If you have hired and paid contract workers who are not employees, you need to give them a 1099-MISC form each year to record your payments to them for their income taxes. But before you prepare those 1099s, there are some steps you need to take during December:
1. Get W-9 forms from each contract worker or other non-employee, to verify their tax ID number. If you don't have a valid tax ID number for someone, you must institute backup withholding. William Perez, at Tax Planning, has a reminder about the updated Form W-9 for 2013.
2. Get 1099-MISC forms for 2013. You can buy them from an office supply store or online from the IRS. DO NOT try to print out these forms from the Internet; the special red ink in the form can't be reproduced on a printer. The 2013 1099-MISC form has changed; make sure you have the correct form.
3. Send to contract workers, not employees. Make sure you are sending the right forms to the right people. 1099-MISC forms go to contract workers and other non-employees; W-2 forms go to employees. If you're confused; here's some information on independent contractors vs. employees.
4. Record payments in the right year. Put payments into the correct year by using the paycheck date. If you are paying a contract worker for the last week in December, but the check is dated in January, that income counts toward January. Read more about timing checks to contractors and vendors at year end, as well as other year-end income and expense timing issues.
More details on what to do before preparing those 1099-MISC forms
As the Marketplace Fairness Act winds its way through Congress, new wrinkles keep coming up.
The bill is designed to set up a process to allow sales tax to be charged for all Internet transactions across the U.S. States want the money they are currently not able to collect.
"Bricks and mortar" stores want to make sure online sellers don't have a fair advantage. Online sellers are concerned because the sales tax systems are such a mess, with over 9000 different state and local sales taxing entities. How is an online seller supposed to figure the sales tax for each buyer?
As originally proposed, the law would exempt smaller online sellers (those with under $1 million in online sales). The bill has been passed by the Senate, but the House has yet to act on it. The newest wrinkle, as proposed by several Representatives, would eliminate this small seller exemption.
"This is a tough issue for small business owners," said an SBA statement. "On one end of the spectrum, a small-seller exemption would reduce burdens for small online retailers. On the other end, brick-and-mortar stores without an online presence would continue to collect sales taxes."
But Internet Retailer (IR) says it's not the number of the sellers who would be affected that matters; it's the amount of purchases. IR cites a report issued by the Small Business Administration's Office of Advocacy which concludes that an exemption for small online sellers, even with a $5 million threshold, "would likely bring in the same sales tax revenue from online purchases." That's because the top sellers bring in over half (57.6%) of online retail sales.
Is the current sales tax situation really so unfair to bricks-and-mortar sellers? Blogger Ryan Riebe at FreedomWorks points out that the Marketplace Fairness Act in the House is co-sponsored by a Representative from Arkansas, home of - you guessed it - a little company called WalMart. And WalMart has an increasing online presence.
One more note: Amazon, probably the largest online seller, has changed its tune and Amazon is now supporting the Marketplace Fairness Act.
Top 7 Myths about Sales Taxes, from William Perez, at Tax Planning
December is a great time to review your small business tax situation with your tax advisor. Some areas you might want to discuss:
- Fox Business reminds us to remember self-employment tax when doing tax planning. Small business owners tend to forget self-employment (Social Security/Medicare tax), which is payable on net income from your business. Consider that the maximum self-employment tax increases in 2014 and look at your business income in both years, in light of this additional tax.
- William Perez, at Tax Planning, in his article about year-end tax planning, suggests you look at your business structure. Your business type can affect your tax situation, which changes every year. Finding the best business structure can help reduce your taxes.
- Entrepreneurs @About.com says, "Don't make financial decisions just for tax savings." You may be hurting your business in other ways.
- Accounting Today lists some expiring tax provisions you may want to take advantage of in 2013, because they won't be available in 2014.
- Business Week suggests you look at your business income and your tax bracket. before you make any decisions to move income from this year to next year.
- And Steve Parrish at Forbes reminds us that the new additional Medicare tax can affect your business taxes too. Going over the earnings limit can add more to your tax bill in 2013.
More on Year-end Tax Planning
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Did you know the IRS has a Fast Track program, to help small businesses who are being audited?
