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Credits & Deductions for Individuals

EITC Home Page--It’s easier than ever to find out if you qualify for EITC
If you worked but earned less than $51,567 during 2013, you may qualify for EITC. The Earned Income Tax Credit, sometimes called EIC is a tax credit to help you keep more of what you earned. You must file a return and claim the credit to receive it. Find out more about EITC and links to helpful tools and resources.

The Health Coverage Tax Credit (HCTC) Program
The Health Coverage Tax Credit helps make health insurance more affordable for eligible individuals and their families by paying 72.5% of health insurance premiums. Find out if you're eligible for this tax credit, and how you can receive it.

Adoption Credit
Taxpayers who adopt an eligible child may qualify for the adoption tax credit.

Deducting Business Expenses
Find out what qualifies as a deductible business expense, including depreciation.

Page Last Reviewed or Updated: 05-Mar-2014

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Taxslayer com main aspx destination Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. Taxslayer com main aspx destination More information. Taxslayer com main aspx destination Exception—Community Income. Taxslayer com main aspx destination Exception—Qualified joint venture. Taxslayer com main aspx destination More information. Taxslayer com main aspx destination More information. Taxslayer com main aspx destination Identification NumbersEmployer Identification Number (EIN) Payee's Identification Number Tax Year Accounting Method Business TaxesIncome Tax Self-Employment Tax Employment Taxes Excise Taxes Depositing Taxes Information Returns PenaltiesWaiver of penalty. Taxslayer com main aspx destination Business ExpensesBusiness Start-Up Costs Depreciation Business Use of Your Home Car and Truck Expenses RecordkeepingWhy Keep Records? Kinds of Records To Keep How Long To Keep Records Sample Record System How to Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What New Business Owners Need To Know As a new business owner, you need to know your federal tax responsibilities. Taxslayer com main aspx destination Table 1 can help you learn what those responsibilities are. Taxslayer com main aspx destination Ask yourself each question listed in the table, then see the related discussion to find the answer. Taxslayer com main aspx destination In addition to knowing about federal taxes, you need to make some basic business decisions. Taxslayer com main aspx destination Ask yourself: What are my financial resources? What products and services will I sell? How will I market my products and services? How will I develop a strategic business plan? How will I manage my business on a day-to-day basis? How will I recruit employees? The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions. Taxslayer com main aspx destination For information on how to contact the SBA, see How to Get More Information, later. Taxslayer com main aspx destination Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. Taxslayer com main aspx destination When beginning a business, you must decide which form of business to use. Taxslayer com main aspx destination Legal and tax considerations enter into this decision. Taxslayer com main aspx destination Only tax considerations are discussed in this publication. Taxslayer com main aspx destination Your form of business determines which income tax return form you have to file. Taxslayer com main aspx destination See Table 2 to find out which form you have to file. Taxslayer com main aspx destination Sole proprietorships. Taxslayer com main aspx destination   A sole proprietorship is an unincorporated business that is owned by one individual. Taxslayer com main aspx destination It is the simplest form of business organization to start and maintain. Taxslayer com main aspx destination The business has no existence apart from you, the owner. Taxslayer com main aspx destination Its liabilities are your personal liabilities. Taxslayer com main aspx destination You undertake the risks of the business for all assets owned, whether or not used in the business. Taxslayer com main aspx destination You include the income and expenses of the business on your personal tax return. Taxslayer com main aspx destination More information. Taxslayer com main aspx destination   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. Taxslayer com main aspx destination If you are a farmer, see Publication 225, Farmer's Tax Guide. Taxslayer com main aspx destination Partnerships. Taxslayer com main aspx destination   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Taxslayer com main aspx destination Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. Taxslayer com main aspx destination   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. Taxslayer com main aspx destination , from its operations, but it does not pay income tax. Taxslayer com main aspx destination Instead, it “passes through” any profits or losses to its partners. Taxslayer com main aspx destination Each partner includes his or her share of the partnership's items on his or her tax return. Taxslayer com main aspx destination More information. Taxslayer com main aspx destination   For more information on partnerships, see Publication 541, Partnerships. Taxslayer com main aspx destination Husband and wife business. Taxslayer com main aspx destination   If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Taxslayer com main aspx destination Do not use Schedule C or C-EZ. Taxslayer com main aspx destination Instead, file Form 1065, U. Taxslayer com main aspx destination S. Taxslayer com main aspx destination Return of Partnership Income. Taxslayer com main aspx destination For more information, see Publication 541, Partnerships. Taxslayer com main aspx destination Exception—Community Income. Taxslayer com main aspx destination   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Taxslayer com main aspx destination S. Taxslayer com main aspx destination possession, you can treat the business either as a sole proprietorship or a partnership. Taxslayer com main aspx destination The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Taxslayer com main aspx destination A change in your reporting position will be treated as a conversion of the entity. Taxslayer com main aspx destination Exception—Qualified joint venture. Taxslayer com main aspx destination   If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Taxslayer com main aspx destination Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. Taxslayer com main aspx destination For an explanation of "material participation," see the Instructions for Schedule C, line G. Taxslayer com main aspx destination   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Taxslayer com main aspx destination Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. Taxslayer com main aspx destination For more information, see Qualified Joint Venture in the Instructions for Schedule SE. Taxslayer com main aspx destination Corporations. Taxslayer com main aspx destination   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. Taxslayer com main aspx destination A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. Taxslayer com main aspx destination A corporation can also take special deductions. Taxslayer com main aspx destination   The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. Taxslayer com main aspx destination However, shareholders cannot deduct any loss of the corporation. Taxslayer com main aspx destination More information. Taxslayer com main aspx destination   For more information on corporations, see Publication 542, Corporations. Taxslayer com main aspx destination S corporations. Taxslayer com main aspx destination   An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. Taxslayer com main aspx destination Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. Taxslayer com main aspx destination On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss. Taxslayer com main aspx destination More information. Taxslayer com main aspx destination   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. Taxslayer com main aspx destination S. Taxslayer com main aspx destination Income Tax Return for an S Corporation. Taxslayer com main aspx destination Limited liability company. Taxslayer com main aspx destination   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Taxslayer com main aspx destination The members of an LLC are not personally liable for its debts. Taxslayer com main aspx destination An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in regulations section 301. Taxslayer com main aspx destination 7701-3. Taxslayer com main aspx destination For more information, see the instructions for Form 8832, Entity Classification Election. Taxslayer com main aspx destination Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. Taxslayer com main aspx destination The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). Taxslayer com main aspx destination An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. Taxslayer com main aspx destination An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. Taxslayer com main aspx destination You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. Taxslayer com main aspx destination You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. Taxslayer com main aspx destination This includes returns or documents filed to report the following information. Taxslayer com main aspx destination Interest, dividends, royalties, etc. Taxslayer com main aspx destination , paid to you. Taxslayer com main aspx destination Any amount paid to you as a dependent care provider. Taxslayer com main aspx destination Certain other amounts paid to you that total $600 or more for the year. Taxslayer com main aspx destination If you do not furnish your identification number as required, you may be subject to penalties. Taxslayer com main aspx destination See Penalties, later. Taxslayer com main aspx destination Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. Taxslayer com main aspx destination If you don't already have an EIN, you need to get one if you: Have employees, Have a qualified retirement plan, Operate your business as a corporation or partnership, or File returns for: Employment taxes, or Excise taxes. Taxslayer com main aspx destination Applying for an EIN. Taxslayer com main aspx destination   You may apply for an EIN: Online—Click on the EIN link at www. Taxslayer com main aspx destination irs. Taxslayer com main aspx destination gov/businesses/small. Taxslayer com main aspx destination The EIN is issued immediately once the application information is validated. Taxslayer com main aspx destination By telephone at 1-800-829-4933. Taxslayer com main aspx destination By mailing or faxing Form SS-4, Application for Employer Identification Number. Taxslayer com main aspx destination When to apply. Taxslayer com main aspx destination   You should apply for an EIN early enough to receive the number by the time you must file a return or statement or make a tax deposit. Taxslayer com main aspx destination If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. Taxslayer com main aspx destination If you apply by telephone or through the IRS website, you can get an EIN immediately. Taxslayer com main aspx destination If you apply by fax, you can get an EIN within 4 business days. Taxslayer com main aspx destination   If you do not receive your EIN by the time a return is due, file your return anyway. Taxslayer com main aspx destination Write “Applied for” and the date you applied for the number in the space for the EIN. Taxslayer com main aspx destination Do not use your social security number as a substitute for an EIN on your tax returns. Taxslayer com main aspx destination More than one EIN. Taxslayer com main aspx destination   You should have only one EIN. Taxslayer com main aspx destination If you have more than one EIN and are not sure which to use, contact the Internal Revenue Service Center where you file your return. Taxslayer com main aspx destination Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. Taxslayer com main aspx destination The IRS will tell you which number to use. Taxslayer com main aspx destination More information. Taxslayer com main aspx destination   For more information about EINs, see Publication 1635, Understanding Your EIN. Taxslayer com main aspx destination Payee's Identification Number In the operation of a business, you will probably make certain payments you must report on information returns (discussed later under Information Returns). Taxslayer com main aspx destination The forms used to report these payments must include the payee's identification number. Taxslayer com main aspx destination Employee. Taxslayer com main aspx destination   If you have employees, you must get an SSN from each of them. Taxslayer com main aspx destination Record the name and SSN of each employee exactly as they are shown on the employee's social security card. Taxslayer com main aspx destination If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. Taxslayer com main aspx destination This may occur, for example, if the employee's name has changed due to marriage or divorce. Taxslayer com main aspx destination   If your employee does not have an SSN, he or she should file Form SS-5, Application for a Social Security Card, with the SSA. Taxslayer com main aspx destination This form is available at SSA offices or by calling 1-800-772-1213. Taxslayer com main aspx destination It is also available from the SSA website at www. Taxslayer com main aspx destination ssa. Taxslayer com main aspx destination gov. Taxslayer com main aspx destination Other payee. Taxslayer com main aspx destination   If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. Taxslayer com main aspx destination If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. Taxslayer com main aspx destination   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. Taxslayer com main aspx destination This form is available from IRS offices or by calling 1-800-829-3676. Taxslayer com main aspx destination It is also available from the IRS website at IRS. Taxslayer com main aspx destination gov. Taxslayer com main aspx destination    If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. Taxslayer com main aspx destination For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. Taxslayer com main aspx destination Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. Taxslayer com main aspx destination A tax year is usually 12 consecutive months. Taxslayer com main aspx destination There are two kinds of tax years. Taxslayer com main aspx destination Calendar tax year. Taxslayer com main aspx destination A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Taxslayer com main aspx destination Fiscal tax year. Taxslayer com main aspx destination A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Taxslayer com main aspx destination A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Taxslayer com main aspx destination If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. Taxslayer com main aspx destination You must use a calendar tax year if: You keep no books. Taxslayer com main aspx destination You have no annual accounting period. Taxslayer com main aspx destination Your present tax year does not qualify as a fiscal year. Taxslayer com main aspx destination You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. Taxslayer com main aspx destination For more information, see Publication 538, Accounting Periods and Methods. Taxslayer com main aspx destination First-time filer. Taxslayer com main aspx destination   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. Taxslayer com main aspx destination You adopt a tax year by filing your first income tax return using that tax year. Taxslayer com main aspx destination You have not adopted a tax year if you merely did any of the following. Taxslayer com main aspx destination Filed an application for an extension of time to file an income tax return. Taxslayer com main aspx destination Filed an application for an employer identification number. Taxslayer com main aspx destination Paid estimated taxes for that tax year. Taxslayer com main aspx destination Changing your tax year. Taxslayer com main aspx destination   Once you have adopted your tax year, you may have to get IRS approval to change it. Taxslayer com main aspx destination To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. Taxslayer com main aspx destination You may have to pay a fee. Taxslayer com main aspx destination For more information, see Publication 538. Taxslayer com main aspx destination Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. Taxslayer com main aspx destination You choose an accounting method for your business when you file your first income tax return. Taxslayer com main aspx destination There are two basic accounting methods. Taxslayer com main aspx destination Cash method. Taxslayer com main aspx destination Under the cash method, you report income in the tax year you receive it. Taxslayer com main aspx destination You usually deduct or capitalize expenses in the tax year you pay them. Taxslayer com main aspx destination Accrual method. Taxslayer com main aspx destination Under an accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. Taxslayer com main aspx destination You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. Taxslayer com main aspx destination For other methods, see Publication 538. Taxslayer com main aspx destination If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. Taxslayer com main aspx destination Inventories include goods held for sale in the normal course of business. Taxslayer com main aspx destination They also include raw materials and supplies that will physically become a part of merchandise intended for sale. Taxslayer com main aspx destination Inventories are explained in Publication 538. Taxslayer com main aspx destination Certain small business taxpayers can use the cash method of accounting and can also account for inventoriable items as materials and supplies that are not incidental. Taxslayer com main aspx destination For more information, see Publication 538. Taxslayer com main aspx destination You must use the same accounting method to figure your taxable income and to keep your books. Taxslayer com main aspx destination Also, you must use an accounting method that clearly shows your income. Taxslayer com main aspx destination In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. Taxslayer com main aspx destination An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. Taxslayer com main aspx destination More than one business. Taxslayer com main aspx destination   When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows your income. Taxslayer com main aspx destination You must keep a complete and separate set of books and records for each business. Taxslayer com main aspx destination Changing your method of accounting. Taxslayer com main aspx destination   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Taxslayer com main aspx destination A change in