TaxMama’s® TaxQuips Are You In Business?

2022-03-01 by Eva Rosenberg

It’s TaxQuips time from TaxMama.com®
TodayTaxMama® wants to talk to you about all those pesky 1099Ks that you’re receiving this year.

 

 

 

 

 

 

 

 

Dear Family,

We’re getting questions from people who have suddenly started getting 1099Ks from their various casual sales – like Etsy, eBay, PayPal, Zelle, and other bank-like sources where they send or receive money.

Why are they getting these 1099Ks this year? The IRS dropped the reporting threshold to payments of $600 or more, instead of 200 transactions and $20,000.

Every one of those 1099Ks is reported to the IRS. The IRS computer is looking for those numbers in specific places on the tax return. Generally, the IRS computer wants to see that income amount on Schedule C.

Let’s outline the different ways people use these accounts and how to report these 1099Ks on their tax returns. Remember, please, this is a brief outline. It may be a bit technical (and therefore, boring), so feel free to skip the rest of this if it doesn’t apply to you or your family, friends, or clients.

If there is a lot of money involved, please work with a tax professional. (YOU decide how much is a LOT.)

Before I go forward, I will tell you that some people recommend that you report all this income on Schedule 1, when you are not in  business. Don’t do that, except for hobbies. You’ll see why as we go along.

1) What are you supposed to do if you just use these payment systems to send or receive  money to/from friends and family?

Keep things simple. Report the income on Schedule C as Other income.
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Then, on page 2 in Part V, deduct out that full amount. The description on the line is “Personal Transactions Only”.

You end up paying taxes on nothing.

2) What’s if you are using these payment systems purely to sell things in your home or garage? You’re just cleaning things out, without having an in-person garage sale.

Keep things simple. Report the income on Schedule C as Other income.
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Then, on page 2 in Part V, deduct out that full amount. The description on the line is “Garage Sales – No Profits.”

Of course, if you want to be meticulous, you can then, also report this on Schedule D. https://www.irs.gov/pub/irs-pdf/f1040sd.pdf

In that case, change the description in Schedule C Part V to “Garage Sales – See Schedule D.”

On Schedule D, enter the amount from the 1099K in column (d) as the Proceeds. And the same amount in column (e) as the cost. Why – you cannot report a loss when you are selling personal property, so you want to zero out the loss.

Once again, you end up paying taxes on nothing.

3) You make things using your skills and talents and sell them to people who like them, just for fun. You’re not out to make a profit – and, in fact, you don’t generate more income than your costs.

In this case, you have a hobby.

Report your income on Schedule 1, as Other Income.
https://www.irs.gov/pub/irs-pdf/f1040s1.pdf

Take no deductions at all. Hobbyists are no longer permitted to deduct expenses. Perhaps that right will be restored after 2025, when the Trump Tax Cut expires.

In this case, you end up paying taxes on all your income.
But at least it’s not subject to self-employment taxes.

4) You’re actually selling things that you make or buy, or provide services in order to sell them for a profit. In that case, you’re in business – and should have been reporting this income all along. This is the population the IRS is trying to catch – folks who have taxable income and haven’t been reporting it. So, what do you do this year?

A) Report the income on Schedule C in box 1 as Gross Income.


B) Keep good records about your costs to make or buy the merchandise that you sold, and direct costs related to the services that you provide, and report those costs on Schedule C, Part III, Cost of Goods Sold. If you have costs for merchandise you didn’t sell, then they are not the cost of anything that was sold, right? So save those costs for next year. (Or learn how to report beginning and ending inventory.)

C) With good records, you will also have the data for all the other business expenses – enter those in Part II of Schedule C.

D) If you have mileage and office in home expenses – you need to learn how to compute and enter those on your Schedule C.


In other words, you need to do full-blown business reporting in order to reduce your net profits.
This will reduce two things for you – self-employment taxes (Schedule SE) and income tax (Form 1040).

