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Estimated Tax Payments – Do They Apply to You?

There are two ways to make income tax payments to the IRS throughout the year: through the withholding amount on your paycheck, and through making estimated tax payments. If you have ever wondered about estimated tax payments, this article will explain what they are, if you need to make them, and how to make them if they are required for your tax situation.

Although you may never have had to worry about them before, a change in your income/situation may put you in a position of needing to make estimated tax payments during the year. If you fail to make estimated payments (and therefore fail to pay taxes on your income as you earn it), you may be in for a nasty surprise come tax time: a hefty tax bill along with an unwelcome penalty from the IRS.

Who is required to pay estimated tax payments?

In general, you are required to make quarterly estimated tax payments if both of the following apply:

  1. You expect to owe at least $1,000 in federal tax after subtracting federal tax withholding and credits, and
  2. You expect your federal withholding and credits to be less than the smaller of:
  • 90 percent of the tax to be shown on your current year federal return, or
  • 100 percent of the tax shown on your prior year federal return

There are additional rules for some type of taxpayers, such as farmers and fishermen.

If you receive your main income via paycheck as an employee who receives a W-2, chances are you won’t be subject to this requirement as long as your employer is withholding the proper amounts from your paychecks. The amount withheld is determined by the information on Form W-4 that you complete when you are hired.

What if you have income, but no paycheck? What if you have lots of income in addition to your paycheck? Chances are you will need to make estimated tax payments (or adjust your withholding). Most taxpayers who are subject to making estimated tax payments are those who have a large amount of income on which there is no tax withholding, including interest, dividend, capital gains, rental/royalty, or business income.

If you receive a paycheck, you can avoid making estimated payments by increasing your W-2 withholdings enough to cover any additional tax liabilities. Make sure to double check with your employer, to ensure that the correct information is being used to calculate your tax withholdings.

If you do have additional income and you don’t get a paycheck, or you do, but you simply don’t want to withhold more from your paycheck, you will need to make estimated tax payments. 

What information do I need?

In order to determine the proper amount of estimated tax payments to make, you’ll need to approximate your adjusted gross income, taxable income, taxes, credits, and other deductions. Start with your prior year return information, and make changes based on what you know will be different. Form 1040-ES, which can be found on the IRS website, includes an Estimated Tax Worksheet to help you with this process. 

When are these payments due?

Estimated tax payments are generally made in four installments. Payments are due by April 15th, June 15th, September 15th, and January 15th of the next year. These dates are based on quarterly payment periods (you pay tax on income earned during each applicable quarterly period); however, notice that the payment due dates aren’t all three months apart.

As a side note, you are not required to make the final payment on January 15th if you file your current year tax return by February 1st and pay the entire balance due with your return. 

Where and how do I make my quarterly estimated tax payments?

There are various ways of making estimated tax payments for the current year, including:

  • Mailing the payment in with a voucher – Form 1040-ES
  • Paying by phone or electronically via EFTPS, the Electronic Federal Tax Payment System
  • Making a payment via EFT with your prior year e-filed return
  • Remitting a payment on the IRS website (or the appropriate state tax authority website; yes, you may need to make estimated tax payments to your state). Here’s the IRS link: https://www.irs.gov/payments
  • Applying an overpayment on your prior year return towards your current year estimated tax payments

Why should I consider making estimated tax payments?

The main reason is to avoid penalties and interest on underpayments. This can happen if your income varies a lot from year to year; you can get surprised by the changes.

Penalties and interest can add up quickly. They are calculated based on the number of days you are late – so, even if you’re already behind, don’t panic! You can address the situation now and minimize the dollar amount of penalties you are hit with.

Getting on track with making proper and timely estimated tax payments may help you in the long run. Getting hit with a large tax bill on April 15th is no fun, and by breaking your tax liability down into four installment payments, you may be doing yourself a big favor in forcing yourself to set those funds aside and having them available to make your payments (while simultaneously keeping the IRS at bay).

This can also help you to avoid a “snowballing” problem in the future – if you end up with a large bill that you cannot pay all at once, and you get on a payment plan with the IRS, it can be difficult to play catch-up.

Staying on top of your estimated tax payments requires you to be more disciplined and aware of your tax responsibilities as a taxpayer and/or business owner. If you need help getting these calculated or set up, please reach out any time.

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Cool Tech Tools: ClickUp™

ClickUp™ is a versatile new web application that serves multiple functions for a small business. It’s primarily a CRM – customer relationship management – with project management and workflow features built in, and is adaptable across several industries.

ClickUp’s goal for its users is to save time and reduce redundancy by tying everything together in one app. Its integrations, which are called ClickApps, are truly its strength. The 1,000+ integrations set ClickUp apart from other offerings, and for this reason, ClickUp excels at automating processes that use multiple apps, including hard-to-automate processes like customer onboarding.

Some of the items people use ClickUp for include reminders, goals, whiteboards, templates, calendars, document flow, task management, dashboards, marketing processes, and team collaboration and communication.

