IRS Form 1098
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Question:
What purpose does IRS form 1098 serve
Response:
Returns by persons receiving mortgage interest payments are made on Form 1098, Mortgage Interest Statement, and must include:
· the names, addresses and identification numbers of the payer and the recipient;
· the telephone number of the information contact of the person required to file the form.
This number should provide direct access to the individual or individuals with the immediate resources to resolve a taxpayer’s question promptly (for example, the department of the payer with the relevant information).
· the amount of mortgage other than points received during the calendar year;
· the amount of reimbursements of mortgage interest.
· the amount of points paid directly by the payer of record; and
· any other information required by Form 1098 or its instructions.
An interest recipient must make all reasonable efforts to obtain the payer of record’s taxpayer identification number (TIN). If the interest recipient does not have the TIN, it must make the request at least annually. The request does not have to be made on any particular form and can be mailed together with other material. The request must be on a separate paper and clearly notify the payer that the IRS needs his TIN to verify any mortgage interest deduction. Form W-9, Request for Taxpayer Identification Number and Certification, can be used to make the request.
Returns on Form 1098 must be filed on magnetic media unless the interest recipient reasonably expects to file less than 250 such returns for the calendar year. Magnetic media filing may be waived in cases of undue hardship. A waiver is requested on Form 8508, Request for Waiver From Filing Information Returns on Magnetic Media.
The information return must be filed with the IRS office designated in the instructions to the Form 1098 on or before February 28 of the year following the calendar year in which the mortgage interest being reported was received. For returns filed after 1999, the due date for electronically filing Form 1098 is March 31 of the year following the calendar year in which the mortgage interest was received.
Every person required to file a return for mortgage interest received must furnish the payer with a written statement showing the name, address and identification number of the person filing the return and of the payer of record, the aggregate interest paid and a legend stating that the information is being reported to the IRS. Another legend must state that the reported interest payment is deductible on the payer’s federal income tax only to the extent that he actually paid the interest and was not reimbursed by another person and that, depending on the cost and value of the property securing the mortgage, limitations on deducting mortgage interest may apply. This requirement can be met by providing the payer with Copy B of Form 1098. The statement should be mailed to the payer at his last known address. The statement can be provided together with other information as permitted by applicable revenue procedure. An interest recipient that furnishes a statement to a payer of record under a federal mortgage program satisfies the requirement to provide a written statement if the statement contains all the information and legends discussed above and is furnished by the time and at the place required.
An interest recipient who is permitted to use the Rule of 78′s method of accounting can use this method to report mortgage interest only if the interest recipient notifies the payer of record that the Rule of 78′s was used to calculate interest received on the mortgage. The notice must state that the payer may use the Rule of 78′s for determining interest deductions only if the rule is properly applied to a self-amortizing consumer loan requiring level payments at regular intervals for no longer than five years, with no balloon payment at the end of the loan term, and the loan agreement provides for use of the rule. This notice is provided to the payer with the statement required to be furnished to the payer.
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Huntington Beach, CA 92648
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Student Loan Interest Deduction
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Question:
Is student loan interest deductible and are there limitations?
Response:
An eligible taxpayer can deduct qualified interest on a qualified student loan for an eligible student’s qualified educational expenses at an eligible institution. The amount of the deduction is limited, and it is phased out for taxpayers whose modified adjusted gross income (AGI) exceeds certain thresholds. Some income from the cancellation of student loans avoids taxation as cancellation of indebtedness income.The deduction is scheduled to change for tax years beginning after 2012, upon the sunset of provisions enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001.
The maximum deduction allowed for educational loan interest is $2,500. This amount is not adjusted for inflation.
Lenders who receive payments aggregating $600 or more for a calendar year on one or more qualified education loans must comply with reporting requirements and provide information statements to the persons paying the interest.
Loan Interest Deduction Phase-out
The student loan interest deduction begins to phase out for taxpayers whose modified AGI exceeds $50,000 ($100,000 for joint returns), and phases out to zero at modified AGI of $65,000 ($130,000 for joint returns). The phase-out thresholds are adjusted each year for inflation in increments of $5,000.
