How to Prepare W-2s for Church Employees and Ministers

Richard Hammer at Managing Your Church posted an excellent article on how to prepare W-2's.

Churches need to report each employee’s taxable income and withheld income taxes as well as Social Security and Medicare taxes on Form W-2, and furnish copies B, C, and two of the 2011 Form W-2 to each employee by January 31, 2012. Copy A should be submitted to the Social Security Administration by February 29, 2012, along with Form W-3, Transmittal of Wage and Tax Statements. If your employees give their consent, you may be able to furnish Forms W-2 to your employees electronically. Electronic forms are due April 2, 2012. See IRS Publication 15-A for additional information.

Although W-2s are not difficult to prepare, there are some tips you should know. First, be sure to add cents to all amounts. Make all dollar entries without a dollar sign and comma, but with a decimal point and cents. For example, $1,000 should read “1000.00.” Government scanning equipment assumes that the last two figures of any amount are cents. If you report $40,000 of income as “40000,” the scanning equipment would interpret this as 400.00 ($400)!

Continue reading at How To Prepare W-2s.

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Tax Tips for the Self-employed

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the IRS would like you to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

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February Tax Dates

February 10, 2012

 Form 4070, tip reporting to employer.

Taxpayers who were able to extend the due date of the following 2011 forms because they deposited the tax and forms on time must file: 

• Form 941 due for 4th Quarter 2011. 
• Form 940 or 940EZ (Federal Unemployment Tax) for 2011. 
• Form 943 (social security and withheld tax for farm workers). 
• Form 945 (Nonpayroll items).

February 15, 2012 

• Employment tax deposits for January wages due for monthly depositors. 
• Form W-4. Last day for employees to file to continue exemption from withholdings in 2012 by filing new W-4. If new W-4 not filed, employers must begin withholding on prior exempt employees on February 15.

February 28, 2012 

• Forms 1099 series due to IRS. 
• Forms 1098 due to IRS. 
• Forms W-2 due to IRS. 
• Last day for farmers and fishermen who did not pay estimated tax on January 15 to file Form 1040 and pay tax to avoid underpayment penalty. 

Various

Form 8300 (statement to payer of cash of more than $10,000) must be filed with the IRS by the 15th day following the transaction. 

Semi-Weekly Employment Tax Deposit Schedule for February:

1, 3, 8, 10, 15, 17, 23, 24, 29

Special Rule: Employers must deposit taxes on next banking day after date employment tax liability exceeds $100,000.

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Deducting Un-reimbursed Employee Expenses

You can deduct on your personal return business expenses that you're not reimbursed for by your employer or by a partnership in which you're a partner. But that's only true if you would not have been reimbursed because of a policy by the business. 

In Peter A. McLauchlan (T.C. Memo. 2011-289) the taxpayer paid various expenses (e.g., advertising, home office, automobile, travel, meals, entertainment, cell phone, professional organizations, continuing legal education, State bar membership, supplies, interest, banking fees and legal support services) in connection with work at the partnership. The partnership reimbursed him for over $60,000 of expenses for each of 2005 and 2006. The taxpayer contended, however, that he paid over $100,000 of partnership expenses in both 2005 and 2006 for which he was not reimbursed.

He categorized and claimed these expenses on Schedules C. Partners in the firm were required, under the partnership agreement, to pay expenses for business meals, auto, travel, entertainment, conventions, and continuing education, collectively called indirect expenses. Indirect expenses were reimbursable under the partnership agreement if approved by a managing partner. The firm had a written reimbursement policy that specifically provided for reimbursement of certain indirect expenses include reasonable travel expenses related to client maintenance and development. As a matter of routine practice, the firm would reimburse indirect expenses that were not provided for in the written reimbursement policy. The firm did not have a limit on the amount for which a partner could be reimbursed. Reasonableness, rather, was the overarching standard for approving reimbursement of indirect expenses. The firm would deem an expense unreasonable if it was personal, excessive or not in the firm's best interests.

