Newsletter

July 2021

Feature Articles

Tax Tips

 
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Tax Due Dates


Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.


Advance Child Tax Credit Payments Start This Month

The Internal Revenue Service has started sending letters to more than 36 million American families who, based on tax returns filed with the agency, may be eligible to receive monthly Child Tax Credit payments starting July 15, 2021. Here's what families need to know:

Background

The expanded and newly-advanceable Child Tax Credit was authorized by the American Rescue Plan Act, enacted in March. The letters are going to families who may be eligible based on information they included in either their 2019 or 2020 federal income tax return or who used the Non-Filers tool on IRS.gov last year to register for an Economic Impact Payment.

Families who are eligible for advance Child Tax Credit payments will receive a second, personalized letter listing an estimate of their monthly payment, which begins July 15.

Most families do not need to take any action to get their payment. Normally, the IRS will calculate the payment amount based on the 2020 tax return. If that return is not available, either because it has not yet been filed or has not yet been processed, the IRS will instead determine the payment amount using the 2019 return.

Eligible families will begin receiving advance payments, either by direct deposit or check. The payment will be up to $300 per month for each qualifying child under age 6 and up to $250 per month for each qualifying child ages 6 to 17. The IRS will issue advance Child Tax Credit payments on July 15, August 13, September 15, October 15, November 15, and December 15.

Eligible Families Should File Tax Returns As Soon as Possible

The IRS urges individuals and families who haven't yet filed their 2020 return – or 2019 return – to do so as soon as possible so they can receive any advance payment they're eligible for. Doing so ensures that the IRS has their most current banking information, as well as key details about qualifying children. This includes people who don't normally file a tax return, such as families experiencing homelessness, the rural poor, and other underserved groups.

Throughout the summer, the IRS will be adding additional tools and online resources to help with the advance Child Tax Credit. One of these tools will enable families to unenroll from receiving these advance payments and receive the full amount of the credit when they file their 2021 return next year instead. In addition, later this year, individuals and families will also be able to go to IRS.gov and use a Child Tax Credit Update Portal to notify IRS of changes in their income, filing status, or number of qualifying children; update their direct deposit information, and make other changes to ensure they are receiving the right amount as quickly as possible.

New Online Tool Available

An online Non-filer Sign-up tool is scheduled to go live on the IRS.gov website on July 15 to help eligible families who don't normally file tax returns register for the monthly Advance Child Tax Credit payments. This tool provides a free and easy way for eligible people who don't make enough income to have an income tax return-filing obligation to provide the IRS the basic information needed—name, address, and Social Security numbers - to figure and issue their Advance Child Tax Credit payments. Often, these individuals and families receive little or no income, including those experiencing homelessness and other underserved groups.

People who did not file a tax return for 2019 or 2020 and who did not use the IRS Non-filers tool last year to register for Economic Impact Payments can also use this tool, which enables them to provide required information about themselves, their qualifying children age 17 and under, their other dependents, and their direct deposit bank information so the IRS can quickly and easily deposit the payments directly into their checking or savings account.

The tool is an update of last year's IRS Non-filers tool and is designed to help eligible individuals who don't normally file income tax returns register for the $1,400 third round of Economic Impact Payments (also known as stimulus checks) and claim the Recovery Rebate Credit for any amount of the first two rounds of Economic Impact Payments they may have missed.

Eligible families who already filed or plan to file 2019 or 2020 income tax returns should not use this tool. Once the IRS processes their 2019 or 2020 tax return, the information will be used to determine eligibility and issue advance payments. Families who want to claim other tax benefits, such as the Earned Income Tax Credit for low- and moderate-income families, should not use this tool and instead file a regular tax return.

Other useful new online tools, include:

  • An interactive Child Tax Credit eligibility tool to help families determine whether they qualify for the Advance Child Tax Credit payments.
  • Another tool, the Child Tax Credit Update Portal, will initially enable anyone who has been determined to be eligible for advance payments to unenroll or opt-out of the advance payment program. Later this year, it will allow people to check on the status of their payments, make updates to their information, and be available in Spanish. More details will be available soon about the online Child Tax Credit Update Portal.

Child Tax Credit Changes

The American Rescue Plan raised the maximum Child Tax Credit in 2021 to $3,600 for qualifying children under the age of 6 and to $3,000 per child for qualifying children between ages 6 and 17. Before 2021, the credit was worth up to $2,000 per eligible child, and 17 year-olds were not considered as qualifying children for the credit.

The new maximum credit is available to taxpayers with a modified adjusted gross income (AGI) of:

  • $75,000 or less for singles,
  • $112,500 or less for heads of household, and
  • $150,000 or less for married couples filing a joint return and qualified widows and widowers.

For most people, modified AGI is the amount shown on Line 11 of their 2020 Form 1040 or 1040-SR. Above these income thresholds, the extra amount above the original $2,000 credit — either $1,000 or $1,600 per child — is reduced by $50 for every extra $1,000 in modified AGI.

