Filing Quarterly - Making Quarterly Tax Payments

Filing Quarterly – Making Quarterly Tax Payments

Who is Subject to Paying Quarterly?
Everyone, in essence. Individuals whose tax obligation for any year exceeds $1000 need to make payments on those taxes due throughout the year. Most of us do without realizing it. If you are an employee at a regular job, most likely, those taxes are withheld from your paycheck by your employer. If, however, you are an independent contractor, own your own business, or make other money on the side, you are responsible for making those payments.

When and What to Pay
Four times per year, you must pay estimated taxes on your income and self-employment tax using Form 1040ES. Due dates for these payments are: April 15, June 15, September 15, and January 15. You are supposed to estimate the amount of income you will earn and subsequent taxes you will owe for the entire year. Self-employment tax must be taken into consideration when figuring estimated payments. You need to then pay 25% of this amount each quarter.

Tax software generally figures your estimated taxes based on what you did in previous years. It can also prepare estimated forms for you.

If you are not liable for paying estimated taxes prior to a given due date, but become liable before the next due date, file for the quarter you become liable, but increase your percentage paid.

Example:
Dan has a regular job through which taxes are withheld from each paycheck. He begins selling online. During the first part of the year, he is having enough taxes already withheld to cover his online income, as well as his regular income.

In July, however, Dan’s online sales spike significantly. He realizes the amount withheld from his regular paycheck will no longer cover his total tax liability. He may file a Form 1040ES by September 15, paying enough to equal a total of 75% (when combined with his regular withholdings) of his estimated tax due without realizing penalties (75% because it is the third quarter).

Dan may also be able to increase the amount he has withheld from his regular paycheck, instead of having to file estimated payments.

If you (and/or your spouse if married filing jointly) has income tax withheld from a paycheck, no estimated taxes are due if the withheld taxes cover more than 90% of the total tax bill for that year – or – if the tax withheld totals more than your entire tax bill from the previous year.

This means if you (or your spouse if married filing jointly) is an employee at another job besides the business, just make sure to have enough tax withheld from each check to cover taxes due from your business income, too. If so, you can forget about making estimated, quarterly payments. In essence, that withholding is paying your quarterly business payments, as well as the taxes due on the other earned income.

IRS Publication 919 will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It will also help you determine how much additional withholding you may need each payday from your regular job in order to avoid owing taxes and penalties for not filing quarterly. To add to the amount withheld from your regular job, you will need to fill out a new W-4 for your employer.

Form 1040ES
Form 1040ES is a simple payment voucher where you list your and your spouse’s names, social security numbers, and address. The only other space on the form is to write in the amount you are paying. Don’t forget to include a check. There is a worksheet to help you figure your estimated tax in the instruction booklet for 1040ES.

If you earn under $150,000, quarterly payments must equal 90% of your final income tax bill or at least 100% of last year’s tax bill (amount due before deducting what had already been paid – line 63 of 1040).

If you earn over $150,000, you must pay at least 110% of last year’s tax bill, spread out quarterly, or risk and under-payment penalty.

Overpayment
If you over pay your estimated taxes and expect a refund, you may elect to apply it to next year’s estimated payments.

Underpayment

You could receive a tax penalty if you under pay or miss a deadline. If you are late, you could also end up paying interest on what you owe. Your state may require quarterly payments, as well.

This and other information may be found in the book listed below.
Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com/
Copyright 2007 -2008

Claiming the Standard Mileage Rate

Claiming the Standard Mileage Rate

Claiming the standard mileage rate for an automobile on your taxes takes a little record keeping. Some taxpayers hope to avoid that hassle by claiming actual expenses, instead. Truth be told, even more record keeping is necessary with the actual expense method, and you must keep mileage records either way. These records will not be filed with your taxes, but must be available for review in the case of an audit.

If you use your vehicle for obtaining inventory or supplies for your business, you may deduct the business percentage of your automobile expenses. The first step is to record your mileage. Make a habit of writing down the odometer reading on January 1st each year. You may use a spreadsheet (like the PDF example shown here) or something as simple as a pocket calendar you keep in your glove box. Whatever the method, make sure to write it down. Record your starting mileage, ending mileage, where you went, and the purpose of your trip. Jot down your mileage on a scrap of paper if you have to. When you return home, you can fill in the remaining information on your spreadsheet. Total how many miles you drove for business only ─ round trip. The remaining miles used on your vehicle this year are either personal or commuting. Vehicles are considered listed property. Therefore, you must keep records denoting business use.

If your office is in your home, you will not have any commuting mileage. If, however, you work in an office on Main Street, instead of your home, the number of miles between your house, that location, and back again are your commuting miles. Write the number of business, personal, and commuting miles down in the appropriate blanks on Part IV of your Schedule C. You figure your total mileage for the year by subtracting your odometer reading on January 1st, from the odometer reading at the end of the year.

