Author Archive for ClintM

W2 or 1099 – The Painful Truth for the Wrong Answer

In today’s economy the question of “Am I an employee or independent contractor?” comes up quite frequently. This is also true for employers themselves as there are several types of tax that an employer must pay if the people performing work for them are deemed employees as opposed to an independent contractor.

Such examples are Social Security and Medicare Tax(FICA), Federal/State Unemployment Tax(FUTA) and Worker’s Compensation coverage. Additionally, a reason for employers’ motivation to mis-classify an employee is the compliance requirement for offering fringe benefits. At the end of the day a mis-classification can cost an employer – BIG TIME.

Under IRC 3509 if an independent contractor is deemed an employee the employer is subject to not only paying the employment taxes, but an additional 1.5% of the wages paid plus 20% of the employer’s share of FICA taxes(7.65% of wages paid).

An example of penalties assessed can be seen with a mis-classified contractor being deemed an employee who was paid $40,000 in 1 year. In addition to having to pay the employer’s share of FICA(7.65% or $3,060) and FUTA(0.6% or $42) the additional taxes of 1.5%($600) and 20% of the FICA($612) are assessed for a grand total of $4314.

For the employee themselves there’s the added pain of not having taxes with-held and having to pay both Federal and State(if applicable, remember, 7 states do not have an income tax) as well as their share of FICA.

The next question that arises is – why on Earth would an employee want to be paid on a 1099?

Simple – they can deduct work related expenses they wouldn’t otherwise be able to while being paid on a W2.

Back to our example of a worker being paid $40,000 for the year vs. contractor netting $40,000 in gross income to $30,000(75% of gross which would be the result of a lot of unreimbursed expenses- i.e. vehicle costs, cellphone/internet, etc) the difference is as follows:

Employee pays – $4824($3988 Fed + $950 AZ) or $5406($3988 Fed + $1418 IL)

Contractor pays – $6970($2165 Fed + $4239 SE Taxes + $566 AZ) or $7368($2165 Fed + $4239 SE Taxes + $964 IL)

As you can see having to pay the full amount of your own FICA taxes(known as Self-Employment Taxes) makes a huge difference and can be quite painful when you find out that balance due in April(while your employee friends are going on fancy vacations or buying new electronics with their large refund checks).

At least when you are an employee your employer normally has the Federal and State income withheld so come tax time you are usually looking at a small balance owed or even a refund. This does not even take into account under-payment penalties that would be assessed in addition to those balances above if you did not make estimated payments through-out the year.

Since taxes are such an individual situation with many variables it is best to talk to your income tax professional to find out 1) are you an employee or contractor?, 2) what tax strategies can you incorporate to keep more of your hard-earned money?

This goes for employers as well, as evidenced by the excess costs that can be assessed if you mis-classify your employees as contractors.

If you want to avoid the pain of excess taxes and penalties, please give us a call at 623-240-9545 and we will provide you with the relief you need!

Saving A Few Hundred Bucks That Really Costs You Thousands

I just saved myself money by doing my own taxes. Why do I need you when there is free online software X or even a mobile app that’ll do it and even GUARANTEES it is correct?

You’re right that doing a tax return has become so easy even a neanderthal can do it. You know the ad or there’s one about how you don’t have to be a genius to do your own taxes. So what’s the point of going to a professional? The point is doing your own taxes may be easy, but doing them RIGHT is a whole other story. Just in our own experience we have seen mass marketed free-mium services(you know the ones that say it’s free only to end up charging you a small fee in the end) do the following:

-“double dip” deductions – meaning place deductions that should have only gone on a Schedule A on both Schedule A AND another schedule that did not even apply to the client’s return.

-take a business loss for property that was not even owned by the client’s small beauty care business NOR was it even eligible for a loss on the personal level.

In both cases the client or prospective client saved a few hundred dollars in tax prep fees but ended up costing themselves thousands in taxes and penalties when the IRS came and challenged those so-called “100% accuracy guarantee” self-prepared returns. Even worse than the thousands of dollars owed is the fear and pain of getting those pesky letters from the IRS and not knowing why they were even sent in the first place or what they actually mean. And what happens with that so-called guarantee? They just tell you that it was your input error that caused the problem and you’re on your own. I mean the software did ITS job and made the calculations, even supposedly asked you all the right questions, but YOU still did it wrong and that’s what they emphasize when you go back to them for help on that “guarantee”.

This is why it PAYS to have a professional do your taxes right the first time. As the saying goes “pay a little more now or pay a whole lot more later.” If you want to know if you’re really costing yourself thousands versus savings hundreds please give us a call and we’ll be your financial and tax pain relief.

Put It On Extension

With the end of the tax season coming on Tuesday April 18th, 2017(normally it is April 15th) a recurring theme has been “I’ll just put it on extension”, but what does this really mean?

Filing an extension, which is commonly done with IRS Form 4868 – Application For Automatic Extension of Time To File US Individual Income Tax Return, is only a 6 month extension on filing and will only prevent “late filing” penalties until the extension date, normally, October 15th.

What this does NOT do is prevent “late payment” penalties from accruing. The good news is late filing penalties accrue at a rate 10x what late payment penalties accrue(5% for each month or part of a month for late filing vs. 0.5% for each month or part of a month for late payment) so by filing an extension you are saving yourself from substantial penalties. In both cases the max amount is 25% of the unpaid balance.

Finally, here’s a great article from the IRS website which explains late filing and late payment fees. In fact, if you do a direct debit from your account you can pay online for free through IRS Direct Pay, however, if you need to use a credit card there are services such as Drake PayTax which charges a 1.85% fee for credit card transactions and a flat fee of $2.85 for debit card transactions. Please note both services are only for FEDERAL and do not cover any state balances owed.

If you have any questions or would like to speak with one of our income tax professionals, please call us at 623-240-9545 or shoot us an email through our contact form.