Pay Your Children for Business Chores

Pay Your Children for Business Chores I am astonished by how many business owners overlook the simple tax strategy of hiring their children. The benefits of the hiring vary by the type of tax return that you file, as you will see below. Did your under-age-18 children help you in your business this year? Did you pay them for their work? You should. Why? First, wages paid by the parent to the parent's under-age-18 child for work done in the parent's business are both1 deductible by the parent, and exempt from payroll taxes. Thus, if you operate your business as a proprietorship, you face no payroll taxes on the W-2 wages you pay your under-age-18 child. Second, your child can use the 2011 standard deduction to eliminate taxes on up to $5,800 in wages. Third, your child can contribute up to $5,000 to a tax-deductible IRA and exclude that amount from taxable wages. Example. Your child is age 14, and she has no earned income other than what she earns from you. You pay her $10,800 in fair market wages for work she actually does during the year. You deduct the $10,800 and pocket $4,320 because of your 40 percent tax bracket. Your daughter collects the $10,800 and pays zero federal income taxes because The IRA deduction removes $5,000 from taxable income, and The standard deduction removes $5,800 from taxable income. Your family unit has $4,320 in additional spendable cash. Key point. To avoid payroll taxes, the wages paid by the parent to the child must be on a W-2. If you use a 1099, you destroy payroll tax benefits because your recipient child will pay self-employment taxes on the 1099 income. Corporation or LLC. If a corporation does the hiring, both your corporation and your child face payroll taxes. The same is true with an LLC because the law treats the LLC as a corporation for payroll taxes. Paying payroll taxes is not a deal breaker for the strategy, but it does reduce the net family benefit. It is also a negative when considering the corporation or the multi-owner LLC as a possible choice of business entity. Ask me for an article titled "Big Tax Breaks for Hiring Your Child" written by Murray Bradford, CPA " for additional insights into this strategy. Planning note. The kiddie tax does not apply to the child's wages. The kiddie tax applies to unearned income, such as dividends, interest, rents, etc. ********************************* The real point is that good tax planning produces cash and builds net worth. In the example above, the family unit gained $4,320 in after-tax cash from hiring the child. If the child works for the parent for 10 years, the family unit gains $43,200 in after-cash, a nice addition to the investment or college-fund portfolio.

Do I Need to File a Tax Return This Year?

ed@EdSlovacekCPA.com

www.EdSlovacekCPA.com

979-846-4667

Do I Need to File a Tax Return This Year?

You are required to file a federal income tax return if your income is above a certain level, which varies depending on your filing status, age and the type of income you receive. However, the Internal Revenue Service reminds taxpayers that some people should file even if they aren't required to because they may get a refund if they had taxes withheld or they may qualify for refundable credits.

To find out if you need to file, check the Individuals section of the IRS website at www.irs.gov or consult the instructions for Form 1040, 1040A or 1040EZ for specific details that may help you determine if you need to file a tax return with the IRS this year. You can also use the Interactive Tax Assistant available on the IRS website. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions.

Even if you don’t have to file for 2011, here are six reasons why you may want to:

1. Federal Income Tax Withheld You should file to get money back if your employer withheld federal income tax from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.

2. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund. To get the credit you must file a return and claim it.

3. Additional Child Tax Credit This refundable credit may be available if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

4. American Opportunity Credit Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Forty percent of the credit is refundable so even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student.

5. Adoption Credit You may be able to claim a refundable tax credit for qualified expenses you paid to adopt an eligible child.

6. Health Coverage Tax Credit Certain individuals who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a 2011 Health Coverage Tax Credit.

Eligible individuals can claim a significant portion of their payments made for qualified health insurance premiums.

For more information about filing requirements and your eligibility to receive tax credits, give our office a call at (979) 846-4667 or email us at info@EdSlovacekCPA.com.

Voluntary Worker Classification Settlement Program

IRS Announces New Voluntary Worker Classification Settlement Program; Past Payroll Tax Relief Provided to Employers Who Reclassify Their Workers

The Internal Revenue Service today launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.

This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

This is part of a larger “Fresh Start” initiative at the IRS to help taxpayers and businesses address their tax responsibilities.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

To be eligible, an applicant must:

• Consistently have treated the workers in the past as nonemployees,
• Have filed all required Forms 1099 for the workers for the previous three years
• Not currently be under audit by the IRS
• Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

IRS and DOL Sharing Information on Independent Contractors

A Memorandum of Understanding (MOU) between the IRS and the United States Department of Labor (DOL) sets forth the agreement of the parties with respect to a joint initiative to improve compliance with laws and regulations administered by the IRS and DOL. The sharing of information and collaboration between the parties allowed by the MOU will help reduce the incidence of misclassification of employees as independent contractors, reduce abusive employment/unemployment tax schemes, and improve compliance with federal labor and tax laws.

