Tax Tips For Self-Employed Barbers And Hair Stylists
No matter how good your tax professional is, if you don’t provide all of the necessary information and figures, your return will be wrong. And, any tax return that is done wrong will fail an audit if exposed.
Undocumented cash income, inventory mistakes, overlooked deductions, and missed benefits are common within this industry. Some of these errors increase your federal tax bill; others shortchange your future. Self-employed people can take advantage of the same IRS rules used by large corporations, allowing them to lower their tax bill without cheating on their taxes.
The following tips will help self-employed hair-care professionals to survive an audit.
Tax Tip 1 – Without receipts, you will always fail an IRS audit. When every expense and all income has a paper trail you nearly always survive an audit. Tax returns should be kept for a minimum of 10 years, and tax receipts for at least 6 years.
Tax Tip 2 – All items purchased or created for resale are considered inventory by the IRS. Inventory expenses can only be deducted as that inventory is sold.
Products used on clients are never considered inventory, allowing for the immediate deduction of all business supply expenses. However, many stylists supplement their bottom line by selling hair products or other goods to their clients. Knowing how inventory is tracked will keep non-deductible inventory costs to a minimum, and show you how easy it is to beat an IRS inventory audit.
Tax Tip 3 – Overlooked deductions mean you put less money into your own pocket, and pay too much tax. Even though you create a paper trail each time you use your debit card, credit card, or write a check, it’s not an easy trail to follow at tax time.
Federal Income Tax Dependency Test
Support Test
Taxpayer must have provided over 50% of total support, OR
Two or more persons shared the support and together they provided more than 50% of the total support.
The dependent must be a member of the household, or closely related to BOTH contributors.
Those sharing support must mutually agree which will claim the exemption.
Form 2120 Multiple Support Declaration must be signed by all contributors and filed with their tax return.
Gross Income Test
The dependent must have made less than the gross income requirement for the tax filing year.
The only exception to this rule is if the dependent is the taxpayer’s child, under the age of 19 years at the end of the tax year, or is a full-time student during at least 5 months of the year and is under the age of 24 years old.
Gross Income Does Not Include:
tax-exempt income
income earned by a totally and permanently disabled person at a sheltered workshop operated by a tax exempt organization or government agency.
Gross Income Does Include:
gross receipts from rental property
income from Schedule C
Citizenship Test
The dependent must be a U.S. citizen, resident or national, or resident of Canada or Mexico.
After the finalization of an adoption, the citizenship test does not need to be met if the adopted child lived with the taxpayer and was a member of the household for the entire year.
Joint Return Test
No exemption may be claimed for a dependent who files a joint return.
Exception: a joint return filed only to claim a refund of tax withheld when neither spouse is required to file and there is no tax liability.
The Importance of Tax Planning During the Year
Being a tax consultant and preparer for over 20 years, I can tell you that there have been a number of times that I’ve had clients who were surprised by how much they money they owed at tax time. Why did they wind up owing so much money? There are numerous reasons. What it all comes down to tax planning or the lack of.
Tax planning is very similar to financial planning. It involves taking a close look at your tax situation from one year to the next. People who have financial investments are always checking with their financial advisors to improve their financial situation. If you’re going to check with your financial advisor, you should also check with your tax advisor and so see how your financial investments are going to affect your taxes.
Tax planning is not only for those people with financial investments. Tax planning is for everyone, especially if you’re undergoing financial changes that could affect your tax situation. Some of these financial changes could be the purchasing of a home, it could be the purchase or sale of rental property, it may be the withdrawal of money from a retirement account, or it may be starting a business. Anyone of those financial changes as well as others could significantly affect your tax situation.
The best time to check with your accountant is before you take any kind of financial action to see how it could affect your taxes. Many times people call their accountant after the fact. That’s like closing the door after the horse has left the barn.
There are two things that I always tell my clients. First, I always tell them if that if they have any tax questions to call me. The second thing I tell them is if they are going to do anything that they think could affect their taxes to contact me.
How You Can Get a Jump on the IRS Before It Gets a Jump on You
Do you think your income taxes are going up? They are not going up in 2012 but the extension of the 2001 Bush Tax Reduction program expires at the end of 2012. According to the Congressional Budget Office, (CBO) if interest on the debt rises gradually and the Bush/Obama Tax Reduction program expires, the annual interest on the national debt could reach 5.5 trillion dollars over the next ten years. In other words, 14 cents of every federal tax dollar that the government collects will be spent on interest alone.
If the government extends the Bush/Obama tax cuts and interest rates rise 1 percentage point more than expected, Congressional budget analysts expect the annual interest on federal debt to exceed $7.5 trillion dollars. That would amount to 19 cents of every federal dollar spent. It would trump what the government expects to spend on Medicare, defense or all of the other discretionary programs combined.
Given these statistics, I think we can all assume the government will let the Bush/Obama tax reduction program expire a little over a year from now. Assuming they let it expire at the end of 2012, after national elections, how much more could you end up paying in taxes? Well, lets’ consider what could have happened last year if Congress and the President allowed the 2001 Bush tax reduction plan expire.
First, the government would have eliminated the 10 % tax bracket. The lowest personal income tax bracket would now be the 15% tax bracket. This only could have affected you if you had less than $8,500 in income as a single person or $17,000 as a married couple.
California Tax Preparers In the Middle, Between the Feds and the State
When instructing tax students in recent in past years, I always made it a point to over emphasize the difference between federal law and the California state law when it came to Medical Marijuana.
FACT: The use of marijuana is illegal under federal law.
PROBLEM: The IRS has determined that an obscure provision of a 1982 federal law prevents a marijuana dispensary from qualifying for the standard deductions that any other normal business could use.
What this means is that a Marijuana Dispensary CANNOT use or legally take tax deductions for expenses such as rent, miles driven for business, advertising, marketing, web design, travel, legal expenses, product inventory or any other deduction. Yet “all” income, legally, has to be reported.
So the IRS sent out tax bills recently based on non-deductions. (Not sure of how many notices went out yet.)
This, for many small marijuana dispensary owners, means “out of business, closed, bankruptcy!”
But, what it really means is, these small business owners thought they were safe under the California law, which allows marijuana dispensaries for certain health patients. And now that they are not safe, more then likely the businesses will become like a book store in a store front window, with a back room of “all cash transactions” with no trace of income, except for the books!
And, it is interesting, that for the first time in the history of the country, the IRS has decided to registered over 1.2 million tax preparers, using a $63 fee and testing requirements to be complied with by the end of 2013 for existing tax preparers, and immediately for new tax preparers.