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Author: Jake Snelson

Small Business Payroll 101

Small Business Payroll 101: The W-2 Explained

You just got a new job. Congrats! Pat yourself on the back and start filling out that mountain of new hire paperwork. Sign here, sign there, date a few places, and you’re ready to start. Most people don’t understand exactly what it is they’re filling out, or what exactly the documents mean that they receive from their employer until they need to understand them.

If you are hired as a regular hourly or salaried employee, you’ll receive a Form W-2 from your employer by January 31st of each year. If you’re self-employed or working as a contractor, you will receive a Form 1099 instead. Because of withholdings and insurance requirements, W-2s are really only useful for tax purposes. If any taxes (Social Security, Medicare, etc.) are withheld—and legally, they always should be—a W-2 will be issued.

You may not realize it, but in most cases, you cannot actually wait until April 15th to pay your entire tax bill. If you’re self-employed, you know this from your estimated quarterly tax payments. However, if you are an employee who receives a W-2, your employer is actually taking care of this for you, based on the information you provide on your W-4. When that magical day, April 15th comes along (and it always does), the numbers reported on your W-2 are subtracted from your tax bill. This helps you to determine whether you are owed a tax refund or if you need to make additional payments to the IRS.

The information on a W-2 is fairly straightforward. Let’s take a closer look at each of the boxes on your form.

Here’s a quick rundown of boxes on the left side of your W-2.

Box a: Your social security number. This information must be 100% accurate to properly file taxes with the IRS.

Box b: Your employer’s EIN. Basically, your employer’s EIN number is equivalent to your Social Security Number—it identifies their business individually. No two EINs are the same.

Box c: Your employer’s legal address. Whether or not that is the exact location you will be working does not matter so much as the legal address being the one reported on a W-2.

Box d: This box is for your employer’s payroll department. Sometimes this box is filled in; sometimes it is not.

Boxes e and f: This should contain your full name as it appears on your Social Security card. It also contains your mailing address. Again, whether or not you actually live in your tiny little PO Box is not as important as providing an address that you can receive mail. The USPS prefers that you do not use punctuation in your address.

If you notice that any of the above boxes are incorrect on your W-2, contact your employer immediately to make the changes. If the information on your W-2 is inaccurate or different from other information, the IRS will want to know why.

Now we’re getting to the good stuff. The boxes on the right side of your W-2 reflect information from your company, wages, and withholdings.

Box 1: This shows your total taxable wages, or, what you’ve earned before any withholdings have occurred. However, this number does not include elective contributions to retirement plans, pretax benefits, or payroll deductions like insurance. It’s not unusual for this number to be less than the amounts in boxes 2 and 3.

Box 2: This box reports the total amount of federal income taxes withheld from your pay during the entire year. This amount is determined by the information you provided on your form W-4 that indicates any exemptions and additional withholdings. You can adjust this number on your W-4 for next year if you feel that it is incorrect.

Box 3: This shows your total wages subject to Social Security tax. This number is figured before payroll deductions which means the amount could be either less or more than the number in box 1.

Box 4: Correlating with box 3, box 4 shows the total amount of Social Security taxes withheld for the entire year. Social Security taxes are calculated based on a flat rate of 6.2%. The maximum amount for Social Security withholdings in one year is $7049.40.

Box 5: This box indicates wages subject to Medicare taxes. Unlike Social Security wages, there is no cap for Medicare taxes and this is likely the largest number on your W-2.

Box 6: This shows the amount of Medicare taxes withheld for the year. Again, this is based on a flat rate of 1.45%. If an individual earns more than $200,000 in a year, regardless of filing status, they are taxed an additional .9%.

Box 7: This box represents tips reported to your employer. If you earned tips and didn’t report them to your employer, you still have to report them to the IRS.

Box 8: Allocated tips reported in this box are those that your employer attributed to you. This is considered income and is taxable.

Box 9: This box will be blank. There is no longer a reporting requirement for this box and it has not yet been removed from the form.

Box 10: This is where your employer reports any benefits paid on your behalf under a dependent care assistance program.

Box 11: This box is used to report amounts which have been distributed to you from your employer’s non-qualified deferred compensation plan. This is a taxable amount.

