May 19, 2013

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Employee Misclassification and the Consequences

May 17, 2013 By

In their efforts to lower operational costs and maximize returns, some employers may resort to deliberate payroll-tax evasion strategies like deliberate employee misclassification. Some legitimate employees can deliberately be misclassified as contractors, and thus, the employers can strategically evade paying unemployment taxes or their portion of payroll taxes and other legally stipulated employee benefits.

Employee misclassification is associated with the tax law and sheer violation of the labor law. The IRS is fully aware of these schemes and is hunting down employers engaged in this dangerous malpractice that denies taxpayers their rights as well as Uncle Sam millions of dollars annually.

Employee misclassification is common in industries where workers suffer wage violations. These workers work for very long hours and are paid poorly. This does not only affect the well being of the employees, but that of their whole families, who rely on them for survival.

In their efforts to end work-related mistreatment, a partnered venture involving the U.S. Department of Labor, the IRS, and State labor departments encouraged mutual information sharing. To their surprise, they discovered that Uncle Sam is being swindled millions of dollars due to an alarmingly high amount of misclassified employees.

It is because of this that the ‘Voluntary Classification Settlement Program’ was launched by the IRS in September 2011. The program was mainly meant to persuade the falsifying employers to correctly reclassify the workers. This official pardon encourages companies to make the necessary amendments before an IRS audit is performed, which will investigate and penalise them for any unpaid taxes as a result of misclassification of workers.

The federal investigators on the other end ensure the workers are listed on the payrolls. In case an employee believes that he or she is being misclassified, they are encouraged to inform the federal agents. The biggest challenge facing this initiative is fear of the consequences of turning in your boss; you may just be shown the door the moment the federal investigators step out of the company gates.

Since the employers have control over their employees, it becomes their responsibility to split the FICA tax payments with their employees. Workers misclassified as contractors have to pay Social Security and Medicare taxes entirely on their own, which is very unfair, especially if their wages are pretty low.

Employees who feel that they are being misclassified are encouraged to talk to their employers about this issue. There are however, some employers who would rather keep you as a contractor for as long as they wish, but not as an employee. If they fail to act, then you can simply file the IRS Form SS-8 and let the IRS will look into the matter before acting accordingly.

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Tax Tips for the Recently Married and Those Planning to Tie the Knot

May 16, 2013 By

The only consistent thing in life is ironically, change. If you get married, you may not only change your home, you also may change your name, change your lifestyle, become kin to an extended family, but you may even open a joint bank account and everything in it. However, one of the biggest changes in marriage is your taxes and you must be prepared to adapt to these changes in your life. The following is a list of how marriage affects your taxes, and what has to be done to remain safe from IRS trouble.

Name Changes and SSN:  It is essential that you Social Security number and name match those on your tax returns.  For a bride who in most cases, takes up a new name, the first thing to do is to report the name change to the Social Security Administration and get a new Social Security card.  The application form can easily be obtained online or by calling the Social Security Administration office closest to you.

Address Changes: It is possible that you may have to move to a new home to accommodate your growing family. Inform the Postal Service of any address changes through the U.S. Postal Service website or by visiting the nearest post office. You will also have to inform the IRS of your new address.  Download the IRS Form 8822 online from the IRS official website and fill in the new address.  You can also update your Address by calling the IRS’s toll free number. Another person that must be informed about your address and status change is your employer to facilitate the Wage and Tax Statement Form W-2 yearly.

Withholding Check: Are you and your spouse both working? If yes, then you have to check your current withholdings and determine the amount of withholding that is appropriate for your new marital status. Fill out the necessary forms and take them to your employer for accurate withholding.

Right IRS Tax Forms: There may be too many different IRS tax forms out there, but it is not justified to fill the wrong ones. Did you know that you can save a lot of money by choosing and filing the right tax forms? As newly-weds, there will be more deductions that will set in. There are specific forms for itemized deductions, including the IRS Forms 1040EZ, 1040A, or 1040.

Filing Status: You marital Status as of December 31st determines if you are married or not for that full year for taxation. You also have the option of either filling for the income tax return as an individual or jointly as a couple. Each of these has its advantages and maybe some disadvantages; scrutinize your options and settle on what suits you best.

Conclusion

As you make plans for your wedding, don’t forget to consider how saying “I do” will affect your taxes. A wedding presents an array of tax opportunities as well as challenges. Understanding these factors will simplify the process of settling into change.

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Watch Out for Scams and Save Your Dollars!

