Author: Donohoo Accounting Services

How are “bonuses” taxed? Different than regular wages?

As an employee, getting a raise is exciting for a few important reasons. Not only does it validate what you’re contributing to the company, but it also means getting a bigger paycheck every two weeks. Getting a bonus is also a great validation of what you’re doing at work every day. While a bonus comes with plenty of excitement, it can also create a little confusion. The reason that type of confusion is so common is people aren’t sure what effect a bonus will have on their tax filing.

 

What Does the IRS Think of Bonuses?

Supplemental income is the label that the IRS uses to classify bonuses. This label is used for other benefits like payouts for accumulated sick leave, severance packages, moving pay and vacation pay. So you have your regular salary, and then anything else you receive goes in the supplemental income category. While that information is helpful, it doesn’t fully answer the question of how bonuses are taxed at the federal level.

 

Flat Rate vs. Aggregate Taxes

The most common method employers choose for taxing bonuses is flat rate. As long as a bonus is separated from regular income and under one million dollars, it will be taxed at a rate of twenty-five percent. In the event that a bonus does exceed one million dollars, the tax rate goes up to 39.6 percent.

While most employers go with the flat rate method to handle the taxation of bonuses, there is another option available. Known as aggregate taxing, this approach involves adding bonuses to the latest paycheck and taxing the entire amount together. Not only can this method be a little more complex to process, but another reason it’s not as popular is it often results in a higher withholding, which means an employee will be left with a larger tax burden. It’s important to note that regardless of which method is used, bonuses are also subject to Social Security and Medicare taxes.

 

How Bonuses Are Taxed in the State of Ohio

On top of making sure your bonus is properly accounted for when you file at the federal level, it’s also important to understand your state obligations. According to the Ohio Department of Taxation’s website, “the rate is at least 3.5% percent. Ohio Administrative Code 5703-7-10 provides that withholding agents must withhold at least 3.5% on supplemental compensation such as bonuses, commissions, and other non-recurring types of payments other than salaries and wages.”

If you have any additional questions about bonuses or other tax issues, you can reach Donohoo Accounting Services by calling 513-528-3982.

First Year Tax Deduction Strategies for Your Startup

 

Over the last few years, the startup landscape has absolutely exploded. Some of the factors that have contributed to this explosion are decreasing technology costs, increased awareness about startups and access to more sources of capital. But even though there are more startups than ever before, successfully growing a startup into a meaningful company remains a significant challenge. For every success story shared in the media, there are dozens, if not hundreds, of untold stories about startups failing.

Although we could spend all day talking about why growing a startup is still very hard, we want to focus on a specific topic that all founders need to care about. That topic is expenses. Whether your startup is bootstrapped or you have some form of outside funding, keeping a close eye on expenses is a must for making it through the challenges you will inevitably encounter as you work to grow your startup.

There are plenty of stories of startups that had traction but were cut short due to running out of money. So if you want to have the best chance of success, you need to have the funds to stay around. In addition to knowing exactly what your startup is spending money on every month, you should be aware of your tax situation. Doing so will help you avoid getting caught off guard by an unexpected tax bill. This awareness will also give you the ability to make strategic decisions about the deductions your startup takes during its first year.

With that in mind, we want to highlight three deductions that can really help your startup during this time:

Equipment

Depending on your specific startup, equipment may make up a significant percentage of your expenses. If that’s the case, you’ll want to take full advantage of the equipment deductions that are available. A great starting resource for knowing exactly what and how much you can deduct is our Section 179 guide.

2. Startup Costs

As a first-year startup, the IRS allows you to take a $5,000 deduction for startup costs. Examples of qualifying costs provided by the IRS include ads and salaries, as well as travel and other necessary costs for securing prospective distributors, suppliers, or customers. The one caveat to this deduction is your total startup costs must be $50,000 or less.

 

  1. Organizational Expenses

If you structure your startup as a partnership or corporation, you can deduct an additional $5,000 for organizational costs. Just keep in mind that the same rule of limiting your total startup costs to $50,000 or less applies to this deduction as well.

We hope the deductions we highlighted help your startup reduce its tax obligations at the end of its first year. And if you want more hands-on help with your taxes, you can easily contact Donohoo Accounting Services for a free consultation.