Box 12: Here you’ll find lots of codes that, to some, seem to be gibberish. Here’s a quick explanation of three of the most common codes you might see here:

  • Code D: Elective deferrals will general be include in boxes 3 and 5, even if they are excluded from wages in box 1.
  •  Code DD: This amount is not taxable, but it reportable to the Affordable Care Act. It is the cost of the employer-sponsored health coverage.
  •  Code P: This code is reported by your employer but not taxable to you. If reimbursments are non-qualified, they are reported as income in boxes 1, 3, and 5.

Box 13: This series of three boxes will be checked by your employer if your earnings are subject to Social Security and Medicare taxes but not federal income tax withholding. It will also be checked if you participated in a retirement plan during the year, or if you received sick pay under your employer’s third-party insurance.

Box 14: Your employers will report anything else here that doesn’t fall under any other categories on your W-2.

Box 15: This box includes your employers state and tax ID number.

Box 16: This box indicates the total amount of taxable wages for state tax purposes.

Box 17: If box 16 is filled in, box 17 will show the total amount of state income taxes withheld during the year.

Box 18: If you are subject to local, city, or other state income taxes, those will be reported here. You will need an additional W-2 form if your wages are subject to withholding in more than one state.

Box 19: The amount of withholding for box 18 will be reported in box 19.

Box 20: This box shows the name of the local, city, or state tax reported in box 19.

All W-2s should be received from your employer January 31st of each year. The IRS requires that a copy of your W-2 form is attached to your tax documents when filing your income taxes.

Visit more posts in our Payroll 101 series:

What is Payroll?

The 1099-Misc Explained

Setting Your Own Salary as a Business Owner

How Often Should You Pay Employees?

What are the Costs Associated with Payroll?

5 of the Best Benefits to Offer Employees

The Power of the Employee Pay Stub

Small Business Payroll 101

Small Business Payroll 101: The 1099-MISC Explained

In our last post, we demystified the elusive W-2 Form received from employers for wages earned on the job. However, non-employees who do contract work for a company will receive a Form 1099-Misc instead of a W-2.

Like the W-2, the 1099-Misc Form is an IRS form used for tax purposes only. This form reports miscellaneous payments to individuals for a calendar year. The IRS refers to 1099s as “information returns.”

The person or company who pays you to do the contract work is responsible for filling out the appropriate 1099 form and sending it to you by January 31st of each year. If you earned more than $600 from a person or company, you should receive a 1099-Misc.

When you prepare your income tax return for the year, you are required to report all income showing on the 1099 forms you received and pay income tax on these amounts. If you did work for a company or individual and did not receive a Form 1099-Misc from them, you are still required to report the income to the IRS as self-employment income.

1099 Forms are also issued for other reporting requirements such as: acquisition or abandonment of secured property, proceeds from broker and barter exchange transactions, cancellation of debt, changes in corporate control and capital structure, dividends and distributions, certain government payments, interest income, and other miscellaneous type of income. Each 1099 form will have a letter or series of letters after the “1099” that indicates which type of form is being reported. (Ex. 1099-A, 1099-DIV, 1099-K, 1099-Misc).

All non-employees should receive their Form 1099-Misc by January 31st, and an additional copy of the same 1099 is sent to the IRS by February 28th.

Visit more posts in our Payroll 101 series:

What is Payroll?

Setting Your Own Salary as a Business Owner

The W-2 Explained

How Often Should You Pay Employees?

What are the Costs Associated with Payroll?

5 of the Best Benefits to Offer Employees

The Power of the Employee Pay Stub

Employee Pay Stub

Small Business Payroll 101: The Power of the Employee Pay Stub

 

With electronic banking, direct deposits, pay with your phone options, virtual bookkeeping, and a decreasing need for anything made of paper, technology is changing nearly every aspect of the world. More and more employees are opting to have their paychecks directly deposited into their account and are using online banking to pay their bills. Their account numbers fluctuate tremendously between paydays, all without a piece of paper ever being passed through their hands. Gone are the days of a paper paycheck and pay stub being handed to you on your way out the door on Friday, and here to stay are the days of electronic everything.

It’s no surprise then that younger employees hardly glance at their pay stub, let alone understand what it means. However, the employee pay stub always has and always will provide a tremendous amount of valuable information.