May 15, 2013 By

Criminals have become excessively creative in their methods to steal anything from anyone today. The internet offers fraudsters the perfect avenue to contact unsuspecting individuals using an array of devious strategies. You might have come across some emails purporting to have originated from the IRS-don’t bite the bait; the IRS does not initiate communication with the taxpayers via emails.

Because the IRS is well known for its numerous and even confusing correspondences, it is still not yet very clear to most taxpayers how to guard themselves from fraudsters. What most people do not know is that IRS never sends any correspondence via the internet. The IRS will only send notices or tax documents through U.S. mail.

Most of these scam emails that might land in your inbox may ask for personal information which, if disclosed, can only be comparable to opening your front door to a gang of burglars. This is a very simple method to get access to your bank information and credit card finances. Most of the emails sent for phishing purposes contain links, which if clicked, can install data-extracting viruses or some other malware into your computer with ease. This makes it possible for the hacker to trace your personal information by monitoring the keystrokes of your keyboard; simple, but very dangerous.

The IRS website is unique in numerous ways, and phony emails stand out. However, if you are in a hurry to open and read the emails, you might not even the difference between irs.gov and something like irs.com or even worse, girs.com. The senders of these emails could be anywhere in the world. Note, that these individuals go an extra mile to copy the IRS website, even though most of them do such a shoddy job, and a single glance is all you need to detect danger.

Another important factor to consider is the English used on the website. There is a clear distinction amongst various English languages, but U.S. English is distinctive. However, countries like Russia are hiring native English writers and English-trained professionals to write acceptable U.S. English that can lure even the most astute mail readers. Even though you need to watch out for improper English, it is no longer a red alert. There are some perfectly coded websites with amazing U.S. English content still linked to phishing scams.

If you receive such emails, do not be in a hurry to respond to them, scrutinize the details of the website and if there is anything fishy, report them to the IRS. A simple search on the IRS website with the keyword “phishing” will open up some links on how to report such cases.  Finally, before making any monetary transactions, it is important to research and verify the organization or company.

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Above the Line Deductions-Lower your Overall Tax Bill

May 14, 2013 By

Above the line deductions bring down your taxable income, which brings down your taxes. These deductions include alimony, expenses related to work, student loan interests, health insurance deductions for the self-employed, retirement contributions, and bank charges on early withdrawals from saving accounts.

These deductions are officially referred to as adjustment to one’s income; but they are commonly called deductions because they are deducted from your earnings to arrive at the final Adjusted Gross Income.  These deductions are optional, but claiming them goes a long way in reducing your taxable income.

On the IRS Form 1040, three main deductions are included.  These deductions include educator expenses, business expenses, and health savings account deductions.

Educator Expenses Deduction: This gives teachers the opportunity to have the amount spent on classroom supplies to go untaxed. This deduction also includes repayment of student’s loans. It is possible to claim up to $250 of the educator expenses. These are untaxed funds that eligible taxpayers, mostly educators, can claim.

Business Expense Deductions: This does not cover all business expenses but applies to some.  On the Schedule A, it appears as a miscellaneous deduction and not necessarily as a business expense.  It can be claimed by filling either the IRS Form 2106-EZ or the IRS Form 2106.  Both forms are available online and can be filled online too. This deduction does not carter for all taxpayers, but for a selected few including performing artists, military reservist, and fee-basis government officials. 

Health Savings Account Deduction: This is like a health insurance policy where those that participate therein are allowed to put aside some money which is tax-free, for medical bills.  It functions in the same fashion as a retirement fund.

Generally, the above the line deductions have a positive effect on taxpayers as they give funds that are tax exempted.  However, there also are deductions below the line; whatever deduction that follows below the gross income are taxable. If there is a deduction of $1,000 above the line, it gives you $1,000 tax exempted income, which reduces your gross taxable income.

The above line deductions can easily be claimed directly on the IRS Form 1040; the taxpayer doesn’t have to go through the hassle of filling out a Schedule A. The secret to claiming deductions is to understand how they work; this will go a long way in lowering your tax bill.

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Plan for Tax Day with Proper Record Keeping

May 13, 2013 By

Most taxpayers heave a sigh of relief moments after filing their taxes, stash away related documents, look forward to their tax refunds, and wait for next year’s tax day. Though taxpayers have more than ten months to prepare for next year’s tax filing season, the majority suffer from procrastination; only remembering about tax filing a few weeks or days before the tax day. This poses the danger of missing out on important tax deductions, possible errors that could beckon an IRS audit, or even missing the tax filing deadline, which might attract hefty fines and interests.