accounting method not only includes a change in your overall system of accounting, but also a change in the treatment of any material item. Taxslayer com main aspx destination For examples of changes that require approval and information on how to get approval for the change, see Publication 538. Taxslayer com main aspx destination Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. Taxslayer com main aspx destination The following are the four general kinds of business taxes. Taxslayer com main aspx destination Income tax. Taxslayer com main aspx destination Self-employment tax. Taxslayer com main aspx destination Employment taxes. Taxslayer com main aspx destination Excise taxes. Taxslayer com main aspx destination See Table 2 for the forms you file to report these taxes. Taxslayer com main aspx destination You may want to get Publication 509. Taxslayer com main aspx destination It has tax calendars that tell you when to file returns and make tax payments. Taxslayer com main aspx destination Income Tax All businesses except partnerships must file an annual income tax return. Taxslayer com main aspx destination Partnerships file an information return. Taxslayer com main aspx destination Which form you use depends on how your business is organized. Taxslayer com main aspx destination See Table 2 to find out which return you have to file. Taxslayer com main aspx destination The federal income tax is a pay-as-you-go tax. Taxslayer com main aspx destination You must pay the tax as you earn or receive income during the year. Taxslayer com main aspx destination An employee usually has income tax withheld from his or her pay. Taxslayer com main aspx destination If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Taxslayer com main aspx destination If you are not required to make estimated tax payments, you may pay any tax due when you file your return. Taxslayer com main aspx destination Table 2. Taxslayer com main aspx destination Which Forms Must I File? IF you are a. Taxslayer com main aspx destination . Taxslayer com main aspx destination . Taxslayer com main aspx destination   THEN you may be liable for. Taxslayer com main aspx destination . Taxslayer com main aspx destination . Taxslayer com main aspx destination   Use Form. Taxslayer com main aspx destination . Taxslayer com main aspx destination . Taxslayer com main aspx destination Sole proprietor   Income tax   1040 and Schedule C 1 or C-EZ (Schedule F 1 for farm business)     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES     Employment taxes:         • Social security and Medicare   taxes and income tax   withholding   941 or 944 (943 for farm employees)     • Federal unemployment (FUTA)   tax   940     Excise taxes   See Excise Taxes Partnership   Annual return of income   1065     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes Partner in a partnership (individual)   Income tax   1040 and Schedule E 2     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES Corporation or S corporation   Income tax   1120 (corporation) 2  1120S (S corporation) 2     Estimated tax   1120-W (corporation only)     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes S corporation shareholder   Income tax   1040 and Schedule E 2     Estimated tax   1040-ES 1 File a separate schedule for each business. Taxslayer com main aspx destination 2 Various other schedules may be needed. Taxslayer com main aspx destination Estimated tax. Taxslayer com main aspx destination   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. Taxslayer com main aspx destination Sole proprietors, partners, and S corporation shareholders. Taxslayer com main aspx destination   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Taxslayer com main aspx destination Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. Taxslayer com main aspx destination For more information, see Publication 505, Tax Withholding and Estimated Tax. Taxslayer com main aspx destination Corporations. Taxslayer com main aspx destination   You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. Taxslayer com main aspx destination Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. Taxslayer com main aspx destination You must deposit the payments as explained later under Depositing Taxes. Taxslayer com main aspx destination For more information, see Publication 542. Taxslayer com main aspx destination Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Taxslayer com main aspx destination Your payments of SE tax contribute to your coverage under the social security system. Taxslayer com main aspx destination Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Taxslayer com main aspx destination You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. Taxslayer com main aspx destination Your net earnings from self-employment were $400 or more. Taxslayer com main aspx destination You had church employee income of $108. Taxslayer com main aspx destination 28 or more. Taxslayer com main aspx destination Use Schedule SE (Form 1040) to figure your SE tax. Taxslayer com main aspx destination For more information, see Publication 334, Tax Guide for Small Business. Taxslayer com main aspx destination You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. Taxslayer com main aspx destination The Social Security Administration (SSA) time limit for posting self-employment income. Taxslayer com main aspx destination   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. Taxslayer com main aspx destination If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. Taxslayer com main aspx destination The SSA will not change its records to increase your self-employment income. Taxslayer com main aspx destination Employment Taxes This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees. Taxslayer com main aspx destination Employment taxes include the following. Taxslayer com main aspx destination Social security and Medicare taxes. Taxslayer com main aspx destination Federal income tax withholding. Taxslayer com main aspx destination Federal unemployment (FUTA) tax. Taxslayer com main aspx destination If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. Taxslayer com main aspx destination If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. Taxslayer com main aspx destination These publications explain your tax responsibilities as an employer. Taxslayer com main aspx destination If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. Taxslayer com main aspx destination That publication has information to help you determine whether an individual is an employee or an independent contractor. Taxslayer com main aspx destination If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. Taxslayer com main aspx destination An independent contractor is someone who is self-employed. Taxslayer com main aspx destination Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. Taxslayer com main aspx destination Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. Taxslayer com main aspx destination To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15. Taxslayer com main aspx destination Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). Taxslayer com main aspx destination Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Taxslayer com main aspx destination Medicare tax pays for benefits under the hospital insurance part of FICA. Taxslayer com main aspx destination You withhold part of these taxes from your employee's wages and you pay a part yourself. Taxslayer com main aspx destination To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. Taxslayer com main aspx destination Which form do I file?   Report these taxes on Form 941, Employer's QUARTERLY Federal Tax Return, or Form 944, Employer's ANNUAL Federal Tax Return. Taxslayer com main aspx destination (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. Taxslayer com main aspx destination ) Federal Unemployment (FUTA) Tax The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. Taxslayer com main aspx destination You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. Taxslayer com main aspx destination You pay FUTA tax only from your own funds. Taxslayer com main aspx destination Employees do not pay this tax or have it withheld from their pay. Taxslayer com main aspx destination Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Taxslayer com main aspx destination See Publication 15 to find out if you can use this form. Taxslayer com main aspx destination Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. Taxslayer com main aspx destination Form I-9. Taxslayer com main aspx destination   You must verify that each new employee is legally eligible to work in the United States. Taxslayer com main aspx destination Both you and the employee must complete the U. Taxslayer com main aspx destination S. Taxslayer com main aspx destination Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. Taxslayer com main aspx destination You can get the form from USCIS offices or from the USCIS website at www. Taxslayer com main aspx destination uscis. Taxslayer com main aspx destination gov. Taxslayer com main aspx destination Call the USCIS at 1-800-375-5283 for more information about your responsibilities. Taxslayer com main aspx destination Form W-4. Taxslayer com main aspx destination   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. Taxslayer com main aspx destination You will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold from your employee's wages. Taxslayer com main aspx destination For more information, see Publication 15. Taxslayer com main aspx destination Employees claiming more than 10 withholding