Wayne's "MAKE MY LIFE LESS TAXING!" eZine... ...the bi-weekly publication dedicated to helping you pay the least amount of tax required by U.S. tax law. And not a penny more. Week of March 24, 2003 =========================================================== The Tax Season Countdown Continues. . . . Only 3 weeks to go to get your personal tax returns done. Need more time? No problem. I've written the definitive guide on how to legally postpone the filing of your Year 2002 income tax returns. It's called "Tax Filing 101: It's Never Too Early To Procrastinate." When it comes to putting things off, you can never plan too far ahead! To get your free copy, send a blank email to: extend@YouSaveOnTaxes.com. If you own a corporation, the deadline for filing your business income tax return (or an extension) was March 17. But if you operate as a Sole Proprietorship, a Partnership, or a Limited Liability Company (LLC), this article is for you! =========================================================== If you haven't filed yet, I can certainly sympathize with you, especially if you're a college basketball fan (like me!) How can you be expected to work on your tax return with all these great games to watch? I live in Indiana, where basketball is the state religion and our beloved ex-King of Hoops lives in exile in Texas. And everybody around here is all abuzz about little Butler University. Indiana and Purdue are gone, but unknown Butler makes it to the Sweet 16. Is that cool, or what? Of course, Notre Dame is still in it, but you must understand that in these parts, Notre Dame is not really considered an "Indiana" team. I mean, there are far more Irish fans outside Indiana than inside. (I live in Indiana, but I rarely root for the Indiana teams. I grew up in Wilmington, Delaware and so my heart belongs to any number of East Coast teams, particular Penn State. So I'm glad to see that the Big East is well represented in the Sweet 16, as is my favorite basketball conference, the ACC. Go Duke.) Enough about b-ball. Time for some Q&A. Lots of good questions have been comin' my way lately. =========================================================== Reader Q&A: QUESTION: Wayne - I've recently signed up for your newsletter and enjoy it. What a great e-zine to get. I am a Personal and Business Coach and that income requires quarterly self-employment tax payments as estimates of that year's taxes. I also earn some occasional income through a couple of other businesses who hire me as contract labor. The income I earn through those businesses gets reported on 1099-Misc under section 7. Nonemployee compensation. Does that income also need to be included in the quarterly self- employment tax payments? At what point of income MUST you file the quarterly payments? Thanks so much!!! Sandy Burton BLISS PERSONAL COACHING http://www.blisslifeguide.com ANSWER: Great question, Sandy. And your timing is perfect! The answer to your first question is a resounding "Yes". ALL your self-employment income, regardless of source, and regardless of whether it is reported on a Form 1099-MISC, must be reported on your personal income tax return, and is therefore subject to BOTH income tax and self-employment tax. Since all your self-employment income is subject to both income tax and self-employment, then you must also consider all this income when calculating your quarterly estimated tax payments. You refer to these quarterly payments as "self-employment tax payments". Please do not misunderstand this key point: if you are self-employed and filing a Schedule C on your personal income tax return, these quarterly payments are for BOTH federal income tax and self-employment tax. Your second question, "At what point of income MUST you file the quarterly payments?", is a little more complicated than the first. There are a couple rules that come into play when calculating quarterly estimated tax payments. The first rule is this: Generally speaking, you should make quarterly estimates if you have a balance due on your personal income tax return of at least $1,000. How do you go about calculating your quarterly estimates? You have 2 options: OPTION #1: "The Safe Harbor Rule" says that your estimated payments must be at least as much as the previous year's total tax liability. So, for Year 2002, you should have paid in an amount equal to or greater than your Year 2001 tax liability. OPTION #2: "The 90% Rule" says that your estimated payments must cover at least 90% of your current year's tax liability. Which option should you use? In classic "tax expert" jargon, "IT DEPENDS"! It depends on your particular situation, of course. But again, here's a rule that can help you decide -- the MINIMUM amount that you must pay to avoid penalty is the lesser of Option #1 and Option #2. So, you can calculate your estimates both ways and then just pay whichever amount is less. Now, a practical point to consider: which is easier to calculate -- Option #1 or Option #2? Obviously, #1. You know what your previous year's tax liability was long before you know what your current year's liability is going to be. So for most self-employed folks, Option #1 is much easier to implement, and it's the way I recommend that most Schedule C-er's do it. Just take the previous years total federal tax liability and divide it by 4. Voila! There's your quarterly estimated tax payment for the next year. FINAL COMMENT: These payments must be made in 4 equal installments. If you wait until the 4th quarter to pay the whole year's estimate, you can still get hit with an underpayment penalty. Sandy, I'm so glad you asked this question! Why? Because not only is your Year 2002 income tax return due on April 15, 2003, but so is your 1st Quarter estimated tax payment for Year 2003! Here's the schedule for Year 2003 federal quarterly estimated tax payments: Quarter #1 -- April 15, 2003 Quarter #2 -- June 15, 2003 Quarter #3 -- September 15, 2003 Quarter #4 -- January 15, 2003 Use Form 1040-ES to make the payments: http://www.irs.gov/pub/irs-pdf/f1040e03.pdf Don't try to make sense out of these "quarters" -- except for Quarter #1, they don't correspond to the calendar quarter. Don't ask me why -- all I can say is "that's taxes for ya!" =========================================================== I welcome your feedback and questions. If you have a tax question that's got you stumped, send it my way and I'll do my