Top 7 Reasons You Need to Hire an Accountant

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Many Americans take advantage of online tax platforms and do the heavy lifting themselves. But when your situation is a bit more complicated, you need a certified public accountant (CPA)

Key takeaways

  • Top 7 reasons to hire an accountant:
    1. You’re starting a business
    2. You need small business tax planning help
    3. You’re self-employed
    4. You need to free up time
    5. You’re facing an audit
    6. You need help with deductions
    7. You’re applying for a business loan or grant

Sometimes, you need more assistance than just using an online tax website to submit your tax return. Tax planning should be an ongoing consideration throughout the entire year, not just in April. This is especially true if you’re starting or running a business or are otherwise a self-employed worker. 

There are many credits and deductions you may not fully understand as a business owner, or you may need to pay quarterly taxes and are unsure how to start. Whenever you have uncertainty about taxes, you should work with an accountant—and ideally, a certified public accountant (CPA). You never want to miss something that could help you save money or put you at risk of an audit or other legal issue.

Let’s walk through seven common reasons to hire a CPA:

1. You’re starting a business

There are many crucial tax considerations when starting a business. One major factor is the type of legal business structure you set up. For example, sole proprietorships, partnerships, LLCs, and corporations all have different tax implications. An accountant can help you figure out which structure will give you the most benefits based on your current and long-term business goals.

2. You need small business tax planning help

Even after a small business is set up, you will need an ongoing tax planning strategy. It’s not enough to only think about taxes once a year. You may need to incorporate business planning and financial software to help keep track of cash flow and tax obligations. If you’re seeking funding, you’ll need to create a balance sheet, a business model, and other documents that a professional can help you with.

3. You’re self-employed

There are many benefits to working for yourself as a sole proprietor. You don’t have to worry about creating certain legal structures and other requirements that some small businesses have. 

However, independent contractors have unique tax obligations since they’re not working for a traditional employer. You’ll have to pay quarterly estimated taxes in addition to your tax return. Especially if you’re just starting out in the self-employment realm, working with an accountant will help you understand the tax obligations and how to comply with them.

4. You need to free up time

Running a small business brings many responsibilities, and taxes are just one piece to the overall puzzle. You must manage daily operations, vendors, employees, customers, cash flow, and products, and you may no longer have time for bookkeeping and accounting. If this is the case, hire an accountant who can step in and take on many of these tasks. 

5. You’re facing an IRS audit

Of course, some businesses end up facing audits from the IRS. This could happen for a variety of reasons, including itemizing lots of deductions, profits skyrocketin from one year to the next, making an error on a tax return, or running a cash business. If you’re dealing with an audit, hire an accountant to help you through the process. You don’t want to face these issues alone, and they can be resolved much quicker with the right help by your side.

6. You need help with deductions

One major step that gets more complex in small business taxes is claiming deductions. You can significantly lower your taxable income and thus your tax burden when taking all of the deductions you’re eligible for. Deductions include eligible business expenses like equipment purchases, office expenses, bills, meals, and others. 

Additionally, there may be other deductions you qualify for, like the Qualified Business Income Deduction, which you can use to deduct up to 20% of business income if eligible. You don’t want to miss any of them when doing a tax return. An accountant will make sure you don’t overpay and claim all applicable deductions.

7. You’re applying for a business loan or grant

If you need a business loan or grant, an accountant can help. These applications can be tricky, and you want to be sure you put your best foot forward. Especially if it’s a new business, an accountant can help you understand the options and how to establish creditworthiness. They can tell you about funding options that you may not be aware of. And they can make sure that applications are always strong and information is presented clearly and accurately.

Why work with Provident CPA and Business Advisors?

If any of these situations apply to you, it’s time to hire an accountant. And the “certified” in certified public accountant means an individual has passed educational, work, and testing requirements that signal their competence in the field.

Running your own business requires that you maintain the right strategy for taxes, and you can’t always do it on your own. Make sure you claim all applicable deductions and are reporting everything accurately. 

The team at Provident CPA and Business Advisors is here to help, no matter what stage your small business is in. We help with business formation and planning, tax planning, and tax minimization. 

Contact our team of experienced professionals today to get started.

Are Unemployment Benefits Taxable?

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If you were one of the millions of Americans who received unemployment, here’s what you need to know about taxes.