allowances. Taxslayer com main aspx destination   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. Taxslayer com main aspx destination See section 16 of Publication 15. Taxslayer com main aspx destination Form W-2 Wage Reporting After the calendar year is over, you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. Taxslayer com main aspx destination You must also send copies to the Social Security Administration. Taxslayer com main aspx destination See Information Returns, later, for more information on Form W-2. Taxslayer com main aspx destination Excise Taxes This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. Taxslayer com main aspx destination Manufacture or sell certain products. Taxslayer com main aspx destination Operate certain kinds of businesses. Taxslayer com main aspx destination Use various kinds of equipment, facilities, or products. Taxslayer com main aspx destination Receive payment for certain services. Taxslayer com main aspx destination For more information on excise taxes, see Publication 510, Excise Taxes. Taxslayer com main aspx destination Form 720. Taxslayer com main aspx destination   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. Taxslayer com main aspx destination Environmental taxes. Taxslayer com main aspx destination Communications and air transportation taxes. Taxslayer com main aspx destination Fuel taxes. Taxslayer com main aspx destination Tax on the first retail sale of heavy trucks, trailers, and tractors. Taxslayer com main aspx destination Manufacturers taxes on the sale or use of a variety of different articles. Taxslayer com main aspx destination Form 2290. Taxslayer com main aspx destination   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. Taxslayer com main aspx destination The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Taxslayer com main aspx destination Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. Taxslayer com main aspx destination For more information, see the instructions for Form 2290. Taxslayer com main aspx destination Form 730. Taxslayer com main aspx destination   If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. Taxslayer com main aspx destination Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. Taxslayer com main aspx destination Form 11-C. Taxslayer com main aspx destination   Use Form 11-C, Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering. Taxslayer com main aspx destination Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. Taxslayer com main aspx destination Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). Taxslayer com main aspx destination Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. Taxslayer com main aspx destination Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. Taxslayer com main aspx destination Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. Taxslayer com main aspx destination The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. Taxslayer com main aspx destination You must give a copy of each information return you are required to file to the recipient or payer. Taxslayer com main aspx destination In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. Taxslayer com main aspx destination For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. Taxslayer com main aspx destination Form 1099-MISC. Taxslayer com main aspx destination   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. Taxslayer com main aspx destination These payments include the following items. Taxslayer com main aspx destination Payments of $600 or more for services performed for your business by people not treated as your employees, such as subcontractors, attorneys, accountants, or directors. Taxslayer com main aspx destination Rent payments of $600 or more, other than rents paid to real estate agents. Taxslayer com main aspx destination Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. Taxslayer com main aspx destination Royalty payments of $10 or more. Taxslayer com main aspx destination Payments to certain crew members by operators of fishing boats. Taxslayer com main aspx destination You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. Taxslayer com main aspx destination Form W-2. Taxslayer com main aspx destination   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. Taxslayer com main aspx destination For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. Taxslayer com main aspx destination Form 8300. Taxslayer com main aspx destination   You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction or two or more related business transactions. Taxslayer com main aspx destination Cash includes U. Taxslayer com main aspx destination S. Taxslayer com main aspx destination and foreign coin and currency. Taxslayer com main aspx destination It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Taxslayer com main aspx destination For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). Taxslayer com main aspx destination Penalties The law provides penalties for not filing returns or paying taxes as required. Taxslayer com main aspx destination Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. Taxslayer com main aspx destination Failure to file tax returns. Taxslayer com main aspx destination   If you do not file your tax return by the due date, you may have to pay a penalty. Taxslayer com main aspx destination The penalty is based on the tax not paid by the due date. Taxslayer com main aspx destination See your tax return instructions for more information about this penalty. Taxslayer com main aspx destination Failure to pay tax. Taxslayer com main aspx destination   If you do not pay your taxes by the due date, you will have to pay a penalty for each month, or part of a month, that your taxes are not paid. Taxslayer com main aspx destination For more information, see your tax return instructions. Taxslayer com main aspx destination Failure to withhold, deposit, or pay taxes. Taxslayer com main aspx destination   If you do not withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit them or pay them to the IRS, you may be subject to a penalty of the unpaid tax, plus interest. Taxslayer com main aspx destination You may also be subject to penalties if you deposit the taxes late. Taxslayer com main aspx destination For more information, see Publication 15. Taxslayer com main aspx destination Failure to follow information reporting requirements. Taxslayer com main aspx destination   The following penalties apply if you are required to file information returns. Taxslayer com main aspx destination For more information, see the General Instructions for Certain Information Returns. Taxslayer com main aspx destination Failure to file information returns. Taxslayer com main aspx destination A penalty applies if you do not file information returns by the due date, if you do not include all required information, or if you report incorrect information. Taxslayer com main aspx destination Failure to furnish correct payee statements. Taxslayer com main aspx destination A penalty applies if you do not furnish a required statement to a payee by the due date, if you do not include all required information, or if you report incorrect information. Taxslayer com main aspx destination Waiver of penalty. Taxslayer com main aspx destination   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. Taxslayer com main aspx destination   In addition, there is no penalty for failure to include all the required information, or for including incorrect information, on a de minimis number of information returns if you correct the errors by August 1 of the year the returns are due. Taxslayer com main aspx destination (To be considered de minimis, the number of returns cannot exceed the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year. Taxslayer com main aspx destination ) Failure to supply taxpayer identification number. Taxslayer com main aspx destination   If you do not include your taxpayer identification number (SSN or EIN) or the taxpayer identification number of another person where required on a return, statement, or other document, you may be subject to a penalty of $50 for each failure. Taxslayer com main aspx destination You may also be subject to the $50 penalty if you do not give your taxpayer identification number to another person when it is required on a return, statement, or other document. Taxslayer com main aspx destination Business Expenses You can deduct business expenses on your income tax return. Taxslayer com main aspx destination These are the current operating costs of running your business. Taxslayer com main aspx destination To be deductible, a business expense must be both ordinary and necessary. Taxslayer com main aspx destination An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Taxslayer com main aspx destination A necessary expense is one that is helpful and appropriate for your business, trade, or profession. Taxslayer com main aspx destination An expense does not have to be indispensable to be considered necessary. Taxslayer com main aspx destination The following are brief explanations of some expenses that are of interest to people starting a business. Taxslayer com main aspx destination There are many other expenses that you may be able to deduct. Taxslayer com main aspx destination See your form instructions and Publication 535, Business Expenses. Taxslayer com main aspx destination Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. Taxslayer com main aspx destination Your business start-up costs will depend on the type of business you are starting. Taxslayer com main aspx destination They