Most pay stubs cover basically the same information, regardless of the company you work for. The pay stubs Vyde issues are no different.

IRS-looking terms

Here’s a quick rundown of all those big IRS-looking terms that show up on each and every pay stub:

Gross Pay is the total amount of money you earned before deductions are taken from your check. Usually, this number will not be the same number as the amount of your paycheck.

Net Pay is the amount of money you take home after Uncle Sam takes his cut, you’ve made your Social Security and Medicare contributions, and other withholdings are taken from your check. This will be the same amount that is deposited into your bank.

Social Security Taxes withheld contributes to your coverage for the Social Security system. After you have paid into the system for years and then retire, you are entitled to receive monthly payments. The Social Security rate is 6.20% for 2015. For example, if your gross is $1,000, $62 will be withheld for Social Security.

Medicare Taxes are similar to Social Security taxes and are mandatory. The rate of Medicare withholdings is 1.45%, and all employers contribute another 1.45% on behalf of the employee. When an employee becomes eligible for Social Security, they are also eligible for Medicare coverage for their medical expenses.

Federal Income Taxes are determined by the information you provided on your W-4 when you were first hired. This amount is what you owe to the Federal government when it is time to file income taxes and is taken incrementally from each paycheck.

State Income Taxes varies from state to state, and some employees are not required to pay state tax. This amount is also deducted from your paycheck in the same way Federal taxes are to cover the amount of taxes you owe to the state come tax season.

Leave Time includes vacation days, PTO (paid time off), or sick days. Most employers include how many hours have been used to date and how many hours remain for the year.

Insurance Deductions are taken from your paycheck depending on the type of health and/or life insurance your company offers. This deduction varies based on the type of plan the employee enrolled in upon hiring.

Retirement Contributions such as 401K or 403B show the amount contributed to either of these accounts.

Expense Reimbursements are included if the employee has used their own money for a company expense, or if they are being reimbursed for travel (gas, hotels, etc.)

Expense Reimbursements

You may also find these common abbreviations on your paystubs:

YTD: Year-to-Date

FT or FWT: Federal Tax Withheld

ST or SWT: State Tax Withheld

SS or SSWT: Social Security Tax Withheld

MST or Med: Medicare Tax Withheld

If you still have questions or if you’re confused about something on your pay stub, contact your Human Resources department for assistance. Understanding contributions, taxes, and withholdings listed on a pay stub contributes to good money management skills and financial independence.

Visit more posts in our Payroll 101 series:

What is Payroll?

The 1099-Misc Explained

Setting Your Own Salary as a Business Owner

The W-2 Explained

How Often Should You Pay Employees?

What are the Costs Associated with Payroll?

5 of the Best Benefits to Offer Employees

Employee’s First Day

7 Accounting Things To Do On An Employee’s First Day

When it comes to hiring a new employee, there is a lot of work to be done before the training even begins. Employers have to post the job, screen applicants, conduct interviews, perform background checks and more, all before the employee is even hired.

After hiring an employee, there is even more work to be done. However, hiring a new employee doesn’t have to be as tedious as it sounds if you already have a new hire checklist in place.

Here are seven accounting tasks to add to your new hire checklist for an employee’s first day:
  1. Fill out an I-9. This proves your employee is eligible to work in the US. Find the official form, here.
  2. Fill out a W-4. This form ensures that the right amount of taxes is withheld from an employee’s paycheck, based on family size, insurance withholdings, and more. This form will then need to be sent to your company’s payroll department.
  3. Add the employee to your worker’s compensation plan.
  4. Have the employee fill out health insurance paperwork.
  5. If you offer a benefits package, the employee will need to fill out the necessary paperwork such as retirement, life insurance, wellness programs, etc.
  6. Put the employee on your payroll system and gather all necessary banking information.
  7. If your company offers direct deposit, get a void check with the necessary information to set that up.

Having a new hire checklist in place helps ease the process of starting an employee off on the right foot with your company. You will find that the checklist needs to be modified and changed over time, but streamlining this process and having the accounting paper ready to go can save time and hassle on an employee’s first day. When the process is perfected, you can delegate this task to another employee to take care of so you can start with the actual job training.

