The Internal Revenue Service announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business purposes.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.

Many people don’t think they make enough to worry about tax planning, but what they don’t realize is no matter what your income level, tax planning can help you make adjustments that will significantly reduce your tax liability.

If given the choice, would you rather owe $148.67 or be getting a check for $352.10? See, not bad, huh?

With a little planning, knowledge and effort on your part, you could actually be looking forward to tax day for once!

Here are some ways the Average Joe can save on taxes:

1. Self-employed? Make sure you’re taking full advantage of tax deductions including most ordinary business expenses which can include money spent generating business, retaining clients, vehicle expenses, health insurance and capital expenditures.
2. IRAs. If you’re like a good amount of American’s you’ve seen your retirement savings sucked dry by the stock market. Planning now will ensure proper handling of IRA retirement contributions including the new unlimited Roth IRA conversion provision available in 2010, and allow you to address issues with retirement plans that have declined in value.
3. Education. If you or a dependent are attending school you need to be sure to claim all credits and deductions available to you–it’s free money, don’t miss out on it!
4. Bankruptcy/Foreclosure. You’ve already suffered enough if you’ve endured bankruptcy or a foreclosure this year, so a little planning now will avoid further headaches ahead. Minimize the taxable income impact of a home foreclosure or bankruptcy petition.
5. What If? There are several big tax changes waiting for Congress to either reverse or put into action, all of which could dramatically affect your tax bill. Planning now, as best you can, for potential tax rate hikes after 2010 for ordinary income and investment income keeps you from being blind-sided in the coming months.

So, hopefully these tax saving ideas will inspire you to take a look at your own situation and get you thinking about asking for some tax advice this year. Knowing what to expect and how to maneuver your finances throughout the year for maximum tax savings is the beginning of taking control of your finances, rather than letting your finances control you.

Accrual Method or Cash Method Accounting?

It’s one of the first questions you’re usually asked when setting up your accounting software and it can be one of the most puzzling. This topic is complicated and often confuses a lot of people (you are not alone if you’re stumped). Whether it is for personal finances or business, this is an important decision that will have a big affect on your financial future.

So which is right for you? Well, that depends on your goals: are you interested in a quick fix and maintaining your financial status or would you like to get out of debt, grow your business and increase your personal financial status?

The Cash Method

The Cash Method of Accounting tracks income when it is received (money is collected) and expenses when they are actually paid (money is disbursed) in a given period.  This method does not match income to expenses in a given time period.  It is a strict cash in and cash out system.  The benefit of the Cash Method of Accounting is that it reports a better representation of cash flow than the accrual method.  The downside here is that it does not match income to the expenses that the income is associated to in the appropriate time period.

Basically, the cash method for either personal or business purposes is your absolute basic method of recording your finances to meet minimum government reporting requirements. It is a quick fix that will keep you apprised of how much you have in the bank at that moment in time. What it won’t do for you is alert you to any imminent issues like runaway debt or give you a full understanding of your financial situation. If unchecked, you could find your personal or business finances getting out of control leading you to bankruptcy and loss of your home and/or business.

The Accrual Method

The Accrual Method of Accounting reports income when earned (before the cash is received) and expenses as they occur (before the cash is paid out) in a given time period.  The Accrual Method of Accounting recognizes economic events at the time the transactions occurs thus matching revenues to expense which is often referred to as “The Matching Principle”.  This method’s strength is that it gives a more accurate picture of an entity’s current financial position. The downside is that it does not measure cash unless a Cash Flow Statement is included in the Financial Statement Presentation.

Accrual Method accounting takes more effort to use, and if you are self employed or own a small business you’ll definitely need a bookkeeper to help you stay on top of things, however the benefits far outweigh the expense and inconvenience. For self employed and business owners this method can alert you to growing trends of outstanding A/R that could sink you in a matter of months. It also helps you have a more accurate picture of the growth of your business. For personal purposes, this method will help you get off the treadmill of cash in/cash out and start you on a path to financial growth.

