One of the best perks about working for someone else is the retirement benefits: many established companies offer pensions, match you on 401(k) contributions, or have high-deductible health care plans that give you the opportunity to invest in HSAs. You don't automatically get those perks when you're self-employed, but what you can do is build them for yourself.
How can you plan for retirement when you're self-employed?
No matter what the state of your employment, you can always invest in your IRAs. Traditional IRAs are pre-tax and can help keep your taxable income in just the right range for any other tax strategies you're using. Roth IRAs are post-tax, which means you pay taxes on that income the year in which you made it, but you can tap into your contributions if you absolutely have to.
You can also create a solo 401(k). This retirement account functions just like the 401(k) you might have had at your previous job, but you get a lot more freedom. You can choose the investment company, pick from a wider range of index funds, and even contribute more: if you're both the 'employer' and 'employee' of a business you run by yourself, you can contribute up to fifty-three thousand pre-tax dollars or no more than 20% of the earned income plus an additional eighteen thousand dollars. This plan also allows for Roth rollovers for additional tax flexibility.
What does this have to do with taxes?
Business taxes are high, especially if your business falls square in the 'small business' category. That makes your actual income smaller. Running a business on your own is already risky because you don't have access to group healthcare plans or a corporation paying half of the qualifying taxes. Putting some of your income away into retirement accounts now lowers your current tax bill and your future one.
But if you're taking the plunge into running your own business and putting the profit away in independent retirement accounts, the most important step you can take for running the back-end of your business is to document everything. Even if you're your only employee, make sure you have a spreadsheet, a dedicated card, and clear financial records for every travel expense, office purchase, and penny you make.
Why is documenting everything so important?
If you're self-employed, you have access to a large number of deductions that can help make those first rocky years of business easier to manage. However, the IRS digs a bit more deeply into many self-employed deduction claims and the tax benefits of retirement accounts, so you need to have a record full of every scrap of proof in case you're flagged for an audit.
Documentation also helps your tax professionals find deductions you might not have known about. While you might have read up on a home office deduction and travel deductions, a tax advisor can help point out the small details that add up over time. They can also help you select the backup documentation that makes your tax return clean, ironclad, and easy to defend.
If this is your third year of business, a few years of thorough documentation can even make your previous tax years better. The IRS allows for tax amendments that let you correct or adds claims for credits and deductions, so if you learn something new about your taxes that you could have used a year ago, it's not too late.
Just like with all investments, self-funded retirement accounts have complicated regulations and tricky rules to navigate. Contact MSM Accounting and Tax Services, LLC about the best way to lay out your self-employment retirement infrastructure.
Every year, tens of thousands of Americans receive a troubling phone call, ostensibly from the Internal Revenue Service. Typically, the caller (often with a foreign accent), says the call recipient owes money to the IRS, which has issued a warrant for their arrest. The caller demands payment to satisfy the supposed debt and make the warrant go away.
Fortunately, most people are sufficiently skeptical to ignore these calls, or to report them to the authorities. Many, however, are so frightened by these calls they comply, turning over their hard-earned money to IRS scammers. According to the IRS, for example, in 2014, the Treasury Inspector General for Tax Administration (TIGTA) received more than 90,000 complaints from targets of this scam. They also identified about 1,100 victims who had lost in total more than $5 million.
How Do Scammers Get Away with It?
This scam, and the many others foisted on taxpayers and tax preparers every year, might seem to be foolish on the part of the scammers. After all, most people are too smart to be tricked into turning over their money without checking to see that the caller is in fact a representative of the IRS.
For scammers, however, it's a volume business—if even a tiny fraction of people fall for their scam, they can make huge amounts of money. And they can do so with relative impunity: it's extremely difficult to track down perpetrators or these scams and bring them to justice.
What Are the Most Common IRS Scams?
Scammers are creative—and persistent. They're continually coming up with new ways to separate gullible people from their money. Some scams, however, are more profitable than others, including the following 3:
1. Pay Or Be Arrested
This is the scam detailed above. The caller, typically with a foreign accent and a fake name (beware of a caller with a thick Indian accent who says his name is "John Smith"), and often giving a fake IRS badge ID number, says you own the IRS money. They often say you'll be arrested if you don't pay, or tell recent immigrants (a favorite target) they'll be deported. They usually ask for money in the form of a gift card or wire transfer. It's not unusual for these scammers to become both hostile and insulting if you ask questions.
There are easy ways to know that these calls are a scam. For one thing, the IRS never calls taxpayers about outstanding debts—they always send such notifications by mail. For another, the IRS does not threaten to have people arrested, won't ask for immediate payment through spurious means, such as prepaid debit or gift cards, and will never ask for someone's credit or debit card numbers over the phone.
2. We Need Information about Your Clients
Scammers don't only target individual taxpayers. Increasingly, they're focusing their efforts or tax professionals. Their goal is to trick tax preparers into turning over their clients' personal financial data, so they can file fraudulent state and federal income tax returns and receive the refunds.
Often, the scammer uses the ruse of "informing" tax professionals about scams, including the so-called e-Services Scam, in which scammers send a phishing email urging tax preparers to sign a new e-Services agreement. The goal is to steal passwords and other sensitive data. Other tax professional scams include those which attempt to steal PTINs, EFINs and e-Service passwords, those which mimic software providers, and those which seek to "unlock" tax software accounts.
To protect themselves and their clients, tax professionals need to stay abreast of the latest scamming initiatives. A good start is to read Publication 4557, "Safeguarding Taxpayer Data, A Guide for Your Business."
3. They've Gone Phishing
An increasingly pervasive IRS scam in one in which scammers send bogus emails, typically using both the IRS name and logo, in an effort to obtain personal and financial information. The scammers then use this information to commit identity theft. In some cases, the scammer will claim to be a representative of popular tax software companies, or even the victim's personal tax preparer.
In some cases, scammers directly ask for financial information. In others, they send emails (or text messages) infected with malware, which can infect your computer to steal that information. The bottom line: just as the IRS doesn't communicate important notifications by phone, they don't initiate contact via emails. If you receive an email ostensibly from the IRS, don't respond, and report it immediately to the IRS.
This is just a small sampling of the many scams of which you need to be aware to avoid being victimized. You work hard for your money, and that means you need to remain vigilant in protection of it, and of your rights.
One of the best ways to protect yourself is to partner with an experienced, competent CPA firm. To learn more about the ways our personal and business tax preparation, accounting and bookkeeping services can help you meet all your tax needs, contact us today.