Remember That Your Tips Are Taxable

If you work in an occupation where you receive tips, they are considered taxable income. Regardless of whether the tips are cash or non-cash, they are subject to federal income, Social Security, and Medicare taxes. The tips received must be included on your income tax return. If you receive $20 or more worth of tips in one year, you should report them to your employer so that they can withhold the taxes for you. The amount of tips as well as the amount of taxes withheld will then appear on your W-2 for your tax return. To help you keep track of your tips, you can use IRS Publication 1244.

Here is a short list of common positions that receive tips:

• Waiters/Waitresses/Caterers
• Bartenders  
• Taxi Drivers/Chauffeurs
• Hairstylists/Barbers
• Manicurists/Pedicurists
• Dog Groomers
• Delivery Drivers

Even if your profession is not listed, do not think that you are exempt from having your tips taxed. Remember that any occupation that receives tips is subject to these taxes!

Employing Relatives in Your Business

Employing family members is a big advantage of having your own business. But before you start hiring, make sure you know the federal tax rules.

Employing Your Child
If your business is a corporation, the wages that you pay your child are subject to the same federal taxes as an employee that is not related to you.

If your business is a partnership where one or more of the partners is not a parent of the child, the wages that you pay your child are subject to the same federal taxes as an employee that is not related to you.

If your business is a sole proprietorship or a partnership where each partner is a parent of the child, the wages that you pay your child are not subject to:

• Social Security taxes (for children under 18 years of age)
• Medicare taxes (for children under 18 years of age)
• Federal Unemployment taxes (FUTA) (for children under 21 years of age)

Employing Your Parent
Generally, the wages that you pay your parent are subject to the same federal taxes as an employee that is not related to you. However, FUTA taxes are always excluded.

Employing/Working with Your Spouse
If your business is a corporation or a partnership where your spouse is not a partner, the wages that you pay your spouse are subject to the same federal taxes as an employee that is not related to you.

If your business is a partnership where you and your spouse are partners, then the rules of a general partnership should be followed.

If your business is not a corporation or a partnership and there is an employer/employee type of relationship between you and your spouse, then your spouse may be treated as an employee. This type of relationship is characterized by you (the owner) having substantial control over management of the business and your spouse being under the direction of you. In this case, the wages that you pay your spouse are subject to the same federal taxes as an employee that is not related to you. However, FUTA taxes are excluded.

If your business is not a corporation or a partnership, but there is a partnership type of relationship between you and your spouse, then your spouse may be treated as a partner. This type of relationship is characterized by you and your spouse having equal control over management of the business, providing equal services to the business, and contributing equal capital to the business. In this case, the business income should be reported on Form 1065, U.S. Return of Partnership Income, and the rules of a general partnership should be followed.

The Small Business and Work Opportunity Act of 2007 allows spouses with a partnership type of relationship to opt out of being treated as a partnership if they meet the criteria of a joint venture. The requirements for this qualification are:

• The only members of the joint venture are husband and wife
• Both spouses materially participate in the business
• Both spouses elect to not be treated as a partnership

If you and your spouse choose this route, you must then follow these steps to properly account for the business financials and taxes:

1. Divide all income, deductions, gains, losses, and credit between each spouse accordingly.
2. You and your spouse must jointly file a Form 1040 tax return and elect to be treated as a qualified joint venture.
3. With your joint tax return, each spouse must file their own Schedule C, Profit or Loss from Business, using the information from Step 1.
4. With your joint tax return, each spouse must file their own Schedule SE, Self Employment Tax, using the information from Step 1. This step gives each spouse credit for social security earnings for calculating retirement benefits.

The tax consequences of employing a relative can be complicated depending on your situation. It is always best to discuss your circumstances with your accountant or payroll specialist before hiring.

DISCLAIMER:  All information on this post is the opinion of the author and is not offered as legal advice.  Please consult the appropriate authoritative laws, codes, rulings, cases, etc. for the most accurate and timely information.  This firm offers valuable professional tax advice only as part of prepaid engagements.

The IRS Targets Independent Contractors

The government is taking a closer look at companies that use contactors. They’re also trying to revamp the definition of a freelancer. To read more, click here.