The IRS says the program is designed to:
Provide an independent Appeals review of the dispute in an environment where all parties to the dispute have a "voice" in the dispute resolution process,
Utilize the mediation skills and delegated settlement authority of Appeals, and
Reduce the length of a taxpayer's overall IRS experience.
If the FTS process isn't successful, you still have the right to appeal the IRS judgement.
Eligibility seems a little mysterious: The IRS says
To be eligible for FTS the issues must be fully developed; the taxpayer must provide a brief, considered and soundly written response to the Service's position; and there must be a limited number of issues capable of being resolves within the 60 day goal.
To apply for this program, complete Form 4017 (PDF). I could find no information about where and how to send this application. If your business is involved in an audit, ask your IRS agent if you might qualify for this program.
Sounds like you'll need a good tax attorney or CPA for this one. (More details on requirements are available on IRS Publication 5022.)
Since the FTS program is a mediation process, you might want to read more about how mediation works. But this may not be how the IRS is viewing the process.
More about IRS Audits:
The holidays are the biggest times for many retail businesses. But then comes January and slumping sales...and income. Seasonal businesses have a cash flow problem; if most of their revenue comes in just a few months, how do they pay their bills the rest of the year?
Create a live by a budget. Then,
Don't spend all the money. It's tempting to spend when you are flush, giving bonuses to employees who worked extra hard, and buying big ticket items. But putting the cash away for those dry times can mean the difference between business survival and failure.
Find additional income streams, like products that can be sold in a different season, or different business lines that have a steady income. This article from Entrepreneur, for example, describes a lawn and landscape business that put employees and trucks to work installing holiday lights, extending the "season" by several months.
Another source of credit might be an SBA CAPLine loan, which offers working capital financing to seasonal businesses and others who have fluctuating cash flow.
More tips for managing cash flow in seasonal businesses and other types of variable income businesses.
A reader asked, "As a 1099 employee what are my options for collecting back wages?"
First, a 1099 worker is not classified as an employee. Someone who receives a 1099 is, by definition, a non-employee. That is, an independent contractor. An independent contractor is self-employed. If you receive a 1099, you claim this income on your personal tax return, but not as employment income.
So, what if you are a 1099 worker and you don't get paid? You must try to collect the money from the client or customer for whom you are working, in the traditional way all small businesses/self employed people collect:
- Send a letter requesting the money you are owed.
- Note any contract terms and state that you have performed the work and you are owed the money.
- Call the customer/client on the phone and try to negotiate terms.
- Stop working for this client/customer. That may be difficult or impossible, but the more work you do, the deeper in the hole the whole situation gets.
- If all else fails, you can try going to small claims court. If you can prove that you have done the work, you can probably get a judgment. Then, you must hope that the person pays. There is no guarantee that you will get payment.
Unfortunately, there are some people who just won't pay, no matter what. You can try your darnedest to get paid, but sometimes you just have to move on and not work for these people again.
More about the Small Claims Court Process - filing a claim, increasing your chances of getting a judgment, what if you don't get paid
The holiday season is also the end of the year and time to think about increasing business tax deductions. A used business asset, like a car or truck or office equipment, might give you additional tax savings if you donate it to a charity. Before you send that business asset (auto, equipment, furniture) off to a charity, think carefully. You have the choice of selling the asset and donating the proceeds to charity instead, and this option might be better for your tax situation.
Donating the asset makes sense if it has increased in value. You can deduct the value of the donated asset from your taxes. You'll have to be able to prove that the asset value has increased, by getting an appraisal or showing some certified valuation (like Blue Book value for autos).
Selling the asset and donating the proceeds makes sense if the asset has decreased in value (like that clunker or obsolete copy machine). If you sell the asset, you can take the loss as a loss on your tax return. Then you can donate the proceeds for a tax deduction.
For example, you purchased a vehicle for your business in 2010 and you decide to donate it to charity in 2013. Purchase price was $10,000. The fair market value is now $6,000. If you sell the asset, you can take the $4,000 in loss from your business taxes, then give the money to a charity. If you donate the lower-valued asset, you can't deduct the loss.
Most business assets decrease in value through use and obsolescence, but you might have an asset that has appreciated because of its rarity or because it has become a collectible. If you sold the asset, you would have to take a gain on the sale. If you give it away, you can donate it and take a higher deduction for the value.
