What is the difference between gross pay and net pay?
When it comes to paychecks and paystubs, two of the most important terms to know are gross pay and net pay. Someone may make $60,000 a year, but this doesn’t mean that they will take home all of that money. This is where the difference between gross pay vs net pay begins.
Gross Pay: Gross pay is the total amount someone makes before deductions and taxes are taken out of the paycheck.
Net Pay: Net Pay is the amount of money that remains after taxes and deductions are taken. This is the amount of money that employees take home.
The most noticeable difference between gross and net pay is that gross pay will always be a larger number than net pay. When looking at a pay stub, most of the time, the net pay will be listed in a larger font compared to the gross pay making it easier for employees to easily understand what their take-home pay for that pay period will be. When adding the gross pay for all of the pay periods within a fiscal year is what is used to calculate gross income. Net income is calculated the same way by summing the total net pay for each pay period within a fiscal year, totaling the amount of take-home income an employee will make.
Common Gross Pay Deductions
Gross pay vs net pay can be easily shown by the number before deductions, and the number that is left after these deductions have been taken out. The most common deduction any working individual will find coming from their gross pay is federal income tax deductions. The federal government will always take a portion of every paycheck you earn as long as you are working. The amount of money deducted from your paycheck will always fluctuate depending on the total amount of gross pay employees make, the more you make, the larger the deduction will be. The way that this deduction is derived is dependent upon which federal tax bracket you fall into. The federal tax brackets for 2020 are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Within each bracket is a range of gross income that fluctuates each year, it is important to always know which tax bracket you fall into to know how much federal income tax you can expect to be deducted from each paycheck.
The next most common deduction is state income tax. That being said, only 41 states have a state income tax. If you are a resident of Alaska, Florida, Nevada, South Dakota, Texas, New Hampshire, Washington, Wyoming, and Tennessee, you are one of the lucky ones who will not have state income tax deducted from your gross pay.
Social Security, like federal income tax, is one of the deductions that every working individual in the United States contributes to from each paycheck. In 2020 the social security wage limit is $137,700, and with the social security percentage being 6.2%, you will never contribute more than $8,537.40 in social security deduction this year.
Medicare is the third required deduction that is paid by everyone. The percentage taken from each paycheck is 1.45%, this is the standard percentage that is deducted from each paycheck and this percentage doesn’t change if someone was to make more or less money.
Calculating Gross Pay
Calculating the gross pay for hourly employees is as simple as taking the number of hours the employee worked in one week and multiplying it by their hourly rate.
For example, if Karen works 40 hours per week and her hourly rate is $20, a simple calculation is done by taking (40 hours X $20) results in $800 gross pay for Karen that week
Depending on how many pay periods exist within your workplace, the next step is to calculate the gross pay for each week in one pay period, then sum them to get the total gross pay for the employee in that current pay period. Calculating the gross pay for an hourly employee is as simple as that.
Salaried employees are a little more complicated to calculate gross pay for but it is doable. The first thing to know when calculating the gross pay of a salaried employee is to know what the pay period is for that specific employee. The most common pay periods being weekly, bi-weekly, semi-monthly, and monthly.
For example, if Jill makes $100,000 per year and is paid semi-monthly, Jill’s gross pay for each paycheck would be calculated by ($100,000/24) resulting in $4167 gross pay for each pay period.
Where there is not a difference between gross pay and net pay when it comes to calculating net pay by applying deductions to both salaried and hourly employees paychecks. Regardless of if an employee is paid hourly or by salary, there will always be some kind of deductions.
Calculating Net Pay
Deductions are the biggest way to differentiate between gross pay vs net pay. The easiest way to calculate net pay is by doing it in two steps, the first being calculating all the voluntary pre-tax deductions an employee has elected to have. Two of the most common voluntary deductions to see on an employee’s paycheck are for retirement and healthcare benefits. The first thing that needs to be done is to calculate taxable gross pay.
Using Jill’s gross pay of $4167 we calculated before, the next step is to take the voluntary deduction out of it. If Jill’s retirement and healthcare deductions are $300 and $200 respectively, Jill’s net pay after voluntary deductions is $3667. The exact same process is used to calculate the taxable gross pay after voluntary deductions for hourly employees as well.
The second step to calculating net pay is calculating the mandatory deductions that every working person in the United States pays out of each paycheck and taking them from the taxable gross pay we just calculated. As we discussed previously, two of the deductions every working American pays are Social Security and Medicare.
Knowing that the percentage taken from each paycheck for Social Security and Medicare are 6.2% and 1.45% we know that the amount we will be taking out of Jill’s taxable income is $227.35 for Social Security and $48.8 for Medicare. This brings Jill’s net income to $3090.85 for the pay period, this is the money Jill pockets and can use how she wants.
Gross pay vs net pay seems like a complicated topic, but in reality, it is quite simple. The difference between gross pay and net pay is simply that gross pay is what an employee earns before taxes and deductions, and net pay is what the employee takes home after taxes and deductions have been taken out of their gross pay.
Calculating paychecks for all employees can take time, using our services can make this a painless process for you. While we are confident you can do this easy math yourself, using our simple paystub generator will do the math for you in a matter of minutes.
If your LLC is looking to change your default tax classification, then the IRS requires you to fill out a Form 8832. Here’s everything you need to know about Form 8832 instructions and where to file a Form 8832.
What is Form 8832?
Businesses use Form 8832, also called the Entity Classification Election, to change their tax classification. These classifications include C-corporation, partnership, or sole proprietor. The most common use of a Form 8832 is to have your LLC be taxed as a C-corporation. Changing your tax status could potentially save you tax money every year.
Single-member LLCs are automatically taxed as a sole proprietor, while multiple-member LLCs are automatically taxed as a partnership. Different entity types are classified in different ways, so changing your tax classification could lower your taxes.
A similar form is the Form 2553. This form is used for LLCs or corporations that want to be classified as S-corps. Stick to using a Form 8832 if you want your LLC to be taxed as a C-corp, partnership, or sole proprietor.
Who is Eligible to Make an 8832 Election?
U.S.-based LLCs and partnerships are eligible to file for an 8832 election, along with certain foreign entities. Make sure you are making a decision that will last since businesses can only change their tax classification every five years.
Sole proprietors aren’t able to file a Form 8832, and corporations aren’t eligible unless they are an LLC that previously changed to a corporation status and wishes to change their classification again.
What is the Deadline to File Form 8832?
Although there is no deadline for filing Form 8832, it’s important to be strategic about when you want your new tax classification to take place. Your new
classification cannot take effect more than 75 days before or 12 months after filing the election.
How do I File Form 8832?
Completing Form 8832 takes only 17 minutes according to an IRS estimation. Follow along with these Form 8832 instructions.
Before getting started, make sure that you’ve filed articles of incorporation with your Secretary of State if you want to be taxed as a corporation.
You’ll also need to have the following information handy:
Business name
Business address
Business phone number
Employer identification number (EIN)
Owner name and Employer Identification Number (EIN) or Social Security number
The first section will include your basic business information, such as the name, Employer Identification Number (EIN), and address. Check the boxes if:
Address change: You’ve changed your address since applying for an EIN or since filing your most recent tax return
Late classification relief sought under Revenue Procedure 2009-41: You’ve researched late classification relief and know that you need to file your classification late.
Relief for a late change of entity classification election sought under Revenue Procedure 2010-32: You’ve researched late election relief and know that you need to check this box.
Step 2: Choose Your Type of Election
Part I, election information, will ask questions about your tax status election. Line 1 determines if you are filing to change your classification for the first time or if you’ve changed your status before. If you check box a, then go straight to line 3. If you check box b, then answer lines 2a and 2b about your previous elections.
