If you’re living with a bit of anxiety that your tax naughtiness might be uncovered and cost you, now is a good time to do something about it. The IRS is offering an amnesty. Inform them of your assets before Aug. 31 and you’ll pay a lower penalty fee of 12.5 percent for up to $75,000 or 25 percent if you’ve got more than that (on the odd chance you inherited a foreign account and never withdrew anything, the penalty will be only five percent).

If you’re discovered outside the amnesty program, the penalties “are draconian,” warns Harry Miller, a partner at Burns & Levinson, and expert on international tax issues. “If the failure to disclose is determined to be willful, then the civil penalty for each violation is up to the greater of $100,000 or 50 percent of the value of the undisclosed account. Accounts can be decimated.”

Who should consider taking advantage of the program? Miller recommends that “any U.S. citizen or U.S. resident with investments or accounts outside of the U.S. who has failed to disclose these accounts on annual information returns required by the U.S. government, or who has failed to include the income from such accounts on their personal U.S. income tax return, should consider taking advantage” of the amnesty program. But he notes it’s not for everybody:

There are significant tax costs involved with coming clean. In most cases the cost to be paid will be very low in comparison with the potential costs of being discovered without having participated in the program.  But anybody interested in this program needs to know what the potential tax cost and reduced penalties will be before getting into it.

For those who have so far avoided detection and are considering risking it for a while longer, Miller warns that a combination of terrorism-related scrutiny of international accounts and a recession-related drive to increase revenue without increasing tax rates will make the government more likely to discover you going forward. The IRS “has hired hundreds of new agents in Europe and Asia specifically in order to beef up their compliance enforcement efforts,” says Miller, who warns the risk is greatest in those countries with tax treaties with the U.S.

And while this amnesty is a repeat of a successful 2009 program, which convinced 15,000 tax dodgers to turn themselves in, “it is unlikely that there will be another similar program, and certainly nobody should count on such a program,” says Miller.

So what do you do if you’re thinking of taking advantage of the amnesty? Your regular accountant may not be able to handle the matter, as this is a highly specialized area of tax law, so find someone experienced with the 2011 Offshore Voluntary Disclosure Initiative. And do it quickly. Paperwork must be filed and penalties paid by the end of August.

Image courtesy Flickr user Podknox

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With the self-assessment deadline for the 2008-2009 British tax year looming this coming Monday, it seems like an opportune moment to round-up some useful tools and services for managing your business expenses. Each year, I find that I’m missing a receipt, I can’t account for a crucial purchase or that paper receipts have literally faded.

Though too late to help my preparations for filing my own tax return this year, the selection below is driven by what’s caught my eye lately and my preference for web-based, iPhone and Mac applications. For the 2009/2010 tax year, I’ll certainly be employing one of the following:

Cha-Ching

Midnight App’s beautifully crafted Cha-Ching almost makes me want to do my expenses! With a playful name, Cha-Ching is very much designed with Macs in mind, employing a gorgeous, intuitive interface and integration with iSync (for scheduling bill payment reminders) and an iPhone edition for mobile use.

I found Cha-Ching’s real strength to be the ability to tag individual expenses, and — like iTunes’ smart playlists — create dynamic standing searches that can, for example, pull out anything you bought from tagged as “Apple” and “business expense.”

ReceiptFarm & Shoeboxed

We covered receipt organisation service Shoeboxed a couple of years ago, finding it to be a great solution for uploading, storing and organising your paper receipts, via a mail-in service. In the time since we last wrote about them, they’ve added a DIY “self-scanning & data entry” plan to their service, along with an iPhone app.

More recently, ReceiptFarm has begun to offer a similar Shoeboxed-style service, based here in the UK. Both services are almost identical, feature-for-feature, though ReceiptFarm appears to be slightly more expensive than its competitor. Also, where Shoeboxed is confident their stored receipts meet IRS guidelines for taxes, its not clear whether UK authorities accept scanned copies of expenses.

Expensify & WebExpenses

We reviewed Expensify early last year; it’s a comprehensive solution for managing and tracking expense reporting. The service is oriented around importing expenses, scanning receipts and generating reports. The service’s killer feature is the ability to generate tax authority compliant electronics receipts for expenses below $75. Recently, Expensify also launched integration features with bookkeeping service Outright.