Fred’s Fast Track Tax Tip:

If you’re considering switching to the Accrual Method for your personal or business finances, be aware that there is a bit of a learning curve.  I generally steer my non-public business clients to a Modified Accrual Method which integrates the Cash Method and the Accrual Method because it adds a level of reporting on the Accrual side that should be taken into consideration.

I would suggest finding an accountant in your area and scheduling a one hour consultation. Your investment in professional advice will probably cost a few hundred dollars and several hours of your personal time to understand the Accrual Method, but you will be more likely to understand it, stick with it and get better reporting results (lower debt, more savings) if you do.

Yes, we are back, rested and ready to hit the road running after a little break over the Holiday season!  To start off the new 2010 tax year, I wanted to cover a topic that will affect most taxpayers in a positive way , the Making Work Pay Tax Credit.

This tax credit is worth up to $400 for each individual taxpayer or up to $800 for married couples who file Married Filing Joint so it’s definitely worth checking out.

How it works:

This credit is 6.2% of a taxpayer’s income which maxes out at $400.  If you are married it works the same way, the credit is 6.2% of the couples total earned income with the maximum credit of $800.

Higher income taxpayers will be subject to the credit phasing out.  A single taxpayer will have their credit reduced by 2% of the amount of Modified Adjusted Gross Income (MAGI) if they make over $74,999 and the credit is completely phased out at $95,000.  If the taxpayers are Married Filing Joint they will have their credit reduced by 2% of the amount of Modified Adjusted Gross Income (MAGI) if they make over $149,999 and the credit is completely phased out at $190,000.

Earned income from wages or self employment taxable income is required for this credit.  However military personal who receive combat pay which is excluded from income are eligible for this credit.

You must be a US Citizen or a resident alien with a valid Social Security number to be eligible for the credit.  Dependents of taxpayers are not eligible for the credit.

Taxpayers who are Social Security recipients, retired railroad workers and disabled veterans are eligible for a 1 time $250 tax credit.  If they also work and meet the thresholds they may qualify for an additional $150 totaling $400 in a tax credit.  Unfortunately, if you received a pension and no earned income (or those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income), you will not be eligible for the Making Work Pay Credit.

This credit is claimed on Schedule M.

With the recent changes to the federal income tax withholding tables, some tax payers may find that too little was taken out of their paychecks over the tax year.  If you’re not eligible for the Making Work Pay tax credit, this could mean a smaller than usual refund OR you may even end up owing tax. There is special relief that the IRS may grant if an estimated tax penalty applies. If you receive a estimated tax penalty from the IRS you can request a waiver by filing form 2210.

If you are in one of these categories, keep an eye on your withholdings:

• Pensioners
• Married couples with two incomes
• Individuals with multiple jobs
• Dependents
• Some Social Security recipients who work
• Workers without valid Social Security numbers

If you’re still not sure about your qualification for the Making Work Pay tax Credit or if you’ve got questions regarding your estimated tax penalty, I would highly recommend contacting your accounting or tax professional to guide you through this. Tax issues like these can become very complex and may be affected one way or the other by other factors within your financial situation. Most accountants and tax professionals offer a free initial consultation; at that point they can advise you on your options and let you know if they may be able to help you reduce your tax bill.

Make sure you have your “parachute” packed when making the leap from employee to sole proprietor!

This may be your first foray into realms outside of employment with little to no understanding of the tax implications involved in such ventures. Did you know that for most Sole Proprietors as much as 50.3% of every dollar of profit that they make could be owed to the IRS, Social Security and Medicare?

We understand it can be difficult knowing where to turn for accurate advice or information to educate yourself about your new circumstances. Here at Fredrick James Accounting, we embrace the mantra “knowledge is power”. Our focus is the empowerment through education of independent contractors, the self employed and small business owners to be able to make educated decisions regarding their tax liabilities

“I guarantee anyone who takes advantage of this consultation will save $300.00 dollars in taxes at a minimum, if their income is at least $3,000.00 and they follow my instructions, or I will refund their consultation fee.” –Fred Daus, CEO Fredrick James Accounting, Tax & Consulting

Our firm is now offering a 1-hour personal consultation & informative course that can save you a minimum of $300* on your taxes, guaranteed!