The Court noted that the firm routinely reimbursed most of the expenses the taxpayer claimed. Moreover, the firm had no set limit on the amount of expenses for which it would reimburse a partner. The Court found the taxpayer was not required under the partnership agreement or by routine practice to pay such expenses. In addition, the taxpayer failed to point to any specific expense for which the firm denied him reimbursement. The Court disallowed the expenses.

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Vendor Co-Op Funds

Many manufacturers and wholesalers provide funds to their distributors and retailers for advertising, demo equipment, point-of-purchase displays, etc. Generally, it's free money. There may be strings attached such as how the money can be used, that products from competing suppliers can't be advertised on the same page, etc., but for the most part the restrictions aren't onerous.

Make sure you know the rules. The amount you receive is often based on your volume with the supplier over a 3, 6, or 12-month period. You usually have a certain amount of time to use the money and file a claim. Make sure someone is in charge of the program so you don't lose out.

Finally, keep in mind that any amounts you receive constitute taxable income. But, of course, that will be offset by the cost of the ads, etc. If you're a manufacturer or supplier, you might consider instituting such a program for dealers.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

No Bad Debt Deduction for Cash Method Taxpayers

It's a well-settled issue, but some business taxpayers still think you can take a deduction for an unpaid invoice if you're on the cash method of accounting. You can't. And the reason is simple when you think about it. Under the cash system you only pay tax on money you receive. Since you never paid tax on the money, you can't take a deduction. (You're still getting a deduction for your cost of goods sold, labor, etc. on the return.) Under the accrual system you're reporting income even if you don't receive the cash or check, so if you can't collect, you've got a bad debt deduction.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

1099 Reporting Requirements

You generally have until January 31 to prepare and mail 1099s to recipients. You've generally got until February 28 to mail the required copy to the IRS. This article isn't intended to provide all the details on filing 1099s. Rather, we want to make you aware of some frequently overlooked details. If you find you need to file some 1099s and haven't, contact us immedately.

 Penalties

 They've gone up. For information returns required to be filed on or after January 1, 2011, the penalties are:

• If you file a correct return up to 30 days after the required filing date, the first-tier penalty is $30 per return, with a maximum of $250,000 ($75,000 for small businesses).
• If the correct return is filed more than 30 days late but on or before August 1, the second-tier penalty of $60 per return applies, with a maximum of $500,000 ($200,000 for small businesses). 
• If the correct return is not filed on or before August 1, the third tier penalty of $100 applies ($1.5 million maximum; $500,000 for small businesses).

If the failure to file a return or to include the required information is due to intentional disregard of the rules, the above penalties don't apply. Instead, the penalty is the greater of $250 per return or 10% of the amount required to be reported on 1099-MISC and certain other returns. There is a de minimis exception, but it's fairly narrow. In addition, if you must file 250 or more information returns, you must file electronically. There are substantial penalties for failure to do so.

There's a second penalty of $100 per statement for failure to furnish the statement to the payee. This penalty has a maximum of $1.5 million per year ($500,000 for small businesses). As with the penalties for failure to file with the IRS, the penalty is tiered--$30 (instead of $100) if corrected within 30 days the penalty is only $30 ($250,000 maximum, $75,000 for small businesses); if on or before August 1, $60 ($500,000 maximum, $200,000 for small businesses). For intentional disregard of the rules the penalty is the greater of $250 or 10% of the total amount required to be reported correctly.

Clearly, failure to file even a few returns can be very costly.

While we're on the subject of penalties, you can't avoid withholding, FICA, unemployment, etc. by giving a worker a 1099-MISC when they really should be classified as an employee and get a W-2. But you may be able to reduce your penalties for misclassifying a worker as an independent contractor by giving him or her a 1099. The rules are involved. Talk to your accountant or tax advisor.