You may either claim the Standard Mileage Rate (SMR) or Actual Expenses, not both in the same year.

Standard Mileage Rate

Taking the standard mileage rate means you are able to deduct a certain amount for each business mile driven in a particular year (48.5 cents in 2007). You multiply the number of business miles driven by 48.5 cents per mile in order to figure your standard mileage deduction. This amount is figured in Part IV of your Schedule C, then deducted in Part II, line 9 of the same form. There are spaces to account for commuting and personal miles in Part IV, Schedule C, but those miles are not deductible.

You may also deduct the business percentage of parking fees and tolls, and the business percentage of state and local personal property taxes on the vehicle, in addition to the standard mileage rate. If you itemize your household deductions instead of taking the standard deduction, you may claim the remainder of your state and local personal property taxes on the vehicle on your Schedule A.

Example:
Dawn drove her car a total of 4530 miles this year. She drove her car 453 business miles this year. She multiplies that number by 48.5 cents (453 x 48.5 cents = $219.70). If she does not have any parking fees or personal property taxes to report on her car, she can simply carry the $219.70 to line 9 of her Schedule C.

If she does have parking and state and local personal property taxes on her car, Dawn will figure the business percentage she used her car by dividing the business miles by the total miles. (453 ÷ 4530 = 10%) Now, she will total her parking and state and local personal property taxes on her car, separately.

If she paid out a total of $150 in parking fees, she will figure 10% of that by multiplying 150 x 10%. Dawn will be able to deduct $15 in addition to the $219.70 for the standard mileage rate. She will then enter $234.70 on line 9, Schedule C.

If Dawn had a total of $200 in state and local personal property taxes for the vehicle, she will find her business percentage (200 x 10%). She may also deduct $20 on line 23 of her Schedule C.

If you want to use the standard mileage rate on a vehicle, you must choose it in the first year the automobile is available for use in your business. Then, in later years, you may choose to use either the standard mileage rate or actual expenses. If you switch from the SMR to actual expenses and want to deduct depreciation, however, you must use straight-line depreciation, as opposed to an accelerated method, estimating the remaining useful life of the car.

When the SMR is NOT allowed:
You may not deduct mileage on a car for hire (taxi).
You use five or more cars in your business at the same time.
You claimed an accelerated depreciation method in previous years on the same car.
You claimed a Section 179 deduction on the car.
You claimed actual expenses on a car you leased after 1997.
You are a rural mail carrier who received a qualified reimbursement
You claimed actual expenses on the same vehicle in the first year you used the automobile in your business.

Beware! When you sell the vehicle or switch to actual expenses for depreciation purposes, you will have reduce your basis by a certain amount (17 cents per mile deducted in years 2005 and 2006).

This and other information may be found in the book listed below.

Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com/

Copyright 2007 -2008

Recapture ─ Selling Business Assets

Recapture ─ Selling Business Assets

The most common way to dispose of equipment used in your business is by selling it. When you sell that asset, however, you will create income from the proceeds you realized on the sale.

If you have taken any Section 179 deductions or depreciation on the equipment, you may be subject to what is called a recapture tax. Don’t let this scare you. It is not as bad as it sounds. It simply means a portion of the income you receive from the sale may be taxed as ordinary income, which you might have assumed anyway. Let’s see how it works.

First we need to figure your tax basis in the item. You figure this by subtracting any Section 179 deductions or other depreciation you have taken on that item over the years, from your investment in it. (Your investment is usually what you paid for it when you purchased it.) The result is your tax (or adjusted) basis.

If you never took any Section 179 deductions or depreciation on the item, you figure your tax basis using the amount of depreciation that would have been allowable had you depreciated it using the straight-line method. Consider the number of years and the amount you could have taken based on the year you purchased and put the asset into use in the business.

How much money did you receive from selling the asset? Subtract your tax basis from the amount received (amount you sold it for). The result is your total loss or gain.

Any amount of profit produced from selling an asset, above your tax basis, up to the amount you were allowed to depreciate, is taxed at ordinary income tax rates. Any amount over that is taxed at (generally more favorable) long-term capital gains rates, unless you have Section 1231 losses from previous years which need to be figured first. (Chapter 8 – Taxes for Online Sellers)

This and other information may be found in the book listed below.

Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com/
Copyright 2007 -2008

Depreciation ─ Conventions

Depreciation ─ Conventions

When choosing to depreciate a business asset, you need to choose both a method and a convention. A convention simply refers to figuring how much of the item’s basis you may depreciate the first year, based on when during that year you purchased and put the item to use in your business. This article will explain the differences between the half-year convention, the mid-quarter convention, and the mid-month convention.

Half-Year Convention (H/Y) ─ Under the half-year convention, your item is treated as though it was purchased and placed in service at the mid-point of the first year, no matter when during that year the purchase was actually made. Therefore, only half of the otherwise allowable depreciation amount is able to be deducted during the first year.

