Archive for Social Security

IRS Can Levy More Than 15% of Social Security Benefits According to Bowers V. US

December 4, 2012 Back Taxes Owed, Income, Intent To Levy, Intent To Lien, IRS Centralized Insolvency, IRS Collections, IRS Enforcement, IRS Levy, IRS Lien, Social Security, Social Security Tax, Tax Court, Uncertain Tax Position

The distinction of how this is possible distills down to understanding the nuanced difference between a ‘Continuous’ and a ‘One Time’ IRS tax levy.

Under Code Sec. 6331(h) once a tax levy is approved, the effect of the levy on specified payments received by a taxpayer is continuous from the date the levy is first made until the levy is released. A continuous levy attaches to up to 15 percent of any specified payment including social security payments.

However as a one-time levy, the 15 percent cap on continuing levies under Code Sec. 6331(h) does not apply to monthly social security benefits allowing the IRS to take more than 50 percent of the taxpayer’s monthly benefit in Bowers v. U.S., 2012 PTC 133 (C.D. Ill. 5/22/12).

In the Bowers case we learn that according to the court, the IRS has discretion to approve continuous levies under either Code Sec. 6331(a) or (h) however it is not required to attach a continuous levy even where the type of property might be eligible for one.

The court stated in this case that social security payments represented a present, vested right to receive benefits in fixed monthly payments for the taxpayer’s life and the amount of the benefits are based upon a formula that included prior wages.

Because the social security benefits were not contingent on the performance of any additional services the tax levy could attach to the entire stream of Social Security payments as a one-time levy under Code Sec. 6331(a) and (b). Thus, the levy was considered a one-time levy.

As a one-time levy, the 15 percent cap on continuing levies under Code Sec. 6331(h) does not necessarily apply.

I think the lesson learned here is that if you are having your social security levied try to have it levied under IRC 6331(h) as a continuous levy subject to the 15% maximum threshold..

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IRS Treatment of Social Security Benefits – SSA Form 1099

November 21, 2012 Social Security

If you receive Social Security benefits (checks) you should also receive a Form 1099-SSA from the Social Security Administration. Use the data on this form to help determine if your benefits are taxable. Basically the tax depends on total income and marital status. If Social Security benefits were your only income, your benefits are not taxable.

If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status which sounds more complicated than it really is.  Here’s the quick calculation I use to determine whether a taxpayer’s social security benefits may be taxable.

First, add one-half of the total Social Security benefits you received to all your other income, including any tax-exempt interest and other exclusions from income. Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

There is a worksheet in the IRS Form 1040 Instruction booklet to help calculate specific taxable benefits. IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits is an excellent resource.

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IRS Form 1040 Schedule C: Profit or Loss from Business

February 7, 2012 Accounting Method, Business Expense, Business Income, Car expense, Depreciation, Disallowed Expenses, Employee Business Expense, Entity Classification, FICA, Health Insurance, Hobby, Home Office, Husband/Wife, Medicare, Net Operating Loss, NOL, Passive Activity, Self Employ, Small Business, Social Security, Social Security Tax, Sole Proprietor, Start up costs, Sub-chapter S, Tax Guidance & Preparation, Tax Problems & Requests

The sole proprietorship or Limited Liability Corporation (LLC) is in my opinion the easiest type of business entity to set up and begin operating. It is not separate from its owner with the income and expenses reported on IRS Form 1040 Schedule C.

Some people have instant success with a venture that is profitable from the very beginning. However it is more common to be unprofitable in the first 24 to 36 months of operation. If you are loosing money it is important to remember that you MUST REPORT A PROFIT IN 2 OUT OF THE PREVIOUS 5 TAX YEARS TO AVOID BEING CONSIDERED BY THE IRS TO BE REALLY ENGAGED IN A HOBBY. For more details on the specifics of hobby versus business see my post at: http://johnrdundon.com/how-to-determine-what-is-a-business-vs-what-is-a-hobby/

When it comes to losses the other thing to keep in mind is that they can be limited basically in three different ways:

1. By the amount of your investment or basis limitation;
2. By the amount you have at risk or at-risk limitation; and
3. By the passive activity loss limitation.