New to Self Employment Business Orientation: How To Avoid Tax Problems & Pave The Way To Success.

Get answers to your questions:

Deductions: what is and is not deductible

How much should I set aside for taxes, Medicare & Social Security?

Do I have to pay State Taxes?

Do I need to charge Sales Tax?

Do I have to make quarterly payments?

Do I qualify for the mileage deduction?

What can I do to reduce my tax liability?

One hour of your time will result in big tax benefits as you make every day decisions regarding your side job, self employment or small business. In this personalized, private session with CEO Fred Daus, he will go over the main topics that could affect you, answer any questions that you have and provide you with a business tax reference guide that will help you make good business decisions that will have positive tax results.

Sign up now or call our office at 727-474-0922 for more information!
Click the button to sign up and save at least $300* on your taxes or your money back, guaranteed.

We prefer to provide this service in person, however if you are not in the Tampa Bay area we would be happy to provide your consultation via phone or web meeting. Once notice of payment has been received by our office, we will contact you to schedule your appointment, thank you!

*The New to Self Employment Business Orientation will save you at least $300.00 dollars in taxes, if your income is at least $3,000.00 and you follow the instructions provided, or we will refund your consultation fee.

_{Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida. Visit our website www.FredrickJames.com or call 727-474-0922 for more information}

Last week I went over the different types of accountancy services generally available to business owners. This week I wanted to follow up with some advice on an even more individual level: finding an accounting professional you can get along with, communicate with and work with. Yes, that’s a big deal.

Choosing the Right Accountant Can Make or Break You

Before I start, I want to clarify that accounting is an investment in your business, rather than an annoying expense. Finding the right accountant who understands your goals and is willing to work with you toward achieving them is worth his weight in gold. You will see a much higher return on your investment through smart tax planning and good financial reports that will help you more easily obtain credit in these credit-strapped times.  Having reconciled financial statement can become the difference between getting the loan you need to grow your business and getting the denial letter.  Those financial statements can also become the difference between negotiating fair market value or losing out because your potential partner did not trust the excel spreadsheets and tax returns that you supplied.  I can go on and on with examples, but the point that I am trying to stress is that your accountant should provide value that will pay for itself in the future.  Financial Statements are just the minimum; there are so many other ways that a good accountant can provide value.

Regardless of which type of service you decide to use, be sure that you get along with your accountant and you can envision yourself working with them for the long haul. It does you no good to hire an accountant or bookkeeping service if you dread each interaction with them. Keep in mind too that it is much harder to change accountants once you’ve already gotten established with one, so definitely pay attention to your first instincts and ask a lot of questions during your consult to evaluate their communication style:  Do they answer your questions or deflect? Do they make sure you understand their explanation or rattle off a bunch of jargon then move on? Do they seem sincere or do you feel like you’re being sized up like a juicy morsel?

While price is always a consideration, your main concern should be on the overall results a firm can deliver as the primary factor in determining which accountant or accounting firm to select.  A good accounting firm should become a valuable asset, providing a range of services designed to help your business grow and become more profitable.

_{Some other things to look for in a good accountant:}

• _{The ability to explain the results of their services in plain English.}
• _{Knowledgeable, professional, personal, helpful, informative and friendly.}
• _{Be able to help you set up your new company in a tax savvy manner, keep track of income, expenses, assets and liabilities, reporting, benchmarking, forecasting, provide tax planning for personal & business income, personal and business finance advice, loan packaging, handle responses to various governmental State & IRS letters, preparing for Audits, business growth consulting, IT consulting, Advertising and Marketing Growth Consulting.}
• _{Able to help you set goals and offer creative business advice that will benefit your company as well as insightful recommendations.}
• _{Be your most trusted business advisor and should be involved in many of your business decisions and ready to advise you from a financial perspective.}
• _{Contact from your accountant throughout the year with proactive advice and recommendations.}
• _{Answers their phone & email messages in a timely manner.}
• _{Refers their clients to other reputable professionals in the finance and legal arena.}
• _{Understands the word “value” which ultimately means superior service, innovative ideas,  forward thinking approaches and a relationship that you can rely on throughout the years.}

Good accountants generally have great reputations and rave reviews from their clients; most of their business comes from client referrals. Talk to your friends and business associates. Ask them about their accountant.

