Get Straight Or Pay! 3 Keys To Avoid Confusion And 1099-Misc Penalties

 

I like this overview by TurboTax because it sets a clear outline of the topic. Watch it and then check out the discussion below.

One of the most common practices or I should say non-practices I saw during my career with Treasury was the way in which businesses exposed themselves to needless penalties by not having a working understanding of when to issue a 1099-misc.

Our purpose here is to take the guesswork out of  what to file and when to file it.

Now I don’t want to make you think that there are 1099-misc police hiding behind every bush ready to pounce but if you ever find yourself on the wrong end of the discussion, you may have a rude awakening.

Penalties can be severe…ranging from $30 to $100 per 1099 form depending on how long past the deadline you are before issuing the form. There is a cap of $1.5 million for the year which will normally be applicable to the larger companies but who wants to pay any penalties regardless of the amount.

Oh by the way, if you intentionally disregard the requirement to provide a correct payee statement, it is subject to a minimum penalty of $250 per statement, with no maximum.

Once you realize that this is a no-nonsense item, you will also realize that you need some guidelines. As you read this, it may occur to you that if you handle your transactions in cash, you can get around this whole process. Before you start down that slippery slope, let me give you a link to the drama of Miss Lindsay Lohan  http://www.dailyfinance.com/2012/12/07/getting-paid-in-cash-dont-end-up-like-lindsay-lohan/

With that out of the way, let’s cover three general rules that apply. Remember we are talking about payments made in the course of your trade or business; not anything paid for personal reasons.

First, as mentioned in the video, the accounting of payments of payments is in the aggregate not on a per item basis. When payments to any individual, partnership, Limited Liability Company, Limited Partnership or Estate, total $600 or more, you are required to issue a 1099-misc.

Also, you must issue a Form 1099-MISC to each entity to whom you have paid at least $600 in rents, services (including parts and materials), prizes and awards, or other income payments.

Second, be smart! As a normal business practice get the vendor’s mailing information, Tax ID number, and also require the vendor indicate if it is a corporation or not. This will save you the headache of sending them a 1099 next year.

You can get this information by requesting a W-9 Form from anyone you expect to pay at least $600 to during the year. Download here: http://www.irs.gov/uac/Form-W-9,-Request-for-Taxpayer-Identification-Number-and-Certification

Third, remember the deadline! You are required to issue and essentially mail out all of your Form 1099s to your vendors by January 31. Then you have to send in the transmittal Form 1096 to the IRS before February 28. Check your state law to see if you are required to submit to the state.

These forms are pre-printed in triplicate by the IRS so in order to comply, you will have to secure the paper forms as they are not downloadable from the website. If you have a sizable volume, you may want to outsource this to an accountant.

If you have a manageable volume, order the forms from the IRS or another outlet. If you are early enough, you can generally secure from the Post Office when they become available.

Lastly, there are exceptions to the requirement. The most common are that you don’t need to send to a corporation or to real estate agents who are managing property. Additionally, sellers of merchandise, freight, storage, and similar items are exempt. Oddly, you must send to your lawyer if they meet the threshold. Probably has something to do with trust…

That is it in a nutshell. These are the basics but as always, there is something more. Provisions cover foreign workers and your responsibility to determine their status as a U.S. citizen, etc. While this is beyond the scope of this article, I suggest that you become familiar with the provisions as they arise.

For further information, TurboTax tips can be found on the YouTube but for a more professional face-to-face FREE consultation, check out my friends at Elevation Tax:   FREE Consultation

To your success!

FJ

 

p.s. while you are here, don’t forget to check out the Tools for Success page for resources! Check back often to watch it GROW!

5 Steps to Building a Healthy Business and Life Balance

Your work is unique and full of life…your life, your passion.

That’s a mark worth leaving on the universe!

But work without regret…

It seems many of us live a life of extremes. If we’re relaxing, then we’re doing absolutely nothing. And if we’re working, we’re at it so intently that we’re completely stressed out.

Wouldn’t it be nice if every day was a healthy balance of work and play? If you could work without regret and play the same way?

Good news – you can. It takes time, patience and a commitment. However, finding a healthy business/life balance is completely possible.

#1 Track the data.

This may sound a bit retentive; however it’s tough to know where you can make changes if you don’t have accurate information.

Simply track how many hours each day you’re working and how many hours each day you’re spending on fun, friends, family and yourself.

Note: if you’re cleaning the kitchen or picking kids up from school, that’s a third category. Somewhere between work and pleasure. Track that information too.

#2 Assess your happiness and that of the people around you.

Realistically, take a good look inside. How are you feeling about your business and personal life? Are you happy? Satisfied? Fulfilled?

Now, take a look at your friends and family.

Do they feel they’re getting enough of your attention and time?