Small Business Payroll 101: What Are The Costs Associated With Small Business Payroll?

Payroll takes up a significant portion of a company’s revenue, but in addition to the money paid to employees for their work, there are other costs associated with payroll as well.

Some of the costs associated with payroll include:
  • Printing checks for employees. Since payroll checks include Year to Date pay information, they must be special business checks.
  • Direct deposit fees and other banking costs.
  • Employer portion of the following: Social Security Tax, Medicare Tax, state unemployment, federal unemployment, worker’s compensation insurance, paid holidays, sick days, contributions toward 401K, retirement, etc.
  • Time spent by a business owner or accountant to calculate gross and net incomes for each employee.
  • If your company uses an outside service to process payroll, they may be charged based on the number of checks cut, plus a flat fee for each time payroll is processed. The more often you pay your employees, the higher your processing fees are.

Many small business owners find that as their company grows, their time becomes more precious, and they can actually save money by outsourcing payroll services.

On average, businesses are overpaying employees by about 4 percent because of differences between the employee’s time and an accurate time record. Hiring an expert accountant to handle payroll can often reduce these discrepancies.

Another quick way to determine if outsourcing payroll would save your business money is to look through your small business bookkeeping and figure out how many hours your employees are devoting to payroll-related activities. Then, calculate how much you’re spending and compare the amount to the plans offered by several payroll-services providers.

Doing payroll yourself can take a lot of time and focus from the money-making aspects of your business. Payroll may not directly increase sales, but done incorrectly, it can put your business in a world of hurt. To be in accordance with the laws and legal requirements of payroll takes a considerable amount of time and detail. Outsourcing payroll will help you save time and allow you to spend more money on the profitable parts of your business.

 

Visit more posts in our Payroll 101 series:

What is Payroll?

The 1099-Misc Explained

Setting Your Own Salary as a Business Owner

The W-2 Explained

How Often Should You Pay Employees?

5 of the Best Benefits to Offer Employees

The Power of the Employee Pay Stub

Small Business Payroll

Payroll 101: How Often Should Small Business Pay Employees?

In the United States, the majority of small businesses pay their employees bi-monthly. However, creating an appropriate payment timetable for employees presents a notable difficulty for small business owners, demanding thorough contemplation of multiple factors.

Federal and state laws require that a small business pays their employees at regular intervals. That is, a company cannot pay an employee twice in one month, and then only once the next month. Regardless of the time in between payroll, it must be scheduled at regular intervals.

The IRS does not mandate a certain number of pay periods each year. However, some states impose minimum payment frequencies. For example, Massachusetts, Ohio, and Utah require that employees are paid semi-monthly.

How Often Should Small Business Pay Employees

Benefits of a Well-organized and Systematized Payroll Schedule

A systematized payroll schedule holds significant importance for businesses due to several key reasons:

Consistency and Predictability

A set payroll schedule provides consistency and predictability for both employers and employees. It establishes clear expectations regarding when employees will receive their pay, promoting stability and reliability within the organization. This consistency fosters trust and satisfaction among employees, reducing uncertainties about their financial situations.

Compliance with Regulations

Adhering to a regular payroll schedule ensures compliance with various federal and state labor laws and regulations. These regulations often dictate specific deadlines for paying employees, and a structured schedule helps ensure that these deadlines are consistently met, avoiding potential legal issues or penalties.

Efficient Time Management

A systematic payroll schedule allows employers to efficiently allocate time and resources for payroll processing. By having predefined dates for tasks such as collecting employee hours, calculating wages, and processing payments, it streamlines the workflow and prevents last-minute rushes or errors in payroll processing.

Better Financial Planning

A scheduled payroll system facilitates better financial planning for businesses. It enables accurate forecasting of cash flow, allowing businesses to manage their finances more effectively. Knowing when payroll expenses occur helps in budgeting and prevents unexpected financial strains on the company.

Employee Morale and Retention

Timely and consistent paydays contribute to positive employee morale and satisfaction. When employees receive their wages on time, it enhances their trust in the employer and promotes a sense of appreciation for their work. This, in turn, can lead to higher employee retention rates and a more motivated workforce.