If your accountant is not listening or giving you the right advice, if you’re frustrated, confused and/or annoyed, then you are going to have a very hard time achieving your financial goals and should consider a new accounting relationship.

The best advice I can give you is: give yourself the time to research and meet with several professionals to help you choose the right type of accounting relationship and the right personality fit for you.  Make sure you clearly communicate your expectations and define your roles.  Remember that your accountant is an investment in your business and that your investment in a good accountant will pay off.  Finally, communicate with your accountant as often as possible or at least on a monthly basis.  Your accountant’s knowledge of your industry, tax tips and great advice will pay dividends as your business grows and helps fulfill your goals and dreams.

_{Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida. Visit our website www.FredrickJames.com or call 727-474-0922 for more information}

Employee or Contractor?

Many companies are surprised to learn there are no straight-forward rules in determining worker classification. There is no simple checklist (or magic 8-ball) available that can give a company the correct answer. Instead, worker classification is determined using common-law rules and relevant facts on an individual basis.

Here is an IRS excerpt discussing the general rules and how to apply them:

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

So the overall theme of the IRS comon law rules refer to the amount of control of activities the business utilizes. If there is an overall high level of control the company exercises over that person’s activities for the company then the worker is probably an employee, however, there are some neutral (not relevant) facts in making this determination. For example, a worker that works from home can be a neutral fact since employees (depending on the job) are also able to work from home.

Applying the common-law rules to a specific worker classification question can be tricky and you still may not be able to make a determination on classification after going through this process. If that’s the case, you can ask the IRS to make the determination by filing Form SS-8.

_{Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida. Visit our website www.FredrickJames.com or call 727-230-0716 for more information}

_{U.S. Treasury Department Circular 230 Disclosure: In accordance with applicable professional regulations, please understand that, unless specifically stated otherwise, any written advice contained in, forwarded with, or attached to this communication is not a tax opinion and is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed under the Internal Revenue code. The information provided on this blog is not intended to provide or be a substitute for specific individualized accounting, tax, legal, business, or investment planning advice. Where specific advice is necessary or appropriate, Fredrick James, LLC recommends consultation with a qualified Accountant, Tax Advisor, Lawyer, Financial Planner or Investment Manager. The information provided herein is for general informational purposes only and should not be considered an individualized recommendation, personalized investment advice or an endorsement by Fredrick James, LLC. The information presented is prepared for a general overview of subject matter; however, its accuracy, completeness or reliability cannot be guaranteed and therefore should not be relied upon as such. Fredrick James, LLC accepts no liability for any direct or consequential loss arising from any use of this information.}

“Small businesses create most of the nation’s new jobs, employ about half of the nation’s private sector work force, and provide half of the nation’s nonfarm, private real gross domestic product (GDP), as well a s a significant share of innovations.” -SBA 2008 report to the President

There has been so much media coverage about the current economic decline here in the US that it is easy to find ourselves feeling helpless and, at times, hopeless that the situation will ever turn around. Fear not, my fellow Americans, the end is far from near. Adversity is actually a good thing for our economy—economic upheavals, historically, have proven to be the motivation needed to shake Citizens out of their industrial stupor and get them thinking about new ways to do business, new niche products or services that are not being provided and creative ways to make a living.

The U.S. was built upon the new idea of independence and innovation

Our country was founded on innovative thinking and new ideas, and this legacy continues today.

