Do I need to establish myself as a business with a FEIN or can I simply have a business name and file a schedule C with my personal 1040? What about a 2106?
So an Entrepreneur/Self Employed business that uses a Schedule C can obtain Solo 401k? Or does that business have to be regarded as a S- Corp and on payroll to have the Solo 401k?
I’m going to research S Corp more. Just paid 15,000 in taxes this year- LLC 🤢 In the example used, after you pay yourself 40k are you allowed to touch the 60k left?
The benefit of the ROTH is that it grows tax free. Most of what is in your account at retirement is growth not contributions. To make math simple I'll use round numbers. Also let's assume that both ROTH and Traditional balances are at $1 mil. Let's also assume that contributions are 100k. Roth: Pay taxes on income prior to contributing the $100K. That means that when you go to withdrawal, you are getting 900k tax free. Traditional, you reduce your taxable income and contribute $100. You then pay tax on what you withdrawal so the $900k
So i have had a few clients who are in their 1st year of business and they ask what they owe quarterly... i help them out based on their NET income for that IRS Quarter and taking into account their standard deductions if they want or have any. But then they always ask how the late fee is assessed. If its based on LAST years return divided by 4 then how would that work? Additionally what happens if they did have a good year LAST year and this year they are making a lot less and I give them an accurate figure on what they SHOULD pay this year for Q2 and it is maybe a few thousand dollars LESS than last years return and quarterly figure... is the IRS really going to charge them interest on a income that they have NOT earned this year just because they made more last year? I take pride in helping my clients pay as little in taxes as possible and this includes providing a "suggested" income tax estimated payment that they should make, broken down by each quarter... if the IRS is always going to be expecting Last Years taxable income /4 as a quarterly payment and then anything LESS than that they are going to charge 8% interest on the remaining balance... then everything that I am doing with my ACCURATE payment figures is good for their 1st year in business and then is just a waste after that... and I should be telling them to pay last years filing /4. THOUGHTS??
Here is what ChatGPT 4-O has to say about the same question fed into it... Understanding Estimated Tax Payments and Underpayment Penalties Introduction I appreciate your dedication to helping your clients minimize their tax liabilities through accurate estimated tax payments. The concerns you've raised are common among tax professionals working with self-employed individuals and small business owners. Let's delve into how the IRS underpayment penalties work, the safe harbor rules, and how you can effectively guide your clients to avoid unnecessary penalties while ensuring they aren't overpaying their estimated taxes. 1. IRS Underpayment Penalties and Safe Harbor Rules How Underpayment Penalties Work: The IRS requires taxpayers to pay taxes throughout the year as income is earned. If a taxpayer underpays their taxes during the year, the IRS may assess an underpayment penalty. The penalty is essentially interest on the amount of tax that was underpaid for each quarter. Safe Harbor Rules to Avoid Underpayment Penalties: To avoid penalties, taxpayers must meet one of the following criteria: Pay 90% of the Current Year's Tax Liability: If the taxpayer pays at least 90% of their total tax liability for the current year through estimated payments and withholding, they can avoid underpayment penalties. Pay 100% of the Previous Year's Tax Liability: If the taxpayer pays 100% of their prior year's total tax liability (110% if their adjusted gross income [AGI] was over $150,000), they can avoid penalties, regardless of their current year's tax liability. Key Points: First-Year Businesses: Since there is no prior year's tax liability, the safe harbor based on the previous year isn't applicable. They need to ensure they pay at least 90% of their current year's tax liability to avoid penalties. Subsequent Years: Taxpayers can choose either safe harbor method. If their income is significantly lower in the current year, paying 90% of the current year's tax liability may result in lower estimated payments and still avoid penalties. 2. Addressing Your Concerns A. Is the IRS Going to Charge Interest on Income Not Earned This Year? No, the IRS Does Not Charge Penalties on Income Not Earned: If a taxpayer's current year's income is lower than the previous year, and they pay estimated taxes based on 90% of their actual current year's tax liability, they can avoid underpayment penalties. The IRS only charges penalties if the taxpayer fails to meet either safe harbor threshold. B. Should You Tell Clients to Pay Last Year's Tax Divided by Four? Not Necessarily: Paying 100% (or 110%) of the prior year's tax liability is one way to avoid penalties, but it may result in overpaying if the current year's income is lower. Advising clients to pay estimated taxes based on their actual current year's income can be more accurate and cash-flow friendly. C. Are Your Efforts in Providing Accurate Payment Figures Wasted After the First Year? Absolutely Not: Your role in helping clients estimate their current year's tax liability is valuable every year. By accurately projecting their income and tax obligations, clients can make informed decisions and avoid both overpaying and underpayment penalties. 