The Self Employed Vicious Tax Cycle

Let us lay out a scenario. You are a self employed individual. You are meeting with your tax accountant to complete your taxes by April 15 and are told that you owe a bundle in taxes for the year. In addition to the thousands you owe (that is due by April 15), your tax accountant advises you to also make your first estimated tax payment for the current year(also due April 15).

You simply do not have the money. You get set up on a payment plan to pay the balance due and because you are paying off this amount, you surely cannot make estimates for this year. At this rate, it feels as though you will never catch up. Does this sound familiar? Let’s talk about the vicious cycle of taxes and why estimated tax payments are important.

Estimated tax payments are due April 15, June 15, September 15, and January 15 (Note: The 4th quarter payment is due in the following year). Particularly, if you are a self employed individual, you should be making estimated tax payments. If you do not, with 100% certainty, you WILL owe every year. When you are self employed, your income has no withholding. You are on the hook for federal tax, state tax, but also self employment tax on this income.

To illustrate, think back to a time when you were a W-2 employee. Your actual pay was $2,000 but by the time you got your check, it felt like only a small portion was deposited in your account. The difference between your gross check and net check was a result of all those taxes are being taken out each paycheck. When you transition over to a position where you are getting a 1099, you are now considered self-employed and are responsible for paying these taxes on your own. This is a very important concept to understand.

We believe that proper planning starting in the beginning of the year can alleviate the illusion that you do not have the available funds to pay taxes at year end. I say illusion, because if your business is profitable, you did have the money at some point, you just spent it on something other than taxes. If you choose to put aside funds and pay as you go, you will never have such a large balance at year end. Being proactive and making the estimated payments will leave you from having a large amount due at year end, as well as help you to avoid associated underpayment penalties.

We attempt to explain this to clients before they get caught up in the vicious cycle. If you are already at the point where you are in the cycle, there is a way out. This will take planning and budgeting, but it will be worth it in the end. Please let us know if you have questions.

Our Spring Clean-A-Thon: Helping Others via Charitable Donations

In December, the Adam Shay CPA team ventured out for our volunteer day expecting to decorate the Harrelson Center downtown for the holidays while learning about each organization. Sadly, when we arrived at the center that Monday morning, we were informed that over the weekend, someone had vandalized the building, flooding every level. While we were not able to decorate, we were able to help the center start cleaning up the mess. We hate that it happened, but we were glad that we could be there to help.

For those of you who do not know, The Harrelson Center houses various non-profit Organizations that are helping our wonderful Wilmington Community. For example, Wilmington Area Rebuilding Ministry (WARM), Phoenix Employment Ministries, and Philippians 3 are inside the center. Even with such a disaster, everyone there had such a positive attitude and was a joy to work with.

We have worked with WARM in the past, but we were able to learn more about each of the other organizations. Philippians 3 Ministries spoke to our hearts. This organization does a variety of helpful things for the community, such as providing clothing to job seeking individuals. In addition to that, they provide help to families that need assistance with food through their “Food for Families” Program. They were able to provide 40 families with Christmas dinner this year. These are families that without Philippians 3 assistance would have gone without.

Can you imagine not being employed and one huge barrier to getting a job was that you did not have the funds needed to purchase business clothing? Most of us know how expensive a good suit can be. Can you imagine walking into Christmas dinner with your family and not having food? Most of us cannot. Let’s look into our hearts (and closets) and work together to make this fundraiser a success.

Adam Shay CPA, PLLC is hosting a professional attire clothing drive. We are partnering with Philippians 3 Ministries, a local 501(c)(3) nonprofit organization that provides interview clothing for job seeking individuals in our community that could not otherwise afford it. It is never too early to start racking up charitable contributions for 2016! Join us in supporting this wonderful nonprofit organization. For a specific donation list
and information about the nonprofit organization contact [email protected]. Donation receipts will be provided upon drop off at our office. Donations will be accepted now through the end of April.

**For those of you who want to participate but do not have business attire that you can part ways with, we will also accept non-perishable food items as well as monetary donations.

Insolvency and Cancellation of Debt

Generally, if you are forgiven or discharged from debt in which you were personally liable, you are required to include the cancelled amount into income in the year in which it was cancelled. The company that is forgiving the debt will issue you a 1099-C showing this amount.


Keep in mind, if you default on a credit card, this process could take a couple of years before the company releases you of the debt. The correct thing to do upon receiving the 1099-C is amend the tax return for that year and pay the amount of taxes due.


There is an exception to the rule. If you were insolvent (your liabilities were more that your assets), you may be able to exclude this additional income on your federal tax return. Upon receiving the 1099-C, if you discover that you were indeed insolvent, you should still file the amended tax return and attach Form 982.


Keep in mind that state laws are typically not the same. They do not exclude this income regardless of your situation. The “income” will be added back to you state tax return and you will owe the taxes.


If you have questions, please let us know.

What is Cucalorus?

