On the fence about hiring a tax professional, buying tax prep software, or just filing taxes yourself? Let’s compare them! Pros and Cons of Tax Prep Software Tax preparation software is a great way to do your own taxes in a way that offers subtle guidance. So let’s talk about the pros and cons. The pros: tax software is affordable, speedy, and (if you got a good one) easy to use. Purchasing software will always cost less than hiring a real-life CPA or another tax pro. And this price is tailored to your tax needs. If you have an easy return, without lots of property dependents, and business accounts to reconcile, you will pay much less than someone who does have assets in all of these areas that need to be accounted for. As for speed, once you’ve collected all the necessary information, doing your taxes using tax prep software should very rarely take you more than an hour. And most software is straightforward, instructional, and user-friendly. Many of the cons of tax prep software will be pros for hiring a tax professional and vice versa. Using tax prep software means that you are going it “alone” in a sense – while the software may have helpful tools and insights if you get stuck, it doesn’t have the human touch and knowledge that a trained tax preparer will. Tax prep software also isn’t as well-equipped to handle more complex questions. And with all the COVID aid and new tax rules present in tax years 2020 and 2021, it’s much more likely that you’ll need some extra help navigating those changes. Pros and Cons of Hiring a Tax Pro Hiring a tax pro comes with its own unique perks. One pro of paying someone else to do your taxes is that you don’t have to do them! But besides that, professional tax preparers often have much more advanced (and expensive) tax software they use to make sure your taxes, corrections, and TIN checking are done correctly and accurately. Arguably the biggest pro to hiring a tax preparer is the human touch element. When …
Everything You Need to File Taxes as an Independent Contractor
Independent contractors and employees are treated very differently when it comes to tax prep. Independent contractors are their own small businesses, even if they don’t have an incorporated or otherwise legally recognized business or brand. Let’s discuss what it takes to file taxes as an independent contractor. First, You Need a W-9 The beginning of the tax-filing process for independent contractors always starts with a W-9. Before you even start working on a contracting project, you need to be sure you’ve sent a W-9 with your name, address, and TIN (taxpayer identification number) to the company that is hiring you. It’s important to know who you are partnering with. W-9s must be sent to each company that wants to pay you for your contracting work, and they contain important and sensitive information about your business. Contractors Need Contracts No matter who you work with, whether it’s the President, a reputable local company, or your childhood best friend, it’s always best practice to get things in writing. Not only does a contract outline the expectations of the project for both parties, but it is also a great way to legally document the income you are expecting to make (be it hourly wages, cost of materials, or labor and equipment expenses). Nothing messes up your tax preparation and expectations more than a missing or incorrect payment. Contracts and legal agreements can be as itemized or as broad as you like, but you always want to make sure you protect yourself and your business. If you get paid by the company that hires you (which should happen 100% of the time, but it doesn’t always work that way), you will need to report that income. And if you don’t get paid by the company that hires you – whether it be for legal or illegal reasons – you’ll want to make sure you document the time and materials that you should have been compensated for on your taxes. Form 1040 or 1040SR Working as an independent contractor has tons of perks, but one …
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5 Common Tax Problems and How to Avoid Them
Taxes are confusing, and they change every year. Let’s go through some common tax problems and how to avoid them. Filing Late 1 in 5 taxpayers waits to file their taxes until just one week before the (typical) April 15th deadline. Missing the filing deadline is expensive: if you fail to file on time, you can expect to pay a penalty of 5% of the unpaid tax for every month or part of a month that the return is late, up to 25% of the unpaid tax. To avoid this, the best practice is to file early. Start thinking about tax prep in January, whether that means gathering your documents and sending them to your preferred tax preparer or gathering all documentation and applicable forms for completing your return yourself. However, if you think you are going to miss the deadline, you should always file for an extension. You can file Form 4868 to push the filing deadline back 6 months – but you still need to pay any taxes you still owe at the same time that you file for the extension. Click here for accurate deadline dates. Typos & Missing Information There are lots of boxes to check and lines to fill out, and it’s very easy to accidentally mess up your SSN or report your income as $52,986 instead of $52,896. Errors that occur when filling out the complicated and often numerous tax forms are very common. To avoid this, you should always go through your forms slowly and deliberately, and also more than once. A good double-check is often the best way to fix errors before you file. Be sure to reference your tax forms and banking information (routing and account numbers) to ensure all the data is correct and present. If you are unsure how to find certain information or are looking for a second opinion, you can always contact a trained tax professional to have them check your work. Miscalculations Because it’s so easy to make small but mighty mistakes when you are entering your information on the appropriate forms, it also means that it’s very easy to file a …
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Minimum Income Requirements: How Much Money Do I Have to Make to File Taxes?