Reduced Errors and Discrepancies

A structured payroll schedule reduces the likelihood of errors and discrepancies in wage calculations or payments. With a set routine and ample time for processing, there’s less chance of rushed or inaccurate payroll, leading to fewer mistakes and subsequent corrections.

Enhanced Operational Efficiency

Implementing a systematic payroll schedule increases operational efficiency within the HR and accounting departments. It minimizes administrative burdens, allowing staff to focus on other critical tasks, thus optimizing overall business operations.

Small Business Pay Employees

Key Elements to Check for an Efficient and Successful Payroll Scheduling System

Employee Payment Frequency

Determine how often you will pay employees (weekly, bi-weekly, semi-monthly, or monthly) considering the needs of your business and state regulations. Ensure this frequency aligns with your cash flow and budget.

Compliance with Laws and Regulations

Familiarize yourself with federal, state, and local labor laws governing payroll schedules. Ensure your chosen schedule complies with minimum wage laws, overtime regulations, and pay frequency requirements.

Employee Preferences and Needs

Consider the preferences of your employees. Some may prefer more frequent payments for budgeting purposes, while others might prefer less frequent but larger paychecks. Gather feedback to understand their needs.

Business Cash Flow and Financial Planning

Assess your business’s cash flow to determine a payroll schedule that aligns with your financial capabilities. Ensure the schedule allows for timely payment of salaries while maintaining a healthy cash reserve.

Administrative Processes and Workflows

Evaluate the time needed for payroll processing, including tasks such as collecting employee hours, calculating wages, and processing payments. Design a schedule that allows sufficient time for these tasks without rushing or errors.

Payroll Processing Time

Consider holidays, weekends, or other non-working days that might impact payroll processing. Adjust your schedule accordingly to accommodate these days to ensure timely payments.

Payroll Process

Payroll Process: Ways to Compensate Your Employees

1. Understand State and Federal Payroll Laws

As a small business owner, it is important that you familiarize yourself with federal and state laws governing payroll. These laws cover minimum wage, overtime pay, tax withholding, and other regulations. Understanding these regulations is crucial to ensure compliance and avoid legal issues.

2. Choose a Payroll Schedule

Decide on a payroll schedule or pay period that suits your business and state regulations. Common schedules include weekly, bi-weekly, semi-monthly, or monthly pay periods. Ensure consistency and clearly communicate the schedule to employees.

There are several options of setting up a payroll schedule for employees. Some of them include:

  • Weekly: employees are often paid on the same day each week—normally Friday—for the previous week’s hours worked.

  • Bi-weekly: Like weekly, employees are usually paid on the same day of the week, perhaps every other Friday, for the immediate work done (Work September 1-14, paid for that work on September 14), or for the previous two weeks worth of work.

  • Semi-monthly: Payments are made to employees on the same days of each month, for example, the 1st and the 15th of the month. When these days land on a Saturday or Sunday, payday is typically pushed to either the Friday before or the Monday after.

  • Monthly: Paydays fall on the same day every month, normally the first or last day of the month.

You may pay your employees on different days of the month, which reduces the workload for the accountant at payroll time, but can also complicate things if meticulous payroll records are not kept.

3. Collect Employee Paperwork

Obtain necessary paperwork from employees, including Form W-4 (for federal tax withholding), Form I-9 (Employment Eligibility Verification), direct deposit authorization, and any other relevant forms mandated by federal or state laws.

These documents are essential for an employer to gather pertinent information from a new employee. They are typically completed on the employee’s first day of work and are crucial for legal and administrative purposes:

  1. Form I-9, Employment Eligibility Verification:

    This form is required by the U.S. Citizenship and Immigration Services (USCIS). It verifies an employee’s identity and authorization to work legally in the United States. It requires the employee to present acceptable documents to confirm their identity and employment eligibility.

  2. Form W-4, Employee’s Withholding Certificate:

    The W-4 form is used by the employer to determine the amount of federal income tax to withhold from the employee’s paycheck. It includes information such as the employee’s marital status, number of allowances, additional withholding amounts, and exemptions, which directly impact the tax withholding calculations.

  3. State Withholding Allowance Certificates:

    Some states require additional withholding allowance certificates apart from the federal W-4. These state-specific forms are used to determine the amount of state income tax to be withheld from the employee’s wages, based on state tax laws and the information provided by the employee.