As more and more Americans find themselves unemployed or working under the fear of job loss, they are taking the opportunity to start that business they’ve always dreamed of. Small, independently owned and operated businesses and independent contractors are a rising force in our economy and it seems the trend will continue for some time to come.

We’re all for supporting independent businesses here at Fredrick James (I started this firm many years ago from my kitchen table) and we know how important it is to start on a solid foundation. There are many things to consider now that you’ve decided to embark upon the path of independence. One of the most important issues, related to your tax situation, is how you will define the people who work for you or, if you work for yourself, how you define your relationship to your business.

Do I classify workers as employees or independent contractors? And why does it matter?

Payroll Taxes

The most important difference between an employee and independent contractor classification relates to payroll taxes. The payroll tax is comprised of two taxes, Medicare and Social Security which total 15.3%. Employers & employees split the payroll tax (Medicare and Social Security) 7.65% is the employee’s portion and 7.65% is the employer’s portion. Independent contractors, who generally receive a 1099 Misc., pay the FULL payroll tax amount of 15.3% because there is no employer to split the cost with AND in addition their earnings are subject to federal (and possibly state) income taxes.

Finding a solid footing along the sometimes rocky path to independence leads to success

Deductions

Both employees and independent contractors are allowed to deduct business related expenses for tax purposes but independent contractors are allowed to deduct work related costs as business expenses, reducing the amount of self-employment income subject to 2009 payroll tax (15.3%), 2009 Federal income tax (10%-35%) and 2009 state income tax (0%-9.9%). An independent contractor can be subject to a combined tax rate (Payroll Tax, Federal and state if applicable) of 60.2%!  This is why it’s so important for independent contractors to keep track of any deductible business related expenses and to seek additional tax help to minimize their possible tax exposure.

Qualified unreimbursed employee business expenses paid by the employee and not reimbursed by the employer may be deductible for income tax purposes if the employee itemizes their deductions and certain thresholds are met. Unreimbursed employee expenses are itemized deductions which would need to exceed the standard deduction and are deductible only for qualified amounts greater than 2% of Adjusted Gross Income (AGI).

Tax withholding

Employers withhold payroll and income taxes from employee paychecks then forward the withholdings to the IRS. The company paying the independent contractor usually does not withhold any taxes placing the responsibility on the independent contractor to make tax payments throughout the year. This is where many new independent contractors get a big surprise at the end of the year when they find out they owe thousands of dollars in taxes.

So there are pros and cons to each but it is important for new business owners and independent contractors to fully understand the tax rules so that after enjoying the thrill of starting out on your own and making a go of it, you don’t get slapped by a big tax bill at the end of the year. Talk to your Accountant and get his or her advice on which option is right for you and make sure your road to independence has one less obstacle to overcome!

Join us next week when we discuss definition of employees and independent contractors and why it is important to the IRS for auditing purposes.

_{Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida with a focus on providing outstanding service, tax savings and financial growth to clients in the Tampa Bay area and Nationwide. Visit our website www.FredrickJames.com or call 727-230-0716 for more information.}

_{U.S. Treasury Department Circular 230 Disclosure: In accordance with applicable professional regulations, please understand that, unless specifically stated otherwise, any written advice contained in, forwarded with, or attached to this communication is not a tax opinion and is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed under the Internal Revenue code. The information provided on this blog is not intended to provide or be a substitute for specific individualized accounting, tax, legal, business, or investment planning advice. Where specific advice is necessary or appropriate, Fredrick James, LLC recommends consultation with a qualified Accountant, Tax Advisor, Lawyer, Financial Planner or Investment Manager. The information provided herein is for general informational purposes only and should not be considered an individualized recommendation, personalized investment advice or an endorsement by Fredrick James, LLC. The information presented is prepared for a general overview of subject matter; however, its accuracy, completeness or reliability cannot be guaranteed and therefore should not be relied upon as such. Fredrick James, LLC accepts no liability for any direct or consequential loss arising from any use of this information.}