Archive for Paying Taxes

IRS Form 7004 Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.

March 12, 2013 Corporation, Estate Tax, Estimated Taxes, Excise Tax, Extension, Paying Taxes, Penalty, Sub-chapter S, Tax Guidance & Preparation, Tax Relief, Trusts

If your corporation, partnership or estate operates on a calendar year basis the tax return is due March 15th which is coming up! If you need additional time to file tax returns for these entities file IRS Form 7004 which is an application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.

Filing this form by March 15th gives you an additional 5 or 6 months to file your actual tax documents. Instructions for this form are essential so be sure to read them.

If you contact me (or any tax practitioner worth their salt) to hit this deadline the first thing that you will be advised to do at this late date is to get this automatic extension request filed. If anything it alleviates the stress of rushing through the tax return AND you avoid the onerous late filing penalty.

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Withholding Tax for Social Security Goes to 6.2% of Wages

January 6, 2013 Employment Tax, FICA, Paying Taxes, Payroll Tax Problems, Self Employ, Small Business, Sole Proprietor, Sub-chapter S, Tax Guidance & Preparation, Tax Problems & Requests

Contrary to the manufactured ‘news’ dribbling out of the main stream media to sell advertising, last week the IRS published updated employer’s withholding guidance clearly stating that employers are to now withhold Social Security tax at the rate of 6.2 percent of wages rather than the previous rate of 4.2 percent in place for the past two years.

Alas THOSE OF US IN THE ‘MIDDLE CLASS’ WITH JOBS ARE ALL PAYING MORE TAX!!

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The ‘Fiscal Cliff’ and Your Tax Obligations

January 2, 2013 Capital Gain, Charitable Contribution, Children, Earned Income Tax Credit, Education Expense, Estate Tax, Paying Taxes, Payroll Tax Problems, Self Employ, Small Business, Social Security Tax, Tax Filing Status, Tax Guidance & Preparation, Tax Preparer, Tax Problems & Requests, Tax Relief, Taxable Income

Our esteemed President has proven to me to be extraordinarily disingenuous with his statements about the middle class and their purported tax obligations as pretty much everyone’s taxes will go up in 2013 as a direct result of the cumulative efforts of our ‘elected officials’ over the last few days.  Please don’t get me wrong as I find the man’s leadership in most regards to be much more stoic than any other President in my life time.

What I find particularly galling however is that everyone it seems from pundits to established economists speak about the need to create jobs in America as the best way to reduce the deficit. I believe as a matter of principal that the best way to create jobs from a policy or legislative perspective is to drastically reduce employment tax and to completely eliminate self employment tax as these are some of the biggest costs and risks associated with being an employer or job creator.

Either way if you would like to read the actual legislation a pdf version can be found here at the US Government Printing Office and summaries can be found here at the Library of Congress.  The following are some highlights of what to expect:

Starting in 2013, there will be a new 39.6% rate placed on these thresholds:

  • Married Filing Jointly: $450,000 of taxable income

  • Qualifying Widow(er):  $450,000 of taxable income

  • Head of Household: $425,000 of taxable income

  • Single: $400,000 of taxable income

  • Married Filing Separately: $225,000 of taxable income

Starting in 2013 the tax rates on long-term gains would be:

  • 0% if income falls below the 25% tax bracket

  • 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate

  • 20% if income falls in the 39.6% tax bracket

The Senate proposes the following AMT exemption amounts for 2012 indexed for inflation starting after 2012:

  • Married Filing Jointly: $78,750

  • Qualifying Widow(er): $78,750

  • Single: $50,600

  • Head of Household: $50,600

  • Married Filing Separately: $39,375

The proposed threshold amounts at which itemized deductions would start to be limited are:

