Dave CJ, Author at Bridge Group Tax

April 13, 2022

Employers bear the burden of calculating, withholding, and remitting taxes from employee wages. They must also report them to the correct government agencies. But, what must self-employed individuals do? And what about individuals whose income isn’t taxed? What should those individuals do to pay and report their taxes?

If you’re self-employed or receive untaxed income, you may need to pay estimated taxes. So, what is estimated tax? Read on to learn the ins and outs of estimated taxes, including who is responsible for paying, when to pay, and how to pay them.

What is the estimated tax?

Estimated taxes on income is a method individuals use to pay income taxes on money not subject to withholding taxes. If you owe estimated tax, you pay projected (aka estimated) tax liabilities quarterly.

The estimated tax pays for things like self-employment and income taxes.

Because the following forms of income aren’t subject to withholding, you may need to pay estimated taxes on them:

Dividends
Taxable alimony
Gains from sales of stock
Self-employment income
Cash prizes and awards
Interest income
Other income without withholding

Keep in mind that there are also types of income not subject to withholding. Consider speaking with an accounting professional to determine if you must pay estimated taxes on income you receive.

Who pays estimated tax?

The IRS has specific rules regarding who must pay and file estimated taxes. So, you may need to pay estimated tax if you:

Aren’t an employee
Do not have taxes withheld by an employer
Are self-employed
Have other forms of income not subject to withholding

According to the IRS, you should make estimated tax payments if you:

Expect to owe at least $1,000 in taxes after subtracting withholding tax and credits,
Do not expect your withholding tax to equal 90% of the total tax you owe for the tax year, OR
Do not expect your income tax withholding to cover 100% of your tax liability from the previous tax year.

Do you intend to file as a sole proprietor, partner, S corporation owner, shareholder, or self-employed individual? You will likely need to make estimated quarterly tax payments if you expect to owe $1,000 or more in taxes.

If you file as a corporation, you typically need to make estimated tax payments if you expect to owe $500 or more in taxes for the year.

Pop quiz: Who doesn’t have to pay estimated taxes? You don’t have to pay estimated tax if you meet all three of the following requirements:

You had no tax liability for the previous tax year
You were a U.S. citizen or resident for the entire tax year
Your prior tax year covered a 12-month period

If you’re unsure about whether or not you must pay estimated tax, check with the IRS.

How to calculate estimated taxes

To calculate your estimated taxes, first estimate the following for the entire tax year:

Adjusted gross income (AGI)
Taxable income
Deductions
Credits

One option you have for calculating the total for the current year is to use last year as a starting point. Use the prior year’s information to estimate the values for the current year. After you estimate that data, calculate the estimated quarterly tax payments.

Follow these steps to calculate your estimated taxes:

Calculate your AGI
Determine total estimated taxable income
Find the estimated income tax for the estimated income
Divide the estimated income tax by four

To get your AGI, first estimate your total income for the year. Do you plan to earn as much or more than you made last year? Once you have that estimate, subtract any deductions from your estimated income total. This is your adjusted gross income.

Next, find your estimated taxable income by subtracting the standard deduction from your AGI. The 2022 IRS standard deduction is different for each filing status. Use the standard deduction that matches how you file (e.g., head of household).

Calculate your income tax by multiplying your AGI by your income tax rate. Use Publication 15-T and the applicable tax brackets for this step. Tax brackets typically change each year. Use the most recent Publication 15-T to determine the amount of income tax.

The income tax you calculated is for the entire year. To determine how much tax to pay each quarter, divide the amount by four.

If you need help calculating estimated taxes, you can reference the IRS’s Estimated Tax Worksheet on Form 1040-ES, Estimated Tax for Individuals.

You can also access an estimated tax worksheet in IRS Publication 505, Tax Withholding and Estimated Tax.

Paying estimated taxes

Use Form 1040-ES to calculate and pay estimated taxes to the federal government. After you complete the form, you can mail it to the IRS with your payment or e-file it online. Corporations must use the Electronic Federal Tax Payment System (EFTPS) to pay estimated taxes.

But, when are estimated taxes due? Again, estimated taxes are due quarterly. The estimated tax due dates for filing and paying Form 1040-ES each quarter are:

April 15 for income received January 1 – March 31
June 15 for income received April 1 – May 31
September 15 for income received June 1 – August 31
January 15 for income received September 1 – December 31

If the deadline falls on a holiday or weekend, the due date is the next business day.

