Are you a Resident or Nonresident Alien for Tax Purposes?

If you are not a U.S citizen, it is important to know if you are a resident or nonresident alien because this affect your tax return. Most U.S. source income a nonresident alien receives is subject to withholding with a tax rate of 30%. Nonresident aliens must file and pay any tax due using Form 1040NR, U.S. Nonresident Alien Income Tax Return or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens with No Dependents. A nonresident alien who is married to a U.S. citizen or resident at the end of the year can choose tax treatment as a U.S resident.

Generally, the IRS considers a person a resident alien if he or she meets either the green card test or the substantial presence test.

To meet the substantial presence test, the nonresident alien must be physically present in the United States (U.S.) on at least:

1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
   • All the days you were present in the current year, and
   • 1/3 of the days you were present in the first year before the current year, and
   • 1/6 of the days you were present in the second year before the current year.

For purposes of the substantial presence test, the term "United States" includes all 50 states and the District of Columbia, territorial waters, and the seabed and subsoil of those submarine areas that are adjacent to U.S. territorial waters and over which the United States has exclusive rights under international law to explore and exploit natural resources. The term does not include U.S. possessions and territories or U.S. airspace.

If one spouse is a nonresident alien and the other is a resident alien or a U.S. citizen, the nonresident alien can choose to be treated as U.S. resident alien. and file joint return. A nonresident alien can elect taxation as a U.S. resident for the whole year if all of the following apply:

• He or she is married;
• His or her spouse is a U.S. citizen or a resident alien on the last day of the tax year;
• He or she files a joint return for the year of the election using form 1040, 1040A or 1040EZ.

If you become a U.S. resident, you stay a resident until you leave the United States,

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Using QuickBooks - Setting Up Time Tracking

The advantage of tracking time in QuickBooks is that the hours you record are ready to attach to an invoice or use in payroll. You can enter time for individual activities  or fill in a weekly timesheet. In the Time / Enter  Single Activity dialog box, you can type  in the number of hours for a single activity. The dialog box also includes a stopwatch, so you  can have it track the time you spend working on a task.

The set up is : You tell QuickBooks that you want to track time and then set up the people who need  to track their time. You use the customers and items you've set up in QuickBooks to identify the billable time you work. If you want to track nonbillable time, you need a few more entries in QuickBooks.

To turn on time tracking in QuickBooks go to Edit - Preferences - Time & Expenses and click the Company Preferences tab. You need to choose Yes to the question "Do you track time?".

You only can track people's time if their name  appear in one of your name list (the employee list, vendor list or other names list).

To set up items and customers for time tracking, you choose the service item you're working on. QuickBooks then totals your hours and figures out how much you charge the customer based on the number of hours and figures out how much to charge the customer based  on the number of hours you worked and how much you charge per hour for that service.

The only type of item that QuickBooks' time tracking feature recognize is service.

If you will not bill to a customer, enter zero as rate for the service.

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The Work Opportunity Tax Credit (WOTC) - Earn Federal Income Tax Credits for your Company

WOTC is a federal income tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment.
The WOTC tax credit is a one-time tax credit for each new hire – and there is no limit to the number of new hires who can qualify an employer for a tax credit. 

What are the WOTC target groups ?

• Qualified Veterans 
• Qualified Disabled Veterans 
• Qualified Unemployed Veterans 
• Qualified Designated Community Resident 
• Qualified Ex-Felons 
• Qualified Vocational Rehabilitation Recipient (requires release form) 
• Qualified Supplemental Nutritional Assistance Program (SNAP) (Food Stamps) Recipient 
• Qualified Supplemental Security Income (SSI) Recipient (requires release form)
• Qualified Recipients of Temporary Assistance to Needy Families (TANF) 
• Qualified Summer Youth

The WOTC Program has been reauthorized through December 31, 2019. An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work.
The credit is limited to the amount of the business income tax liability or social security tax owed.

The maximum tax credit ranges from $1,200 to $9,600, depending on the employee hired and the number of hours worked in the first year. Employees must work at least 120 hours in the first year of employment to receive the tax credit.
Relatives or dependents (this includes a spouse), majority owners of the employer, and former employees do not qualify for WOTC.

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Using QuickBooks - Tracking Mileage

Keeping track of mileage helps you get all the reimbursements you're due and it is important because all business-related mileage is tax-deductible. QuickBooks can help you keep records of the miles you drive.

