Here in our Chicago South Loop Tax Preparation, and our Homewood Il, Tax preparation offices, we specialize in helping taxpayers legally reduce their taxable income, claim every tax deduction they are entitled to, and maximize tax credits. Through our work of helping taxpayers, we’ve come to find that many people often miss the Federal Child and Dependent Care Credit. The Federal child and dependent care tax credit refunds taxpayers a portion of the expenses paid for the care of dependent children and other dependents (qualifying persons).
Since summer is almost here, we wanted to give you some tips on what you need to do to claim the federal Child and Dependent Care credit if you have children (or disabled siblings/parents that you care for) that you plan on enrolling into a summer DAY camp program (so that you can work, or look for work). You’ll notice that we’ve put emphasis on summer DAY camp programs, as overnight summer camp programs are not eligible for the credit. Below please find some key points to claiming the Federal Child and Dependent Care Credit.
🔶The credit is equal to a percentage (from 35%-20%) of the amount you paid for daycare or summer camp attendance, and daycare throughout the year (up to $6,000 for 2 children, & $3,000 for 1 child). However, if you have 2 qualifying children, and paid expenses of $6,000 for only 1 child, you would be able to use the entire $6,000 to figure your credit, even though you only paid expenses for 1 child. To illustrate, Susan is a single mother earning $40,000 a year and has 2 children ages 8 & 12. The local park district is offering an 8-week summer day camp for $100 a week per child totaling $1,600 ($800 per child). Throughout the year, the 8-year-old goes to an afterschool daycare that charges $85 a week for 40 weeks totaling $3,400. At tax time Susan calculates that she paid a total of $5,000 in dependent care expenses, and her income level entitles her to a 22% reimbursement ($1,100) of the amount paid for care. If Susan has a $4,000 tax liability and was receiving a $500 refund, the $1,100 dollar-or-dollar tax credit will reduce her tax liability to $2,900 and increase her tax refund to $1,600.
🔷You must have earned income. Earned income is defined as W2 Income, rideshare driving, food delivery person, MLM business, self-employment, etc.
🔶The provider must provide you with their name, EIN (unless it’s a tax-exempt organization like a church or school), and address.
🔷You must provide your tax professional with the amount paid to the provider PER CHILD.
🔶The dependent(s) must be age 13 or under.
🔷You must be the custodial parent.
🔶There are no minimum or maximum income limits on this credit.
🔷If your filing status is married filing separately, you must have lived apart from your spouse for the last 6 months of the year. You don’t have to be legally separated, but you must be able to prove that you lived apart from your spouse.
🔶 Sometimes you can file married filing separately, and the person may not qualify as your dependent for head of household status, earned income credit, etc., but they can still qualify as your person for the Federal Child and dependent care credit tax credit. For example, you left your cheating spouse in May, and you’re the primary caregiver for your disabled sister. Your disabled sister receives a monthly dividend check of $400 from her ownership of Ford stock (left to her by your parents). While your sister isn’t your qualifying dependent because her gross income is more than $4,400, you can still claim the child and dependent care credit for any dependent care expenses that you pay on her behalf.
Although we’ve given you the basics, this article is not all-inclusive. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.
Here in our Chicago South Loop Tax Preparation, and our Homewood Il, Tax preparation offices, we specialize in helping business owners and real estate investors reduce their tax liability. One topic that always comes up is the topic of self-employment taxes. Regardless of age, all individuals with self-employment income must pay self-employment taxes. Even if you have a regular W2 job, if you earn additional income through a side gig, then you have self-employment income. Self-employment income can be earned through rideshare (Uber or Lyft) driving, delivery driver (Doordash, GrubHub, Instacart, etc.) work, independent contractor work (construction, life insurance sales, cleaning business, etc.) selling things online (Mercari, Eba, Amazon, etc.) or simply selling dinners out of your home.
The government claims that the reason self-employed workers need to pay self-employment taxes (in addition to income taxes), is so that when business owners reach retirement age, they’ll be able to collect Social Security and Medicare part A (hospital insurance) benefits if they paid self-employment taxes for at least 10 years (40 quarters). It is important to note that self-employment taxes are paid on your net earnings from self-employment, not your entire business income. In this article, we will discuss:
What is the self-employment tax
How Much Are Self-Employment Taxes?
Do employees pay less in tax than self-employed people?
Individuals Subject to Self-Employment Taxes.
Net Earnings from Self-Employment.
