Glossary
A 1099 is an IRS form that identifies any non-employee income received in a year - think of it like a W-2 for freelancers. This could be income from providing services, interest, dividends, rent, retirement income, etc. The goal of this form is to report income earned to the IRS.
For contractors and business owners, it’s important to pay particular attention to box 3 on the 1099:
Other Income and box 4: Federal Income Tax Withheld. Hint: Box 4 will usually be empty unless you (a contractor or freelancer) ask the business owner to withhold tax.
For more info, check out our post, What is a 1099?
The accrual method, also called accrual basis, is a form of accounting that tracks income and expenses as they occur. This means that it is recorded before any actual money changes hands. For example, if something is ordered, the transaction is accounted for in a bill before the bill is actually paid.
This refers to the change in the value of a particular asset, to help determine if there’s been a gain or loss when you sell.
Adjusted Gross Income (AGI) is defined as gross income plus or minus adjustments to income such as deductions.
Amount realized refers to what you bring in from a sale minus any expenses, fees, etc., and is used to assess any capital gains or losses for taxes.
An Annual Information Return (also known as a statement of information, annual report, or various other names depending on the state) is a statement that details operations and financial conditions of the business and is submitted to any state the business is registered in and operates in. This could mean listing individuals or businesses that have departed the business, how much the business earned in the previous year, or any other pertinent information the state may require. Business formed in a state will file a domestic report, business registered in one state but formed in another, will file a foreign report.
A report sent to shareholders annually that documents the financial activity and performance from the previous year. In addition to last year’s data, the report may include high-level insights about the current financial state of the business and objectives for the future. Annual reports are required by law for all public companies.
An organization formed to conduct business. Depending upon the structure, a business entity may also create legal and financial separation between a private individual and the business. There are dozens of ways to structure a business. Still, small business owners tend to choose one of six common types of business entities: sole proprietorship, general partnership, limited partnership, limited liability company, C corporation, or S corporation.
A calendar year, also known as a tax year, is January 1 to December 31.
In relation to small businesses, a capital account is typically the place where a partner or shareholder is able to see any additions or withdrawals of their equity based on their original contribution.
Through a carryback, a business can use a net operating loss and put it toward a prior year’s tax return and obtain a tax refund.
A carryforward allows business owners to use net operating loss deductions in future tax years.
The cash method is a form of accounting that tracks revenue and expenses only when cash is actually received or spent.
A corporation is an organization that is compromised of individuals or businesses formed under state laws to conduct business. A corporation has shareholders also known as stockholders who have shares (stocks) in the business.
A deduction, typically referred to as a tax write-off, is a business expense (money you paid) that can be deducted from taxable income in order to lower the amount of taxes that you owe.
A dividend is a payment made to stockholders (also known as shareholders) from a company after a company declares a profit. Not every company pays out dividends to its shareholders. It's a practice that's established either in bylaws or through shareholder voting. Dividend income is not taxed like traditional income, but still must be reported to the IRS or local tax authority.
All taxes remitted, paid, and reported to the IRS by employers on behalf of their employees on a set schedule. Employment taxes can include income tax, Medicare, and social security contributions. Employers are also responsible for contributing a portion to Medicare and social security taxes on behalf of their employees, and they are often also responsible for federal unemployment (FUTA) tax payments.
Estimated tax refers to the estimated amount of tax you are required to pay quarterly, in lieu of regular payroll tax withholding. Think of it as a tax prepayment plan.
Excise tax is a type of tax that is imposed on certain products such as alcohol, soda, and cigarettes.
Payroll taxes on employee wages owed to the federal government. These taxes mandatory contributions to Medicare (MedFICA) and Social Security (FICA). Employees and employers are each responsible for a portion of the amount owed. Self-employed workers and contractors must contribute the full amount.
A fiscal year-end is determined by having a business year other than January 1 to December 31 like a traditional calendar year. A fiscal year typically ends on a quarter such as: March 31, June 30, or September 30.
The total amount of payments a user of these platforms can report to the IRS when submitting sales and income tax information to the IRS. Refers to payments made within payment processing platforms like Venmo, CashApp, Square, etc.
Read more about what small business owners using 3rd Party Payment tools should know when filing their taxes here.
Gross receipts tax is a type of tax that is based on all revenue sources that is charged by some states, in place of sales tax.
Debts or assets that a company may owe.
A limited liability company (LLC) is a business structure that limits the owner(s) personal accountability for company debts and obligations. Owners of an LLC are called members and may include individuals, corporations, other LLCs, or foreign entities.
Loss: The amount of money lost by a business or organization in the period indicated.
Gain: The amount of money gained by a business or organization in the period indicated.
When there are more expenses than there is income, businesses have a ‘net operating loss’. This net operating loss can be used as a carryback to get a refund on previous tax years or a carryforward and used as a deduction in the future.
Ordinary Income is income taxed at ordinary rates. Examples include wages, salaries, tips, and bonuses.
A partner is an individual or business in a partnership with another individual or business.
Tax on employees’ wages. These taxes fund specific programs (Medicare, Social Security). A portion is deducted from an employee’s earnings (including wages, tips, and salaries), and employers pay the other part directly. Employers, but not employees, are also usually required to pay an unemployment tax.
Self-Employment Tax refers to the 15.3% that self-employed professionals pay in addition to income tax to cover Social Security and Medicare benefits. This tax is paid quarterly.
A SEP IRA is a Simplified Employee Pension Individual Retirement Account that is for self-employed people. Self-employed taxpayers can contribute to a SEP-IRA and deduct contributions.
Under the Standard Mileage Method, business owners deduct a specific amount per mile as part of their car-related business deductions. The rate for standard mileage in 2021 is set by the IRS at 56 cents.
Tax on employee wages owed to the state. Applicable taxes can vary by state. However, these taxes often include contributions to fund programs like unemployment and disability insurance. The amount owed by the employer and employee can also vary by state.
A tax return is a form or forms submitted to the tax authority that reports income, expenses, and other pertinent tax information. The tax authority may be the federal government (IRS) or state tax agency (such as the state's department of treasury or department of revenue).
A tax year, also known as a calendar year, is January 1 to December 31.
The difference between how much small businesses in the U.S. owe in taxes every year, and how much actually gets paid on time to the IRS or local tax authorities.
Usually a withdrawal made by a partner or shareholder is money taken from the business and given to the partner or shareholder. Withdrawals are tracked through the capital accounts.