For tax years beginning in 2010 and 2011, the $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified AGI exceeds $60,000 ($120,000 for joint returns), and is completely eliminated when modified AGI is $75,000 or more ($150,000 or more for joint returns).
For tax years beginning in 2009, the $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified AGI exceeds $60,000 ($120,000 for joint returns), and is completely eliminated when modified AGI is $75,000 or more ($150,000 or more for joint returns). For tax years beginning in 2008, the $2,500 maximum deduction is reduced when modified AGI exceeds $55,000 ($115,000 for joint returns), and is completely eliminated when modified AGI is $70,000 or more ($145,000 or more for joint returns). For tax years beginning in 2007, the maximum deduction is reduced when modified AGI exceeds $55,000 ($110,000 for joint returns), and is completely eliminated when modified AGI is $70,000 ($140,000 for joint returns).
For this purpose, modified AGI is AGI increased by adding back:
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the domestic production activities deduction
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otherwise deductible student loan interest
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otherwise deductible qualified tuition and related expenses
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otherwise excludable foreign earned income and housing costs
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otherwise excludable income from sources within Guam, American Samoa, and the Northern Mariana Islands, and Puerto Rico
Modified AGI is calculated after
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the disallowance of passive activity losses
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the exclusion of qualified social security benefits
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the exclusion of U.S. savings bond interest used for higher education
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the exclusion of payments from adoption assistance programs
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the exclusion of qualified contributions to IRAs
Bartolme and Associates, Inc..
Certified Public Accountants
2134 Main Street Suite 270
Huntington Beach, CA 92648
714-969-1663
Fax 714-969-7225
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2011 Planning: Employee Business Expenses
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Question:
Can expenses I incur as an employee be tax deductible?
Response:
Now may be a good time to evaluate the expenses you incur as an employee in connection with your work. While your employer may be reimbursing you for some of these expenses, there may be others for which you are bearing the cost yet not utilizing the tax benefit. Through proper substantiation, it is possible that you may be able to obtain greater reimbursement from your employer. Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized deductions.
In order to be reimbursed and/or deducted, trade or business expenses must be ordinary, necessary, and reasonable. They also must be properly substantiated. Examples of qualifying expenses include:
- Travel, transportation, meal, or entertainment expenses
- Safety equipment, small tools, or supplies
- Uniforms required by your employer that are not suitable for everyday wear
- Required protective clothing
- Dues to professional organizations
- Subscriptions to professional journals
- Certain job hunting expenses
- Certain expenses for the business use of your home
- Computer costs
- Work-related educational expenses
You may also benefit from a review of the business expenses related to the use of your home. If you qualify for the home office deduction, you may be able to deduct part of your home’s normal operating expenses, such as utilities and insurance. The tax-savings opportunities available to you are dependent not only on the type of work you do at home, but where in your home you perform it.
The rules for deducting these expenses, as well as substantiating your deduction, vary according to the type of expense involved. It is important to retain all records and receipts that document the time, place, and business purpose of each expense.
Bartolme and Associates, Inc.
Certified Public Accountants
2134 Main Street Suite 270
Huntington Beach, CA 92648
714-969-1663
Fax 714-969-7225
We use industry standard tax research and professional service platforms.
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IRS – Offers in Compromise program
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Question:
How does the IRS Offers in Compromise program work?
Response:
The IRS’s Offers in Compromise program allows settlement of tax liability with the IRS at an amount that is less than the original tax liability. However there are some ground rules that clearly must be part of any deal that will be made for you with the IRS. Here is a summary of the operative rules as they now exist.