Joanne Fritz at Nonprofits has some good tips for donating a car to a charity, to avoid scams.
Disclaimer: This article, and the information on this site, is for general information purposes only. It is not intended to be tax or legal advice. Each business situation is different; be sure to consult your tax advisor before you take any actions that could affect your business taxes.
More on Business Donations to Charities
The IRS is going fishing for pass-through businesses, particularly partnerships, reports Accountingweb. The head of the IRS's Small Business and Self-employed Division said recently that "the IRS will spend more time and money training its agents to go after what it previously considered to be small-fry." That means small businesses, particularly partnerships, that pay their business income tax on their personal returns.
Because some partnerships are very large, some of this income may not be reported correctly, so the IRS is going to take a closer look at these business entities.
- The partnership files an informational return, on Form 1065, showing the net income or loss for the entire firm for the year.
- Then, each partner receives a form (Schedule K-1) showing his or her portion of that income/loss for the year., called a "distributive share." The portion is based on the percentage of ownership, as spelled out in the partnership agreement.
- The Schedule K-1 income/loss for each partner is entered into the partner's personal income tax return along with other income.
Two important notes:
- A partner may not have taken this share out of the business during the year. That doesn't matter; it's the distributive share amount that counts for tax purposes, not the amount actually taken from the business.
- Active partners must also pay self-employment tax (Social Security/Medicare tax) on their distributive share. If the distributive share amount is above IRS limits, the partner may also be subject to the new Additional Medicare tax.
Partnerships are not a do-it-yourself proposition, especially when it comes to taxes. If you are in a partnership, discuss with your tax advisor or a tax attorney to see if you can save on taxes and make sure your partnership is in compliance with IRS regulations. You may need to change your partnership agreement.
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Confused about the small employer health insurance tax credit? You're not alone. If you employ fewer than 25 employees, your business may be eligible for this tax credit. If you think you might qualify, here's what you need to know and do:
How do I know if my business qualifies for this tax credit?
- Your business must employ fewer than 25 employees. First, determine if you have the right number of employees, by counting full-time equivalents (combined full-time and part-time employees).
- Their average wages must be less than $50,000. So you must calculate their average wages.
- Then, you must provide health coverage to at least some of these employees. The employer contribution must be at least 50% of single employee (not family) coverage premiums. The employees must be enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace ("exchange").
- Finally, you apply for the credit on Form 8941, which is filed with your business tax return.
What's the tax credit?
- The amount of the credit is 35% of premiums paid for employees in 2013, increasing to 50% of premiums in 2014.
- The full amount of the credit is only available for companies with 10 or fewer employees; it decreases down to 25 employees. Average employee wages must be less than $50,000.
- If you are self-employed, you can't get the tax credit for covering yourself, but you can get it for covering employees.
NOTE: Your business can only get the tax credit for two years, and the credit is increasing to 50% of premiums in 2014. If you think your business might be eligible for this tax credit, gather information and check with your tax advisor. Remember that the credit is only for the amount of premiums your company covers for eligible employees during the year.
More about how to qualify for the small business health care tax credit
More details from the IRS on this small business health care tax credit.
Want to move your business? The ease of transferring your business to another state depends on your business type.
It's relatively easy to move a sole proprietorship to another state. You just change your address with the IRS and your state. If your business name is not the same as your personal name, you'll need to file another "fictitious name" (doing business as) report with your new state.
Because an LLC, partnership, or corporation registers with a state, moving one of these entities to another state gets complicated and you have several options, depending on whether you want to keep doing business in the old state.
If you want to do business in several states (as an LLC, corporation, or partnership), you need to register with each state. Your primary state registration is called a "domestic" entity, and registration in other states is called a "foreign" entity, not to be confused with foreign as in another country (and just to keep things complicated).
So moving an LLC to another state might be as simple as registering as a foreign LLC in the new state and keeping your main LLC registration in the previous state.
It does get complicated, and there are legal and tax implications to this kind of business change. Talk to both your attorney and your tax advisor before moving your business, to be sure you understand all the implications.
The SBA has a new article discussing how to move your business type to another state which gives more details.