Blog

Need 2018 Estimated Tax Payments?

Phew! Tax season 2018 is over! So how did it turn out? Did you have to pay when you filed your 2017 returns? Do you know if you are withholding or paying enough for 2018?

 

April is a good time to check on what you are projected to owe for your 2018 taxes and see if it’s enough, or too much. That’s especially true this year because of the new tax law and changes to employer withholding tables. Word on the street is that the IRS was really aggressive in decreasing employer withholdings in order to increase paychecks. That can make employees feel rich now, but it could bite them hard when their 2018 tax returns are due.

 

If all your income comes from wages, chances are that your tax withholdings will cover your income tax liability. But if you are self-employed or receive other income, such as interest, dividends, capital gains, or rent, you might need to make estimated income tax payments. On top of that, if you don’t pay enough of your taxes on time, you could get hit with interest and penalties.

 

What the Required Payments?

If you owed additional tax for 2017, you may have to pay estimated tax for 2018. Estimated payments should be made if:

 

  • You expect to owe at least $1,000 in tax for 2018, after subtracting your withholding and refundable credits.

AND

 

  • You expect your total withholding and refundable credits to be less than the smaller of 90% of your 2018 tax liability or 100% of your 2017 tax liability.

 

What Are the Penalties?

Penalties are assessed if the required payments described above aren’t made as income is received, at least quarterly. Interest penalties are assessed on the underpaid amount, accrued daily from the date it was due and until it is paid. Interest rates are adjusted periodically and daily accruals really add up.

 

What Should You Do?

Clearly, the IRS and other taxing agencies are serious about wanting their money on time. You can figure out your 2018 federal income tax bill by using the IRS Withholding Calculator, updated for the new tax law – . People who are self-employed or have investment income should check out the IRS web page about tax estimates.

 

When in doubt, or if you are not comfortable with DIY tax estimates, be sure to consult with a qualified tax professional. She or he will help you identify all the information needed to project your 2018 tax liabilities, pay enough taxes on time, and avoid interest penalties.

Getting a Tax Filing Extension

Your life is busy and deadlines can be hard to meet. April 15th is on a Sunday this year and Monday is a holiday, so the tax deadline is pushed back to April 17th. Whether you just can’t get organized or all your tax information hasn’t come in, you might just need more time to get those tax returns filed by the deadline, even with those extra two days.

 

Not ready? Not a problem! You can get an automatic six-month extension to file your taxes.

 

Two things to know if you’re not ready to file your taxes by April 17th:

 

  1. Requesting an Extension

 

Individual taxpayers use IRS Form 4868 to request an automatic extension to file their federal income tax return. An extension can be filed on the IRS website, e-filed using approved tax software, or in paper form. Paper forms must be postmarked or date-stamped before midnight of the due date.

 

Requesting an extension to file your state taxes varies based on where you live. Check your state’s tax website for instructions and details.

 

  1. What to Do if You Owe

 

You have to estimate your tax liability and figure out your tax withheld and/or paid quarterly to prepare your extension request. If you will owe more tax than you’ve already paid in, the balance due must be paid with your extension request. Failure to pay will result in an underpayment penalty and interest on the unpaid amount, accrued daily until it’s paid. That really adds up.

 

If you are getting a refund, your extension is automatically approved. But you still have to wait until your return is filed to get your tax refund.

 

Need more details about estimating your 2017 tax liability and getting a tax filing extension? Go to the IRS website and your state tax website. Need more guidance? Consult a qualified tax professional.

Vendor Risk and Your Reputation

Recent news about Facebook and user data highlights the need to understand how your organization’s confidential data is protected. As if we needed another reminder! Sure, it’s a big, extreme and public example most of us cannot relate to. Splashy news stories are an opportunity for you to think about your own organization’s risk exposure related to data protection, without the splashy headlines.

 

These days, many businesses outsource services to third party vendors. Those vendors could have access to or be responsible for your organization’s confidential data. How can you make sure that those vendors are protecting your data as well as, if not better, than you would? How do you prevent your organization from being the victim of a data breach and avoid the negative on your reputation and operations?

 

Organizations should, at minimum, take three simple steps to protect their data and reputation from vendor risk:

 

  1. Written Agreement

Data protection responsibilities and expectations must be clearly delineated in a written agreement signed by both parties. Sufficient details should be included to clearly describe what controls and precautions are in place, who is responsible, how controls and precautions are validated, and when validations are performed. The agreement should also address the assumptions and performance expectations for your operations and controls.

 

  1. Vendor Monitoring

Use the data protection responsibilities and expectations in the written agreement to determine the vendor activities for you to monitor. Monitoring can take many forms, such as system or management reports and performance test results. Don’t hesitate to ask the vendor for documented evidence. Taking the vendor’s word without proof can backfire later.