First contact. The first contact that the taxpayer who needs an offer in compromise will generally have with the IRS is on audit. There, the IRS examiner will make an assessment of taxes owed, and issue a notice of deficiency. Offers in compromise as to doubt of liability usually take place at an earlier stage than offers based on doubt as to collectability. Offers in compromise as to doubt of collectability almost always take place at the collection stage, after a liability has been reduced to judgment or is uncontested by the taxpayer. Some taxpayers combine the two grounds for an offer as a strategic move, on the assumption that the IRS will assume that the odds are greater that the amount will not be collected. Offers based on doubt as to collectability must be accompanied by a nonrefundable $150 fee. This fee has been imposed primarily to keep frivolous claims from clogging up the system for taxpayers with legitimate problems. If the offer is based on doubt as to liability, submission of a personal statement is not required, but the taxpayer must explain why the amount is owed to the IRS.
Financial statement. The financial statement form that a taxpayer is required to file with a formal offer in compromise is at the heart of the IRS’s examination of whether an offer is acceptable. Documentation required for the IRS’s financial statement analysis must include a full credit report for liabilities greater than $100,000. Financial statements must reflect information no older than the six-month period prior to submission of the offer in compromise.
Quick sale value, which is used to value most assets, generally is an amount less than fair market value (FMV), but greater than forced sale value (generally 75% of FMV). Determining fair market value for many items turns into a matter of opinion in many situations and it is often good strategy to document how valuation is determined on the taxpayer’s property so that the IRS is not tempted to call for its own valuation. Fair market value itself can reasonably vary by 15 or 20 percent depending upon the type of property and market conditions, which in turn can lower the figure set for quick sale value. The IRS cannot use the hindsight of any actual sale after the offer in compromise is in place to negate the agreement (absent a showing of fraud). However, taxpayers who wish to renegotiate a compromise offer may introduce evidence of a sale that brought in substantially less than had been anticipated on the financial statement.
Agent’s Worksheets. The IRS agent is instructed to use worksheets in evaluating an Offer in Compromise. Made available to tax professionals through the Freedom of Information Act, we know that this form requires that the IRS agent weigh nine principal factors included in “total income” compared against ten factors included in necessary living expenses. Necessary living expenses include:
• the National Standard expense;
• housing and utilities;
• transportation;
• health care;
• taxes;
• court ordered payments;
• child/dependent care;
• life insurance;
• secured or legally perfected debt;
• other miscellaneous expenses.
While the IRS is considering an offer, penalties and interest continue to accrue on the unpaid tax liability.
Payment requirements. Generally, an individual can offer one of three payment plans: (1) a lump sum cash offer, which must be paid in five or fewer installments; (2) a short-term periodic payment offer, which must be paid within 24 months from the date the IRS receives the offer; or (3) a deferral periodic payment offer, which must be paid over the remaining statutory period for collecting the tax. The offer must be accompanied by a partial payment. For example, the required partial payment for a lump sum offer is 20 percent of the amount of the offer.
Offer rejection? Having an Offer in Compromise rejected should not deter a taxpayer from further action. The taxpayer may ultimately win through an appeals process, through a resubmitted Offer, or through alternative terms such as an installment agreement.
The IRS Restructuring and Reform Act of 1998 requires the IRS to implement procedures to review all proposed rejections of taxpayer offers in compromise prior to the rejection being communicated to the taxpayer. This review is not conducted by the front line manager with direct supervisory authority over revenue officers working in compromise cases. The taxpayer’s second bite at the apple comes after the rejection letter is sent. Appeals rights are available to the taxpayer when any reasonable offer is rejected. Collection is prohibited during the appeal period.
In early 2011, the IRS announced an expanded streamlined offer in compromise program. The expanded program is intended to cover more taxpayers experiencing economic hardship. The streamlined offer in compromise program is expected to allow taxpayers with annual incomes of up to $100,000 to participate. Participants generally must have a tax liability of less than $50,000.
So, the upshot of all this information is that you may stand “a fighting chance” to strike a compromise with the IRS on your tax liability through their “new and improved” offers in compromise program. The IRS is still not “giving it away,” however, though with careful adherence to their new, less stringent guidelines, compromise is certainly more likely now than ever before.
Bartolme and Associates, Inc.