My goal today is to help you avoid those under-reporting notices from the IRS and to help you reduce your tax burden. (Too many people are telling me that they are reporting their garage sale-type income and paying Self-Employment taxes – when they should not even have taxable income!)  As long as the IRS computer finds the numbers where it expects to see them, you can wipe out the income when the activity is not taxable.

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

To make comments please drop into the TaxQuips Forum.

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TaxMama’s® TaxQuips IRS E-File is Open Today The IRS Goes Online!

2022-01-24 by Eva Rosenberg

Courtesy of VectorStock.com

It’s TaxQuips time from TaxMama.com®
Today TaxMama® wants to address some of your concerns.

 

 

 

Dear Family,

First of all, let’s start with the news you’ve been waiting to hear.
The IRS efiling system is officially open today.

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So anything you submitted to the tax software companies earlier – or from now on, can get transmitted immediately.  No doubt, there will be glitches for a while – but not as many as last year, when Congress changed the rules in the middle of the filing season.

In case you want to look up various filing deadlines, the TaxMama’s 2022-2023 Tax Calendar is up, ready for you to use.

The IRS has expanded some of their do-it-yourself resources this year for both taxpayers and tax professionals. Since the IRS is nearly impossible to reach by phone or in person (fewer offices – all require appointments), being able to do things electronically will reduce problems and save headaches. Here are some key things you should get set up to use ASAP:

Special Tip for folks who are STILL waiting for your 2020 tax return to be processed! (when H freezes over???). The IRS says to enter ZERO (0) on the line asking for your 2020 adjusted gross income (AGI). More details here.

  • To use the new online tools, you may be required to set up an me account for security purposes.
  • Taxpayer’s IRS Account – It will let you look up payments, refunds, transcripts and perhaps notices. It will also let you approve your tax professional’s power of attorney or information authorization rights, in minutes.
  • Look up your advance payments:
    • Advance Child Tax Credits – you should have gotten a 6419 Letter with the details
    • The 3rd Economic Payment – you should have gotten a 6475 Letter this month.
    • The IRS Free File system is now open. Millions of taxpayers can use this system to prepare simple tax returns themselves at no charge – and without being hassled to pay for anything. Many states are also participating in the program. Be SURE to print out or save the returns before transmitting.


  • Tax Professionals also have a Tax Pro account. This will make it possible for Enrolled Agents, CPAs, attorneys and certain others with existing Central Authorization File (CAF) numbers to gain access to clients’ accounts – with the client’s immediate permission. (Instead of waiting for many weeks for the CAF unit to activate their authorization.)
    • You can get your PTIN (if you don’t already have one (if you have to ask what it is – you don’t have one).
    • Get access to all the e-services for tax professionals


  • General online tools include:
    • Get Transcript
    • Where’s my refund?
    • Direct pay – and this year, DO only pay electronically – not via paper checks
    • Set up an Online Installment Agreement
    • Get your employer ID number
    • Locate an IRS office
    • Look up a charity to see if it’s in good standing with the IRS
    • And more


  • You can now file tax returns electronically:
    • For the current year and the last two years.
    • And amended returns for the same time frame

    And for those of you wanting to become Enrolled Agents, this year, please stay tuned. I will be opening the Early-Bird Registrations with special rates, during the first week of February. To get details, please sign up for the IRSExams newsletter.

    Sheesh! Were there enough links in today’s newsletter? Lots to do and know.

    And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

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TaxMama’s® TaxQuips Goodbye 2021

2021-12-27 by Eva Rosenberg

 

It’s TaxQuips time from TaxMama.com® –
Today TaxMama® wants talk to you about some year-end tips and ideas to get ready for next year.

 

 

 

 

 

 

 

 

 

 

Dear Family,

This year is coming to a close remarkably fast. It seems it was just January one blink ago – and now, it’s nearly over.