Basis limitations do not apply to sole proprietors as they would with an S corporation shareholder or partner in a partnership. A sole proprietorship is predominantly financed by the proprietors own assets. Two obstacles must be overcome before a Schedule C loss is deductible as addressed in this particular order:

1. The at-risk limitations of IRC Sec. 465; and
2. The passive activity loss limitations of IRC Sec. 469.

The at-risk limitations apply before any loss is limited due to lack of material participation which is a threshold criteria of a passive activity. The proprietor’s at-risk limitation is calculated on IRS Form 6198. If a taxpayer cannot verify a material-participation level with respect to the Schedule C activity, then being at-risk for the loss is essentially immaterial. The at-risk concept is one that looks at the source of funds for the business. Usually sole proprietors would not be at-risk when:

• The business was financed with non-recourse loans – except for holding real property;
• A valid guarantee or stop-loss agreement is in force; or
• Amounts borrowed for use in the business are from a person with an interest in the business, other than a creditor, or who is
related to a person having an interest in the business under IRC Sec. 465(b)(3)(C).

Most all small businesses with gross receipts of $1 million or less are allowed to use the cash method of accounting (Rev. Proc. 2001-10). New proprietors generally begin using the cash method of accounting immediately. An existing business may qualify to change its accounting method by filing IRS Form 3115 – Application for Change in Accounting Method with its tax return under the automatic consent procedures. When changing from an accrual to a cash method of accounting usually a negative IRC Sec. 481(a) adjustment is deducted in the year of the change and a positive IRC Sec. 481(a) adjustment is generally reported in income over a four-year period.

Items withdrawn for contributions to charitable organizations are reported via to IRS Form 8283 Non-cash Charitable Contributions and finally to Schedule A Itemized Deductions.

Office-in-home deduction items are detailed separately on IRS Form 8829 Expenses for Business Use of Your Home rather than on the expense lines for rent, utilities, interest, etc.

Proper deduction of vehicle expenses includes a decision for utilizing the cents-per-mile deduction or the actual method. Both methods require maintaining a mileage log and an understanding
of which miles are business miles.

Additionally, an understanding of depreciation methods available, which includes knowing the weight of the vehicle, are important. IRC Sec. 179 deductions are limited to income, but regular depreciation, including bonus depreciation, can actually assist in creating or increasing an net operating loss (NOL).

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Severance Payments and FICA Tax

December 12, 2011 FICA, Social Security, Social Security Tax, Tax Court

Generally severance payments made to terminated employees have been held by the US Tax Court to be FICA wages because the definition of “wages” for FICA purposes found in the Internal Revenue Code is so broad. “Wages” include all remuneration or money paid for employment with 23 listed statutory exceptions to the definition.

A federal district court case case I blogged about before, US v. Quality Stores, Inc. from the western district of Michigan provides a FICA exception for one small area of severance pay. Specifically, the federal court found a FICA exception for severance pay which constitutes “supplemental unemployment compensation benefits” within the meaning of Section 3402(o) of the Internal Revenue Code defined as amounts paid to an employee because of an employee’s involuntary separation from employment resulting directly from a reduction in work force, the discontinuance of a plan or business operation.

When you retire from employment and your separation is not the direct result of a reduction in work force or operational shut-down your retirement is usually NOT considered involuntary and as such your severance pay can be subject to FICA taxation if you have not hit the income threshold for the tax year.

Furthermore it is important to note that the IRS disagreed with the Quality Stores decision described above. On June 18, 2010, the IRS issued an opinion which refers to the Quality Stores decision by stating “the decision is not binding precedent,” and “the opinion runs counter to (a) Federal Circuit Court of Appeal’s 2008 decision.” Which means in plain terms from my perspective that the IRS will dedicate resources to defending their position on this matter the next time a case like Quality Stores comes up. In other words chances are really good that your severance payment will more likely than not be subject to FICA tax.

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Social Security and Medicare Changes 2012

November 1, 2011 Medicare, Social Security, Social Security Tax

The Social Security Administration has announced the new benefits and thresholds for 2012 as follows:

  1. Gross Social Security benefits increase for 2012 by 3.6%. 

  2. The amount of earnings subject to Social Security taxes increases to $110,100. 

  3. The amount of earnings required to be subjected to Social Security taxes in order to receive a quarter of coverage increases to $1,130. 

  4. Earnings limitations for taxpayers who have not reached full retirement age (before having to repay Social Security benefits) increases to $14,640 ($1,220/month).

  5. Earnings limitations for taxpayers who reach full retirement age in the current year (before having to repay Social Security benefits)  increases to $38,880 ($3,240/month).  “Full retirement age” is age 66 for those born in 1943-1954.

  6. The maximum monthly Social Security benefits increases to $2,513. 

  7. The amount of the SSI Federal Payment Standard increase to $698/month.  For a married couple this increases to $1,048/month.  

