Archive for Tax News

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.

 

Claiming Tax Back! Are You Eligible For the $1 Billion IRS Giveaway?

The IRS is giving away $1 billion! Yes, you read that correctly, one billion with a “b”. There is a catch, though, you must be one of the almost 1million taxpayers who have yet to file a 2008 income tax return AND this offer expires 4/15. If you’re interested in claiming tax back go see your income tax professional immediately! Additionally, you cannot E-File past due returns, however, your income tax professional can still prepare your taxes and print a paper copy for you to mail in.

Do your own taxes? Read this article about how it costs you more in lost refund than it would cost to have an income tax professional do your taxes in the first place.

Claiming Tax Back – An IRS Video

Here’s a video from the IRS for those interested in claiming tax back:

Claiming Tax Back – IRS Tips On Getting Your Past-Due Refund

With the news on tax refund delays it’s good to see the IRS is letting you know just in case you’re interested in claiming tax back.

 

Claiming Tax Back – Even If You Already Filed

Did you know?

On top of those who haven’t yet filed, if your taxes were prepared incorrectly, claiming tax back is as simple as having your income tax professional file Form 1040X. The only way to know is to see your income tax professional. No-one can guarantee that you will get more money back, but many professional tax preparation services offer “second looks” where for a small fee they will look over your past filed tax returns for errors made and determine if claiming tax back is right for you. They might also find erroneous deductions that your tax preparer could’ve taken for you which the IRS WILL catch. It takes a few years, but we’ve seen that audits don’t usually occur until about the 3-5yr mark, long after your refund has been spent. If you amend in time you can save yourself from excess interest and penalties.

Interested in claiming tax back? Click the image below to contact a Jefferson Franklin Tax Patriot to schedule an appointment today!

Claiming Tax Back

Why Married Filing Separately Is Like Committing Income Tax Suicide and Our Solution For You

Now that Valentine’s Day has passed, it’s time to talk about an income tax situation that will make you love your tax professional almost as much as you love your significant other!

 

At JFTS we get a lot of married couples who come to us looking to file their income tax return separately. After a few follow-up questions we find out that the reasoning is that one spouse has a past debt, either child support, student loans or a past tax debt, all of which can be taken from a tax refund. The couple feels that the only way to keep their refund is to file separate and they forget to realize that there is another way. It’s called Injured Spouse Allocation!

Injured Spouse Allocation

What is Injured Spouse Allocation?

It is a provision in the tax code that the IRS setup for this particular situation where one spouse has a past collectible debt that the other spouse is NOT liable for paying. This way couples do not have to commit “tax return suicide” by filing separately and killing their tax refund entirely just to make sure that their refund does not get taken away. The irony is that filing separate almost guarantees that NEITHER spouse will get a significant refund. WHY?

 

When you file separately one of the credits that is unavailable is the Earned Income Tax Credit(EITC or EIC). This is the credit that most low-mid income earners with children depend on for large refunds and can be up to $5751 for married couples who have 3 children and are usually between $25k-$35k in combined earned income. Another major credit that is unavailable to separate filers is the Adoption Credit. This credit, which just became refundable in 2010 and 2011, can be up to $13,360 for each qualifying child adopted. In addition to less available credits, the income tax brackets are higher, so an income level that might’ve been taxed at 10% for a joint couple might fall into the 15% level for separate filers.

 

In fact, we had a client in this situation who felt it was better to file separate instead of joint despite adopting two (2) special needs children. If they filed separately not only would neither spouse have been entitled to a refund, they both would’ve OWED money, a lot of money! However, thanks to Injured Spouse Allocation they received over $20,000 in federal refund! From this $20,000 only a small portion was applied to the “injured” spouse’s past debts and it was a happy ending.

 

For anyone who wants to file Injured Spouse Allocation, here’s what you need to qualify per IRS regulations:

  • File Married Filing Jointly(MFJ)
  • Only ONE spouse can have “legally enforceable” past-due debts which include: Federal Tax, State Income Tax, Child Support, Spousal Support, Federal Nontax Debt(i.e. Student Loans)

One situation that might complicate matter is if you reside in a “Community Property State”(AZ, CA, ID, LA, NV, NM, TX, WA or WI) at any time during the year. While this won’t necessarily disqualify you from Injured Spouse Allocation, it will reduce the benefit somewhat. Like ALL tax matters it is dependent on your specific situation and the only way to know is to speak with an income tax professional, such as a JFTS Tax Patriot.