Line 3 asks if your business has more than one owner. If so, go to line 5 and provide the name of the parent corporation and the EIN. If you answer line 3 saying that you have only one owner, go to line 4 and provide the name and identifying number of the owner.
Line 6 is where you will declare the type of entity you wish to become. Check the box that applies to your business and the classification you wish to obtain. If your business is a foreign entity, list your country on line 7. On line 8, enter the date that you want your new tax classification to become effective. Remember that you can’t enter a date more than 75 days before or 12 months after the filing date. If you don’t fill out this line, the classification will become effective on the day you file the form.
On lines 9 and 10, provide the name, title, and phone number of a person in your business that the IRS can contact for more information.
In the signatures section, make sure to have authorized signatures from a business owner, manager, or officer of the business. If the election is going to go into effect before the date you file the form, then it also needs to be signed by anyone who was an owner during the effective period.
Step 3: Complete Late Election Relief if Needed
Part II, late election relief, only needs to be completed if you’re applying for your tax election more than 75 days after you want your election to begin. To be eligible for late election relief, four requirements must apply:
Your previous Form 8832 was denied because it was filed late
The federal tax deadline has not passed for the current year, or you are currently up to date on all federal tax filings
You have reasonable cause for not filing Form 8832 on time
Your requested effective date is less than three years and 75 days from the filing date
If all these requirements are met, then explain the delay on line 11. This section also needs to be signed by an authorized representative of your business and each affected person. Anyone who signs must have personal knowledge of the information described on line 11.
Step 4: Where to File Form 8832
Once you’ve completed the form, mail it to the appropriate address. Your Form 8832 mailing address will depend on where your business is located.
Businesses located in:
Will mail their form to the following Internal Revenue Service Center address:
Connecticut, Delaware, District of Columbia, Florida, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, West Virginia, Wisconsin
Note. Also attach a copy to the entity’s federal income tax return for the tax year of the election.
Conclusion
By filing Form 8832, you’re helping your business find the tax classification that will be most beneficial for your bottom line. Once the election is submitted, the IRS will notify you of acceptance within 60 days.
IRS Forms W4 and W2 both have to do with employers paying their employees, but they’re very different in function.
Tax form W2 is used to record all the wages earned by an employee, as well as any taxes withheld from their paychecks throughout the year. This is completed by the employer and gives the employee (and the IRS) the information they need to file and process tax returns at the end of the year.
Form W4 is completed by the employee, and it tells the employer how much money they should withhold from each paycheck. This amount is determined by your total income, number of dependents, custom adjustments, and a variety of other factors. If you have too much tax withheld, you’ll get a larger tax return at the end of the year. This comes at the expense of smaller take-home paychecks each pay period throughout the year. Don’t have enough taxes withheld, however, and you may find yourself owing the IRS come tax season.Let’s dive into both forms to get a better understanding of the difference between a W2 and a W4.
Form W2:
To quickly list what we know so far about the W2:
Record of wages earned and taxes withheld
Filled out by the employer
Used by the employee/IRS when filing/processing tax returns
Essentially the W2 is just the record of an employee’s income. Common questions about the W2 include:
Who sends out W2 forms?
Your employer, not the IRS, is responsible for sending out copies of a W2. They send one copy to the employee, one copy to the IRS, and should keep a copy on hand in case an employee misplaces theirs or delivery fails.
When can I get my W2?
The IRS requires employers to send out employee W2s by January 31st of each year. If an employer misses this deadline they can face steep fines. If it’s well past this deadline and you still haven’t received yours, here’s what to do about a missing W2.
Will my W2 be forwarded to my new address?
Remember that your employer(s), not the IRS, sends your W2 to you. Even if your address is updated in the IRS system, your employer may have an old address on file. Double check your address with your employer before tax season rolls around. This problem is especially common when a person switched jobs partway through the year — it’s vital to get your W2s from all employers that you worked for in a given year. To this end, set up address forwarding with the postal service to keep important letters heading your way — it won’t automatically find you otherwise.
Does an independent contractor need a W2?
Independent contractors get their income reported through 1099 forms instead of W2s. For this reason, an independent contractor or other 1099 worker will never use a W2 when filing taxes.
Form W4:
The form W4 is filled out so infrequently for some, that it becomes its own sort of confusing. It has also changed recently (as of the 2020 tax year) and lost some of its signature features of years past.
As a brief review, IRS form W4:
Tells the employer how much tax to withhold from each paycheck
Is filled out by the employee
Amounts withheld are determined by factors such as dependents and family income according to a table defined by the IRS
Affects the size of an end-of-year tax return
The difference between a W4 vs W2 is this: if the form W2 is the scoreboard of a year’s income, the W4 is the game plan. A W4 determines in advance how much of each paycheck will be withheld. The W2 then records actual amounts as they are earned and withheld throughout the year.
Saying the W4 is “filled out by the employee” does not mean the employee can choose indiscriminately how much they want removed from each paycheck, though it does give them some control.
If an employee meets certain requirements that make it likely they will owe no taxes that year, they can apply for exemption from withholding. If they meet the requirements, the employer will take no taxes out of their paychecks, resulting in more take-home pay, but also the possibility of owing taxes. Withholding exemption requires a check and the employee to fill out a new W4 each year to maintain their exemption status.
Conversely, if an individual would rather play it safe and pay more taxes from each paycheck, they can request that more be withheld. This can be done as a custom amount, or by claiming fewer dependents. If the employee knows their spouse’s income will raise their tax liability bracket, they can indicate such and file for the higher rate. This is why it’s important to fill out a W4 properly — each dependent or dollar of expected income can directly affect the size of your take-home-checks every two weeks.
Here are some specific answers to frequently asked questions about the W4 form:
Do I claim 0 or 1 withholding allowances on my W4?
This is possibly the most common question about W4s. It’s also obsolete! In years past, there was a box for “withholding allowances”. 0 withholding allowances meant that the highest amount of taxes was paid, and a 1 was used to indicate a typical single filers tax liability. More allowances could be used for numbers of dependents or other factors that decreased liability, with 5 being the highest (nearly equivalent to a tax withholding exemption.)
As of the 2020 tax year, withholding allowances are no longer on the W4. Instead, withholding is determined by dependents, income, and other factors as they correspond to the IRS table. Manipulating one’s tax withholding is now done by manipulating these other factors.
Who counts as a dependent on a W4?
Dependents are children under 19 (unless students) for whom you provide support, or other qualifying family members who receive more than 50% of their support from you. These individuals must have limited income and cannot be able to be claimed as dependents on someone else’s tax return.
Can I change my W4 at any time?
You can adjust your W4 whenever and as often as you want! You simply fill out a new form and get it on file with your employer. Keep in mind, making changes late in the year won’t have as large an effect on your taxes, as there will be less time for earnings and withholdings to accrue.
Can I use a PO box as my address on my W4?
The IRS discourages using PO boxes for W4s, W2s, and other tax forms, except in cases where the post office does not deliver mail to your home. Not that there would be adverse consequences if this was the only problem with your tax return, but it’s a good idea to use your home address in case things get inspected a little more closely.
Who can claim as exempt from withholding?
The IRS puts down two rules for claiming exempt on a W4.
You had no tax liability the previous year, and
You expect no tax liability this year.
That said, there are a few further exceptions.
If you made or make more than a thousand dollars, and $300 dollars of that is from un-work-related income, you cannot claim exemption.
If you are going to claim dependents on your tax return, you cannot claim exemption. (this gets a lot of people, as their tax liability is reduced by their dependents)
If you plan on itemizing your deductions, you’re disqualified.
