What Tax Professionals Need To Know About Tax Compliance For Their Small Businesses
Whenever tax season rolls around, it’s important for tax professionals like yourself to market to small businesses in the area. Because even though those business owners are proficient at providing goods and services, it’s unlikely they are well versed in tax codes. That’s where you can come in and save the day as a superhero.
With your help, you can make tax season less of a nightmare for local businesses while increasing your client base. Doing so can keep the IRS off your clients’ books, ensure the local community remains vibrant, and increase the amount of clients you have through positive word of mouth.
Here is what you need to know as a tax professional regarding when it comes to small business tax compliance.
Stay Up To Date With Sales, Income, And Employment Taxes
Each category of business tax might have special rules, qualifications, or IRS forms you need to file. If your client's business employs people, they must pay state employment taxes. Workers' compensation insurance, unemployment insurance taxes, and temporary disability insurance are common examples. Your clients may also be required to withhold employee income tax.
Forty-five states and the District of Columbia collect statewide sales taxes at the state level. Thirty-seven states (including Alaska, which has no state tax) allow local general sales taxes. Tobacco, alcohol, and motor fuels are all subject to separate sales taxes in most states. With this in mind, staying up to date on this information could mean the difference between your clients having an easy break when filing their taxes or not.
On the federal level, those businesses you’re helping need to make sure their income taxes are up to code with what the IRS requires. Most businesses are required to file and pay federal taxes on all revenue made or received during the fiscal year. On the other hand, partnerships must submit an annual information return but do not pay income taxes. Instead, each partner declares their portion of the partnership's revenues or losses on their personal tax return.
Almost every state levies a corporation or company income tax. Each state and municipality, however, has its unique tax rules.
A payroll tax is a tax imposed by the federal, state, or local governments to help support government activities. It is often funded by direct employer payments and deductions from employee earnings, thus the term payroll tax.
Medicare, which provides health coverage to adults over the age of 65, and Social Security, which provides retirement income to adults age 62 and older and certain handicapped persons and survivors of taxpayers, are examples of payroll taxes.
Payroll taxes have flat rates and are directed to the program for which they are meant, such as Medicare, Social Security, and so on. On the other hand, income taxes have progressive rates that fluctuate with total income and are collected by the United States Treasury to finance different government activities. Furthermore, some payroll taxes have a wage base limit after which the tax is no longer taken from the employee's earnings for the rest of the year. There is no such limit on income taxes.
There are many forms of payroll taxes at the national and state levels. They are as follows:
- Federal payroll tax
The federal payroll tax, often known as the Federal Insurance Contribution Act (FICA), is divided into one for Medicare and one for Social Security.
- Social Security payroll tax
Employers and workers each pay half of the total Social Security tax burden until the employee hits the wage base limit of $147,000.
- Medicare payroll tax
The Medicare tax is similarly evenly distributed between employers and employees, but unlike Social Security, there is no wage restriction. However, certain employees earning more than $200,000 per year may be forced to pay an extra Medicare levy, which employers are not compelled to match.
- Unemployment insurance taxes
Employers pay the federal unemployment tax (FUTA) on each employee's first $7,000 earned. The same is true for state unemployment programs, except that pay base restrictions vary and, in a few places, employees contribute to the tax as well. Employers who pay their state unemployment taxes on time and are not in a credit reduction state may qualify for a lower federal unemployment tax rate.
- Local and state payroll taxes
Some governments and municipalities may levy extra payroll taxes to fund programs such as short-term disability, paid family medical leave, and others. Employers should consult their local governments for relevant rules.
Independent contractors and solopreneurs may not have an employer withholding payroll taxes from their salary, but it doesn't absolve them entirely. They instead pay self-employment tax, which combines the employee and employer elements of FICA tax. The current rate is 15.3 percent, which is divided as follows: Medicare receives 2.9 percent, while Social Security receives 12.4 percent. As previously stated, the Social Security wage base limit is $147,000.
Saving your clients any amount of money could make the difference in allowing their business to grow effectively as they pay less out of pocket once tax season comes around. With this in mind, as a tax professional, you should keep a few business tax deductions in mind when you’re working with your clients.
- Business interest
If your client pays interest on a business loan, there is a new limit on how much of that interest may be deducted. For the 2020 tax year, your clients can deduct interest charges up to 50% of their taxable income. For the 2021 tax year, your clients can deduct interest charges up to 30% of their taxable income.
- Business insurance
If you believe business insurance to be both usual and required for your company's operations, the expense is entirely deductible. Most contemporary firms are obliged to carry some sort of business insurance by state legislation, industry requirements, or contracts.
- Advertising and marketing
Your client's advertising or marketing expenses to promote their small business are totally tax-deductible. They qualify as long as the costs are regarded as routine, reasonable, and essential.
- Use of a car
Your client can deduct the costs of their vehicle if they use it for commercial reasons. The optional standard mileage rate used to deduct the costs of running a business car will be 56 cents per mile beginning January 1, 2021.
Leverage Your Other Services
When you’re handling your clients’ small business taxes, it’s important to build a trusting relationship. This makes the process go by smoother, and it can pay dividends in the long run. This is because if clients are pleased with your services, you can use this as an opportunity to leverage their needs with your accounting business. Showing how much your clients would benefit from employing your bookkeeping services could lead to an increased, steady income for yourself throughout the year as that is a service that does not end after tax deadlines. Being in charge of their bookkeeping services is useful because it helps you understand how the business can benefit from your knowledge in future tax seasons.
If you’re looking for a way to increase your income on the side as a tax professional, turn to Taxfyle. We connect experienced professionals like yourself to individuals and small businesses across the country looking for help during tax season. This gives you more experience filing different sets of tax returns without having to worry about finding the clients on your own. We even have our Pros covered outside tax season through our outsourcing work where our Pros get work from accounting firms in the country. Regardless of the season, our Pros have a chance to increase their earning potential through Taxfyle.