  • Married Filing Jointly: $300,000 of AGI

  • Qualifying Widow(er): $300,000 of AGI

  • Head of Household: $275,000 of AGI

  • Single: $250,000 of AGI

  • Married Filing Separately: $150,000 of AGI

The Senate proposes to re-instate the personal exemption phase-out starting in 2013. Taxpayers would see their total personal exemptions reduced by two percent for each $2,500 by which adjusted gross income exceeds the threshold. The proposed threshold amounts for 2013:

  • Married Filing Jointly: $300,000 of AGI

  • Qualifying Widow(er): $300,000 of AGI

  • Head of Household: $275,000 of AGI

  • Single: $250,000 of AGI

  • Married Filing Separately: $150,000 of AGI

The Senate proposes that the following tax provisions be extended through the end of the year 2017:

  • American Opportunity Credit

  • Child Tax Credit at $1,000 maximum and partially refundable

  • Earned Income Credit for 3 or more dependents

The following provisions would be extended through 2013:

  • Educator expenses deduction

  • Exclusion for cancellation of debt on primary residences

  • Mass transit and parking benefits excluded from income set at maximum of $175 per month.

  • Mortgage insurance premium deduction

  • Deduction for state and local sales taxes

  • Charitable deduction for donating real property for conservation purposes

  • Tuition and fees deduction

  • Exclusion for charitable distributions from individual retirement accounts

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YIKES! IRS Issues Proposed Regulations on New 3.8% Net Investment Income Tax

December 7, 2012 Investment Income, IRS Collections, Paying Taxes, Tax Guidance & Preparation

A new Net Investment Income Tax goes into effect starting in 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. The IRS and the Treasury Department have issued proposed regulations on this new Net Investment Income Tax. I’m going to pour over these recently released documents and make a follow up post or two. Either way this here is one ledge in the fiscal cliff.

For more specifics on the proposed regulations check out the IRS’ FAQ Page on the matter. Or feel welcome to call Michala Irons, (202) 622-3050, or David H. Kirk, (202) 622-3060 or you can email ME your questions and concerns and I’ll do the best I can to respond accordingly. Please feel welcome to also submit comments electronically, by mail or hand delivered to the IRS as follows:

US Mail: CC:PA:LPD:PR (REG-130507-11), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Hand-delivered: Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-130507-11), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC, or

Sent electronically: via the Federal eRulemaking portal at www.regulations.gov (IRS REG-130507-11).

If you questions concerning submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, call Oluwafunmilayo (Funmi) Taylor, (202) 622-7180.

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IRS Tax Filing Extension Form 4868 & Tax Paying Extension Form 1127A

April 17, 2012 Paying Taxes, Tax Guidance & Preparation

Tax day is upon us – remember to at least get you application for automatic extension post marked today using IRS Form 4868

Or if your Adjusted Gross Income is under $57,000 you can file an automatic extension request online using Free File

If you or your spouse (when filing a joint return) were unemployed for 30 consecutive days in 2011 you can file for an extension of time to pay until October 15th 2012 using IRS Form 1127-A

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Paying Estimated Taxes IRS Form 1040-ES

April 5, 2012 Estimated Taxes, Paying Taxes, Tax Guidance & Preparation

As a general rule, you must pay estimated taxes in 2012 if both of these statements apply:

1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and tax credits, and

2) You expect your withholding and credits to be less than the smaller of 90 percent of your 2012 taxes or 100 percent of the tax on your 2011 return.

For Sole Proprietors, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. Use the worksheet in IRS Form 1040-ES, Estimated Tax for Individuals. You want to be as accurate as possible to avoid penalties. Also, consider changes in your situation and recent tax law changes.

Estimated payments are generally due on April 15, June 15, Sept. 15 and Jan. 15 of the next or following year.

Special rules apply for farmers, fishermen, certain household employers and certain higher income taxpayers.