may include costs for advertising, travel, surveys, and training. Taxslayer com main aspx destination These costs are generally capital expenses. Taxslayer com main aspx destination You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). Taxslayer com main aspx destination You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. Taxslayer com main aspx destination The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Taxslayer com main aspx destination Any remaining cost must be amortized. Taxslayer com main aspx destination For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. Taxslayer com main aspx destination Depreciation If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. Taxslayer com main aspx destination You must spread the cost over more than one tax year and deduct part of it each year. Taxslayer com main aspx destination This method of deducting the cost of business property is called depreciation. Taxslayer com main aspx destination Business property you must depreciate includes the following items. Taxslayer com main aspx destination Office furniture. Taxslayer com main aspx destination Buildings. Taxslayer com main aspx destination Machinery and equipment. Taxslayer com main aspx destination You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Taxslayer com main aspx destination This deduction is known as the “section 179 deduction. Taxslayer com main aspx destination ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. Taxslayer com main aspx destination Depreciation must be taken in the year it is allowable. Taxslayer com main aspx destination Allowable depreciation not taken in a prior year cannot be taken in the current year. Taxslayer com main aspx destination If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. Taxslayer com main aspx destination S. Taxslayer com main aspx destination Individual Income Tax Return, or by changing your accounting method. Taxslayer com main aspx destination For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. Taxslayer com main aspx destination Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. Taxslayer com main aspx destination Even then, your deduction may be limited. Taxslayer com main aspx destination To qualify to claim expenses for business use of your home, you must meet both the following tests. Taxslayer com main aspx destination Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use, later), Regular, For your trade or business, AND The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) you use in connection with your trade or business. Taxslayer com main aspx destination Exclusive use. Taxslayer com main aspx destination   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Taxslayer com main aspx destination The area used for business can be a room or other separately identifiable space. Taxslayer com main aspx destination The space does not need to be marked off by a permanent partition. Taxslayer com main aspx destination   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Taxslayer com main aspx destination Exceptions to exclusive use. Taxslayer com main aspx destination   You do not have to meet the exclusive use test if either of the following applies. Taxslayer com main aspx destination You use part of your home for the storage of inventory or product samples. Taxslayer com main aspx destination You use part of your home as a daycare facility. Taxslayer com main aspx destination For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Taxslayer com main aspx destination Principal place of business. Taxslayer com main aspx destination   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. Taxslayer com main aspx destination You use it exclusively and regularly for administrative or management activities of your trade or business. Taxslayer com main aspx destination You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Taxslayer com main aspx destination   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. Taxslayer com main aspx destination The relative importance of the activities performed at each location. Taxslayer com main aspx destination If the relative importance factor does not determine your principal place of business, the time spent at each location. Taxslayer com main aspx destination    If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Taxslayer com main aspx destination However, for other ways to qualify to deduct home office expenses, see Publication 587. Taxslayer com main aspx destination Which form do I file?   If you file Schedule C (Form 1040), use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. Taxslayer com main aspx destination If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. Taxslayer com main aspx destination More information. Taxslayer com main aspx destination   For more information about business use of your home, see Publication 587. Taxslayer com main aspx destination Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. Taxslayer com main aspx destination You generally can deduct either your actual expenses or the standard mileage rate. Taxslayer com main aspx destination Actual expenses. Taxslayer com main aspx destination   If you deduct actual expenses, you can deduct the cost of the following items: Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. Taxslayer com main aspx destination You can divide your expenses based on the miles driven for each purpose. Taxslayer com main aspx destination Example. Taxslayer com main aspx destination You are the sole proprietor of a flower shop. Taxslayer com main aspx destination You drove your van 20,000 miles during the year. Taxslayer com main aspx destination 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. Taxslayer com main aspx destination You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Taxslayer com main aspx destination Standard mileage rate. Taxslayer com main aspx destination   Instead of figuring actual expenses, you may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. Taxslayer com main aspx destination You can use the standard mileage rate for a vehicle you own or lease. Taxslayer com main aspx destination The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. Taxslayer com main aspx destination It is announced annually by the IRS. Taxslayer com main aspx destination To figure your deduction, multiply your business miles by the standard mileage rate for the year. Taxslayer com main aspx destination    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. Taxslayer com main aspx destination However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. Taxslayer com main aspx destination Choosing the standard mileage rate. Taxslayer com main aspx destination   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Taxslayer com main aspx destination In later years, you can choose to use either the standard mileage rate or actual expenses. Taxslayer com main aspx destination   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). Taxslayer com main aspx destination Additional information. Taxslayer com main aspx destination   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Taxslayer com main aspx destination Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. Taxslayer com main aspx destination It also explains how long you must keep your records for federal tax purposes. Taxslayer com main aspx destination A sample recordkeeping system is illustrated at the end of this part. Taxslayer com main aspx destination Why Keep Records? Everyone in business must keep records. Taxslayer com main aspx destination Good records will help you do the following. Taxslayer com main aspx destination Monitor the progress of your business. Taxslayer com main aspx destination   You need good records to monitor the progress of your business. Taxslayer com main aspx destination Records can show whether your business is improving, which items are selling, or what changes you need to make. Taxslayer com main aspx destination Good records can increase the likelihood of business success. Taxslayer com main aspx destination Prepare your financial statements. Taxslayer com main aspx destination   You need good records to prepare accurate financial statements. Taxslayer com main aspx destination These include income (profit and loss) statements and balance sheets. Taxslayer com main aspx destination These statements can help you in dealing with your bank or creditors and help you manage your business. Taxslayer com main aspx destination An income statement shows the income and expenses of the business for a given period of time. Taxslayer com main aspx destination A balance sheet shows the assets, liabilities, and your equity in the business on a given date. Taxslayer com main aspx destination Identify source of receipts. Taxslayer com main aspx destination   You will receive money or property from many sources. Taxslayer com main aspx destination Your records can identify the source of your receipts. Taxslayer com main aspx destination You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. Taxslayer com main aspx destination Keep track of deductible expenses. Taxslayer com main aspx destination   You may forget expenses when you prepare your tax return unless you record them when they occur. Taxslayer com main aspx destination Prepare your tax returns. Taxslayer com main aspx destination   You need good records to prepare your tax returns. Taxslayer com main aspx destination These records must support the income, expenses, and credits you report. Taxslayer com main aspx destination Generally, these are the same records you use to monitor your business and prepare