WebExpenses also offers a similar service here in the UK, and with the likes of E*Trade and Heineken amongst its clients, it appears to have traction within large as well as small organisations. Features are broadly similar, though the service offers an innovative SMS expensing feature, which enables users to expense items as and when they occur.

inniAccounts

Finally, recent weeks have seen the launch of inniAccounts, a comprehensive accounting and bookkeeping service designed specifically for UK-based freelancers.

inniAccounts was created by a pair of engineering contractors, frustrated with the minutae of managing their fiscal data using Excel or complex accounting software designed for large organisations.

The service helps manage timesheets, invoices and payroll, but also include some features for compiling, completing and settling tax returns as well as mileage and expense claims. Uniquely, the service also provides a real-time tax calculation, helping users understand their financial position immediately, rather than waiting to the end of the year.

With only five days to the 31st January filing deadline here in the UK, it’s likely too late to adopt and employ any of the applications we’ve covered here, but they may help streamline your accounting for the coming 2009/2010 tax year, with greater productivity and accuracy.

Personally, after tinkering with each of the options above, I’m leaning towards Cha-Ching, simply because of the playful interface (it makes a difference for such a dull task!) and the immediacy of booking expenses via an iPhone app. However, I suspect something like inniAccounts will be a better long term solution, though I’m concerned that much of this space is occupied by startups rather than established companies, raising questions and doubts about the continuity of your financial data if the company ceases to trade.

Do you have preferred services, applications or methodologies for tracking and managing your expenses and receipts?

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The reasons for employers to decentralize workers are becoming harder and harder for businesses, employees and governments to ignore. Telework can help employers reduce costs, avoid job cuts and start hiring. It can help them minimize turnover, assure business continuity during emergencies and boost productivity. It can help employees save on commuting and achieve a better work/life balance. It can decrease traffic congestion, the cost of repairing and maintaining transportation systems, carbon emissions and the nation’s dependence on foreign oil.

However, despite these and other well-publicized benefits of telework, some states maintain a tax rule that frustrates employers and employees trying to use it. The rule — known as the “convenience of the employer” rule — imposes a heavy penalty on nonresidents who telecommute to in-state employers.

To assure that state tax authorities do not impede the growth of interstate telework arrangements, Congress must abolish the convenience rule.

How the “Convenience of the Employer” Rule Works

New York State is notorious for its exceptional drive to enforce the convenience rule. Under the rule there, if a nonresident of the state works for a New York firm and opts to telecommute sometimes — even for most of the year — New York will tax him on 100 percent of his salary: the wages he earns in New York plus the wages he earns in his home state. Because the employee’s home state can also tax the compensation he earns at home, he risks double state taxation for working off-site.

To protect their residents from double taxation, some states grant a credit for personal income taxes telecommuters pay the employer’s state on the salary earned at home. However, even telecommuters offered a credit risk being penalized. When a telecommuter’s state has a lower tax rate than the employer’s state, the telecommuter has to pay the steeper rate on the income he earns at home.

Similarly, telecommuters living in states with no income tax suffer because of the rule. Say a Florida resident telecommutes to his New York employer, traveling to New York on business only a few weeks a year. Although the employee chooses to live and do most of his work in a state with no personal income tax, he may nonetheless be forced to pay state income tax — to New York — on all of his Florida wages.

The additional state tax burden the convenience rule imposes can make telework too expensive for employees. The rule also creates tremendous confusion for them: Determining where they owe income tax if they telecommute — their own state, the company’s state, or both — can be a considerable challenge.

How Businesses Suffer

When employees cannot afford to telecommute, employers cannot tap the business benefits telework offers. In addition, just as employees can be confused about where they owe income taxes, businesses can be confused about where they have to withhold taxes. Compliance with the convenience rule can become so onerous for payroll departments that firms in convenience rule states may be forced to move out. For example, in 2008, a company reported to The New York Times that it was planning to leave New York because it was “blindsided” by the state’s enforcement of the rule (“Telecommuters Cry ‘Ouch’ to the Tax Gods“).