What happens if I own two businesses?
What happens if you work a job and have side self-employment income?
Will having self-employment income allow me to write off everything?
Income Not Subject to Self-Employment Taxes.
If you own an unincorporated business, you likely pay at least three different federal taxes. These three taxes are:
Federal income taxes.
Social Security taxes.
Social Security taxes and Medicare taxes are collectively called self-employment taxes.
The self-employment tax totals 15.3% and has two parts:
1.) 12.4 percent Social Security tax up to an annual income ceiling adjusted for inflation each year ($147,000 for 2022) 2.) 2.9 percent Medicare tax on all net earnings from self-employment.
If your self-employment income is more than $200,000 (if you’re single) or $250,000 (if you’re married filing jointly), you must pay an additional 0.9 percent Medicare tax on self-employment income over the applicable threshold for a total 3.8 percent Medicare tax.
Do employees pay less in taxes than self-employed people?
Excluding the additional Medicare tax that’s levied solely on employees, the self-employment tax rate is the same as the combined Social Security and Medicare payroll tax paid by employees and employers. But with employment, employers pay half of the taxes while withholding the other half from their employees’ wages.
At first glance, it looks as if W-2 employees personally pay half as much as the self-employed. But that’s not so. The tax code allows the self-employed to make up for some of this unfairness by allowing them to reduce net income subject to self-employment taxes by 7.65 percent and deduct on their Form 1040 half of their self-employment taxes.
Individuals Subject to the Self-Employment Tax.
You pay self-employment tax if you:
operate as a single-member LLC.
earn income on a 1099-NEC.
operate as a single-member LLC.
do business as a sole proprietor.
are a general partner in a partnership.
are an LLC member in a multi-member LLC.
or are a co-owner of any other business entity taxed as a partnership (there is an exemption for limited partners).
You determine if your activity is a business under the same rules you use for deducting business expenses. The general rule is that a business is an activity you engage in regularly and continuously to earn a profit. You don’t have to work at a business full-time, but it can’t be a sporadic activity.
Net Earnings from Self-Employment.
The self-employment tax is not a progressive tax. It starts immediately—on dollar one, once you have over $433 in Schedule C, E, or F net income from a business ($433 x 92.35 activity = $400 which is the starting amount that requires reporting of self-employment income, & the payment of self-employment taxes).
Example. Nancy earns $1,000 from her single-member LLC, and reports this income on Schedule C. Her net earnings from self-employment are $935 ($1,000 x 92.35 percent). Her self-employment tax is $143 ($935 x 15.3 percent).
Your net earnings from self-employment start with the gross income from your trade or business minus valid allowable business deductions. Because you get to deduct valid business expenses, it makes it even more important to keep up with your bookkeeping, so that you can identify the expenses that will allow you to lower your income tax and self-employment tax. It’s important to note that, personal itemized deductions (charity donations, property taxes, medical expenses, etc.) and “above-the-line” adjustments to income don’t decrease net earnings from self-employment.
What happens if I own two businesses?
If you have more than one business (say two Schedule Cs), you combine the net income or loss to determine your net earnings from self-employment. Thus, a loss from one business offsets the income from another profitable business. But all is not roses: when calculating net earnings from self-employment, you may not deduct:
Net operating loss carryovers from past years,
Deduction for health insurance premiums for the self-employed,
Contributions to a self-employed retirement plan such as an IRA, SEP-IRA, or 401(k).
Section 199A qualified business income deduction.
Deduction for one-half of your self-employment taxes.
What if I Have Both W-2 Wages and Self-Employment Income?
If you earn both W-2 wages and self-employment income, you count your W-2 first as if you had no self-employment income. If your W-2 wages exceed the annual ceiling ($147,000 in 2022), no Social Security taxes are due on any of your self-employment income. In this case, you pay less in taxes under the ordering rule because it allows you to use all or part of the Social Security wage ceiling with your employee income (taxed at 6.2 percent).
Will having self-employment income allow me to write off everything?
Despite what some may believe, becoming self-employed will NOT allow you to
Write off all your meals as a business expense.
Write off all the utility bills in your home.
Write off 100% of your cell phone usage.
Deduct the cost of taking your friends to sporting events or bars.
Deduct all your travel and transportation expenses.
Write off the entire cost of owning or renting a residence that contains your home office.
Some types of income are not subject to self-employment tax at all, including:
most rental income,
most dividend and interest income,
gain or loss from sales and dispositions of business property, and
S corporation distributions to shareholders.