 Forms You May Have to File

 1099-MISC. This is the one you're probably most familiar with. This is the form you use for independent contractors. Many businesses only consider those individuals who do work related to the purpose of the business. For example, a machine shop might give 1099s to a subcontractor who has his own shop. But you have to provide a 1099 to any business other than a corporation who performs services for your business. For example, the auto mechanic who repairs the company truck; the electrician who came in to add outlets in your office; etc. You must also send a 1099 to the person to whom you pay office or other rent. For this filing year, the old requirements apply. That is, you don't have to send out a 1099 on rental properties if you're not in the trade or business of renting property, and the controversial requirement to send a 1099 to providers of goods as well as services doesn't apply. That changes for payments made in 2011. Here's a list of other payments that might have to be reported on a 1099:

• payments to attorneys (even if a corporation)
• amounts paid to accountants, architects, contractors, engineers
• auto reimbursements
• awards
• bonuses
• commissions to nonemployee salespersons (even if subject to repayment)
• travel, expense, etc. reimbursements to independent contractor for which the contractor did not account
• exchanges of services between individuals (barter transactions)
• compensation 
• damages
• director's fees
• fees
• fishing boat crew members proceeds
• fish purchases for cash
• health care services (even if a corporation)
• nonqualified deferred compensation
• prizes
• rents
• vacation allowance
• fees paid by one professional to another, such as fee splitting

Only report nonemployee payments on a 1099-MISC. If the individual is an employee, the amount should be reported on his or her W-2. For example, a bonus paid to an employee is reported on a W-2; a bonus to an independent contractor belongs on a 1099. (Amounts paid to the estate of a deceased employee are reportable on a 1099-MISC. Death benefits from nonqualified deferred compensation plans paid to the estate or beneficiary of a deceased employee are reportable on Form 1099-MISC. Check the instructions.)

You don't have to send a 1099-MISC to a party that provides you only with goods. (See the comment above.) For example, you buy auto parts from a local distributor and one of your employees repairs the vehicles. But a 1099 is required to an auto repair shop even if the value of the services is relatively small. For example, it's $2300 for the parts; $150 for the labor. The 1099-MISC should be for $2450. If state or local sales taxes are imposed on the service provider and you (as the buyer) pay them to the service provider, report them on the 1099. However, if sales taxes are imposed on you (as the buyer) and collected from you by the service provider, do not report the sales taxes.

If you don't classify payments by vendor as well as by general ledger account, you should go through your records to see who you might owe a 1099. That can include the service that cleans the office; your attorney who's on retainer (or paid by hour); etc.

You generally don't have to report payments made to a corporation. The exceptions are payments to attorneys, for medical services, and fish purchases for cash. In these cases even if the provider does business as a corporation, the payments are reportable. What about other providers? Don't know if the business is a corporation, LLC, sole proprietorship? Did the person provide goods or services? Sending a 1099-MISC where one is not required has no adverse consequences (just more paper). Many businesses, even large ones, send 1099s to every vendor.

You must report fees paid by one professional to another, such as fee-splitting or referral fees. Report commissions paid to nonemployee salespersons that are subject to repayment but not repaid during the calendar year. Fees paid to a nonemployee, including an independent contractor or travel reimbursement for which the nonemployee did not account to the payer, if the fee and reimbursement total at least $600.

Report a fee paid to a nonemployee, including an independent contractor, or travel reimbursement for which the nonemployee did not account to you (the payer), if the fee and the reimbursement total at least $600.

When an escrow agent maintains owner-provided funds in an escrow account or a construction project, performs management and oversight functions relating to the construction project, and makes payments for the owner and the general contractor, the escrow agent must file Form 1099-MISC for reportable payments of $600 or more.

The reporting threshold for nonemployee compensation, services, etc. and rents is $600. If the amount paid during the year is $600 or more, you owe the recipient a 1099-MISC. (The threshold is only $10 in the case of royalties.)

For coin-operated amusements, if the arrangement between the owner of the amusement and the owner of the business establishment where the amusements are placed is a lease of the amusements or the amusement space, the owner of the amusements or the owner of the space, whoever makes the payments must report the lease payments in box 1 (Rents) if the total payments are at least $600.