In addition, the entire credit is fully refundable for 2021. This means that eligible families can get it, even if they owe no federal income tax. Before this year, the refundable portion was limited to $1,400 per child.

Watch Out for Scams

As always, everyone should be on the lookout for scams related to both Advance Child Tax Credit payments and Economic Impact Payments. The only way to get either of these benefits is by either filing a tax return with the IRS or registering online through the Non-filer Sign-up tool, exclusively on IRS.gov. Any other option is a scam.

Be sure to watch out for scams using email, phone calls, or texts related to the payments. Remember: The IRS never sends unsolicited electronic communications asking anyone to open attachments or visit a non-governmental website.

Help is Just a Phone Call Away

Don't hesitate to contact the office for the most up-to-date information on the Child Tax Credit and advance payments.

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Small Business: Understanding Payroll Expenses

Federal law requires most employers to withhold federal taxes from their employees' wages. Whether you're a small business owner who is just starting or one who has been in business for a while - ready to hire an employee or two - here is what you should know about withholding, reporting, and paying employment taxes.

Federal Income Tax

Small businesses first need to figure out how much tax to withhold. Small business employers can better understand the process by starting with an employee's Form W-4 and the withholding tables described in Publication 15, Employer's Tax Guide. Please call if you need additional help understanding withholding tables.

Social Security and Medicare Taxes

Most employers also withhold social security and Medicare taxes from employees' wages and deposit them along with the employers' matching share. In 2013, employers became responsible for withholding the Additional Medicare Tax on wages that exceed a threshold amount. There is no employer match for the Additional Medicare Tax, and certain types of wages and compensation are not subject to withholding.

Federal Unemployment (FUTA) Tax

Employers report and pay FUTA tax separately from other taxes. Employees do not pay this tax or have it withheld from their pay. Businesses pay FUTA taxes from their own funds.

Depositing Employment Taxes.

Generally, employers pay employment taxes by making federal tax deposits through the Electronic Federal Tax Payment System (EFTPS). The amount of taxes withheld during a prior one-year period determines when to make the deposits. Publication 3151-A, The ABCs of FTDs: Resource Guide for Understanding Federal Tax Deposits and the IRS Tax Calendar for Businesses and Self-Employed are helpful tools.

Failure to make a timely deposit can mean being subject to a failure-to-deposit penalty of up to 15 percent. But the penalty can be waived if an employer has a history of filing required returns and making tax payments on time. Penalty relief is available, however. For more information, please call the office.

Reporting Employment Taxes

Generally, employers report wages and compensation paid to an employee by filing the required forms with the IRS. E-filing Forms 940, 941, 943, 944, and 945 is an easy, secure, and accurate way to file employment tax forms. Employers filing quarterly tax returns with an estimated total of $1,000 or less for the calendar year may now request to file Form 944, Employer's ANNUAL Federal Tax Return once a year instead. At the end of the year, the employer must provide employees with Form W-2, Wage and Tax Statement, to report wages, tips, and other compensation. Small businesses file Forms W-2 and Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration and, if required, state or local tax departments.

Save Time - File Payroll Taxes Electronically

Running a business with employees can be hard work. Business owners can make things a little easier on themselves by filing payroll and employment taxes electronically. Not only does it save time, but it is also secure and accurate, and the filer receives an email to confirm the IRS received the form within 24 hours.

While the easiest way to file payroll and employment taxes is to have your tax professional file the forms for you, some employers prefer to do it themselves. Employers submitting the forms themselves will need to purchase IRS-approved software. There may be a fee to file electronically. The software will require a signature in one of two ways. The first way is by scanning and attaching Form 8453-EMP, Employment Tax Declaration for an IRS e-file Return. The second is to apply for an online signature PIN. Taxpayers should allow at least 45 days to receive their PIN. The software will prompt the user on the steps needed to request the PIN..

Some of the forms employers can e-file include:

  • Form 940, Employer’s Annual Federal Unemployment Tax Return - Employers use this form to report annual Federal Unemployment Tax Act tax.
  • Form 941, Employer's Quarterly Federal Tax Return - Employers use this form to report income taxes, social security tax or Medicare tax withheld from employees' paychecks. They also use it to pay their portion of Social Security or Medicare tax.
  • Form 943, Employer's Annual Federal Tax Return for Agricultural Employees - Employers file this form if they paid wages to one or more farmworkers and the wages were subject to social security and Medicare taxes or federal income tax withholding.
  • Form 944, Employer's Annual Federal Tax Return - Small employers use this form. These are employers whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less. These employers use this form to file and pay these taxes only once a year instead of every quarter.
  • Form 945, Annual Return of Withheld Federal Income Tax - Employers use this form to report federal income tax withheld from nonpayroll payments.

Questions about payroll taxes?

If you have any questions about payroll taxes don't hesitate to contact the office.

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Employee Relocation: What Happens to Your Home?

