News

When providing us with your personal tax information, please also provide us with the amount of use tax, if any, you want us to include on your return or let us know if you would like us to use the tables for estimating your liability.  If you provide us with no information, we will assume the liability is zero.

Issues specific to taxpayer(s) with trades or businesses:

Questions on tax forms regarding filing Form(s) 1099:

There are new questions on your Federal tax return that require you to indicate if you have made any payment that would require you to file Form(s) 1099 and if you actually filed those Form(s) 1099.  These two questions are included on all business tax returns (Forms 1120, 1120S, 1065, etc.) as well as individual taxpayer schedules C, E and F.  Answering these questions incorrectly could subject your return to unnecessary scrutiny by the Internal Revenue Service and potential penalties of up to $200 per 1099 not filed.  Following is a summary of some basic Form 1099 rules:

Business tax returns and individual Schedule C and Schedule F filers have always been required to file Form(s) 1099 to recipients by January 31st and to the IRS by February 29th but this is the first year that these questions appear specifically within a tax return.  For Schedule E filers, there is no clear-cut answer to whether or not your activity is considered a trade or business.  For Real Estate professionals we believe it is in your best interest to prepare Form(s) 1099 for your Schedule E properties.  For all other clients preparing a Schedule E, we suggest you review your specific situation with us to make that determination.

The following are useful links describing general instructions for certain information returns and specific instructions for Form 1099-MISC:

http://www.irs.gov/pub/irs-pdf/i1099gi.pdf

http://www.irs.gov/pub/irs-pdf/i1099msc.pdf

New Form 1099-K reporting requirement:

For 2011, new lines have been added to income sections of Federal tax forms to implement reporting of gross receipts received via merchant card (credit and debit cards) and third party network payments. 

However, for 2011, the IRS has deferred the requirement to report these amounts separately on your income tax return.  It is possible that you will receive a Form 1099-K from some payers for 2011.  For 2011, the IRS has instructed us to enter zero on the line for merchant card and third party payments and report all gross receipts on the "all other” gross receipts line. 

For 2012, be aware that you will be receiving a Form 1099-K for all merchant card and third party payments you receive and we will be required to report those gross receipts separately from receipts by cash or check on your tax return.  You should adjust your recordkeeping for 2012 to keep track of income received from combined merchant card and third party payment networks on a monthly basis.  The current rules for the preparation of this new Form 1099-K require that gross receipts be reported for the calendar year and its corresponding months.  The reporting of both annual and monthly amounts is necessary in order to reconcile differences between these Form 1099-K forms and your actual records.  We can assist you in developing procedures to aid in this reconciliation if the requirements apply to you.

Following is a useful link to the IRS document describing this new reporting requirement:

http://www.irs.gov/newsroom/article/0,,id=249029,00.html

Voluntary worker classification settlement program:

The question of whether a worker is an independent contractor or employee for federal income and employment tax purposes is a complex one.  It is intensely factual, and the stakes can be very high.  If a worker is an employee, the company must withhold federal income and payroll taxes, pay the employer's share of FICA taxes on the wages plus FUTA tax, and often provide the worker with fringe benefits it makes available to other employees.  There may be state tax obligations as well.  These obligations do not apply for a worker who is an independent contractor.

Although there are many aspects to consider (the relevant facts fall in to three main categories: financial control, behavioral control and type of relationship), in general, an individual is an employee if the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it.  Otherwise, he is an independent contractor.  Because the stakes are high, the issue is contested between taxpayers and the IRS.

The IRS has launched a new employment tax settlement program—the Voluntary Classification Settlement Program (VCSP).  This program allows employers to reclassify as employees those workers they have erroneously treated as independent contractors.  The program has generous payment terms and participants get relief from employment tax audits for previous years.

A taxpayer who is accepted into the VCSP must agree to treat the class of workers as employees for future tax periods.  Going forward, the taxpayer must also agree to allow the IRS an additional three years beyond the existing statutory assessment period to assess employment taxes.  This extension applies for the first three calendar years beginning after the agreement takes effect.

In exchange for making these concessions, the taxpayer gets the following benefits:

• The taxpayer must pay only 10% of the employment tax liability on compensation paid to the workers for the most recent tax year, determined under reduced rates (see "Figuring the payment due” below).

• The taxpayer will not be liable for any interest and penalties on the employment taxes.

• The taxpayer will not be subject to an employment tax audit for the classification of the workers for prior years.

The payment due under the VCSP is 10% of the employment taxes, calculated under reduced rates, on the compensation paid to the reclassified workers in the most recently completed tax year, determined at the time the VCSP application is filed.

Illustration: A company paid $1.5 million in 2010 to workers that are the subject of a VCSP application.  None of the workers were paid more than $106,800 in wages.

The company submitted its application on Oct. 1, 2011.  It wants to begin treating the workers as employees on Jan. 1, 2012.  The company calculates the payment due based on amounts paid to the workers in 2010, because 2010 was the most recently completed tax year when the application was filed.

Under the reduced rates, the employment taxes on $1.5 million of wages would be $160,200 (10.68% of $1.5 million).  The company's VCSP payment would be 10% of $160,200, or $16,020.

Although the VCSP's terms are generous, any decision to participate in the program should be made carefully, after weighing the costs and benefits.  Agreeing to treat workers as employees may have far-reaching consequences under a variety of federal and state statutes.  The right choice may depend on how clear it is that the workers are in fact employees.

Following is a useful link to the IRS website devoted to this topic:

http://www.irs.gov/businesses/small/article/0,,id=246013,00.html

We are available to discuss with you the pros and cons of participating in the VCSP in your specific situation.  Please call our office to arrange for an appointment.  If participation is right for you, we can work with you and your attorney with filing an application and negotiating a closing agreement.

If you have any questions on any of the four topics discussed here, please do not hesitate to contact our office.