Do they make comments about the fact that you’re always working?

Do they seem to resent the time you spend on your business? If so, chances are there’s an imbalance here.

#3 Now that you have both the data and your emotions and family’s emotions recorded, it’s much easier to see where you can make changes.

You can see where you’re spending more of your time and you can see how it’s affecting you and your friends and family. Now comes the tough part – making changes and sticking to them.

Look at the possibilities and your resources.

If you’re working from 9-9 seven days a week, is it because you have to? Or are your time-management measures not holding up?

Can you outsource?

Can you create more focused work times?

Can you schedule time for yourself?

Can you schedule time for your friends and family?

Scheduling it sounds a bit strange; however, when you set aside time to spend on your personal life, it forces you to manage your time a bit better.

#4 Become a better organizer.

One of the best ways to find and maintain a healthy business and life balance is to become a skilled expert in the field of time management.

Create lists, prioritize your tasks and focus on the most important, high impact activity first.

Use tools that assist you in routine tasks. You would be surprised at the number of time-saving tools available on the market.

Check out the “Tools for Success” page on this blog  http://www.powerfulhomeofficetips.com/tools-for-success/ and make it a habit to keep coming back as I am constantly updating. 

#5 Learn to let go.

It takes practice but it is possible to focus on what you’re doing right now and to let go of the fear, guilt and stress related to what you think you should be doing.

Once you can accomplish that, you’re better able to produce and to enjoy the moment.

When you’re with your family, be with them. Don’t think about what you should be doing for your business and vice versa.

You control your life.

You’ve created a fantastic business and you deserve the best of both worlds. You can have it. It takes a plan, commitment and an honest look at reality. If you’re living an unbalanced life, make changes.

Live the life you want. It’s all in your control.

To your success!

FJ

Avoid IRS Problems: Know the 3 Factors To Properly Classify Employees and Contractors (Part 2)

I like this video because it is short and to the point in addressing the employee/independent contractor issue. Watch it and then read through the discussion below for more information.

Internal Revenue Service position

The Internal Revenue Service (IRS) puts the requirement upon the taxpayer that they properly classify those performing services for them as either employees or independent contractors. Why you say?

Well, think about it. Would you rather have to go to one source or several for your money?

The independent contractor is responsible for paying his own taxes while the employer is responsible for withholding and remitting the taxes to the government on behalf of the employee.

And because the IRS assumes that a worker is an employee unless it can be proven that the worker is an independent contractor, there is a bit of an assumption to overcome. Sometimes it is simple, sometimes it is not.

Why does the classification matter? It matters!

It matters because of the liability. Employers who misclassify workers as independent contractors can end up with substantial tax bills.

If the IRS determines that an individual is an employee rather than an independent contractor, then it is the employer that is liable for paying the tax. Of course, if the independent contractor has paid the tax, there may be an offset.

But if he has not, well…  Then there is the difference in the rates between the employee and the independent contractor to consider also.

Employers who misclassify workers as independent contractors can end up with substantial tax bills.

Additionally, employers can face penalties for failing to pay employment taxes and for failing to file required tax forms.

It’s all about control, my friends!

If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees. Making assignments, setting work hours, approving leave, providing supplies and a work environment are all key elements.

If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors. A great example of this would be a cleaning service which comes to your location to do the work but the workers are not your employees.

There is a third factor that the IRS uses which relates to how the workers and the business owner perceive their relationship but this one is a bit tough and if you operate clearly on the first two, this one kind of falls in line.

The Grey area

I have seen time and time again in my career, people attempt to get around the issue by having a worker sign an employment agreement that stipulates that he/she is an independent contractor when they clearly fall within the definition of an employee. 

Don’t do this! It does not matter that you have a contract if the substance of the relationship does not substantially support your position. The courts, including the Supreme Court has held that no one single rule or test governs. It is the total activity or situation which controls.

Most of the time there should not be an issue. Companies and individuals whom you pay for their delivered services under a contract will clearly fall in one category. Individuals that you “control” per the foregoing conditions will fall in another.

If you do find yourself in a grey area, ask for counsel. 

The IRS also provides the form SS-8, Determination of Worker Status for Purposes of federal Employment taxes and Income Tax Withholding,  http://www.irs.gov/pub/irs-pdf/fss8.pdf

or

 A free tax consultation can be scheduled with my friends at Free Consultation at Elevation Tax

Regardless of your choice, be sure to get up to speed on this issue to avoid the distractions of dealing with the IRS.

To your success!

FJ

p.s. if this raises additional questions, drop me a note and let me know and I’ll get back with you! Also stop by our Tools for Success page. Lots of goodies over there and growing!