Also helpful is IRS Publication 505, Tax Withholding and Estimated Tax

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IRS Fresh Start Initiative: Apply for Extension of Time to PAY with Form 1127A or Request an Installment Agreement with IRS Form 9465FS

April 3, 2012 Installment Agreement, IRS Collections, IRS Enforcement, IRS Mediation, IRS Penalties, IRS Penalty and Interest Abatement, Partial Payment Installment Agreement, Paying Taxes, Tax Guidance & Preparation

If you don’t have the money to pay your taxes you should file your return on time and pay as much as you can with the return to eliminate the late filing penalty and minimize the late payment penalty/interest charges.

For tax year 2011, qualifying individuals may request an extension of time to pay and have the late payment penalty waived as part of the IRS Fresh Start Initiative. This is done using IRS form 1127-A, Application for Extension of Time for Payment. Check out the form to see if you qualify.

Or if you prefer you can request an installment payment agreement. You do not need to wait for IRS to send you a bill before requesting a payment agreement. I suggest considering the Online Payment Agreement application  or submitting IRS Form 9465-FS, Installment Agreement Request, with your tax return. IRS charges a user fee to set up your payment agreement.

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Reporting Back Pay

February 27, 2012 Employment Tax, Paying Taxes, Payroll Tax Problems, Social Security Tax, Tax Guidance & Preparation, Tax Problems & Requests, Taxable Income

Reporting back pay is not as straight forward as one imagines.

If you issued back pay you should report it on IRS Form W-2 (in boxes 1, 3, and 5) for the year payment is made.

If any punitive damages are involved in a settlement they should be reported by the company on IRS Form 1099-MISC because they are not payment for actual wages.

If the settlement included attorney fees, they are also reported on IRS Form 1099-MISC, whether they were paid directly to an attorney or not.

Interest associated with either the wages or the punitive damages is reported on IRS Form 1099-INT.

If you receive back pay you report the wage portion of the settlement on the tax return for the year in which the back pay is received. Note that only the part of the settlement that relates
to the back pay is subject to payroll taxes.

Interest paid on the settlement is taxable and likewise reported on the return for the year it is received.

IF you receive punitive damages they are reported as other income on line 21 of IRS Form 1040.

Finally, note that any attorney fees associated with the lawsuit may be deducted as a miscellaneous itemized deduction subject to the two-percent-of-AGI threshold.

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Solo 401(k)

October 20, 2011 Paying Taxes, Retirement, Self Employ, Small Business

I blog today about 401(K)’s from a tax perspective solely keeping in mind that my license is as an Enrolled Agent with the US Treasury.  With that as a basis the benefits available to a self-employed individual in a solo 401(k) plan have increased. The self-employed individual can contribute to the solo 401(k) plan two ways:

  1. Through elective deferrals limited to the lesser of $16,500 or 100% of the self-employed individual’s compensation for 2011 and 2012.

  2. Through employer contributions limited to 20% of the self-employed individual’s compensation. The total of all contributions cannot exceed the lesser of 100% of the self-employed individual’s compensation or $49,000 for 2011. An additional amount of $5,500, for 2011, can be contributed if the self-employed individual has attained at least age 50 by the calendar year-end.

The self-employed individual’s compensation is defined as self-employment income after the deduction for half of the self-employment tax and the self-employed individual’s deductible contribution to the plan. Since the self-employed individual’s compensation is calculated in this manner it creates a simultaneous reduction in the maximum percentage amount the owner is able to contribute. To avoid this complicated calculation, the self-employed individual’s maximum contribution percentage can be figured by dividing the percentage amount allowed by the plan for the owner and employee by one plus the owner-employee’s contribution percentage (owner-employee % / (1 + owner-employee %)). For instance, if the self-employed individual’s plan document has a stated contribution percentage of 18% the self-employed individual’s actual maximum contribution percentage is 15.25% (18% / (1 + 18%)).

As a general rule, if the plan document states an owner-employee contribution percentage of 25%, the self-employed individual’s maximum contribution percentage is 20%. Therefore, after finding the self-employed individual’s maximum contribution percentage, using the above formula, the self-employed individual’s compensation amount is self-employment income after the deduction of half the self-employment tax.

