Issue link: https://www.ascpskindeepdigital.com/i/108113
Ask your accountant for the most current Fortunately, there is another way to estimate your future income. Incorporated skin care businesses may use what is called an annualized income installment. This means that each quarterly payment is calculated from your actual income during that quarter, annualized (i.e., estimating your annual income based on that quarter's income). With the annualization method, you end up paying more tax during quarters when you are earning more, and less tax during quarters when your income is down. Because this method is based on actual income per quarter, it is necessary to closely monitor your income and expenses throughout the year. The IRS recently discovered some taxpayers were using the annualization method to avoid having to pay one or more of their installments; as a result, the regulations have been tightened up to make it clear that all expense items, income, and other gain must be taken into account when computing the annualized taxable income for any quarter—right up to and including the last day of the quarter. It's also acceptable to pay in adjusted seasonal installments, if the usual quarterly installment would be less than 25 percent of your total annual tax bill. Spreading Out Expenses If there is a certain expense you plan for each year—for example, if you always take a continuing education course or travel to attend a particular trade show—then you may include a portion of that expense into your calculations for each payment period. This is only allowed for expenses with known, specific costs that can be determined with reasonable accuracy in advance. Obviously, the expenses must also be legitimately deductible in the current tax year under all the other normal rules for deductions. The rules also cover annual expenses that might be paid or incurred at the end of the tax year (or in some cases, even after it) but which are usually deemed to be paid or incurred during the tax year. There is an exception to all this for businesses that don't operate on a cash basis. Some businesses track their information that applies to your specific situation. Answers to simple questions can often be found on www.irs.gov, and H&R Block offers a discount to ASCP members. $ Annualizing Income accounting based on when the bills go out or supplies are ordered, rather than when payment actually happens. This is called the accrual method. Since virtually all estheticians are paid by the client at the time a service is performed, using the accrual method of accounting is not common for skin care businesses, but if it applies to you, there are some new guidelines this year. These guidelines prevent an accrual-method business from taking any tax deduction into account for a payment period unless the deduction was incurred during that period. This is one more reason to carefully track both your income and expenses. Changing in Mid-Guess What if you need to change your estimate partway through the year? This can happen if you find your business is making less or (hopefully!) more money than you anticipated. If you realize that your tax bill for the year will be different from what you originally estimated, you can adjust your remaining installment payments. Failure to do so can result in an underpayment penalty, called an "addition to tax," at the end of the tax year. The amount of this penalty is based on the underpayment interest rate, which is determined quarterly by the IRS. You can avoid the "addition to tax" penalty by making an extra catch-up payment if you find you have been underpaying your previous installments. Use IRS Form 2220, "Underpayment of Estimated Tax by Corporations," to make a catch-up payment. New Year, New Rules As of January 1 this year, two new taxes came into effect for high-income individuals—defined as those who earn more than $200,000 in modified adjusted gross income, or $250,000 for married couples. The new taxes consist of a 3.8 percent investment income tax on capital gains and dividends, and a 0.9 percent health-care tax on wages. Both of these must be taken into consideration when a taxpayer in this category figures out his or her estimated tax bill for 2013. There have also been a few recent changes in tax rules that may apply to certain businesses. For example, if you have any recaptured tax credits, these are no longer treated in the same way when estimating taxes. Ask your accountant for the most current information that applies to your specific situation. Answers to simple questions can often be found on www.irs.gov, and H&R Block offers a discount to ASCP members. No matter what your income will be in 2013, estimating it ahead of time poses a unique set of challenges. Nonetheless, the IRS wants what it is due, and making an accurate estimate and paying the correct installments throughout the year remains an obligation for all skin care businesses. The continued uncertain economy and current Congressional battles over tax reform make seeking professional assistance even more important than ever. Mark E. Battersby is a freelance writer who has specialized in taxes and finance for 25 years. Based in Ardmore, Pennsylvania, he writes for publications in a variety of fields, syndicates two weekly columns that appear in more than 65 publications, and has written four books. Contact him at mebatt12@earthlink.net. Get connected to your peers @ www.skincareprofessionals.com 33