S Corporation Distributions
The income earned by anS corporation passes through the business to the individual shareholders as dividends or distributions. Such pass-through S corporation income is not trade or business income to the shareholders and is not subject to self-employment taxes.
Key point. The S corporation is the one business form that can save its owners substantial self-employment taxes, which is why it is so popular. However, most first starting out don’t need a S-Corp as the cost to maintain the S-Corp, payroll, and bookkeeping will outweigh the benefits until you net at least $35,000-$40,000.
Example Jason owns a landscaping business that generates $100,000 in net profit. If he operates as a sole proprietor, 92.35 percent of his $100,000 net business income is net earnings from self-employment subject to self-employment taxes. Instead, he incorporates his business with him as the sole shareholder and works full-time in the business as the corporation’s employee. Jason has his corporation pay him $60,000 as employee salary, on which payroll taxes must be paid. In addition, the corporation distributes $40,000 to Jason during the year as a distribution. The $40,000 is not subject to self-employment taxes, saving $5,652 in taxes ($40,000 x 92.35 percent x 15.3 percent)
Here are five things to know from this article:
The self-employed must pay a 12.4 percent Social Security tax and a 2.9 to 3.8 percent Medicare tax on their net earnings from self-employment.
The 12.4 percent Social Security tax is subject to an annual income ceiling ($147,000 for 2022).
You must pay self-employment taxes if you earn income from a business, side hustle, or side gig that you report on Schedule C or F, co-own as a general partner in a partnership, or own as a member in a multimember LLC, or if you co-own any other business entity taxed as a partnership.
Net earnings from self-employment do not include real estate rental income (unless you provide services to tenants), dividend or interest income, or gain or loss from business property other than inventory.
Distributions from S corporations are not subject to self-employment taxes. S corporations must ordinarily treat shareholders who work in the corporate business as employees and pay them a reasonable W-2 salary
Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.
To summarize, the guidance says that if a taxpayers PPP loan is forgiven based upon lies, or leaving things out (misrepresentations or omissions) the taxpayer cannot exclude the forgiven loan income from taxation; basically, you will have to pay taxes on the loan amount that you received.
According to the IRS, while many small business owners were entitled to receive the loan (and properly claimed the PPP loan forgiveness), there are many taxpayers who weren’t eligible for the loan, or loan forgiveness. Some taxpayers lied to receive the PPP loan funds, while other’s spent the loan proceeds on ineligible items.
Per IRS Issue Number IR-2022-162: “Under the terms of the PPP loan program, lenders can forgive the full amount of the loan if the loan recipient meets three conditions.
1 – The loan recipient was eligible to receive the PPP loan. An eligible loan recipient:
is a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity;
was in business on or before February 15, 2020; and
had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.
2 – The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.
3 – The loan recipient had to apply for loan forgiveness. The loan forgiveness application required a loan recipient to attest to eligibility, verify certain financial information, and meet other legal qualifications.
If the 3 conditions above are met, then under the PPP loan program the forgiven portion is excluded from income. If the conditions are not met, then the amount of the loan proceeds that were forgiven but do not meet the conditions must be included in income and any additional income tax must be paid.”
Per IRS Issue Number IR-2022-162: “Taxpayers who inappropriately received forgiveness of their PPP loans are encouraged to take steps to come into compliance by, for example, filing amended returns that include forgiven loan proceed amounts in income.” In essence, if you know that you lied about how you spent the PPP (paycheck protection program) funds, take the lie back by amending (changing) your tax return to reflect the truth.
IRS Commissioner Chuck Retting said: “This action underscores the Internal Revenue Service’s commitment to ensuring that all taxpayers are paying their fair share of taxes.” “We want to make sure that those who are abusing such programs are held accountable, and we will be considering all available treatment and penalty streams to address the abuses.”
If you, or someone you know had a person “do your PPP loan” (complete the application, and get you the funds), and you need assistance with amending your tax return, please reach out to us for assistance.
1.) underpay your tax, leaving you open to IRS penalties, or 2.) overpay your tax, meaning you gave a gift to the government.
However, if you made an error on your tax return, don’t worry; there’s good news: you can undo your mistake! Here’s even better news: there are two special ways to fix your incorrect tax return that will save you from paying more to the IRS than you would otherwise. We’ll tell you all about them in this article. —there are two easy ways to fix it:
A superseding return
A qualified amended return
A superseding return is an amended or corrected return filed on or before the original or extended due date. The IRS considers the changes on a superseding return to be part of your original return.