The secret to successful tax filing lies in proper record keeping, which can best be achieved through the following three main ways:

1. What Are Your Possible Tax Deductions And Credits?

Tax payment and filing can be hectic, but they pay off if you claim tax deductions and credits you are eligible to. You must therefore, project any possible credits and deductions you are likely to be entitled for during the year. Assuming that you enroll your children to a daycare, you might qualify for a Child tax credit. Just keep an eye on your expenditures and ensure that you have the tax ID number of the childcare provider. The same applies to eligible deductions as a result of making donations to charities, use of business cars (where you have to keep track of the mileage by using a log), amongst others. You have to be informed about what will happen during the year to successfully keep necessary tax documents for easy tax filing.

2. Design a Filing System

A properly organized filing system is the gateway to stress-free tax filing. You must ensure that everything is organized by carefully labeling your files like “tax receipts” or related items. Similar documents must be filed in appropriate files, which have to be kept at an easy-to-access place like your desk or convenient drawer. In the beginning, it might appear a bit tricky and tedious, but with time, you might even start doing it without having to think about it. The same applies to tax documents like W-2s, which should be safely stored as soon as you retrieve them from your mailbox. When you finally start filing, it will be a breeze.

3. Go Digital in Record Keeping

The best way to safely keep your tax records for a very long time and for speedy future access is to store them in paperless form. This is very convenient and easy; just create a file on your computer or even in the cloud where scanned tax documents can be saved. There are some apps like the Shoeboxed that are helpful in storing digital versions of your receipts. You can even use your smartphone to capture the image of the documents and digitally file them away.

Since tax documents contain very sensitive information, taxpayers are encouraged to use passwords or encryptions. Regular back ups are also important so that you don’t lose the information. For simplified tax filing, plan in advance and keep the necessary tax documents.

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Writing Off Bad Debts on Your Taxes

May 10, 2013 By

Writing off bad debts is always an inevitable part of any business operation. Whether one likes it or not, there are points in business when you are forced to write off a debt, especially when a client fails to pay for a service rendered. A typical case could be where you agree with a client that you will undertake a service at an agreed fee only for the client to fail in meeting his or her side of the agreement.

Writing off debts in a business needs a business operation that is genuinely honest. Your accounting needs to be spot on and you must keep good track of any profits and losses. If you incur a loss of $1,000 when using the cash basis model of accounting, it is only logical to say that you cannot deduct a loss twice. This means that you will not report a sale because the value of the sale or service you have given is zero.

On accrual basis, you only have the sum lost recorded in accrued revenue, thereafter you write it off. The difference in this case is zero.

For example, assume that you had provided the service based on a contract worth $2,000, and had hired somebody to do it for let’s say $600 while using office equipment worth $400. These expenses you incurred while undertaking the contract will be deducted from the $2,000. In this case, it means you might have had a profit of $1,000. The IRS does not allow anyone to deduct their profits from a bad debt. Your taxable income would have been $1,000 but in this case, it is a loss of $1,000 but you cannot deduct it from your taxable income.

In any contract, say one involving offering a service, you must’ve spent time. If you had spent a total of 2 hours while your hourly rate is $200 per hour, it means that you might have walked away with $400. The next mind boggling question that you might ask is; how do you treat the $400? You cannot write off the value of time that you spent working on your contract.

IRS does not recognize time that anyone spent doing a job for a client. If you incur bad debts with your time, then you are the sole bearer of the losses that you have incurred. The same principle applies in cases where individuals might have chosen to volunteer their services in a community project. The value of time you spend in services means nothing to the IRS. The IRS will only consider the value of the supplies that you might have used to perform such services. For example, the cost of gas that you used in the vehicle used while engaging in a volunteer service delivery.

Bounced checks that are never redeemed by clients should also be treated as bad debts using the same procedure. When using the accrual accounting model, the same procedure of writing off bad debts applies. For sole proprietors or those who are filing tax returns for corporate businesses, your bad debts will be handled in Schedule C when you are filing tax returns.

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Divorce and the Tax Consequences: Watch Out!

May 9, 2013 By

Divorce can be devastating and a hard blow to accept, as life changes drastically. You can divorce multiple times in a lifetime, but you can never “divorce” Uncle Sam. You have to therefore, pay attention to tax implications to as you split assets with your former spouse. Keeping an eye on financial changes and how they may affect your stakes can guard you from risky confrontations with the IRS.

Are You Single or Married?

The IRS would be interested to know your marital status when filing tax returns; either single, married, or divorced. If the divorce is not settled by the end of the year, you may still be considered as married and you can claim tax deductions by showing your household expenses. Example; if you pay 50% of the household expenses lived separately from spouse for 6 months of the tax year and if you have a dependent child that has stayed with you for over six months, you are eligible for some deductions.

