Tax Help – The More You Know, The More You Save
It’s no wonder that people need tax help. After all, the Internal Revenue code is tens of thousands of pages long and grows longer by hundreds of pages each year.
Nobody can ever achieve complete mastery of the tax code. In fact, the tax code is complex and varied that even most accountants have to look to others in their profession for specialized help.
Everyone should receive some form of tax help from an accredited professional. For high income earners, business owners, and the self-employed, professional help is especially necessary.
But first, you must help yourself. It is important to develop a basic knowledge of tax help strategies before setting foot in your accountant’s office.
Armed with an understanding of some tax law basics, you will be able to get much more out of your accountant and the help that he or she provides.
Tax Help Tip #1 – Income Tax vs. Payroll Tax
If you are a wage earner, you may not give much thought to taxes. Sure, you may notice that the federal government takes a healthy chunk of your pre-tax pay, but since you never see this money in the first place, you barely miss it.
Employees, particularly those without sources of income outside of their day jobs, need the least help of all. But certain life events, such as an inheritance, the sale of a home for profit or loss, or an unexpected influx of cash definitely require professional tax help, and thus, it is important for employees to understand tax basics.
Furthermore, if you are an employee thinking about making a jump into the ranks of the self-employed, general knowledge of the tax code is essential.
Self-employed people definitely know the difference between income tax and FICA. FICA, named for the Federal Insurance Contribution Act, is also known as the payroll tax.
The revenue generated by this tax pays for Social Security and Medicare benefits, and is assessed at 7.65 percent of employee earnings. Employees of corporations can see that 7.65 percent of their pay is being taken from each paycheck, but they might not know that their employers are required to match their FICA contributions.
Self-employed people definitely know this, because since they are their own employers, they have to pay both halves – that’s 15.3 percent, and it can be painful.
If you are self-employed or the owner of a small business operating as a sole proprietorship or general partnership, you should definitely find professional help.
It is best to pay your income tax and FICA on a quarterly basis, and to save a set percentage of your gross proceeds in a special bank account in order to be prepared for when these tax burdens become due.
Tax Help Tip #2 – Consider Incorporating Your Business
If you own and operate a small business, you should definitely consider incorporating. By doing so, you create another legal entity, the corporation, which is responsible for its own taxes. You, the individual, only pay taxes on the salary or investment income you receive from the corporation.
Clearly, anyone choosing to incorporate needs professional help. But there is a common misconception, even among tax help professionals, that incorporating results in “double taxation.”
In reality, a corporation pays taxes at a rate of just 15 percent on its first $ 50,000 in profits, and of course, corporate profits are not subject to the dreaded payroll tax.
Furthermore, any dividends paid to you, while taxable as corporate income (15 percent for the first $ 50,000) and personal income, are taxed at a maximum personal rate of 15 percent – and that’s only if your personal income puts you in the highest tax bracket. Best of all, dividends are not subject to the payroll tax either.
Tax Help Tip #3 – Make Sure Your Tax Professional Is On Your Side
The tax help industry – accounting, bookkeeping, lawyers specializing in tax law – is the fastest growing field of business in the United States. As more colleges expand their offerings of courses designed to train future tax professionals, the quality and character of people dispensing tax help advice is becoming more diverse.
In this case, diversity is a bad thing, as trustworthy and highly trained tax specialists have been joined by people who just want to make a quick buck in the tax help industry. They are just going through the motions – they have no real passion to serve.
True tax professionals understand the difference between tax evasion and tax avoidance. The IRS is clear – you are fully entitled to do everything within the law to avoid taxes. It is only when you break the law that you are guilty of tax evasion, a very serious crime.
Make sure that your tax help professional is on your side, and that all tax advice he or she dispenses is designed to legally save you as much money as possible.
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