How to head off under-withholding penalties

Let’s say you run a business, and take a small salary.  And let’s say you had a great year!  If your business is an LLC or S Corp, or even a sole proprietorship, that great year is going to find its way to your personal 1040, and you’re going to have to pay tax on it.

But you’re already contributing with withholding from your small salary, right?  Isn’t that good enough?  Well, if it’s been enough in prior years, and this year is especially good, then probably not.  And not only will you owe income tax and self-employment tax, but you may be subject to underpayment penalties.

The IRS (and the State of New Jersey, as well as most other taxing jurisdictions) expects you to contribute “ratably” throughout the year, just like a W2 employee.  It goes like this:  a W2 worker has taxes withheld every time he or she gets paid.    If the paycheck is large, the government gets more.  If the paycheck is tiny, the government gets less.  But either way, the government gets its cut way before April 15.  And they want this from the self-employed community, too.

Are you ready?

Haunted Hayrides.  Reruns of creepy classics.  Grocery store clerks dressed up as Frankenstein.  It must be the scariest time of the year, right?

No.  The scariest time of the year, for way too many people, is tax season.  This is because way too many people fail to plan for the inevitable.  That’s right:  you’re going to pay taxes whether you like it or not, so why not take control of the situation?  Find out in advance what it’s going to look like.  See if there’s anything you can do, now, to ameliorate the situation.

How and when to take a meal expense when you are an employee

Employees sometimes have business expenses. Typically, these are union dues, uniforms, education, and professional licensing, education, and insurance. It is rare for an employee to entertain clients without being reimbursed by the employer, but it is possible.

It is more likely for an employee to incur a meal expense while traveling for business. In this scenario, there is usually a reimbursement, but the reimbursement does not cover the full cost. Like the items listed above, any expense that is not reimbursed is a possible tax deduction. But that does not mean anything you eat or drink while at the seminar in New Orleans is business related! Those cute little bottles on the flight and in the mini-bar of your hotel room are not meals and do not count. A mid-afternoon ice cream, candy bars from the hotel store, and espresso in the lounge are also not meals. Meals are breakfast, lunch, and dinner. Skip breakfast and go drinking after class? Don’t try it: your documentation will out you.

What about eating at your desk?

In a word:  NO!

Remember that pb&j that you slapped together at home this morning and then stashed in your bottom drawer?  You don’t get to take that as a business expense, so why would anyone think it counts if you have a deli sandwich delivered in the middle of the day?

Well, actually there is a precedent.  Let’s say there’s a big project, and the boss is worried about the deadline.  The boss just might spring for Chinese to encourage the team to stay late.  This counts!  Check it out –

Common pitfalls in the area of Meals & Entertainment

No meal was ever enjoyed more than the meal you wrote off as a tax deduction.  But was it legit?

In my experience, this is one of the most abused deductions available to the small business owner.  All too often, the small business owner considers every activity a business deduction from the first step outside the home in the morning until returning to the home in the evening.  When the business owner meets a business buddy in a coffee shop, and they each buy a sandwich and eat together companionably, they each believe they’ve just had a deductible business meal.   If the business owner is on a trip, every cup of coffee, and even the tiny little airplane cocktail get tallied up for a meal reimbursement.  Sadly, none of these are valid deductions as Meals & Entertainment.

How to properly document your meal expense

What a great lunch! You just convinced Gidget (of Gidget’s Widgets) not only to carry your patented micro-widget, but also to devote an entire edition of The Wonders of Widgets magazine to the marvels of micro-widgets. You smile broadly as you sign the credit card receipt, tuck a $7 cash tip under the water glass, and (making small talk about the frightful weather) walk with Gidget out to your respective cars.

Stop! Let’s rewind a bit, because if we don’t, you aren’t going to be able to support the meal expense. Sure, it definitely had an acceptable business purpose, and for $44.44, the meal was certainly reasonable – not too fancy, not too plain. But you’re still forgetting a few things.

First in a short series on the Meal Expense

A good old turkey club…

a crock of French onion soup…

and anything alfredo…

Everybody likes to eat, and getting to take a meal as a tax deduction only makes it sweeter. 

FBAR (pronounced eff-bar) is the acronym for the original form, Foreign Bank Account Report.  In time for the 2015 filing season, and in conjunction with the renaming of various governmental agencies, the name of the form was changed to Report of Foreign Bank and Financial Accounts, FinCEN Report 114.  (Is it any wonder it is still referred to as the FBAR?)  You can search for it on the internet this way.  Even IRS publications still use FBAR.

Effectively, it is a list of all financial accounts outside of the USA, to which your name is attached.   You might own the account 100%, or only own part of the account.  You might simply be a signer on the account, and actually own none of it.  For example, you are the treasurer for a missionary hospital that maintains a bank account in Brazil, or you and your brother are both signers on your mom’s bank accounts back home in Egypt.