Key takeaways:

  • Unemployment benefits are taxable after the first $10,200
  • Some states don’t require an additional state income tax
  • Use Form 1099-G, which you should receive from the IRS

The COVID-19 pandemic led to record closures and lay-offs, disrupting almost every industry. The unemployment rate hit its peak in April 2020 at 14.7%, which was the highest rate and the largest monthly increase in the history of Bureau of Labor Statistics data, which dates back to January 1948. 

The pre-pandemic unemployment rate has receded, and things are looking up. But millions of Americans will receive unemployment this year. And those who receive these benefits may be wondering how to handle the income on a tax return. 

Unemployment benefits are taxable, but there are other considerations to be aware of. Here’s what you need to know:

Do you have to pay taxes on unemployment benefits?

Unemployment is a way for the government to help out workers when they lose their jobs. 

The CARES Act introduced in March 2020 provided new tax provisions and relief for those in need. The Act expanded unemployment benefits to gig workers, independent contractors, and other self-employed individuals, and the compensation amount received was increased to include an additional $600 per week. Another relief package signed in December 2020 provided continued assistance at $300 per week as supplemental to existing benefits.

In March 2021, the Biden Administration signed the American Rescue Act of 2021, which extended the $300 per week benefit until September 6, 2021. 

This new Act also outlined that taxpayers with an adjusted gross income of up to $150,000 don’t have to pay taxes on up to $10,200 of benefits received. However, anything received after that amount is considered taxable income on a tax return. 

Important note: if you paid your taxes before this law was implemented, you can file an amended tax return to reflect the change.

You may also have to pay a state tax. There are a few states that specifically don’t tax unemployment benefits, which are:

  • Alabama
  • California
  • Montana
  • New Jersey
  • Pennsylvania
  • Virginia

If you live in a state that doesn’t tax income at all, you also won’t have to pay income tax on unemployment:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Tennessee
  • Washington
  • Wyoming

All other states will tax these benefits, however. 

How to pay taxes on unemployment

If you received unemployment, you’ll get IRS Form 1099-G from the government, which indicates the exact amount received in a calendar year. Even if you don’t receive this form for whatever reason, you still need to report all income over the $10,200 amount on your tax return. 

Note that this compensation isn’t subject to FICA taxes. This includes Social Security and Medicare taxes that an employer withholds from paychecks. 

Keep in mind that the extra funds provided under the CARES Act and following legislation — the additional $600 per week and $300 per week — are also taxable after that initial $10,200. 

What if you can’t afford unemployment taxes?

When the tax deadline is approaching, you may realize that you haven’t saved enough and you just don’t have the money to pay. If this is the case, the IRS does provide options. 

If you owe $50,000 or less, you can file Form 9465, which requests an installment agreement. You’ll pay a set amount each month over up to 72 months to pay off the amount of tax owed. Just remember that you will have to pay interest and a late payment penalty on any tax owed that isn’t paid by the due date, even if the IRS grants an installment agreement. 

It’s important to do everything you can to pay your taxes on time to avoid overpaying with fees and penalties. Remember that you can’t simply decide not to file your tax return—it’s the law, and not doing it will become expensive fast. 

The team at Provident CPA & Business Advisors helps business owners develop strategies for success while paying the least amount of tax legally possible. Contact us to learn more. 

When Should I Itemize Tax Deductions?

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The standard deduction is the simplest way to do your taxes, but sometimes itemizing will save more money. Learn how to start calculating and which route to choose.

Key takeaways:

  • Itemizing deductions means you will list all eligible expense deductions on your tax return instead of claiming the standard.
  • Most Americans claim the standard deduction since it almost doubled from the Tax Cuts and Jobs Act in 2017.
  • If your itemized deductions are more than the standard deduction, consider itemizing.
  • Getting help from a tax professional will help you determine the best course of action.

When tax season rolls around each year, it’s easy to put off making your calculations, examining your records, and gathering your income-reporting forms. It can be especially challenging for self-employed individuals or business owners.

A big concern for many taxpayers is whether to itemize deductions on their tax returns versus taking the standard deduction. Of course, you always want to be sure that you minimize your tax burden in any way possible, so it’s no minor consideration. You may decide to itemize if you have a lot of eligible expense deductions, but most Americans claim the standard deduction. This is especially true ever since tax law revisions in 2017 nearly doubled the standard deduction.

Let’s walk through what it means to itemize, how to figure out expenses, and when you should go that route instead of the standard tax break.

What does it mean to itemize deductions?

Itemizing deductions on a tax return means you will list all deductible expenses from the applicable tax year, including charitable donations, out-of-pocket medical expenses, some mortgage expenses, investment interest, tax preparation costs, disaster losses, and others. 