Some companies choose to pay their hourly and salaried employees on different days of the month, which reduces the workload for the accountant at payroll time, but can also complicate things if meticulous records are not kept.

Since salaried employees are paid the same amount for each paycheck regardless of hours, they can be paid currently without any delay.

For example, a salaried employee who has an annual pay of $36,000 can be paid

  • $3,000 a month

  • $1,500 semi-monthly

  • $1,386 every two weeks. Since this amount has been rounded up, the last paycheck of the year may be slightly different to account for this difference.

On the other hand, paychecks for employees paid on an hourly basis take more time to calculate and the amounts are different from paycheck to paycheck.

4. Calculate Pre-Tax Pay

Determine employee’s gross pay by multiplying the number of hours worked by the hourly rate or using the agreed-upon salary. Deduct any pre-tax employee benefits, such as retirement contributions or health insurance premiums, from gross pay to calculate pre-tax pay.

5. Figure Out Tax Withholding

Use the information provided on Form W-4 to calculate federal income withholding tax. State income tax withholding may also apply, depending on the state. Utilize IRS guidelines and state tax tables to accurately withhold the correct amount.

6. Determine Net Pay

Subtract all deductions, including taxes and any post-tax deductions (like post-tax benefits or garnishments), from the pre-tax pay to arrive at the employee’s net pay—the amount they receive in their paycheck.

7. Distribute Paychecks

Distribute paychecks or arrange for direct deposits on the chosen payroll schedule. Ensure accuracy and timeliness in payments to maintain employee satisfaction and compliance with fair labor standards act laws.

8. File Taxes

Submit payroll taxes to the appropriate government agencies on time. This includes federal income tax withholding, Social Security, Medicare taxes, and state payroll taxes. Failure to file taxes properly can result in penalties.

9. Pay Into Benefits

If your business provides benefits such as health insurance or retirement plans, ensure that the employer’s contributions are made accurately and on time.

10. Maintain Payroll Records

Keep detailed records of all payroll-related transactions, including employee compensation, tax withholdings, benefits, and tax filings. Maintain these records for the required period as per federal and state laws.

Well-organized and Systematized Payroll Schedule

Before setting up a pay schedule for employees, consider the pros and cons and costs associated with payroll for your company. It is best to have a system including a small business bookkeeping in place before hiring employees so there is less confusion and adjustments to make as the company grows.

Visit more posts in our Payroll 101 series:

What is Payroll?

The 1099-Misc Explained

Setting Your Own Salary as a Business Owner

The W-2 Explained

What are the Costs Associated with Payroll?

5 of the Best Benefits to Offer Employees

The Power of the Employee Pay Stub

Small Business Payroll 101: What is Payroll?

 

Simply put, payroll is the total amount of wages and salaries paid to employees by a company. While the term can be summed up in a single sentence, the work behind payroll can be extensive and a little confusing at times.

Many companies pay their employees in different ways. Some employees are paid salary (a set amount of money per year, divided into equal amounts for each pay period), some are paid hourly, and others are paid by the numbers of goods produced or items sold. Each employee’s payroll must be calculated and their paychecks distributed, depending on the job they do and the way they are paid.

Payroll accountants are responsible for calculating and keeping track of employee’s hours and multiplying that by their pay rate. This gives an accountant the gross income for the employee. They then deduct federal and state taxes, medical insurance, retirement contributions, and other withholdings from the gross amount before issuing a check to employees, which then becomes the net pay.

Payroll specialists and accountants are also responsible for identifying employers and employees by a federal code and keeping a running tally of total income and deductions for the company’s fiscal year.

When a business is in its early stages, keeping enough cash to pay all employees is a high priority, and often a challenge. Even if the business is not yet profitable, employees must still be compensated for their time. Often times when small businesses reach a level of profitability, they outsource payroll services in order to save time and maintain accuracy in their records.

 

Visit more posts in our Payroll 101 series:

The 1099-Misc Explained

Setting Your Own Salary as a Business Owner

The W-2 Explained

How Often Should You Pay Employees?

What are the Costs Associated with Payroll?