W4 vs W2: Wrapping up
At this point, the difference between the W2 and the W4 should be completely apparent. Keep in mind, the W4 is the game plan for how points (income and withheld taxes) will be scored, and the W2 is the scoreboard as points (earnings and actual withholdings) are scored. One is the plan, the other is the record. Happy filing!
If you don’t work a typical nine to five, tax season can get complicated. Whether your self employed or just running an Etsy shop on the side, it’s difficult to know what needs to be reported on your taxes and what you can safely omit without fear of being dishonest. In this article, we’ll go over the finer definitions of one of these unclear tax terms: miscellaneous income.
Miscellaneous Income Definition:
Miscellaneous income is any income besides regular employee wages, as reported on the IRS tax form 1099-MISC.
Most people think of non-employee compensation when they hear miscellaneous income, but as of 2020, the IRS moved it to its own dedicated form, the 1099-NEC. The 1099-MISC is the form for miscellaneous income, and it includes specific categorizations as to what is miscellaneous income and what is not.
How Do You Calculate Miscellaneous Income?
Calculating miscellaneous income is more simple than you might think. The definition of miscellaneous income is given in clear terms by the boxes on the tax form 1099-MISC. Simply total the boxes that apply to you and you have your total miscellaneous income for the year.
One key thing to remember when calculating miscellaneous income: You only need to report it if the yearly total is above $600. If your total yearly income for any category was less $600, you can leave the box blank and the income unreported.
Types of Miscellaneous Income
BOX 1: RENTS
“Rents” refers to real estate rental income, machine rental (like bulldozers) income, and pasture rentals (when a farmer rents out his land for grazing.)
Real estate rents are specifically rents paid for office space. Additionally, if you paid them to a real estate agent or property manager, it’s not your responsibility to report them.
Rents can also refer to coin-operated amusements (think pinball machines and gumball vendors), but it depends if the machine is used on rented space. If you make or pay more than $600/year in running one of these machines, it may need to be reported in box 1 of the 1099-MISC.
BOX 2: ROYALTIES
Royalties are an exception to the $600/year rule- you must report royalties of $10 or more. These royalties can come from oil, gas, mineral properties, patents, copyrights, trade names, and trademarks. A few types of royalties (surface royalties, timber royalties under a pay-as-cut contract, or oil and gas payments for a working interest) are reported elsewhere.
One quick note: If you don’t understand the terms of any of these categories, they probably don’t apply to you. If it sounds like something that’s related to your industry, you may want to research further.
BOX 3: OTHER INCOME
This is the “catch-all” box. If you made more than $600 of miscellaneous income that isn’t reported on another box, record it here. These are things like payments or compensation from medical research studies, punitive damages, Don’t report anything that should be reported on another form, like non-employee compensation (independent contractor wages) as of 2020.
This box also includes prizes and awards, like merchandise or cash won on game shows or sweepstakes. It doesn’t include gambling winnings— that’s reported on Form W-2G
BOX 5: FISHING BOAT PROCEEDS
If you had a share from the sale of a fishing catch, it counts towards miscellaneous income. There are a couple more specifications, but if you’re a commercial fisher you should be able to find the details easily.
BOX 6: MEDICAL AND HEALTH CARE PAYMENTS
This box is for payments made in business to providers of health care services. Common services include “injections, drugs, dentures, and similar items”.
You do not need to report payments to pharmacies for prescription drugs.
BOX 7: PAYER MADE DIRECT SALES OF $5000 OR MORE OF BOX CONSUMER PRODUCTS TO A BUYER (RECIPIENT) FOR RESALE
This box is a yes or no, not a dollar amount! If you made more than $5000 of sales, put an x in this box. If not, leave it blank. This is for tax purposes besides adding taxable income amounts and is typically accompanied by a report of the commissions, prizes, or awards.
BOX 9: CROP INSURANCE PROCEEDS
If you’re a farmer, and your insurance company pays you crop insurance in excess of $600, report it here.
BOX 10: GROSS PROCEEDS PAID TO AN ATTORNEY
Gross proceeds are amounts paid in a settlement, but not all of it is taxable income. The specific tax on this miscellaneous income is decided elsewhere – this box is simply for the gross amount.
BOX 13: EXCESS GOLDEN PARACHUTE PAYMENTS
If you had an excess golden parachute payment, you probably have a personal accountant filing your taxes. Golden parachutes are payments made to highly compensated officers or owners of companies (think CEO or board members) when they are removed from their office because the company has changed ownership. It needs to be three times as much as the base yearly pay to count as an excess payment.
There are a few other boxes not included in this list, but the ones we omitted don’t directly add to your year’s miscellaneous income. If you have questions about these boxes you should probably contact a tax professional.
Do I Have to Report Miscellaneous Income?
If you made more than $10 in royalties, or more than $600 in any other category, you’ll need to report it as miscellaneous income. As a business owner making payments to contractors or other individuals, you’ll need to report the payments you make in the payment categories to the IRS each time you make a payment. This is so the IRS can have a record of what that individual should be reporting at the end of the year. (Its also why as a recipient of payments you should be honest in your end of year reporting)
What Is the Tax Rate on Miscellaneous Income?
If your miscellaneous income is from self-employment (ie you do something consistently as a form of income, like running a business or even consistent side gigs), it will have an additional 15% self-employment tax exacted. This is a federal tax that goes towards medicare and social security. If the income came from one job you happened to do for a friend or a one-off windfall, you won’t pay the self-employment tax. Your normal tax rate will apply, and there will be extra taxes for things like prize winnings.
Miscellaneous income is a bit of a catch-all phrase, ranging from fishing proceeds to office space rental income. But by following the form and knowing your niche, it doesn’t have to be so complicated that you can’t do your taxes yourself. Happy filing!
Gross income is a fundamental concept in the US tax system. It’s simple to understand at a high level, but has some finer points that can confuse the unwary tax filer. Read on to learn what gross income means, how to calculate gross income, and a few ways to reduce your tax liability.
What does gross “income” mean?
Gross income, simply put, is all the money you make in a year before taxes and deductions. It’s contrasted with net income, which is your “take-home pay”, the money you keep after taxes (and other deductions, like an HSA or a 401k).
Your gross income is an important number because it is the starting point for your taxes— you are taxed on your gross income minus any deductions you qualify for.
For most employees, their employer deducts their estimated taxes from each paycheck. These employees’ gross income never even hits their bank account, because their employer is withholding their taxes and sending it to the IRS throughout the year. This is different for the self-employed, or 1099 contractors. These people are simply paid what they are paid (their gross income) and should be setting aside their taxes so they aren’t hit with a massive bill during filing season.
There are some finer points on calculating gross income when it comes to tax filing individuals versus businesses with their corporate applications. We’ll discuss that next, but here’s a summary so far.
Gross income vs net income
Gross income is (pretty much) all the money you make in a year
Net income is your “take-home pay”
You are taxed on your gross income minus any deductions you qualify for
Most employees already have taxes removed from their paychecks
Self-employed individuals should set aside their estimated taxes from their gross income
Gross Income for Individuals: What is my gross income?
Finding your personal gross salary is easy. For most individuals, you can simply take your W2 form at the end of the year (or any salary paystub throughout the year) and the amount will be listed on the form. The W2 will list it as “wages, tips, and compensation”. Most company pay stubs will call it “YTD Gross Income”, as pay stubs only list your gross income “year-to-date”, or up to that pay stub. It’s that simple!
What does gross income mean for my taxes?
Generally speaking as individuals, your gross income is the starting point for your taxes. Typically, if you have a higher gross annual income, you will need to pay more in taxes. However, (And this is where it gets tricky) there are certain deductions you can use to reduce your taxable income to maximize the money you get to keep. While there are others, 401ks and HSAs are the two most common deductions you can use to reduce your tax liability.