One of the features that is frequently mentioned is the ability to create custom views exactly the way you want them. Views provide a summary of your work and come in many flavors. You can create task views, list views, boards, calendars, Gantt views, workload views, and box views.

If ClickUp has a weakness, it would be its complexity. You really need to be somewhat tech-savvy to get everything set up. The learning curve can be intimidating, but once you get through it, there is so much power in having everything customized and in one platform.

ClickUp does have a following of power users, and a certification of sorts is offered. Becoming ClickUp Verified means that you’ve earned expertise in the product. If the learning curve is too much for you or your team members, you can hire one of these ClickUp consultants to do the setup for you.

As of this writing, ClickUp hosts 4,000,000 users, including the ones on the free version that is for personal use. Monthly pricing for business users ranges from $5 to $19 per user, depending on the features you need. Enterprise options are also available.

ClickUp was founded in 2017, is headquartered in San Diego, CA, and has raised three rounds of funding as of this writing. You can find out more at clickup.com.

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Do You Have a Bank Account in a Country Outside of the United States?

If you have a bank account in a foreign country, you may need to disclose it to a branch of the government that fights financial crimes. This is what tax professionals call FBAR reporting. FBAR stands for Foreign Bank and Financial Accounts Report.

Your foreign bank accounts may also impact your tax returns. Let’s take a look at this requirement.

FinCEN and FBAR

The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Department of the Treasury that collects and analyzes data on financial transactions for the purposes of protecting the financial system from illicit use and combating domestic and international money laundering and related financial crimes.

If you have a financial interest in or signature authority over a foreign financial account (including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account) exceeding certain thresholds, the Bank Secrecy Act (BSA) may require you to report the account yearly to the Department of Treasury by electronically filing a FinCEN 114, Report of Foreign Bank and Financial Accounts (FBAR). 

Who Must File?

United States persons are required to file an FBAR if:

1) The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States, and

2) The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

By definition, United States persons include U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States. 

Exceptions to the Reporting Requirement

There are filing exceptions for the following United States persons or foreign financial accounts:

  • Certain foreign financial accounts jointly owned by spouses
  • United States persons included in a consolidated FBAR
  • Correspondent/Nostro accounts
  • Foreign financial accounts owned by a governmental entity
  • Foreign financial accounts owned by an international financial institution
  • Owners and beneficiaries of U.S. IRAs
  • Participants in and beneficiaries of tax-qualified retirement plans
  • Certain individuals with signature authority over, but no financial interest in, a foreign financial account
  • Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust)
  • Foreign financial accounts maintained on a United States military banking facility 

Reporting and Filing Information

A person who holds a foreign financial account may have a reporting obligation even when the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.

The IRS can waive the penalty for failure to timely file or request an extension for any person required to file an FBAR for the first time. Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to a civil penalty that generally starts at $10,000 (adjusted for inflation) per violation for non-willful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 (as adjusted for inflation) or 50 percent of the balance in the account at the time of the violation, for each violation.

The FBAR is a calendar year report and is due April 15th of the year following the calendar year being reported, with a 6-month extension available. FinCEN will grant filers failing to meet the FBAR due date of April 15th an automatic extension to October 15th each year. A specific extension request is not required. The FBAR must be filed electronically through Fin-CEN’s BSA E-Filing System. The FBAR is not filed with a federal income tax return.

U.S. Taxpayers Holding Foreign Financial Assets May Also Need to File IRS Form 8938

 

Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with an income tax return. Those foreign financial assets could include foreign accounts reported on an FBAR.

The Form 8938 filing requirement is in addition to the FBAR filing requirement. Form 8938 must be filed by certain U.S. taxpayers living in the U.S. and holding foreign financial assets with an aggregate value exceeding $50,000 ($100,000 MFJ) on the last day of the tax year, or more than $75,000 ($150,000 MFJ) at any time during the year.

Delinquent FBAR Submission Procedures

Taxpayers who have not filed a required FBAR and are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about a delinquent FBAR, should file any delinquent FBARs and include a statement explaining why the filing is late. Select a reason for filing late on the cover page of the electronic form or enter a customized explanation using the ‘Other’ option. If unable to file electronically you may contact FinCEN’s Regulatory Helpline at 800-949-2732 or 703-905-3975 (if calling from outside the United States) to determine acceptable alternatives to electronic filing.

The IRS will not impose a penalty for the failure to file the delinquent FBARs if income from the foreign financial accounts reported on the delinquent FBARs is properly reported and taxes are paid on your U.S. tax return, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

Schedules K-2 and K-3 – Do They Impact the FBAR? 

The new K-2 and K-3 schedules must be filed by all pass-through entities (partnerships, S corporations, etc.) with items of international tax relevance, including those with foreign partners and international activities. These new schedules were created to provide more clarity for shareholders and partners as it relates to calculating their U.S. income tax liability or international-related deductions, credits, etc. (for example, information necessary to fill out the Foreign Tax Credit form and calculate the credit amount).