Employees and small business owners often have questions about what to do with an employee's home - and what the tax consequences might be - when they move to a new job location. Here are some answers:

Employees

Most employers want to protect the employee from being relocated against financial loss on a "forced" sale of their home. Here are the most common ways to do that, and the tax consequences to the employee:

The employer reimburses the employee's financial loss. Here, the employer has the home appraised and agrees to pay the employee the difference between the appraised fair market value and any lesser amount the employee gets on the sale. Such reimbursement would cover the employee's costs of the sale.

Financial loss as described here is not the same as a tax loss. The financial loss is the home's value less what the employee collects under "forced sale" conditions. In the current real estate market, the value is not always clearly determined. The relocating employee might think the home is worth more, based on earlier appraisals or comparative sales. A tax loss is the property's tax basis (cost plus capital investments) less what's collected on the sale.

If the employee has a gain on the sale (the amount collected on the sale exceeds the basis), the gain can be tax-exempt up to $250,000 ($500,000 on certain husband-wife sales). Tax-loss on the sale of one's residence, however, is not deductible.

The employer's reimbursement of the employee's financial loss is taxable pay to the employee. Employers who want to shelter the employee from any tax burden on what is usually an employer-instigated relocation may "gross-up" the reimbursement to cover the tax. But gross-up can be costly. For example, a grossed-up income tax reimbursement for a $10,000 loss would be $15,385 for an employee in the 35% bracket - more where Social Security taxes or state taxes are also grossed-up.

Employer buys the home. Few employers directly buy and sell employees' homes. But many do this indirectly, effectively becoming the homes' owners, through relocation firms acting as the employers' agents. Known as a Guaranteed Home Sale (formerly known as a Guaranteed Buy-Out or GBO), there is no tax on the employee when using either of these two options:

Option 1. The relocation firm as employer's agent buys the home for its appraised fair market value and later resells it. The firm collects a fee from the employer, covering sales costs and any financial loss to the firm on resale. The IRS now says that this fee is not taxable to the employee. Also, the employee's gain on the sale to the relocation firm qualifies for the tax exemption under the limits described above ($250,000 or $500,000).

Option 2. The relocation firm offers to buy the home for its appraised value, but the employee can choose to pursue a higher price through a broker they choose from a list provided by the relocation firm. If a higher offer is made, the relocation firm pays that price to the employee (whether or not the home is then sold to that bidder). Here again, the employee is not taxed on the firm's fee, and the gain is tax-exempt under the above limits.

Either option works for the employee, letting him or her realize full value on the sale of the home (with possibly greater value through Option 2), without an element of taxable pay.

If the deal is structured so that the relocation firm facilitates a sale from the employee to a third-party buyer (rather than to the relocation firm), the employer's payment of the relocation firm's fee is taxable to the employee.

The Employer's Side

Reimbursing the employee's loss. This is fully deductible as a business expense, as would be any additional amount paid as a gross-up.

It's fully deductible, but it may be more costly, before and after taxes, than buying the home for resale through the relocation firm.

Paying the relocation fee only, without buying the home, as in the "Caution" above, is also fully deductible, as would be any gross-up amount on that fee.

Buying the home. The change in the IRS rule was good news for employees, but it gave nothing to employers whose tax treatment wasn't covered. The official IRS position is that employer costs (other than carrying costs such as mortgage interest, maintenance, and fees to a relocation management company) are deductible only as capital losses, which, for corporate employers, are deductible only against capital gains. Taxpayer advocates tend to argue that employer costs here are fully deductible ordinary costs of doing business.

Questions about Relocating?

If you've been offered a job that requires relocating to another state and wondering how it might affect your tax situation, don't hesitate to call.

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Settling Tax Debt With an IRS Offer in Compromise

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer's tax liabilities for less than the full amount owed. That's the good news. The bad news is that not everyone can use this option to settle tax debt; the IRS rejected nearly 60 percent of taxpayer-requested offers in compromise. If you owe money to the IRS and wonder if an IRS offer in compromise is the answer, here's what you need to know.

Who is Eligible?

If you can't pay your full tax liability or doing so creates a financial hardship, an offer in compromise may be a legitimate option. However, it is not for everyone, and taxpayers should explore all other payment options before submitting an offer in compromise to the IRS. Taxpayers who can fully pay the liabilities through an installment agreement or other means generally won't qualify for an OIC.

To qualify for an OIC, the taxpayer must have:

  • Filed all tax returns.
  • Made all required estimated tax payments for the current year.
  • Made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

IRS Acceptance Criteria

Whether your offer in compromise is accepted depends on several factors; however, typically, an offer in compromise is accepted when the amount offered represents the most the IRS can expect to collect within a reasonable time frame - referred to as the reasonable collection potential (RCP). In most cases, the IRS won't accept an OIC unless the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP), which is how the IRS measures the taxpayer's ability to pay.

The RCP is defined as the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income minus certain amounts allowed for basic living expenses.