A traditional 401(k) is an individual retirement savings account that has untaxed contributions. This means that if you contribute to a traditional 401(k), your taxable gross salary is considered “less” by the government. You contribute, taco-free, to the 401(k), which can then accrue interest with your untaxed money until retirement. You should note that while this tax deduction only applies while contributing to it, not when withdrawing. Withdrawals from a 401(k) in retirement are taxed as income. The benefit is that your account was able to grow interest on untaxed dollars.
Important note on 401(k)s: unlike a traditional 401(k), a Roth 401(k) is still taxed in the year you contribute to the account. This type of account will not reduce your taxable income regardless of your gross salary. The advantage of a Roth is that withdrawals in retirement are tax free. You should do your research and consult with an advisor before deciding which retirement account is best.
HSAs (Health Savings Accounts) can also reduce your taxable gross salary. Depending on your plan, your HSA contributions may count as deductions against your gross annual income, allowing your to reduce your liability when doing taxes.
Gross Income For Businesses: What’s different?
Asking “what does gross income mean” gets an entirely different answer when you’re asking as a business owner. This is essentially because of two reasons: It is calculated differently, and it is taxed differently.
Business gross income is defined as their annual revenue minus the cost of goods they sold. It’s not a very frequently used term, because it essentially equates to net profit (total revenue minus expenses). In a business financial statement, gross income is typically only used if there is something further that will be done with the income, extraneous to the business goods and services. This is why it isn’t the same as an individual’s gross annual income. Other terms, like net profit or other financial terms are better used by businesses to describe company costs and revenue. These other metrics, like net profit margins, are more specific at telling the business whether their total costs and expenses are exceeding their sources of revenue, allowing them to account more specifically for where they need to alter amounts of money, expenses, or goods and services provided.
Conclusion
Understanding what gross income means is simple enough, with just a few snags that you should be aware of. Find it on your W2 or your paystub (if your company doesn’t provide paystubs you can generate one here), and decide how you should use credits and deductions to minimize your tax liability and leave this tax season smiling.
Figuring out your adjusted gross income (AGI) is a key step in calculating your tax liability for a given tax year. There are several common misconceptions when a non-tax-professional is learning how to calculate AGI – we’ll go into detail and soon have you calculating your AGI number like a pro.
Deductions
The IRS rarely taxes every dollar of income a person makes in a year. They reduce the amount of income taxed based on certain activities. These reductions in taxable income are called “deductions”. The ability to give deductions lets the IRS extend tax advantages to those in poverty, incentivize charitable donations, and empower students and educators financially, among other things. For example, if I make a total of $45,000 per year (my gross income), and I donate $5,000 dollars to charity, the IRS will only tax $40,000. I can take a $5,000 deduction for charitable contributions.
To show this in action, let’s assume the IRS taxes us at 20% (An oversimplification). If we don’t deduct our charitable contribution, they take 20% of 45,000, meaning we owe $9,000 in taxes that year. With the $5,000 deduction, we only owe $8,000, because they would take 20% only from our $40,000 taxable income.
Claiming deductions is an important way to save — sometimes thousands — on your tax bill. This is especially true if you are a business owner, have close ties with charity or education, or pay a lot of interest in a given year.
But what does this have to do with my AGI Number?
Glad you asked! If you’re inferring that deductions are “adjustments” to your gross income, you’re technically right. But only a certain type of deduction factors as you learn how to calculate AGI: above the line deductions. (Above the line deductions are also referred to simply as “adjustments”, but for this article, we’ll compare them and classify them with other deductions.)
There are three general classes of deductions — above the line deductions, itemized deductions, and the standard deduction (the latter two are considered “below the line” deductions). Only above the line deductions matter when calculating your AGI number. You can choose to take itemized deductions or the standard deduction after your adjusted gross income has been calculated. They reduce your taxable income even further, adding to the above the line deductions used to calculate your AGI number.
Above The Line Deductions (Found on the 2019 IRS Schedule 1):
Educator expenses
Certain business expenses of reservists, performing artists, and fee-based government officials.
Health savings account contributions
Moving expenses for members of the Armed Forces
A portion of self-employment tax
Self-Employed SEP, SIMPLE, and qualified plans
Self-employed health insurance deduction
Penalty on early withdrawal of savings
Alimony paid
IRA contributions
Interest paid on student loans
Educational tuition and fees
How to Calculate AGI
Calculating your adjusted gross income is simply taking your gross income, and subtracting your above the line deductions. With a few definitions, it’s not that difficult to understand! Gross Income – Above the Line Deductions = Adjusted Gross Income. Now you know how to calculate AGI from your W2 (The form you’ll find your gross income on) and get ready to claim your below-the-line deductions.
In case you haven’t noticed, AGI is the “line” in “above-the-line” or “below-the-line”. This is where many get confused. They think your adjusted gross income is your taxable income — the number after all deductions have been taken. Adjusted gross income is just an intermediary step!
Why is Adjusted Gross Income Important?
When taking your below-the-line deductions, you can choose to either itemize or take the standard deduction. If you itemize, you have to go through the IRS schedule and total the dollar amount you spent on every area that qualifies as deductible. It can be a time-consuming hassle, and for many people doesn’t amount to much. The standard deduction is a baseline, no-questions-asked dollar amount you can deduct from your adjusted gross income. In 2018 it was increased to $12,200 for individuals, and $24,400 for married filers filing jointly. For many tax filers, this is a great option because it lets them take the $12,000 even if they didn’t donate to charity or participate in education.
The beauty of calculating adjusted gross income before deciding between itemizing or standard deductions is that even if you choose the standard deduction you can still get benefits for participating in education, self-employment, or health savings account contributions. This still incentivizes certain activities, even if the filers are choosing the standard deduction over itemizing.
Beyond tax benefits, your AGI number is used in calculations all throughout tax code and IRS forms. It’s an important figure that speaks quickly about somebody’s tax liability without getting too specific.
Learning how to calculate AGI is an important part of becoming tax-savvy. As with most of the tax code, ensuring you have a good grasp on a few basic definitions goes a long way towards comprehending bigger concepts. Happy filing!
Saving money in a business is often a chief concern of small business owners. Maybe cash is tight and you’re looking to extend your runway. Maybe things are fine and you’re just looking for creative ways to tighten up your operation. In any case, here is our fantastic list of ways to save money in business.
General Advice
Negotiate With Everyone
When it comes to business transactions, no price is set in stone. You should always be keeping track of various prices for the supplies and services your business pays for. Know what your neighbors are paying. You can use this knowledge to negotiate prices on everything from insurance to property tax. Always shop around for suppliers and contractors, and always negotiate on the goods and services you receive.
Grow your business incrementally
If you’re low on cash, it’s okay to scale back a little and recharge in a place of safety before making aggressive investments. Grow when you can, and don’t overextend your business when you don’t have the capital.
DIY When You Can . . . And Don’t When You Can’t
Know when you should and shouldn’t “do it yourself”. You can learn just about anything from the internet— everything from online advertising to HR management. Doing it yourself can be a valuable way to save company money during one-off projects. However, if there’s going to be something recurring, or very complex, consider hiring a contractor or freelancer. It frees up your more valuable time for other cost-saving activities and gives the project the individual attention it deserves.
Payroll and HR Savings
Go Virtual
Allowing your employees to work remotely can boost morale and translate to office savings for your small business. At the very least it’s helpful to allow people to skype into meetings when they wouldn’t have needed to come in otherwise.
Remember – Experience Is as Good as a Paycheck
Rather than looking for new hires who are experienced and set in their ways by other companies, look for inexperienced recruits who are hungry to learn. New college grads will often trade a high pay offer for a job that gives them the experience they’re looking for. Training them yourself will result in a higher-performing worker who is better suited to your workplace culture, all without paying a higher salary premium for experience.