1099-INT. This form is for interest payments. It's easy to overlook this one. But there's a good chance the business made interest payments to a shareholder for a loan. The business may have made interest payments on funds borrowed from an angel investor or relative, on accounts payable, etc. The reporting threshold is $600 for such payments (it's $10 for banks, credit unions, etc.).

1099-DIV. Regular (C) corporations that pay dividends have to report such amounts on a 1099-DIV. Whether or not a distribution is a dividend depends on a number of factors. Generally a payment from a C corporation's earnings and profits (similar to retained earnings) is a dividend. Dividends to a recipient of $10 or more are reportable. Liquidating dividends are reportable when they amount to $600 or more. (Under certain circumstances, distributions by an S corporation could be reportable dividends.)

1099-A. You may have to report the acquisition or abandonment of secured property for each borrower if you lend money in connection with your trade or business and, in full or partial satisfaction of the debt, you acquire and interest in property that is security for the debt, or you have reason to know that the property has been abandoned. You don't have to be in the business of lending money to be subject to this reporting requirement. You don't have to file a 1099-A if tangible personal property is used solely for personal purposes. The reporting threshold is $600.

1099-C. Report the cancellation of a debt of $500 or more owed to you if lending money is a significant trade or business for you. The lending of money is a significant trade or business if money is lent on a regular and continuing basis. The law contains a safe harbor. Generally if lending provides 10% or more of the organization's gross income, the lending of money is significant.

8027. Employer's Annual Information Return of Tip Income and Allocated Tips. This reporting requirement applies to receipts from large food or beverage operations, tips reported by employees and allocated tips. Check with your accountant or tax adviser for the rules.

1042. Use Form 1042S to report tax withheld on certain income of foreign persons, including nonresident aliens, foreign partnerhips and corporations, and foreign estates and trusts.

Other Points

Reporting period. Forms 1098, 1099, 3921, 3922, and W-2G are used to report amounts received, paid, credited, donated, transferred, or canceled (Form 1099-C) during the calendar year.

Specific instructions. The IRS has some specific rules such as no dollar signs, no entry for zero amounts, etc. Using a software program to prepare the returns will automatically handle these issues. The programs are generally cheap and well worth it.

Retention rules. Generally, keep copies of information returns filed with the IRS or have the ability to reconstruct the data for at least 3 year (4 for Form 1099-C) from the due date of the returns. Keep copies of information returns with backup withholding for 4 years.

State reporting. You may also have to file state copies of 1099s. Contact us if you gave any questions.

Need more help? Download the General Instructions for Forms 1099, etc. or the Instructions for Form 1099-MISC or Instructions for Form 1099-INT.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Turn Your Home Office Into A Tax Saving Machine

A home office deduction is allowed for those who work out of their home, but it can be tricky to understand which expenses to track and who should record and pay for the expenses.

Proper tracking and recording is key for maximizing any deduction - particularly the home office deduction.

Here is a checklist you can use to help with tracking and recording your home office expenses. 

Personal Expenses for Your Home Office

A great tax benefit that comes with qualifying your home office is that a portion of your personal expenses to maintain your home becomes deductible. 

Some of these expenses are not deductible otherwise.  But even for those that are already deductible, such as your mortgage interest and property taxes, the way in which the home office calculation works, your deduction for these items is not subject to the limitations that otherwise apply. 

Track and record (and pay) these expenses personally:

• Mortgage interest
• Property taxes
• Homeowner's insurance
• Utilities
• Security
• HOA dues
• Cleaning
• Pest control
• Other expenses that relate to the running of your entire home

Caution! Certain expenses are non-deductible.  This includes pool maintenance, lawn maintenance, landscaping and the first phone line into your home.

Business Expenses

Business expenses for your home office are expenses that your business has regardless of where your office is located. 

Have your business track and record (and pay) these expenses directly:

• Supplies
• Equipment
• Furniture
• Separate business phone line
• Repairs made directly to the home office
• Other expenses that are 100% business use

Claim Your Home Office Deduction

The home office is one of the best types of deductions because it turns expenses you already have into deductible expenses. This means it is eliminating tax and that is the best type of tax planning

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.  