Avoid IRS Problems: Know the 3 Factors To Properly Classify Employees and Contractors (Part 1)

It’s a dilemma, isn’t it? You need help in your business – after all, you can’t possibly do everything yourself – but the added expense and headache of hiring someone just doesn’t seem worth it.

And then there is the question of hiring an actual employee, or simply working with a self-employed contractor. Which you choose will depend largely on your business model, but there are some major differences you need to be aware of.

The Tax Burden Shifts depending…

Probably the most important difference between an employee and a contractor lies in who has the responsibility for paying taxes.

Employers withhold taxes from their employees’ pay and send regular payments to the government. These withholdings are then reported to the employee at the end of every year (and also on their check stubs) on IRS form W-2 which the employee uses when he or she files his or her income tax return.

Contractors, on the other hand, are responsible for their own tax bill. That means that when you pay them, you don’t withhold any money to send to the government on their behalf. You also don’t issue a W-2 at the end of the year. Instead, contractors – if they’ve earned more than $600 dollars and are not a corporation – receive a 1099-MISC.

The Pay is Different – Maybe

Contractors – depending on where they live and work – typically make more per hour than an employee does. At first glance, it can seem like it would be smarter (or at least less expensive) to hire an employee rather than a contractor, but if you look carefully, you might be surprised.

First, while you might pay a US-based virtual assistant (VA) $25 or more per hour, you have to keep in mind what you are NOT paying for.

Note: For a cost savings, use the blog search for “virtual assistant” for an insight into VA rates in the Phillipines. I personally used one VA on a project for over two years and would rate her A+.

You don’t have to foot the bill for:

  • Office space and furniture – your VA works from his or her home.
  • Computer equipment – your VA buys her own.
  • Software – again, your VA supplies her own tools, with very few exceptions.
  • Vacation and sick days – contractors are only paid for the hours they actually work.
  • Lunch breaks (and all that other unauthorized downtime) – most contractors work with a timer system so you pay only for the hours actually worked.
  • The employer portion of Social Security tax – as a self-employed individual, contractors are responsible for the entire amount.

So while it might seem like hiring $10 per hour employee is the better deal, by the time you’re done paying for all those extras, you can bet you’re paying close to what you’d pay a contractor. Plus, you don’t have to deal with payroll – simply cut a check and issue a 1099-MISC at the end of the year.

You Are Not Their Only “Employer”

When you hire an employee, you can expect that he or she will show up at the designated time and focus only on you and your business for the time he or she is working.

Not so with a contractor. Their time will likely be divided between many clients, so organizing your tasks is critical if you hope to get the most out of the relationship.

They most likely schedules their client work on a first-come-first-served basis, so unlike an employee, you cannot add a rush job to her task list with a moment’s notice.

Whether you hire a true employee or just retain the services of a contractor will depend largely on the type of business you own and how much work there is for him or her to do.

For small local businesses like retail stores and restaurants, employees are obviously necessary. But if your business exists online, you might just be better served by opting for contractors instead.

But that’s not all…

While the logic of hiring a contractor is pretty straightforward, it is always good to get off on the right foot and understand that there are a few subtleties that I should mention.

First, the mentioned 1099-misc has to be issued to the contractor if payments exceed $600 but I don’t want to leave you with the impression that issuing to contractors is the only requirement.

The 1099-Misc also has to be issued to each individual person, partnership, Limited Liability Company, Limited Partnership or Estate when payments exceed $600.

Because there can be severe penalties involved for not complying with the law, I will treat the issue of 1099s in a separate article. And to round out the series, a future article will address the IRS classification of “Independent Contractors”, another area of concern. 

But for now, I think you can see that when evaluating “employee vs. contractor”, there is a little more than what initially meets the eye. :-)

To your success!

FJ

p.s. check out the folks over at Elevation Tax who specialize in small business structure and are offering a Free, No Obligation consultation: http://go.elevationtax.com/a/2475

 

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

 

Uncle Sam Still Wants YOU: 3 Major Tax Considerations for ExPats

It’s true. Death and taxes are the only certainties in life. Even if you live abroad.

The truth is, moving to another country does not exempt you from filing income tax in your home country. In fact, Americans may have to continue to pay state taxes as well. And then there are taxes in your adopted country to deal with as well.

Before making the decision to move abroad, you need to know exactly what your home country will expect of you, and what your adopted country’s laws are as well, because the last thing you want is to find yourself in hot water with either government.

Here’s the good news: If you’re American and live abroad for an entire calendar year, or 330 days out of the past 365, you do not have to pay US federal income tax on earnings less than $100,800. Revenue Procedure 2014-61 *

While that sounds like a hefty exemption, items such as housing, automobiles, child care & schooling, etc. are included in income so it diminishes quickly. Be aware!

For a married couple filing jointly, double that if the spouse is also a “qualifying” individual. You also may be entitled to tax credits for housing costs. Plus, if you pay income tax in your host country, that income may be excluded from taxation in the US as a result of tax treaties in place with several foreign countries.