These deductions are subtracted from your adjusted gross income (AGI), potentially lowering your annual tax bill significantly.

Most taxpayers claim the standard deduction—often, it doesn’t make sense to itemize to maximize tax savings. And the standard tax break is a lot easier, given you don’t have to list expenses line-by-line.

How to figure out your deductions

To understand what kind of deductions you’re working with, you’ll need to keep track of your expenses throughout the year. Make sure you have a system in place to maintain accurate, complete records, so you’re not scrambling when it’s tax time.

If you want to calculate your deductions, there are several numbers to keep track of, including:

  • Mortgage interest paid: A lender will send you Form 1098, Mortgage Interest Statement, to report what you paid in interest.
  • State and local taxes: If you pay state and local income tax, sales tax, personal property tax, or real estate tax, you can add these up to a maximum of $10,000 in deductions.
  • Charitable donations: Keep receipts and records of all contributions you made to nonprofits during the year.
  • Out-of-pocket medical expenses: You can only deduct out-of-pocket medical expenses that are over 7.5% of your AGI. Eligible expenses include fees for doctor and dentist visits, glasses and contacts, medical supplies, prescriptions, and many others. Just make sure it’s worth tracking all these expenses by first multiplying your AGI by .075 and thinking through whether you are realistically over that amount.
  • Costs of property damage: If you reside in an area that is a federally declared disaster area, any damage to your property may qualify for a deduction.
  • Miscellaneous deductions: There are a host of other expenses that are possible deductions, including gambling losses, amortizable bond premiums, theft losses from income properties, and penalties paid as restitution or remediation, among others.

If you plan to itemize your deductions next tax season, be sure to keep tabs on all these expenses and others you may be eligible for. Because taxpayers have to list the amounts of each on a tax return, it’s not enough to just have the overall total.

When you should itemize

It makes sense for some taxpayers to itemize, even though most people claim the standard deduction. The standard deductions for the 2020 tax year were as follows:

  • Single taxpayers: $12,400
  • Married joint filers: $24,800
  • Heads of household: $18,650

If you are over age 65 and/or are blind, you can increase the standard deduction, sometimes by more than $5,000. The standard deduction is relatively high now, nearly doubling in 2017 after the Tax Cuts and Jobs Act.

To determine if you should itemize or claim the standard deduction, calculate all the expenses above that you can deduct. At a minimum, ballpark them. If the expense total is greater than the standard deduction for a given taxpayer status, itemizing will get you a bigger deduction and reduce your tax bill even more. If it is less, then the standard deduction is your best bet.

Sometimes, if taxpayers expect to have a similar itemized total to their standard deduction, they’ll go with the standard just to save themselves all the work of keeping receipts and ensuring everything they report is accurate. The IRS may be more likely to audit tax returns with numerous itemized deductions, so it’s crucial to keep excellent records.

Getting help from a tax professional

Tax laws are not the easiest things to understand, and they frequently change as political administrations come and go. When you’re not sure whether you should itemize or take the standard deduction, or you don’t know which of your expenses are deductible, a tax professional can help. 

Talk to the team at Provident CPA and Business Advisors to get all of your tax questions answered. We are experienced in best practices and well-versed in current rules—and will help you pay the least amount of tax legally possible.

What Basic Documents Do I Need to Do My Taxes?

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If you have several avenues of income or lots of opportunities for deductions, gathering the right tax forms and documents can seem overwhelming. Here are the basics to help guide you.

Key takeaways

  • Documents and records you’ll need for your taxes:
  • Income tax forms (W-2, 1099s, etc.)
  • Investment income and retirement information
  • Tax forms for deductions (donations, medical payments, real estate, etc.)
  • Stimulus payment information

It’s always important to keep taxes in mind throughout the year to avoid leaving all the work to the last minute. And whether you are a regular W-2 employee or a business owner will significantly impact the information you need, the tax forms you will receive, and the tax planning strategy you implement.

No matter the situation, start gathering your documents and records early. Let’s walk through the paperwork and information you may need to complete your tax return.

Personal information

First, you’ll need all the essentials about yourself and your spouse, if applicable, to complete your taxes:

  • Name and spouse’s full name
  • Social security number or tax ID number
  • Spouse’s social security number
  • Date of birth and spouse’s date of birth
  • Bank account information if using the direct deposit method for your refund

If you have dependents, you’ll also need to gather their personal information and childcare records for your taxes, including their date of birth and social security number.

