Archive for Unemployment

IRS Publication 503 – Dependent Care Expenses

A taxpayer came to me today for verification on dependent care expenses. Their basic profile may be similar to yours. A husband and wife with two children in day care. The wife is a full time student that does not work outside of the house. The husband was laid off from his former job and has been regularly seeking gainful employment throughout the duration of the tax year in question.

These good people were told by a cog in a tax preparation franchise that they did not qualify for dependent care expenses because neither had employment income.  Of course I got pissed off because I’m just so sick and tired of tax practitioner ineptitude and deceit that I felt compelled to throw down this post at the end of a long day which is basically a brief overview of IRS Publication 503, Child and Dependent Care Expenses reported on IRS Form 2441.

This can be a hard topic to understand. Here’s the basic deal on dependent care – expenses paid while either working, seeking employment or attending school are qualified dependent care expenses under IRC [§21(e)(7); Reg. §1.21-1(a)(3)]. As long as the husband/wife file a joint return, the expenses paid while the wife attends school full-time for at least five months of the year and the expenses paid while the husband actively seeks employment are qualifying dependent care expenses.

A taxpayer who is a student is deemed to have earned $250 per month thus meeting the earned income requirement of §21. This is what tripped up the neophyte tax practitioner.

Regarding the Child and Dependent Care Tax Credit, according to IRS Tax Topic 602 this tax credit is “generally a percentage of the amount of work-related child and dependent care expenses you paid to a care provider. The percentage depends on your adjusted gross income. Work-related child and dependent care expenses qualifying for the credit are those paid for the care of a qualifying individual to enable you to work or actively look for work for any period when you had one or more qualifying individuals. Expenses are paid for the care of a qualifying individual if the primary function is to assure the individual’s well being and protection.”

Three points that tend to trip taxpayers up are:

1. In general. amounts paid for services outside your household qualify for the credit if the care was provided for a qualifying individual who (i) was your qualifying child under age 13 or (ii) regularly spent at least 8 hours each day in your household.

2. The expenses qualifying for the credit must be reduced by the amount of any dependent care benefits provided by your employer that you excluded from gross income.

3. The total expenses qualifying for the credit are capped at $3,000 (if you had one qualifying individual) or at $6,000 (if you had two or more qualifying individuals), and may not exceed the lesser of your and your spouses earned incomes.

A qualifying individual is:

1. Your dependent who was under age 13 when the care was provided and was your qualifying child

2. Your dependent who was physically or mentally incapable of self-care and who had the same principal place of abode as you for more than half of the year, or

3. An individual who was physically or mentally incapable of self-care, had the same principal place of abode as you for more than half of the year, and was your dependent. For this purpose, whether the individual was your dependent is determined without regard to the individual’s gross income, whether the individual filed a joint return with the individual’s spouse, or whether you or your spouse could be claimed as a dependent on someone else’s return.

Unemployment Benefits and the IRS

Unemployment compensation generally includes, among other forms, state unemployment compensation benefits, but the tax implications depend on the type of program paying the benefits. You must report unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ as represented by any IRS Form 1099-G‘s that you receive, with the total unemployment compensation paid to you shown in box 1.

For complete information on each of the benefits listed, see chapter 12 in IRS Publication 17, Your Federal Income Tax, or Publication 525, Taxable and Nontaxable Income.  Some other types of unemployment benefits include:

  • Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund

  • Railroad unemployment compensation benefits

  • Disability payments from a government program paid as a substitute for unemployment compensation

  • Trade readjustment allowances under the Trade Act of 1974

  • Unemployment assistance under the Disaster Relief and Emergency Assistance Act

You also must report benefits paid to you as an unemployed member of a union from regular union dues. However, if you contribute to a special union fund and your payments to the fund are not deductible, you only need to include in your income the unemployment benefits that exceed the amount of your contributions.

You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. Tax will be withheld at 10 percent of your payment. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year.

New IRS Form 8952 – Voluntary Worker Classification Settlement Program

I received an interesting call today from a small business employer who was reported to the IRS by a disgruntled past worker who claimed that he was paid as an independent contractor (and received IRS Form 1099) when in actuality he believed himself to be an employee (that should have received IRS Form W-2) for tax reporting purposes.

This prompted me to post about the new Voluntary Worker Classification Settlement Program. Having created well over 300 living wage jobs with benefits for people over the years I’ve grown to believe that most people roaming the planet today have no idea about the risks associated with that effort. The biggest risk in my opinion is associated with properly classifying workers as either employees subject to employment tax obligations or independent contractors whereby the worker is responsible for paying their own self employment tax. In the past the IRS has closed down the most well meaning business operations because improper worker classification created very large employment tax liabilities and heavily burdensome Trust Fund Recovery Penalties. The biggest risk I think is when a worker classified as an independent contractor gets injured on the job and doesn’t have his/her own insurance coverage or when a worker classified as an independent contractor becomes disgruntled and decides as a parting blow to report his/her ‘boss’ to the IRS or the US Treasury.

To alleviate that pain and mitigate some risk associated with one of thousands of decisions that job creators routinely make IRS Announcement 2011-64 gives businesses an opportunity to reclassify independent contractors as employees going forward.