3. Strategies to Help Your Clients A. Estimating Current Year's Tax Liability Accurate Projections: Work with your clients to project their income, deductions, and credits for the current year. Adjust estimates as necessary if their financial situation changes. Calculating Estimated Payments: Determine 90% of the projected current year's total tax liability. Divide this amount by four to determine the quarterly estimated payments. B. Monitoring Throughout the Year Quarterly Reviews: Reassess income and expenses each quarter. Adjust estimated payments if there are significant changes in income. C. Using the Annualized Income Installment Method When Income Fluctuates: If your clients have uneven income, the annualized income installment method allows them to match estimated payments with actual income earned each period. This method can help avoid penalties even if the income is lower in some quarters. Implementation: Form 2210, Schedule AI: Complete Schedule AI to annualize income and calculate the required installments. This form is filed with the annual tax return to demonstrate that the correct estimated payments were made based on actual income. D. Communicating Safe Harbor Options Educate Clients on Safe Harbor Rules: Explain both the 90% current year and 100% (or 110%) prior year safe harbor options. Discuss which method is more beneficial based on their financial situation. Avoiding Unnecessary Overpayments: If their income is lower this year, paying based on the prior year's higher tax liability may not be the best approach. Accurate current-year estimates can prevent overpayment and improve cash flow. 4. Addressing Potential Underpayment Penalties A. Calculating Potential Penalties Underpayment Penalties Are Interest Charges: The penalty rate is the federal short-term rate plus 3%, compounded daily. For example, if the rate is 8%, the penalty applies only to the underpaid amount for the period it was underpaid. B. Penalty Exceptions Exceptions and Waivers: If the total underpayment is less than $1,000, no penalty is assessed. If the taxpayer had no tax liability in the prior year, they are generally exempt from penalties. The IRS may waive penalties due to casualty, disaster, or other unusual circumstances. 5. Practical Example Client Scenario: Last Year's Tax Liability: $20,000 Current Year's Projected Tax Liability: $15,000 Option 1: Pay 100% of Last Year's Tax Liability Estimated Payments: $20,000 ÷ 4 = $5,000 per quarter Outcome: No underpayment penalty but overpaying taxes based on current year's lower income. Option 2: Pay 90% of Current Year's Tax Liability 90% of Current Year's Tax Liability: $15,000 × 90% = $13,500 Estimated Payments: $13,500 ÷ 4 = $3,375 per quarter Outcome: Avoids underpayment penalties and aligns payments with actual income. Option 3: Pay Actual Current Year's Tax Liability Estimated Payments: $15,000 ÷ 4 = $3,750 per quarter Outcome: No penalties since payments exceed 90% of current year's liability. 6. Recommendations A. Continue Providing Accurate Estimated Payment Figures Value of Accurate Estimates: Helps clients manage cash flow effectively. Prevents overpayment and potential financial strain. B. Educate Clients on Safe Harbor Rules Empower Clients: Understanding the rules allows clients to make informed decisions. They can choose the method that best suits their financial situation. C. Use Tax Planning Strategies Adjust Withholdings if Applicable: For clients who have other sources of income with withholdings (e.g., wages), adjusting withholdings can help meet safe harbor requirements. Consider Retirement Contributions: Advise on making deductible retirement contributions to reduce taxable income. D. Monitor and Adjust Estimates Regularly Stay Proactive: Regularly review financial performance. Adjust estimated payments to reflect changes in income or expenses. 7. Final Thoughts Your efforts in providing accurate estimated tax payment figures are crucial for your clients, not only in their first year of business but every year thereafter. By understanding and applying the IRS safe harbor rules effectively, you can help your clients avoid underpayment penalties without overpaying taxes. Key Takeaways: Avoiding Penalties: Clients can avoid underpayment penalties by paying at least 90% of their current year's tax liability. Accurate Estimates Matter: Providing accurate, up-to-date estimates helps clients make appropriate quarterly payments. Flexibility in Methods: Clients have options between the prior year and current year safe harbor methods. Ongoing Communication: Maintain open communication with clients to adjust estimates as needed throughout the year. Disclaimer: This information provides a general understanding of estimated tax payments and is not personalized tax advice. Tax laws and regulations are complex and subject to change. For specific guidance tailored to your situation, consider consulting a certified tax professional or accountant. Additional Resources: IRS Publication 505 - Tax Withholding and Estimated Tax: Provides detailed information on estimated taxes and safe harbor rules. IRS Publication 505 IRS Form 2210 - Underpayment of Estimated Tax by Individuals: Includes Schedule AI for the annualized income installment method. IRS Form 2210 By leveraging these strategies and maintaining a proactive approach, you can continue to provide exceptional value to your clients, helping them navigate their tax obligations efficiently and effectively.
