Your Complete Guide to the U.S. Tax Return Definition

Tax is the money paid by citizens and businesses to the government so that they can make roads, build and maintain public parks, fund the army, provide policing, offer schooling and education, and more. 

Have you ever wondered how the U.S. government decides how much tax each individual must pay? The government’s staff don’t go knocking at everyone’s door to examine our finances and then calculate our tax duty. No, in fact, we do the job ourselves — through a tax return. 

So, what is a tax return, exactly?

This article will introduce you to the tax return definition, give an overview of its three main sections, and answer the most frequently asked questions about this financial matter. 

Tax return definition 

A tax return, also known as a tax report, is a form or a set of forms issued by the government which you fill in to report your income, expenses, and other financial information. When you complete your tax return, you’ll know if you owe any money to the government and how much to pay. In the case that you overpaid your taxes, you can also request a refund by filing the tax return. 

The tax return form for individuals for United States federal taxes is Form 1040, whereas Form 1120 is for corporations, and Form 1065 is for partnerships.

See also: What Is Tax Season And How To Prepare For Your 2022 Tax Return

The three main sections of a tax return 

Typically, a tax return consists of the following three sections: 

Income 

The income section lists all your income sources, such as wages, salaries, dividends, self-employment income, and royalties. If you’re an employee, your income will be recorded in a W-2 form provided by your employer. 

Deductions 

Deductions, also known as tax write-offs, lower your tax liability, which essentially means the more deductions you claim on your tax return, the less tax you’ll have to pay. Just be aware and make sure you only claim deductions that you’re eligible for. 

Some typical deductions for individuals that you may be able to claim are interest paid on your mortgage or your student loans, charitable donations, and contributions to your retirement saving plans. For business owners, you can claim tax deductions for most expenses involved in business operations. 

Taxpayers can either take a standard deduction or itemized deductions. For those who opt for the former method, the standard deduction for the tax year 2022 is $12,950 for single filers, $25,900 for joint filers, and $19,400 for heads of households. The deduction amount may increase slightly each year to keep up with inflation. On the other hand, if you use itemized deductions for your tax return, you choose from various individual tax deductions rather than taking a fixed deduction amount. 

Tax credits  

Many people get confused between tax deductions and tax credits, so here is the key difference: deductions are subtracted from your taxable income while credits are subtracted directly from your total tax bill. For example, a tax credit of $1,000 will result in a $1,000 reduction in your tax bill. On the other hand, a $1,000 tax deduction lowers your taxable income (the amount of money you have to pay taxes on) by $1,000. So, if you are in the 22% tax bracket, a $1,000 deduction would save you $220.

Tax credits cover a wide range of expenses and situations: you can get tax credits if you purchase solar panels for use in your home, or for child-dependent care and education credits, etc.

See more: How To File Taxes For The First Time: A Complete Guide To All Your Questions.

Who has to file a tax return? 

While most U.S. citizens and permanent residents who work in the United States need to file a tax return — not everyone must do it. Whether you have to file a tax return depends on your age, filing status, income level, and source of money.

To find out if you need to file a tax return this year, check out this detailed guideline from the IRS (Internal Revenue Service): Publication 501 (2021), Dependents, Standard Deduction, and Filing Information

What happens if I make a mistake on my tax return? 

If you filed your tax return incorrectly or failed to include something, you need to notify the IRS. To do so, you would need to file an amended return with the IRS using Form 1040-X. You can file it yourself or have a professional prepare it for you. If you don’t inform the IRS of these mistakes yourself, you could face financial penalties and pay interest. 

How can I track my refund? 

You can use the IRS Where’s My Refund? tool or call the IRS directly at 800-829-1954 to check on the status of your refund 24 hours after you e-file. The IRS will give you an exact refund date once your tax return and refund are approved.

You’ll likely receive your refunds in less than 21 days.