your financial statements. Taxslayer com main aspx destination Support items reported on tax returns. Taxslayer com main aspx destination   You must keep your business records available at all times for inspection by the IRS. Taxslayer com main aspx destination If the IRS examines any of your tax returns, you may be asked to explain the items reported. Taxslayer com main aspx destination A complete set of records will speed up the examination. Taxslayer com main aspx destination Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. Taxslayer com main aspx destination You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. Taxslayer com main aspx destination The business you are in affects the type of records you need to keep for federal tax purposes. Taxslayer com main aspx destination You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. Taxslayer com main aspx destination See Accounting Method, earlier. Taxslayer com main aspx destination If you are in more than one business, you should keep a complete and separate set of records for each business. Taxslayer com main aspx destination A corporation should keep minutes of board of directors' meetings. Taxslayer com main aspx destination Your recordkeeping system should include a summary of your business transactions. Taxslayer com main aspx destination This summary is ordinarily made in your books (for example, accounting journals and ledgers). Taxslayer com main aspx destination Your books must show your gross income, as well as your deductions and credits. Taxslayer com main aspx destination For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. Taxslayer com main aspx destination In addition, you must keep supporting documents, explained later. Taxslayer com main aspx destination Electronic records. Taxslayer com main aspx destination   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. Taxslayer com main aspx destination When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. Taxslayer com main aspx destination An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. Taxslayer com main aspx destination The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. Taxslayer com main aspx destination All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Taxslayer com main aspx destination Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. Taxslayer com main aspx destination   The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. Taxslayer com main aspx destination You still have the responsibility of retaining any other books and records that are required to be retained. Taxslayer com main aspx destination   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. Taxslayer com main aspx destination This test is not considered an examination and the results must be shared with you. Taxslayer com main aspx destination If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. Taxslayer com main aspx destination If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copy books and records in a manner that allows you and the IRS to determine your correct tax. Taxslayer com main aspx destination For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. Taxslayer com main aspx destination Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Taxslayer com main aspx destination Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Taxslayer com main aspx destination These documents contain information you need to record in your books. Taxslayer com main aspx destination It is important to keep these documents because they support the entries in your books and on your tax return. Taxslayer com main aspx destination Keep them in an orderly fashion and in a safe place. Taxslayer com main aspx destination For instance, organize them by year and type of income or expense. Taxslayer com main aspx destination Gross receipts. Taxslayer com main aspx destination   Gross receipts are the income you receive from your business. Taxslayer com main aspx destination You should keep supporting documents that show the amounts and sources of your gross receipts. Taxslayer com main aspx destination Documents that show gross receipts include the following. Taxslayer com main aspx destination Cash register tapes. Taxslayer com main aspx destination Bank deposit slips. Taxslayer com main aspx destination Receipt books. Taxslayer com main aspx destination Invoices. Taxslayer com main aspx destination Credit card charge slips. Taxslayer com main aspx destination Forms 1099-MISC. Taxslayer com main aspx destination Purchases. Taxslayer com main aspx destination   Purchases are the items you buy and resell to customers. Taxslayer com main aspx destination If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Taxslayer com main aspx destination Your supporting documents should show the amount paid and that the amount was for purchases. Taxslayer com main aspx destination Documents for purchases include the following. Taxslayer com main aspx destination Canceled checks. Taxslayer com main aspx destination Cash register tape receipts. Taxslayer com main aspx destination Credit card sales slips. Taxslayer com main aspx destination Invoices. Taxslayer com main aspx destination These records will help you determine the value of your inventory at the end of the year. Taxslayer com main aspx destination See Publication 538 for information on methods for valuing inventory. Taxslayer com main aspx destination Expenses. Taxslayer com main aspx destination   Expenses are the costs you incur (other than purchases) to carry on your business. Taxslayer com main aspx destination Your supporting documents should show the amount paid and that the amount was for a business expense. Taxslayer com main aspx destination Documents for expenses include the following. Taxslayer com main aspx destination Canceled checks. Taxslayer com main aspx destination Cash register tapes. Taxslayer com main aspx destination Account statements. Taxslayer com main aspx destination Credit card sales slips. Taxslayer com main aspx destination Invoices. Taxslayer com main aspx destination Petty cash slips for small cash payments. Taxslayer com main aspx destination    A petty cash fund allows you to make small payments without having to write checks for small amounts. Taxslayer com main aspx destination Each time you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of payment. Taxslayer com main aspx destination Travel, transportation, entertainment, and gift expenses. Taxslayer com main aspx destination   Specific recordkeeping rules apply to these expenses. Taxslayer com main aspx destination For more information, see Publication 463. Taxslayer com main aspx destination Employment taxes. Taxslayer com main aspx destination   There are specific employment tax records you must keep. Taxslayer com main aspx destination For a list, see Publication 15. Taxslayer com main aspx destination Assets. Taxslayer com main aspx destination   Assets are the property, such as machinery and furniture you own and use in your business. Taxslayer com main aspx destination You must keep records to verify certain information about your business assets. Taxslayer com main aspx destination You need records to figure the annual depreciation and the gain or loss when you sell the assets. Taxslayer com main aspx destination Your records should show the following information. Taxslayer com main aspx destination When and how you acquired the asset. Taxslayer com main aspx destination Purchase price. Taxslayer com main aspx destination Cost of any improvements. Taxslayer com main aspx destination Section 179 deduction taken. Taxslayer com main aspx destination Deductions taken for depreciation. Taxslayer com main aspx destination Deductions taken for casualty losses, such as losses resulting from fires or storms. Taxslayer com main aspx destination How you used the asset. Taxslayer com main aspx destination When and how you disposed of the asset. Taxslayer com main aspx destination Selling price. Taxslayer com main aspx destination Expenses of sale. Taxslayer com main aspx destination   The following documents may show this information. Taxslayer com main aspx destination Purchase and sales invoices. Taxslayer com main aspx destination Real estate closing statements. Taxslayer com main aspx destination Canceled checks. Taxslayer com main aspx destination What if I don't have a canceled check?   