Archive for Paying Taxes
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
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
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.
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.
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:
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Through elective deferrals limited to the lesser of $16,500 or 100% of the self-employed individual’s compensation for 2011 and 2012.
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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.
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.
Notice 2011-53, issued by Treasury and the IRS, provides a workable timeline for foreign financial institutions (FFI) and U.S. withholding agents to implement the various requirements of the Foreign Account Tax Compliant Act (FATCA). The notice phases in the implementation of FATCA in the following manner:
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An FFI must enter an agreement with the IRS by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.
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Withholding on U.S. source dividends and interest paid to non-participating FFIs will begin on Jan. 1, 2014, and withholding on all withholdable payments (including on gross proceeds) will be fully phased in on Jan. 1, 2015.
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Due diligence requirements for identifying new and pre-existing U.S. accounts (including certain high-risk accounts) will begin in 2013. Reporting requirements will begin in 2014.
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For purposes of the Notice, high risk accounts include private banking accounts with a balance that is equal to or greater than $500,000.
This new law targets noncompliance by U.S. taxpayers through foreign accounts. Under the notice’s phased implementation approach, foreign financial institutions (FFIs) and U.S. withholding agents are given adequate time to build the systems needed to fully comply with FATCA.
FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid being withheld upon under FATCA, a participating FFI will have to enter into an agreement with the IRS to:
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Identify U.S. accounts,
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Report certain information to the IRS regarding U.S. accounts, and
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Withhold a 30-percent tax on certain payments to non-participating FFIs and account holders who are unwilling to provide the required information.
FFIs that do not enter into an agreement with the IRS will be subject to withholding on certain types of payments, including U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and passthru payments.
The IRS issued three rulings in 2010 to address how the income of registered domestic partners in California should be reported and taxed for both state and federal income tax purposes.
In Chief Counsel Advice 201021050, the IRS determined that for tax years beginning after December 31, 2006, registered domestic partners in California are to report one-half of the community income, whether received in the form of compensation for personal services or from property, on the tax return.
In a similar private letter ruling [PLR 201021048], the IRS ruled the same and extended the community property treatment to include one-half of the credits for income tax withholding.
The third ruling, Chief Counsel Advice 201020149, addressed the issue of collection potential when one partner files an offer in compromise. The IRS ruled that it can consider the assets of a taxpayer’s registered domestic partner in California when
determining the reasonable collection potential of a taxpayer’s offer in compromise under IRC §7122.
Although the three rulings from the IRS do not specifically address
other community property states that may have registered domestic partner laws, a recent IRS Quick Alert implied that the IRS would use the same rules in other community property states with similar laws specifically referencing California, Nevada and Washington. The alert stated:
Registered Domestic Partners in California, Washington and Nevada must split their income and withholding credits in accordance with community property laws of their states.
Effective February 14, 2011, they can file a Form 1040 return using either Head of Household filing status (if the taxpayer is claiming one or more dependents) or single filing status.
There are six other community property states: Arizona, Idaho,
Louisiana, New Mexico, Texas and Wisconsin. Some of these states
(maybe all) have domestic partner laws in effect that extend certain fringe benefits, such as health care and retirement benefits to a domestic partner.
It is unclear whether the IRS will require domestic partners residing in these states to split income and withholding as they apparently are required to do in California, Nevada and Washington.