How can you do bookkeeping just by knowing the fundamentals of accounting/bookkeeping? Some industries have complex ways of recording revenue, you can get stuck with categorizing expenses, you need to know what expenses are tax deductible and non deductible how can you know all of these by yourself? I want to do bookkeeping as a side hustle but I don’t know how to handle things I don’t know. How did you teach yourself?
So happy to have found your channel. Appreciate the simplified explanations and sharing all you've learned as you've grown your business. Thank you!
I’m happy to help!
Thank you!! Excellent info.
Thank-You!
Thank you, Zack, for a great video, keep them coming. You are a rockstar.
I’m happy to help! I definitely will keep them coming
I love your enthusiasm, it's contagious.
I love what I do
Thank you Zach 💜
Thanks for watching!
Thanks tons for the inside baseball info!
Thanks for watching!
Excellent Job!!!
Thank you!
Do you just provide profit and loss report or both Balance sheet and profit & Loss?
Do I need to establish myself as a business with a FEIN or can I simply have a business name and file a schedule C with my personal 1040? What about a 2106?
So an Entrepreneur/Self Employed business that uses a Schedule C can obtain Solo 401k? Or does that business have to be regarded as a S- Corp and on payroll to have the Solo 401k?
So, with being a bookkeeper, we need to give our clients a w-9 if it is our bookkeeper business?
Yes, you should get a 1099 unless you are an S Corp
I’m going to research S Corp more. Just paid 15,000 in taxes this year- LLC 🤢 In the example used, after you pay yourself 40k are you allowed to touch the 60k left?
Yes, the $60,000 is still yours
The benefit of the ROTH is that it grows tax free. Most of what is in your account at retirement is growth not contributions. To make math simple I'll use round numbers. Also let's assume that both ROTH and Traditional balances are at $1 mil. Let's also assume that contributions are 100k.
Roth: Pay taxes on income prior to contributing the $100K. That means that when you go to withdrawal, you are getting 900k tax free.
Traditional, you reduce your taxable income and contribute $100. You then pay tax on what you withdrawal so the $900k
Thanks for sharing that!
So i have had a few clients who are in their 1st year of business and they ask what they owe quarterly... i help them out based on their NET income for that IRS Quarter and taking into account their standard deductions if they want or have any. But then they always ask how the late fee is assessed. If its based on LAST years return divided by 4 then how would that work?
Additionally what happens if they did have a good year LAST year and this year they are making a lot less and I give them an accurate figure on what they SHOULD pay this year for Q2 and it is maybe a few thousand dollars LESS than last years return and quarterly figure... is the IRS really going to charge them interest on a income that they have NOT earned this year just because they made more last year?
I take pride in helping my clients pay as little in taxes as possible and this includes providing a "suggested" income tax estimated payment that they should make, broken down by each quarter... if the IRS is always going to be expecting Last Years taxable income /4 as a quarterly payment and then anything LESS than that they are going to charge 8% interest on the remaining balance... then everything that I am doing with my ACCURATE payment figures is good for their 1st year in business and then is just a waste after that... and I should be telling them to pay last years filing /4.