Final thoughts 

Understanding the definition of “tax return” and how it’s calculated will help you become more confident in dealing with this important financial process. As a result, you’ll gradually learn how to file your tax return quicker and more accurately. 

A great tip for everyone who wants to streamline their tax return filing process is to have your receipts organized. Receipts help you record transactions correctly and serve as concrete evidence for your deduction claims. It might be too much of a task to do yourself — and that’s where Shoeboxed comes in. 

Shoeboxed is a well-trusted tool to help businesses, freelancers, and DIY accountants store and organize their receipts. It quickly scans and digitizes your receipts and documents, then automatically extracts, categorizes, and human-verifies important data from your receipts. On top of that, Shoeboxed also helps you manage expenses, store business cards, and track business mileage easily, helping you boost productivity and bring in more revenue. 
Go paperless with Shoeboxed for FREE today!

Finding the Best Tax Solution for Small Businesses in 2022

The 2022 tax season has the potential to bring a lot of headaches for many business owners. If you’d like to file your taxes yourself, maximize your tax refund as much as possible, and get it promptly, then choosing the right tax solution will save you a lot of time and hassle. 

This article will list the best five popular online tax preparation software in 2022 and their specific features to help you choose the right one. As a bonus, we’ll also give some general tax tips near the end of this article.

TurboTax – Best tax solution for ease of use

When it comes to the easiest tax solution, TurboTax is the clear front-runner for a good reason. This software combines tax expertise and an easy user experience, enabling self-employed individuals and sole proprietors to file their taxes with as many deductions as possible. 

TurboTax is very easy to use as it walks you step by step through the filing process. During this process, this app collects your financial situation by asking you a series of interview-style questions. The questions are written in plain English and follow an interview format. After that, the software fills out the appropriate tax forms based on your answers. Moreover, the TurboTax Live feature offers the help of a tax professional, which further enhances the company’s software solutions. 

TurboTax‘s outstanding features include free audit support and free multi-year storage. That means if you use the software year after year, your past returns are saved on the site, saving you time and effort. The software also offers extra features, tools, and calculators specifically designed for self-employed filers and those with more complex tax returns. Self-employed filers, for example, receive a free one-year subscription to QuickBooks Self-Employed. You can even store your receipts and track business mileage throughout the year to maximize your business deductions.

While TurboTax brings a user-friendly interface and numerous feature options, its price is quite a bit higher than other competitors. The Deluxe option costs $59 for your federal return and an additional $50 for each state return. There is, however, a free option for tax-filers with simple tax situations. Though TurboTax‘s paid version may cost more than other tax software, the peace of mind you’ll have could be worth the extra expense. 

Base price: From $59. 

Available on: iOS, Android, and website

TaxSlayer – Best budget tax solution

TaxSlayer is definitely the No.1 option for best budget software. This app offers no-frills tax preparation at reasonable rates, and its full-featured software will entice filers on a tight budget. TaxSlayer, similar to most popular tax preparation software, walks tax-filers through their returns with a question-and-answer format. Some other outstanding features of TaxSlayer are free multi-year storage and reimbursement for penalty or interest charges. 

It offers four service levels, from Simply Free, Classic, Premium, and Self-Employed, ranging from $0 to $48. The free version also lets you file a simple tax return, much like TurboTax, while the Classic filing option gives you access to all major tax forms. 

Unlike most other filing software, TaxSlayer doesn’t require upgrading to access certain forms. If you purchase the premium version, it just offers more features, such as audit assistance and a guide to self-employed taxes.

Base price: From $17.95. 

Available on: iOS, Android, and website

H&R Block – Best tax software for in-person filing

H&R Block is a tax solution specially designed for small business owners. It guides users in preparing and filing partnership and LLC returns (Form 1065), as well as produces payroll forms for the IRS (Forms 940 and 941) and employer forms for employees (Forms W-2 and 1099). The software also lets businesses maximize tax benefits from business expenses, vehicle deductions, equipment, and asset depreciation. H&R Block offers free, unlimited state program downloads and business e-filing, as well as federal and state forms. H&R Block also guarantees 100 percent accuracy, offers audit support, and provides free advice from H&R Block tax experts. 