Certified Public Accountants
2134 Main Street Suite 270
Huntington Beach, CA 92648
714-969-1663
Fax 714-969-7225
We use industry standard tax research and professional service platforms.
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2011 Fourth Quarter Federal Tax Developments
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Question:
I remember there being several tax developments in late 2011. What were they and how do they effect my tax planning in 2012?
Response:
During the fourth quarter of 2011, there were many important federal tax developments that now have a direct impact on 2012.
Tax legislation
President Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011 on December 23, 2011, extending the employee-side payroll tax cut through the end of February 2012. In November, President Obama signed the 3% Withholding Repeal and Job Creation Act of 2011, which repeals three percent government withholding, enhances the Work Opportunity Tax Credit (WOTC) to cover more military veterans, expands the IRS’s continuous levy authority, and more. In October, President Obama signed the Trade Adjustment Assistance Extension Act, enhancing the health care tax credit (HCTC) for qualified individuals.
In related news, the IRS advised employers to implement the reduced employee-side payroll tax rate as soon as possible in 2012 but no later than January 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in employees’ pay as soon as possible but no later than March 31, 2012, the IRS instructed.
Foreign accounts
The Foreign Account Tax Compliance Act (FATCA) generally requires certain U.S. taxpayers holding specified financial assets outside the United States to report them to the IRS. FATCA also requires foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The IRS posted a final version of Form 8938, Statement of Specified Foreign Financial Assets, and Instructions on its website in December.
The IRS also issued a Fact Sheet alerting dual citizenship taxpayers, as well as U.S. citizens who reside abroad, to their obligation to file U.S. income tax returns and, if appropriate, a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. The IRS described possible penalties for failure to file, and grounds for avoiding the penalties.
Mileage rates
The IRS announced in December that the business standard mileage rate for 2012 will be 55.5 cents-per-mile, which is unchanged from the second half of 2011. The standard mileage rate for medical and moving expenses will be 23 cents-per-mile, reflecting a 0.5 cents-per-mile reduction from 2011. The statutorily-determined rate for the charitable deduction remains unchanged at 14 cents-per-mile for 2012.
Capitalization of tangibles
Just before year-end 2011, the IRS issued much-anticipated revised regulations on the capitalization of tangible assets. The IRS withdrew proposed regulations issued in 2008 and issued temporary and proposed regulations. The new guidance, the IRS explained, is intended to clarify existing standards and provide certain bright-line tests for applying the standards. The text of the temporary regulations serves as the text of the proposed regulations. The temporary regulations are binding on both taxpayers and the government.
Worker classification
A new IRS program – the Voluntary Classification Settlement Program (VCSP) – will enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of audit production and a reduced penalty framework. The VCSP is open to taxpayers currently treating their workers as independent contractors or other nonemployees and that want to prospectively treat the workers as employees. Other requirements also must be satisfied.
Inflation adjusted amounts
The IRS issued cost of living adjustments (COLAs) for various provisions in the Tax Code for 2012. Because of inflation, many provisions are adjusted upward for 2012. For example, the standard deduction for single taxpayers increases from $5,800 for tax years beginning in 2011 to $5,950 for tax years beginning in 2012, and the standard deduction for married couples filing a joint return increases from $11,600 for 2011 to $11,900 for 2012.
Social Security wage base
The Social Security Administration (SSA) announced that the maximum amount of earnings subject to Social Security will be $110,100 for 2012, up from $106,800 for 2011. SSA also reported that the so-called “nanny tax” threshold will increase to $1,800 for 2012.
Qualified plans
Many retirement plan contribution and benefit limits will increase in 2012, the IRS announced. The 2012 cost of living adjustments (COLAs) affect a variety of retirement savings vehicles, including defined contribution plans, defined benefit plans, employee stock ownership plans (ESOPs), and individual retirement arrangements (IRAs).
Decedents’ estates
The IRS released final Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, and its Instructions. Executors will use Form 8939 to make a “Section 1022 Election” to opt out of the 2010 estate tax and apply modified carryover basis.