A qualified amended return is an amended return that you file after the due date of the return (including extensions) and before the earliest of several events, but most likely when the IRS contacts you with respect to an examination of the return. If you file a qualified amended return, you avoid the 20 percent accuracy-related penalty on that mistake.
Superseding Return Example
You file a joint Form 1040 tax return electronically on February 21, 2022, for tax year 2021, but you later decide you want to file a separate return. Since the joint-filing election is irrevocable, on or before April 15, 2022 (which is the unextended due date for your 2021 Form 1040), you must file a superseding return to undo the joint election.
IRS electronic filing rules for amended returns do not permit you to file this superseding return electronically, because you are changing your filing status (from married, filing jointly, to married, filing separately). That being said, your only other option is to use “snail mail.” Using a paper return via snail mail, you’ll submit either:
1.) A second original Form 1040 return using the married-filing-separately filing status, or 2.) An amended Form 1040X showing the change from joint to separate filing status. Be sure to write “SUPERSEDING RETURN – IRM 184.108.40.206.10” in red at the top of page 1 of either Form 1040 or Form 1040X.
Qualified Amended Return Example
You realize your return preparer left a $30,000 IRA distribution off your 2019 tax return. Ouch! Let’s assume you are in the 32 percent tax bracket and had no federal income tax withholding on the distribution: you owe an additional $9,600 in federal income tax on your 2019 tax return due to this distribution.
If you file an amended return before the IRS contacts you about the missing income, then it’s a qualified amended return, and you avoid $1,920 (20percent of $9,600) in audit penalties.
If you don’t file the amended return, and if the IRS contacts you about the missing income, the IRS will propose the $1,920 penalty. You may be able to request penalty relief, but you’ll have to make your case, and the facts may or may not be on your side.
In both circumstances, you’ll also pay interest on the $9,600 back to July 15, 2020 (the COVID-19-postponed 2019 Form 1040 due date). Of course, the earlier you pay the tax, the less interest you’ll accrue. You’ll pay less interest with a qualified amended return because you’re paying the tax sooner.
As you probably know, establishing a home office for your Schedule C or corporate business creates valuable tax deductions.
But it’s not available only for your proprietorship,partnership, or corporate business. If you have rental properties, you can establish a home office to manage your rental properties and deduct the cost on your Schedule E. or click here to call us 1-855-743-5765.
Rentals as a Business
The first hurdle is that your rental activities have to qualify as a “trade or business” under the tax law.
Luckily for you, that’s relatively simple—you’ll need regular and continuous involvement with your rental activities to meet this requirement.
Whether or not your rental activities are a trade or business depends on the facts and circumstances of your particular situation, and tax court cases give us guidance on that.
Your second hurdle is setting aside space in your home that qualifies for the home-office deduction.
For this to work, you need to use that space in your residence regularly and exclusively as the principal place of business for your rental activities. or click here to call us 1-855-743-5765.
This sounds hard, and it was hard—before lawmakers changed the rules to include, as a principal place of business, the space you use for administrative or management activities, provided there is no other fixed location where you conduct substantial administrative or management activities.
Establishing a rental property home office does two things to your household expenses:
Turns non-deductible household expenses into tax deductions.
Moves household expenses normally deductible on Schedule A to your rental properties on Schedule E.
The latter is especially important after passage of the Tax Cuts and Jobs Act
put a $10,000 limit on your Schedule A state and local tax deductions, and
lowered the amount of your mortgage on which you deduct mortgage interest from $1 million to $750,000.
Without a qualifying home office, your mileage from home to your first business stop and then from your last business stop back home is non-deductible commuting mileage.
But here is what happens with the rental property’s principal office in your home:
You have no commuting mileage from your home to and from your rentals, if the rentals are in the area of your tax home (say, within 50 miles).
You establish your rental property tax home, and if your rentals are outside the area of your tax home, then the mileage from your home to and from the rentals is deductible business mileage because you are traveling outside the area of your tax home.
Real Estate Professional
If you qualify as a real estate professional under the tax law, then you can deduct 100 percent of your rental losses in the year you incur them.
But there’s a big hurdle to the tax law classification as a real estate professional. You must show that you spend
more than 50 percent of your personal service work time in real property trades or businesses in which you materially participate, and
more than 750 hours of service during the tax year in real property trades or business in which you materially participate.