Hiring Incentives to Restore Employment (HIRE) Act Enacted Into Law

Obama signed the Hiring Incentives to Restore Employment (HIRE) Act on Thursday! This Act provides employers with the opportunity to receive two new tax benefits when they hire workers who were previously unemployed or only worked part-time. Although household employers are not qualified to receive the benefits, businesses, agricultural employers, tax-exempt organizations and public colleges and universities are. So, before you start hiring, here are some things to think about…

When an employer hires qualified workers after February 3, 2010 and before January 1, 2011 they can receive a 6.2% Social Security tax incentive (a savings of up to $6,622) for each worker. There are no limits or phase-outs for the benefits claimed, they can hire as many qualified workers as they wish, and it has no effect on the employee’s future Social Security benefits!

The savings are applied to wages paid after March 18, 2010. If an employer realizes these benefits in March, they will have a credit applied to their second quarter employment taxes. The IRS says that they will make revised 941 Forms and details available in the next few weeks.

The Social Security benefit sounds pretty good, right? Well, the HIRE Act doesn’t stop there. When an employer retains the qualified workers for at least one year (52 consecutive weeks), they can claim an additional tax credit of up to $1,000 per worker! The credit can be claimed on the business’s 2011 income tax return. The only catch is that the total wages paid to each worker starting 6 months after the hire date to 1 year after the hire date must equal at least 80% of the total wages paid to that same worker during the first 6 months (26 weeks) of employment.

Still interested in going for the tax benefits? Here are the criteria that an employee must meet:

• A statement certifying that he or she was unemployed or worked fewer than 40 hours during the 60 day period prior being hired must be provided by the employee. The IRS is currently developing a form for this. 
• He or she must be a new hire for the employer.
• He or she can fill an existing position, so long as the previous worker left the position voluntarily or for cause.
• Family members and other relatives do not qualify.

Even though an employer may be eligible to take this Social Security tax break, they still need to withhold the employee’s share of Social Security taxes, Medicare taxes, and Income taxes, as well as provide the employer’s share of Medicare taxes and Unemployment taxes. If you are an employer hiring a qualified employee, be sure to tell your payroll tax specialist to ensure that you receive the benefits without any issues.

DISCLAIMER: All information on this post is the opinion of the author and is not offered as legal advice. Please consult the appropriate authoritative laws, codes, rulings, cases, etc. for the most accurate and timely information. This firm offers valuable professional tax advice only as part of prepaid engagements.

2010 Standard Mileage Rates

Beginning on January 1, 2010, the standard mileage rates are as follows:

• 50 cents per mile for business miles driven
• 16.5 cents per mile driven for medical and moving purposes
• 14 cents per mile driven for charitable services

The new rates reflect lower transportation costs compared to a year ago and slightly lower.

Exercising an Incentive Stock Option?

How to avoid the alternative minimum tax (AMT)

In general, when you buy stock by exercising an incentive stock option (ISO) and don’t sell that stock in the same year, you could be subject to AMT. For regular tax purposes, no income is recognized when an ISO is exercised. However, additional income is recognized for AMT purposes equal to the excess of the stock’s FMV on the date of exercise over the exercise price. Therefore, you may be taxed on income you haven’t even received (phantom income). 

Don’t be caught off guard and end up with an unexpected tax liability when you go to file your tax return. If you exercised an ISO early in the year and the stock has been rapidly declining ever since, consider selling the stock before the end of the year. There is no AMT adjustment when stock that was acquired by exercising an ISO is sold in the same year, so you can avoid paying tax on phantom income. Otherwise, if you want to hold onto the stock and don’t want a big tax liability at year-end, you can make estimated tax payments. Also, the additional tax triggered by the AMT adjustment for ISOs generates a minimum tax credit (MTC) that may reduce your regular tax in future years.

Note: If you owed AMT attributable to the exercise of ISOs for 2007 or any prior year, the amount still owed as of October 3, 2008, was abated. However, your MTC must be reduced accordingly. In addition, any unpaid interest and penalties with respect to such unpaid AMT as of October 3, 2008, were abated. If you already paid such interest and penalties, you can increase your MTC. You should have received a Letter 2719C from the IRS detailing the amount of tax, interest, and penalties that were abated.

DISCLAIMER:  All information on this post is the opinion of the author and is not offered as legal advice.  Please consult the appropriate authoritative laws, codes, rulings, cases, etc. for the most accurate and timely information.  This firm offers valuable professional tax advice only as part of prepaid engagements.

