If you are thinking of not filing a tax return, you should think again. You may think you’re sticking it to the man, but you’re really sticking it to yourself. Filing a tax return is just one of those things you have to do in this country. Don’t shoot the messenger, but here are a few reason why you should file a tax return.
Banks look at tax returns as a qualifications for loans. If you haven’t filed, it will be hard to prove your income.
Not filing can open you up to an audit. There are various documents that are filed with the IRS that support your income history. If there is no record of a filed return, you can trigger an automatic audit. Once an audit is started, the IRS has right to audit other years.
The IRS will file a return for you. If the IRS files a return for you, they will not take into consideration every credit and deduction you may qualify for. Therefore you may have to pay a higher tax liability. Failure to pay may result in suspension of future refunds, way garnishments, or withdrawal of funds from your bank account.
It is a criminal offense. If you purposely avoid filing a return, you can be charged with crime. Although there aren’t many cases where individuals were prosecuted for not filing a tax return, you can be forced to pay high penalties.
According to the IRS about 1.2 million taxpayers did not file a return since 2015. As a result, there is almost $1.4 billion in unpaid refunds. So if you think you should not file, maybe you should think again. There maybe money waiting for you.
As a business owner, you need to protect yourself from personal liability. If your client sues you for any reason, you could be found at fault. If this happens, they can come after you home, car, as well as any money saved for retirement. One of the ways to prevent this is to structure your business so your personal business is not affected.
1. Apply for an EIN (Employer Identification Number)
The EIN (also known as a Federal Tax Identification Number) is used to identify a business entity. Your business entity will need to be a Limited Liability Company (LLC) or a corporation in order to avoid liability.
2. Open a Business Bank Account
It is important not to mix personal and business finances. When you pay for business expenses from your personal bank account, this opens your personal assets up to liability. The same goes for the money you earn.
3. Pay Yourself from your Business Account
If you plan to pay yourself from the money earned through your business, you should do it through your business bank account. Write a check from the business account to yourself then deposit it into your personal account. Make sure your write “personal wages” in the memo line.
4. Sign Documents as Owner
When you sign documents in behalf of your business make sure your write, “owner” next to the subject line. It is important to specify your position in the business.
Before you file your tax return make sure you have all the required forms to file. A W-2 is the one form everyone seems to be familiar with, however that’s not the only income form. If you received any additional income, there are other forms you may need to file. You don’t want to receive a letter from the IRS stating something is missing.
Here is a list of the income based forms you may need to file during the tax season.
Employee Wages: W-2
Income received as a Contractor: 1099 MISC
Retirement account Income (ie 401k): 1099-R
Stock Sales: 1099-B
Dividend Payment: 1099-DIV
Bank Interest: 1099-INT
Unemployment Income: 1099-G
Lottery/Gambling Winnings: W-2G
If you have questions about your income tax return, schedule a 60 minute coaching session.
You already know as a writer you’re self-employed. That means you can file a business return during tax season. The benefit with doing this is you can subtract money spent to make your income as low as possible. The thing with tax returns is, the more income you have, the more taxes you pay!
You can’t claim everything you spent, but you can use what the IRS considers a “qualified expense.” It’s easy to overlook some of these expenses as a writer.
If you’re like me, you put in tons of research before becoming an authorpreneur. You’d even pay if the information was valuable.
This expense pays you back more than once. One for knowledge and the other as a “supply expense” on your tax return.
Whether you purchase one or in bulk, the amount you pay is can be amortized because it’s an “intangible asset”. Amortization is similar to a depreciable expense where you claim a portion each year until it totals the original amount paid.
An ISBN is considered an amortized expense because it is not a physical item but is still an asset. Just like a computer, it holds value. It also has an useful life over a year which is a necessity in order to amortize or depreciate an expense.
If you’ve showcased at a book expo or festival, more than likely you’re paid a vendor fee. Even if you didn’t do as good as you thought, it’s good to know you can claim the cost of being featured.
The vendor or exhibitor fee you pay is 100% deductible as an advertisement expense on your tax return.
With running a business we all hope to have as little expenses as possible. However, when it comes to tax returns, expenses help. If you aren’t reporting business expenses, you’re being taxed on total income earned from your business. If you report expenses, you are only taxed on the net income.
Net income is:
Income – Expenses = Net Income
Net income is used to determines the amount you will owe in employment tax as well as income tax.
It is important to keep track all your income and expenses from your business. I recommend using accounting software because it can also help with the amount of taxes you owe. If you’re not into doing it yourself, contact me to do it for you.