I thought I would write about a story we recently experienced with a client ( now, ex-client) and how this can impact anyone who fails to properly tax plan.
This client came to us at the beginning of 2019. The client runs a small business where in 2016, she made a small amount of gross income. Then in 2017, she made a lot more income and in 2018, more income than the previous year. The client had two major issues: (1) 2017 & 2018 tax returns had to be filed together and (2) the client is a Schedule C tax filer.
WHAT DO YOU MEAN SCHEDULE C?
See this image below? If you have ever received a 1099 form for a side job you did or you are an individual/sole proprietor YOU NEED TO SUBMIT ONE OF THESE WITH YOUR PERSONAL TAX RETURN. This is how active earnings from a business, outside a W-2 from an employer, are reported if you are an individual/sole proprietor.
Once the Schedule C is completed, depending on whether or not you have a net profit at the bottom of the schedule, you will have to pay approximately 15.3% of SELF-EMPLOYMENT TAX. WHAT????
Yes, you read that correctly. For those who are W-2 employees, you receive a net check for your wages. The difference between the gross and net is approximately 7.65% of tax that is withheld that goes to Federal and state. An employer, matches those amounts and pays their portion of the 7.65% tax withholding, on your behalf. When you file a Schedule C, you are viewed as the employee and employer, therefore, you end up paying both the employee and employer portion of the taxes on your net income.
BACK TO THE STORY....
When we prepared the 2017 & 2018 tax returns, it was determined that after all the income and expenses were accounted for in both years, the client owed a lot of
We are talking over $100K in taxes for the two years combined (Self-Employment Tax alone was approximately $20K).
WHAT HAPPENED NEXT WILL SHOCK YOU!
When speaking to the client, the blame was squared at our feet. It didn't matter the client failed to pay in any quarterly estimate tax payments for 2017 or 2018, it didn't matter that the client initially worked with a bookkeeper / tax preparer that didn't accurately capture income/expenses or that the client was ill advised on how to plan moving forward. The client blamed us because we are the messengers who did our job and told them what they had to owe for the 2017 & 2018 taxes as a result of all of this. Needless to say, the client pushed off having any meetings about incorporating their business and facing the reality of what needs to be done.
HERE ARE SOME MONEY SAVING LESSONS THAT EVERYONE NEEDS TO KNOW WHEN IT COMES TO TAXES
(1) Always, Always, ALWAYS work with a proper accountant who can advise and help you plan out your future. A tax preparer merely captures what happened in the previous year, prepares a tax return (whether you know it to be correct or not), send you an invoice and then you don't hear from them for another year. It is a redundant cycle that breeds procrastination and lacks value.
(2) Take responsibility for your own past mistakes. Blaming someone else for a mess you created will not solve your issues. When you have a proper accountant and tax adviser by your side to walk through the necessary steps and clear up the financial skeletons in your proverbial closet. Everyone has them. Those that face them and address them are the ones who take control of their financial affairs.
(3) Being present in your business means you need a financial partner to be active in your best interests as well. Remember: a tax preparer simply prepares taxes. Tax preparation is about looking to the past and not about planning for the future. The past can never be changed but the future can. Having an accountant and tax adviser means you can proactively tax plan throughout the year and avoid the mess that our client (former client) did.
(4) By doing step #3, a proper accountant and tax adviser would discuss with you the various tax structures to set up in order to protect your business and help mitigate your tax liability at the same time.
THAT'S THE END OF THIS STORY BUT WHAT ABOUT YOUR'S? ARE YOU ACTIVELY WORKING WITH AN ACCOUNTANT AND TAX ADVISER WHO IS LOOKING OUT FOR YOUR BEST INTERESTS?