This year has been filled with lots of small and major successes for my students, family and friends. Tinged with a great deal of sadness, illness, and death. The Yin/Yang of life.

We still have a few days to take some steps to minimize taxes this year. So let’s look at some of those ideas first. Then I will give you some ways to make next tax season easier.

Year-end Tips

  • Taxpayers who do not itemize can deduct up to $300 worth of cash donations per person ($600 on a married filing jointly return).
  • If you are using itemized deductions be sure to get receipts dated in 2021.
    • Make your charitable contributions before year-end.
    • Go through the house and closets to clear out anything you haven’t used for a year or more. If the clothing, appliances, furniture, pictures, etc., are in good condition – take pictures or video to prove it. Then donate them to your favorite charity.
    • If you want to make a really big donation, but don’t have time to make the arrangements, consider having your brokerage or financial institution open a donor-advised fund.  You can fund it before year-end and distribute the donations to your charities in 2022.
    • Pre-pay your 2022 installment of property taxes (unless you have already reached the $10,000 State and Local Tax (SALT) deduction limit.
      • Will the Build Back Better Act ever pass, raising the limit?
        Not in time. But when it does, those who pay much more than $10,000 in the first place will get the benefit of the higher deduction.


    • Everyone aged 72 and over must take their Required Minimum Distributions (RMDs) from their IRAs and retirement accounts. (In 2020, we didn’t have to do it – we do now.)
      • There is a 50% penalty (excise tax) for failing to draw the funds.
      • If you don’t really need to use that money, and don’t want to add it to your adjusted gross income for the year, consider sending the amount of your RMD directly to your favorite charity.


    • Divorced parents dealing with an aggressive ex who doesn’t support your children, but claims them anyway. Get an IP PIN for each child, so that only you can claim the child on an electronically-filed tax return. Do it as soon as the portal opens in January – gather all the information now – http://iTaxMama.com/IRS_IP_PIN
    • Business assets – buy things you are going to need for next year. But start to put them to use this year, or you won’t be able to get the deduction until next year.




Tips for the next filing season

The IRS finally published the mileage rates for 2022  https://www.irs.gov/newsroom/irs-issues-standard-mileage-rates-for-2022
When they update their website, you will find 2022 – 2011 here: https://www.irs.gov/tax-professionals/standard-mileage-rates

To survive all the information, transcript and taxpayer account-related needs during 2022, do this:


For Tax Pros – What’s in it for you? This will make it possible to quickly activate a Power of Attorney (Form 2848) or Information Authorization Request (Form 8821), instead of waiting weeks for the Central Authorization Filed (CAF) unit to record your authority.

For Taxpayers – This will give you access to your transcripts, payments and so much more without having to sit on hold with the IRS for hours.

Expect Letters from the IRS in January:


Tell your clients to save these letters – very important.

It’s going to be bumpy this coming tax season as we try to reconcile all the payments received – and that were not received.

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

To make comments please drop into the TaxQuips Forum.

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Navigating the California Employee vs Independent Contractor Maze

2021-10-18 by Eva Rosenberg

Subtitle: Playing 10 Questions with California’s Employment Development Department about How to Onboard Former Freelancers

 

Since the California Legislature passed Assembly Bill 5 (AB5) in September of 2019, the rules regard who is and who is not an employee in this state have gotten ever more stringent – and confusing.

Why confusing? Because there was a very loud roar from several industries whose workers’ statuses were so severely compromised by this Bill.

I remember being at the 2019 CSEA State Tax Agency Liaison Meeting (STALM) in Sacramento after the bill was signed and one of the big concerns was truckers. Many of them work for the same company all year round (one “employer”) but own their own rigs and have always filed their tax returns using a Schedule C. Suddenly, if they had to be employees, there goes their federal deduction for the depreciation on the very expensive rig (costs approach $100,000 for some), the interest or lease fees, the fuel costs and all the other, legitimate out-of-pocket expenses they have in order to do their “jobs.”