However, these schedules are separate from the FBAR filing, which involves disclosing an interest in and/or authority over certain foreign accounts, and doesn’t directly impact income tax liability or calculation of deductions and credits. While the passthrough entities subject to the K-2/K-3 filing requirements may have their own FBAR filing requirements as it pertains to the accounts that are generating the income/deduction/other items reported on these schedules, this is not necessarily related to any FBAR reporting requirement at the individual shareholder/partner level.

Foreign bank accounts, foreign income, and foreign taxes are highly complex in their reporting requirements and their effect on taxes. It is recommended that you work with your tax professional to ensure that you are fully in compliance with disclosing all the required foreign activity and data that pertains to your specific situation.

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Is Your Best Skill Aligned with Your Business Model?

When starting a business, most entrepreneurs excel at the specific technical skill set they need in order to deliver their services and products to clients.  For example, if you own a bike shop, you are pretty great at all things related to bikes. If you own a law firm, you are probably good at practicing law. This skill is your core skill.

As your business grows, you need different skills beyond your core skill in order to thrive. That skill depends on the type of business model you want to succeed at. Here are some examples of business models and the key skill you need to be outrageously successful.

People-Based Business Model = Leadership

If your business is one of the 25 percent of small businesses that have employees and you have a team that serves customers, then you most likely have a people-based business model. The revenue you earn is dependent on how your people perform and serve clients.

Some examples would be a mid-sized law firm, a nail salon, a marketing agency, and a mid-sized plumbing company. Each one has a team of people that generate revenue.

These people need to be hired, trained, and motivated, and that is where the skill comes in.  If you have a business model like this, you need to excel at leadership, which includes managing people as well as hiring and firing. You need to be great at developing a productive, happy team in order to reach your highest pinnacle of success. Your core skill is still needed, but without leadership skills, you won’t grow as much as you could.

Acquisition-Based Business Model = Negotiation

Some companies grow through acquisition of other companies. In this case, your top skill should be negotiation; you will need to make excellent deals to keep your business growing.

Project-Based Business Model = Project Management

If your job revolves around delivering large projects, such as construction, possibly IT companies, and some real estate, then your business model might be project-based. While knowing how to be a general contractor might be your core skill, your top skill should become project management.

How well you manage the project timeline, delivery of materials, and management of the right number of people with the right skill at the right time all factors into completing the project as quickly and profitably as you can, with the quality needed so you can move to the next one.

Volume-Based Business Model = Merchandising 

If moving high quantities of products or services is your business model, then your revenue depends on volume and how much you can sell. Some examples of these types of firms include grocery stores, software companies, some retail stores, and wholesalers.

How you display and market your products will affect how many customers you can get in the door and how fast you can sell. Your top skill should become merchandising and all things marketing.    

Your Top Skill Is No Longer Your Core Skill

These four types of business models serve as a sampling to show that once you achieve some level of success, your core skill will no longer be the keystone to further success. Developing skills beyond your core skill will take you farther than you ever imagined you could go with your business.

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Where’s My IRS Refund?

Did you know the IRS provides a tool on their website that allows taxpayers to check their refund status? The good news is you don’t have to rely on your tax professional to access this information; you can access it directly yourself.

Here’s the direct link: https://sa.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp

How do I get started? 

The “Where’s My Refund” tool can provide refund information for the three most current tax years. You’ll need the following information in order to complete the query:

  • Social Security (or ITIN) number
  • Filing Status (ex: married filing jointly)
  • Exact refund amount listed on your tax return

After entering in the requested information correctly, a progress bar will appear showing three stages:

  • Return received
  • Refund approved
  • Refund sent

The IRS processes most returns within 21 days, but occasionally a tax return may require additional review. Some of the most common delays in refund processing include:

  • If the return has errors or is incomplete
  • If the filer is the victim of identity theft or fraud
  • If credits aren’t properly accounted for 

What happens if the refund is sent, but not received?

The “Where’s My Refund” tool will tell you what date your refund was sent to your bank account for direct deposit. If the refund hasn’t been received timely, take the following steps:

  1. Check with your financial institution
  2. Verify that the routing and bank account numbers on your return are correct
  3. If it’s determined that an error was made when providing routing or account information, the direct deposit will be returned to the IRS and they will issue a paper check through the mail instead. 

What if I don’t have online access?

Taxpayers can call the IRS Refund Hotline at 800-829-1954. Be sure to have the same information on hand (SSN, filing status, refund amount) when using their automated system to inquire about refund status. 

How do I check the status of my state tax refund?

If your state collects income tax, it is possible to check the status of your return online or by automated phone service. While each state uses a slightly different system to check the refund status, having your SSN and refund amount will be needed. Some states may also require your date of birth, filing status, or zip code. Use an internet search engine to determine the correct state website lookup tool.

Want more information?

The IRS has a page describing the Where’s My Refund tool. You can access it using this link: https://www.irs.gov/refunds