The tax deadline for ex-pats is different as well. Americans living abroad have until June 15 to file, and can file an extension until October 15. Most ex-pats file for an extension their first year abroad just to make sure they’ve met the 330-day requirement for living in another country.

 However, if you’re self-employed, you may still have to pay your Social Security Tax (known as “self employment tax” to some), regardless of whether you meet the wage limit. Plus, even though you may not have to pay taxes, you do still have to file. The only way to get out of that obligation is to give up your citizenship.

 Obviously, local tax rates will vary wildly depending on where you choose to live. And in some countries, you may not be required to pay personal income tax at all.

As in the United States and Canada, some countries may have both federal (country-wide) and local (state or city) taxes to deal with. Not only that, but if you buy property, you will most likely have to pay some kind of property tax as well. Again, only by thoroughly researching your options will you have a clear idea about the ins and outs of taxes in your adopted homeland.

 Wherever you choose to live, you’ll want to consult a tax professional who is knowledgeable not only about US or Canadian tax laws, but also about the laws in your host country. A good place to start is your consulate. Another source to begin is with a free consultation with the people at Elevation Tax, especially if you have a small business operation: http://go.elevationtax.com/a/2475

To your success!

FJ

*Note: Revenue Procedure 2014-61 provides a figure for 2015. These amounts have changed each year for inflation so keep up to date for your tax planning.

See also: http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion

 p.s. If you like these blogs, please share your comments and sign up for blogs delivered to your inbox!

 

World Traveler or American Expatriot: 5 Factors On Choosing Where to Live

Dreaming of living abroad but not sure where to go? The possibilities are nearly endless, now that the Internet is available in almost any location you can imagine. The ability to work from your computer makes living outside your home country a real possibility for anyone. All it takes is a little advanced planning.

 Settling Down or Traveling – The Choice is Yours!

 It is possible to earn a living while traveling, just ask blogger Chris Buillebeau: http://chrisguillebeau.com/. He’s made it his mission to see every country in the world, and at last count, he’s nearly there. He works from the road, creating guides to help other would-be world travelers make the most out of their journeys.

 But that’s not what most people think of when they say “location independent.” Instead, they mean living somewhere else permanently – most often in another country. The question is, where?

 

You need to take into account several factors when making your choice, including:

 * Infrastructure. You’ll need adequate (and readily available) health and dental care, not to mention reliable Internet access.

* Cost of living. Make sure your income can support you in the country you choose. Not only that, but be aware that in many countries, the cost of living may be quite low, but only because the locals live in terrible poverty.

* Emigration laws. How easy is it to earn permanent resident status? Some countries welcome immigrants and are well equipped to handle them. Others, such as Switzerland, Austria, and other European countries are notoriously difficult to gain entry to.

* Safety. Are Westerners welcomed? Will your religious beliefs be tolerated? Is the area in general stable, or is it prone to outbreaks of violence?

* Distance from home. Depending on your situation (elderly relatives, etc) you might want to look toward Central America rather than Asia, for example, just for easier travel.

 

The US State Department maintains a database of all countries which includes information about safety, infrastructure, travel requirements, residency applications and more. You can find the listing of countries at http://travel.state.gov/travel/cis_pa_tw/cis/cis_4965.html

 Another source of information about your proposed country is the consulate or embassy there. The US maintains a presence in most friendly countries, and it’s recommended that before traveling or moving to a foreign nation you inform the embassy about your plans. You can find a complete listing of embassies, consulates, and their websites at http://www.usembassy.gov/.

 Something else to consider: Is there a community of ex-pats already there? While it can be thrilling to dream of living and working in a foreign country, the reality can be quite different.

Having other Americans around to hang out with (and learn from) can make moving abroad much easier on your entire family.  See my article in http://www.powerfulhomeofficetips.com/you-cant-just-run-away-from-home/ for researching the ex-pat issue.

Whether you choose to put down roots in a foreign country or just wander from place to place enjoying the scenery, it’s important to do your homework. Be sure your adopted country is someplace you’ll be comfortable visiting or living, and that your own government has good relations with that country. Planning ahead will make your adventure much more satisfying.

If you don’t blog-regardless of what business you have or start-, you should. It is one of the greatest ways to share information with your clients and educate them on your products. We all have something to say and what a great avenue to do it. If the idea of blogging seems too complicated or time consuming, you need to check out the Empower Network blogging platform and the 21-day blogging challenge.

http://www.perfectstormofopportunity.com?id=6261790&ad=blog

This is what I use and believe me, it is simple!!

To your success!

FJ

p.s. if you found this helpful, be sure to sign up for future blogs. There will be a few more written on location independent living.