In addition to using H&R Block‘s software to file your taxes, the company provides three full-service tax preparation programs. First, you have two options for tax prep performed at an H&R Block office. The first one is an in-person tax-prep service, in which you sit with a tax professional in a local office (or at home on a computer) while your return is being prepared. The second option is a drop-off service, in which you leave your tax papers at the office and come back to sign the final paperwork, where everything is calculated on the correct forms. The price for both scenarios  starts at $80 for basic returns, plus an extra charge per state.

H&R Block‘s newest option lets you upload all of your forms for a completely virtual tax preparation experience. This means you receive the full service of an H&R Block representative without having to walk into a physical office. The combination of many locations and multiple tax preparation options at a reasonable price makes it our best overall pick.

Base price: From $49.99. 

Available on: iOS, Android, and website

Cash App Taxes – Best free tax solution

If your business’s goal is to save banknotes, consider using Cash App Taxes. Cash App Taxes, previously known as Credit Karma Tax, makes its debut with a completely free tax preparation solution that includes all accessible IRS forms and schedules. It offers users one federal and one state tax return, entirely free, with maximum accuracy and refund guarantees. Cash App Taxes comes with a simple interface and an interview-style process that quickly collects data about your tax situation and then populates IRS forms.

However, this app lacks a file importing feature, which means you’ll need to enter your information manually. Cash App Taxes also has several limitations that may exclude some tax-filers: No multiple state filings, no foreign income, no married filing separately option in community property states like California or Texas. It also lacks professional tax support, so we recommend Cash App Taxes to tax filers confident in handling their own taxes, having a few forms, and relatively simple tax situations. 

Base price: Free. 

Available on: iOS, Android, and website

Bonus: Shoeboxed – the painless tax filing preparation for freelancers and small businesses

The Shoeboxed app is exclusively designed for freelancers and small businesses who would like to have their expense reports “audit-ready.” Shoeboxed assists users in tax filing by quickly and efficiently digitizing your receipts and documents. Our OCR engine automatically extracts and categorizes important data from your receipts, then storing them securely in the cloud. From there, you can create and export clear, comprehensive, and accurate financial reports from your paper receipts. 

What if you’re too busy to scan your receipts? You can always mail them to a Shoeboxed facility to have them scanned and organized. 

Most importantly, scanned documents from Shoeboxed are human-verified data and approved by both the Internal Revenue Service and the Canada Revenue Service in the event of an audit. Shoeboxed helps you get your records clearly organized and well stored, making sure you don’t have to pay any more tax than necessary. 

Shoeboxed integrates with numerous accounting programs, like Quickbooks, Xero, Wave Accounting, FreshBooks, and so much more. This means no more manual entry required, no more missing receipts, and no more wasting time preparing for tax season. What’s more, Shoeboxed offers a mileage tracking and business card storing feature, making it a one-touch app to access all your important information. 

Tips for an easy tax preparation

Here are some helpful tips for lowering taxes, saving time and money, and avoiding tax penalties:

  • If you have self-employment income, itemized deductions, investments, or other complicated tax situations, you can consider seeking tax planning assistance from a qualified financial expert to help ensure your tax efficiency. The additional expenses you’re paying could result in a higher return, making the upfront expense a wise investment. However, it depends a lot on your individual filing situation, your withholdings, and your tax bracket.
  • Set a deadline to gather all your financial documents, such as your W-2 forms, 1099-s forms, information of your investment income, last year’s tax refund, student loan interest, and other items listed on the IRS Tax Form checklist. Breaking the intimidating task of the filing process into smaller parts saves you from a last-minute marathon session to meet the filing deadline. You can also check Shoeboxed’s guide to file taxes for the first time
  • If possible, try to digitize all your important information into Shoeboxed’s well-organized system. This will help clear your desks and drawers from piles of papers and enables you to access your data from anywhere, at any time. 
  • Learn about tax write-offs. Understanding what you can and can’t deduct from your taxes helps you better control how taxes impact your situation and maximize your tax return.