How To Handle Your Start-Up Expenses

One of the great benefits of having an entity is that it is separate from you.  This allows for great tax and asset protection benefits.  

One of the key rules of keeping your entity separate from you is to not commingle funds.  This means the entity pays for its expenses with its own funds.  

The catch-22 is the entity cannot set up a bank account to pay for its own expenses until after it is formed and the formation fees must be paid before the entity can be set up.

How Do You Handle this Situation?

In this situation, personal funds must be used to pay the formation fees, and other expenses, until the entity's bank account can be set up.

 There are a few things to keep in mind when you use personal funds for business expenses:

Capture It in Your Personal Bookkeeping

Your personal bookkeeping is the starting point since personal funds will be used. 

There are a few ways the personal funds can be coded in your personal bookkeeping.  For example, the funds could be considered a capital contribution or a loan to your entity.  Let's assume that they will be considered a loan.  

When you code the expense(s) in your personal bookkeeping, code it to a current asset account that is used only for tracking expenses for your business.   In my bookkeeping, I use the account name "Reimbursements Due from Entity XYZ."  

The key is making sure that this reimbursement account is an asset account.  This will ensure that if you have not been reimbursed by your entity for these expenses you paid for personally, there will be a balance in this asset account.  If your entity has reimbursed you in full, then the balance will be zero.  

Capture It in Your Entity's Bookkeeping

Next, you need to have your entity reimburse you.  The amount your entity owes you is the balance in the asset account in your personal bookkeeping from above.  

To complete this step, have your entity make a payment to you for the amount of the reimbursement due.  When your entity makes this payment, it will code the payment in its bookkeeping to the appropriate account.  

This is a key step because the reimbursement is how your entity records the expense on its books.  It's important to make sure the reimbursement gets done before the end of the year so your entity can capture the expense in the appropriate tax year.

If your entity doesn't have the funds to reimburse you, then you should consider charging interest or categorizing the expenses paid personally as a contribution to your entity rather than a loan. 

When your entity reimburses you, be sure to code it to the asset account you use to track your reimbursements in your personal bookkeeping.  This is the "Reimbursements Due" account described above.  

Use this Method for all Personal Funds Used for Business Expenses  

While the most common instance of using personal funds for business expenses is during the formation phase, you may find that there are other times when you must use personal funds for business expenses.

When you run into this, use this same method.  Capture the expenses in your personal bookkeeping when you pay the expense and then have your entity reimburse you.

A quick way to check if your entity has properly reimbursed you is the reimbursement account on your personal books should be zero.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.   

Additional Information On The New 1099-K

If you make payments to service providers, landlords, sub-contractors, etc. that you would normally send 1099-Misc to, you can pay them by credit/debit card and be relieved of having to provide them a 1099-Misc at year end. 

No 1099-MISC if paid by credit card.  In the instructions to Form 1099-MISC, the IRS has made it clear that payments made with a credit card, debit card, or through any third-party payer, are not reported on Form 1099-MISC.

It is important that you track which vendors you pay by credit/debit card and the ones you pay by check, which you must provide 1099's to if they are paid more than $600.

New for 2011 is the 1099-K.  The 1099-K will be used for matching purposes by the IRS computers to ensure that businesses are reporting all of their income.  The information contained in the 1099-K will include sales tax, shipping, charge backs and other charges. Adjustments may have to be made in order to properly reconcile the books against the 1099-K. It is important that payments received via credit/debit cards are properly tracked.

The 1099-K is issued by your merchant provider if the payee has more than 200 transactions or more than $20,000 of gross income paid to them. Even though the merchant provider does not need to issue a 1099-K to their payees, it is unclear if the merchant provider will report the information to the IRS anyway. 

There is a lot of mis-information on the internet concerning the 1099-K. Please email this to your colleagues and business associates. 

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.