They were not the only industry with legitimate issues. Nearly a year after AB5 was passed, Governor Newsome signed AB2257 on September 4, 2020. This gave us  an entire list of industries and employees that are now exempt from the rules of AB5.

But we weren’t done yet. The entire industry of gig transportation workers (the original target for AB5) did more than just protest. They floated a 2020 ballot proposition to exempt gig workers from AB5. Proposition 22 passed in the November election. So now, the main workers for whom AB5 was written are exempt from AB5 by law. Granted, Prop 22 came with some conditions requiring Lyft, Uber, etc. to provide employee-style benefits and certain work-hour restrictions.

Still confused?

That brings to mind the exit line from the parody television series, Soap. “”These questions—and many others—will be answered in the next episode of…Soap.”

more->

Well, I have some bad news for you. I will not be clearing up the entire situation. But…I did have some important questions that really needed to be clarified by our California Employment Development Department (EDD). They were kind enough to bring an entire team of their key staff to this year’s CSEA STALM virtual meeting.  Some of my questions were covered during the meeting. Others were answered afterwards by one the EDD’s team of Taxpayer Advocates.

OK, let’s play 10 Questions with the dedicated team at California’s Employment Development Department:

 

Q1.  All businesses that pay workers must use the ABC test that will probably define their long-term freelancers as employees. Does California have any law or amnesty provision similar to the IRS’ Voluntary Classification Settlement Program (VCSP)? (Note: In very simple terms, the IRS program works with companies that had consistently been issuing a Form 1099 to all affected freelancers. They can pay 10% of one year’s payroll taxes and avoid being audited for all the earlier open years.)

  1. California does not have a program like this. It would require the state legislature to pass laws to make this possible. Perhaps CSEA should lobby our legislature for an amnesty program for AB5.


 

Q2. Since there is no VCSP-like program, what are the consequences (or protections) for those employers who sign up with the EDD for the first time to comply with the new laws?

  1. A. There are no specific protections. But newly registered employers are not apt to face automatic audits for all the earlier years when they are not in compliance. In other words, the EDD will not get a specific alert that this new employer has been in business for 20 years and has just now registered as an employer. When filling in the DE1 registration form, the employer should simply enter the current year in box D as the first payroll date.


Q3. But wait! The statute of limitations to assess payroll taxes is open for all years in which the employer had employees but didn’t file payroll tax returns. Doesn’t that still leave the employers vulnerable for all the years when they did not treat their workers as employees?
  1. A. Yes, it does. But EDD doesn’t have the time or staff to simply audit everyone. So they will only audit a business if there is a valid reason. Some valid reasons include:


  • Workers filing unemployment or disability claims without ever having been on payroll
  • Someone submits an Audit Lead Referral (same form as worker classification request – Form DE230)
  • Public informants in general
  • On Site inspections
  • Forms 1099 NEC or MISC
  • Random industry surveys


There are multi-agency strike force teams that go out and do inspections  of certain kinds of businesses. For instance, restaurants are notorious for not reporting employees and/or paying in cash.

If EDD does perform an audit and the business has not put the proper workers on payroll, then that may result in the audit going back for several years.

Q4. In the event of an EDD audit, how many years is EDD most likely going to examine?

  1. A. Typically EDD starts with the assumption of 3 years. If payroll tax returns have not been filed, and this was due to negligence or intentional disregard, they may go back further than that.


On the other hand, if a company has been filing payroll tax returns all along but excluded some of their workers (by issuing 1099s to them), the EDD may only look back for 3 years – unless there is evidence of fraud or intent to evade taxes.

Q5. Naturally, if the audit determines that they should have been paying their workers as employees, there are likely to be penalties. What can employers expect?