Perks > Benefits
Studies show that great workplace perks can be as valuable to employees as more expensive benefits. This doesn’t mean you can just buy a ping pong table and call it good— make them personal. What do your employees value? What do they do in their free time? Cater to that and make them feel loved.
Review Your Healthcare Plan and Consider Reasonable Changes
Reviewing your healthcare plans can often reveal ways to reduce expenses. Just be sure you aren’t ripping your employees off or you’ll have an entirely different set of problems.
Use Social Media as a Hiring Tool
Posting job offers to social media can be incredibly effective— among your followers are people who love your product. Who makes a better employee than someone who is converted to the brand? Beyond this, social media is free. You can’t beat free.
Don’t Overstaff
Is your business seasonally busy? Do you have hours of the day when 5-10 of your employees are idle? For busy seasons, find temps who can take part of the load but won’t become a burden in the off-season. If you have slow hours, consider structuring shift times so you aren’t paying for employees who aren’t being used.
Examine Salesforce Commissions
If you have a sales force but are in hard times, take a good look at their pay structure. By shifting to a lower base wage, (but offering higher commissions) you can both make your best workers happy and save your business money from inefficient wages.
Employee Productivity and Morale
Lean up your meetings
We’ve all been there— in a company meeting, listening to four other people work on something completely unrelated to us. It’s frankly a waste of time. Elon Musk encourages his employees to get up and leave if a meeting is not serving them. Make sure your meetings are valuable— or simply cut them to save time and money.
Consider Going ROWE
A Results Only Work Environment is a pretty extreme, but very effective, way to structure a small business. The concept is to stop evaluating employees on how much time they put in, or even how hard they work, in favor of evaluating purely based on results. Did one employee bring complete her work in 20 hours while another took 40? Compensate them the same. It typically only works in businesses where results can be clearly measured, but it certainly promotes efficiency, time management, and employee morale.
Reward Profit Drivers, Let Go of Dead Weight
You know who your best employees are. Incentivize them to stay, as this investment will pay off in the future. The same goes for your favorite contractors and freelancers. The employees who are simply there sucking money out of payroll? Work with them and train them, but in the end, if they are going to remain parasitic you need to be okay firing them. Just be careful to not create an environment of fear among your better employees.
Simple Ways to Make Culture Great
Company culture is not an air-hockey table. Company culture is about people making connections and feeling safe to “have fun” at work. Do this cost-effectively by instituting little traditions, like anonymous hand-written compliments on post-it notes that float around the office. Making it fun doesn’t require shelling out cash.
Budget, Accounting, and Finance
Leverage Tax Deductions
This one comes back to being positive even your smallest expenses are tracked. Knowing how much you spend where not only allows you to make savvy decisions on what to cut and what to keep, it helps when the taxman comes around. This is especially important for at-home businesses. Have you considered that your lawn care might be a business expense?
Make Your Paystubs Top-Notch
Many small business owners don’t even give official pay-stubs to their employees. It’s technically not required by law, so it’s an easy oversight for small and medium businesses. When your employees apply for an apartment and ask you for a paystub, it’s easy to make a few with our fantastic pay stub builder. Simple, easy to use, and compliant with tax laws. Not to mention immediate delivery.
Take Off the Blindfold— Budget, Track, Review
Many small business owners are lax in what expenses they track, simply because it seems like a lot of work. This is a terrible idea. Making money decisions in business without financial awareness is like navigating a minefield with a blindfold on.
Take off the blindfold by:
Establishing a realistic budget
Tracking your expenses (all of them)
Reviewing periodically and adjusting as needed.
Even the smallest petty cash expenses can make an ENORMOUS difference over time. You may think that getting lunch on company dime isn’t an expense worth tracking, but a $15 meal 3 times a week is well over $2000 by the end of the year. Combine this and all your other “small” expenses, and you won’t only hurt when tax season comes around, you won’t be able to diagnose problems with your business.
Some small business owners become confused as to what metrics to track— there are so many different ways to slice and dice your company’s financial health. Make sure that you are at least tracking the items necessary to determine your net profit margin. That’s the key to knowing when your expenses are outweighing your revenue. Taking the extra time to track all expenses will save money for your business in the long run.
Say Goodbye to Bad Customers
Literally, say goodbye to them. Too many small business owners cling to each and every client, not realizing that there is value being lost to their cheapest, most abusive and hard-to-work-with clients. These contracts need to be renegotiated for more pay or more reasonable work. Client won’t have it? Let them go entirely, and use your newfound time to get a better contract.
REALLY Shop Around for Your Bank
Your bank is one of the most valuable— and long term— partners you have. It’s worth taking the time to investigate different ones. Compare interest rates on savings, fees on accounts, and international accessibility if you need it. For most small businesses that are working in one area, credit unions offer the best interest rates and lowest fees. However, if you plan on scaling to many different areas it may not be the best option.
Best Friend, Worst Enemy— Credit Cards
Like banks, credit cards can be your longest-term partners. They can consistently reward you— or consistently hurt you. Take the time to find the best card for your business.
Location, Location, Location
Do you know what your neighboring state’s property taxes are like? What about typical commercial rent rates in the city over? What if by moving to a state with a lower minimum wage you could save your company 20% of your payroll expense? These questions are important to understand. Don’t be tied down to one area simply because that’s where you already are. If it will save your business significant money in the long run, it may be worth a total relocation.
Lean Marketing
Work to better understand your customer
Many businesses don’t understand the cost of not really knowing who their consumers are. When you know what your target audience’s habits are, where they spend their time, what problems they have, and what they think of you, all of your marketing becomes more effective. Find an online buyer persona tool, and make a quick and dirty buyer persona. You can always refine it as you learn more.
Think Laterally
It’s easy to think of marketing as a set of actions you just dump more or less money into to generate leads. Need more customers? “Buy more [billboards][Facebook ads][mailers]” is not a cost-saving way to think. Instead, check out examples of guerilla marketing. Think about adding a bit of class with handwritten thank you cards. Find ways to connect and impress people without just pumping up the ad spend.
Leverage Social Media
Social media is a wonderful thing. If you really know who your customers are, it will be clear what kind of content they want to see. Even if it’s only tangentially related to what you sell, just delight your followers. Thoughtful quotes, inspirational stories, amazing photos— gain their trust through honest connection and you’ll be amazed at the cost-effective lead generator social media can be.
Your Best Customers are your Best friends
You’ll find that many of your loving customers will also become your best (and lowest paid) salespeople. Find ways to make it easy for customers to evangelize- shareable posts and personal shoutouts on social media will go a long way towards letting customers become evangelists. If you receive a raving five-star review, don’t hesitate to reach out to that person with a perk or a gift- they’ll be telling their friends about it for weeks to come.
Structure a Referral Program
For the rest of your less-vocal customers, a simple referral program can go a long way to incentivizing them to onboard their friends. Something as simple as 15% off for them and a newly invited friend can move the needle in word-of-mouth selling.
Scrub your Physical (and Digital) Mailing Lists
Physical mail can make up a significant portion of some company’s advertising costs. If your list hasn’t been trimmed for a while, go run your addresses through CASS certified software that will verify that addresses and names are up to date. At the very least, you should hop onto the USPS’s free zip code tool. It will both correct mistakes as well as make barcoding (and the associated discounts) available for your bulk mailing.
Digital email lists can become a mess over-time as well. If you are paying a bulk emailing service based on the number of contacts in your database, it can save your business money to be sure your contacts are only people you really want to be talking to. Take the time to cut back archivers-only and wrong addresses, and replace them with digits in your bank account.