The IRS may accept an OIC based on one of the following criteria:

Doubt as to liability. An OIC meets this criterion only when there's a genuine dispute about the existence or amount of the correct tax debt under the law.

Doubt as to collectibility. This refers to whether there is doubt that the amount owed is fully collectible such as when the taxpayer's assets and income are less than the full amount of the tax liability.

Effective tax administration. This applies to cases where there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship - or would be unfair and inequitable because of exceptional circumstances.

Application and Fees

When requesting an OIC from the IRS, use Form 656, Offer in Compromise, and also submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. If you are applying as a business, use Form 433-B (OIC), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must file additional forms as well.

A nonrefundable application fee, as well as initial payment (also nonrefundable), is due when submitting an OIC. If the OIC is based on doubt as to liability, no application fee is required, however.

If the taxpayer is an individual (not a corporation, partnership, or other entity) who meets Low-Income Certification guidelines, they do not have to submit an application fee or initial payment. They will not need to make monthly installments during the evaluation of an offer in compromise.

The initial payment is based on which payment option you choose for your offer in compromise:

  • Lump Sum Cash. Submit an initial payment of 20 percent of the total offer amount with your application. If your offer is accepted, you will receive written confirmation. Any remaining balance due on the offer is paid in five or fewer payments.
  • Periodic Payment. Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.

If the IRS rejects your OIC, you will be notified by mail. The letter will explain why the IRS rejected the offer and provide detailed instructions on appealing the decision. An appeal must be made within 30 days from the date of the letter.

Questions?

If you have any questions about the IRS Offer in Compromise program, don't hesitate to contact the office for more information.

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What Is the Net Investment Income Tax?

While the Net Investment Income Tax (NIIT) tends to affect wealthier individuals most often, in certain circumstances, it can also affect moderate-income taxpayers whose income increases significantly in a given tax year. Here's what you need to know.

What is the Net Investment Income Tax?

The Net Investment Income Tax (NIIT) is a 3.8 percent tax on certain net investment income of individuals, estates, and trusts with income above statutory threshold amounts referred to as modified adjusted gross income or MAGI.

What is Included in Net Investment Income?

In general, investment income includes, but is not limited to interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and passive business activities such as rental income or income derived from royalties.

What is Not Included in Net Investment Income?

The following types of income are not included:

  • Wages
  • Unemployment compensation
  • Operating income from a non-passive business
  • Social Security Benefits
  • Alimony
  • Tax-exempt interest
  • Self-employment income
  • Alaska
  • Permanent Fund Dividends
  • Distributions from certain Qualified Plans

Individuals

Individuals with MAGI of $250,000 (married filing jointly) or $200,000 for single filers are taxed at a flat rate of 3.8 percent on investment income such as dividends, taxable interest, rents, royalties, certain income from trading commodities, taxable income from investment annuities, REITs and master limited partnerships, and long and short-term capital gains. The NIIT is a flat rate tax paid in addition to other taxes owed and threshold amounts are not indexed for inflation.

Non-resident aliens are not subject to the NIIT; however, if a non-resident alien is married to a US citizen and is planning to file as a resident alien as married filing jointly, there are special rules. Please call if you have any questions about this.

Investment income is generally not subject to withholding, so NIIT is going to affect your tax liability for the 2021 tax year. In addition, even lower-income taxpayers not meeting the threshold amounts may be subject to NIIT if they receive a windfall such as a one-time sale of assets that bumps their MAGI up high enough to be subject to the NIIT.

Strategies to Minimize NIIT

Tax planning is crucial. For example, if you are anticipating a windfall (this tax year or next), there are several strategies that you could use to minimize your MAGI and reduce or possibly eliminate tax liability when you file your tax return. These include but are not limited to:

  • Rental Real Estate (depreciation deductions)
  • Installment sales (including figuring out the best timing for sale)
  • Roth conversions
  • Charitable donations
  • Tax-deferred annuities
  • Municipal bonds

Sale of a Home

The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes ($250,000 for single filers and $500,000 for a married couple) on the sale of a principal residence from gross income for regular income tax purposes. In other words, only the taxable part of any gain on the sale of a home has the potential to be subject to NIIT, providing the taxpayer is over the MAGI threshold amount.

Estates and Trusts Affected

Estates and Trusts are subject to NIIT if they have undistributed net investment income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year. In 2021, this threshold amount is $13,050.

Special rules apply for certain unique types of trusts such a Charitable Remainder Trusts and Electing Small Business Trusts. Some trusts, including "Grantor Trusts" and Real Estate Investment Trusts (REIT), are not subject to the NIIT.

Non-qualified dividends generated by investments in a REIT and taxed at ordinary tax rates may be subject to the Net Investment Income Tax.

Reporting and Paying the Net Investment Income Tax

Individual taxpayers should report (and pay) the tax on Form 1040. Estates and Trusts report (and pay) the tax on Form 1041. Please call if you need assistance or have any questions abut reporting and paying the NIIT.

