Too many small businesses have been taxed and penalized for having independent contractors that the IRS believes should be employees. This is even more critical given the requirement to have health insurance.
Is a worker an independent contractor or an employee? This seemingly simple question is often the contentious subject of numerous IRS audits. As an employer, getting this wrong could cost you plenty in the way of Social Security, Medicare taxes, and other employment related taxes. Here is what you need to know.
As the worker. If you are the worker and you are not considered an employee you must;
- pay self-employment taxes (Social Security and Medicare related taxes)
- make estimated federal and state tax payments
- handle your own benefits, insurance, and bookkeeping
As the employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to;
- payment and penalties related to Social Security and Medicare taxes
- payment of possible overtime including penalties for a contractor reclassified as an employee
- legal obligation to pay for benefits
Determining the answer: things to consider
When the IRS recharacterizes an independent contractor as an employee they look at the business relationship between the employer and the worker. The IRS focuses on the degree of control exercised by the business over the work done and they will assess the worker’s independence. Here are some tips.
- The more the employer has the right to control the work, when the work is done, how the work is done, and where the work is done, the more likely the worker is an employee.
- The more the financial relationship is controlled by the employer the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a business-like manner.
- The more business-like the arrangement the more likely you have an independent contractor relationship.
While there are no hard set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged.hrll
Recent notices sent out by the IRS for victims of identity theft refer to tax year 2014 in error. These one-time use PINs are for the 2015 tax year. Here is what you need to know.
If you are one of the unfortunate victims of IRS identity theft you will need a one-time PIN to file your tax return. Without this numeric identifier your 2015 tax return will be rejected. The IRS issues taxpayer victims this PIN in a written notice.
What has happened
IRS notices that have this one-time PIN are hitting mailboxes of identity theft victims right now. This is notice CP01A. The tax year printed on the notice may be 2014, when the PIN is to be used for your 2015 tax return. This mistake is causing confusion among taxpayers.
What to do
Do not throw out the notice! This PIN is for your 2015 tax return. Without it you cannot file this year’s tax return.
File your tax return. When tax return filing opens on January 19th, you can file your tax return. This PIN must be entered on your tax form to be accepted by the IRS.
The IRS knows of the mistake. They will not be issuing new forms. Here is their announcement on the error:https://www.irs.gov/Individuals/The-Identity-Protection-PIN-IP-PIN
The IRS recently announced mileage rates to be used for travel in 2016. The Business mileage rate decreases by 3.5 cents while Medical and Moving mileage rates are lowered by 4.0 cents. Charitable mileage rates are unchanged.
2016 New Mileage Rates
Here are 2015 rates for your reference as well.
2015 Mileage Rates
Remember to properly document your mileage to receive full credit for your miles driven.
Missing a Form? Not an Excuse.
At the start of each year our mail boxes begin to fill up with information tax forms. They include W-2s, 1098s, 1099s and the new 1095-A. If you fail to receive a form, you are still liable for the tax it creates. Here are some tips to avoid this possible audit risk.
Understanding Your Special K’s – 1099-Ks are now being subject to underreporting IRS audits
The IRS recently announced it is going to conduct automated audits of 1099-K filings against business income. This includes unicorporatated small businesses filing Schedule C with their Form 1040. How do you protect yourself from this audit risk?
For the first time, the IRS is reporting that it will be comparing filed 1099-Ks against income reported on business tax returns (including those reported on 1040 Schedule C tax returns). Knowing how this impacts you can save you an unwanted IRS correspondence audit.
A couple of years ago the IRS introduced the 1099-K. This new informational tax return is meant to capture sales activity of previously unreported credit card transactions from places like e-bay and Amazon. Credit card processors are now required to report these transactions to you and the government if you have 200 or more transactions and over $20,000 in billing activity.
What is happening now
The IRS is now going to be comparing these filed 1099-Ks with the income reported by those receiving the form. If their computer audit shows you have not reported income sufficient enough to cover the activity on the 1099-K you will receive a letter asking for an explanation.
What you need to know
- 1099-Ks could include more than income. Since your 1099-K comes from a credit card merchant processor, whatever is on that credit card transaction is included on the tax form. This means it can often include sales tax receipts that have been passed on to your state. If you only record the income portion of the 1099-K, you may run the risk of under-reporting your 1099-K causing an underreporting audit.
- Sole proprietors using a Schedule C do not have a place to report 1099-K activity. If you are a sole proprietor, your business activity is reported on a Schedule C. There is not a separate line to report 1099-K activity. Given this, the problem with sales tax previously mentioned can become even more complicated.
- Make sure you do not double count. Remember 1099-K is credit card transaction activity that may also be reported within other types of 1099 reporting. You must make sure that Gross Revenue on your tax return matches the revenue on your business books.