If you want to track mileage on the vehicles you use for your business, create entries for your vehicles in the Vehicle List (List - Customer & Vendor Profile Lists - Vehicle List) first, set up the mileage rate (Company - Enter Vehicle Mileage - Mileage Rates), record mileage driven (Company - Enter Vehicle Mileage) and then, record the vehicle, date, miles driven, odometer settings, and reason for the trip.

Usually with the actual expenses method, you get a higher business vehicle expense deduction. However, note that the IRS limits the amount that you can include as vehicle depreciation, so you may not get the highest deduction with this method.

No matter which method you use, you need to record of your actual business miles, which the Enter Vehicle Mileage command enables you to do. By law, you need a good record of business mileage to legitimately claim the deduction.

When you prepare your taxes you can use one of the reports generated by QuickBooks. (Reports - Jobs, Time & Mileage)

• Mileage by Vehicle Summary;
• Mileage by Vehicle Detail;
• Mileage by Job Summary;
• Mileage by Job Detail.

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Excise Taxes for a Business

 

Excise taxes are taxes paid when purchases are made on particular items. Excise taxes are often included in the price of the item. You may also pay excise taxes on certain activities, such as highway usage, telephone service or gambling.

Most of the time excise taxes are figured as part of the price of the commodity or service. Unlike sales tax, the excise tax isn’t listed separately. 

Business owners or product or service vendors are responsible for collecting the excise tax and turning it over to the government.

If you run a business that’s required to collect an excise tax, you collect the tax and pay the tax to the government each quarter. You’ll file Form 720, Quarterly Federal Excise Tax Return. Form 720 lists the various types of excise taxes in effect, including the following:

• Environmental taxes
• Communications and air transportation taxes
• Fuel taxes
• Tax on the first retail sale of heavy trucks, trailers, and tractors
• Manufacturers' taxes on the sale or use of a variety of different articles

There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return.

If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. Use Form 730.

For more information on excise taxes, see Publication 510.

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Using QuickBooks - Price Levels

Price levels allows you set custom pricing for different customers or jobs. When you define price levels and assign them to customers, QuickBooks takes care of adjusting the prices on every invoice you create. You can also apply a price level to specific lines on invoices to mark up or discount individual items. 

Fixed percentage price levels allows you increase or decrease prices of all items for a specific customer or job by a fixed percentage. If you have a fixed set of discounts, you might name the various levels by the percentage, like Discount 20 for example. An alternative is to name them by their purpose, like NewCustomer. That way, it's easy to change the discount amount without changing the price level's name.

To create a price level, make sure the price level preference is turned on. If QuickBooks' Price Level preference is turned off, you won't see the Price  Level Item in the List menu. Check it at Edit - Preferences - Sales & Customers, and then click the Company Preferences tab. Select the Enable Price Levels radio button, and then click OK.

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Your Self-Employed Tax Obligations

If you are an independent contractor, sole proprietor or a member in a partnership or of an LLC, you are considered self-employed and need to understand your self-employed tax obligations. You're subject to the tax if you were self-employed and your net earnings from that source were $400 or more.

As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly.

Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. 

You must figure your net profit or net loss from your business to determine if you are subject to self-employment tax. You figure self-employment tax (SE tax) yourself using Schedule SE (Form 1040). A self-employed has to pay 15.3% of his or her self-employment income.
The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

Inactive partners are subject to the self-employment tax.

You can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your self-employment tax.

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Does a Small Business Need to Pay Estimated Tax?

You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. If you had a tax liability for the prior year, you may have to pay estimated tax for the current year. The IRS rule is that you must pay at least 90% of income taxes (and self-employment taxes) during the year or 100% of income taxes from last year, to avoid fines and penalties.

If you are filing as a sole proprietor, partner, S corporation shareholder and/or a self-employed individual, you should use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax.

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

Remember, because the business owner owes the tax, the owner must pay from his personal account. 

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Does Small Business Need an EIN Number?

You will need an EIN if you answer "YES" to any of the following questions:

• Do you have employees?
• Do you file any of these tax returns: Employment, Excise, Alcohol,Tobacco or Firearms?
• Do you withhold taxes on income, other than wages, paid to a non-resident alien?
• Do you have a Keogh plan?
• Are you involved with any of the following types of organizations?
• Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
• Estates
• Real estate mortgage investment conduits
• Non-profit organizations
• Farmers' cooperatives
• Plan administrators

If you need an EIN number, you can apply:

• Online
• By Fax
• By Mail
• By Telephone - International Applicants

How to apply for an EIN

You can get an EIN immediately by applying online. International applicants must call (267) 941-1099. If you prefer, you can fax a completed Form SS-4 to the service center for your state, and they will respond with a return fax in about one week. If you do not include a return fax number, it will take about two weeks. If you apply by mail, send your completed Form SS-4 (PDF) at least four to five weeks before you need your EIN to file a return or make a deposit.