As a side note, the self-employed individual’s deductible contribution amount is equal to the amount determined by multiplying the self-employed individual’s maximum contribution percentage by self-employed individual’s compensation (self-employment income after the deduction for half of the self-employment tax). This is the amount deducted on page 1 of Form 1040 as an adjustment to income, not as a Schedule C deduction.

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IRS Implications of Paying Yourself

September 28, 2011 Paying Taxes, Payroll Tax Problems, Sole Proprietor, Sub-chapter S, Tax Guidance & Preparation

Another fabulous question came my way today from a small business owner that is actually proving to be monetarily successful and wants to know how to pay herself while minimizing her tax burden. Basically the answer depends first on the type of business structure elected, sole proprietorship, partnership, corporation, S-corporation, or LLC.  The following is some text and links pulled off the IRS web site to help answer the question…

Corporate officers

An officer of a corporation is generally an employee, but an officer who performs no services or only minor services, and who neither receives nor is entitled to receive any pay, is not considered an employee. Refer to “Who Are Employees?” in Publication 15-A, Employer’s Supplemental Tax Guide (PDF).

Partner distributions

Partners are not employees and should not be issued a Form W-2 in lieu of Form 1065, Schedule K-1, for distributions or guaranteed payments from the partnership. Refer to partnerships for more information.

Dividend distributions

Any distribution to shareholders from earnings and profits is generally a dividend. However, a distribution is not a taxable dividend if it is a return of capital to the shareholder. Most distributions are in money, but they may also be in stock or other property. For information on shareholder reporting of dividends and other distributions, refer to Publication 550, Investment Income and Expenses.

Form 1099-MISC or Form W-2 wages

You cannot designate a worker, including yourself, as an employee or independent contractor solely by the issuance of Form W-2 or Form 1099-MISC. It does not matter whether the person works full time or part time. You use Form 1099-MISC, Miscellaneous Income (PDF) to report payments to others who are not your employees. You use Form W-2 to report wages, car allowance, and other compensation for employees.

Treating employees as non-employees

You will be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold them because you treat an employee as a non-employee, including yourself if you are a corporate officer, and you may be liable for a  trust fund recovery penalty. Refer to Publication 15, Circular E, Employer’s Tax Guide for details about the trust fund recovery penalty or Independent Contractor for more information on employee classification.

Shareholder loan or officer’s compensation?

A loan by a corporation to a corporate officer should include the characteristics of a loan made at arm’s length. That is, there should be a contract with a stated interest rate, a specified length of time for repayment, and a consequence for failure to repay the loan. Collateral would also be an indication of a loan. A below-market loan is a loan which provides for no interest or interest at a rate below the federal rate that applies. If a corporation issues you, as a shareholder or an employee, a below-market loan, the lender’s payment to the borrower is treated as a gift, dividend, contribution to capital, payment of wages, or other payment, depending on the substance of the transaction. Refer to “Employees’ Pay/Kinds of Pay/Loans or Advances” in Publication 535, Business Expenses for more information.

Reasonable compensation

Because an officer of a corporation is generally an employee with wages subject to withholding, corporate officers may question what is considered reasonable compensation for the efforts they contribute to conducting their trade or business. Wages paid to you as an officer of a corporation should generally be commensurate with your duties. Refer to ”Employee’s Pay, Tests for Deducting Pay” in Publication 535, Business Expenses for more information. Public libraries may have reference sources that provide averages of compensation paid for various types of services. The Internal Revenue Service may determine that adjustments must be made to the income and expenses of tax returns for both the corporation and an individual shareholder if the officer is substantially underpaid for services provided.

Draw account

If you are a sole proprietor  or partner in a partnership, the money or other forms of payment you take from your business should be accounted for in a draw account. This helps you know what amount of benefits you have taken from the business during the year. You cannot deduct the sole proprietor s own salary or any personal withdrawals made from the business.

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