- Leverage the IRS matching knowledge. Knowing that the IRS is going to run an automated underreporting match using 1099-K information, here are some suggestions;
- Make sure your Gross Income (gross receipts) surpasses the amounts shown on all related 1099 transactions. Focus on your 1099-MISC and 1099-K activity.
- Reduce your gross 1099-K activity to account for non-revenue transactions on a separate line and note what the activity represents. Do not net out the non-revenue portion of 1099-K activity as this may cause a mismatch for the IRS comparison program.
- Double check your book income against your tax return and make sure you can tie them to each other. Pay special attention to ensure your 1099-K activity is not over-stating your revenue.
Should you receive a correspondence audit from the IRS concerning a 1099-K call for help. Remember, this process will be new for them as well as for you.
IRS Identity Theft Season Begins Now
Be on your guard as the IRS identity theft season starts in late January. Here’s what you need to know.
Each year thieves try to steal billions in Federal Withholdings by stealing your identity. As the IRS focuses more attention on this quickly growing problem, now is the time of year to be extra vigilant.
Early tax filing season is the worst time
Your federal tax account at the IRS has plenty of money in it from all the taxes withheld from your paycheck during the course of the year. Until you file your tax return, the IRS does not know whether you need to pay more in or they need to refund you the excess amounts withheld.
Thieves know this too, and will try to file a fraudulent tax return before you have time to submit your own. By doing this, they can steal some of your withholdings and be long gone by the time you file your own tax return. So what can you do?
- File early. The sooner you file your tax return, the less likely a thief will beat you to your refund.
- Check your credit reports. See if there is any suspicious activity on your accounts and on your credit reports.
- Protect your ID. Be suspicious; never give out your Social Security Number, do not leave your credit card unattended, never give ID information to someone who called you, use the password function on your phone, be aware of strange mail, and shred important documents. Often your best defense to IRS ID theft is to use best practices to protect your information.
The IRS is becoming a better spotter
If the IRS suspects something is wrong with your filed tax return they will send you a notice. If this happens to you:
- Respond Immediately. Get the direct contact information from the IRS web site and let them know that you have a possible identity theft problem.
- File an Identity Theft Affidavit (IRS form 14039). This will record your problem with the IRS and they will take extra steps to ensure your account activity is coming from you and not the ID thief.
- File a police report.
- Contact the credit bureaus.
Having your identity stolen is one thing. Having your tax withholding stolen and then having to unravel this problem within the IRS is a major hassle. Try to stay vigilant and know that there are steps to help protect your tax records. Is there good news in all this? If the IRS pays out a refund to someone stealing your identity, they are on the hook for this loss, not you.
Beware of This New IRS Scam
The IRS recently announced a new scam to steal your money from theives posing as the IRS. Here is what you need to know to protect yourself.
Lost in the recent news regarding stolen identities at Snapchat and the credit and debit card theft at major retailers, is the dramatic increase in identity theft and scams using the IRS. One of the more recent scams announced by the IRS is worth noting.
Callers identifying themselves as the IRS phone you and disclose that you owe delinquent taxes. They say that unless there is immediate payment by debit or credit card you may be subject to immediate deportation, arrest, loss of a license or loss of your business.
Why does this work?
These callers sound legitimate and the scams are often fairly sophisticated. Per the IRS, the callers who commit this fraud often;
- Use common names and fake IRS badge numbers.
- Know the last four digits of the victim’s Social Security number.
- Make caller ID appear as if the IRS is calling.
- Send bogus IRS emails to support their scam.
- Call a second time claiming to be the police or DMV, and caller ID again supports their claim.
What can you do?
While the IRS never initiates communication via email, they sometimes do initiate contact via the phone. So what steps can you take to ensure this does not happen to you?
- Mail is the typical IRS contact vehicle. Initial communication with the IRS is most often the mail. Your fraud alert should go way up with a phone call or email.
- No personal information from you. Never give personal information to the caller. This is true even if the person calling sounds legitimate.
- Get their information. Get the caller to give you all the information they have on the case. Get their badge number. Also get the name of their supervisor and the division they work with at the agency. Then hang up.
- Initiate the contact. After hanging up, contact the IRS. You can then confirm whether the call was legitimate. Here are the legitimate contact points:
- Internet: www.irs.gov
- 1040 questions: 1.800.829.1040
- To report fraud: Treasury Inspector General for Tax Administration at 800-366-4484
If, by chance, the request appears to be genuine please ask for help prior to sharing any information. As the old adage goes, it is better to be safe than sorry.