You also may need to provide an identity protection PIN issued by the IRS, if applicable, for you, your spouse, or a dependent. This number is used to protect your social security number from being used by someone else to file a tax return in your name. The IRS recently announced that all taxpayers are now eligible to get an identity protection PIN.

Forms and sources of income

Now, let’s take a look at the most common forms needed for income reporting. By the time you are completing your taxes, you should have received these forms from your employer or anyone who paid you throughout the year:

  • Form W-2: for regular employees
  • Form 1099-MISC: some self-employed individuals may receive this form from clients
  • Form 1099-NEC: most independent contractors will now receive this form from clients
  • Form 1099-G: reports government payments, including unemployment 
  • Form 1095-A: reports health insurance marketplace statements

To summarize: if you are a regular employee, you will receive Form W-2; independent contractors will receive either Form 1099-NEC or Form 1099-MISC; and the unemployed will receive Form 1099-G. 

That said, some contractors paid through third-party payment processors, such as PayPal, won’t receive a form if the annual amount is less than $20,000 and 200 transactions. If this is the case, you’ll need to self-report this income. If pay exceeds the threshold, the payment processor or freelance site should send a Form 1099-K.

Make sure you have a method for tracking income throughout the year so you can confirm that you’ve received all applicable forms from your employer(s) and/or clients.

If you are a small business owner or an independent contractor, you probably have to pay estimated quarterly taxes throughout the year. You will need Form 1040-ES with your tax return, which is a record of the payments you made. 

Other types of income you may need to report include prizes or awards, income from a trust, hobby income, or gambling income. Even if you do not receive a tax form for these payments, you still need to report them on your tax return.

Investment and retirement income

If you have any investment accounts, including retirement plans, you will also need the applicable forms from your financial institutions before doing taxes. These include:

  • Form 1099-INT: where interest income is reported
  • Form 1099-R: income from a pension, IRA, or annuity
  • Form 1099-OID: used if the original issue discount (OID) in gross income is at least $10
  • Form 1099-DIV: dividend income
  • Form 1099-B: for proceeds from broker and barter exchange income
  • Form 1099-S: reports income from real estate sales or exchanges and some royalty payments
  • Forms 1099-SA: reimbursements from Health Savings Accounts 
  • Form 1099-LTC: long-term care reimbursements

Today’s institutions may have enrolled you in a paperless program. So, instead of receiving a physical copy of your investment tax form in the mail, you may be able to find it in your online portal for easier access. If this is an option, it can help speed up the preparation process. 

Documents for deductions

Depending on your situation, you may need certain statements or receipts to claim deductions on your return. For example, if you made significant charitable donations, make sure you have those records to report that information accurately. Charitable donations may be cash or non-cash donations.

Other records you may need for deductions include the following:

  • Medical expenses
    • Doctor/hospital visit payments 
    • Insurance
  • Childcare expenses
    • Payments to daycare centers or other childcare providers
  • Homeownership documents, including:
    • Property tax records
    • Form 1098 or other mortgage interest documents
    • Records for energy-efficiency home improvements
  • Educational expenses, reported on Form 1098-T or 1098-E
    • Scholarships or fellowships received
    • Other qualified educational expenses
  • Educator (K-12) expenses
    • Supplies for the classroom
  • Tax payments
    • State and local tax paid aside from wage withholding
    • Vehicle sales tax
  • Retirement contributions on Form 5498, 5498-QA, or 5498-ESA
  • Disaster payments for federally declared disaster

These deductions can make a big impact on your tax burden, so always be thorough in record-keeping to ensure everything is reported. 

Stimulus payment information

For tax years 2020 and 2021, you will need information about the economic impact payments (EIPs), or stimulus payments, if you qualified for them. IRS Notice 1444 shows the amounts you were paid, but keep records of when you received it and how much you were given each time.

If you did not receive the amounts you are owed, you can claim the Recovery Rebate Credit for the 2020 tax return to claim the rest of a stimulus payment.

Work with a tax professional for your tax-related questions

Depending on your work, income, and investments, your tax return may get complicated fast. To make sure you have all the documents you need—and that everything is claimed that you’re eligible for—work with a tax professional who knows how to take care of it all. 

The team at Provident CPA and Business Advisors is ready to help. We can help you minimize your tax burden as a business owner or individual taxpayer. Work with our team to create the right tax plan. Contact us today to learn more about our services.