Most businesses deduct federal, state, and additional taxes from each employee’s pay. On your W-2 form, these deductions will be detailed. You’ll have to keep your tax records if you’re a contract employee or operate a business.
Significant Life Changes
Important life events might have an impact on your tax return. If you had a life event that the IRS recognized, you may be able to claim additional deductions, such as:
Had a baby
Moved to a new state
The federal tax code is constantly changing. Make sure you discuss how these changes may affect you each year with your tax expert. Proposed tax legislation may have an impact on those in higher tax bands. Make sure you understand these bills significantly if your family’s annual income surpasses $250,000.
With over 15 years of experience, AOTAX is the experienced team you need. AOTAX has managed the finances of a number of Indian IT professionals. We have aided in reducing tax burdens and simplifying tax preparation year-round. So, if you’re going to trust a pro, sign up for free with AOTAX today!
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.
As a relatively new resident in the US, there are many things to adjust to – a different culture, new sights, distinct workplace norms, and unfamiliar financial regulations. With so many things to get used to as an Indian professional in the States, taxes definitely sit high on the priority list.
IRS guidelines and the tax return system can be confusing, especially to newcomers who are unaware of the finer details that need to be considered when filing their income tax returns. The implications can include large and unnecessary financial losses. The best way to avoid receiving lower refunds and incurring penalties is to file your tax returns correctly.
What Are Some Common Mistakes That Individuals Make?
Mistakes are meant for learning, not repeating. That’s why we’ve compiled a list of the most common errors individuals make in their tax filings. Read on to know more about what they are, and how you can avoid them, while simultaneously maximizing returns.
1. Not Being Aware of Important Deadlines
Having a clear idea of important dates on the tax calendar can help you plan financially according to payment deadlines and refund dates, which is something many people neglect to consider. Paying your taxes on time and budgeting expenses according to when you’re likely to receive your refund can greatly ease financial burdens. Additionally, respecting IRS deadlines means you can avoid any nasty penalty fees, and also make the most of deductible contributions within the requisite timeframes. Being a fiscally responsible resident can help you avoid unnecessary legal obstacles, and does wonders for your personal finances.
2. Not Proofreading Your Forms
As is rightly said, the devil is in the detail. A shockingly large number of US residents receive delayed refunds because of their own doing. Silly spelling mistakes and small discrepancies in values declared on tax return forms can cause delays that can last weeks or even months.
Even the smallest of errors could result in you having to redo your taxes altogether, so make sure the information matches what is given on forms such as the W-2, or 1099, etc. Always remember to dot your I’s and cross your T’s!
3. Not Checking Your Eligibility and Residential Status
As an Indian professional and H1B visa holder, the Substantial Presence Test is an important component of being able to reside in the country legally and to receive the requisite benefits from paying taxes. The SPT is used to determine how long you have been in the country, and whether you are considered a resident for tax purposes. For more information, visit the IRS webpage.
4. Not Safeguarding Important Documents
Documentation is undoubtedly the most significant facet of filing your tax returns. The taxes you are liable to pay, and the refund you are eligible to receive, both hinge on the supporting documents you provide. This includes financial statements, mortgage statements, letters from the IRS substantiating credits you have claimed, etc. Additionally, keeping past tax returns is equally critical in protecting against potential audits. The IRS has up to three years to decide whether to audit an individual and in the event you are audited, the records can make the process easier.
5. Not Checking Tax Brackets or Adjusting Tax Withholdings
Life is full of big changes: marriage, children, job changes, and relocations. What professionals often underestimate is the influence that these life changes can have on your taxable income. For instance, your marital status can impact the value of the deductions you can claim, and your employment status can influence the tax bracket you fall into. The IRS recommends revisiting your W-4 form on a yearly basis to retain control over your finances and potential tax liability.
6. Not Maxing Out Deductible Contributions
What seems to have become a buzzword, and rightly so, are deductions. We are revisiting this due to their sheer utility, although taxpayers seem to have forgotten them. When used correctly, tax deductions can considerably lower your taxable income, and therefore your tax bill. This is particularly useful while planning for your retirement, since contributions to 401k and IRA accounts are tax-deductible, hence affording taxpayers the twin benefit of smaller tax bills and growing nest egg.
7. Not Claiming Applicable Credits and Deductions
While deductions lower taxable income, credits lower tax bills. Both are incredibly useful in maximizing returns when harnessed strategically. Tax credits such as the Child Tax Credit, Kiddie Tax Credits, and Other Dependent Credits lower tax burdens. Additionally, proofs of payments towards loans, fees, charitable donations, and state taxes among others do the same. Most taxpayers fail to take note of where their money is going throughout the year, and then miss out on the opportunities to reap the benefits owed to them. It’s important to remember that the IRS cannot assume anything about your expenses and lower your tax bill in good faith. Getting sizable returns depends on what you declare and claim.
8. Not Filing Online or Asking for a Direct Deposit
The IRS is still battling large backlogs with skeleton staff amidst ongoing legislative changes, and hence urges taxpayers to file their returns online and opt for a direct deposit. Doing so will quell mounting frustration from both ends, and will quicken the refund process. Those who file electronically and provide their bank details can expect their accounts to be credited within 21 days of submission. Of course, it could take a little longer for those who have claimed credits that are prone to be misused (such as the Child Tax Credits), simply due to more stringent verification procedures.