Determining the value of items on your tax return is always open to interpretation. You do not want that to happen to you during an audit as it can lead to additional tax and penalties. Here are some tips to help defend your Fair Market Value (FMV)
“Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”
Source: IRS Publication 561
This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes. It is also a definition that is so broad that it is wide open to interpretation. The difficulty here, is if the IRS decides your FMV opinion is wrong, you are not only subject to more tax, but penalties to boot. Here are some tips to help defend your FMV in case of an audit.
Understand when it is used
Fair Market Value or FMV is used whenever an item is bought, sold, or donated that has tax consequences. The most common examples are:
- Buying or selling your home or other real estate
- Buying or selling personal property
- Buying or selling business property
- Establishing values of other business assets like inventory
- Valuing charitable donations of personal goods and property like automobiles
- Valuing bartering of services
- Valuing transfer of business ownership
- Valuing the assets in an estate of a deceased taxpayer
Ideas to defend your FMV determination
Here are some suggestions to help you defend your FMV determinations.
Properly document donations. FMV of non-cash charitable donations is an area that can easily be challenged by the IRS. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt (confirmation) of your donations.
Donate capital items like automobiles to the correct places. You may use the FMV of a donated automobile but only if the charity you donate the item to will use it themselves, or will provide it to someone who will use it. Websites like Kelley blue book (kbb.com) can help establish the value of your vehicle when you donate it. Otherwise, the FMV of the donated vehicle will be limited to the amount the charity receives when they re-sell it.
Get an appraisal. If you sell a small business, collection, art, or capital asset make sure you have an independent appraisal of the property prior to selling it. While still open to interpretation by the IRS, this appraisal can be a solid basis for defending any differences between your valuation and the IRS.
Keep copies of similar items and transactions. This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar item to the one you sold, it can readily support your FMV claim.
Take photos. The condition of an item is often a key determinate in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount.
Keep good records. Keep copies of invoices for major purchases. Retain bills for any improvements. Make sure your sale of property includes a dated bill of sale that clearly states transfer of ownership and amount paid for the item.
With proper planning, establishing the fair market value of an item sold or donated, can be done in a reasonably defendable way if ever challenged.
Every year thousands of taxpayers go through a ”gotcha” with the IRS. A large, unexpected tax bill. Here are five common causes of tax surprises from lost refunds to retirement plan mistakes.
Every year taxpayers are hit with tax surprises that could be avoided if they just knew the rules. Here are five big ones that are easy to avoid with some simple planning.
Mistake #1. Withholding too little. This results in a tax surprise when filing your income tax. Don’t be too hard on yourself if this happens to you. Social Security withholdings have changed each year and new tax laws in 2013 make it very difficult to withhold the proper amount from each paycheck.
The plan: Check your withholdings after filing each year’s taxes. Make adjustments as necessary by filing a new W-4 with your employer.
Mistake #2. Inadvertently withdrawing funds from retirement plans. Amounts taken out of pre-tax retirement plans like 401(k)s and IRA’s can create taxable income. The most common inadvertent withdrawal occurs when you roll over funds from one retirement plan to another. If done incorrectly all the rollover could be deemed taxable income.
The plan: Do not touch your retirement accounts if at all possible (Exception: when you reach age 70 ½ you may be subject to Required Minimum Distribution rules). If you do withdraw funds, ensure you have the proper withholdings taken out at time of withdrawal. Direct rollovers into your new plan are always a better alternative than receiving the withdrawal from the plan administrator and then conducting the transfer yourself.
Mistake #3. Not taking advantage of tax-deferred retirement programs. There are numerous opportunities to shelter income from tax through tax preferred retirement programs.
The plan: Review your retirement savings options and plan to contribute as much as possible to your plans. Pay special attention to plans that include an employee match component. This attention can reduce your taxable income each year.
Mistake #4. Direct deposit mix-ups. You may now have tax refunds directly deposited in up to three bank accounts. The problem: what if one of the account numbers is entered incorrectly? Unfortunately, unlike replacing a lost check, the IRS does not have a good means of correcting this type of error. There have been instances where taxpayers have lost their refund when this occurs.
The plan: Many taxpayers do not feel comfortable giving the IRS direct access to their bank account. If you are in this camp, the digital deposit problem is solved. If you use direct deposit, avoid depositing your refund into more than one account. Ideally have a second person double check the account number on your tax form prior to submitting the return.
Mistake #5. Not keeping correct documentation. You know you drove the miles, donated the items to charity, had the medical expense, and paid the daycare. How can the IRS be disallowing your valid deductions? Remember without correct documentation the IRS is quick to disallow them.
The plan: Set up good recordkeeping habits at the beginning of each year. Create both a digital and paper folder separated by income and expense type. Keep a mileage log and properly document your charitable contributions.