Taxing Moments by Andrew Steckbeck, Partner
I sit down to write this article just after my last tax return for the 2011 calendar year has been signed, sealed and delivered. The tax deadline is often a stressful time for filers, when one finds out how much of their money is really theirs to keep, and how much belongs to various government authorities. Most of the time taxes are only thought about in the days and weeks leading up to April 15; may I suggest that pausing and considering your tax circumstances throughout the year may make the year-end process less stressful. Most tax planning needs to be executed prior to the end of the tax year (December 31 for calendar year taxpayers). If the only time you spend thinking about taxes is between January and April 15 of the subsequent year, you may miss many opportunities to implement any tax-saving strategies.
Tax law is too complex to outline detailed answers – each scenario needs to be dealt with on an individual basis – but allow me to suggest some items that you should be discussing with your tax preparer well in advance of the filing deadline:
• Independent contractors (workers to whom you issue a 1099) – make sure you have all required documentation to support your position that these workers are not employees. This is a consistent point of emphasis with the IRS – if they determine on audit that one of your independent contractors is an employee, you can be liable for back payroll taxes, penalties, and other costs. In addition, Pennsylvania has added criminal sanctions to the law for those contractors who intentionally misclassify workers.
• When you win a contract in a state other than Pennsylvania, make sure you are properly registered with the state agencies of Department of Revenue and Department of State. Profit from these jobs will usually be taxed to the state in which the job is performed and the profit earned. Because states (unlike the Federal government) need to balance their budgets, “catching” out-of-state companies earning income within their borders has become a major revenue-raising means for revenue-hungry states. Failing to properly register in a state may also deprive you of certain legal remedies with that state’s court system. Make sure all filings are properly done and up-to-date to avoid tax penalties and legal issues. There may also be separate tax filings and tax payments required for work performed in various cities (Harrisburg, Philadelphia, and York included), so alerting your tax preparer to these contracts is crucial to compliance.
• For those that are charitably inclined, there currently exists for Pennsylvania a significant tax credit labeled the “Educational Improvement Tax Credit”, or EITC. The EITC can provide a credit of at least 75% and possibly up to 100% of the contribution given against Pennsylvania income tax. In plain English, you can choose to divert your tax dollars to specific tax-exempt organizations rather than the Pennsylvania Department of Revenue. The funds must be given to pre-approved scholarship and/or educational improvement organizations. Applications must be submitted and approved by various due dates in May and July.
• As you track your company’s profitability through the tax year, and particularly if your profits are improved over the previous year, make certain that your cash flow planning allows for the impending tax bill. This can be of particular importance if your profit is tied up in retainage or other slow-paying receivables – you may incur a tax liability on these funds before you receive the cash. Confirming that you have adequate cash to pay the tax on your company’s profitability will help prevent a cash flow emergency when it comes time to file your tax return.
Stress is often a result of a lack of preparedness; make sure you implement processes that help prevent taxing moments.
Simon Lever LLP is a full-service public accounting and business advisory firm in Lancaster, Pennsylvania. With over 40 talented professionals, Simon Lever LLP provides Bottom Line Results for individuals and businesses that require assistance with audit, accounting, tax planning & preparation, payroll, business valuation, advice, succession, estate, and retirement planning services.