IRS basis regulations
The U.S. Supreme Court agreed to resolve the split among the federal courts of appeal over IRS regulations that impose a six-year limitations period on assessments due to overstated basis. The government asked the Supreme Court to decide whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from income that can trigger the extended six-year assessment period; and whether a final Treasury regulation, which reflects the IRS’s view that an understatement of gross income attributable to an overstatement of basis can trigger the extended six-year assessment period, is entitled to judicial deference.
“Hot Stock” rule
The IRS finalized temporary regulations, which the agency described as mitigating the impact of the “hot stock” rule on Code Sec. 355 spinoffs if the controlled corporation is a member of the distributing corporation’s separate affiliated group (SAG). The final regs generally adopt the substantive rules of the temporary regs without change.
Per diem rates
The IRS issued the simplified per diem rates that taxpayers can use to reimburse employees for expenses incurred during business travel after September 30, 2011, retaining the high-low method. The simplified high-low per diems have increased for 2012 to $242 for high-cost localities and to $163 for all other localities, an increase from $233 and $160, respectively, for 2011. The IRS also announced it will not discontinue use of the “high-low” method for substantiating travel expenses.
Whistleblowers
A whistleblower who reported her employer’s significant tax underpayment to the IRS would be entitled to anonymity, the Tax Court held in December. However, the court found the whistleblower was not entitled to an award because the IRS had been unable to collect any additional tax from the employer.
IRS operations
The Treasury Inspector General for Tax Administration (TIGTA) highlighted some of the management and performance challenges confronting the IRS for fiscal year (FY) 2012 in November. According to TIGTA, the challenges include: keeping taxpayer data secure; tax compliance initiatives; modernization; implementing major tax law changes; fraudulent claims and improper payments; providing quality taxpayer service operations; human capital; globalization; taxpayer protection and rights; and achieving program efficiencies and cost savings.
Identity theft
A top IRS official told Congress that the IRS intends to take additional measures to combat identity theft during the 2012 filing season. In 2011, the IRS began issuing Identity Protection Personal Identification Numbers (IP PINs) to victims of identity theft under a pilot program The IRS intends to expand the IP PIN program.
Ponzi schemes
The IRS modified guidance issued in 2009 that allows investors to take losses in certain Ponzi schemes. The new guidance, the IRS explained, ensures that investors will still be able to deduct their losses if the lead figure in the Ponzi scheme has died.
If you have any questions about these or any federal tax developments, please contact our office.
Bartolme and Associates, Inc.
Certified Public Accountants
2134 Main Street Suite 270
Huntington Beach, CA 92648
714-969-1663
Fax 714-969-7225
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2011 Planning: Maximizing Itemized Deductions
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Question:
How can I maximize my deductions?
Response:
Successful tax planning includes a review of your available deductions and the impact of your filing status on your option to itemize. It is important that all of the technical requirements for your deductions are met. In addition, certain items are deductible only to the extent they exceed a percentage threshold. By reducing your adjusted gross income, you increase the amount of itemized deductions you can claim, because the floor limitation amounts are reduced accordingly.
A strategy commonly used in year-end individual tax planning is to determine the best timing for claiming itemized deductions. Generally, it is beneficial for taxpayers to defer income and accelerate expenses. This strategy may enable you to itemize your deductions if you claimed the standard deduction in the past. This year, some certainty for planning purposes is provided due to the extension of the reduced individual income tax rates through 2012 by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Relief Act of 2010).
In addition to the reduced tax rates, the Tax Relief Act of 2010 also extended numerous other tax benefits, including:
- Marriage penalty relief
- Repeal of the itemized deduction and personal exemption phaseouts
- Itemized deduction for state and local general sales taxes in lieu of state and local income taxes
- Mortgage insurance premium deduction
- Above-the-line deduction for certain out-of-pocket classroom expenses
- Above-the-line higher education tuition deduction and other education-related incentives
- Alternative minimum tax (AMT) patch
- Nonrefundable tax credit offset of entire regular and AMT tax liability
- Tax-free IRA distributions to charity
However, the additional standard deductions for state and local real property tax, motor vehicle sales tax, and net disaster losses are no longer available.