  1. There are a variety of different options open to the EDD. But, in some cases, penalties are mandatory. For instance, if the employer never registered with EDD and didn’t file payroll tax returns, there is a mandatory penalty of 15% of the assessed taxes (Unemployment Code Section 1126). If an employer was registered, but misclassified some of their employees, the 15% penalty is not mandatory and is applied if the examiner determines that the failure was due to negligence or intentional disregard.


The worst penalties tend to be generated for willful non-compliance involving 
fraud and intent to evade. Those could amount to 50%. If they failed to provide information returns in the past, then there is the potential for another 50% penalty. In other words, penalties can end up being 100% of the taxes owed. 

A common example is the restaurant industry, mentioned above. They may be hiding workers and demonstrate a clear intent to evade taxes. These are the kinds of cases where fraud penalties can be applied.

For a list of all the penalty codes – here’s a chart – https://www.edd.ca.gov/pdf_pub_ctr/de231ep.pdf

Q6. Speaking of audits of newly registered employers, are there extra records or precautions they must take to avoid problems going forward (beyond normal recordkeeping and defining employee functions)?

  1. A. These employers should make sure they have the 1099 records for the past years.
    They should be prepared to provide them in the event of an audit. If these employers are audited, encourage them to cooperate with the examiners. Penalties start to build when they try to hide the truths.  


Q7. This discussion about hiding employees, paying them under the table and so on, brought up a common problem in our state. Illegal aliens as employees. Setting aside all the other legal problems with this kind of hire, let’s look at what employers can do if they do want to put illegal aliens on their payroll. The EDD has a way to handle this, right? What can an employer do to ensure the withholding is credited to the correct worker?
  1. According to the EDD’s Tax Processing and Accounting Division regarding the proper completion of the Quarterly Contribution Return and Report of Wages(Continuation) (DE 9C) – when an employee does not have an SSN or ITIN. Employers enter the employee’s name and put all zero’s in the SSN field on the DE 9C.  Do this for each quarter, showing the name the same way, and the EDD will have a record of the data on each employee, by name.
    If the employee later provides either the SSN or ITIN at a future date, the employer should submit a Form DE 9ADJ correcting the previously reported information.


Q8. That brings up the question of illegal aliens applying for EDD benefits. Is that even possible?
  1. Yes, it is. If the employer has been filing payroll tax returns that include these workers, they are eligible for disability benefits if they become ill or unable to work. However, they are not eligible to collect unemployment benefits.


 

Q9. What should employers do when a worker (often a friend or family member) begs to be treated as an independent contractor instead of as an employee? Is the employer still liable for penalties when they were not the ones to initiate this employment status.

  1. Absolutely! Advise your clients to protect themselves first – to not succumb to these requests. The employer will be totally exposed for the payroll taxes, penalties and workers compensation – and any potential lawsuits when the employee reports the employer for not being in compliance with the law.


Q10. There is so much to know. Where can employers get all the information they need to know about how to start doing payroll for the first time – or how to do a better job?
  1. EDD agrees that employers need to be educated. They offer employment status tax seminars online. They are taught regularly – and people can ask questions. This page gives employers choices of several topics. https://seminars.edd.ca.gov/payroll_tax_seminars


 

Frankly, I was pleasantly surprised about the information regarding illegal aliens. Perhaps the IRS has a similar program? Who knows? The question has been posed to them. When they come back with an answer, I will update this report.

In the meantime, if you are and employer, and are still confused – work with an experienced Enrolled Agent or CPA to make sure you get it right.

 

 


 

Resources

Unemployment Code Section 1126  https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=GOV§ionNum=1126

EDD AB 5 – Employment Status
https://edd.ca.gov/Payroll_Taxes/ab-5.htm

CA Labor and Workforce Development Agency

https://www.labor.ca.gov/employmentstatus/

 EDD -  DE 40 tax audit guidelines
https://www.edd.ca.gov/pdf_pub_ctr/de40.pdf

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TaxMama’s® TaxQuips Ready or Not – Time is Up!