It’s been a year of job changes and layoffs. Let’s discuss minimum income requirements and how much money you have to make to file taxes. Minimum Income Requirements & Tax Status Let’s get right to it. Not everyone has to file taxes, and the need to file is based on minimum income requirements. If you don’t meet the minimum income requirements, you don’t have to file a tax return. Here are a few things you’ll need to have to determine your minimum income requirements: filing status, federal income tax withheld for the year, and basic information to help calculate your gross income. For taxpayers under the age of 65, here are the minimum income requirements by filing status: Single: $12,400 Married, filing jointly: $24,800 Head of household: $18,650 Married, filing separately: $5 Qualifying Widow(er): $24,800 For taxpayers 65 and older, the minimum income requirements are: Single: $14,050 Married, filing jointly: $26,100 and $27,400 if both are 65 or older Head of household: $20,300 Married, filing separately: $5 Qualifying Widow(er): $26,100 There are also a handful of parameters that mean you have to file a tax return, regardless of income: You made a self-employment net income of at least $400 You got any health savings account, Archer Medical Savings Account, or Medicare Advantage MSA distributions You currently owe taxes on IRA, health savings account, or other tax-favored accounts You owe alternative minimum tax You made more income than $108.28 from a church or church organization You owe recapture taxes You owe Social Security or Medicare tax on tips that you didn’t report to your employer or that your employer didn’t already take out of your pay You had advance payments of the premium tax credit made for you, your spouse, or a dependent who received insurance marketplace health coverage You had advance payments of the health coverage tax credit made for you, your spouse, or …
Everything You Need to Know about Taxable Income
Are you just starting your tax journey? Have you been employed by someone else in the past and are now working for yourself as a small business owner, independent contractor, or freelancer? Did your side hustle take off? Let’s talk about taxable income. What is Taxable Income? According to Investopedia, taxable income is “the portion of an individual’s or company’s income used to calculate how much tax they owe the government in a given tax year.” Taxable income includes wages, salaries, bonuses, tips, investment income (profits and dividends), and some types of unearned income (unemployment compensation, pensions, annuities and some social security benefits). Basically, if you received money from a person, business, or government program this year, there’s a large chance it is considered taxable income. One big exception to this rule is if the business is a nonprofit. Non-profit businesses are exempt from paying federal income tax, sales tax, and property tax if they meet certain criteria. The amount of taxable income you are responsible for will vary based on how much you made in the tax year you are filing for. And the taxes on your income get increasingly higher as you make more money, so it is important to take a close look at your earnings every year. How to Calculate Taxable Income There are a few steps to calculating your taxable income: Determine your filing status. There are 5 filing statuses to choose from, and taxpayers always want to choose the filing status that results in the lowest taxes possible for their situation. The filing statuses are: single, married filing jointly, married filing separately, head of household, and qualifying widow(er) with dependent child. Gather all documents. You’ll need to gather all documents from all sources of income for you, your spouse, and your dependents, based on your living and family situation and the filing status you chose. Form W-2s are given when income is earned by a traditional …
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5 Practices to Prepare for Tax Season Year-Round
Are you one of the millions of people who dread doing their taxes? Do you always want to put off filing until the very last minute? Here are some great practices to help you prepare for tax season year-round. Schedule Monthly Check-Ins A lot can change in one year. Jobs and income, family status, and so much more. All of these things will affect your taxes, but by the time tax season rolls around, you may realize you didn’t withhold enough, and now you owe a large, one-time sum. It would’ve been easier to manage if you’d caught it sooner, so why not set yourself up for success this year? Just like paying bills or subscription costs, you should also check in with your tax maintenance every month. That way, if you or your spouse had a job change, you inherited a large sum of money, or you started a family, you’ll know what to expect next January, and you can better prepare for it. Keep (& Organize) Your Receipts We know, we know – you have that pile or that box with all your receipts. Or you moved all your electronic receipts to a folder in your email app. But keeping track of the expenses that may result in deductions is an exercise in organization as well as collection. Before making a big purchase or payment, make sure to document the expenses you plan to count as deductions, from rent to mileage to charitable donations. It’s easier to organize one month of receipts 12 times a year than it is to do them all at once and hope you didn’t forget anything. Watch for Out-of-Season Tax Documents Just because you aren’t ready to start thinking about your taxes doesn’t mean you won’t receive something in the middle of the year that you’ll need to keep for tax purposes. When you sort your mail (both physical and electronic), make sure to pay attention to documents that expressly say they are for tax purposes, and to set aside anything else you think might be helpful or needed when you file your taxes. This includes checking your spam or junk folders …
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