Employee or Independent Contractor?

Determining the proper worker status

When you hire someone to work in your business, that individual will either be an employee or independent contractor for tax purposes. Failure to properly classify the worker can subject you to an IRS audit and possibly interest and penalties for failing to withhold and deposit payroll taxes. Under common-law rules, if you have control over what work is being done and how it will be done, you are generally regarded as an employer and the worker is considered your employee.

The IRS uses three factors to determine the proper worker classification. Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. Behavioral control looks at the type of instruction given, the degree of instruction, an evaluation system, and training.

The second factor is financial control. Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job. Financial control factors consist of significant investment, unreimbursed expenses, opportunity for profit or loss, services available to the market, and method of payment. If you provide the tools and supplies to do the job, set the work hours, provide the location where the work is performed, and can hire or fire the worker, chances are this worker is classified as an employee. However, if the worker provides his own tools and supplies, performs services for an agreed price, performs these same services to others, and maintains control over how the work is completed, the worker is more likely an independent contractor.

The third factor is the type of relationship between you and the worker. Under type of relationship, take into consideration any written contracts, employee benefits, permanency of the relationship, and services provided as the key activity of the business. An employee will be hired for a long-term relationship and employee benefits will generally be provided.

You must weigh all of these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate an independent contractor. The key is to look at the entire relationship you have with the worker, consider the degree or extent of the right to direct or control, and finally document each of the factors used in arriving at a determination.

If you are unsure whether your newly hired worker is an employee or independent contractor, you may file Form SS-8 with the IRS. They will assist you in making a proper determination, thus avoiding mistakes, audits, and additional taxes and penalties.

Winter 2009/2010 NATP Tax Tips

DISCLAIMER:  All information on this post is the opinion of the author and is not offered as legal advice.  Please consult the appropriate authoritative laws, codes, rulings, cases, etc. for the most accurate and timely information.  This firm offers valuable professional tax advice only as part of prepaid engagements.

W-2 Error

Be careful which form you give to your workers and file with the IRS. In Porter, D.C., Iowa vs. IRS, the service was successful in having the contractor pay employment taxes after the contractor made a mistake in the form that was filed. The contractors had regularly treated similar workers as contractors and given 1099 forms each year except one year they gave out W-2s.

There is a 1978 law that the IRS can’t argue that contractors are employees if the business always gave them 1099s, regularly treated similar workers as contractors and had a reasonable basis for that treatment. They made an error by changing forms one time and it cost them.

DISCLAIMER: All information on this post is the opinion of the author and is not offered as legal advice. Please consult the appropriate authoritative laws, codes, rulings, cases, etc. for the most accurate and timely information. This firm offers valuable professional tax advice only as part of prepaid engagements.

Minimum Wage Increases Again!

The federal minimum wage rate for covered, nonexempt employees will change again. On July 24, 2009 it will increase to $7.25 per hour. Keep in mind that many states also have their own minimum wage laws. In the cases where employees are subject to both the federal and the state minimum wage laws, the higher of the two rates should be used. read more

Making Work Pay Program Will Cause Problems for a Few

Making Work Pay

Did you notice the increase in your pay this past week?  The IRS released updated withholding tables (see Publication 15-T), decreasing the amount of federal tax withheld from your pay.  This is a result of the new economic stimulus law’s “Making Work Pay” provision.

This is a refundable tax credit available in 2009 and 2010.  It equals the lesser of 6.2 percent of earned income or $400 for working individuals and $800 for married taxpayers filing joint returns.  The rate will phase out for those earning gross income in excess of $75,000 for singles and $150,000 for married couples filing joint tax returns.

For those of you who receive a paycheck and are subject to withholding, the credit will likely be handled by your employer via these newly released withholding tables.

Pay Less Now, Pay More Later

This is good in most cases, but…

• What if you have multiple jobs?

• What if both you and your spouse combined income is more than the $150,000?, or

• Your single and your income is over $75,000?

If one of these situations apply to you and you stick with these tables, you could end up with an unexpected larger tax bill when filing 2009 and/or 2010 returns.  I found a calculator that shows the difference between the old and the new federal withholding numbers.  This calculator can be used as a tool to help you decide whether to file a new Form W-4 with your employer.