 

  1. Hold Up your End

Vendors with access to or responsibility for your confidential data are depending on your organization and your workers to fulfill certain responsibilities. If a data breach or other performance issue occurs and you have not held up your end, the vendor could escape taking the appropriate responsibility – or liability. Remember, outsourcing doesn’t mean a total hand-off.

 

Data breaches, splashy headline or not, can be expensive and damaging to your organization. A vendor you depended on could be the cause. Outsourcing can be great but it comes with risks. Protect your organization’s reputation by managing vendor risk using the three simple steps above.

 

New Qualified Business Income Deduction

Headlines about the new tax law and its impacts are daily news. Some of the tax law changes are clear and easy to understand. Other changes are incredibly unclear and difficult to interpret. One particularly ambiguous tax law change is the new deduction for “qualified business income” contained in the 2017 Tax Cuts and Jobs Act. It’s so confusing that the AICPA requested “immediate guidance” from the IRS last month.

 

The new deduction is the lesser of 20% of qualified business income or 50% of W-2 wages paid by pass-through businesses that operate as a sole proprietor (reported on Schedule C), partnership, Subchapter S Corporation, or owner of rental property (reported on Schedule E). Sounds pretty simple, but it’s really not.

 

More guidance will be coming at some point, but business owners often can’t wait to make decisions. Based on what is now known, businesses need to look closely at three considerations to know whether they are eligible to take the new qualified business income deduction:

 

  1. Excluded Businesses

Right off the bat, specified businesses are excluded from taking this new deduction. Businesses providing accounting, legal, consulting, and architect services are specifically excluded. Businesses that “rely on the skills and expertise of the owner or employees” are also excluded. That last part is certainly open to interpretation, and one of the reasons the AICPA’s requested IRS guidance.

 

  1. Income Level

The deduction of 20% of qualified business income is subject to a dollar limit, based on the owner’s filing status. For example, the dollar limit for a single individual is $157,500 and $315,000 for married couples filing a joint tax return. At first glance, this sounds pretty awesome, but required adjustments could reduce the limit.

 

  1. Wages Paid

After calculating 20% of qualified business income, compare it to 50% of total wages paid to employees. Sole proprietors don’t pay themselves wages, so this deduction is not available to them unless they pay wages to employees. Remember, it’s a “lesser of” situation, so if one option is zero, no deduction. Understanding the type of business entity and how workers are paid is essential to getting this right.

 

The number of complexities and variables to consider about qualified business income and the new tax deduction for pass-throughs are too long and dense to cover here. Plus, the IRS still needs to issue guidance to help business owners — and their accountants – make informed decisions and file their taxes next year. So stay tuned!

New Tax Withholdings

The IRS issued new tax withholding tables for employers in January 2018, designed to reflect the new tax law passed in December 2017. By now, you’ve probably seen the results in a higher net paycheck. Seems like a pretty nice deal. But will you feel the same way next tax season?

 

The new tax withholding tables may not account for all of your income and deductions, which could result in under- or over-withholding income taxes compared to your tax liability. You could end up giving the government an interest-free loan — your refund. Or, you could end up having to pay a chunk of money when you file. You could even owe interest and penalties!

 

How can you avoid all of that? Compare your withholdings and any estimated tax payments to your projected tax liability. More easily said than done.

 

You have two options for verifying that your taxes are covered for next tax season:

 

  1. Do It Yourself (DIY)

Most people have all the information needed to figure out if their tax withholdings are enough to cover their tax liability. Pay stubs or online pay information reflect how much you earn and have withheld each pay period and year-to-date. Apply a little arithmetic to the pay information, and you can figure out your income and withholdings for the year. Have a completed copy of your most recent tax return handy. Information on that return can help you estimate income and other items for 2018.

 

It’s really important to know about the new tax law changes to estimate your 2018 income and deductions. To help with that, the IRS published a Withholding Calculator at https://www.irs.gov/payments/tax-withholding so taxpayers can make sure they have the right amount of withholding.

 

  1. Get Professional Help

No, not that kind of professional help. I mean help from a tax professional. The IRS Tax Calculator may be a great tool for taxpayers with simple situations. People with more complicated financial situations might need to meet with a tax preparer to get insight on how 2018 will differ from 2017 because of the new tax law. Sure, you’ll pay a fee for that service, but peace of mind is extremely valuable.

 

Avoid expensive surprises next tax season by figuring out now whether your tax withholdings will cover your 2018 income tax liability. Whether you Do It Yourself or get help from a tax professional, you’ll have peace of mind that your taxes are covered.

 

Am I Running a Business?

This week’s blog was inspired by conversations I’ve had recently with a few new tax clients. Part of my job as a tax professional is to learn about clients’ circumstances and activities so I can help them be aware of and comply with federal, state, and local tax rules for operating a business.