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Using QuickBooks - Categorizing with Classes

If you need to classify by categories your income and expenses in QuickBooks, the solution is using classes. Classes help you track financial results by categories such as business unit, location, etc. This is a way to identify related data. Classes are used in transactions. Classes let you organize transactions into any categories you want. Classes also come in handy for tracking the allocation of functional expenses that nonprofit organizations have to show on financial statements. You can have a subclass of each class that you create.

Before you can assign classes, you have to turn on QuickBooks' class-tracking feature. In the QuickBooks Pro, you can turn it on: Edit - Preferences - Accounting, and then click the Company Preference tab. 

You can create two classes in QuickBooks for your business: location 1 and location 2. Each time you enter a transaction, it will assign one of two classes. Another example is if you have two or more vehicles in your company and you would like to know how costs for repairs, fuel, and so on. You need to set up a class for each vehicle and apply those classes to your QuickBooks transaction entries for repair, fuel, etc.

QuickBooks comes with reports specially designed for tracking class-based transactions such as Profit & Loss by Class, it  can be found in the Reports menu, under Company & Financial. You can find more reports on Report Center.

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W-4 - What is the Correct Amount of Tax Withholding?

Form W-4 allows you a degree of control over how much of your income you want to subject to those federal taxes by controlling the amount of withholding allowances you can claim on your paycheck. Without a W-4 on file, an employer is required to withhold at the highest rate - as if you are single and claim zero allowances. The more allowances you claim, the less your employer will tax from your paycheck. The number of exemptions you should claim varies and is based on a number of factors, such as marital status, job status, earned wages, filing status and child or dependent care expenses. 
If you are exempt on your W-4, that means you are telling your employer that you do not want any money withheld from your paycheck for federal taxes. You must meet the following two criteria to file as exempt:

1. You were refunded all of your withholding in the previous year because you had no tax liability;
2. You expect to have no tax liability in the current year.

Remember, if another person can claim you as dependent on his or her tax return, you cannot claim exemption from withholding if your income exceeds $1,050 and includes more than $350 of unearned income.
W-4 includes three worksheets to help you determine the correct number of allowances.
 
You can use the withholding calculator to help you figure out how many extra allowances you should be claiming on your W-4.  Withholding Calculator

You can adjust your withholding at any time during your employment.

The Form W-4 and instructions for 2016 can be downloaded here:  Form W-4 (2016)

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FATCA - Foreing Account Tax Compliance - Who must file?

The Foreign Account Tax Compliance Act (FACTA) is an important development in U.S. efforts to combat tax evasion by U.S. persons holding accounts and other financial assets offshore. The legislation created new self-reporting requirements and increased penalties for failure to comply fully with complex reporting rules. The regulation imposes on all foreign financial institutions a vast new legal mandate to determine who among their clients are "U.S. Persons" and report directly to the IRS information on those clients' accounts. Usually, a withholding agent is required to withhold 30% on a withholdable payment made to a Foreign Financial Institution (FFI) or to a Non Financial Foreign Entity (NFFE), unless the FFI or NFFE meets certain requirements.

In general, federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. 

Generally U.S citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad).

Specified individuals, which include U.S. citizens, resident aliens, and certain nonresident aliens that have an interest in specified foreign financial assets and meet the reporting threshold must file Form 8938.

Form 8938 is due with your annual income tax return and filed with the applicable IRS service center.

There is a penalty up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply.

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What is Backup Withholding and How to Prevent It

Backup withholding is a specified percentage (currently 28%) withheld by the taxpayers to be paid to the IRS on some transactions reported on variants of Form 1099 for tax purposes. 
Backup withholding is required in certain situations. These include:

• Interest payments;
• Dividends;
• Patronage dividends, but only if at least half of the payment is in cash;
• Rents, profits, or other income;
• Commissions, fees, or other payments for work performed as an independent contractor;
• Payments by brokers and barter exchange transactions;
• Payments by fishing boat operators, but only the part that is in cash and that represents a share of the proceeds of the catch;
• Payment Card and Third-Party Network Transactions; and
• Royalty payments

 Backup withholding also may apply to gambling winnings, if the winnings are not subject to regular gambling withholding.

US citizens and resident aliens will be exempt from backup withholding if:

• You properly report your name and Social Security number to the payer using form W-9, and that information matches the IRS records, and
• You have not been notified by the IRS that you are subject to mandatory backup withholding.