The bottom line

Choosing the best tax solution depends on the needs of your company. Whether you’re looking for a program that offers all the Schedule forms, or one with the simplest interface, there are many choices available. By comparing each software’s features and pricing with your business’s needs, you’ll be able to decide which one is the best tax solution for your business. Keep in mind that the more complicated your tax situation, the more likely you’ll need a premium plan. Otherwise, the basic or free plan can work for you. 

Sign up for Shoeboxed today to start your 30-day trial and see how this app can benefit you in all sorts of practical situations! 

Don’t forget to subscribe to the Shoeboxed blog for more useful tax information, success stories, DIY accounting, together with the latest Shoeboxed product update. 

Understanding the IRS’s Tax Underpayment Penalty and How to Avoid It

Whether you are a freelance worker or an owner who earns money from your business, if you didn’t pay the estimated tax properly, you could end up paying an Internal Revenue Service (IRS) tax underpayment penalty. 

This article covers what can trigger a penalty and what you can do to avoid penalties in the future. 

What is a tax underpayment penalty and how does it work?

Though you only file one tax return each year, federal income tax is technically a pay-as-you-go system. You’re expected to pay tax on your income as you earn it throughout the year. Ordinarily, your employer does this for you through income tax withholding. However, if you are a freelancer, you must make your own tax payments throughout the year.

A tax underpayment penalty is a fine imposed by the IRS on individual or corporate taxpayers who don’t pay enough of their estimated taxes, don’t have enough withheld from their wages, or who pay late. The purpose of this penalty is to promote on-time and accurate estimated tax payments from taxpayers. 

The IRS may charge the tax underpayment penalty if you owe more than $1,000 in tax when you file your tax return. They may also apply this penalty if the payments you made add up to less than 90% of the tax you owe. For example, suppose that you owe $10,000 worth of tax on your 2020 tax return, but you only made $8,000 in estimated tax payments. In this case, since your tax payments only amounted to 80% of the tax due, the IRS could apply a penalty. 

The tax underpayment penalty isn’t a static percentage or flat dollar amount. Suppose the taxpayer realizes that they have underpaid taxes. In that case, they must then pay the difference plus a penalty calculated based on the remaining balance owed and how long the amount has been overdue. 

The failure-to-pay penalty that applies to tax underpayments is 0.5 percent of the amount owed for each month (or another time frame) the tax is not paid. This underpayment/failure-to-pay penalty won’t exceed 25% of the unpaid amount. 

Along with a penalty, tax underpayments (as well as overpayments) generate interest. The IRS sets the interest rate every quarter for most individual taxpayers, based on the federal short-term rate plus 3%.

The interest payment rates for Q4/2021 (announced on Aug. 25, 2021) are:

  • 3% for individual underpayments
  • 5% for large corporate underpayments (exceeding $100,000)

Exceptions for underpayment penalties

There are certain exceptions when the underpayment penalty doesn’t apply, which are: 

  • A taxpayer’s total tax liability (after withholdings and credits) is less than $1,000
  • The taxpayer paid a minimum of 90% of the total tax from the current year’s return or paid 100% of their tax liability from the previous year. (*See below for a more detailed note)
  • The taxpayer missed a required payment due to an unforeseen, uncommon, or noteworthy event (such as a casualty or disaster)
  • The taxpayer retired at age 62 or older during the prior or current tax year 
  • Estimated payments were unfulfilled because the taxpayer became disabled during the tax year or the preceding tax year
  • Any other situation in which the underpayment was due to a reasonable cause, not willful neglect. 

(*Note: In this case discussed in this second point, the rule changes a bit if your annual income increases. If your adjusted gross income for the current tax year exceeds $150,000 ($75,000 if married filing separately), you must pay 110% of your previous year’s tax liability.