IRS Form 8952 is used by businesses to apply for this reclassification opportunity. A business that applies for and is accepted into this program:

1) Receives audit protection backwards in connection with these reclassified workers,

2) Pays only 10% of the normal employer tax liability that may be due for the most recent tax year, and

3) Is not liable for interest and penalties on the amount.

In exchange the business gives IRS a six-year statute of limitation on the following three years’ employment taxes.

To be eligible:

1) The business cannot currently be under audit by IRS, the Department of Labor, or a state or local agency.  If the business has previously been audited, the business has to be currently complying with the directions of that audit.

2) The business must have consistently treated the workers as independent contractors.

3) The business must have filed all Forms 1099 for the prior years.

Scum Bags Millionaires Collecting Unemployment

Its a rare occasion that I pontificate in my tax blog but this just took me over the top this morning……. Recently released IRS data indicates that 2,840 households making at least $1 million collected $18.6 million in unemployment insurance in 2008.  Of those, 806 had incomes of more than $2 million, and 17 had incomes over $10 million, according to Bloomberg.com. If you are one of these scum bags that felt compelled to collect unemployment even though you made over $1,000,000.00, may the Good Lord have mercy on your soul for you are in route to rot in hell for all of eternity.  On the bright side its never too late to change.

How to Classify Worker – Independent Contractor or Employee

The IRS uses the common-law factors listed below to determine whether a worker is an independent contractor or an employee. All the factors below must be taken into consideration in determining worker classification

  1. Instructions. An employer should not tell an independent contractor how to do a job.

  2. Training. An employer should not provide substantial training for an independent contractor.

  3. Integration. An independent contractor should not be hired to provide a service that is an essential part of an employer’s business.

  4. Personal Services. An employer should not insist that the work be performed by the contractor rather than someone that the contractor may hire.

  5. Assistance. Independent contractors control and pay their assistants.

  6. Length of relationship. Independent Contractors should not have a continuing relationship with an employer unless there are multiple contracts.

  7. Work hours. An independent contractor usually determines the hours worked to complete a job.

  8. Amount of work. An independent contractor should not be told to work fulltime for an employer if that would prevent the contractor from doing other work.

  9. Location. Unless ther services can be performed only in one location, an independent contractor chooses where to do the work.

  10. Sequence of work. Independent contractors determine the order in which they are to accomplish tasks.

  11. Reports. Independent contractors should not be required to produce interim reports.

    payment.

  12. Independent contractors are paid for the results of their work, not for the time worked.

  13. Expenses. Independent contractors are responsible for their business expenses.

  14. Tools. Independent contractors are typically provide their own equipment and tools.

  15. Investment. An independent contractor has a significant investment in his business.

  16. Profit. Independent contractors realize profits and incur losses on each job.

  17. Multiple jobs. Independent contractors can work for more than one employer at a time.

  18. Availability. Independent contractors usually can make their services available to the general public as the wish.

  19. Termination. Independent contractors can not usually be fire at will, as can employees.

  20. Liability. Independent contractors are liable for failure to complete a job.

Tax implications of unemployment benefits

Taxpayers who received unemployment benefits in 2009 are entitled to a special tax break when they file their 2009 federal tax returns. This tax break is part of the American Recovery and Reinvestment Act of 2009.  Here are five important facts the Internal Revenue Service wants you to know about your unemployment benefits.

  1. Unemployment compensation generally includes any amounts received under the unemployment compensation laws of the United States or of a specific state. It includes state unemployment insurance benefits, railroad unemployment compensation benefits and benefits paid to you by a state or the District of Columbia from the Federal Unemployment Trust Fund. It does not include worker’s compensation.

  2. Normally, unemployment benefits are taxable; however, under the Recovery Act, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their federal tax return.

  3. For a married couple, if each spouse received unemployment compensation then each is eligible to exclude the first $2,400 of benefits.

  4. You should receive a Form 1099-G, Certain Government Payments, which shows the total unemployment compensation paid to you in 2009 in box 1.

  5. You must subtract $2,400 from the amount in box 1 of Form 1099-G to figure how much of your unemployment compensation is taxable and must be reported on your federal tax return. Do not enter less than zero.

IRS Publication 4128 – Tax Impact of Job Loss

IRS Publication 4128 Tax Impact of Job Loss was released in August of 2009.

The publication explains the job loss tax issues connected to severance pay, unemployment compensation, pension plans, IRAs, expenses for a job search, and possible moving costs. It also discusses self-employment issues for the newly unemployed. The IRS provides the following information to assist those newly unemployed:

  • Severance pay and unemployment compensation are taxable. Payment for any accumulated vacation or sick time is also taxable.

  • Generally, withdrawals from a pension plan are taxable unless they are transferred to a qualified plan (such as an IRA).

  • Certain expenses incurred while looking for a new job may be deductible. Examples of deductible expenses include employment and outplacement agency fees, resume preparation, and travel expenses for job search and interviews.

  • Moving costs you incur because of a change in your job location may be deductible. You must meet certain criteria relating to distance moved and timing of the move.

Unemployed Tax Ramifications

The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable. The IRS has updated a helpful publication which lists a number of job-loss related tax issues. For more information, see Publication 4128, Tax Impact of Job Loss.