Easy Tax Preparation

We all know that preparing for tax day is a daunting task. There are certain tips you can follow to make your tax preparation manageable. Here are five of those tips to make the process seamless.

Keep the Two Worlds Apart

As a general rule of thumb, you want to keep any new projects or jobs separate from what you’ve already got going on. You don’t know how successful your new business will be, so play it safe and keep a separate bank account for all of your dealings.

Hiring Employees vs. Subcontractors

Part of tax preparation is making sure that the proper forms are signed. Not only is it crucial to hire those who will make a difference in your company, but you also want to make sure you’re having them fill out the proper paperwork. There are two main forms, the W2 and 1099 for subcontractors.

Employees are those who work scheduled shifts and are paid on payroll, while freelancers come and go as projects are needed. The W2 should be given to the regular shift worker. If you fail to provide the proper paperwork, you could face hefty penalties. Be sure to understand the type of workers you have and which paperwork you need to have on file for each type.

Deductions

If you read your books carefully, you’ll find there are many shortcuts and tricks that may help you claim deductions. You can get a deduction for your startup’s expenses, such as ordering supplies, buying space, etc. There is a $5,000 limit, so make the most of it.

Double-Check Payroll

Taking in an employee is a big decision that usually benefits the employee and lightens the employer’s workload. However, as mentioned earlier, it’s important to make sure all the proper paperwork is filled out on time. Social Security, Medicare, and Medicaid are examples of important programs that the W4 and W3 forms account for. Make sure you are up to speed on what is expected of you regarding these regulated fees.

Claim Depreciation

In your annual tax preparation, you can legally claim depreciation on your businesses’ cars, computers, patents, copyrights, and more. These are all tangible items that could lighten your tax obligation each year something depreciates.

Tax preparation is not the first thing most businesses think of when starting out; however, it is definitely an important factor that could cause a lot of headaches and unnecessary battles if you are not fully informed of what your responsibilities are.

 

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Factor Of Tax Policy

Globalization has been an increasing trend for businesses looking to expand. By growing into foreign markets, a company expects to increase revenue and earnings to stockholders over the long run. As this has happened, globalization has made taxation more complex than it had already been. Countries developed taxation in attempt to grow domestic economies; however globalization has changed the design of certain taxes and the extent of compliance. Some nations have chosen to raise taxes, while others have lowered tax rates to attract individuals and businesses in an effort to boost the domestic economy. Taxes are put in place to have individuals and corporation paying their fair share, but that is not what is happening in many areas around the world.

The mobility of capital across nations is leading to less revenue through taxation. In The Impact of Globalization on the Characteristics of European Countries’ Tax Systems, Lukovi cites a belief that taxation should be implemented using a multilateral approach instead of a unilateral one. This would certainly help the effectiveness of taxation across foreign borders, but still would not solve all problems. Around the globe, countries are at different stages of development, thus have different ideas on how to implement tax policy for their own good. Due to that reason, it is unrealistic to believe that a unitary tax system could be obtained. If a unitary system were implemented, related companies would be taxed as a single entity and tax havens would be eliminated.

Higher tariffs offer an alternative that is easier to tax and have increasing compliance. In contrast, higher tariffs discourage trading amongst nations in which certain resources are still needed. Consumption taxes, such as sales tax and excise tax, reduce the ability for taxpayers to play tricks in attempt of tax avoidance. “The small open economy is less reliant on taxing profit and income, and more reliant on consumption taxes and taxes on international trade, reflecting the fact that a well-designed tax system based on consumption taxes may create fewer economic distortions than many forms of tax on corporate profit and personal income” (Lukovi 120). When it comes to income tax, in the United States, it can be taken advantage of by making sure to receive income that is taxed at lower alternative rates, like qualified dividends among other financial assets.

Corporations have used numerous techniques to reduce tax liability, one of which is establishing branches in low-tax dominions. The Organization for Economic Cooperation and Development (OECD) is trying to improve the international taxation system. “Another proposal could eliminate a rule that allows companies to have a warehouse in a country without establishing a tax residence there. That could hit Amazon.com, which reports its European profits to tax haven Luxembourg thanks to the warehouse exemption” (Roll Call). This is one of countless examples of corporations, as well as individuals, finding ways to succeed in tax evasion. Individual countries are the ones that need to take action in the end as the OECD does not have enforcement authority.

It is unfathomable how many corporations do not pay taxes. “In the USA between 1996-2000, around two-thirds of transnational corporations (TNCs) paid no tax at all, and over 90% paid below 5% of their total income. From 2005 to 2006, of the 700 largest firms in the UK, 220 paid no UK tax at all” (Strauss). This shows that there are loopholes in many tax systems, and that clever businessmen will find ways to minimize tax liability. Administration for tax policy gets complicated when corporations have a residence in a handful of nations.

Globalization has made the solution to tax policy quite cloudy. Taxes can very much alleviate the effects of poverty. Whatever the best way to set tax policy internationally is, there needs to be increased coordination between territories. This involves communication of information across nations to ensure that potential tax revenue is not lost. A step closer to a unitary tax system will help the effectiveness of taxation as avoidance and evasion would be more difficult to achieve.

 

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How To Manage Your Tax

It seems like every year there are more do-it-yourself tax preparation software options as April 15th draws close. While there are plenty of reputable, efficient, and convenient options, an informed consumer should consider the pros and cons of e-filing before going through with it. For many people, the cost of hiring a certified public accountant or other professional to handle your tax preparation is greater than the return. If you do choose to file for yourself, you should know the pros and cons and be wary of common pitfalls that can trip up even the most intrepid of self-reliant DIYers.

The pros of self-filing are probably self-evident. The biggest benefit, of course, is that you’ll save money, at least up front. It is also a good way to acquaint yourself with your personal finances and take a hard annual look at your income, spending, and budgetary practices. Some people also get a certain peace of mind out of it. You know the saying, “If you want something done right, do it yourself?” Well, that’s all well and good, but it certainly has its limits. When it comes to yard work or thank you cards, it’s a solid philosophy. Open-heart surgery, on the other hand, is probably best left to the professionals. Gauge the seriousness in terms of the financial stake. If your adjusted gross income is under $57,000 per year and you only have one or two income streams, the Internal Revenue Service can direct you to some free or low-cost options. If, on the other hand, you run your own business, qualify for some deductions, or source your income from many independent sources, you might want to think about professional tax preparation services.

For one thing, you should assess the amount of time it will take you to file yourself versus the cost of having a professional tax preparer file for you. Many people look to save money, but few people consider that their time has value. If you have a couple of days worth of work to put together your return, would that time be better spent working on your actual career? The biggest factor, of course, is the bottom line. You may think that it’s expensive to hire a professional, but in many cases, it can be extremely costly not to hire a professional. The fact of the matter is that the tax code is a veritable labyrinth of deductions, exemptions, and credits built up over time, often for the benefit of very narrow interests. If it costs you $500 to hire a CPA, but they can get you $1500 more on your return, it’s a no-brainer.

Again, maybe you’re a student, only work part-time, or have a single modest paycheck with taxes automatically deducted. But if there’s a chance that you could end up getting more in the long run, professional tax preparation is worth every penny.

 

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