Glossary

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1099

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 WithheldHint: 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?

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Accrual Method

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.

Accuracy-Related Penalties

An Accuracy-Related Penalty occurs if you claim deductions or credits you do not qualify for and because of these claims, you do not pay the accurate amount of taxes you owe.

Adjusted basis

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

Adjusted Gross Income (AGI) is defined as gross income plus or minus adjustments to income such as deductions.

Amount Realized

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.

Annual Information Return

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.

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Calendar Year

A calendar year, also known as a tax year, is January 1 to December 31.

Capital Account

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.

Carryback

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.

Carryforward

A carryforward allows business owners to use net operating loss deductions in future tax years.

Cash method

The cash method is a form of accounting that tracks revenue and expenses only when cash is actually received or spent.

Corporation

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.

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Deductions

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.

Dividend

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.

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Estimated tax

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

Excise tax is a type of tax that is imposed on certain products such as alcohol, soda, and cigarettes.

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Gross Payments

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

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.

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Net operating loss

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.

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Payroll tax

This refers to the tax put on employees’ wages. A portion of this tax is deducted from an employee’s check and the other portion paid directly by employers.

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Self-Employment Tax

Self-Employment Tax refers to the 15.3% that small business owners pay to cover Social Security and Medicare benefits.

SEP-IRA

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.

Standard Mileage Method

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.

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The "Tax Gap"

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.

Read more here.

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