 

Clients who engage in business activities sometimes need my help to understand the rules that are not related to income taxes. One of those rules is about registering a business with the state, county and local jurisdiction where it operates. Individuals who do freelance or other non-employee work may not realize that they are running a business, albeit a small one.

 

Individuals engaging in business activities, freelance or otherwise, should get clear and accurate answers to these three questions:

 

  1. Is my activity a business?

Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit. Profits are often not made in the early stages, but the business activity starts when goods or services are offered in exchange for funds. In other words, even a small freelancer is engaged in a business activity.

 

  1. What does my jurisdiction require?

States, counties, and cities want to know about business activities that operate in their jurisdictions. One reason is to enforce safety and zoning laws, but another big reason is to get their fair share of business tax revenue. Businesses are required to register in every jurisdiction where they are located. License fees, registration fees and taxes vary.

 

  1. Where do I get help?

Being a business owner in the 21st century means that you have Internet access to every resource you need. State, county and city websites are a goldmine of information about registering a business and other requirements. Government websites usually have pages dedicated to new businesses with checklists and links.

 

Business activities, freelance or otherwise, must be registered with the applicable state, county and local jurisdictions. Figuring out the requirements is easier than it’s ever been with all the online resources and links. Do a little homework to ensure that your business is aware of and complies with the rules.

Checks and Balances to Prevent Bad Behavior

The news is filled with instances of offensive and unacceptable behavior in the work place. It’s happening in all types of organizations, both business and nonprofit. In hindsight, it’s pretty easy to see the bad behavior pattern. We wonder how these instances could occur unchecked, sometimes going on for years.

 

After the news story breaks and more details come out, we learn that the bad behavior was tolerated from a powerful individual to keep the revenue streaming in or because the victims did not have an independent person to turn to for help. Often, the offensive and unacceptable behavior was enabled and/or explained away by other individuals in the organization who stood to lose money and/or position by speaking up.

 

What’s missing from every instance of work place behavior “gone wrong” are the checks and balances needed to identify and address problems. We usually think of checks and balances as applying to finances – reconciling bank accounts and segregating financial transaction tasks to prevent one person from having too much control. But the analogy definitely applies. Unchecked control and bad behavior can result in lawsuits and reputational damage, as we have seen.

 

Examples of bad behavior in the news are often extreme and not typical of most work places. Three checks and balances below, when implemented in a typical organization, promote an ethical culture where bad behavior will not be tolerated.

 

  1. “Tone at the Top” – Organizations must make it clear that bad behavior will not be tolerated. Clear and convincing policies should convey the organization’s values and expected behaviors. Leadership must also set an example through its actions.

 

  1. Confidential Reporting- No matter what leadership does to promote an ethical culture, some individuals will still engage in unethical, or even illegal, activities. Establish a confidential tip line or other mechanism for independently reporting real or suspected fraudulent behavior or ethical violations without fear of retaliation.

 

  1. Take Clear Action – Set up an independent mechanism to follow-up on confidential reports of bad behavior. Act on the results consistently. Remember that lost revenue when an unethical person is separated from your organization pales in comparison to lost revenue and costs associated with lawsuits and tarnished reputation.

 

Checks and balances alone do not guarantee that bad behavior will be stamped out. However, they can go a long way to establishing an ethical culture where bad behavior is just not acceptable.

Your Organization’s Financial Health

Your personal health and your organization’s financial health are the same in at least one way — serious problems could exist that you cannot see or feel. A sudden loss of income or an unexpected expense can stop the heart of your organization just like a medical crisis can stop your body. For your organization, like your body, monitoring a few key areas can alert you to problems on the horizon.

 

At a minimum, organizations should monitor financial health in these three essential areas:

 

  1. Actual vs. Expected Financial Activity

Financial performance information should be compared to planned, or budgeted, performance to determine how actual events compare to what you thought would happen. Focus on variances in significant income and expense categories. Obtain explanations for why the budget or plan was not met. Did conditions change?  Were projections unrealistic? Focus on “why” and use that information to refine budgets and plans.

 

  1. Cash Flow

Project your cash inflows and outflows for at least three months, preferably for six or more. Assess whether income that you expect to take in is going to cover the amounts you need to pay. Sounds easy, but this analysis takes some thought and effort. You need to know your payments receivable and payable, regular payments that are required no matter what, such as payroll and rent, and your reconciled bank account balances. Be realistic about payment timing and what it really costs to sustain your organization.

 

  1. Expenses

Maintaining control over spending is the most important and most difficult part of running an organization. Demands to fund day-to-day operations, in addition to investing in technology and infrastructure, are constant. Prioritizing essential expenses and growth investments is a challenge that requires regular attention. This is particularly true in newer organizations where infrastructure investments are most crucial.

 

Maintaining your organization’s health is a lot like managing your personal health. Monitoring a few key health areas can alert you to problems on the horizon, and give you an opportunity to act before it’s too late.