“Cucalorus is a non-competitive festival focused on supporting innovative artists and encouraging creative exchange. The festival is held each November 11-15 in historic downtown Wilmington, North Carolina with screenings of 150 films from around the world.” With Wilmington, NC having a very active film community, this event allows not only our community but others across the United States to have the opportunity to support the arts and/or showcase their material.

Some of you may feel that this is not for you. While you may think the concept is great, if you are not into film, you may wonder how you could really relate to any of this. Perhaps you like to watch movies and you appreciate the arts, but film and technique is completely out of your wheel house and/or interest. Great news! There are now more ways you can participate.

Starting in 2015, the event organizers took it a step further. The festival has added a segment called “Cucalorus Connect” which is more business oriented than film. There is a range of events to attend. Common themes have been entrepreneurial focused, innovation, company culture, and collaboration.

Both film and business are very important aspects of our community. What if we added the creativity from film and the business oriented minds together? What do we get? The answer is, a great opportunity for collaboration.

I started with “Spreading Innovation and Port City Pitch”.   The keynote speaker was Joan Siefrert Rose, the President/CEO of The Council for Entrepreneurial Development (CED). She presented the audience with three companies that work with CED that had been successful. It was interesting to hear how each of the three companies got to where they are: Phononic, bioMASON, and Spoonflower. Although each were in very different industries, they all have one common thread. They have entrepreneurial spirit and the creative mindset.

Later in the day, I attended “Tellin’ it like TED #1” where we heard from some business owners in the community, Stephanie Lanier (Lanier Property Group) and Jordan Watson (National Speed). Stephanie spoke on company culture and what she has done within her business to improve on this. Jordan spoke on being an entrepreneur and following his vision. Both offered interesting and helpful insights to business.

I am attending additional events, but wanted to get this out there so that the community would be more informed about what Cucalorus is. You can visit the website to see the remaining events at:

NC Personal Income Tax Changes for 2015

As a North Carolinian, we have seen some dramatic tax law changes over the past couple of years.  It seems as though our government is attempting to make our state more tax friendly. It was nice to see the recent updates to North Carolina tax law for individuals. There were three main areas of change: restoration of the medical expense deduction, increase in standard deduction, and income tax rate decrease.

1. Restoration of Medical Expense Deduction: Before 2013 legislation, North Carolina’s itemized deduction was based on the federal calculation. In 2013, North Carolina limited these deductions to just charitable contributions, real property taxes paid, and mortgage interest (taxes and mortgage interest limited to $20,000 as well as removing medical expenses from this list of allowed itemized deductions.

Starting again in 2015, individuals that itemize on the federal level will be able to deduct medical and dental expenses on the state level as well. This will be very helpful to those who have high out of pocket medical costs.

2. Increase in Standard Deduction: Starting in 2016, the North Carolina standard deduction will increase to $15,500 (from $15,000) for married filing jointly. For single, it will increase to $7,750 (from $7,500).

3. Rate reduction: The North Carolina tax rate has dropped each year and will continue to do so. For 2014, it was 5.8%. For 2015 and 2016, it will be 5.75%. In 2017, it will be 5.499%. This was huge for our state as the top tier used to be as high as 7.75%.

This is a very positive change for North Carolina. Stay tuned for more updates.

Data Security

After the data breach from Turbo Tax, IRS data breaches, credit card hacking schemes, and similar instances,  we can see why some clients are apprehensive of virtual process.  This could range from the e-filing of a tax return to sending documents over the internet to using credit cards. Here are some tips to make your data more secure:

1. Do not send sensitive data directly over email.

This includes tax returns, statements that would have your social security numbers listed (W-2, 1099, etc.), banking information, etc. This even pertains to simply listing these sensitive items in the body of the email.

This could come up when sending data to your CPA, to your banker, to your attorney, etc.

If you must, at the very least password protect your files. Be sure the end user knows the password so they can access the document. Be smart about it. Do not send the password as identified as such in the body of the email.

2. Use a program to send sensitive data more securely.

For example, Sharefile. Sharefile encrypts the data and keeps it safer than simply sending via email. Sharefile (and programs like it) are also good for the storage of data.

3. Use the EMV chipped credit cards and equipment.

If you are the customer, be sure to use the new credit cards with the chip. If you are the business, be sure to convert to the updated credit card reader machines (that reads the newly chipped credit cards) by October 1, 2015. See our blog on EMV chips.

4. Choose smart passwords.

Be sure to use passwords that are hard to guess. Use both upper and lower case, symbols, and make 8-12 character long. Change your passwords from time to time.

5. Be sure that you have a strong firewall and antivirus protection. This can help hackers from getting in and viruses getting onto your computer.

As we see the shift in most processes becoming digital/virtual/cloud based, it’s important to keep yourself safe. Try to stay up to date on typical schemes. These are areas that constantly evolve. As the data theft evolves, ways to protect yourself will to. If you have any questions, please feel free to let us know.

EMV Credit Cards

About a month ago, I received an updated credit card in the mail, but this one was a little different than my old version. This version had a little chip on the front of the card. I began to notice that in some stores, they now required me to place the entire card inside the credit card machine and wait, as opposed to quickly swiping the magnetic strip as usual. What is the purpose of this chip and the new process?