However, those who don’t qualify for the above exceptions may still qualify for a reduced tax underpayment penalty in certain circumstances. For instance, individuals who change their tax filing status from “single” to “married filing jointly” may be eligible for a reduced penalty because of the higher standard deduction.

What you can do if you received a tax underpayment penalty

Generally, if you fail to pay a sufficient amount of your taxes owed throughout the year, the IRS can issue a tax underpayment penalty. However, suppose you have already paid enough and still receive a tax underpayment penalty. In that case, you may request to have it waived by showing a reasonable cause or proving that you were unable to calculate your estimated income. 

In some cases, you may successfully reduce or eliminate your tax underpayment penalty if the IRS provided you with incorrect information. For example, if you called the IRS to address a question and got the wrong advice from an IRS agent, you might succeed in avoiding a tax underpayment penalty. To be eligible for this, make sure you always note down the date and time of your call to the IRS as well as the name of the person you spoke to. If you encounter an agent who is hesitant to give you a firm answer to your question, try to be patient with them. Many agents are cautious to answer anything that could be regarded as tax advice for fear of misspeaking or giving you wrong information.

How to avoid tax underpayment penalties in the future?

No one likes ending up with a tax underpayment penalty, so here are some steps you can take to avoid this penalty in the future. 

1. Be aware of when your payments are due

For starters, adequately paying quarterly taxes by the dates shown below will help save you from incurring the underpayment penalty: 

  • Apr. 15
  • Jun. 15
  • Sept. 15
  • Jan. 15 of the following year

If a due date falls on a weekend or holiday, the payment is due the next business day.

2. Annualize your income

Generally, you don’t need to wait and pay all your tax liability at the end of the year. Especially if your income is unpredictable or seasonal, you may want to annualize your income, which basically means you will pay your tax payments based on a reasonable estimate of your income during each quarterly period. 

If you own a seasonal business and most of your annual earnings come from three consecutive months, annualizing your income can help you better estimate your tax payment. Calculating your estimated payments and making quarterly estimated payments can help you avoid the tax underpayment penalty. To use this method, you need to complete Form 2210 and attach it to your return.

For example, your business makes $30,000 per year, but all of that money comes in from June through September. When determining your estimated payments, take the $30,000 you expect to make and divide it by 12 months. This way, you can spread the amount of your estimated tax payments evenly across the year and make sure you don’t break the IRS’s pay-as-you-go rule.

3. Adjust your W-4 withholding

Generally, employers must withhold taxes from employees’ paychecks based on their earnings and employees’ information on their W-4s. If your employer isn’t withholding enough tax, you can make up the difference by revising your W-4 and requesting that they withhold more.

You can use the IRS withholding calculator to estimate how much your employer should withhold from your paychecks. Then fill out a new Form W-4, indicate how much you want to be withheld, and submit it to your employer. This can reduce or even eliminate the need for making estimated payments on your own.

The bottom line

To pay the right amount of your taxes owed throughout the years, you can ask your employer to withhold more from your paycheck. Otherwise, you can calculate and make your quarterly estimated tax payments if you’re a freelancer.

Submitting tax payments on time and filing paperwork can seem daunting, but it’s all part of developing a disciplined, well-organized documentation process. The Shoeboxed app can help your business stay efficient and organized!

Shoeboxed is a painless receipt-tracking and expense-managing app that helps get you ready for tax seasons. After scanning your receipts with the Shoeboxed app, you can create clear and comprehensive expense reports that include images of your receipts. You can then export, share or print all of the information you need for easy tax preparation or reimbursement, all within a few clicks. Shoeboxed ensures that the digital versions of your receipts are legibly scanned, clearly categorized, and accepted by both the Internal Revenue Service and the Canada Revenue Service in the event of an audit. 
The Shoeboxed app is available on iOS and Android. Try Shoeboxed for free and get yourself prepared for tax seasons!