The half-year convention is standard with all depreciation and must be used unless the mid-quarter convention rules apply. (Except in the case of depreciating the business use of your home, in which case the mid-month convention applies the first year. This is explained below and in Chapter 10.) The half-year convention is built into depreciation tables found in IRS Publication 946.

Example: Using the straight-line method of depreciation (because it’s easier for me to demonstrate the half-year example using S/L), Morgan is able to depreciate her office desk (seven year property), used 100% for business, over a seven year recovery period. Her basis in it (the amount she paid) is $700. She is able to take equal, $100 deductions each of the seven years. Because of the half-year convention, however, she may only deduct half of that in the first year.

Year One - $50
Years Two through Seven - $100 each year
Year Eight - $50

Morgan may continue to take a deduction into an additional year (year eight) beyond the desk’s recovery period (seven years) in order to fully depreciate it.

Mid-Quarter Convention ─ Under the mid-quarter convention, all property placed in service during a particular quarter of the year is treated as having been acquired at the mid-point of that quarter. Depreciation tables with the mid-quarter convention built in may be found in IRS Publication 946.

The mid-quarter convention only applies if more than 40% of the combined bases of property is placed in service during the last three months of the tax year. Section 179 deductions are not included when figuring this amount.

You can avoid the mid-quarter convention in a couple of ways. Plan your purchases, so over 40% of the cost of them doesn’t get spent at the end of the year, by buying early or waiting until January. You could also choose to use Section 179 to expense some of your end of the year equipment purchases. Those items’ bases would then not be a part of your calculation of the 40% mark.

Mid-Month Convention ─ When you depreciate the business percentage of your home office, you will use the mid-month convention in the first year. This means you may only deduct expenses beginning in the month you first began using the home for business purposes. This not only includes using mid-month depreciation tables, but it also means you may only deduct other business-related expenses for the home from that month forward. See IRS Publication 587 for more information on taking a home office deduction.

This and other information may be found in the book listed below.
Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com/

Copyright 2007 -2008

Depreciation ─ Choosing a Method

Depreciation ─ Choosing a Method

Depreciation is a way you are allowed to deduct the normal wear and tear of business assets (equipment, computer software, automobiles, office furniture, etc). You may claim an item which: you use in your business, wears out over time, AND has a useful life exceeding one year. Because the item is expected to wear out over time (longer than one year), time frames have been assigned to different classes of items, depending on how long that item is expected to be useful in your business. These time frames are called classifications or class life.

Some common classifications:

3 years: off the shelf computer software
5 years: cars, trucks, trailers, computers and peripherals, copiers, calculators
7 years: office furniture, fixtures, unclassified personal property
(See IRS Publication 946 for more detailed lists.)

When depreciating an item, you will need to choose both one method and one convention.

Methods:

Declining Balance─The General Depreciating System (GDS) is the standard, accelerated method of depreciation under MACRS. Using the GDS 200% declining balance (200DB) method (150% for 15 and 20 year property) means you get to deduct more of the item’s value in the early years of its recovery period.

Straight Line─The Straight-Line (S/L) method of depreciation allows you to deduct the value of your item equally over the recovery period.

Alternative Depreciation─The Alternative Depreciation System (ADS) uses the straight-line method of depreciation over a specified number of years. The recovery period for ADS is usually a little longer than used under general or straight-line depreciation methods. (Comparison charts found in the book.)

Choosing a Method

The year you purchase and put your item into use in the business is generally the first year you will take depreciation deductions. That first year is when you will choose what method of depreciation to use. It is standard to use the GDS 200% declining balance method for computing most of your business property. Sometimes, however, you are required to use a different method (usually when business usage is 50% or less on listed property).

You may generally elect to use either the ADS or Straight-Line method for business assets, instead of an accelerated method. The catch to doing so is you must make that election for all property of the same class life put into use in the same year.

Example: If Morgan made the election to depreciate her office desk (7 year property) using the straight-line method, she would also have to use the straight-line method for all other 7 year property purchased and put into use in the same year.

Once you choose a depreciation method, you need to stick with it for that particular item until it is fully depreciated (unless you are required to change, as with business usage dropping to 50% or less).

Listed Property
In order to use an accelerated method of depreciation for listed property, you must use the equipment more than 50% for business purposes. If you use the item 50% or less for business purposes, listed property must be depreciated using the Alternative Depreciation System.

If you initially use your listed property over 50% for business, but then in drops in a later year, previous accelerated depreciation deductions are subject to recapture. The amount recaptured is the amount previous deductions exceed the depreciation that would have been allowable under ADS. (See Chapter 8 of the book for a thorough explanation on recapture.)

This and other information may be found in the book listed below.

Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com

Copyright 2007 -2008