Become Your Own Content Marketer (and a Thought Leader Along the Way)
Doing your own content marketing can be a terrifying task, but if you are stretched for cash it is a responsibility that can be effectively done by a small business’s leader. Just make sure to do all the planning in advance and it becomes a much more manageable task. Plan out 6 months’ worth of blog posts/infographics, and then you only have to do a couple of pieces a month.
Seek Speaking Gigs Industry Conferences
Sponsoring events isn’t the only way to get your thought-leadership on stage. Many lower-level industry events are actively looking for speakers and industry professionals to lead breakout sessions of their conference. This is a great (and usually free) way to connect with a lot of people at once in a very personal way.
Create marketing partnerships
You’d be amazed at how many companies you work with feel the same lack in marketing that you do. Network with industry connections, and offer to “scratch their back if they’ll scratch yours”. Really follow up on this and send a couple leads their way, and you’ll quickly see them returning in kind.
Become a passive evangelist
Attach your company information to everything you do. Put it on your email signature line, in your voicemail, and (obviously) on business cards. If you are active in any social media groups, make sure the other members of your group know what you do.
If you want to be a bit more proactive, go on sites like Reddit and Quora and offer your expertise when users have questions. Just make it so other users know what you do while you do it.
Tech Stack
Update your Technology
Still on a landline? Worse yet, do you still have a dedicated fax machine? There are web-based services for both phone calls and faxing that are often cheaper than staying in the old ways.
Find Open Source and Free Software
Between freemium models and open-source software, there are plenty of low-cost or discounted business software options. Doing a quick search for “open source [insert software type here] will yield solid results, especially if you are a small business with needs that are still scaling.
Cloud Server Options
Do you have an on-site server, and accompanying configuration and maintenance expenses? Move your storage to the cloud and you’ll almost definitely see business savings.
Designing Your Own Website Is Easier (And Cheaper) Than You Think
There are many easy to use graphical user interfaces (GUIs) that make web design something you can do in-house without hiring an expensive web development team. Don’t have an eye for design? Contact a nearby university and see if they have a student who would do a good job on a simple website. Hiring them for the one-off job will still be cheaper than using a full-fledged web development team.
Save Green on Overhead—Go Green on the Environment
Make a “Green Game Plan”
You can definitely save your company money while also saving the environment. Just sit down and make a “green game plan”, deciding where you will and won’t invest in long-term energy savings. The following are a few specific ideas you might take for your plan.
Smart Thermostats
Don’t need heat all the time? Don’t pay for it all the time! It’s one of the single largest steps you can make to lowering your utility bill and your carbon footprint. Smart thermostats can seem pricey until you find that residential savings with a smart thermostat can be above $180. Scale that up to an office and you quickly see the value.
Solar May Be a Better Option Than You Thought
Solar systems are definitely an investment, but if your roof has appropriate sun access, your business could save money compared to simply paying the electricity company. Additionally, once your solar system is paid off, all your generated energy is free. Add to that the tax subsidies that are offered by the federal government for solar users, and it becomes an option worth looking into.
It’s 2020. Go Paperless.
Just imagine- clean desks, nearly empty wastebaskets, and fewer filing cabinets. Going paperless is not as difficult as it may seem in this day and age. With the clever implementation of Microsoft Office or Google Drive, it’s easy to get your teams off paper forms and onto the cloud. You can save your business all the money of buying paper and printing out forms, not to mention the time spent looking for that document you “had just one second ago”.
Save Passively.
There are plenty of low-tech ways to improve your office’s imprint on the environment. Think of installing double-paned windows, or drawing blinds that block sunlight entirely in the hot late afternoons. Just by properly sealing your doors you’ll cut down on unnecessary utility expense, saving money in your business.
Garlic Won’t Save You From Vampire Power
Many appliances- computers included- draw power even when “off”. It’s called vampire energy, and it sucks. The best way to avoid it without going around unplugging the whole office each night? Connect your whole office to easily accessible power strips and switch those off at night. You could also connect everything to smart outlets that can be controlled from your smartphone- just be sure not to turn off a computer when someone doesn’t have their work saved!
Use Recycled Printer Cartridges
Many printing companies have special savings to offer businesses willing to use recycled printer cartridges. Contact your provider and ask if they have a recycling program. If they don’t? Use it to leverage them into a discount to keep your business.
Motion Sensor Lights
First, choose LED lights or something similarly energy-efficient. Then, make it even better by connecting them to a motion sensor. Not only will you pay less for energy when the last person out forgets to turn off the light, but your lights will last longer, saving your business money in lighting expenses.
Find Vendors Who Are Similarly Green
By going green, your business saves money that translates down to its bottom line. In the same way that this can pass to your consumers, making sure your suppliers are green can translate into savings on your supplies and services.
More Ways to Save Company Money on Overhead
Find an Electric Plan That Matches Your Usage
Does your business use energy day and night at roughly the same rate? Maybe you start your peak usage in the early morning? Many electricity providers offer rates that vary by overall energy demand— if you use energy during off-peak hours you can save company money and get your energy at a fraction of the typical cost.
Buy used office equipment and furniture.
Furniture is easy. As long as someone has a little taste for decorating, send them to a community buy and sell site, or even to the local Savers to find discounted furnishings. Equipment can get a little trickier depending on what industry you’re in, but asking around will direct you to either hubs or individuals who have what you’re looking for, secondhand. Do a thorough quality inspection on anything bought used— you won’t be saving your business money if you have to repair or buy new in six months.
Find OEM Products
Instead of buying used, you can save money on business equipment by finding original equipment manufacturer (OEM) products. These companies are manufacturers that typically sell to other businesses wholesale, but by hopping on AliExpress or a similar site you can find individual items at hugely discounted prices.
Negotiate With Your Landlord
Landlords don’t want to go to the hassle of finding new tenants and losing money while offices remain empty. You can approach your landlord, especially around renewal periods, and request lower rent rates or even favors on utilities, deposits, or other fees. Always ask to have standard fees waved, especially if you’ve been a great business tenant.
Get More out of Less Office Space
There are plenty of ways to make use of the office space that you have. By going paperless, for example, you can untether your employees from specific desks. When they come into work it can be a “free-floating” atmosphere, without assigned seats. This works great for businesses that rarely have their whole workforce at the office at one time. Why have 70 available desks when you only ever have 30 employees working? Combine ideas like this with other seating arrangement ideas and you can make a little office space worth a lot of business savings.
Coworking Office Options
If push comes to shove and you need to downsize, you can often find a shared office or coworking office. Sharing rent between two small businesses can often translate into powerful savings for both companies. There are also structured coworking office providers who only make you pay for the number of desks you use- leave utilities, maintenance, and property taxes up to them.
Sublet Unused Space
If you have a little too much space in your office or find that by implementing some efficiency tactics you can create enough space to be useful to someone else, don’t hesitate to look for someone to sublet to! It can be a great way to get your rent expense lowered without interrupting your flow deeply. Just be sure that whoever you sublet to is a good fit for an office-roommate.
Turn a VERY Critical Eye to Monthly Subscriptions
There’s been a remarkable surge in subscription-based services lately— while valuable, they often cost more than they’re worth. Find them, and ask “Is this service totally necessary? Is it saving company money somehow? What could I do instead of paying this monthly?” Cut mercilessly on anything unnecessary.
Garage Sale! Clean up and Throw Out
Go through your office, and find unused items. Yes, even that closet where everything accumulates over the years. Especially that closet. Throw out anything useless, and hold a digital garage sale on Craigslist for everything of value.
Playing Well With Others
Barter, Swap, and Haggle
When you’re low on cash, there aren’t many better ways of negotiating contracts with vendors and suppliers than offering an exchange of goods and services. This can keep costs low while also expanding your network and portfolio.