 

With all that said, when should you file Married Filing Separately(MFS)? Answer- ALMOST NEVER.

 

The only situation that would make sense filing separately is if there is a spouse who has left the state or country and there is no possibility of getting their signature on a joint return. Otherwise, even in cases of divorce or separation, if there are dependents involved there is a special filing status known as “Married, but Unmarried for Tax Purposes” and it is similar to the Head of Household(HOH) filing status. Since this is a complex income tax matter it is best to check with a Tax Patriot first to see if you qualify.

 

Hope this helps and if you enjoyed what you read please leave a comment or share this with your friends. Sharing is as easy as clicking on one of the links above to share on our preferred social media networks(Facebook, Twitter, Google+ and LinkedIn).

We Need To See Some ID! How To Tell If Your Tax Preparer Is “Legit”

Now that the IRS has finally instituted the Preparer Tax Identification Number(PTIN) requirements for paid preparers it is our duty to make sure that you know how to designate between the different professionals out there who prepare and file income tax returns for pay. In addition, we will show you samples of what IRS issued identification looks like.

 

It’s hard to believe that before 1/1/11 ANYONE could prepare and file an income tax return and it was not just limited to the usual professionals such as a Certified Public Accountant(CPA), Enrolled Agent(EA), Enrolled Actuary or State Licensed Tax Attorney. All you had to do was sign a return, use your Social Security Number and viola, you’re in business as a paid income tax preparer. Despite this new requirement there will still be income tax preparation services that find a way to operate around this guideline. Unfortunately, at this time there is no database to lookup a PTIN to make sure it is valid. The best course of action is to check with the IRS, either on irs.gov or by calling them at 1-800-829-1040.

 

To check on the credentials of most tax return professionals you can try the following methods per IRS.gov:

  • Enrolled agents, enrolled actuaries, and enrolled retirement plan agents can contact the IRS Office of Professional Responsibility at (202) 927-3397.
  • Certified public accountants can find contact information for all state boards of accountancy at www.nasba.org.
  • Attorneys can find contact information for all state bar associations at www.abanet.org.

In addition, we have found that some provisional PTIN preparers are confused as to what is an EA and a RTRP. I even asked a manager at a local store-front income tax service “Are you an Enrolled Agent?”. Her response “I have a license number, but I still need to take a test”. Well there are two tests, one which will be the minimum IRS requirement to become a RTRP and the more thorough examination to become an EA. Here’s the official distinction according to the IRS:

 

Is there a distinction between Enrolled Agents and Registered Tax Return Preparers? (posted 1/22/10)

Yes. The practice of enrolled agents before the IRS generally is not limited. The practice of Registered Tax Return Preparers is limited to preparing and signing tax returns for compensation and representing taxpayers before an Examination function of the IRS when the Registered Tax Return Preparer prepared the return under examination.

 

Here is what an IRS issued PTIN card looks like:

 

And an IRS issued Enrolled Agent(EA) card:

 

When it comes to tax professionals, the official stance of the IRS is:

 

“The IRS does not endorse any particular individual tax return preparer. For more information on tax return preparers go to IRS.gov.”

 

Go figure that they would have such a “politically correct” stance on this issue. The decision is yours, who would you trust the most to work on your taxes? A dedicated income tax professional such as an Enrolled Agent who focuses solely on income taxes and is required to take Continuing Professional Education(CPE) courses that are approved by the IRS OR a preparer who only abides by the minimum standards?

 

A great resource to look-up tax professionals is: TeaSpiller – Find An Accountant or Tax Pro

Big News for Small Business – Two Tax Benefits for 2011

After a long hiatus thanks to a busy tax season, we’re back with news you can use. Here at JFTS we believe that this year’s April 18th filing deadline is just the beginning and that there is still so much we can offer to help you prepare for 2011.

First off, this week marks Small Business Week at the IRS and one way you can take advantage as a small business owner is to participate in a free, 30-minute webinar titled “Small Business Advantage” to learn more about planning for 2011. The webinar is scheduled for tomorrow – Wednesday, May 18th at 2pm EST.

So far the biggest news is two provisions for 2011, one credit and one deduction, which are:

1) Health Care Tax Credit

In order to qualify an employer must:

  • cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate
  • have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
  • pay average annual wages to qualifying employees of under $50,000

Note that this applies to both for-profit and non-profit organizations that meet the above criteria.