2021-10-14 by Eva Rosenberg

It’s TaxQuips time from TaxMama.com.
Today TaxMama® wants talk to you about the final income filing deadline for this year’s tax returns.

 

 

 

     

 

 

Dear Family,

Every year we get to this point in time. Getting down to the wire.

In private social media forums, tax professionals are posting notes and screams of frustration, dealing with clients showing up at the last minute with surprise income, off-handedly mentioning – Oh, I sold that property last year, or mention of an LLC they opened that they forgot to bring up earlier. Or still not providing the missing documents or expense summaries the tax pros have been requesting for months. And then there are those charming folks who think it’s fun to walk into their tax pro’s office two days before the final filing deadline, all ready to sit down and get the tax return prepared on the spot.  (I have a friend who thinks that’s cute – he’s not a client, though.)

Let’s face a few realities, my friends.

This has been a tremendously stressful year – on so many levels. Aside from the COVID dangers, Congress has been passing laws in 2020 and 2021 that they expect taxpayers, tax professionals and the IRS to understand and implement – some of the laws being retroactive for the last year or two. In addition to tax compliance and enforcement, Congress has tasked the IRS with issuing several series of payments to taxpayers – and the IRS is trying so hard to make the information easier for taxpayers to find that they simply don’t have time to answer all the questions people have.

And with everyone working from home, the IRS is totally behind on opening paper mail, including payments people have made – so the IRS computers are spewing out past due notices to people who have already paid their taxes.

This year is a total mess.  But that doesn’t mean you’re off the hook about meeting this October 15th filing deadline. (Unless you live in a disaster area. Then you still have more time.)

My message to you?

If you haven’t already filed your tax return, finish up and do it IMMEDIATELY!
Today. File it electronically and keep an eye out for rejections, so you or your tax pro can fix the problem quickly.

But, you don’t have all the information?

Too darn bad! You have had over 9 months to gather the data. If you don’t already have it all – make your best estimate of the missing income or expenses. Include a disclosure statement, Form 8275, to explain why you have estimated amounts – and that you will amend your tax return as soon as you get the correct data.

Why should you file a tax return with estimates, instead of waiting until you get all the numbers?

  • Your extension will run out on October 15th. The non-filing penalty is 5% per month for up to 5 months. That’s 25%. Does that start in October or April? I believe it starts in October.
    • But the late payment penalty of ½% per month started in April, if you didn’t pay all the taxes you expected to owe for last year at the time you filed the extension. (So you’re already up to 7 months of late payment penalties plus interest.)


  • In order to claim certain tax breaks and credits, you must file the tax return on time. They don’t work on late returns.
  • Folks who miss this filing deadline often get stymied about what to do in the following year – and it starts a pattern of non-filing for the next few years until they get things sorted out. This ends up becoming very, very expensive.


Oh yeah, There’s More Due tomorrow

Yup. In addition to the final filing deadline for the prior year, you have the 3rd quarter estimated tax payment due for the current year.  

Paying this is especially important if you find yourself owing more than you can pay for last year and/or earlier years. To get the IRS to agree to an Offer in Compromise or Installment Agreement, or any other breaks for past due balances, you must be current on this year’s withholding or estimated taxes. So, catch up – and pay online only, to ensure that your payment is credited to your taxpayer account – be sure to put the correct year on the payment – https://www.irs.gov/payments .  Do not send paper checks – they are taking too long to post to taxpayer’s accounts.

This is also a good time to schedule a meeting to review your tax situation for the past year. Your tax pro is going to want a break, desperately. So schedule your meeting for next month.

We know there will be more legislation coming from Congress this year. And we already know it’s going change a great many issues in your tax life – probably retroactive to the beginning of this year – after it’s (nearly) too late to change what you’ve done. So expect next year to be a challenge as well.

I will keep you updated once they actually pass the legislation – hopefully before the end of December!

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

Download the MP3 (0:00min, 0MB) or listen now...

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