Everyone has once thought of a way to reduce their taxable income. Taxpayers at times go as far as protesting for tax reduction. Some think of a filing structure that reduces tax. However, many factors have been implemented at each opportunity to stop this reduction from happening. And one way is through Personal services income (PSI). The PSI system is structured to make money from your skills or effort. You file PSI by differentiating the figures of each income as a contract or invoice. Here;
If you receive 50% and above on an invoice or contract from your labor, skills, or enterprise, it is expected to be recorded as PSI.
But you have no worries for PSI if you receive less than 50% from your labor, skills, or enterprise.
Also, PSI principles do not affect employee wages or salaries, among other little incomes. That is;
If you get income from selling or distributing finished goods, even if you manufacture them.
If the income is from an asset like rental cars or machines
If the income is from your intellectual property like a patent
However, some businesses are exempted from PSI and are considered Personal Services Business (PSB). But your income will have to undergo four tests.
Results test
Unrelated clients test
Employment test
Business premises test
Note that a business that receives more than 80% of its earnings from a single client is subjected to tests 2 to 4 and is filed using the 80% rule. Though there are four tests, you'll only have to get good grades in one to avoid PSI rules. However, the structure has to be the same for each year except for the figures, which vary with the income received for the years.
If the income is 50% foreign and 50% in the United States, you must file the correct figures received and taxed under the United States PSI rules. Aside from fringe benefits, each figure must be reported alongside the time you receive it. You do this by multiplying the figures paid by the number of days spent rendering the services in the United States. You get the entire day by dividing the number of days you worked in the US by the total number of days spent on the job.
For instance, Murphy Julius, a nationalist and resident of Gambia, works in the US as an HRM. According to the contract, he earns $150,000 for 242 days of work each year. The day comprises work and off days during the contract. Murphy spent 194 days out of 242 days working in the US and 48 days in Gabon. The income filed as PSI to the United States is $120,248 ((194 ÷ 242) × $150,000).
People can overpay their PSI taxes without knowing because of errors in calculating their allocated PSI income. The filing structure is a bit complicated, giving chances for mistakes, especially when deducting from earnings. Here are some of the misleading factors.
Failure to realize they pay for some items through their business accounts. These personal items can be clothes and food.
Going DIY or filing the tax through software without the help of a professional. Some of this software is still new in the market and under trial.
Mismanaging deduction by mistakenly adding extra figures to PSI taxes.
Inputting wrong figures or calculations for capital gains and losses
Misallocating expenses and other things made by the business
In summary, getting the correct digits for PSI is complex, and a professional is the best to contact to avoid miscalculation and overpayment. The tax professional should be licensed, trained, experienced, and trusted for the job.
FOR MORE INFORMATION ON HOW KLSM CPA FIRM, PLLC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLlICK THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