The benefit is:

  • worth up to 35 percent of a small business’ premium costs in 2010 (25% for non-profit employers) and increases to 50 percent (35 percent for tax-exempt employers) on 1/1/14.
  • phased out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

2) Accelerated Write-Offs

For 2011 there will still be accelerated depreciation available for most qualifying business property purchased and put into service for 2011. This includes both 50% and 100% deductions.

Prior to making any major purchases, please talk with your tax professional first to see if you can qualify for an accelerated deduction. We will post an update later this week as we get more information on this particular deduction.

Until next time, have a great off-season and don’t forget that setting up a consultation with a Jefferson Franklin Tax Patriot is easy, convenient and secure. So contact us today and we’ll assist you with your tax needs.

Bartering & Your Taxes – 4 Tips On How To Report Barter Income

In the tough times that small businesses are going through today, many business owners are choosing to levy payments for goods and services by bartering.  It’s important to recognize that the fair market value of the goods or services provided or exchanged is still taxable income.

By definition, bartering is the exchange of products or services for another in lieu of paying cash. However, the fair market value of the goods and services must be reported as part of the business at the end of the year.

Here are 4 essential tips on how bartering affects your tax return:
1.     Barter Exchange: Barter usually functions where businesses trade products or services among themselves. No matter whether the business has a physical location or operates over the internet, it is normally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, at the end of the year to its clients and to the IRS.
2.     Barter Income: For the purposes of tax reporting, barter dollars are equal to real dollars. You must report the fair market value of the products of services exchanged on your tax return.
3.     Taxes: The income generated through bartering is taxable in the year it is performed. Your barter may result in ordinary business income, capital gains or losses, or you might have a nonrefundable personal loss. It may result in liabilities for income tax, self-employment tax, employment tax, or an excise tax.
4.     Reporting: Generally, the rules for reporting bartering services vary based on which form of bartering takes place. You should report this type of income on Form 1040, Schedule C Profit or Loss from Business, or on other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations, or Form 1120-S for Small Business Corporations.

If you are uncertain about how to go about reporting your barter income as part of your tax return, please contact one of our trained and knowledgeable Tax Patriots who can help you understand and file such returns.

Missing a W-2? Here is what you do!

Missing a W-2? Here is what you do!

In order to file your 2010 tax return, you need to have all of your financial and tax documents including all your W-2 employment forms. You should receive Wage and Tax Statement, Form W-2, from each employer you worked for in 2010. January 31st, 2011 was the deadline for employers to send you a 2010 W-2 earnings statement.

If you know you should have received a W-2 from a certain employer but haven’t received it, you can follow these steps:

1.   Contact Your Employer: Contact the employer to inquire if and when your Form W-2 was mailed out to you. Make sure they have your correct address on file and have sent it to the right place. Otherwise, it may have been returned to them. After talking to the employer, allow a couple of weeks for them to resend or issue your Form W-2.
2.   Contact the IRS: If you still have not received your Form W-2 by February 14th, contact the IRS for help. The number to reach them is 1(800) 829-1040. You must provide them with your full name, address, city and state, zip code, Social Security Number, phone number, and the following additional information about the employer:
a.   Employer’s name, address, city, state, zip code and phone number
b.   Dates of employment
c.    An estimate of your wages earned and federal tax withheld during your 2010 employment there. You should base your estimate on your final pay stub or leave-and-earnings statement, if that’s possible.
3.   File Your Return: Even if you do not receive your Form W-2, you still have to file your return or request for an extension to file by April 18th, 2011. If you do not receive your Form W-2 by the due date, you may use Form 4852, Substitute for Form W-2. Attach Form 4852 to your return, with your estimated income and withholding taxes as accurate as possible. Your return may be slightly delayed in order to verify the information.
4.   File a Form 1040X: Occasionally, you might receive your missing Form W-2 after your taxes have already been filed using Form 4852. If the information you reported differs from the information reported on the W-2 by a lot, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

To be certain you are doing everything correctly, contact one of our trained Tax Patriots to help you with any questions and concerns. We can provide you with the necessary forms and instruct you on how to fill them out and file them correctly.

You can also download Form 4852, Form 1040X and their instructions from the IRS website.