For tax years 2018 and beyond, individuals, estates, and trusts that expect to pay estimated taxes should adjust their income tax withholding or estimated payments to account for the tax increase and avoid underpayment penalties. The NIIT is not withheld from an employed individual's wages; however, it is possible to request that additional income tax be withheld.

Wondering how the Net Investment Income Tax could affect your tax situation? Give the office a call today and find out.

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10 Tips to Help You Start Saving for Retirement

It's never too late to start, but the sooner you begin saving, the more time your money has to grow. Gains each year build on the prior year's gains - that's the power of compounding - and the best way to accumulate wealth. These ten tips will help you get started:

  1. Set Realistic Goals. Project your retirement expenses based on your needs, not rules of thumb. Be honest about how you want to live in retirement and how much it will cost. Then calculate how much you must save to supplement Social Security and other sources of retirement income.

  2. A 401(k) Is One Of The Easiest And Best Ways To Save For Retirement. Contributing money to a 401(k) gives you an immediate tax deduction, tax-deferred growth on your savings, and - usually - a matching contribution from your company.

  3. An IRA Can Also Give Your Savings A Tax-Advantaged Boost. Like a 401(k), IRAs offer huge tax breaks. There are two types of IRAs. The first is a traditional IRA offers tax-deferred growth, meaning you pay taxes on your investment gains only when you make withdrawals. If you qualify, your contributions may be deductible. The second is a Roth IRA. By contrast, it doesn't allow for deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals, but contributions are not deductible.

  4. Focus On Your Asset Allocation More Than On Individual Picks. How you divide your portfolio between stocks and bonds will have a big impact on your long-term returns.

  5. Stocks Are Best For Long-Term Growth. Stocks have the best chance of achieving high returns over long periods. A healthy dose will help ensure that your savings grows faster than inflation, increasing the purchasing power of your nest egg.

  6. Don't Move Too Heavily Into Bonds, Even In Retirement. Many retirees stash most of their portfolio in bonds for the income. Unfortunately, over 10 to 15 years, inflation can easily erode the purchasing power of bonds' interest payments.

  7. Making Tax-Efficient Withdrawals Can Stretch The Life Of Your Nest Egg. Once you're retired, your assets can last several more years if you draw on money from taxable accounts first and let tax-advantaged accounts compound for as long as possible.

  8. Working Part-Time In Retirement Can Help In More Ways Than One. Working keeps you socially engaged and reduces the amount of your nest egg you must withdraw on an annual basis once you retire.

  9. Other Creative Ways To Get More Mileage Out Of Retirement Assets.
    You might consider relocating to an area with lower living expenses or transforming the equity in your home into income by taking out a reverse mortgage.

  10. Consult a Tax Professional. A tax and accounting professional will evaluate your financial situation (i.e., income and expenses), evaluate your tax situation, and help you figure out how much you can put towards your retirement savings.

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What to Know About Backup Withholding

Backup withholding is a federal tax on income that otherwise typically doesn't require tax withholding, such as 1099 and W2-G income. Taxpayers who receive this type of income may have backup withholding deducted from their payments. Here is what you should know about backup withholding:

1. Backup withholding is required on certain nonpayroll amounts when certain conditions apply.

The payer (employer) making such payments to the payee (individual taxpayer) doesn't generally withhold taxes from certain payments. As such, the payees report and pay taxes on this income when they file their federal tax returns. There are, however, certain situations when the payer is required to withhold a percentage of tax to make sure the IRS receives the tax due on this income. The payer's requirement to withhold taxes from payments not otherwise subject to withholding is known as backup withholding. Backup withholding can apply to most kinds of payments reported on Forms 1099 and W-2G.

2. Backup withholding rate is a percentage of a payment.

The current backup withholding tax rate is 24%.

3. Payments subject to backup withholding include:

  • Interest payments
  • Dividends
  • Payment card and third-party network transactions
  • Patronage dividends, but only if at least half the payment is in money
  • Rents, profits or other gains
  • Commissions, fees or other payments for work done as an independent contractor
  • Payments by brokers
  • Barter exchanges
  • Payments by fishing boat operators, but only the part that is paid in actual money and that represents a share of the proceeds of the catch
  • Royalty payments
  • Gambling winnings, if not subject to gambling withholding
  • Taxable grants
  • Agriculture payments

Examples of when the payer must deduct backup withholding:

If a payee has not provided the payer a Taxpayer Identification Number (TIN):

  • A TIN specifically identifies the payee.
  • TINs include Social Security numbers, Employer Identification Numbers, Individual Taxpayer Identification Numbers and Adoption Taxpayer Identification Numbers.

A TIN is one of the following numbers: Social Security, employer identification, Individual taxpayer identification, or adoption taxpayer identification. If the IRS notified the payer (employer) that the payee (individual taxpayer) provided a TIN that does not match their name in IRS records, the payer does not secure the correct TIN from the payee. Payees should make sure that the payer has their correct name and TIN to avoid backup withholding.