  8. The SSI Student Exclusion Limits increases to $1,700/month with the annual limit increasing to $6,840.

  9. The Substantial Gainful Activity earnings increase to $1,010 per month for non-blind disabled recipients while the blind disabled recipients amount increases to $1,690/month.  

  10. The Trial Work Period earnings remain the same at $720/month.

The Department of Health & Human Services has announced the new Medicare amounts for 2012 as follows:

  1. The base Medicare Part B monthly premiums DECREASE from $115.40/month in 2011 to $99.90/month in 2012.  A “hold harmless” provision in the law has allowed about 73% of Social Security beneficiaries to avoid paying the Medicare insurance premiums over the past couple of years because the net Social Security check could not decrease as a result of higher Medicare premium.  These taxpayers typically have continued to pay $96.40/month in premiums.  Therefore as a result of the increase in Social Security gross benefits, these taxpayers will have an offsetting increase in Medicare insurance premiums of about $3.50/month, much less than anticipated.  Those taxpayers who have been paying higher Medicare premiums, such as those who signed up for Medicare in 2010 or 2011, should experience a decrease in their Medicare premiums.

  2. For 2012 the premiums vary depending on the taxpayers’ income as shown on their 2009 income tax returns and their filing status.  The monthly Medicare premium (base and extra) amounts for 2012 based on 2010 income and filing status are:

SINGLE:

Premiums – - – - Income of:

$99.90 – - – $85,000 or less

$139.90 – - – $85,001-$107,000

$199.80 – - – $107,001-$160,000

$259.70 – - – $160,001-$214,000

$319.70 – - – Above $214,000

Married Filing Joint:

Premiums – - – - Income of:

$99.90 – - – $170,000 or less

$139.90 – - – $170,001-$214,000

$199.80 – - – $214,001-$320,000

$259.70 – - – $320,001-$428,000

$319.70 – - – Above $428,000

Married Filing Single:

Premiums – - – - Income of:

$99.90 – - – $85,000 or less

$259.70 – - – $85,001-$129,000

$319.70 – - – Above $129,000

The Part B Medicare deductible for 2012 is $140.

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How to Determine if Your Social Security Benefits are Taxable

February 7, 2011 Social Security

If you received Social Security benefits or payments in 2010, some of that money may be taxable. You should receive a Form SSA1099 which will show the total amount of your benefits. How much of your Social Security benefits are taxable depends on your total income and marital status. Generally, if Social Security benefits were your only income for 2010, your benefits are not taxable and you probably do not need to file a federal income tax return.

If you received income from other sources then Social Security here’s where it gets a little tricky. Your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status. Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet.

The Following computation will help to determine whether some of your benefits may be taxable:

  1. First, add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income.

  2. Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

The 2010 base amounts are:

  • $32,000 for married couples filing jointly.
  • $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.
  • $0 for married persons filing separately who lived together during the year.

Links: Publication 915, Social Security and Equivalent Railroad Retirement Benefits

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Employee vs. Independent Contractor: Business Owners Tips

August 24, 2010 Appeals & Audit Resolution, Audit Reconsideration, Business Expense, Earned Income Tax Credit, Employee Business Expense, Employment Tax, Payroll Tax Problems, Self Employ, Small Business, Social Security, Social Security Tax, Sole Proprietor, Tax Deductible Expenses, Tax Guidance & Preparation, Tax Problems & Requests, Wage Garnish

As a small business owner you may hire people as independent contractors or as employees. There are rules that will help you determine how to classify the people you hire. This will affect how much you pay in taxes, whether you need to withhold from your workers paychecks and what tax documents you need to file. Here are seven things every business owner should know about hiring people as independent contractors versus hiring them as employees.

  1. The IRS uses three characteristics to determine the relationship between businesses and workers:

    Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

    Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.

    Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

  2. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

  3. If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.

  4. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

  5. Workers can avoid higher tax bills and lost benefits if they know their proper status.

  6. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.

  7. Links:

    Publication 15-A, Employer’s Supplemental Tax Guide (PDF)

    Publication 1779, Independent Contractor or Employee (PDF)

    Publication 1976, Do You Qualify for Relief under Section 530? (PDF)

    Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF)

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Employer Misclassification of Workers

May 19, 2010 Business Expense, Employment Tax, FICA, IRS Audit, IRS Enforcement, IRS Examination, Payroll Tax Problems, Self Employ, Small Business, Social Security, Social Security Tax, Sole Proprietor, Sub-chapter S, Tax Guidance & Preparation, Tax Problems & Requests, Wage Garnish

The IRS and Department of Labor have joined forces to reduce employer misclassification of workers. Last fall, the IRS began auditing 6,000 companies to determine if they have misclassified workers as independent contractors or properly classified the workers as employees and paid the required employment taxes.

