Q
How can I avoid tax penalties?
A
As an individual taxpayer, you are required to pay income taxes as you earn money during the year. This is done either by withholding taxes from your paycheck or by making estimated tax payments. If you do not pay a sufficient amount of taxes, then you might have to pay a penalty at the end of the year. Generally, you can avoid the penalty on underpayment of estimated taxes by submitting at least 90% of the tax due for the current year or 100% of the tax from the prior year, whichever is smaller. In our practice, we have noticed that clients typically require midyear adjustments to their estimated tax payments because of changes to their financial situation. Such changes may include fluctuations in business income, the loss of employment, or distributions from IRA accounts. Keeping an eye on your income and how much tax you are paying can help you avoid substantial penalties and even save on taxes.
Q
How can I take money out of my business and save on taxes?
A
To avoid double taxation, a small businesses may elect to be treated as an S Corporation. Two ways for an S-corporation owner to extract money from the business are through salary and distributions. Taking a salary will necessitate the withholding of payroll taxes and possibly federal and state income taxes. However, distributions do not require tax withholding and can result in tax savings if done properly. Before taking distributions, remember that the IRS may not approve of distributions that are disproportionate to an owner's salary. In some cases, the IRS may recharacterize distributions to salary, thereby reinstating payroll and income taxes.
Q
As a small business owner with no formal retirement plan in place, is there any way for me to save more aggressively for retirement than just an IRA contribution of $5,000.00?
A
Many of the same retirement plans that large companies have, are available to small businesses. Within some of these retirement plans, the IRS allows contributions of up to $49,000.00*, to be made on behalf of an individual per year. While most people do not have contributions that high, they usually have contributions much higher than $5,000.
Call our office to discuss which plans would be best for you and your company and how easy it would be to set one up.
* $49,000.00 Is the 415 (c)(1)(A) limit for 2011
Want more information?
Please contact Alesa at alesaklein@cparesults.net or by phone at 704-841-1120 x 120
Thanks!