I am sure you all remember the 2013 Target debacle where hackers stole the information from many customers. Shortly thereafter, this sort of thing was happening regularly. These instances cost the credit card companies and businesses millions of dollars and anyone who was involved stress and headache.

There HAD to be a better way to protect ourselves from hackers. The credit card companies came up with this new chip card technology, often referred to as “EMV chip”.

This EMV chip will eventually replace the traditional cards magnetic strip. This chip will hold the customer information. This technology will make it much harder for hackers to steal your account information. The chips generate a code for every transaction as opposed to sending your information directly over to be processed.

Businesses will need to get updated credit card readers. For now, you will have the chip on the card as well as the traditional magnetic strip. After October 1, 2015, if a customer has a card with this type of technology and a business does not use a credit processing machine that will read it, the business owner is now liable for any type of fraud that occurs.

If you are a business owner and are using credit card processing, you should contact your credit card processing company and make sure that you will be in compliance by October 1. If you are a customer, you should be receiving your updated EMV chip credit cards in the mail.

Fall Extension Deadlines

For taxpayers that extended their returns, the fall extension deadlines are rapidly approaching. If you have an extension filed for your S-Corporation, Partnership, Estate, or Trust tax return the deadline is September 15. If you have an extension filed for your personal tax return, the deadline is October 15.

It’s important to get your tax preparer the necessary information to complete the return. Keep in mind, most firms have an internal deadline where they will need your information  a certain amount of days prior to the actual deadline to ensure a timely filing.

At our firm, we request that our clients have their information to us one month before the actual deadline. To understand why we need that much time, it’s important to know there is a formal process (intake, scanning originals, tax preparation, review, completion). Once we have all of your documents, we try to stick to a two week turnaround time. This process could be more or less depending on where we are in the filing season.

Deadlines should not be ignored. There are penalties assessed if you do not file.

If you have questions regarding filing deadlines, feel free to let us know.

Audit Triggers

What can trigger a tax return to get examined by the IRS?

We don’t know the specific details, but here are some factors that the IRS shares:

1. A high score on The Internal Revenue Service Discriminant Inventory Function System:

The IRS runs tax returns through the Discriminant Inventory Function System. This system assigns a numeric score to each return. If your return has a high score, it is likely you will be selected for an examination.

2. Filed return does not match third party reporting:

Your return could be selected if your filed return does not match what was reported to the Internal Revenue by third parties (1099’s, W-2’s, etc). If you are in doubt, have your tax preparer pull your “Wage and Income Transcripts” from the IRS. This will show you what they have on record.

3. Outside news does not match returns:

Another reason to be selected for an audit by the IRS is if outside information does not agree with a filed tax return. This could be newspaper articles, news stories, public records, etc. We have seen this happen more recently with a reality television celebrity family. If you own multi-million dollar homes and expensive assets, the funds to purchase these things had to come from somewhere.

4. Random Selection.

Number four means that you could do everything that you should and still get selected. The most important thing to do knowing this, is make sure that even if you were to trigger an audit, you have reported all information and it has been done correctly. When you are not sure, you should seek professional assistance.

Our Wilmington Area Rebuilding Ministry (WARM) Volunteer Event

This week, our team volunteered with Wilmington Area Rebuilding Ministry (WARM). We wanted to share with you more on our experience.

First off, what is WARM? WARM, Inc. organizes volunteers and raises funds to complete safety-related urgent home repairs and accessibility upgrades for low-income homeowners in Brunswick, New Hanover and Pender Counties.

The activities may vary from project to project, but our team worked on a roof support replacement project – which was one small piece to the many things being done on this particular home. When it is all said and done, the flooring and the roof would be replaced on this particular project. There will be a handful of groups that come through to complete the task.

Just to give you an idea of the conditions, the homeowner was already on the list to have repairs done, but before the task could be completed, this homeowner’s roof blew off in the last storm we had. Can you imagine what that would be like? Most of us cannot. If you have any compassion at all, seeing this will make you want to help even more. It certainly pulls on your heartstrings to say the least.

Why is this type of volunteering good for your team? It encourages team work. We had a few on ladders with drills, others were outside cutting out the boards that were being used, one was moving furniture to one room to another, etc. All of these tasks were important in getting the overall job done.

Can you or your team volunteer? Absolutely. WARM is always looking for volunteers to help out on projects.

What if you have no skills in this area? This is where team work comes in. We helped each other get the job done. Some of us are more handy and/or strong than others. There was also an employee from WARM to give us direction and show us exactly what we needed to do. If you can follow directions, you will be fine.

Volunteering in the community allows us to give back to this wonderful town that we live in. If working on a project like this is not your thing, there are plenty of other opportunities out there with other organizations. We have gone to schools and worked with the children, worked at The Food Bank, etc.

If your heart is calling you to help but you simply do not have time for that, you can always help in other ways. Any of these organizations are always accepting donations.

If you are thinking of volunteering and had questions about it, feel free to reach out to us.