Tax planning for higher-income taxpayers is more complicated. Generally, you must reduce your otherwise allowable itemized deductions if your adjusted gross income exceeds a specified threshold amount. However, the phase-out of itemized deductions and personal exemptions for higher-income taxpayers is eliminated through 2012 by the Tax Relief Act of 2010. The failure to take the alternative minimum tax (AMT) into account may also jeopardize your tax planning strategy, as the AMT continues to negate many itemized deductions. The Tax Relief Act of 2010 increased the AMT exemptions amounts for the 2010 and 2011 tax years, which provides some relief from this tax burden.
Although maximizing your itemized deductions is an important aspect of tax planning, there are other issues that you may need to consider in light of your overall tax scenario. We hope to provide you with planning options that enable you to achieve the greatest tax savings possible. Please contact our office at your earliest convenience to make an appointment to discuss your tax planning options.
Bartolme and Associates, Inc.
Certified Public Accountants
2134 Main Street Suite 270
Huntington Beach, CA 92648
714-969-1663
Fax 714-969-7225
We use industry standard tax research and professional service platforms.
Visit us on Yelp.
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We are proud members of Pacific Coast Letip. Visit the groups web site to gather information for other professional and quality services and products.
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2011 Planning: Tax Benefits of Home Ownership
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Question:
What are the tax advantages of buying rather than renting a home?
Response:
Buying a home is the single most valuable investment most families make, and home ownership offers tax breaks that make it the foundation for your overall tax planning. The tax law provides numerous incentives to home ownership, including the following:
- Buying, rather than renting, replaces nondeductible rent with deductible mortgage interest.
- For a limited time, qualified mortgage insurance premiums may be treated as deductible mortgage interest.
- Taxpayers can deduct an unlimited amount of property tax they pay on any number of residences.
- Homeowners can exclude up to $250,000 of gain ($500,000 for married couples filing jointly and certain surviving spouses) from taxable income when they sell.
- There is no penalty for an early withdrawal from an IRA for a “first-time” homebuyer for up to $10,000 so long as the proceeds are used for acquisition of a home.
- Self-employed individuals may deduct expenses for a portion of the home used for business.
- Energy credits are available for certain improvements to a residence.
- A temporary provision excludes the discharge of “qualified principal residence indebtedness” from gross income.
You may benefit from a close review of these provisions, particularly if you are considering transactions involving your home, including selling, refinancing, or renting. Many home ownership tax benefits also apply to a second home. We would like to assist you with home ownership as it applies to your overall tax plan. Please call our offices at your earliest convenience to arrange an appointment.
Bartolme and Associates, Inc.
Certified Public Accountants
2134 Main Street Suite 270
Huntington Beach, CA 92648
714-969-1663
Fax 714-969-7225
We use industry standard tax research and professional service platforms.
Visit us on Yelp.
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2011 Planning: Home and Domestic Service Workers
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Question:
What are the tax and filing issues surrounding the many different individuals I hire for my household?
Response:
Your family may need outside assistance to provide care and supervision for your children or elderly parents while you work. You may hire cleaning help or a landscaper to assist with the upkeep of your home, or someone to walk your dog during the work week. These lifestyle choices simplify your daily routine, but there are rules you must follow when compensating your domestic workers. It is important to determine what your responsibilities are with respect to your workers, and ensure that you comply with the payment and reporting rules that apply to your situation.
For instance, understanding the difference between an employee and an independent contractor is very important. If you are an employer, you are required to withhold and contribute a matching amount of FICA and Medicare taxes from your domestic worker’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC, Miscellaneous Income. Failing to make the right classification could cost you money.
Alternatively, if you incur qualified expenses on behalf of a child under age 13, or a disabled spouse or dependent, you may be able to claim a child and dependent care tax credit. The credit that can be claimed ranges from 20 to 35 percent of qualified employment-related expenses, but is subject to a cap which is calculated as a percentage of these expenses. The maximum amount of eligible expenses is $3,000 if you have one qualifying dependent and $6,000 if you have two or more qualifying dependents.