Typically, the IRS does not give payment or filing extensions for estimated taxes. However, the COVID-19 pandemic allowed for some extensions. Check with the IRS for more information.

How to pay estimated taxes

If you need to pay estimated taxes, you have a few options. You can pay online, send a payment (e.g., check) along with Form 1040-ES, pay by phone, or use EFTPS.

Use the IRS Direct Pay option to pay estimated taxes online with the IRS.

If you prefer to mail your payment, you can do so along with your estimated tax forms. Keep in mind it will take longer for the IRS to receive your payment if you mail it.

Another option is to pay via phone by calling the IRS. Enter your debit or credit card information to authorize payment.

EFTPS is another way to pay estimated taxes. The system allows you to track and monitor all electronic payments to the IRS. You must enroll in the system to make any payments.

Refer to Form 1040-ES for additional payment methods if the above options do not work for you.

Estimated tax penalties

The IRS may impose penalties on quarterly tax payments for a few reasons. You might be penalized if you:

Do not pay on time
Underpay estimated tax
Overpay estimated tax

If you underpay your estimated taxes, you will likely need to fill out Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.

You have a few options to avoid an estimated tax penalty. To steer clear of penalties, you can do one of the following (whichever is smaller):

Pay either at least 90% of what you owe in taxes for the year
Pay the same amount as what you owed the previous year (100%)

Taxpayers with higher earnings might need to pay 110% of their previous year’s tax bill. If your previous year’s adjusted gross income was more than $75,000 (married filing separately) or $150,000 (single or married filing jointly), you are expected to pay 110%.

This article has been updated from its original publication date of October 1, 2015.

This is not intended as legal advice; for more information, please click here.

by Dave CJ

April 13, 2022

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If you’re like many business owners, you know that you have to handle certain tasks, like purchasing items, taking on debt, or putting your own money into your business, to get your venture up and running. And when your company processes any type of transaction, whether it’s debt, purchases, etc., you have to record it in your books. This is where accounting assets vs. liabilities come into play. To get a solid understanding of the difference between assets vs. liabilities, keep reading.

Assets vs. liabilities overview

What is the difference between assets and liabilities? To understand how the two differ, you have to know the liability vs. asset meaning:

Liabilities: Existing debts a business owes to another business, vendor, employee, organization, lender, or government agency. Liabilities can help owners finance their companies (e.g., loans).
Assets: Items or resources of value that the business owns. Assets can generate revenue and provide long-term benefits to the owner (e.g., property).

Both assets and liabilities are on the balance sheet, which is one of the three main financial statements for businesses.

Examples of liabilities

Liabilities can be short- or long-term. Typically, short-term liabilities are known as current liabilities. And, long-term liabilities are called noncurent liabilities.

Examples of current liabilities include:

Short-term debts (e.g., credit card balances)
Tax liabilities (e.g., payroll taxes)
Accrued expenses (e.g., received goods you purchased but have not received an invoice yet)
Accounts payable (i.e., unpaid invoices)

Here are a few examples of noncurrent liabilities:

Loans lasting more than a year (e.g., mortgage loans)
Deferred tax payments
Other noncurrent liabilities (e.g., leases)

You must pay short-term liabilities within one year of incurring the debt. Long-term liabilities include debts you pay over a period that is longer than a year.

Examples of assets

Like liabilities, businesses can have current and fixed assets (aka noncurrent assets). A current asset is a short-term asset, while noncurrent assets are long-term.

Examples of current assets include:

Investments
Inventory
Cash and cash equivalents (e.g., checking accounts)
Accounts receivable (aka unpaid invoices from customers)

Current assets can be converted into cash quickly, typically under one year. Another common term for current assets is short-term investments.

Examples of noncurrent assets include:

Property (e.g., buildings or cars)
Equipment
Patents or trademarks

Noncurrent assets are also known as fixed assets. They provide long-term, continual value to a business. But, businesses cannot convert fixed assets into cash within one year. Long-term assets typically depreciate in value over time (e.g., company cars).

Assets can also be tangible or intangible. Tangible assets are physical items that the business owns. These types of assets easily convert to cash. Physical assets include items such as inventory, equipment, and bonds.

