Surprise Tax for the Self-Employed

A self-employed individual expects to pay taxes on profits from their business. Unfortunately, there is an additional tax that must be paid when all is said and done.

When you work for an employer, the employer withholds Social Security and Medicare taxes from your pay. The employer also pays their portion of Social Security and Medicare taxes. Depending on the size of the payroll, the employer may make these payments weekly or monthly. A self-employed individual does not have Social Security and Medicare taxes paid for them. Instead, they pay self-employment taxes on the profits of the business.

If you have your own business or are a subcontractor, the IRS considers you self-employed. This requires you to pay self-employment tax on the profits of your business. Typically, the IRS requires self-employed individuals to make quarterly estimated tax payments. If you fail to make these payments, you may be penalized at the end of the year.

Here is a helpful tip for the self-employed. Open a bank account just for your self-employment taxes. Every week or month, deposit enough money into the new account to cover the taxes for that time period. At the end of each quarter, when your self-employment taxes are due, you should have enough money saved up to make your payment. This will reduce the shock and frustration of trying to find the money to make the payment at the last minute. It will also help you avoid the nasty penalties from the IRS for not making your payments large enough or on time.

New Mileage Rates for 2011

Due to outrageous gas prices, the IRS will increase mileage rates for the second half of 2011. What does this mean for you? If you are reimbursed for your mileage or claim your mileage on your tax return, you will have to distinguish the miles traveled in the first half of the year from the miles traveled in the second half of the year. For those that log their mileage on a daily or weekly basis, this may not be an issue. For those that do not frequently log their travel, take note that your employer or accountant will be asking you to determine in which part of the year the mileage occurred.

01/01/2011 – 06/30/2011 RATES

• Business Mileage: 51 cents per mile
• Medical/Moving Mileage: 19 cents per mile
• Charitable Mileage: 14 cents per mile

07/01/2011 – 12/31/2011 RATES

• Business Mileage: 55.5 cents per mile
• Medical/Moving Mileage: 23.5 cents per mile
• Charitable Mileage: 14 cents per mile

Stark County Sales Tax Rate Change

If your business makes sales in Stark County, Ohio, please take note of the new sales tax rate. Effective July 1, 2011, the sales and use tax rate for Stark County will change from 6.00% to 5.75%.

Looking Your Best May Not Be Tax Deductible

Former Central Ohio television news anchor, Anietra Hamper, lost her deduction for business clothing in tax court (Hamper, TC Summ. Op. 2011-17).  The tax court ruled that regardless of her wearing certain attire only on TV, such items were not consistent with the definition of ordinary and necessary use for business the services uses for what is an allowable deduction.  Hamper claimed her employer required her to maintain a professional appearance and to keep abreast of breaking news events as good reason for the deduction.  read more

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.

Who Trusts You? How to Build Trusting and Lasting Relationships

Wednesday, June 9, 2010

1:00pm – 3:00pm

The Jackson-Belden Chamber of Commerce’s P.E.A.K. committee wishes to invite all Chamber members to:

  ”Who Trusts You? How to Build Trusting and Lasting Relationships.”

presented by The Trio to Inspire Change

During this informative session you will learn: 

•  How to leverage online communications to earn trust that can result in less marketing and more clients
•  How to take the mystery out of networking and be more effective
•  How to build special relationships with trust based client and customer relationships

      Jackson Township Hall

      5735 Wales Ave NW

      Jackson Township, OH 44646-9097

Make your reservations for this free event online at http://www.jbcc.org/ or by email to kwebster@jbcc.org. For more information on this or any other PEAK presentation, please contact the chamber office at (330) 833-4400.

Four More Reasons to Enlist an Accountant

Most business owners start companies because they enjoy the core of their business, not because they want to do the bookkeeping for it. So, as an owner, why not focus more on what you like to do for your company and leave the rest to professionals? Besides bookkeeping, here are four more reasons you should enlist an accountant:

Cash Flow

Cash flow is an analysis of the money going in and coming out of your company. It is what keeps your business alive. If you neglect to monitor it, you could risk losing it all. An accountant can help you keep an eye on cash flow, provide you with strategies to improve it, and show you how to address issues that occur. If you decide to take this task on without professional assistance, you should definitely read this booklet created by the U.S. Small Business Administration.

Theft Protection

If you have employees who handle the accounting in-house, would you be able to tell if someone was stealing from your company or committing fraud? Without the proper internal controls, this could be happening right under your nose with little effort. An accountant can design your internal controls to help detect these problems or to eliminate them completely. They can also do monthly check-ups to look for anything unusual that may be a sign of theft.

Financing

If you need to obtain additional funds for your company, at minimum you will be required to provide financial statements. Often projections and business plans are requested as well. A good accountant can not only help you with these requirements, they can refer you to lendors and investors that they have relationships with.

Taxes

Taxes are complicated and it seems that the government plans on keeping it that way. Every year they make new deductions and take away old ones. It can all be very confusing and hard to keep track of, but that is why you have an accountant, right? Accountants have a wide variety of sources to pull information from and are always being updated with the latest and greatest tax elections. They can utilize their resources to help you maximize your deductions and avoid setting off any “red flags” which might cause an audit. Many people only think about their accountant in March and April, but you should consult them year around. Remember, the actions you take during the year are what determine your tax return, not what you do solely during tax season!

Bookeeping, cash flow, theft protection, financing and taxes…accountants can take care of all of that and more. Are you ready to hire a professional and allow yourself to do what you love?

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.

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.

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.