An individual may be considered a domestic services worker when performing household duties as part of a daily work routine. Generally, services performed by cooks, waiters, babysitters, butlers, housekeepers, maids, valets, caretakers, handymen, chauffeurs, and companions are considered domestic services.
However, an individual may be performing these services as an employee rather than an independent contractor, and this distinction could be very important in determining how to report your income, and pay employment and income taxes. Generally, the right to control how duties are executed and what tasks are performed is sufficient to make a worker an employee.
For example, if you are a babysitter in the parents’ home, you are probably a domestic employee. If you earn $1,700 or more in 2011, your employer is required to withhold FICA and Medicare taxes from your income. Generally, you must contribute an equal amount of FICA and Medicare taxes, but for 2011 only, your tax rate as an employee is two-percent less than your employer’s rate.
Subject to certain limitations, your employer may also be required to pay federal unemployment tax (FUTA), but is not obliged to withhold income taxes unless there is a mutual agreement to do so. However, you are liable for federal and state income tax on your earnings, and may be required to make quarterly estimated tax payments.
Conversely, if you watch children in your own home, you are most likely an independent contractor. Your clients must report your remuneration of $600 or more on a Form 1099-MISC, Miscellaneous Income. Your income is subject to self-employment and income tax, and along with any related business expenses, should be reported on Form 1040, Schedule C. However, since your business expenses are not reported on Form 1040, Schedule A, they are not limited to the 2% of adjusted gross income (AGI) thresh
For further information and help please contact our office at your earliest convenience to make an appointment.
Sincerely yours,
Bartolme and Associates, Inc.
Certified Public Accountants
2134 Main Street Suite 270
Huntington Beach, CA 92648
714-969-1663
Fax 714-969-7225
We use industry standard tax research and professional service platforms.
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We are proud members of Pacific Coast Letip. Visit the groups web site to gather information for other professional and quality services and products.
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2011 Planning: Independent Contractor vs. Employee
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Question:
What are the differences between Employee’s and Independent contractors? What are the possible liability issues surrounding misclassifying a worker?
Response:
Currently, the likelihood of your business being involved in a worker classification or employment tax audit is increased because the IRS is aggressively attempting to reduce the “tax gap,” which is the annual shortfall between taxes owed and taxes paid. Employment tax noncompliance is estimated by the IRS to account for approximately $54 billion of the tax gap. Under-reporting of FICA makes up $14 billion; under-reporting of self-employment tax accounts for $39 billion; and under-reporting of unemployment tax accounts for $1 billion in lost revenue.
As a result of the Questionable Employment Tax Practice (QETP) initiative, in 2007 the IRS entered into agreements with workforce agencies in 29 states to share the results of employment tax examinations. These agreements provide a centralized, uniform means for the IRS and state employment officials to encourage compliance with federal and state employment tax requirements. In addition, for the 2008 through 2010 tax years, the IRS plans to examine 6000 randomly selected employers’ Forms 941, Employer’s Quarterly Federal Tax Return, as part of the National Research Program (NRP).
Because the existing worker classification rules are complex and ambiguous, much uncertainty surrounds their interpretation and application. The lack of a single, definitive test for classifying workers as either employees or independent contractors contributes significantly to the worker classification problem.
Therefore, understanding the difference between an employee and an independent contractor is very important. If you are an employer, you are required to withhold and contribute a matching amount of FICA and Medicare taxes from your employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC (Miscellaneous Income). Failing to make the right classification could cost you money.
If you have workers who make substantial financial investments in tools, equipment, or a place to work, or undertake some entrepreneurial risks, they are probably independent contractors. However, when you control and direct the workers who perform services for you as to the end result and how it will be accomplished, you are probably involved in an employer-employee relationship.
Unless there is a reasonable basis for treating your employees as independent contractors, failing to withhold income and employment taxes from their wages can result in severe penalties and interest, in addition to the back taxes owed. Of course, penalties for intentional worker misclassifications are harsher than they are for inadvertent mistakes.