5 of the Best Benefits to Offer Employees

The Power of the Employee Pay Stub

Who can get a tax extension

5 Must Know Facts To File A Tax Extension This Year

1. Who can get a tax extension?

If you’ve never filed a tax extension before, it probably seems like an elusive, I wouldn’t qualify for something like that, sort of thing. But the truth is, anyone can get a tax extension. Your boss, your grandma, your next-door neighbor and even you! And the process is actually a lot easier than you might think.

To get a tax extension on your federal income return, all you have to do is submit a Form 4868 to the IRS by April 15th. The tax form you submit says “Automatic Extension,” and by filling this, the IRS will automatically grant you extra time to file. You do not need to do anything else to file an extension.

However, don’t be confused with what a tax extension grants you. The extension is extra time to file the return, it is not an extension to pay the taxes due. You need to know how much tax you owe and be ready to submit payment by April 15th, regardless of your tax extension request. When you submit your Form 4868, you must include payment for taxes due to avoid interest, penalties, and late fees.

2. Who typically requests a tax extension?

Most working Americans receive all of the documents they need to file income taxes by the first week in February and are able to file their taxes on time. However, certain groups of people often file tax extensions:

  • Those with complicated financial situations who need more time to assemble their return.
  • Taxpayers who have invested in partnerships or S Corporations. They do not receive their K-1s from these entities until after April 15th. Their returns are due on September 15th with a tax extension.
  • Men and women serving in the military
  • Those who are out of the country for extended periods of time or who live part-time in another country

steps I need to take to get an extension

3. What are the first steps I need to take to get an extension?

If the tax deadline looks like a big, red, nearly impossible task marked on April 15th of your calendar, it’s time to take action. Be aware of your personal situation and file an extension sooner rather than later. If you know you cannot pay the amount owed in April, it is best to act early and file an extension as soon as you know you will not make the original deadline. You may want to seek professional advice or contact the IRS about your situation.

If you know you’ll be filing an extension this year there are two ways to file:

  1. Retrieve the Tax Form 4868 from IRS.gov and file online
  2. Print the Tax Form 4868, fill it out, and send it by mail
You can then pay all or part of your expected income tax due with a credit or debit card through the Electronic Federal Tax Payment System.
4. If I get a tax extension, when do I actually have to file my income taxes?

A tax extension grants you six months. This extends your due date to October 15th instead of April 15th.

5. Should I file a tax extension? Or should I just go ahead and file normally if I can?

There are always benefits to filing taxes early. We’ve discussed the increased risk of identity theft and tax scams (links) when you wait to file taxes. Not only does filing on time check a big item off your to-do list, it takes care of an inevitable bill that will have to be paid sooner or later. Just ask Mr. Ben Franklin. In this world nothing can be said to be certain except death and taxes.

However, extensions definitely serve a purpose. They allow the taxpayer extra time to gather all the necessary information so they can file accurately and on-time without paying a penalty.

Whether you need time to get your information in order or you’ve procrastinated and would just rather not file until October, the extension is an option for you, if you take the proper steps. The most important task in avoiding having to pay late fees is to estimate your tax bill and make that payment on time.

commonly requests tax extensions

FAQs about Tax Extensions

1. Who is eligible for a tax extension? Anyone can request a tax extension using Form 4868. It’s a straightforward process accessible to all taxpayers, granting extra time to file their federal income tax return.

2. Who commonly requests tax extensions? Individuals with complex finances, investors in partnerships or S Corporations, military personnel, and those living abroad often seek tax extensions to ensure accurate filing.

3. What are the initial steps to obtaining a tax extension? To file an extension, obtain Form 4868 from IRS.gov, then either file online or by mail. Additionally, payment can be made through the Electronic Federal Tax Payment System.

4. When is the deadline for filing taxes with an extension? Tax extensions grant a six-month extension, pushing the filing deadline from April 15th to October 15th, providing taxpayers with additional time to prepare their returns accurately.

5. Should I opt for a tax extension or file on time? Filing taxes early offers benefits like reducing the risk of identity theft and addressing financial obligations promptly. However, extensions provide time for accurate filing. Deciding depends on individual circumstances and readiness to file accurately.