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. Taxslayer com main aspx destination These include account statements prepared for the financial institution by a third party. Taxslayer com main aspx destination These account statements must be highly legible. Taxslayer com main aspx destination The following table lists acceptable account statements. Taxslayer com main aspx destination  IF payment is by. Taxslayer com main aspx destination . Taxslayer com main aspx destination . Taxslayer com main aspx destination THEN the statement must show the. Taxslayer com main aspx destination . Taxslayer com main aspx destination . Taxslayer com main aspx destination Check Check number. Taxslayer com main aspx destination Amount. Taxslayer com main aspx destination Payee's name. Taxslayer com main aspx destination Date the check amount was posted to the account by the financial institution. Taxslayer com main aspx destination Electronic funds transfer Amount transferred. Taxslayer com main aspx destination Payee's name. Taxslayer com main aspx destination Date the transfer was posted to the account by the financial institution. Taxslayer com main aspx destination Credit card Amount charged. Taxslayer com main aspx destination Payee's name. Taxslayer com main aspx destination Transaction date. Taxslayer com main aspx destination    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. Taxslayer com main aspx destination You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Taxslayer com main aspx destination Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. Taxslayer com main aspx destination (Your business transactions are shown on the supporting documents just discussed. Taxslayer com main aspx destination ) Business transactions are ordinarily summarized in books called journals and ledgers. Taxslayer com main aspx destination You can buy them at your local stationery or office supply store. Taxslayer com main aspx destination A journal is a book where you record each business transaction shown on your supporting documents. Taxslayer com main aspx destination You may have to keep separate journals for transactions that occur frequently. Taxslayer com main aspx destination A ledger is a book that contains the totals from all of your journals. Taxslayer com main aspx destination It is organized into different accounts. Taxslayer com main aspx destination Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. Taxslayer com main aspx destination For example, a recordkeeping system for a small business might include the following items. Taxslayer com main aspx destination Business checkbook. Taxslayer com main aspx destination Daily summary of cash receipts. Taxslayer com main aspx destination Monthly summary of cash receipts. Taxslayer com main aspx destination Check disbursements journal. Taxslayer com main aspx destination Depreciation worksheet. Taxslayer com main aspx destination Employee compensation record. Taxslayer com main aspx destination The business checkbook is explained next. Taxslayer com main aspx destination The other items are illustrated later under Sample Record System. Taxslayer com main aspx destination The system you use to record business transactions will be more effective if you follow good recordkeeping practices. Taxslayer com main aspx destination For example, record expenses when they occur, and identify the source of recorded receipts. Taxslayer com main aspx destination Generally, it is best to record transactions on a daily basis. Taxslayer com main aspx destination Business checkbook. Taxslayer com main aspx destination   One of the first things you should do when you start a business is open a business checking account. Taxslayer com main aspx destination You should keep your business account separate from your personal checking account. Taxslayer com main aspx destination   The business checkbook is your basic source of information for recording your business expenses. Taxslayer com main aspx destination You should deposit all daily receipts in your business checking account. Taxslayer com main aspx destination You should check your account for errors by reconciling it. Taxslayer com main aspx destination See Reconciling the checking account, later. Taxslayer com main aspx destination   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. Taxslayer com main aspx destination You should also note on the deposit slip the source of the deposit and keep copies of all slips. Taxslayer com main aspx destination   You should make all payments by check to document business expenses. Taxslayer com main aspx destination Write checks payable to yourself only when making withdrawals from your business for personal use. Taxslayer com main aspx destination Avoid writing checks payable to cash. Taxslayer com main aspx destination If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. Taxslayer com main aspx destination If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. Taxslayer com main aspx destination    Use the business account for business purposes only. Taxslayer com main aspx destination Indicate the source of deposits and the type of expense in the checkbook. Taxslayer com main aspx destination Reconciling the checking account. Taxslayer com main aspx destination   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. Taxslayer com main aspx destination The statement balance may not agree with the balance in your checkbook and books if the statement: Includes bank charges you did not enter in your books and subtract from your checkbook balance, or Does not include deposits made after the statement date or checks that did not clear your account before the statement date. Taxslayer com main aspx destination   By reconciling your checking account, you will: Verify how much money you have in the account, Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and Correct any errors in your bank statement, checkbook, and books. Taxslayer com main aspx destination    You should reconcile your checking account each month. Taxslayer com main aspx destination     Before you reconcile your monthly bank statement, check your own figures. Taxslayer com main aspx destination Begin with the balance shown in your checkbook at the end of the previous month. Taxslayer com main aspx destination To this balance, add the total cash deposited during the month and subtract the total cash disbursements. Taxslayer com main aspx destination   After checking your figures, the result should agree with your checkbook balance at the end of the month. Taxslayer com main aspx destination If the result does not agree, you may have made an error in recording a check or deposit. Taxslayer com main aspx destination You can find the error by doing the following. Taxslayer com main aspx destination Adding the amounts on your check stubs and comparing that total with the total in the “amount of check” column in your check disbursements journal. Taxslayer com main aspx destination If the totals do not agree, check the individual amounts to see if an error was made in your check stub record or in the related entry in your check disbursements journal. Taxslayer com main aspx destination Adding the deposit amounts in your checkbook. Taxslayer com main aspx destination Compare that total with the monthly total in your cash receipt book, if you have one. Taxslayer com main aspx destination If the totals do not agree, check the individual amounts to find any errors. Taxslayer com main aspx destination   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. Taxslayer com main aspx destination   When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. Taxslayer com main aspx destination Many banks print a reconciliation worksheet on the back of the statement. Taxslayer com main aspx destination   To reconcile your account, follow these steps. Taxslayer com main aspx destination Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Taxslayer com main aspx destination Note all differences in the dollar amounts. Taxslayer com main aspx destination Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Taxslayer com main aspx destination Note all differences in the dollar amounts. Taxslayer com main aspx destination Mark the check number in the checkbook as having cleared the bank. Taxslayer com main aspx destination After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. Taxslayer com main aspx destination Prepare a bank reconciliation. Taxslayer com main aspx destination One is illustrated later under Sample Record System. Taxslayer com main aspx destination Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. Taxslayer com main aspx destination At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. Taxslayer com main aspx destination If you still have differences, check the previous steps to find the errors. Taxslayer com main aspx destination   Table 3. Taxslayer com main aspx destination Period of Limitations IF you. Taxslayer com main aspx destination . Taxslayer com main aspx destination . Taxslayer com main aspx destination   THEN the period is. Taxslayer com main aspx destination . Taxslayer com main aspx destination . Taxslayer com main aspx destination 1. Taxslayer com main aspx destination Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. Taxslayer com main aspx destination Do not report income that you should report and it is more than 25% of the gross income shown on the return   6 years 3. Taxslayer com main aspx destination File a fraudulent return   Not limited 4. Taxslayer com main aspx destination Do not file a return   Not limited 5. Taxslayer com main aspx destination File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. Taxslayer com main aspx destination File a claim for a loss from worthless securities or a bad debt deduction   7 years Bookkeeping System You must decide whether to use a single-entry or a double-entry bookkeeping system. Taxslayer com main aspx destination The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. Taxslayer com main aspx destination You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. Taxslayer com main aspx destination Single-entry. Taxslayer com main aspx destination   A single-entry system is based on the income statement (profit or loss statement). Taxslayer com main aspx destination It can be a simple and practical system if you are starting a small business. Taxslayer com main aspx destination The system records the flow of income and expenses through the use of: A daily summary of cash receipts, and Monthly summaries of cash receipts and disbursements. Taxslayer com main aspx destination Double-entry. Taxslayer com main aspx destination   A double-entry bookkeeping system uses journals and ledgers. Taxslayer com main aspx destination Transactions are first entered in a journal and then posted to ledger accounts. Taxslayer com main aspx destination