9. Not Consulting a Professional
There is a reason we don’t self-medicate when we’re sick, a reason we don’t fiddle with our cars when it has broken down, and opt instead to visit a doctor or a mechanic. There is an implicit understanding and trust in the professional we choose to consult. We believe in their expertise and heed their advice.
There is no reason the same logic should not be followed when it comes to something as important as filing your taxes, especially when you’re dealing with tax returns in the US as a foreigner.
AOTAX is just the professional team you need: with over 15 years of experience, we’ve taken care of the finances of countless Indian IT professionals. We’ve helped ease tax burdens and made year-round tax preparations much easier. If you’re going to trust a professional, trust AOTAX and sign up for free today!
Of course, being your boss comes with its perks: Flexible working hours, flexible deadlines, control over your career trajectory, etc. However, those aren’t the only perks of a sole proprietorship. Running a one-person show has more advantages than you would expect.
For starters, it’s straightforward to set up. Low startup costs and no need for a formal structure make it simple to set up such a business entity. In addition, most individuals who have their own business don’t even know that they are considered sole proprietors by the IRS.
Secondly, if well-understood, tax preparation, and filing become much more straightforward when filing as a sole proprietor. For instance, in a sole proprietorship, there is no distinction drawn between your business and yourself.
In simple terms, you are considered both business and individual for tax purposes. In technical terms, this is known as a ‘pass-through’ entity—all business income passes through to the business owner.
Of course, this is taxable and must be declared in the individual’s tax return.
Who Is Likely to Be a Sole Proprietor?
Sole proprietorships generally do not require much in terms of brick-and-mortar start. Therefore, becoming an individual business owner can be easy.
Sole proprietorships are dominated by professionals who can work remotely or travel to customers. Common professions under this type of business formation include:
Freelancers (photographers, web developers, copywriters, editors)
Business consultants or public speakers
Professional cleaners and organizers
Home healthcare service providers (physiotherapists, personal trainers, at-home radiology services)
What Sort of Taxes Do Sole Proprietors Need to Pay?
As a one-person team, sole proprietors are both bosses and employees. This means, when filing as a sole proprietor, there are a few additional taxes that you need to pay over and above your income taxes.
Sole proprietors are responsible for paying:
Federal and state income taxes
All sole proprietors must declare their business’ profits and losses, as well as any other personal income. The IRS will decide tax brackets and tax bills based on the combination of these two factors.
If you were to work for an employer, you would have to withhold a certain amount of your pay, which is meant for FICA taxes (Social Service and Medicare). However, being your own boss means that you can make these contributions while paying your taxes.
Federal and state estimated taxes
When employed in an organization, employers withhold taxes from your paycheck for you. On the contrary, as a self-employed individual, you must budget for estimated taxes owed for your business and pay them throughout the year. Ideally, you should estimate the total tax bill for the year, and make quarterly payments as required by the IRS.
Which Deductions Do Sole Proprietors Qualify For?
Like any other organization, business expenses are deductible and can reduce your tax bill. Therefore, keeping separate checkbooks for business and personal expenditures is a good habit to follow.
As long as you have accurate and detailed records of the money spent for profit, you can claim deductions for the following:
Once your business is functional, there are many operational costs that business owners must incur to keep doors open: repairs, advertising, office supply purchases, and utilities.
These expenses can be deducted from your taxable income up to a limit of $5,000 for the first year you’re in business. After that, any remainders can be removed over the next 15 years.
Professional and legal fees
Seeking professional help from lawyers, accountants, and consultants comes with hefty fees. Luckily, such services are deductible as long as you can provide a receipt and proof of service done for your business.
You can deduct any premiums paid toward insurance for health, property damage, loss from theft, etc., from your taxable income. This falls under the ambit of a business operating expense.
Courses for continuous professional development
You may need to upskill from time to time to continue running your business. Therefore, any educational fees paid toward courses that enhance professional abilitiesare tax-deductible.
Apart from the documents required for your tax filing, the following are required:
Form 1040, Schedule C
You must fill the Schedule C, Profit or Loss from Business (Sole Proprietor) of Form 1040. The Schedule consists of five parts:
Part I: Income,
Part II: Expenses,
Part III: Costs of Goods Sold,
Part IV: Information on your Vehicle,
Part V: Other Expenses.
Business owners should keep the following handy:
Business Income Statement
Mileage records (if you plan on claiming deductions for the use of your vehicle to do business)
Inventory count and valuation (if you sell any sort of product)
Records and receipts of all expenses
If your business earned more than $400 worth of revenue in the year, as a sole proprietor, you must report and pay your FICA taxes (Social Security and Medicare).
Consulting a Tax Professional
Financial advisors can help you set goals according to your business needs while maximizing your tax savings. For instance, you may want to consult a professional to help you prepare for filing as a sole proprietor—-and AOTAX is the best out there for Indian professionals.
With close to 20 years of experience, we at AOTAX are well-versed in US taxation laws and how they apply to Indians working in the US. Therefore, we can help you optimize your tax strategy in the best way possible. Sign up for free today!