What You Need to Know About Tax Extensions

Although it’s always best if you can get your return filed on time, there are plenty of situations that come up which prevent people from being able to file their tax return by the date it’s due. These types of delays are actually quite common with professions like securities traders. One of the reasons that traders tend to struggle with hitting the tax filing deadline is they face more complexity than employees with easy-to-report W-2 income, portfolio income, and itemized deductions. Traders have involved trade accounting issues, trader tax status analysis and reporting strategies, business vs. investment expenses and other unique considerations.

 

Whether you’re a trader, business owner or just someone who needs time to get everything together required for filing your tax return, here are some helpful tips on getting an extension to file:

 

The Automatic Six-Month Extension

 

The simplest way to get the extra time you need to complete and file your tax return is by using Form 4868. Known as the Application for Automatic Extension of Time To File US Individual Income Tax Return, this form doesn’t require a reason to request an extension. However, it’s very important to understand that what the form gives you is an extension of time to file a complete tax return, not an extension of time to pay taxes owed. Even if you use this form, you will still want to estimate and report what you think you owe based on your tax information received.

 

Understanding State and Federal Penalties for Being Late

 

On the same form mentioned above, you can see a detailed explanation of federal late-payment penalties and late-filing penalties, including how to request penalty abatement. While it’s best if you can pay the full amount of what you think you owe, paying something is better than not paying anything. A general rule of thumb is the late-filing penalty is ten times more than the late-payment penalty. That’s why even if you can’t pay in full, you should file your tax return or extension and pay as much as you can.

 

Do You Need to File Quarterly Taxes?

 

After going through the process of filing for an extension and then getting your tax return filed within the six-month window, you may decide that you want to avoid going through this additional stress again. One option for individuals like traders, business owners and freelancers is to make quarterly estimated tax payments during the year to avoid underestimated tax penalties

 

If you need help with an extension or any other aspect of your taxes, you can have a free consultation with a member of the Donohoo Accounting team by calling 513-528-3982.

Rental Real Estate Tax Tips – Income, Deductions and Recordkeeping

As a rental real estate owner, it’s important to be aware of your federal tax obligations. Knowing this information up front will prevent you from getting into a problematic situation. The first thing to understand is the method of reporting you use will depend on whether you’re a cash basis or accrual method taxpayer. The next important topic is knowing the exact classification of rental income.

The IRS states that “generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of the property. You must report rental income for all your properties.” They also explain that other forms of payment may need to be reported on your tax return, including advance rent, payments for canceling a lease and security deposits that you end up keeping.

 

More Types of Rental Income (Plus Tips on Deductions)

Another area that can get confusing is expenses paid by a tenant. As the IRS explains, “expenses paid by tenant occur if your tenant pays any of your expenses. You must include them in your rental income. You can deduct the expenses if they are deductible rental expenses.” Other income areas to be aware of include property or services received lease with option to buy and part interests in rental properties.

 

Now that we’ve covered all the different types of income that the IRS expects rental real estate owners to report, you’re probably wondering what kind of deductions are available. Deductible expenses can include mortgage interest, property tax, operating expenses, depreciation, and repairs. The IRS allows you to deduct the ordinary and necessary expenses for managing, conserving and maintaining your rental property. Interest, taxes, advertising, utilities, certain supplies, and maintenance are all examples of deductions that rental real estate owners can generally make.

 

One deduction that’s not allowed is the cost of improvements. The IRS makes it clear that a “rental property is improved only if the amounts paid are for a betterment or restoration or adaptation to a new or different use.” However, it can be possible to recover some or all of your improvements by using Form 4562 to report depreciation beginning in the year your rental property is first placed in service, and beginning in any year you make an improvement or add furnishings.

 

As you can see from both the income and deductions side, there’s a lot that goes into staying on track with your tax obligations as a rental real estate owner. These obligations are why it’s vital to keep good records. The IRS makes it clear that you “must be able to document all information if your return is selected for audit. If you are audited and cannot provide evidence to support items reported on your tax returns, you may be subject to additional taxes and penalties.”

 

If you have any other tax questions related to rental real estate, you can easily get a free consultation with Donohoo Accounting Services by calling 513-528-3982.