https://blog.freelancersunion.org/content/images/2022/07/Kathryn-Sheldon---Amsterdam-Botanical_Greens-Light.jpg
With all of the news coverage about inflation, it is hard not to think about where the economy is going and, for those of us who are self-employed, the perceived risks and threats may be amplified. Is this anxiety justified? Read on so you can judge for yourself and take the appropriate action to reduce your tax obligations as much as possible. First, consider the facts about inflation: Inflation is a loss of purchasing power over time. It’s not your imagination: right now a dollar will not go as today, as it may have previously. If you have noticed your expenses rising due to increased prices, you may already be keenly aware of the effect of inflation. Inflation artificially increases amounts received as wages, self-employment income, interest, dividends, and retirement plan distributions. These artificial increases are not real increases in income, as they do not represent increase in value, per se, but they are subject to income tax as though they were real increases in income. The IRS inflation adjustments are helpful, but not a cure, because they do not exclude inflation from taxation. What is the IRS doing about inflation and its impact on taxes? As inflation rises, the Internal Revenue Service (IRS) has boosted federal income tax brackets for 2022, standard deductions and 401(k) contribution limits, and has taken some additional actions. However, the question remains, is this enough to combat the impact of inflation on your self-employment wages and taxes? As a freelancer, it is essential to make a real assessment of how inflation has and will impact your business. Doing so will make it easier to understand the inflation impacts on your business and the trickle-down effect to your personal financial situation. In general, as costs increase it is common for to see increases in the price products and services. Consumers are not always willing to pay increased prices with very little differentiation in offerings, since they are often highly conditioned by costs. If you are a freelancer whose pricing strategy is cost-driven you likely have much less flexibility to increase your prices, making it more difficult to hedge against inflation. For this reason it is essential to find a way to make changes that allow you to raise prices in exchange for delivering more perceived value in your product and or service offerings. Failing to analyze your profitability and understand your margins may mean your profitability is less than the rate of inflation which can severely impact the success of your freelance business. In addition, it is critical for freelancers to consider how inflation will impact your income taxes. Many freelancers consider profitability to be the sum of income less expenses, however, we cannot forget about taxes, which directly affect the real profitability of your business. Consider how rising prices and tax obligations will impact your freelance business: Let’s look at an example to help illustrate the effect of inflation on taxes. If you are in the 15 percent tax bracket of a $10,000 a year income, this means the IRS collects $1,500 per year in taxes from you. Assume that you received a cost of living/inflation increase to $15,000 a year in income the IRS collects $2,250 per year in taxes. This example only considers federal income taxes and not Social Security and Medicare taxes for the self-employed. Freelancers must consider the additional 15.3 percent in self-employment taxes when analyzing the actual cost of profitability of your business. As a refresher, self-employment taxes are comprised of Social Security taxes, 12.4 percent, and Medicare taxes, 2.9 percent. If you are an employee, your employer is on the hook to pay 50 percent of the Social Security and Medicare taxes, however, as a freelancer you pay 100 percent of the 15.3 percent “self-employment” taxes. As a freelancer, you can deduct the “employer-equivalent” portion of the self-employment tax in figuring adjusted gross income, however, this deduction only affects your income tax. It does not affect either your net self-employment earnings or your self-employment taxes and leaves you with less disposable income. Since as a freelancer you are taxed on your net self-employment income, even if you are lucky enough to have your earnings keep pace with inflation, it is likely you will be in the situation of paying additional federal, state, and local taxes on the increased nominal income. As we have discussed here, the increase in inflation is likely to decrease your disposable income. Especially since freelancers have the additional burden of “funding” the “employer” side of Social Security and Medicare taxes, with no allowable deduction in net self-employment income. The solution may not be as straightforward as you might hope. For example, raising one’s prices with no perceived increase in value will not combat inflation or add to your bottom line. Instead, you may want to consider looking for financial products that help protect against inflation and mitigate its impact on your self-employment income. Common anti-inflation assets include gold, commodities, and various real estate investments gold may also serve as an "alternative currency," particularly in countries where the native currency is losing value. Consulting with a tax and financial professional is advised prior to making any investments in these areas. Inflation is happening, how should freelance business owners respond? According to the Bureau of Labor Statistics, the Consumer Price Index for all Urban Consumers increased 1 percent in May 2022 on a seasonally adjusted basis after rising 0.3 percent in April 2022. Over the last 12 months, all items index increased 8.6 percent before seasonal adjustments. This is the largest 12-month increase since the period ending December 1981. No matter how well your freelance business was doing prior to inflation taking on a more aggressive force in the economic markets, it’s clear that for you as a freelance business owner, it’s key to be educated about your tax, income, and expenses, so you can take action and keep delivering high-value services to the clients who align with your pricing structure. This will crate a business model that can absorb some of your added costs. Once you have these client relationships in place you can then consult with a tax professional to ensure you are doing everything you can to succeed despite the independent forces of inflation on your freelance business. via Freelancers Union Blog https://blog.freelancersunion.org/2022/07/06/inflation-self-employment-taxes/