Tax - Record Keeping & Retention

Keep Good Records Now to Reduce Tax-Time Stress

You may not be thinking about your tax return right now, but summer is a great time to start planning for next year. Organized records not only make preparing your return easier, but may also remind you of relevant transactions, help you prepare a response if you receive an IRS notice, or substantiate items on your return if you are selected for an audit.

Here are a few things the IRS wants you to know about recordkeeping.

1. In most cases, the IRS does not require you to keep records in any special manner. Generally, you should keep any and all documents that may have an impact on your federal tax return. It’s a good idea to have a designated place for tax documents and receipts.

2. Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return

You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:

• A home purchase or improvement
• Stocks and other investments
• Individual Retirement Arrangement transactions
• Rental property records

3. If you are a small business owner, you must keep all your employment tax records for at least four years (current plus prior 3 years) after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:

• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

For more information about recordkeeping, check out IRS Publication 552, Recordkeeping for Individuals, Publication 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Publications 552, Recordkeeping for Individuals (PDF)
• Publications 583, Starting a Business and Keeping Records (PDF)
• Publication 463, Travel, Entertainment, Gift, and Car Expenses (PDF)

YouTube Videos:

Record Keeping English | Spanish | ASL

Should you have a HSA?

Should You Have a Health Savings Account?

Written by: The Bradford Tax Institute Tax Reduction Letter – www.bradfordtaxinstitute.com

February 2011

Are you the owner of a business who is locked out of the Section 105 medical reimbursement plan because

· you are single and don’t want to form a C corporation?

· you have employees and it’s too expensive to cover them?

If this is you, you should consider the health savings account (HSA).

Let’s see if you can qualify.

Can You Qualify for an HSA?

You qualify for an HSA when you

· are covered by a high-deductible health plan as discussed in the article titled “How Tax-Favored Health Savings Accounts Work in a Nutshell,” (request that we email a copy of the article to you)

· have no disqualifying health coverage as discussed below,

· are not enrolled in Medicare, and

· may not be claimed as a dependent on another taxpayer’s return.

Health coverage that destroys your ability to have an HSA includes any health coverage that is not a high-deductible health plan, except insurance to cover the following:

· Accidents

· Disability

· Dental care

· Vision care

· Long-term care

· Liabilities under workers’ compensation laws

· Tort liabilities

· Liabilities related to ownership or use of property

· A specific disease or illness (such as cancer insurance)

· Hospital stays at fixed amounts per day, week, or other period of hospitalization

This means that you can have an HSA and the above coverages too. For more on the insurance aspects, see the article titled “Tax Tips for the HSA: Buying High-Deductible Insurance.”

Should I Put the HSA in Place Right Now?

If the HSA is the right plan for you, then you should put it in place right now.

Your first step is the insurance. You must have your high-deductible insurance policy in place before you contribute to your HSA investment account.

If your HSA does not start in the first month of the year, your investment contributions are figured on either

1. the month-of-eligibility basis, or

2. the last-month rule (this is the one you want, as explained below).

Last-Month Rule

The last-month rule allows you to contribute the maximum amount to your HSA. Under this rule, you must

1. have your high-deductible policy in place on December 1 (if you start now, it will be in place on December 1), and

2. agree to maintain your high-deductible HSA status for 12 months beginning with that December 1. (If this is the plan for you, you will want to keep your HSA for years; therefore, the 12-month commitment beginning December 1 is well worth it.)

Should you not keep your 12-month agreement, you must redo your deductions using the month-of eligibility basis for the actual qualification period and pay a 10 percent penalty tax on the excess deductions.

Planning Note

If you are going to put an HSA in place in 2011, make sure to take advantage of the last-month break because it allows you to put the maximum money in the HSA right now.

How to Procrastinate

You also can have the high-deductible insurance in place on December 1 and wait until April 15, 2012, to make your 2011 HSA investment contribution. However, as with any tax-deferred compounding strategy, you should make the contributions sooner rather than later.

Summary

Don’t procrastinate. If you can qualify for the HSA and you don’t qualify for the Section 105 medical reimbursement plan, take a few minutes and request from us an article titled “How Tax-Favored Health Savings Accounts Work in a Nutshell.”

When you receive an IRS notice

Every year the Internal Revenue Service sends millions of letters and notices to taxpayers, but that doesn’t mean you need to worry. Here are eight things every taxpayer should know about IRS notices – just in case one shows up in your mailbox. The IRS is getting pressured to be more 'efficient' in collecting taxes due. One result in an increase in notices being sent out.

1. Don’t panic. Many of these letters can be dealt with simply and painlessly and frequently they are incorrect.
2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left part of the notice. Allow at least 30 days for a response.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. Have a copy of your tax return and the correspondence available when you call.
8. It’s important that you keep copies of any correspondence with your records.

For more information about IRS notices and bills, see Publication 594, The IRS Collection Process. Information about penalties and interest charges is available in Publication 17, Your Federal Income Tax for Individuals. Both publications are available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Of course we want to know about any notices that pertain to a return which we prepared. Also if the amount in question is significant, we want to review it with you and determine the most expedient response.