How States Suffer

The convenience rule threatens states where telecommuters live (or where would-be telecommuters live) with an unfair drain on their revenue. For example, if a telecommuter’s state does give him a credit for taxes he paid New York on wages he earned at home, the telecommuter’s state effectively shunts its own revenue to the Empire State. That revenue finances public services in New York (like police, fire and other emergency services), even though the telecommuter often works at home and depends on the services provided by the home state. States struggling with perilous budget deficits -– and with the decisions they have to make about which of their own programs to eliminate -– cannot afford to subsidize the programs in New York.

In addition, workers’ states can lose revenue because:

• Confused telecommuters may mistakenly conclude they owe taxes only in their employer’s state, not the home state;
• Confused employers may mistakenly conclude they must withhold only for their own state, not the states where their telecommuters live;
• Unemployed residents may remain jobless — and without taxable income — longer than necessary, because the convenience rule makes looking for work with remote employers unaffordable;
• Businesses in the home state may earn less taxable income when telecommuting residents are forced to cut their home state spending because the extra state tax bill for telecommuting shrinks the residents’ budgets;
• Businesses in the home state may earn less taxable income when residents who cannot afford the telecommuter tax must commute to their out-of-state jobs everyday and purchase more of the goods and services they need in the employer’s state than in the home state.

Even states that maintain a convenience rule suffer because of it. For example, by threatening the profitability of in-state companies and driving them away, the rule jeopardizes the states’ business income tax base.

The rule also threatens the states’ personal income tax base. In New York, because the rule applies only to employees who spend some days working inside New York, telecommuters can duck the tax penalty by staying out of New York entirely. They may decide, with their cost-wary employers, that they will telecommute full-time. Or, they may look for work in their home states. Either way, once a telecommuter leaves New York for good, New York can no longer tax any of his income. Further, New York’s stores, restaurants and other businesses lose his patronage.

The Federal Solution: The Telecommuter Tax Fairness Act

The Telecommuter Tax Fairness Act (H.R. 2600) is proposed federal legislation that would prohibit states from taxing nonresidents on the wages they earn when physically present in another state, removing the threat of double or excessive taxation for telecommuting across state lines.

The bill was introduced by Representatives Jim Himes (D-CT) and Frank Wolf (R-VA). It has support from a bi-partisan group of lawmakers representing states all around the country, including Connecticut, New Jersey, Maryland, Virginia, Georgia, Massachusetts, Kansas, Illinois, Arizona, Washington State and even New York.

The bill also has endorsements from organizations advocating for telework, transportation, homeowners, taxpayers and small businesses. The telecommuter tax is a needless barrier to telework’s expansion. As Washington weighs how to create jobs, improve the country’s preparedness for pandemics and other emergencies, meet national transportation needs, slow climate change, strengthen America’s energy independence and help secure a prosperous future for both large and small businesses, it should demolish this barrier. The Telecommuter Tax Fairness Act would do just that -– without costing the federal government anything. It’s time to make this bill law.

Photo credit: stock.xchng user Ayla87

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This tax break forms part of the Australian government’s economic stimulus package, and although I’d read about it, I hadn’t taken much notice of it — or mentioned it to my friend.

This made me wonder if WWD readers in other countries were unaware of stimulus measures they could use. If so, note that if you’ve yet to submit your 2009 tax return, you may still be able to take advantage of the following benefits.

U.S. Tax Breaks for Small Business

Back in February, the U.S. government announced a series of tax benefits for business as part of the American Recovery and Reinvestment Act. The two that are probably most useful to most WWD readers include depreciation and deduction measures for new equipment purchases made in the 2008-2009 financial year.

• Deductions. According to Karen E. Klein at BusinessWeek, Section 179 of the new law “allows small businesses to immediately expense new equipment or machinery” up to a total of $250,000 ($117,000 higher than the previous year’s limit). The IRS explains that this tax break applies to “machinery, equipment, vehicles, furniture and other qualifying property placed in service during 2009.”
• Depreciation. The stimulus package also offered a one-year extension on the 50 percent bonus depreciation the government offers on new equipment purchases, which, Klein says, allows small business owners to “immediately deduct half of the cost of qualifying purchases rather than depreciating them over time.” To take advantage of this tax break, you must purchase and start to use the equipment (qualified tangible assets) in 2009.