 If you receive a "B" notice from payer, notifying you that the TIN you gave is incorrect, you usually can prevent backup withholding from starting or stop backup withholding once it has begun by giving the payer your correct name and TIN. If you receive a second "B" notice from that payer, you will need to provide the payer with verification of your TIN from SSA - Social Security Administration or the IRS.
If you have been notified that you underreported interest or dividends, you must request and receive a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun.
If the IRS determines that backup withholding should stop, it will provide you with certification and will notify the payers who were sent notices earlier.

If income tax has been withheld under the backup withholding rule, you should take credit for it on your tax return for the year in which you received the income. It will be reported to you and to the IRS using the appropriate form 1099.

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Cash and Accrual Method - Tax Implications

Regardless of whether method of accounting you use, you need to check which option allows you for deferring taxable income to a subsequent tax year and accelerating deductions to the current year.
The cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid. With the cash basis of accounting method, you record income when you actually receive payment from customers and have the cash in hand. Similarly, you record expenses when you write a check and the cash leaves your bank account. This method does not recognize accounts receivable or accounts payable.  Many small business prefer to use the cash basis of accounting because it is simple to maintain. 
In the accrual accounting, expenses and revenue are matched, providing a company with a better idea of how much it is spending to operate each month and how much profit it is making.With the accrual method, income and expense are recorded when they are obligated to be paid. So, if you make a sale, you record it as income on the date of the sale, not when you actually pay for it. And you record an expense the day you incur the expense, even if you don't actually pay for it until a later date.By calculating accounts receivable and accounts payable, you'll have a clearer picture of profits for any given period.
Of course, you will have to pay taxes during one year or the next, but you can strategize to the best of your ability to decrease your liability as much as you can.

We can help you to figure out which method is best for you.

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Using Quickbooks - Setting Up Items

Whether your business does, you'll probably use items in QuickBooks to represent the products and services you buy and sell. But to QuickBooks, things like discount, subtotals and sales tax are items too. In fact, everything that appears in the body of a QuickBooks form (such as an invoice) it is an item.
Items save time and increase consistency on sales and purchase forms. When you create an item, you describe what the items is, how much you pay for it, how much you sell it for, and the accounts to which you post the corresponding income, expense, cost of goods sold, and asset value. You also create items for other stuff you add to sales forms, like discounts, shipping charges, and subtotals.
If you do not use invoices, sales receipts, inventory and estimates, you do not need to use items. 
Planning your Item List can save you lots of frustration. By deciding how to name and organize your items before you create them in QuickBooks. Since QuickBooks Pro and Premier can not hold more than 14,500 items and once you use an item in a transaction, you can not delete that item, you need to plan how specific your items will be.
The best time to create items is after you've created your accounts but before you start purchasing goods from vendors or invoicing customers.

 

We can help you to set up items in QuickBooks

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Accountable Plan - Tax savings

You can have significant tax saving for both the company and employees when you use an accountable plan in your business for certain expenditures.

How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: 

• An accountable plan, or 
• A nonaccountable plan. 

If you make the payment under an accountable plan, deduct it in the category of the expense paid. For example, if you pay an employee for travel expenses incurred on your behalf, deduct this payment as a travel expense. If you make the payment under a nonaccountable plan, deduct it as wages and include it in the employee's Form W­2. 

An accountable plan requires your employees to meet all of the following requirements. Each employee must: 

1. Have paid or incurred deductible expenses while performing services as your employee, 
2. Adequately account to you for these expenses within a reasonable period of time, and
3. Return any excess reimbursement or allowance within a reasonable period of time. An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. 

An accountable plan is a reimbursement arrangement adopted by the company that requires employees to substantiate their business-related expenses to the company within a reasonable time (no more than 60 days from the date of the expense) and to refund to the company any excess advances within a reasonable period (no more than 120 days from the date of incurring or paying the expense); no advances can be made more than 30 days prior to the time of the expense.

With an accountable plan, reimbursements are not reported as income so the employer avoids payroll taxes and W-2 reporting. The employer deducts the business expenses. The employee does not have any income to report and does not have any expenses to claim as miscellaneous itemized deductions. Not having additional income means that adjusted gross income is minimized; this in turn may increase eligibility for certain tax breaks and/or avoid triggering certain phase-outs or additional taxes.

There is no IRS form used to adopt an accountable plan. The law does not even require that an accountable plan be in writing. However, formalities count when it comes to accountable plans. It’s wise to put the terms of the plan in writing. Corporations should add the adoption of accountable plans in their minutes. It is most important to operate an accountable plan in accordance with its terms.

We can help you to set up your accountable plan

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