Questions about backup withholding? Don't hesitate to contact the office for assistance.

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Six Steps to Protect Against Taxpayer ID Theft

Tax-related identity theft occurs when someone uses a taxpayer's stolen personal information, such as a Social Security number, to file a tax return claiming a false refund. Thieves are actively working to steal taxpayer information and identities, and everyone should do everything they can to prevent identity theft.

Here are six ways to help taxpayers protect themselves against identity theft:

1. Always use security software. This software should have firewall and anti-virus protections.

2. Use strong, unique passwords. They should also consider using a password manager.

3. Learn to recognize and avoid phishing emails, threatening calls, and texts from thieves. These scammers pose as legitimate organizations such as banks, credit card companies, and even the IRS.

4. Don't click on links in unsolicited emails or messages from unknown senders. People shouldn't click on links or download attachments from emails that seem suspicious, even if they appear to be from senders they know.

5. Protect personal information and that of any dependents. For example, people shouldn't routinely carry around their Social Security cards. They should also make sure tax records are secure.

6. Get an Identity Protection PIN. The Identity Protection PIN is a six-digit code known only to the taxpayer and the IRS that helps prevent identity thieves from filing fraudulent tax returns using a taxpayer's personally identifiable information.

Please call the office if you have any concerns about taxpayer ID theft.

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Tips for Taxpayers With Hobby Income

Hobby activities are a source of income for many taxpayers. For instance, during the pandemic many people may have started making handmade items and selling them for a profit. As a reminder, this income must be reported on tax returns.

What is considered a hobby?

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. This differs from those that operate a business with the intention of making a profit. When determining whether their activity is a business or hobby, taxpayers must consider the following nine factors:

  • Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
  • Whether the time and effort the taxpayer puts into the activity shows they intend to make it profitable.
  • Whether they depend on income from the activity for their livelihood.
  • Whether any losses are due to circumstances beyond the taxpayer's control or are normal for the startup phase of their type of business.
  • Whether they change methods of operation to improve profitability.
  • Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
  • Whether the taxpayer was successful in making a profit in similar activities in the past.
  • Whether the activity makes a profit in some years and how much profit it makes.
  • Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.

Reporting hobby income

All factors, facts and circumstances with respect to the activity must be considered. And, no one factor is more important than another. If a taxpayer receives income from an activity that is carried on with no intention of making a profit, the income they receive must be reported on Schedule 1, Form 1040, line 8.

For questions about hobby income, please contact the office.

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It's Hurricane Season: Safeguarding Tax Records

With hurricane season in full swing, now is a good time to create or review emergency preparedness plans for surviving natural disasters, which include more than just hurricanes. For example, in the last year, the Federal Emergency Management Agency (FEMA) declared major disasters following hurricanes, tropical storms, tornadoes, severe storms, flooding, wildfires, and an earthquake. Individuals, organizations, and businesses should take time now to make or update their emergency plans.

Here are five steps taxpayers can take to safeguard their tax records before disaster strikes:

1. Secure key documents and make copies. Taxpayers should place original documents such as tax returns, birth certificates, deeds, titles, and insurance policies inside waterproof containers in a secure space. Duplicates of these documents should be kept with a trusted person outside the area of the taxpayer. Scanning them for backup storage on electronic media such as a flash drive is another option that provides security and portability.

2. Document valuables and equipment. Current photos or videos of a home or business's contents can help support claims for insurance or tax benefits after a disaster. All property, especially expensive and high-value items, should be recorded. The IRS disaster-loss workbooks in Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook, can help individuals and businesses compile lists of belongings or business equipment.

3. Employers should check fiduciary bonds. Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider. As such, employers should carefully choose a payroll service provider.

4. Rebuilding documents. Reconstructing records after a disaster may be required for tax purposes, getting federal assistance, or insurance reimbursement. If you have lost some or all your records during a disaster, please call the office immediately for assistance.

After FEMA issues a disaster declaration, the IRS may postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief.

5. Get assistance from a tax professional. Taxpayers who do not reside in a covered disaster area but suffered impact from a disaster may qualify for disaster tax relief and other available options. Please call if you have any questions or need more information about safeguarding your tax records.

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Tax Due Dates for July 2021

July 12

Employees Who Work for Tips - If you received $20 or more in tips during June, report them to your employer. You can use Form 4070.

July 15

Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in June.

Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in June.


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What Are the Benefits of Using a QuickBooks ProAdvisor?

QuickBooks is a versatile accounting technology that is revolutionizing the accounting and bookkeeping industry. Using this software solution and its intuitive functionalities can help you get more organized internally and run your business confidently.

Even if you know a little about accounting and can manage your software, there will likely be situations you haven’t encountered before. QuickBooks ProAdvisors are specialized accountants who hold certifications in software mastery and can help you get around any obstacle successfully. By working with a ProAdvisor, you can learn more about your company and make intelligent decisions for the future. The following are some excellent benefits of using a QuickBooks ProAdvisor.