Making the Most of the Breaks

While in July it was reported that these stimulus measures hadn’t had much effect, since they were introduced at a time when business credit lines were either tight or had dried up completely, it’ll be interesting to see the final figures once the year’s small business tax returns have all been submitted.

Speak to your accountant before you submit your tax return to make sure you’re claiming any purchases you made which are eligible for deduction or depreciation under the law.

Have you, or has a small business person you know, used these bonuses as a way to purchase new equipment for a business? Will you be benefiting from the stimulus package on this year’s tax return?

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Now, I’m not a CPA, and the closest I’ve come to taking accounting is being a professor’s assistant in an online graduate program course. However, I must do something right as I’ve been on my own for over four years and my business tax payments remain on target. So here I’m going to share what I do, as it might work for you or give you ideas on how you can keep on top of your business finances.

I keep it simple by having just two tools in my accounting toolbox: QuickBooks and Electronic Federal Tax Payment System (EFTPS). Substitute QuickBooks with your favorite accounting application to make this process work for you. I tend to pick up new software fast, but not so with QuickBooks. Regardless, it takes care of all of my invoicing, expensing and tax needs. But we won’t go into that. My way is just one way; check the comments on this post to see a bunch of great ways to handle your taxes.

There are two things you need to do:

• Track income and expenses.
• Pay quarterly taxes (otherwise known as 1040-ES).

Track Income and Expenses

How do you invoice customers and track payment? What about tracking things you buy for your business? Applications like QuickBooks make it easy to create reports to see your income and expenses by quarter, year, fiscal year or customized period.

Keep all of your receipts for expenses related to your business. Don’t worry about organizing them. Grab a cheap expandable folder and throw them in there. Write or label it, “Business receipts.” For electronic receipts, create a folder in your email account with the same name. Or if you’re an organized freak like me, scan your receipts and save them in a folder.

Remember that anything related to web working counts as an expense, including your home office space (but verify this with your accountant) and family printer, along with its toner or cartridge replacements. Any time you take the car to buy supplies or to attend an event where you meet with folks on business, track the car’s mileage. Tax law allows you to deduct a set amount for mileage (again, check with an accountant as this varies per year). Paying for parking at the event also counts. Magazines and books related to your profession make the cut as expenses. Add the cell phone, landline phone and any other communications services. Record all purchases in your accounting software on a regular basis so you can deduct the expenses when quarterly tax time rolls around.

Pay Quarterly Taxes

It definitely helps to have a good accountant you can go to, especially for advice on state laws. Or you can brave it and do the research yourself (but I’ll wish you luck decoding bureaucrat-speak). My family has relied on an accountant since before I went into business for myself. They can find deductions you might not think about. A good accountant is worth way more than what you pay them.

Unless you’re a full-time employee with a company that already does the deductions for you, you need to pay federal taxes (1040-ES) on a quarterly basis. EFTPS Online makes it very easy for American web workers to pay online or over the phone. The service costs nothing, stays open 24/7 and accepts payments in advance.

According to the IRS:

Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

As a sole freelance web worker, I pay 1040-ES on a quarterly basis. The due dates for the quarterly payments are as follows, along with the periods they cover:

• April 15: Jan. 1 – March 31
• June 15: April 1 – May 31
• Sept. 15: June 1 – Aug. 31
• Jan. 15: Sept. 1 – Dec. 31 of the previous year

For those payment days falling on a weekend or holiday, the payment is due the following Monday.

EFTPS lets you set up an account with your taxpayer identification number, which is either your social security number (SSN) or employer identification number (EIN). You also provide your bank account information so you pay your taxes directly without writing a check. I’ve been doing this for years without problems.

So how do you know how much to pay? My method is simple, but it may not apply or work for you. For me, I base the amount owed on my household’s tax bracket. Here’s an example for someone who falls in the 20 percent bracket.