Intangible assets are nonphysical items that do not easily convert to cash. Examples of intangible assets include logos, trademarks, patents, and business licenses.

assets

Assets vs. liabilities examples

There is some overlap between assets and liabilities because you can use a liability to purchase an asset. To fully understand the difference, take a look at some asset vs. liability examples.

Example 1

Your business grows and you weigh the pros and cons of leasing vs. buying commercial property. After examining your books, you decide to purchase property.

The property you purchase is a long-term asset that you can grow in value over the years you own it. The cost of the property is spread out over time instead of one year.

On the other hand, the mortgage for the property is a liability in your books. The mortgage loan is a long-term debt you owe to a lender.

Example 2

Say you decide to lease a car for your employees to use on official business. Is the car an asset? No. The car is not your property because it is not a purchase.

Instead, a leased vehicle is a liability for the business even though the business has temporary possession of the car. Payments for the lease increase expenses for the business but do not provide an item of value to the business’s bookkeeping.

Example 3

Let’s say you decide to purchase the leased vehicle when the lease term is up. You need to take out an auto loan to finance the purchase of the car.

When you purchase the vehicle, it becomes an asset you record on your balance sheet. And, the auto loan is a new liability you record, too.

Why is the auto loan a new liability? When the lease term is done, the liability is complete because you paid the entirety of the lease. Signing an auto loan creates a new debt for the business.

Example 4

Say you choose to use funds from your business to purchase the leased vehicle at the end of the lease term. By using your business funds, you do not have to take out an auto loan.

The vehicle becomes an asset at the time of purchase. Because there is no loan, you do not incur a liability. Instead, the purchase is an expense.

Assets vs. liabilities vs. equity

Now that you know the difference between assets vs. liabilities, it’s time to understand the role of equity in the accounting equation. Equity is the:

Amount the business owner or stockholders invest in the company
Value of the company

Equity is a crucial part of the business’s relationship between assets and liabilities.

On a balance sheet, assets equal the total liabilities plus the total equity. If they don’t balance, you need to find and fix the discrepancy. There are several ways to look at the equation:

Equity = Assets – Liabilities

Assets = Liabilities + Equity

Liabilities = Assets – Equity

The accounting equation shows business owners and their financial advisors if the business uses its own funds or finances through debt. Only companies that use double-entry bookkeeping should use the accounting equation.

Equity has an equal effect on both sides of the equation. If a business has only two parts to the equation (e.g., equity and assets), it can calculate the third amount with ease.

This is not intended as legal advice; for more information, please click here.

by Dave CJ

April 13, 2022

Employers juggle many responsibilities, including calculating and withholding payroll taxes and other deductions. But, what exactly does payroll taxes include? And, how do you know how much to withhold from employees’ wages? If you’re wondering about understanding payroll taxes, never fear—your payroll taxes breakdown is here.

What are payroll taxes?

How do payroll taxes work? Payroll taxes are a specific type of employment tax. Not all employment taxes are payroll taxes. Instead, payroll taxes consist of the Federal Insurance Contributions Act (FICA) tax. So, what is FICA tax?

FICA tax is the combination of Social Security and Medicare taxes. The government uses funds from the two taxes for different programs:

Social Security tax: Funds benefits for retirement, dependents of retired workers, and the disabled and their dependents.
Medicare tax: Funds medical benefits for people age 65 and older, the disabled, and individuals with qualifying health conditions.

Social Security and Medicare tax have different tax rates. And, there is an additional Medicare tax for qualifying employees (we’ll get to that later).

What are payroll taxes levied on? Employers must withhold these taxes from their employees’ wages. But, do not withhold the entire amount of each tax from the employee. Employers share the responsibility of paying FICA taxes with their employees. Show payroll tax on paystub for your employees.

Self-employed individuals are not exempt from paying federal payroll taxes. Instead of paying FICA tax, they must pay self-employment tax. The Self Employed Contributions Act (SECA) tax requires self-employed individuals to pay Social Security and Medicare taxes. SECA does not split the tax between employee and employer. Instead, self-employed individuals must pay the entirety of the tax themselves.

Other taxes in payroll

Again, not all employment taxes are payroll taxes. People commonly refer to all taxes deducted in payroll as payroll taxes. But, there are many types of employment taxes.

Employment taxes include:

Federal income tax
State income tax
Local income tax
Federal unemployment (FUTA) tax
State unemployment (SUTA) tax

Employees do not pay all employment taxes. And likewise, employers do not pay all employment taxes.