Expert Setup & Troubleshooting

A QuickBooks Certified ProAdvisor can help you set up your software and get you up and running in no time. These experts have advanced knowledge of how QuickBooks works and take lessons and courses that equip them with all the tricks and nuances of the software. They also know how to troubleshoot everything, including fixing out-of-balance balance sheets and other technical issues with bank feeds. With their expert training of your in-house staff, you can boost the efficiency and productivity in each department of your business.

Access to Experts

Having the right skill to use QuickBooks isn’t the entire picture when it comes to accounting. You need access to a professional with relevant knowledge in your specific business and industry. QuickBooks ProAdvisors often have particular expertise and experience to help your company address its unique goals and challenges.

Your Software Can Be Customized

When your accounting software is designed specifically for your business needs, you can achieve smoother and more productive results. A QuickBooks ProAdvisor can customize your software, and they are a valuable source of advice. They can provide tax estimates, rectify mistakes, process payments, and remove the hassle out of many other accounting operations. You will always have a QuickBooks version that caters to your enterprise and helps you grow.

Frees Up Your Time and Resources

There is no doubt that hiring a QuickBooks ProAdvisor frees up lots of time and resources for your organization. As the experts tackle your challenging accounting problems, your teams can focus on your core business operations and increase productivity.

In addition, your work will become more efficient and effective when the software is fine-tuned, and your team knows how to use it for maximum benefit. Using QuickBooks at its highest potential, you can turn over work that would ordinarily involve multiple professionals.

Professional Troubleshooter

QuickBooks ProAdvisors have access to top-tier customer service and support, so they can help troubleshoot and fix any issue that could crop up. They have access to an online forum to talk to other ProAdvisors and find the correct solution to the problem. Also, QuickBooks ProAdvisors can pass along their special annual discounts to you.

Train & Coach Your Team

QuickBooks ProAdvisors offer expert training on using the software effectively and taking advantage of all the impressive functionalities. Studies show that about 50% of software features don’t get used. As such, your business is most likely leaving some money and tools on the table when using QuickBooks. Hiring a ProAdvisor to train your in-house staff allows you to unlock more details and capabilities in using your bookkeeping software.

Get the Most Out of QuickBooks

Consulting an advanced Certified QuickBooks ProAdvisor can streamline your accounting and bookkeeping in many ways. Regardless of the size of your business, leveraging expert knowledge of QuickBooks will give you a significant return on investment and help grow your business by leaps and bounds. Fortunately, many CPAs and other financial professionals often have ProAdvisors on staff who can provide additional advice and insights on running a successful venture.

The post What Are the Benefits of Using a QuickBooks ProAdvisor? first appeared on www.financialhotspot.com. Go to top

Simple Steps to Organize Your Finances

When you are busy with career, family, or academic activities, it may feel a bit overwhelming to keep track of your income, savings, and expenses. However, organizing your finances is achievable when you have a plan. As long as you have a budget and your bills and paperwork are in order, you’re good to go.

Are you wondering how to go about it? Check out these simple steps to organizing and improving your financial future.

Create a Budget That Works for You

Budgeting is one of the most critical skills to master. Start by writing down your monthly expenses, including debts and all your sources of income. Minimize your costs to ensure that all your payment obligations are met. Make sure your monthly spending does not exceed your monthly income.

Review your budget whenever your circumstances change. As you make the adjustments, ensure that you operate within the set parameters. With a reasonable budget, you can quickly tell where every coin goes.

Set Up a System To Organize Paperwork

Mishandling financial statements and paperwork make it challenging to stay organized. The rule of thumb is to go through all your financial paperwork before creating a system. It will be easier to notice a problem that needs immediate attention. So how should you organize your paperwork?

The documents that you need to store include:

  • Bank statements
  • Tax documents
  • Bills
  • Invoices
  • Expense receipts

Arrange these documents by account or by month. Choose either an expanding file or hanging files. Remember to organize your documents in chronological order for easier retrieval when needed. You can also use a computerized system to arrange your paperwork for easier data management.

Schedule Paying Bills and Paydays

Scheduling bill payments ensures that you don’t forget to pay them on time. Jot down all your bills and arrange them by due dates. Pick two days per month, for instance, the 2nd and 16th, when you make all payments. If your monthly cash needed for bills is 100 dollars, pay 50 dollars on the 2nd and the remaining 50 dollars on the 16th.

Payday schedules determine how often you pay your employees and contractors. The frequency is dependent on the size of your business or state requirements. Start by identifying your preferred pay periods; it could be biweekly or monthly. Keep it simple by naming your bill-paying schedule according to the payment frequency of your income.