best to answer it in a future issue. Please don't expect me to answer you personally. Sometimes I can do that, but don't count on it. And please don't expect me to answer you in time to meet some pressing deadline that you are facing (like 4/15!). Your problem doesn't become my emergency! =========================================================== Special message to all subscribers of Wayne's ezine, "Make My Life Less Taxing". . . Discover How To *Eliminate* Your Business Tax Nightmare... FINALLY you can easily get rid of that record keeping nightmare you face every Tax Season (regardless of how big or new your business is) AND take advantage of every lucrative tax deduction available to you, resulting in a potential windfall in tax savings. Find out how easy it can be at: http://www.internettaxhelper.com/g.o/wmdctp I've used this resource myself. It's awesome, man, just awesome! If you are having trouble getting all your tax records organized, do yourself a big favor and check this out NOW! http://www.internettaxhelper.com/g.o/wmdctp =========================================================== Now, for a lighter look at taxes, here's this week's feature article. (The closer it gets to April 15, the more I need a good laugh. Here's one on me.) =========================================================== How To Avoid Getting Burned By Your Own Tax Return -- by Wayne M. Davies Copyright © 2003 by Wayne M. Davies Inc. =========================================================== I did it. I finally did it. Last weekend, while the rest of Fort Wayne celebrated the long-awaited onset of springtime temperatures, I stayed inside and did something I've never done before. I burned my first CD. Yep, I joined the Pepsi generation and got me a real CD-RW drive. And I actually copied a music CD onto a blank CD (my wife's favorite Eric Clapton CD -- so now she's got one for home and one for the van; guess I better burn another one so she can listen to it at work, too.) But it wasn't easy, let me tell ya! If fact, I didn't think it would ever happen. Why? Because when it comes to computers, I ain't the brightest guy in the world. I know how to use my accounting and tax software, and I can peck away at a word processor with the best of them, but hardware? I'm clueless, man, absolutely clueless. To me, RAM is an animal, the mascot for a pro football team that used to play in L.A. and then moved to St. Louis. But my wife and kids have been pestering me for months to get a CD-RW so we can make our own music CD's. So last week I finally gave in and ventured out to my local discount electronics store. And there they were, lined up on the shelf, all 28 different models. I picked up one of the boxes and looked at the "specs". The first label that caught my eye was called "Disc Formats": CD-R, CD-RW, CD-ROM (mode 1 and mode 2), CD-ROM XA (mode2, form 1 and form2), CD-DA, Bootable CD, Photo CD (single and multi-sessions), Video CD, CD-Extra, Mixed mode CD, CD-text. I suddenly felt the beginnings of a headache. I know enough about hardware to know that you've got to make sure a new piece of hardware is compatible with your existing hardware. Ah, yes, the "interface", gotta make sure that's right! So I looked at the box where is said "E-IDE/ATAPI". Now my stomach didn't feel so good either. Finally, I turned the box over and found what I was looking for, "System Requirements": IBM PC Pentium 200MHz or higher; 64MB DRAM, 1 GB for image recording, 150MB free HD space for installing writing software. I no longer had a headache. I had a migraine. Enough was enough. I left the store and came home empty- handed. I was in over my head, and it was time to admit it. While driving home I suddenly realized something. What I just experienced is exactly what most people experience as they sit down to prepare their tax return each year. All those forms, schedules and worksheets, each with their own set of unique codes and convoluted calculations. Forms, forms and more forms. They might as well be written in Greek. For some people, mostly folks with "regular" day jobs and simple W2's, doing your own tax return can be a relatively painless process (particularly if you don't itemize deductions and have no investment income). And with the proliferation of user-friendly tax preparation software programs, I'm sure millions of returns are filed by do-it-yourself-er's without a hitch. But if you're self-employed or own your own business, and you're new to the world of taxes, well, I've got news for you -- be prepared to go through exactly what I went through at Best Buy -- lots of pain, agony and frustration. And be ready to "give up" and do what I eventually did -- call a professional. For me, that meant giving my friend George a call. George is a client who also happens to be a "computer guy" with all the latest gizmos and gadgets known to mankind. George was very happy to help me out. He told me exactly what kind of CD drive to get, and then he came over to the house and installed the thing in 15 minutes! I couldn't believe it! Then he installed some software, spent 10 minutes showing me how to use it, and the next thing I know, I'm burning a CD like I've been doing it all my life. If you are a small business owner or self-employed person and you're trying to prepare you own return this year, how's it going? Do you think you did OK? Or are you getting by on trial and error with a dose of prayer mixed in ("Please, God, please don't let me get audited!") Maybe it's time you did what I did. By George, call a professional. If you're in over your head, admit it, and get some help. Visit your local tax professional today! Until next time, Many Happy Returns, Wayne =========================================================== Wayne M. Davies is author of the new eBook, "The Tax Reduction Toolkit: 29 Little-Known Legal Loopholes That Will Reduce Your Taxes By Thousands (For Small Business Owners and Self-Employed People Only!) Don't file another tax return until you visit: http://www.YouSaveOnTaxes.com/toolkit.html =========================================================== Contact Information: Wayne M. Davies Inc. 4660 W. Jefferson Blvd., Suite 220 Fort Wayne, IN 46804 Tel 260-459-3858 / Fax 260-459-00124 TOLL FREE 866-543-5257 email: Wayne@YouSaveOnTaxes.com http://www.YouSaveOnTaxes.com http://www.MagneticMarketing.biz ======================================================