Children-Related Tax Exemptions

Children-related deductions can contribute to huge tax savings, but it depends on the person who has custody. In case a child has stayed with you for a period of more than half a year, you are eligible for tax exemptions, with a current write-off set at 3,700 USD per child. Cash in form of alimony is considered to be valid for tax exemption for the person who is making the payment and treated as income for the recipient. Child support is not liable for deduction or as an income for the recipient.

Retirement accounts:  

IRAs are important settlements during any divorce, the spouse may get the entitlements to part of the other spouse’s IRA plans or employer sponsored IRAs. For the 401(k) or other employer sponsored plan, the benefits may be shared from a spouse’s plan and help save from potential taxes. Alternatively, rolling of 401(k) IRAs into your own IRA may be possible and the best way to evade paying taxes on them. It must be pointed out that making early withdrawals from retirement plans will attract IRS taxes and penalties.

Property Transfers

Any property that changes hands during a divorce settlement is not considered as a capital gain or loss, and therefore, taxes are also not levied on property transfers. However, in the event that the recipient wants to sell the property, then taxes will eventually set in. Such property transfers are valid only if they are completed within a year of legal termination of marriage.

Community Property

The divorcees are liable to tax return on the income of the other spouses (however this is not the rule in community property states such as Arizona, Texas and Wisconsin). In these states, you will be considered to have earned from the income of the former spouse during the year of divorce.

Divorce can complicate your lifestyle and almost all aspects of your life, including taxes. Whichever decision you make during this process, don’t forget to think about the tax consequences. Visit the IRS website or talk to a tax pro if you are unsure on how you will be affected by a divorce. 

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Personal Filing System: Make Your Tax Filing Simpler

May 8, 2013 By

Filing taxes is a tremendous task, especially when it comes to maintaining a proper personal filing system. The dates of purchases, the receipts of expenses, and other documents are very important for record keeping. To file a tax return that is complete in all aspects, you need all necessary documents and other proofs as they show the amount of investments and expenses you incurred within a tax period.

Also, these proofs are mandatory requirements when you have to apply for loans; failure to produce may prolong the loan processing period. Personal filing systems therefore, require a lot of preparation and organization from the individual. You may choose to keep a paperless system or simply manage all the hard copies as a file.

Proper Labeling: Before you start, ensure that you have a one letter sized pocket file expandable up to 3 inches, files, folders and the labels for the same. It is always prudent to label the primary folder and the remaining file folders appropriately as personal expenses, medical or dental bills, expenses on renovation, large purchases, utility bills, bank statements, credit card statements and receipts, investments, and tax records.

Categorize the Documents: With all documents and files labelled, organize them for the filing system. The documents may be placed in the respective folders and packed into the primary folders and safely placed in a drawer. As the days go by, you may add more receipts, pay slips and other bills into different categories. You may also include the expenses related to education, travel, and pet relocation. But ensure that you never miss a bill by chance. As soon as you make a purchase or pay a bill, file those slips right into the folders immediately.

An additional folder that draws your attention on unpaid bills can be labelled as “bills to pay” that ensures you pay your outstanding bills on time. Similarly, a folder with a label as “Needs attention” will help you sort out any abnormal or suspicious bills, as in case of credit card, for example.

File Daily: Daily filing is a smart choice as it helps you to keep all the folders up to date without missing any receipts or bills scattered here and there. Make it a habit to check mail regularly and place the bills in the “bills to pay” folder and receipts in a proper folder as labelled. Any bills that are overcharged or misappropriated may be placed in the “Needs attention” file and sorted out quickly.

Time Factor: When you have documented properly the next question that arises is the duration in which the document will be preserved. The IRS requires that you keep the records for at least 3 years. In other cases, IRS may ask you to keep them for additional 3 years. So, preserve the files for about six years.

Some of the documents that have to be stored for 6 years are; documents for tax deduction, brokerage statements for tax returns, records of selling a house or property and records of expenses and incomes reported for small business as reported on tax returns.

Some other documents may be kept for a life time, such as tax returns, property deeds, closing statements, life insurance policies, property deeds, life insurance policies, estate related documents etc. You may discard the less important bills such as cable bill receipts, ATM receipts, bank deposit slips, pay check stubs etc.

Keeping all the documents in an organized fashion, you can make use of a clutter-free personal filing system that will at the end of the year, help you pay taxes and reap other benefits. In case any of the tax documents is lost or misplaced, make an effort to obtain a copy.