0 Comments
https://blog.freelancersunion.org/content/images/2022/07/Karen-Fischer---I-Hope-It-Will-Be-Worth-What-I-Give-Up.JPG
(Art Credit: Karen Fischer) 1. Determine if a New York PLLC is Right for You. a. Professional Limited Liability Companies (“PLLCs”) are typically used for health, design, and other licensed professions. b. PLLCs may only provide services in one field, with an exception for Architecture, Land Surveying, Professional Engineering, Geology, and/or Landscape Architecture. c. Consider alternate professional service entities such as a Professional Corporation (“PC”) or Design Professional Corporation (“DPC”). d. Consider a foreign PLLC if you have an existing PLLC in another state. e. Speak with a tax professional about your plans and the entity that is best suited to promote them. Note on hyperlinks: Many regulations for professional business entities are the same for Professional Corporations (“PCs”) and PLLCs. The New York State Education Department Office of Professions often refers to PCs exclusively, despite the regulations being applicable to PLLCs. 2. Choose a Name. a. Consider the restrictions on your business name. b. Choose a business name that is not already registered with the New York Department of Corporations. 3. Request Authority to Form the Entity from the Office of Professions. a. Note specific filing instructions and filing tips. b. Complete the Professional Practice Entity (PPE) Contact Information Form. c. Complete the Business Name Professional Practice Entity (PPE) Affidavit. d. Complete the Articles of Organization but do not file them with the New York Department of Corporations yet. Electronic signatures are not accepted. e. Mail a Certificate of Authority request with the three forms and appropriate fee to the NY Office of Professions ($10 for most professions). f. Do not send cash. Make your check or money order payable to the New York State Education Department. Personal checks are accepted. Your canceled check is your receipt. g. Note that the current wait is 10-12 weeks. h. You may contact the Office of Professions for assistance at 518-474-3817, ext. 400 on Tuesdays and Thursday or [email protected]. Note for attorneys forming a PLLC for their own practice: request a Certificate of Good Standing instead of a Certificate of Authority. 4. File the Article of Organization with the NY Department of State. a. Once you have the Certificate of Authority, file the Articles of Organization, the Certificate of Authority, and the Payment Authorization with request for a certified copy with the New York State Department of State (filing fee of $200.00, $25.00 for certified copy). b. For fastest results, file by fax to 518-473-2492 with a request for Expedited Handling ($25.00 for expedited handling). 5. Complete Registration with the Office of Professions. a. File the Certified Copy of the Articles of Organization with the Office of Professions. b. Confirm your business is listed on official professional business entity database. 6. Request an EIN a. Request an Employer Identification Number (EIN) with the IRS. b. This will allow your business to open a bank account, obtain traditional loans and financing, and file taxes. 7. Publish Notice of the Formation of Your PLLC. a. Contact the County Clerk (New York County, Kings County) to find out which newspapers you must publish notice of your PLLC in. b. Contact the prescribed newspapers and request publication of your notice for six consecutive weeks (publication fees differ but are generally $400.00 - $750.00 for each notice). c. Submit a Certificate of Publication with your proofs of publication from the newspapers with the New York Department of State (filing fee: $50.00). 8. Draft and Adopt an Operating Agreement. a. An Operating Agreement is a legal document establishing the internal rules of the business. They typically include provisions on the business purpose, admitting members, capital contributions and distributions, and management structure. b. Draft and adopt an operating agreement. You can find sample operating agreements (and additional resources) on the SCORE website to give you a sense of what they entail; consult an attorney for up-to-date information and guidance specific to your needs. *You can draft and adopt the Operating Agreement when you file the Articles of Organization (you don’t have to wait for publication to be complete). 9. Maintain Your Entity a. Biennial Statements with the New York Department of State and Renewals with the Office of Professions. b. Report changes to the Office of Professions. 10. Consult a Small Business Attorney An experienced attorney can: a. Help you decide on the best business entity for your needs; b. Choose a proper name; c. Complete all filings and registrations; d. Prepare Operating Agreements, biennial statements, and other required filings; and e. Give you peace of mind throughout the process so you can focus on your business. Disclaimer The information in this guide is not legal advice and is not intended to be relied upon as legal advice. The guide highlights some essential steps; it does not cover all the related laws and regulations. This guide was last updated on June 20, 2022 and some of the information may have since changed. If you have a legal issue, you should not rely on this information and instead speak to an attorney. via Freelancers Union Blog https://blog.freelancersunion.org/2022/07/06/how-to-start-a-professional-limited-liability-company-pllc-in-new-york/ Year-round tax planning: All taxpayers should understand eligibility for credits and deductions7/4/2022
https://blog.freelancersunion.org/content/images/2022/03/wt-logo-black.png
Jul 4, 2022 https://blog.freelancersunion.org/2022/07/04/year-round-tax-planning-all-taxpayers-should-understand-eligibility-for-credits-and-deductions/ via Freelancers Union Blog https://blog.freelancersunion.org/2022/07/04/year-round-tax-planning-all-taxpayers-should-understand-eligibility-for-credits-and-deductions/ |
AuthorI have 5+ years experience working as a medical transcriptionist. When I am not working, I enjoy sports like playing basketball or judo. I love making friends and connections. Archives
April 2023
Categories |