THOUGHTS??
Here is what ChatGPT 4-O has to say about the same question fed into it...
Understanding Estimated Tax Payments and Underpayment Penalties
Introduction
I appreciate your dedication to helping your clients minimize their tax liabilities through accurate estimated tax payments. The concerns you've raised are common among tax professionals working with self-employed individuals and small business owners. Let's delve into how the IRS underpayment penalties work, the safe harbor rules, and how you can effectively guide your clients to avoid unnecessary penalties while ensuring they aren't overpaying their estimated taxes.
1. IRS Underpayment Penalties and Safe Harbor Rules
How Underpayment Penalties Work:
The IRS requires taxpayers to pay taxes throughout the year as income is earned.
If a taxpayer underpays their taxes during the year, the IRS may assess an underpayment penalty.
The penalty is essentially interest on the amount of tax that was underpaid for each quarter.
Safe Harbor Rules to Avoid Underpayment Penalties:
To avoid penalties, taxpayers must meet one of the following criteria:
Pay 90% of the Current Year's Tax Liability:
If the taxpayer pays at least 90% of their total tax liability for the current year through estimated payments and withholding, they can avoid underpayment penalties.
Pay 100% of the Previous Year's Tax Liability:
If the taxpayer pays 100% of their prior year's total tax liability (110% if their adjusted gross income [AGI] was over $150,000), they can avoid penalties, regardless of their current year's tax liability.
Key Points:
First-Year Businesses:
Since there is no prior year's tax liability, the safe harbor based on the previous year isn't applicable.
They need to ensure they pay at least 90% of their current year's tax liability to avoid penalties.
Subsequent Years:
Taxpayers can choose either safe harbor method.
If their income is significantly lower in the current year, paying 90% of the current year's tax liability may result in lower estimated payments and still avoid penalties.
2. Addressing Your Concerns
A. Is the IRS Going to Charge Interest on Income Not Earned This Year?
No, the IRS Does Not Charge Penalties on Income Not Earned:
If a taxpayer's current year's income is lower than the previous year, and they pay estimated taxes based on 90% of their actual current year's tax liability, they can avoid underpayment penalties.
The IRS only charges penalties if the taxpayer fails to meet either safe harbor threshold.
B. Should You Tell Clients to Pay Last Year's Tax Divided by Four?
Not Necessarily:
Paying 100% (or 110%) of the prior year's tax liability is one way to avoid penalties, but it may result in overpaying if the current year's income is lower.
Advising clients to pay estimated taxes based on their actual current year's income can be more accurate and cash-flow friendly.
C. Are Your Efforts in Providing Accurate Payment Figures Wasted After the First Year?
Absolutely Not:
Your role in helping clients estimate their current year's tax liability is valuable every year.
By accurately projecting their income and tax obligations, clients can make informed decisions and avoid both overpaying and underpayment penalties.
3. Strategies to Help Your Clients
A. Estimating Current Year's Tax Liability
Accurate Projections:
Work with your clients to project their income, deductions, and credits for the current year.
Adjust estimates as necessary if their financial situation changes.
Calculating Estimated Payments:
Determine 90% of the projected current year's total tax liability.
Divide this amount by four to determine the quarterly estimated payments.
B. Monitoring Throughout the Year
Quarterly Reviews:
Reassess income and expenses each quarter.
Adjust estimated payments if there are significant changes in income.
C. Using the Annualized Income Installment Method
When Income Fluctuates:
If your clients have uneven income, the annualized income installment method allows them to match estimated payments with actual income earned each period.
This method can help avoid penalties even if the income is lower in some quarters.
Implementation:
Form 2210, Schedule AI:
Complete Schedule AI to annualize income and calculate the required installments.
This form is filed with the annual tax return to demonstrate that the correct estimated payments were made based on actual income.
D. Communicating Safe Harbor Options
Educate Clients on Safe Harbor Rules:
Explain both the 90% current year and 100% (or 110%) prior year safe harbor options.
Discuss which method is more beneficial based on their financial situation.
Avoiding Unnecessary Overpayments:
If their income is lower this year, paying based on the prior year's higher tax liability may not be the best approach.
Accurate current-year estimates can prevent overpayment and improve cash flow.