Outsource the Right Kinds of Work
Outsourcing administrative work, customer service, or menial data entry tasks can be a surefire way to save money your business would have had to put into paying an existing employee (also taking away time from their other responsibilities. If you have one-off jobs, freelancers are a fantastic, low-cost option to complete projects. Consider your employee’s pay rates when you assign them tasks. Is it worth 7 hours of your assistant’s $14 per hour time to complete a project? Phrasing it this way helps put the real cost of jobs in perspective.
Band Together! Join a Trade Association
Trade associations can have massive perks to small businesses. Large businesses like Walmart use their bulk needs to get discounts from suppliers and resources at lower costs. Small businesses can get these types of discounts by banding into a trade association, making purchases in greater bulk. Everything from office supplies to insurance can be discounted through a trade association.
Stay Informed to Negotiate Discounts With Suppliers
Keep an eye on what other suppliers are offering for the things you buy. Often you can use this information to negotiate discounts with your current supplier— and if they won’t budge on prices, it frees you to leave and get your supplies from a better vendor.
Don’t Discount Coupon Sites
Coupon sites aren’t only for household items— business suppliers also post their discounts there. It’s worth investigating to see if you can save money in your business by investigating these sites.
Buy in bulk . . . Or Don’t
Buying in bulk is clearly a good idea, except when it’s not. Bulk purchases have obvious advantages in lower prices per unit, but only buy them when it makes sense. If you make a bulk purchase that you don’t use before throwing out the excess, you probably should have just purchased a smaller quantity.
Ship Early in the Day for Free Expedited Shipping
If you can make it to the post office early, you can often get your package in with the first shipment of the day, often getting you 2-day shipping at no extra cost.
Shop around for an overnight courier
In shipping, as with everything else, take the time to compare couriers. The extra time investment will pay off as your business ships it’s cargo over time.
Proof of income is documentation verifying the amount of income you receive regularly or have received recently. It’s used by lenders and landlords to make sure that people entering credit contracts and lending agreements can actually make the payments they are agreeing to.
Being able to provide proof of income is a necessary step for getting personal and auto loans, taxes, renting, or even refinancing your mortgage. Understanding the ins and outs of proving income can make a huge difference to your personal finances!
Is a Payslip Proof of Income?
A payslip is the most common proof of income by far. Typically lenders and landlords require the last two paystubs you’ve received. They then estimate the rest of the year based on that small period.
This little calculation can make a huge difference if you don’t have a completely steady paycheck. Did you work fewer hours over the holidays and as a result had a smaller paycheck? Their calculations will show your income as if your whole year was worked like your holiday season. In this case, you should wait a few pay periods so they see a more normal income amount.
If you don’t have a few pay periods to wait, you can also use other forms of documentation to prove income. Read on to
Proof of Income From the Landlord or Lender’s Perspective
Before moving on, it’s helpful to understand proof of income from your potential landlord’s or lender’s perspective.
If a guy off the street asked you for one hundred dollars and promised he’d pay you back, would you give it to him? What if he promised to pay it back with interest? If you’re an average person, you’d probably say no and walk away quickly. Why? Because you have no reason to believe he would pay even a cent back, not to mention with interest. This is the situation a lending bank is in. Even if they trust your character, they need to make sure you can make the monthly payments.
Landlords:
Landlords have to be selective about tenants. A bad tenant can damage property, adversely affect neighbors, and cost more money than they’re worth. If a tenant decides to stop paying rent, it creates legal fees in evicting the tenant, the cost of months unpaid, and lost revenue for every day it takes to re-fill the residence. This is why renters nearly always request proof of income. They need to know that you can make monthly payments punctually.
Typically, landlords are looking for your total monthly income to be two to three times the monthly rent. This is key to knowing if your rental application will be approved. If your day job doesn’t total to 3 times the rent, but you have other streams of income, you’ll want to submit documents verifying your income from those side gigs as well. This can bump your income up to the standard and show a landlord that you’ll be able to make rent easily.
Banks:
Banks are a more complex story, if simply because they have more complex options. Capital One, for example, needs documents that verify that you have $425 leftover after rent or mortgage payments. And that’s just for a credit card. For mortgage loans, most lenders require you to be paying 25% or more of your pre-tax income on their mortgage. Personal and auto loans vary greatly, but they also require proof of income in their applications.
How Do You Show Proof of Income Without Pay Stubs?
There are many reasons you might want to use different documents as your proof of income. Maybe you are a salesperson and your most recent commission checks were a little low. Maybe you are a business owner and don’t get “paystubs” like a normal employee. Maybe your employer simply doesn’t give you regular paystubs. Read on for our guide to navigating common paystub-less scenarios.
How to Show Proof of Income:
How to Get Proof of Income If Your Employer Doesn’t Give You Paystubs:
Your first approach in this scenario should be approaching your employer about receiving pay stub documents. These statements are valuable to both employees and businesses and help with more than apartment hunting.
If your employer still chooses not to deliver pay documentation, don’t worry — you can submit several other documents. If your pay hasn’t changed much from the previous tax season, dig your most recent W2 out of your tax documents and submit that as your proof of income. If you have gotten a raise or changed jobs, and expect to make much more or less, don’t use your W2 form. You can use the offer letter from your new job that states your wages, have your employer verify with your landlord over the phone, or even just submit your bank statements.
And don’t forget that your pay stubs are just records. If you know your income information, you can use CheckStubMaker’s pay stub tool to create your own pay stub, with accurate tax information automatically generated for you.
A note: if your employer won’t provide pay documentation because they are paying you “under the table” in cash or personal transfers, be very cautious! You should get their agreement in writing at the very least, and should probably become an independent contractor and make them sign a work agreement. As an independent contractor, you probably won’t get a pay stub, but at least you will be protected legally in the case of a falling out.
How Do Independent Contractors Show Proof of Income?
Very few businesses furnish their independent contractors with a pay stub. However, as part of a work agreement, the business or individual who hired a contractor should be required to send a 1099 statement. A 1099 form is a tax document that records the income of independent contractors. Your 1099s from the past one to three months will verify your income to a landlord or lender.
How to Show Proof of Income as a Business Owner:
If you are a full-fledged business owner you may not be receiving 1099s or pay stub documents. It also precludes the option of an offer letter or employer verification. That said, you’re still paying yourself. You can submit the previous years W2 (again, as long as it is recent or still represents your income) or simply show them your personal bank statements. Send them the last 1-3 months of transfers into your bank account. (You also have the less invasive option of generating your own tax-accurate pay stub and submitting that.)
How Do I Get Proof of Income If Unemployed?
There’s a reason it’s called “proof of income” and not “proof of employment”. In fact, if a bank or landlord asks for “proof of wages”, or “proof of salary”, it’s considered discrimination and they can get in serious trouble. Instead of pay stubs or bank statements, you can submit any compensation or subsidy records you have. These documents come in many forms, including social security statements, workman’s compensation letters, unemployment statements, and more. Whatever benefits you receive from the government or elsewhere, hang on to the documents and you can use this in lieu of a pay stub.
How Do I Show Proof of Income If I’m Retired?
Retirees make great tenants — and landlords will be glad to get you in a home. But providing proof of income can be trickier in retirement. This is simply because the retiree’s income comes from multiple sources. This can include social security benefits, 401k or other IRA withdrawals, annuities, pension distributions, and more. The good news is each of these income streams come with their own documentation. Gather up all the documents, put them together in a proof of income letter, and submit that to the bank or landlord you’re working with.
There are many ways to furnish proof of income, no matter what your stage of life or employment status. So go get that new apartment, car, or mortgage. If you have any trouble procuring your income-proving documents, don’t hesitate to let CheckStubMaker generate your own official pay stubs.