Eliminate Debt

Debt is a financial strain that can disorganize your finances if not cleared on time. Check how much you owe your lenders, the applicable interest rate, and the period needed to clear the debt. Then use a combination of two or more of the following strategies to eliminate the debt:

  • Avoid accumulating more debt
  • Prioritize debt payments on loans with a reducing interest rate
  • Request your creditors to lower your interest rate
  • Consider using the debt avalanche or snowball method, depending on your income and loan terms
  • Increase your income sources and prioritize the extra cash into paying the debt

Save as Much as You Can

Savings come in handy when you experience financial emergencies. Having some money to fall back on during this period will prevent you from borrowing and increasing debt. The amount you save is highly dependent on your income and expenses. You can start small and increase the amount with time or commit a percentage of your income to savings.

Ask an Accountant or CPA for Help

Organizing your finances boosts your confidence and ensures that you are on the right financial track. However, with so many responsibilities, it can be a challenge not to let something slip. It’s never too late to look for a reliable CPA, accountant, or other financial professionals to help you organize and strategize your finances.

The post Simple Steps to Organize Your Finances first appeared on www.financialhotspot.com. Go to top

Questions to Ask Your Business Tax Preparer

Tax season can be a confusing time for many small business owners. It’s best to consult an experienced tax accountant to avoid tax debts or the possibility of missing any available tax breaks and deductions. They can help with detailed tasks and free up time to do what you do best – grow your business. To find the appropriate tax preparer, you need to ask the right kind of questions. Here are the top questions to ask your business tax preparer.

What Records Do I Need to Keep?

You must keep track of all business records to file taxes correctly, monitor profitability, and acquire funding. Moreover, you should always have your financial records handy in case of an IRS audit. Your tax preparer can tell you which financial records are needed for your specific industry, but some standard documents to keep include:

  • Business tax returns
  • Financial statements
  • Cash flow statements
  • Statement of retained earnings
  • Income statements
  • Balance sheets
  • Credit card statements
  • Check registers
  • General ledger
  • Business agreements (such as operating agreement)
  • Business licenses and permits
  • Bank statements
  • Receipts
  • Contracts
  • Insurance documents
  • Payroll records (payroll tax forms, pay stubs)

To protect your recordkeeping process, consider keeping both paper and digital copies.

Which Business Expenses Can I Deduct?

You can deduct some business expenses from your tax return. Depending on your business and entity setup, here are a few tax deductions you may be eligible for:

  • Business travel
  • Employee expenses
  • Home office
  • Business use of car
  • Charitable contributions

When claiming your small business tax deductions, tread cautiously since each type of deduction has a specific set of rules to be followed. Your tax preparer will help you figure out which ones to take advantage of and how you can claim them.

Do I Have the Right Entity Structure?

Choosing the correct business structure is usually the first step you make when starting a new business. There are pros and cons to every type of entity structure. It is essential to discuss this with your accountant so they can point you in the right direction. Here are the common types of business structures:

  • Sole proprietorship: Owned and operated by one person
  • Partnership: Operated by two or more individuals
  • Corporation or C Corp: Has separate legal entity from the owners
  • S corporation or S Corp: Profits and losses are passed directly to the owner’s income without being subject to corporate tax rates
  • Limited liability Company (LLC): Includes aspects of a partnership and corporation

Different entity structures have different sets of rules when it comes to legal liability and taxes. An experienced accountant or CPA can discuss the tax and legal requirements to help you choose the proper entity structure that best suits your business.

How Can I Manage Cash Flow Better?

To run a successful business, you must maintain a healthy cash flow. Working with a professional accountant can ensure that your cash flow doesn’t head south. They can help you manage your cash flow, identify and analyze problems, and craft a plan to improve it. Additionally, your accountant can help you establish a cash flow projection plan to ensure future growth.

Will My Side Job Affect My Taxes?

Anytime you improve your income, there is a potential of increasing your taxes. Ensure you’re withholding the correct amount of money to cover your taxes, especially if it’s your first time getting a second job or side gig. If you are self-employed, always keep receipts of all your business expenses and a journal of the miles you drive for your job.

If you work part-time as a freelancer, for cash, or as an independent contractor, you are considered self-employed. Therefore, you must include the income on the Schedule C, Sole Proprietor, in your tax return.

More Questions? Ask a Professional

Consult with your accountant to understand which taxes apply to you and your enterprise. They can also answer any other questions you might have and discuss the process of preparing and remitting your taxes, including when they are due and what forms to use. Revisit these questions periodically to ensure your enterprise stays up-to-date with any new tax laws and regulations.

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At Meyer & Associates, A Certified Public Accountancy, we've been serving the accounting needs of Novato, CA and the surrounding areas for years. If you need help managing any aspect of your home or business's finances, we want to hear from you.

Please fill out this form and let us know how we can be of service. We will happily offer you a FREE initial consultation to determine how we can best serve you.

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Meyer & Associates, A Certified Public Accountancy

10 Commercial Blvd. Ste 104,
Novato, CA 94949
T: (415)382-9188
F: (415)382-9388
E: dmeyer@meyeraccountancy.com

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