4. Addressing Potential Underpayment Penalties
A. Calculating Potential Penalties
Underpayment Penalties Are Interest Charges:
The penalty rate is the federal short-term rate plus 3%, compounded daily.
For example, if the rate is 8%, the penalty applies only to the underpaid amount for the period it was underpaid.
B. Penalty Exceptions
Exceptions and Waivers:
If the total underpayment is less than $1,000, no penalty is assessed.
If the taxpayer had no tax liability in the prior year, they are generally exempt from penalties.
The IRS may waive penalties due to casualty, disaster, or other unusual circumstances.
5. Practical Example
Client Scenario:
Last Year's Tax Liability: $20,000
Current Year's Projected Tax Liability: $15,000
Option 1: Pay 100% of Last Year's Tax Liability
Estimated Payments: $20,000 ÷ 4 = $5,000 per quarter
Outcome: No underpayment penalty but overpaying taxes based on current year's lower income.
Option 2: Pay 90% of Current Year's Tax Liability
90% of Current Year's Tax Liability: $15,000 × 90% = $13,500
Estimated Payments: $13,500 ÷ 4 = $3,375 per quarter
Outcome: Avoids underpayment penalties and aligns payments with actual income.
Option 3: Pay Actual Current Year's Tax Liability
Estimated Payments: $15,000 ÷ 4 = $3,750 per quarter
Outcome: No penalties since payments exceed 90% of current year's liability.
6. Recommendations
A. Continue Providing Accurate Estimated Payment Figures
Value of Accurate Estimates:
Helps clients manage cash flow effectively.
Prevents overpayment and potential financial strain.
B. Educate Clients on Safe Harbor Rules
Empower Clients:
Understanding the rules allows clients to make informed decisions.
They can choose the method that best suits their financial situation.
C. Use Tax Planning Strategies
Adjust Withholdings if Applicable:
For clients who have other sources of income with withholdings (e.g., wages), adjusting withholdings can help meet safe harbor requirements.
Consider Retirement Contributions:
Advise on making deductible retirement contributions to reduce taxable income.
D. Monitor and Adjust Estimates Regularly
Stay Proactive:
Regularly review financial performance.
Adjust estimated payments to reflect changes in income or expenses.
7. Final Thoughts
Your efforts in providing accurate estimated tax payment figures are crucial for your clients, not only in their first year of business but every year thereafter. By understanding and applying the IRS safe harbor rules effectively, you can help your clients avoid underpayment penalties without overpaying taxes.
Key Takeaways:
Avoiding Penalties:
Clients can avoid underpayment penalties by paying at least 90% of their current year's tax liability.
Accurate Estimates Matter:
Providing accurate, up-to-date estimates helps clients make appropriate quarterly payments.
Flexibility in Methods:
Clients have options between the prior year and current year safe harbor methods.
Ongoing Communication:
Maintain open communication with clients to adjust estimates as needed throughout the year.
Disclaimer: This information provides a general understanding of estimated tax payments and is not personalized tax advice. Tax laws and regulations are complex and subject to change. For specific guidance tailored to your situation, consider consulting a certified tax professional or accountant.
Additional Resources:
IRS Publication 505 - Tax Withholding and Estimated Tax:
Provides detailed information on estimated taxes and safe harbor rules.
IRS Publication 505
IRS Form 2210 - Underpayment of Estimated Tax by Individuals:
Includes Schedule AI for the annualized income installment method.
IRS Form 2210
By leveraging these strategies and maintaining a proactive approach, you can continue to provide exceptional value to your clients, helping them navigate their tax obligations efficiently and effectively.
I’m not a tax expert, that sounds like a great question to ask a tax accountant.
this is exciting stuff 😊 if you love money stuff 😊 number nerds like us
Thanks for watching!
How can you do bookkeeping just by knowing the fundamentals of accounting/bookkeeping? Some industries have complex ways of recording revenue, you can get stuck with categorizing expenses, you need to know what expenses are tax deductible and non deductible how can you know all of these by yourself? I want to do bookkeeping as a side hustle but I don’t know how to handle things I don’t know. How did you teach yourself?
Best way to learn is through experience. Just don’t make the same mistake twice!