Income taxes only come out of the employees’ wages. Federal unemployment taxes are employer-only taxes. State unemployment taxes are typically employer-only, but some states require both employers and employees to contribute to the tax (e.g., Pennsylvania).

payroll taxes

Payroll tax rates

Employees pay the same amount of FICA payroll tax as employers because the total amount is split evenly. Self-employed individuals must pay the entire amount of both taxes. So, how much are payroll taxes for employees, employers, and self-employed workers?

Social Security and Medicare tax rates

To know how much FICA tax to pay or withhold, break it down into the two parts of the tax: Social Security and Medicare.

Social Security tax has a higher tax rate. It is a flat 12.4% but only applies to the first $147,000 an employee earns in 2022. The Social Security wage base typically changes each year. Equally divide the total percentage between you and your employees. Withhold 6.2% from your employees’ wages and contribute 6.2% as the employer (12.4% / 2).

Medicare tax has a flat tax rate of 2.9%. Like Social Security tax, employees and employers equally share the total tax. So, employers and employees each pay 1.45% (2.9% / 2). Unlike Social Security, there is no wage base or cap to the wages subject to the Medicare tax. Instead, there is an additional Medicare tax of 0.9% once employees earn above a certain amount.

Additional Medicare taxes apply to employees based on filing status:

Married filing jointly: $250,000
Married filing separately: $125,000
Single: $200,000

Employees who earn above the threshold must pay 2.35% for Medicare tax (1.45% + 0.9%). Employers continue to pay 1.45% because the additional Medicare tax rate only applies to employees.

Self-employment tax rate

SECA tax is basically the same as FICA tax, except one person pays the total amount for each tax.

Social Security tax is 12.4% and Medicare is 2.9% total. So, the combined rate for SECA tax is 15.3%.

Self-employment Social Security taxes only apply to the first $147,000 in wages a self-employed person earns with a maximum tax of $18,228 (12.4% X $147,000) in 2022.

A self-employed individual must also pay the full 2.9% of Medicare tax. Self-employment wages are also subject to additional Medicare tax (0.9%). If the additional Medicare tax applies, the total tax rate is 3.8% (2.9% + 0.9%). There is no maximum amount of Medicare tax an individual can pay.

Payroll tax FAQs

Still have some questions about payroll taxes? Take a look at some frequently asked questions.

1. Is federal withholding tax a payroll tax?

Federal withholding is a tax calculated during payroll, but it’s not a payroll tax. Instead, federal withholding is an employment tax. Another name for federal withholding is federal income tax.

2. Can employers make employees pay the total amount of FICA tax?

No. Federal law requires employers to evenly split FICA tax with their employees. Only self-employed individuals pay the entirety of Social Security and Medicare taxes.

3. What happens if an employee meets the Social Security wage base in the middle of a pay period?

If an employee meets the Social Security employee tax wage base in the middle of the pay period, only calculate the tax on wages up to the amount.

Say an employee receives biweekly paychecks and hits the wage base at the end of the first week of the pay period. The employee’s total paycheck is $6,000. Divide the gross pay by two and apply the Social Security tax to the first half of the gross wages ($6,000 / 2 = $3,000).

This article is updated from its original publication date of October 20, 2015.

This is not intended as legal advice; for more information, please click here.

by Dave CJ

April 12, 2022

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So, you started a business, then let it sit for a little bit, hmm? If you didn’t earn income for an entire year, you might be wondering if you have to file your tax return. So, how does filing taxes for small business with no income work?

To file, or not to file? That is the question we all must ask.

Reasons why you might not have income in a fiscal year

Not all businesses without income during a year are on their way to closing up shop. There are a number of reasons why a business might not incur income during a fiscal year.

Here are four common situations that could result in no income:

Situation #1: The go-getter that forms a business but waits to start operating.

Some business owners put in the work to form and structure a business a year or more before operations begin.

Does this sound like you? If you formed your business and filed the paperwork with the state (e.g., limited liability company) but wait to officially start, you may not have income during the year.

Situation #2: The entrepreneur who starts multiple companies … then pauses one.

Your brick-and-mortar business is going great, so you decide to open a new, separate online business. Unfortunately, your marketing efforts fall flat, so it doesn’t do very well.

You lose interest and put a “brief” hiatus on it. You hope to get back to it eventually. Weeks turn into months, and before you know it, you’ve gone a fiscal year without incurring income.