If an individual who has been treated as an independent contractor for tax purposes is notified that his/her worker status is actually that of an employee, the IRS will often require corrections to that person’s prior returns. Such a determination impacts the reporting of income and deductions, which in turn affects earned income credit, AMT, and any deductions based on adjusted gross income (AGI).

Individual workers who were not treated as employees most likely filed as self-employed, reported income and deductions on Schedule C, Profit or Loss From Business, and paid self-employment (SE) tax on the net result. These individuals are now required to report the income and expenses as an employee, so many of the deductions that were taken as business expenses on Schedule C will be lost.

Because their expenses must now be reported as employee business expenses on Form 2106, Employee Business Expenses, and carried to Schedule A, Itemized Deductions, the deduction often vanishes when subjected to the 2-percent of AGI limitation.

Reclassification from a self-employed individual to an employee also affects adjustments to income on Form1040, U.S. Individual Income Tax Return. One such adjustment is the deduction on Form 1040, Line 27, for one-half of the self-employment (SE) tax paid. As an employee, that deduction is eliminated, as well as any other deduction originally allowed as a self-employed individual, such as a deduction for self employed health insurance (Line 29), or a self employed SEP, SIMPLE, or other qualified retirement plan contribution (Line 28).

Instead of paying self-employment tax, the employer and employee are each responsible for paying one-half of the total FICA and Medicare tax.

Usually, FICA and Medicare tax is taken out of each paycheck and calculated on the gross amount of wages, as reported on Form W-2 and on Line 7 of Form 1040. If the individual is still employed, he/she needs to pay any of the current year’s federal income tax withholding (FITW), based on the current year wages, before the end of the tax year. If the individual is no longer employed, the employer is ultimately responsible for payment of the FITW and needs to arrange for reimbursement, if any, from the reclassified employee. If the employer pays the FITW, the employee’s gross wages reported on Form W-2 need to include the amount of withholding paid by the employer.

Since this reclassification is generally determined after the individual has been paid for the services rendered, both the employer and the reclassified employee are responsible for paying a portion of any FICA and Medicare on the reclassified wages.

The employee portion of FICA and Medicare is reported on Form 8919, Uncollected Social Security and Medicare Tax on Wages, and attached to either an original or amended return.

For tax years prior to 2007, use Form 4137, Social Security and Medicare Tax on Unreported Tip Income. Cross out the word tip(s) and replace it with the word wage(s). This form is attached to Form 1040 or Form 1040X, as applicable.

If a refund is due the employee, the normal statute of limitations applies. Therefore, any original or amended return must be filed within three years of the due date of the original return or within two years after the date the tax is paid, whichever is later.

After Form 8919 (or Form 4137) is processed, this income will be reported to the Social Security Administration as wages earned.

Note: The employer portion of the employment taxes is reported on Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. For more information, see Pub. 4341, Information Guide for Employers Filing Form 941or Form 944, Frequently Asked Questions About the Reclassification of Workers as Employees.

A complete copy of Notice 989, Commonly Asked Questions When IRS Determines Your Work Status is Employee, is available at www.irs.gov/pub/irs-pdf/n989.pdf.

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Failing to Issue Form W-2 to Corporate Officers

May 19, 2010 Business Expense, Employment Tax, FICA, Paying Taxes, Payroll Tax Problems, Self Employ, Small Business, Social Security, Social Security Tax, Sole Proprietor, Sub-chapter S, Tax Guidance & Preparation, Tax Problems & Requests, Tax Relief

A corporate officer who performs substantial services for the corporation and receives compensation is considered to be an employee. The corporation should issue a Form W-2 reporting the compensation as wages and withhold proper amounts for federal income tax, FICA, and FUTA purposes. Recently, the IRS Small Business/Self-Employed Division issued a memorandum providing guidance to IRS agents when a corporation fails to treat an officer as an employee. If the corporation fails to issue a W-2, it may be eligible for relief under one of several avenues.

First, the corporation may be allowed to classify the officer as a non-employee under §530 of the Revenue Act of 1978 if all of the following conditions are met:

  1. The corporation didn’t treat the individual as an employee.

  2. Federal employment tax returns were filed on a basis consistent with the employer’s treatment of the worker as a non-employee.

  3. The corporation had a reasonable basis for not treating the individual as an employee. This condition is difficult to overcome because §§3401(c), 3121(d)(1), and 3306(i) for purposes of income tax, FICA, and FUTA withholding, respectively, define an officer of a corporation as an employee for employment tax purposes.