Your benefit plan may also be in jeopardy if any eligible employees have been misclassified as independent contractors. Since these employees have been excluded from plan participation, your retirement plan may lose its tax-favored status. The problem is compounded when excluded employees seek restitution for lost benefits not only due to their exclusion from the benefit plan, but also for health coverage and other employee benefits.
Since the potential liability is considerable, it would be beneficial for you to verify that your workers are properly classified. It is also important that your employment tax records are in compliance with IRS guidelines, especially in the event of an audit. Please contact our office at your earliest convenience to make an appointment.
Sometimes workers are specifically designated as employees by the Internal Revenue Code even if the facts do not suggest an employer-employee relationship. Generally, the following types of workers are considered statutory employees:
1. Full-time traveling or city sales representatives;
2. Agent-drivers or commission-drivers;
3. Life insurance sales representatives; and
4. Home workers.
However, there are distinct rules for each worker type, and their employment tax treatment also varies. In addition, statutory employees must personally perform substantially all of the services required under your contract. These workers cannot have a material investment in your facilities, and your relationship with them must be ongoing.
If your business currently employs statutory employees, it would be beneficial for you to verify that your workers are properly classified. It is also important to review your employment tax records and procedures, to ensure that they are in compliance with IRS guidelines, especially in the event of an audit. Employee Employer issues are lengthy and tedious so if you have further questions contact our office for a free consultation.
Bartolme and Associates, Inc.
Certified Public Accountants
2134 Main Street Suite 270
Huntington Beach, CA 92648
714-969-1663
Fax 714-969-7225
We use industry standard tax research and professional service platforms.
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2011 Planning: Retirement Plan Distributions
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Question:
What are the tax effects of retirement plan distributions?
Response:
Your retirement plans and IRAs may be among the largest, if not the largest, asset that you have. Therefore, one of the most important planning areas for you is taking distributions from your IRAs and qualified retirement plans. Understanding the basic tax rules and then planning your distributions to meet your personal financial and estate planning objectives is essential. We can explain those rules and provide some strategies for you to consider as part of your overall tax plan.
Some taxpayers may consider early retirement as a viable option. However, generally, a distribution made before you are 59 1/2 years of age is subject to a 10% penalty in addition to the tax otherwise payable on the distribution. There are some exceptions. The penalty may not apply for certain hardship cases, for first-time home buyers, or to pay certain medical or education expenses. Many distributions may be received tax free if they are transferred to an IRA or another eligible plan within 60 days of the distribution.
Though there is a penalty for premature distributions, there is also a penalty for failure to commence distributions by a certain age. Minimum distribution rules are imposed to prevent participants from unreasonably deferring the tax on their retirement savings. Under these rules, distributions are required to begin, for a participant other than a 5-percent owner, no later than April 1 of the calendar year following the later of:
- the calendar year in which the participant reaches age 70 1/2, or
- the calendar year in which the participant retires.
The minimum distribution rules do not apply to Roth IRA’s, but do apply to traditional IRAs, deferred compensation plans, tax sheltered annuities, and qualified retirement plans.
Navigating the rules of when and how retirement distributions are taxed can be intimidating. However, we can help you make the right choices that will minimize your tax burden, meet your financial needs and comply with tax regulations. Please visit our web site or give our office a call at your earliest convenience to discuss your retirement plan options in view of your overall tax plan.
Bartolme and Associates, Inc.
Certified Public Accountants
2134 Main Street Suite 270
Huntington Beach, CA 92648
714-969-1663
Fax 714-969-7225
We use industry standard tax research and professional service platforms.
Visit us on Yelp.
http://www.yelp.com/biz/bartolme-and-associates-huntington-beach
Visit our twitter feed
http://twitter.com/#!/bartolmecpa
We are proud members of Pacific Coast Letip. Visit the groups web site to gather information for other professional and quality services and products.
http://www.pacificcoastletip.com