10 Ways To Use Your Tax Refund To Improve Your Work Life

If you’re among the 54% of Americans who will receive a tax return this year,  you’ve probably already spent it ten times over in your head. However, if you’re not quite sure what to do with that bit of extra cash, here are a few ideas of how to put that money back into your business and improve your work life.

Discover 10 ways to use your tax refund to enhance your work life. From professional development to workspace upgrades, make the most of your refund

10 Ways To Use Your Tax Refund To Improve Your Work Life

  1. Buy an ergonomic chair.
  2. Have an occupational therapist set up your work area to your specific height.
  3. Invest in a larger computer screen or side-by-side screens.
  4. Buy an ergonomic split screen keyboard to go with your new screen.
  5. Treat yourself to a foot rest.
  6. Or, if you’re still sticking to your New Years resolution, buy an exercise bike pedal or pedometer to keep you moving, even at the office.
  7. Grab an exercise ball to sit on to engage your core muscles while working at your desk.
  8. If you’re a road warrior, have your car detailed.
  9. Consolidate your rewards points and refund and plan a once in a lifetime trip with your family.
  10. Take your employees to lunch.

 

How are you using your tax refund this year? Share with us on our Facebook page.

Blogging Income

Do I Have To Report My Blogging Income? What If I Chance It?

“Do I have to eat all my dinner?” My kids ask me this frequently. So frequently that it has actually has made me ponder on the question…What in life do we actually have to do? Taken literally, I suppose there really isn’t anything in life we are forced to do…it’s just that the consequences can be so bad if we don’t, that we feel it’s required. For my kids, eating all of their dinner is a requirement if they want to have dessert…which usually works for all but one…but we’ll save that for a different post.

Do I Have To Report My Blogging Income?

Likewise, we ask the question, “Do I have to report my business activity on my tax return?” It really is more of a moral question and depends on whether you want to face the consequences of not reporting it.

There is no minimum amount of income that has to be earned before it must be reported on the tax return. Once the IRS has determined you are running a business, you are required (there’s that word again) to report it on your tax return. Even if you lose money, it is supposed to be reported, and in fact will be a tax benefit to you by doing so.

Now, here is the natural question that follows…”Really? Even if I only make one dollar I still have to report it?” My response connects back to the beginning of this post…”You don’t have to do anything…You only have to be willing to face the consequences of your choice.” The consequences of not reporting one dollar of income are certainly different from the consequences of not reporting $1,000 of income.

So What If I Chance It?

Since the IRS’ tax law enforcement methods are a little more effective than copyright enforcement methods, it is good to at least be aware of what the consequences are. The following potential penalties are applied to the amount of tax you end up owing if/when the IRS finds out that you didn’t report:

  • Late Filing: 5% per month that you are late in getting your return filed
  • Late Payment: 1% per month that you are late paying taxes owed
  • Negligence: 20% for not doing your due diligence to inform yourself of what was required of you (sorry, now that you have read this post, you probably won’t fall under this category, but closer to the “F” word one below …just kidding, there is some wiggle room still)
  • Substantial Understatement: 20% for understating what the IRS considers a “substantial” amount of your income
  • Fraud: 75% for willfully, intentionally not reporting your taxes accurately

If you get audited, an IRS agent will go through your records, transaction by transaction in some cases, and find out how much income you should have reported on your tax return. Any of the above penalties that apply to you will be added together and multiplied by the amount of taxes you should have paid.

So I guess this is really a subjective question. After all, 100% of ten bucks isn’t much of a consequence. So if you are in that boat, the pill may be easy to swallow. The uneasiness comes when you don’t know how big the pill might be. Vyde’s hassle-free accounting service helps with that, but you can also put in the time and energy to figure it out. The next post in our series will give you some help for running your own numbers.

If you have any questions about your circumstance, don’t hesitate to contact us.

Disclaimer: We know our readers aren’t dummies, but have to say this just in case… The information provided above is for reference only and not for your specific situation. It does not cover every scenario and may not apply to yours. Please consult us or another professional before executing any of the above advice.

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Vyde is a licensed accounting firm (CPA) based in Provo, Utah, and members of the AICPA. We provide professional accounting services to businesses and individuals, with a focus on small business bookkeeping and taxes.

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