Monthly Archives: January 2013

Who do I issue a 1099-Misc to?

If you employ an independent contractor in your trade or business, you are obligated to report their earnings to them and the IRS.  This is typically done via the IRS form 1099-MISC.  But just who is supposed to receive this form, when is it due and what are the penalties if it’s not filed on time?

Who Receives Form 1099-MISC

Form 1099 goes out to independent contractors if you pay them $600 or more to do work for your company during the tax year.  Additionally, those whom you pay at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest should also receive a 1099.

Taxpayers should note that if you earned less than $600 and you don’t get a 1099, this doesn’t mean you don’t have to report the income.  All income (it doesn’t matter if it’s $1) is taxable and should/must be reported.

In addition to individuals, you must also send a 1099 to the following if you paid them for doing work:

  • Businesses that file on form 1040 Schedule C (i.e. sole proprietors/self employed)
  • Single member LLCs, as they are considered disregarded entities (DREs) and also file on Sch C
  • Partnerships or Multimember LLCs as they essentially file the same return as a partnership

However, there are some instances in which you don’t need to issue a 1099-MISC.  These exceptions include:

  • Suppliers of merchandise, telegrams, telephone, freight, storage, and similar items, with the exception of those who deal in fish or other aquatic life
  • Corporations (e.g. those who’s names contain Corporation, Company, Incorporated, Limited, Corp., Co., Inc. or Ltd.) are also exempt from 1099 requirements, with the exception of those you pay for medical or health care, or law firms that you’ve hired for legal services
  • Those corporations that have filed a S-Corp election with the IRS
  • Tax-exempt organizations or to American or foreign governments

Need the specifics on who is exempt and who isn’t and don’t mind reading the Internal Revenue Code?  Check out section Treasury Regulations, Subchapter A, Sec. 1.6049-4(c)(1)(ii) where it talks about a corporation, as defined in section 7701(a)(3).

When Is Form 1099 Due?

Generally you must furnish a copy of form 1099-MISC to the recipient by January 31st of the year following when the payments were made.   If you are reporting payments in boxes 8 or 14, then you have until February 15th of the year following when the payments were made.

In addition to the recipient, you must also send a copy to the IRS (along with Form 1096) by January 31st IF you are reporting amounts in Box 7 for Nonemployee Compensation.  If you are reporting amounts in any other box:

  • You must submit it by February 28th of the year following when the payments were made if you are sending it via paper
  • If you are submitting everything electronically, then you have until March 31st of the year following payment.

What are the penalties for filing late?

If you fail to file a correct information return by the due date and you cannot show reasonable cause, you may be subject to a penalty. The amount of the penalty is based on when you file the correct information return. Currently, the penalty is:

  • $50 per information return if you correctly file within 30 days; maximum penalty $532,000 per year ($186,000 for small businesses)
  • $100 per information return if you correctly file more than 30 days after the due date but by August 1; maximum penalty $1,596,500 per year ($532,000 for small businesses)
  • $260 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,193,000 per year ($1,064,000 for small businesses)

Obtaining the information needed to file Form 1099

To ensure that you issue a correct 1099 to the recipient, complete Form W-9, Request for Taxpayer Identification and Certification.  The W-9 includes the individual or businesses legal name, tax ID number, address and their signature attesting to the correctness of the content. You will then use this information to create the 1099 and send it to the IRS.

Do you have 1099s that you need to file?  Shoot us an email at the address below or give us a call at 773-239-8850.  Our filing services are extremely affordable (as low as $10/form) and not only will your documents be filed with the IRS, SSA and state, they can also be mailed to the recipient!

Chicago’s Protection Against Unfair Tax Preparers

In February 2012, there was a group of taxpayers in Chicago (and other states) that were pretty irate with one tax preparation company.  Essentially, consumers were complaining of being told that the preparation of their tax return would cost $ and were told they had to pay $$$ when they went to get their return.  There were a host of other charges made regarding this firm (e.g. inability to cash refund checks, checks for lesser amounts, etc) which ultimately led to the company being barred by the Illinois Attorney General from conducting business in Illinois.

Taxpayers in urban areas are sometimes targeted by unscrupulous tax preparation companies.  These companies often use deceptive advertising practices, fail to fully disclose the cost of their services and often prey on the ignorance of those taxpayers who are less knowledgeable of their options.  Well, the IRS and other governmental agencies got tired of getting complaints from Senators and Congress on behalf  dissatisfied taxpayers.  The result?  The elimination of certain “predatory” products (e.g. Refund Anticipation Loans) as well as greater regulation/enforcement of preparers.

In an effort to protect Chicagoans, the Chicago City Council passed an ordinance in 2012 to help educate and protect them against unfair tax preparers.  If you are a taxpayer using a paid preparer in 2013, know that most* tax preparers must do the the following:

  • Offer a detailed explanation of their available services.
  • Prior to rendering any service must provide the price of each offered service, any and all fees, and an estimate of the total charge based upon the services chosen for purchase.
  • Inform customers of the reasonable period of time they can expect to wait for a refund.
  • Tell customers they have the right NOT to utilize an alternative settlement product.
  • Certify that they provided a clear explanation and the required disclosures.
  • Inform customers of their right to file a complaint.