These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). Taxslayer com main aspx destination You close income and expense accounts at the end of each tax year. Taxslayer com main aspx destination You keep asset, liability, and net worth accounts open on a permanent basis. Taxslayer com main aspx destination   In the double-entry system, each account has a left side for debits and a right side for credits. Taxslayer com main aspx destination It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. Taxslayer com main aspx destination   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. Taxslayer com main aspx destination If the amounts do not balance, you have made an error and you must find and correct it. Taxslayer com main aspx destination   An example of a journal entry exhibiting a payment of rent in October is shown next. Taxslayer com main aspx destination General Journal Date Description of Entry Debit  Credit Oct. Taxslayer com main aspx destination 5 Rent expense 780. Taxslayer com main aspx destination 00     Cash   780. Taxslayer com main aspx destination 00                 Computerized System There are computer software packages you can use for recordkeeping. Taxslayer com main aspx destination They can be purchased in many retail stores. Taxslayer com main aspx destination These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. Taxslayer com main aspx destination If you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. Taxslayer com main aspx destination To meet this qualification, the machine-sensible records must reconcile with your books and return. Taxslayer com main aspx destination These records must provide enough detail to identify the underlying source documents. Taxslayer com main aspx destination You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. Taxslayer com main aspx destination This documentation must be sufficiently detailed to show all of the following items. Taxslayer com main aspx destination Functions being performed as the data flows through the system. Taxslayer com main aspx destination Controls used to ensure accurate and reliable processing. Taxslayer com main aspx destination Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. Taxslayer com main aspx destination Charts of accounts and detailed account descriptions. Taxslayer com main aspx destination See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. Taxslayer com main aspx destination How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Taxslayer com main aspx destination Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. Taxslayer com main aspx destination The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. Taxslayer com main aspx destination Table 3 contains the periods of limitations that apply to income tax returns. Taxslayer com main aspx destination Unless otherwise stated, the years refer to the period after the return was filed. Taxslayer com main aspx destination Returns filed before the due date are treated as filed on the due date. Taxslayer com main aspx destination Keep copies of your filed tax returns. Taxslayer com main aspx destination They help in preparing future tax returns and making computations if you file an amended return. Taxslayer com main aspx destination Employment taxes. Taxslayer com main aspx destination   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. Taxslayer com main aspx destination For more information about recordkeeping for employment taxes, see Publication 15. Taxslayer com main aspx destination Assets. Taxslayer com main aspx destination   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. Taxslayer com main aspx destination You must keep these records to figure any depreciation, amortization, or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property. Taxslayer com main aspx destination   Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. Taxslayer com main aspx destination You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. Taxslayer com main aspx destination Records for nontax purposes. Taxslayer com main aspx destination   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. Taxslayer com main aspx destination For example, your insurance company or creditors may require you to keep them longer than the IRS does. Taxslayer com main aspx destination Sample Record System This example illustrates a single-entry system used by Henry Brown, who is the sole proprietor of a small automobile body shop. Taxslayer com main aspx destination Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. Taxslayer com main aspx destination These sample records should not be viewed as a recommendation of how to keep your records. Taxslayer com main aspx destination They are intended only to show how one business keeps its records. Taxslayer com main aspx destination 1. Taxslayer com main aspx destination Daily Summary of Cash Receipts This summary is a record of cash sales for the day. Taxslayer com main aspx destination It accounts for cash at the end of the day over the amount in the Change and Petty Cash Fund at the beginning of the day. Taxslayer com main aspx destination Henry takes the cash sales entry from his cash register tape. Taxslayer com main aspx destination If he had no cash register, he would simply total his cash sale slips and any other cash received that day. Taxslayer com main aspx destination He carries the total receipts shown in this summary for January 3 ($267. Taxslayer com main aspx destination 80), including cash sales ($263. Taxslayer com main aspx destination 60) and sales tax ($4. Taxslayer com main aspx destination 20), to the Monthly Summary of Cash Receipts. Taxslayer com main aspx destination Petty cash fund. Taxslayer com main aspx destination   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. Taxslayer com main aspx destination Each time he makes a payment from this fund, he makes out a petty cash slip and attaches it to his receipt as proof of payment. Taxslayer com main aspx destination He sets up a fixed amount ($50) in his petty cash fund. Taxslayer com main aspx destination The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. Taxslayer com main aspx destination When the totals on the petty cash slips approach the fixed amount, he brings the cash in the fund back to the fixed amount by writing a check to “Petty Cash” for the total of the outstanding slips. Taxslayer com main aspx destination (See the Check Disbursements Journal entry for check number 92. Taxslayer com main aspx destination ) This restores the fund to its fixed amount of $50. Taxslayer com main aspx destination He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. Taxslayer com main aspx destination 2. Taxslayer com main aspx destination Monthly Summary of Cash Receipts This shows the income activity for the month. Taxslayer com main aspx destination Henry carries the total monthly net sales shown in this summary for January ($4,865. Taxslayer com main aspx destination 05) to his Annual Summary. Taxslayer com main aspx destination To figure total monthly net sales, Henry reduces the total monthly receipts by the sales tax imposed on his customers and turned over to the state. Taxslayer com main aspx destination He cannot take a deduction for sales tax turned over to the state because he only collected the tax. Taxslayer com main aspx destination He does not include the tax in his income. Taxslayer com main aspx destination 3. Taxslayer com main aspx destination Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. Taxslayer com main aspx destination All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. Taxslayer com main aspx destination Frequent expenses have their own headings across the sheet. Taxslayer com main aspx destination He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. Taxslayer com main aspx destination Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. Taxslayer com main aspx destination Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. Taxslayer com main aspx destination If he did, he would record them in the journal, even though he could not deduct them as business expenses. Taxslayer com main aspx destination Henry carries the January total of expenses for materials ($1,083. Taxslayer com main aspx destination 50) to the Annual Summary. Taxslayer com main aspx destination Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. Taxslayer com main aspx destination , in the appropriate columns of that summary. Taxslayer com main aspx destination 4. Taxslayer com main aspx destination Employee Compensation Record This record shows the following information. Taxslayer com main aspx destination The number of hours Henry's employee worked in a pay period. Taxslayer com main aspx destination The employee's total pay for the period. Taxslayer com main aspx destination The deductions Henry withheld in figuring the employee's net pay. Taxslayer com main aspx destination The monthly gross payroll. Taxslayer com main aspx destination Henry carries the January gross payroll ($520) to the Annual Summary. Taxslayer com main aspx destination 5. Taxslayer com main aspx destination Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. Taxslayer com main aspx destination He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. Taxslayer com main aspx destination He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. Taxslayer com main aspx destination As in the journal, he keeps each major expense in a separate column. Taxslayer com main aspx destination Henry carries the cash receipts total shown in the annual summary ($47,440. Taxslayer com main aspx destination 9