510-222-5800

California tax accountant

Did You Hire Your First Employee? These are your tax obligations

It’s a major milestone for you, but it comes with a lot of paperwork that must be done correctly.

Bringing a new employee into your business is a reason to celebrate. You’ve done well enough as a sole proprietor that you can’t handle the workload by yourself anymore.

Onboarding your first worker, though, comes with a great deal of extra effort for you at first. You have to show him or her the ropes so you can offload some of the extra weight you’ve been carrying.

But first things first. Before your employee even shows up for the first day of work, you should have assembled all the paperwork required to keep you compliant with the IRS and other federal and state agencies.

A New Number

As a one-person company, you’ve been using your Social Security number as your tax ID. You’re an employer now, so you’ll need an Employer Identification Number (EIN). You can apply for one here.

The IRS’s EIN Assistant walks you through the process of applying for an Employer Identification Number (EIN).

Once you’ve completed the steps in the IRS’s EIN Assistant, you’ll receive your EIN right away, and can start using it to open a business bank account, apply for a business license, etc.

You’ll also need an EIN before you start paying your employee. It’s required on the Form W-4. If you’ve ever worked for a business yourself, you’ve probably filled out this form. As an employer now, you should provide one to your new hire on the first day. When it’s completed, it will help you determine how much federal income tax to withhold every payday. If you’re not bringing in a full-time employee but, rather, an independent contractor, you won’t be responsible for withholding and paying income taxes for that individual. You’ll need to supply him or her with a Form W-9.

Note: Payroll processing is probably the most complex element of small business accounting. If you don’t have any experience with it, you’ll probably want to use an online payroll application. After you’re set up on one of these websites, you enter the hours worked every pay period. The site calculates tax withholding and payroll taxes due, then prints or direct deposits paychecks. Let us know if you want some guidance on this.

Don’t forget about state taxes if your state requires them, and any local obligations. The IRS maintains a page with links to each state’s website. You can get information about doing business in your geographical area, which includes taxation requirements.

More Forms

You also have to be in contact with your state to report a new hire (same goes if you ever re-hire someone). The Small Business Administration (SBA) can be helpful here, as it is in many other aspects of managing a small business. The organization maintains a list of links to state entities here.

All employees are required to fill out a Form I-9 on the first day of a new job. New employees must also prove that they’re legally eligible to work in the United States. To do this, they complete a Form I-9 from the Department of Homeland Security. As their employer, you’re charged with verifying that the information provided is accurate by looking at one or a combination of documents (U.S. Passport, driver’s license and birth certificate, etc.). By signing this form, you’re stating that you’ve done that.

You can also use the U.S. government’s E-Verify online tool to confirm eligibility.

A Helping Hand

The Department of Labor has a great website for new employers. The FirstStep Employment Law Advisor helps employers understand what DOL federal employment laws apply to them and what record-keeping they they’re required to do.

Please consider us a resource, too, as you take on a new employee. Preparing for a complex new set of tax obligations will be a challenge. We’d like to see you get everything right from the start. Call us today at our Bay Area accounting firm at 510-222-5800 or request a free consultation online.

Be Sure to Take Advantage of Deductions for the Self Employed

Tax breaks can be a boon to the self-employed. If you own your own a Bay Area business — or are thinking about it — here are some tax deductions you may be eligible to claim.

Self-employment (SE) tax. When you’re self-employed, you have to pay SE taxes on your earnings instead of the Social Security and Medicare taxes that employees and employers pay. You’ll be able to deduct a portion of your SE taxes.

Health insurance. If you’re not eligible for coverage under a plan offered by your spouse’s employer, you can deduct the costs of health, dental, and long-term care insurance premiums paid for yourself, your spouse, and your dependent children. (Requirements apply.)

Office at home. You can deduct a percentage (usually based on square footage) of your mortgage or rent, utilities, property taxes, homeowners insurance, and home maintenance costs. Alternatively, you may use the “safe harbor” method, which allows a deduction of $5 per square foot (up to 300 square feet). But be careful — you must use the space regularly and exclusively for business to claim the deduction.