1. Figure out earnings for the quarter. From Jan. 1 – March 31, you bring in an income of $10,000.
2. Figure out the expenses for the same quarter: $500.
3. Take the income and subtract the expenses for the final number of $9500.
4. Multiply the final number by the bracket. Here it’s 9500 x .2 (20 percent) = $1900.

$1,900 is what Mr. Example owes for the quarter on April 15. I use this formula and it has yet to fail me. Your tax bracket may change, as it has for me. Just change the percent part of the formula as needed. The IRS web site also provides illustrated examples using its worksheet.

Take advantage of your accountant’s time and find out your tax bracket percentage and what deductions to consider for the next tax year. For example, if your family plans to take a summer trip (lucky you! May I come?), find a way to do business while on the trip so you can deduct parts of it.

How do you manage your taxes?

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A couple of weeks ago, the UK’s tax authority – Her Majesty’s Revenue & Customs Service – announced a number of measures that may benefit Britain’s web workers, and more broadly, any Brits working from home.

Those working from home whom have a portion of their residence setup as a dedicated work area or office can claim that portion as a tax rebate. Also, they no longer have to pay capital gains tax on the sale of their home.

As generous and farsighted as the HMRC’s change of heart might seem, some close examination of the conditions under which these rebates can be claimed underlines how little the UK government understands about the nature of web workers in particular. Notable, in the BBC’s report are the following provisos…

HMRC are content to allow a proportion of these costs to be claimed against the income of the business if certain criteria are met, such as:

• The area of the home is used exclusively for business purposes for a prescribed amount of time – say, 9am to 5pm – this means that if you sit at the kitchen table working you won’t qualify for the additional deductions. What the taxman is looking for is an area that has the appearance of an office – so it will contain a desk, chair, storage etc.
• The amount claimed is reasonable in relation to the business – so you can’t claim that you work 20 hours a day in the office or that the area used is a large proportion of the living area of your home.

Apart from these two provisos, you will be able to claim a percentage of the total cost of running the home.

Ooops – nobody asked the web workers!
To the first proviso, one of the advantages of working from home is the physical flexibility granted to the worker; personally I don’t have a dedicated office – sometimes I work in the dining room, the lounge, family room and even the conservatory. It’s difficult to understand why HMRC are insisting on dedicated work areas and offices in the home, when its the nature, time and intensity of work that’s a more important measurable factor than location.

To the second point, again flexibility is key, in that workers dip in and out of work and domestic tasks often in the same physical space – it’s one of the reasons we work from home!

Still many of the examples given by the HMRC are illustrative and useful and the mortgate rebates are pretty generous. Though web workers represent only a proportion of those who work from home and laws need to be formulated for broad groups, it’s frustrating that the views of web workers weren’t more keenly understood – even consulted as a group – before such important legislation was completed. On the other hand, where would the UK government go to elicit the views of this community?

Web Workers Unite!
What this tells me, alongside my previous thoughts on commuting and coworking, is that web workers need to represent themselves more confidently, ensuring their unqiue perspectives are heard and noted by our politicians. As a group we’re on the bleeding edge of working practices, often at the forefront of civic and social change, but we have a responsibility as citizens to bring those experiences and passions to the attention of our politicians.

As James Bond swore an oath On Her Majesty’s Secret Service, perhaps we all need to declare some principles for Her Majesty’s Web-based Workforce!

Could WebWorkerDaily – who’s brand and iconography alludes to collectivism -  be a platform to help groups organise and represent themselves to legislators and politicans more confidently and muscularly in their localities? Should we be doing more activism as a group to influence monetary, social and civic policies?

What are your thoughts?

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When we’re ready to file our taxes, we have three main options, 1) hiring a professional CPA to do it, 2) using TurboTax, or some other tax preparation software, or 3) braving the quick shops such as H&R Block. It appears more and more Americans are discovering online tax filing is a good way to go.

As a busy web worker, how do you manage your taxes? Do you find ease in handing them off to a professional, or does the do-it-yourselfer in you propel you to fire up TurboTax?

We look forward to a great discussion in the comments.

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