  4. The corporation didn’t treat any individual in a substantially similar position as an employee.

Secondly, §3509 reduces an employer’s liability for income tax withholding and the employee portion of the FICA taxes where the employer unintentionally failed to deduct and withhold those taxes because it treated the employee as a non-employee. That liability is reduced to 1.5 percent of the employee’s wages for income tax withholding and 20 percent of the employee’s portion of the FICA tax.

However, if the employer failed, without reasonable cause, to comply with applicable information reporting requirements consistent with the treatment of the employee as a non-employee, those percentages are doubled. If the employer intentionally disregarded the deduction and withholding requirements, it is liable for the full tax and the lower §3509 rates do not apply.

Example: Axel is an officer of Flying High Co., an S corporation, for which he performed substantial services and received compensation in 2008. Flying High Corp treated Abe as an independent contractor, but did not issue him either a Form W-2 or Form 1099-MISC. Instead, Flying High Corp treated Axel’s payments as a distribution and issued him a Schedule K-1. The lower rates of §3509(a) will be used as long as Flying High did not intentionally disregard the reporting requirements. If no K-1 or other appropriate information return was issued to Axel, still assuming no intentional disregard on the part of Flying High, the higher §3509(b) rates will be used to compute the tax.

Example: Fastrack Corp. knows that officers who perform services for a corporation are employees by statute. Bernie, an officer of the corporation, performs substantial services, but the corporation deliberately structures his pay as distributions or loan repayment in lieu of a salary or wages. Fastrack Corp. has intentionally disregarded the rules and regulations and does not qualify for the lower §3509 rates.

The IRS memorandum notes that reliance on the preparer is not always reasonable cause. The taxpayer must show he received advice from his counsel, that he relied on it in good faith, and that any such reliance was reasonable.

The §3509 rates do not reduce the employer’s liability for the employee’s portion of the FICA taxes for statutory employees described in §3121(d)(3) (i.e., certain agent- or commission-drivers, those who sell life insurance full time, home workers, and traveling or city salespersons).

If an individual could be classified as either a corporate officer under §3121(d)(1) or a statutory employee under §3121(d)(3), then the §3509 reductions of the employer’s liability for the employee’s portion of the FICA taxes do not apply.

Similarly, if the individual could be classified as either a common law employee under §3121(d)(2) or a statutory employee under §3121(d)(3), then §3509 reductions of the employer’s liability for the employee’s portion of the FICA taxes would be inapplicable.

To sum up the rule for corporate officers, §3509 reductions apply unless the officer could also be classified as an agent- or commission-driver, a full-time life insurance salesperson, a home worker, or a traveling or city salesperson.

If a corporate officer could also be classified as an employee under §3121(d)(3), then the §3509 rates apply only to the employer’s liability for income tax withholding and not to the employer’s liability for the employee’s portion of the FICA taxes.

IRS agents who do not allow the reduced tax rates must develop facts to support their position, and address those facts in their examination report. The IRS cannot issue an assessment for any unpaid employment taxes until after:

  1. It has issued a Notice of Determination of Worker Classification

    (NDWC); and

  2. The taxpayer has either exhausted its Tax Court remedies/failed to pursue them, or signed an appropriate waiver of restrictions on assessment.

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New Small Business Health Care Tax Credit

May 17, 2010 Business Expense, Deductible Expense, Health Care Tax Credit, Health Insurance, Self Employ, Small Business, Social Security, Social Security Tax, Sole Proprietor, Sub-chapter S, Tax Credit, Tax Guidance & Preparation, Tax Problems & Requests, Tax Relief

The Internal Revenue Service issued new guidance to make it easier for small businesses to determine whether they are eligible for the new health care tax credit under the Affordable Care Act and how large a credit they will receive. The guidance makes clear that small businesses receiving state health care tax credits may still qualify for the full federal tax credit. Additionally, the guidance allows small businesses to receive the credit not only for regular health insurance but also for add-on dental and vision coverage.

Notice 2010-44 provides detailed guidelines, illustrated by more than a dozen examples, to help small employers determine whether they qualify for the credit and estimate the amount of the credit. The notice also requests public comment on issues that should be addressed in future guidance.

Included in the Affordable Care Act approved by Congress in March and signed into law by the President, the small business health care tax credit, which is in effect this year, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.

In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.
For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt organizations, the IRS will provide further information on how to claim the credit.

More information about the credit, including a step-by-step guide and answers to frequently asked questions, is available on the Affordable Care Act page.

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