We recommend that you visit the City’s website and print the appropriate copy (English or Spanish) applicable to you.  That way you can discuss it with your preparer if they give you any indications that they may not be on the “level” so to speak.  Personally, we’d look for another preparer if one gives you any reason to believe that they may be unscrupulous.  Matter of fact, we know just who to recommend!

Until next time.

* This ordinance applies to preparers physically located in the City of Chicago, with the exception of CPAs and Attorneys.

2013 Tax Changes – The Fiscal Cliff Fallout

On January 1st, 2013, HR 8, the American Taxpayer Relief Act of 2012, passed the Senate and the House of Representatives.  Below is a summary of the tax impact from what was changed and maintained by the bill.

TAX RATES

Income tax rates made permanent. For 2013 and beyond, the top individual income tax bracket will increase from 35% to 39.6% for taxpayers with taxable income of $400,000 or more ($450,000 or more Married Filing Jointly). Taxpayers with income below the thresholds will not see an increase in tax rates.

Capital gain rates. Beginning in 2013, the maximum capital gains tax will increase from 15% to 20% for taxpayers with taxable income of $400,000 or more ($450,000 or more Married Filing Jointly).

Payroll tax holiday. The 2% reduction in Social Security tax for employees and self-employed individuals expired at the end of 2012 and will not be extended for 2013. An employee’s Social Security portion of FICA will increase from 4.2% to 6.2%, with a corresponding increase in self-employment tax.  Result?  A little less take home pay each pay check.

Employer withholding. On December 31, 2012, the IRS issued guidance on withholding, assuming expiration of the 2001 and 2003 tax rates and subsequent tax rate increases at all income levels. The IRS instructed employers to begin using the new withholding rates as soon as possible, but no later than February 15, 2013.  As this guidance was issued before the new law, the IRS is expected to release new withholding tables to reflect the changes in tax rates shortly.

Alternative Minimum Tax (AMT).  The AMT “patch” is applied retroactively to January 1, 2012, and made permanent. For 2012, the AMT exemption amounts will be $50,600 for individuals and $78,750 for married couples.

Estate Tax.  Beginning in 2013, the estate tax rate will increase from 35% to 40% for estates that exceed $5 million in value.

EXTENDERS

Earned Income Credit. The enhanced Earned Income Credit amounts have been extended for five years.

Child Tax Credit. The $1,000 amount for each child for the Child Tax Credit has been extended Permanently.

American Opportunity Credit. The partially-refundable American Opportunity Credit has been extended for five years.

Tuition and fees. The adjustment to income for tuition and fees has been extended through 2013.

Educator expenses. The adjustment to income for educator expenses for primary and secondary teachers has been extended through 2013.

State and local general sales taxes. The deduction on Schedule A, Form 1040, for state and local general sales taxes has been extended through 2013.

Qualified principal residence indebtedness. The exclusion from income for qualified principal residence indebtedness has been extended through 2013.  This is good news for those who were in the process of foreclosure proceedings at the end of 2012 that had not yet been finalized.

Mortgage insurance premiums. The deduction for mortgage insurance premiums as mortgage interest on Schedule A, Form 1040, has been extended through 2013.

Charitable distribution of IRAs. The provision allowing tax-free distributions from IRAs for charitable purposes has been extended through 2013.

Energy Tax Extenders  A variety of energy tax credits have been extended for energy-efficient homes, alternative fuel vehicle refueling property, and energy-efficient appliances.

AGI PHASEOUTS

Phaseout on itemized deductions. Beginning in 2013, itemized deductions will begin to phase out for taxpayers with AGI of $250,000 or more Single, $275,000 or more Head of Household, or $300,000 or more Married Filing Jointly.

Phaseout of personal exemptions. Beginning in 2013, personal exemptions will begin to phase out for taxpayers with AGI of $250,000 or more Single, $275,000 or more Head of Household, or $300,000 or more Married Filing Jointly.

OTHER ITEMS

Unemployment Compensation.  The temporary extension for unemployment benefits has been extended for one year.

Sequestration.  The mandated sequestration spending cuts that were scheduled to take effect at the end of 2012 were delayed for two months by the new legislation.

Marriage Penalty.  In 2001, legislation enacted marriage penalty relief to avoid a higher tax bill for a married couple as compared to two single individuals. As evidenced by the $400,000/$450,000 income thresholds for increased tax rates and standard deduction, the provisions for marriage penalty relief expired beginning in 2013.

Our Revised 2013 Referral Program

As many of you know, last year was our first year with our retail office.  Things went well for the most part and we grew our client base pretty substantially from the days of when were just a “part time” virtual practice.  But where did all that growth come from?  Most of it was from our network of friends, family and clients graciously referring their colleagues to us.

While we had a pretty decent referral program in the past, this year we’ve decided to up the ante so to speak.  This year we’re offering a program where the referrer can earn up to $200 an unlimited number of times.  This is open to existing clients, new clients, friends and family of the practice – essentially anyone who respects us enough to send business our way.

So why are we doing this?  Well, all of the details are outlined here, but the short answer is to reward those who think highly of us.  If you’re willing put your reputation on the line by recommending our services, we’re willing to earn it, in more ways than one!  But seriously, we want to give a little something back to those who continue to help us grow and move this practice forward.  Besides, who couldn’t use more cash these days?  Oh yeah, the Capital One baby…