Thinking about retirement. Deductions for contributions to a tax-deferred retirement plan, such as a SEP-IRA, SIMPLE IRA, Keogh plan, or solo 401(k) plan, will reduce your current tax bill.

Talk and surf. You can deduct phone, fax, and Internet expenses directly related to your business.

Vehicle use. The cost of driving a car for business is deductible. You can use either the IRS standard mileage rate or your actual expenses to compute your deduction.

Interest. Interest on business loans and business purchases charged to a credit card is deductible.

Food, fun, and travel. You can generally deduct 50% of the cost of business meals and entertainment if you meet certain tax law requirements. Other business travel expenses, such as lodging, are 100% deductible.

Make sure you keep good records, and give us a call today if you have any questions at 510-222-5800. Or, request a free consultation with our Bay Area accounting firm.

How To Reduce You Taxes Through Home Improvement

The paint. The dust. The torn-up room. Home improvement projects may not be high on your list of enjoyable events. But, when you’re ready to sell your house, any money you’ve spent on fixing it up may save you from paying tax on the sale.

The Home-sale Exclusion

You probably know that a married couple is entitled to $500,000 of tax-free gain ($250,000 for singles) on a home sale if they’ve used the house as a principal residence for two out of the five years prior to the sale. Taxable gain is the difference between your basis in the home (essentially, your cost) and the selling price. So, for most people, the exclusion eliminates or severely reduces any tax on a home sale. But not for all.

And that’s where home improvements could come into play. If you’ve kept good records, you can increase your home’s basis by adding in remodeling costs. Generally, any work that adds to your home’s value or extends its life counts toward your basis.

What Counts?

Examples of eligible expenditures include:

  •  Putting in a patio, deck, or swimming pool
  •  Finishing a basement or attic
  •  Landscaping
  •  Adding a room or fireplace
  •  Vinyl or aluminum siding or similar exterior improvements like masonry work
  •  Storm windows and doors
  •  New plumbing or heating system
  •  Air conditioning

Simple repairs, such as painting or fixing broken gutters and windows, don’t get added to your basis. But, if repairs are scheduled as part of a home improvement project, the entire cost of the renovation can be added to your basis.

Connect with our team today for all the latest and most current tax rules and regulations. Give us a call at 510-222-5800.

Why Puerto Rico Still Attracts Billionaires Despite Crisis

PRicoFor many that are native to Puerto Rico, the island’s economy is forcing them off the island and onto the main land of the United States. Puerto Rico’s economy is in a death spiral and families are losing their homes and businesses, so why do the rich continue to flock there? The answer can be summed up in two words: tax exemptions.

While the middle and lower economic classes are streaming off the island, the super rich are taking advantage of tax exemptions enacted in 2012 to help the economy. Simply put, Puerto Rico are offering tax exemptions to rich Americans, so they will buy existing businesses and open new ones.

These tax exemptions, which fall under the 2012 Export Services Act and the Individual Investors Act, provide non-residence investors a 3 to 4% flat income tax, zero property tax, as well as 0% tax on earnings and profits.

PRico3In addition, investors can enjoy a 0% tax on dividends and interest as well as a 0 to 10% tax on long-term capital gains. When compared to tax rates of up to 20% in the United States, it can be quite the incentive for rich investors.

For example, hedge fund owner John Paulson is currently investing $1.5 billion dollars in real estate on the island in the form of luxury resorts and hotels such as the Condado Vanderbilt Hotel and the St Regis Bahia Beach Resort.

While Puerto Rico’s debt crisis continues to worsen, and about 200,000 residents are leaving each year, you can expect the influx of American investment money to continue for the foreseeable future.

If you are looking for ways to lower your tax liability, call 510-222-5800 and ask for Navjeet.  We help small business owners and high net worth individuals lower their taxes legally.

 

Chahal & Associates is a California accounting firm with three offices in the Bay area of Northern California, Emeryville, San Rafael and Pinole.  Our firm provides small business accounting services, payroll and a variety of tax services ranging from international tax to IRS Problem Resolution to simple tax preparation.  For business owners seeking to establish a business within the United States, we also provide establishing United States Operations, High Net Worth Immigration Planning, Expatriate Taxes, and Resident and Non-Resident Alien Tax Services.