Editor’s Note: This article is meant only to increase awareness of various aspects of tax laws. These laws are constantly changing, and we cannot guarantee the accuracy or timeliness of this information. While doing tax preparation, please consult your tax professional regarding any tax questions and actions you plan to take.
Tax planning should be a year-round strategy, with year-end planning being especially important. The goal is, of course, to keep your tax bill at a legal minimum, year after year. But it’s never too late to make adjustments to reap tax savings during your tax preparation.
See also: Accounting Software
Whether you use tax preparation software or the services of a tax professional, there are a number of complementary strategies you can use to correct overlooked deductions, help with payment issues, ensure future tax bills will be as low as possible, avoid the potential threat of increased IRS audits, and more. Read on for some common scenarios and strategies to help you meet today’s challenges and make a better plan for tomorrow.
Extending the Tax Preparation Process, If Not the Payment
Consider a situation where you are unable to file tax returns on time. Maybe you need extra time to gather records, search for deductions or seek professional advice for your tax preparation.
What if I can’t file on time?
Anyone who has tried but can’t get their taxes prepared by the filing deadline can file a Form 4868 (Application for Automatic Extension of Time To File U.S. Individual Income Tax Return). The IRS will automatically grant extensions of as much as 6 months to file taxes. Remember, however, that the tax extension provides more time for you to file your business’s tax returns, but not more time to pay the tax bill—or a good estimate of the final tab.
What if I can’t pay what’s due?
If you’re in this situation come April, don’t panic. But do file your tax return or a form 4868. Then, either way, pay as much as you can, as you’ll be charged interest and maybe penalties on the balance.
Also consider filling out Form 9465 (Installment Agreement Request) to see if you can pay off what you owe on a monthly basis. (Note: A setup fee may apply.)
The Estimated Tax Conundrum
It likely won’t surprise you to know that the IRS wants its money ASAP! That means taxes must be paid as income is earned or received during the year. If you’re self-employed or otherwise don’t have taxes withheld from your earnings (say, by a facility that employs you), you’ll likely need to pay estimated taxes every quarter. You can rack up penalties if you fail to do this, don’t pay enough or make quarterly payments late—even if you qualify for a refund at the end of the year!
Do I need to pay estimated taxes?
Individual fitness professionals—including sole proprietors, partners and S corporation shareholders—must make estimated payments if they expect to owe $1,000 or more in annual taxes. An incorporated professional, studio or business must do so if their tax bill is expected to exceed $500 for the year.
How can I pay enough to avoid penalties?
Most fitness professionals with taxes over $1,000 can avoid penalties if they have paid at least 90% of the taxes due for the current year, or if they’ve paid the same amount of taxes that were shown on the previous year’s returns—whichever is smaller.
How do I know how much to pay each quarter?
If your income is uneven over the course of the year, you can avoid penalties by estimating what you’ll make in a full year and paying quarterly based on that—or by making unequal payments (based on actual earnings each quarter).
What if I didn’t pay them this year?
If you didn’t pay estimated taxes this year (or don’t think you paid enough), you can use Form 2210 (Underpayment of Estimated Tax by Individuals, Estates and Trusts) or Form 2220 (Underpayment of Estimated Tax by Corporations) to determine if penalties will be due.
Errors or Changes in Your Tax Preparation? There’s a Form for That!
Mistakes happen. The IRS knows that. They may correct mathematical or clerical errors on a return and may accept returns without certain required forms or schedules. But even if these situations don’t require an amended return, it’s a good idea to officially correct errors (favorable or unfavorable), as this can prevent problems later, such as notices or even an IRS audit.
Are you a sole proprietor or single-member LLC?
Since you use Schedule C to calculate your business taxes, you must make changes there before filing Form 1040-X (Amended U.S. Individual Income Tax Return). To make edits to the Schedule C, you don’t need a special form—just prepare a new one with the correct numbers. Then use those numbers to recalculate everything for the 1040-X.
Are you an S Corporation?
You’ll make corrections using an amended Form 1120-S (U.S. Income Tax Return for an S Corporation) and checking Box H(4) (Amended Return). Create a statement listing each item amended, the amount of change, and an explanation, and attach this to the amended return. Keep in mind that if the changes result in a change to shareholder information, an amended Schedule K-1 must be provided to the shareholders, too!
Are you in a partnership or multi-member LLC?
Most partnerships or LLCs can amend their returns using Form 1065 (U.S. Return of Partnership Income).
If you need to amend a tax return for your incorporated business, Form 1120-X (Amended U.S. Corporation Income Tax Return) must be completed and filed. On the plus side, those fitness professionals operating as an incorporated business entity don’t have to wait until the annual tax return is filed to obtain a refund. Any incorporated professional or business can apply for a quick refund of estimated taxes by filing Form 4466 (Corporation Application for Quick Refund of Overpayment of Estimated Tax).
See also: Top 10 Tax-Planning Ideas for Fitness Professionals and Health Club Owners
The Shifting Sands of Compensation
One problem that’s often overlooked by fitness professionals and business owners involves how professional or key employees are classified and paid.
Owners: Are you paying yourself enough?
Over the years, the way that the IRS viewed “reasonable compensation” has changed significantly. The IRS’s goal was (and continues to be) preventing owners from exploiting a payroll tax loophole to pay less overall. As a result, when the IRS examines the tax returns of S corporations, the focus is usually on determining whether the compensation amount paid to the S corporation owner was “reasonable” based on the services they provided. (Note that the IRS is typically examining data in the 3- to 5-year range.)
In a number of recent rulings, the U.S. Treasury Department determined that S corporations are required by law to pay their owners a reasonable salary for the services they performed for their business. In addition, and crucially, that reasonable salary is subject to self-employment tax.
Independent contractors: Are you about to be reclassified?
Since 2019, when Assembly Bill 45 became a California law, the state has been scrutinizing how businesses—including fitness facilities—classify their “gig” workers. Briefly, the law’s aim was to ensure that businesses aren’t skimping on providing wages, benefits and other perks to people who work for them regularly, simply by calling them independent contractors.
They now use a three-point test (see “The ABC Test of California Law AB5,” left) to determine whether a person should be classified as an employee. And it’s not just those in California who are impacted. A number of states are adopting this approach. What’s more, the IRS is reportedly scrutinizing how fitness studios, in particular, are classifying their workers, and the U.S. Department of Labor has proposed new rules affecting the status of independent contractors. Whether you’re a contractor or someone hiring them, keep an eye on the news for developments.
Hire a “Personal Trainer for Tax Preparation”
Having a tax preparer whom you trust and who understands your needs is extremely important. Just as you wouldn’t expect a CPA to be an expert in anatomy and physiology, you can’t expect yourself to know the ins and outs of deductions and credits. Consider looking for a tax professional who is compatible with your personality, familiar with the fitness industry, accessible when you need them and, of course, affordable. Don’t settle—and keep looking (or switching) until you find a good fit. Doing so can pay off in numerous ways, from dollars and cents to an easier night’s sleep!
The post Navigating Tax Preparation Season appeared first on IDEA Health & Fitness Association.