Having a rental property home office that qualifies as a tax-code-defined principal place of business makes it easier to qualify as a real estate professional, because your time spent on deductible travel to and from your rental properties counts toward the time requirements.
Claiming Your Deduction
The Schedule E instructions not only fail to provide any explanation about where to put your home-office deduction, but they also do not even mention a home office.
But the instructions do say that you can deduct ordinary and necessary business expenses, and the home office meets that rule. Also, as established in Curphey (a precedent-setting case), the home office is allowable as an expense against income from a rental business.
Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes.
Here are five powerful business tax deduction strategies that you can easily understand and implement before the end of 2019.
1. Prepay Expenses Using the IRS Safe Harbor
You just have to thank the IRS for its tax-deduction safe harbors.
IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.
Under this safe harbor, your 2019 prepayments cannot go into 2021. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.
For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.
Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Tuesday, December 31, 2019, you mail a rent check for $36,000 to cover all of your 2020 rent. Your landlord does not receive the payment in the mail until Thursday, January 2, 2020. Here are the results:
• You deduct $36,000 in 2019 (the year you paid the money).
• The landlord reports $36,000 in 2020 (the year he received the money). or click here to call us 1-855-743-5765.
You get what you want—the deduction this year. The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.
Don’t surprise your landlord: if he had received the $36,000 of rent paid in advance in 2019, he would have had to pay taxes on the rent money in tax year 2019.
2. Stop Billing Customers, Clients, and Patients
Here is one rock-solid, time-tested, easy strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2019. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)
Customers, clients, patients, and insurance companies generally don’t pay until billed. Not billing customers and patients is a time-tested tax-planning strategy that business owners have used successfully for years.
Example. Jim Schafback, a dentist, usually bills his patients and the insurance companies at the end of each week; however, in December, he sends no bills. Instead, he gathers up those bills and mails them the first week of January. Presto! He just postponed paying taxes on his December 2019 income by moving that income to 2020.
3. Buy Office Equipment
With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2019.
Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).
4. Use Your Credit Cards
If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities. or click here to call us 1-855-743-5765.
If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.
In our South Loop Chicago Tax Preparation office, Howard Tax Prep LLC works with entrepreneurs from various industries; however, there are 2 industries that give entrepreneurs a built in self-employment tax deduction. To take advantage of built in self employment tax reductions, one must be employed as a minister, or a notary. While this article will deal with notary signing agents, the same concept can also be applied to ministers.
Per IRS publication 17: “Notary public. Report payments for these services on Schedule C (Form 1040) or Schedule C-EZ (Form 1040). These payments aren’t subject to self-employment tax.” ees received for services performed as a notary public. Also, the instructions for IRS schedule SE reads: “if you had no other income subject to SE tax, enter “Exempt—Notary” on Schedule 4 (Form 1040), line 57. Don’t file Schedule SE.”
So how do you know what part of your loan signing agent payments are for notary services only? It’s simple, you count the # of stamps that you made, and exclude your travel, printing, and shipping/faxing cost. For example, let’s say that you have a 30 page loan document, and you charge $80 for the the total signing, $30 of which is strictly for the notary stamps. Using the above example, if you properly DOCUMENT your job, you can exclude the $30 (the charge for each stamp) from self-employment taxes (the 15.3% Medicare & Social Security taxes aka FICA).
Although I’m pretty sure that you probably don’t want to do anymore documentation, the IRS requires documentation for deductions, and this is a HUGE deduction! Don’t let the lack of documentation, or lack of tax preparers knowledge keep you from taking advantage of the self employment tax reduction for notaries/signing agents (& ministers). While most tax reduction strategies require the use entities, retirement vehicles, and state laws, this simple yet effective tax deduction only requires you to itemize your notary fees, & document your work. Below, please find a basic example of the potential savings.
$80,000 Signing agent income.
$60,000 in taxable income.
$60,000 in taxable for self-employment taxes. Self-employment taxes on $60,00=$8,478 Income taxes assuming single person no children=$4,013TOTAL TAX BILL=$12,491
$80,000 Signing agent income.
$60,000 in taxable income.
$30,000 taxable income for self-employment taxes Self-employment taxes on $30,000=$4,239 EASY TAX SAVINGS OF $4,239. Income taxes assuming single person no children=$4,013. TOTAL TAX BILL=$8,252