There are a select few people (mostly those who are expecting a tax refund) that submit their tax returns as early as possible. While the rest of us wait for the last minute panic in mid-April (the usual deadline to file taxes) these individuals chase the earliest date you can file, at the end of January. Unfortunately for these worm-chasing early birds, there are certain forms required to file, and there’s little guarantee you’ll have them on the first day of tax season.
The All-Important W2 (or 1099, or K-2)
Most regular employees will need Form W2 to file their taxes. Form W2 simply states your income for the year, as well as what taxes your employer has paid on your behalf, and what they’ve deposited into tax-advantaged accounts like a 401(k) or IRA. Simply put, A W2 tells you how much you earned, and how much you’ve paid in taxes. It has all the information the IRS needs to decide if you’ll receive a refund, or need to pay further taxes.
Self-employed individuals use Form 1099 for this process. It’s similar in that it shows income and withholdings, but a self-employed independent contractor receives a 1099 from each client they serviced throughout the year. If someone is in a partnership, they receive a similar form called Form K-2. These self-employed individuals typically receive these documents around the same time as the Form W2, right at the beginning of tax season.
Great! But When Should I Get My W2?
Employers are required to send your W2 form by January 31st. However, if the business you work for is sending them through snail mail, it could be 10 business days before you receive the copy of your W2. It could take until the second week of February to arrive, soundly defeating your first-day-of-tax-season enthusiasm.
If you want to receive your W2 as quickly as possible, ask if they have an online method of access. This could be as simple as having them email the form to you, or posting it in the same portal they use to manage payroll. Online options are quicker and just as reliable.
It’s Mid-February – What Do I Do If I Still Haven’t Received My W2?
If it’s the 10th of February, it could still be in the mail. If it’s the 17th, not as likely. If you’re concerned about your W2 arriving, check with your employer and verify that it was sent. Also double-check the address it was sent to, and confirm they had the correct information on file. (This is typically the same address shown on your pay stubs.) If they had the correct address, ask them to resend it, through an online format if possible.
If your employer is not cooperating or responding to your requests, things get a little more serious. You should assume the best; most misplaced W2s are simple clerical errors, not an attempt to block you from filing that year’s taxes. However, if after repeated attempts they still are not providing you your tax document, you can contact the IRS. Businesses know when W2s are due, and they should also know that they can be seriously fined for not providing their employees’ tax documents on time.
In the meantime, you should submit Form 4506. This is a request for your tax return, and the IRS will send you the W2 they have on file for you. This will let you file your taxes even if your employer misplaced your tax information. This is all in an extreme case, and it won’t usually come down to these measures.
Wondering when W2s get sent out is perfectly normal for an early-filer, but rest assured that no matter what, you’ll be able to get your taxes done.
As a small business owner, it’s not uncommon to hire out work to a third party. When these third parties are independent contractors, and you pay them $600 or more for products or services, the IRS requires you to fill out a 1099 form.
What’s a 1099?
A 1099 form is a tax information form used by the IRS to track various transactions. For example, a 1099-A Form is used when real estate transactions take place, 1099-DIV is filled out when dividends are paid to investors — There’s even a 1099-C that’s used if the government cancels debt.
The most common 1099 form (up til 2020) was the 1099-MISC because its the form used when businesses paid contractors — something that happens a lot. On that form, it was reported as “Non-Employee Compensation” in box 7.
The IRS made a change in 2020. Now, there is a specific form for reporting non-employee compensation — The 1099-NEC. For the 2020 tax year, the IRS now requires a 1099-NEC form to be used for general non-employment compensation reporting.
1099 Misc vs 1099 NEC
If you were used to the old 1099-MISC forms, don’t worry; the NEC works the same way, and it’s actually much simpler. On the old 1099-MISC form, box 7 reported non-employee compensation, in between a myriad of other tiny boxes that were irrelevant if you were simply paying a contractor.
Filling out the new 1099-NEC form is simple. Essentially, input your business information, the contractor’s information, how much you paid them, and anything you withheld. The NEC cuts through the clutter and makes paying contractors and non-employees much easier.
Difference between a 1099 MISC and 1099 NEC as of 2020:
1099 MISC
Used for Miscellaneous payments, ranging from rents to fishing boat proceeds to golden parachute payments.
No longer the form used for payments made to independent contractors
1099 NEC
Simplified form
Single-purpose, to report payments to non-employees (i.e. independent contractors)
Required for reporting contractor payments as of the 2020 tax year.
How To Fill Out a 1099 NEC
W-9 Forms
Before you allow a contractor to complete any services, the 1099 employee needs to fill out the W9 form. The W9 is crucial because it has the information of the contractor that you will use while filling out 1099s.
The contractor will provide their taxpayer identification number (TIN) as well as their business or personal contact information. The TIN can be either a number assigned to their business or their personal social security number.
Order forms, or set up your software
Once the contract work has been completed and you have paid the contractor, you need to send them their 1099-NEC. There are three copies of the 1099: Copy A, Copy B, and Copy C. If you are filing on paper, you must order official versions of copy A. You can’t simply download the file from the internet and print it off, as this won’t work with the IRS document scanners.
Copy B, which goes to the contractor so they can file their tax return, can be downloaded from the internet, no special paper needed. Same goes for copy C, which is for your own record keeping.
If you are filing through the IRS’s online filing system, you won’t need to order the official documents, but if you want to handwrite your 1099s you’ll need to order the forms from the IRS or another supplier.
Filling out a 1099 Form
Filling out Payer and Recipient Information
This is where the W-9 you collected earlier comes in. Transfer the contractor’s TIN and contact information under “Recipient TIN” and “Recipient Name.” The address field is the address of the contractor, not your business. Input your own TIN under “payer TIN.” If you did your due diligence in collecting a W-9 from the independent contractor, this is a simple step.
Compensation and Tax Withholding
Input the amount paid to the independent contractor under “nonemployee compensation.” 1099s are only required if you are paying more than $600 to the non-employee.
The following boxes only apply if you are going to withhold taxes on behalf of the contractor. This is uncommon, but works in the same way as withholding employee taxes from their paychecks.
Send Copy A to the IRS
If filing on paper, mail your official (not downloaded from the internet and printed off) copy A of the 1099 form. You can handwrite your 1099 copy A if filing on paper, just make sure it’s on an official purchased form. If submitting electronically, simply go through the IRS online submission tool and send it that way.
Send Form 1096 to the IRS
If you are filing on paper, remember to submit Form 1096 to the IRS along with the 1099. Form 1096 simply lists the various kinds of information returns, and you indicate in checkboxes which forms you are sending them. If you are only sending a 1099-NEC or MISC, simply check that box before enclosing and sending that form. Form 1096 helps the IRS double check that they have received all necessary forms and nothing slips past their attention.
Send Copy B to the Independent Contractor
Copy B can be downloaded and printed off — no need to purchase an official form from a supplier. This is just going to be used by the independent contractor for information while they do their taxes the following year.
Store Copy C for your records.
It’s always a good idea to hang on to your copy of 1099s you’ve paid out. That way, if the contractor loses theirs or the IRS comes knocking, you’ll have all the necessary information on file.
Deadlines
1099s are like W2s — the deadline for sending them to the independent contractor is January 31st of the applicable tax season. Make sure and get copy B to the contractor or you’ll potentially face serious fines. The IRS requires copy A to be sent to them by the last day of February if filing on paper, or March 31st if you are going to use the IRS online system.
These due dates are important! You could face fines of up to $500,000 a year if you neglect to file your company’s 1099s.
Conclusion
Tax code is complex, but filling out a 1099 is simple! As long as you stay aware of deadlines and make sure you keep the right records on file, you’ll be safe from any penalties and will maintain consistent relationships with your independent contractors.