Situation #3: The seasonal business owner dealing with pandemics or natural disasters.

You run a seasonal business. You’re gearing up, ready to open shop for the season, and then Bam!

A natural disaster or pandemic (cough, COVID-19) hits, and you’re forced to stay closed for the season. Which means you won’t be able to open shop until the following fiscal year.

Situation #4: The business that’s at the end of its journey but isn’t officially closed yet.

Some businesses begin the process of closing, but the business owner doesn’t get around to cutting the final cord. So, operations wind down and the business closes … but not officially.

If this sounds like you, you might have a fiscal year (or two or three), where your business has no income.

What about expenses?

Regardless of your situation for not incurring revenue, you fall into one of the following categories:

No business expenses and no income
Business expenses but no income

The category you fall into might influence whether you need to file a tax return with the IRS or not, depending on your business structure. So, keep that in mind as we move on…

Filing taxes for small business with no income

Do I have to file business taxes if my business made no money? This is the question you came here to answer.

And we have answers.

But, your responsibilities for filing taxes for small business with no income depends on your company structure.

The different types of company structure include:

Sole proprietorship
Partnership
Corporation (C Corp and S Corp)
Limited liability company (LLC)

Read on to learn what form each type of structure files and whether you must file it with the IRS in years without income.

Sole proprietorship

Sole proprietorships are businesses owned by one person. Rather than filing a specific tax return, you simply fill out Schedule C, Profit or Loss From Business, and attach it to your personal income tax return, Form 1040.

So, is it necessary to file Schedule C in a year with no income? Maybe.

During a year with no income and no expenses, you generally don’t need to file Schedule C. But, doing so might be a good idea. When it comes to taxes, it’s better to be safe than sorry. So if you plan on not filing a return, be absolutely sure that the IRS won’t think you should have. And, verify that you did not receive any non-income payments related to your business.

If you had no income but had expenses, filing might also be a good idea. You might be wondering, Can I deduct startup costs with no income? If you have no income but did have expenses, you may be eligible to receive a tax refund or credit by filing.

The bottom line is:

No income, no expenses = Filing Schedule C generally is not necessary
No income, but expenses = Filing Schedule C can help you receive a refund or credit

Partnership

What is a partnership? Partnerships are businesses that are owned by two or more people. If you own a partnership, you must file Form 1065, U.S. Return of Partnership Income. And, you need to distribute Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., to partners.

OK, you might be thinking. But do I have to file business taxes if no income is earned?

If you had no income and no expenses, you do not need to file the partnership tax return. Like sole proprietors, verify that you don’t have any hidden income or expenses that you forgot about before skipping your filing responsibility.

If you had no income but had expenses, you must file your information return. That way, the IRS knows about payments that could be treated as deductions or credits.

The bottom line is:

No income, no expenses = Filing Form 1065 generally is not necessary
No income, but expenses = Filing Form 1065 is necessary

Corporation

A corporation (“C Corp”) is a business structure that is a separate legal entity from its owners. Corporation owners must file Form 1120, U.S. Corporation Income Tax Return.

Corporations can also decide to form an S corporation. S Corp owners must file Form 1120-S, U.S. Income Tax Return for an S Corporation. Both C and S Corps follow the same guidelines for filing taxes with no income.

If you had no income, you must file the corporation income tax return, regardless of whether you had expenses or not.

The bottom line is:

No income, no expenses = Filing Form 1120 / 1120-S is necessary
No income, but expenses = Filing Form 1120 / 1120-S is necessary

Limited liability company

The form an LLC is responsible for filing depends on how the company is taxed. An LLC might be treated as a:

Sole proprietorship
Partnership
Corporation

Follow the filing guidelines for the appropriate business structure your LLC is taxed as.

Filing tax return with no income: Chart

Skimmed to the end, eh? No worries. Use the following chart to help you determine your responsibilities:

Business Structure	Do You Have to File a Tax Return With No Expenses and No Income?	Do You Have to File a Tax Return With Expenses and No Income?
Sole Proprietorship/LLC taxed as a sole proprietorship	Generally, no	Generally, no, but it can help you receive a refund or credit
Partnership/LLC taxed as a partnership	Generally, no	Yes
Corporation/LLC taxed as a corporation	Yes	Yes

This is not intended as legal advice; for more information, please click here.