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Planning to Run Away From High Tax States?

May 7, 2013 By

Tax payment is not an option, but an obligation. Other than Federal taxes, you must be ready to pay state taxes accordingly. Is your state income tax too high? If you are considering relocating from a state where taxation is high like California, Connecticut, or New York, to other taxpayer-friendly states, it is important to understand that it is not easy to trick some tax officials.

The tax departments of high tax states always keep track of emigrations, especially when the person is expecting a huge income. It is not very easy to sneak through their eyes and enjoy your wealth in a different state after earning the income.

The tax officials will consider you to be a resident or non resident based on a number of factors, like your place of residence. The place of residence may be determined based on various factors. While some third party sources may tell the tax officials about your residence, there are other important factors you must understand:

·         How long have you been living in the state?

·         In which city do you work or run a business?

·         Where does your family live?

·         What is your primary residence?

·         Have you made any investments and real properties?

·         Where have you been filing tax returns and claiming tax emption?

·         Is your residential contact number registered on the state directories?

·         Which city do the children attend school?

·         Are the churches, social and country clubs and professional associations you visit in the same city?

·         Which state issued the driver’s license?

·         Which state are your vehicles registered in?

·         In which state are the professional licenses and permits maintained?

·         In which state is your electoral registration made?

·         In which states do you have bank accounts?

·         Where do you consult a doctor, accountants, or attorneys?

If you are deemed to be a non resident in the state, then the income will be treated as belonging to a non resident, and you may be exempted from paying heavy taxes. But in some cases, you may still have to pay taxes to the former state. If you have employees working in high tax states even though their residence is elsewhere, you still have to pay taxes to that state.

It is hard to escape the heavy taxes levied by the high tax states as one of the other connections tend to bind you to them, and may make you vulnerable to pay the taxes. You can seek expert advice that will safely take you away from the clutches of tax officials, especially when you have huge investments at stake. Being vigilant and strategizing is important to prevent or resolve any disputes that might arise for the payment of taxes. Note that tax payment is paramount and non-compliance may land you in trouble with the state tax agencies. Hopping from one state to another may help you save a few extra bucks, but think about other factors before you decide to move.

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Why You Must Report Taxable Fringe Benefits

May 6, 2013 By

Anything that qualifies as income according to the the IRS must be reported on your tax return, which includes taxable fringe benefits. Withholding any of these incomes can severely cost you, as the IRS does not treat such matters lightly. The employers who provide these benefits may be held legally responsible for withholding the amount payable as employment tax and federal income tax. On the other hand, the employees may be liable for under-reporting income tax if they do not report the benefits as income, which may amount to tax fraud.

While some fringe benefits are taxable, the others are not. It is consequently imperative to know the difference between the two, lest you find yourself cornered in the IRS’s clutches. Some of the taxable fringe benefits are:

1.      Cash Prizes or Cash Vouchers and Gift Cards: No matter how small they may be, it is important to incorporate them in your taxable income.

2.      Awards: When an employee wins a contest, the award or prize should be considered as an income and has to be taxed.

3.      Regular Snacks: This might sound petty, but to the IRS, it is a mountain of an issue. If a company cares for its employees and even offers snacks, soft drinks, pizzas, milk, tea and other light foods at work, these expenses should be treated as taxable wages to the employees.

4.      Gym: If the employee is a member of a gym at the company or if a personal trainer is hired, the cost has to be included in his or her wages.

5.      Use of Company Car: This is one of the most common issues, and might even result in a tax audit, depending on how you file and claim some deductions. If an employee is allowed to use the company car for personal use, then the costs is definitely taxable to the employee.

All these fringe benefits should be reported to the IRS so that both the employee and the employer are on the safer side.

The Non-Taxable Fringe Benefits

There are a few tax exempt fringe benefits. The two common ones are: working condition fringe benefits and De Minimis fringe benefits.

De Minimis Fringe Benefits: These are the property or services of little value offered by the employer to the employees. For example; personal use of Xerox or scanner, employee picnics, tickets for a sports game, and decorative items such as flowers. However, cash or vouchers, expenses of employer’s vacation, dues on country club, are fringe benefits that are taxable and are to be reported.

Fringe Benefits Based Working Condition: These are benefits or services that are paid for by the employer. They include attending a client meeting, cost of lunch or dinner, attending conferences etc.   

It is the responsibility of the employer to report the right wages for employees and correctly report the income to the IRS to avoid sticky ends later. As a result, it is imperative to document the expenses as taxable or non-taxable, no matter how menial they may appear.

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