INDIVIDUAL

1) WHAT ARE THE TAX IMPLICATIONS OF MARRIAGE?

2) SHOULD I PAY OFF MY MORTGAGE?

3)  IF I SELL MY HOME AND USE THE MONEY I RECEIVE TO PAY OFF THE MORTGAGE, DO I HAVE TO PAY TAXES ON THAT MONEY?

4) IS INTEREST ON A HOME EQUITY LINE OF CREDIT DEDUCTIBLE AS A SECOND MORTGAGE?

5) IS THE MORTGAGE INTEREST AND PROPERTY TAX ON A SECOND RESIDENCE DEDUCTIBLE?

6) IS THE LOSS ON THE SALE OF MY HOME DEDUCIBLE?

7) WHO CAN I CLAIM AS A DEPENDENT?

8) IS THERE AN AGE LIMIT ON CLAIMING MY CHILD AS A DEPENDENT?

9) WHY SHOULD I PARTICIPATE IN MY EMPLOYER’S CAFETERIA PLAN OR FSA?

10) HOW MUCH CAN I CONTRIBUTE TO A RETIREMENT PLAN IN 2015?

11) WHAT IS THE STANDARD DEDUCTION FOR 2015?

12) WHAT TAX BENEFITS ARE AVAILABLE FOR COLLEGE STUDENTS?

13) I DONATED A USED CAR TO A QUALIFIED CHARITY THAT THE CHARITY SOLD IMMEDIATELY AFTER I DONATED IT. I ITEMIZE MY DEDUCTIONS AND WOULD LIKE TO TAKE A CHARITABLE DEDUCTION FOR THE DONATION. DO I NEED TO ATTACH ANY SPECIAL FORMS TO MY RETURN? WHAT RECORDS TO I NEED TO KEEP?

14) WHAT IS THE BEST WAY TO GIVE TO CHARITY?

15) DO YOU CONTRIBUTE TO CHARITY?

16) I RETIRED LAST YEAR AND STARTED RECEIVING SOCIAL SECURITY PAYMENTS. DO I HAVE TO PAY TAXES ON MY SOCIAL SECURITY BENEFITS?

17) MY FATHER IS IN A NURSING HOME AND I PAY FOR THE ENTIRE COST. CAN I DEDUCT THESE EXPENSES ON MY TAX RETURN?

18) WHAT TYPE OF RECORDS DO I NEED TO KEEP?

19) HOW LONG SHOULD I KEEP THESE RECORDS?

20) ARE THERE ANY NON-TAX RECORDS I SHOULD KEEP?

21) SHOULD I KEEP MY OLD TAX RETURNS? IF SO, FOR HOW LONG?

SMALL BUSINESS

22) WHAT SPECIAL DEDUCTIONS CAN I GET IF I’M SELF-EMPLOYED?

23) WHICH KINDS OF BUSINESS ORGANIZATION OR BUSINESS ENTITY WILL LIMIT MY LIABILITY TO BUSINESS CREDITORS?

24) WHICH TYPES OF BUSINESS ENTITY ARE BEST FOR TAX PURPOSES?

25) WHAT KIND OF RECORDS DO I NEED TO KEEP IN MY BUSINESS?

26) WHAT STEPS CAN I TAKE TO IMPROVE MY BUSINESS CASH FLOW?

27) HOW DO YOU DETERMINE IF A WORKER IS AN EMPLOYEE OR AN INDEPENDENT CONTRACTOR?

28) WE HIRED A NANNY TO LOOK AFTER OUR BABY WHILE WE WORK. HOW DO WE PAY HER SOCIAL SECURITY TAXES AND PROPERLY REPORT HER INCOME?

29) I AM A SOLE PROPIETOR AND PAY PERSONAL EXPENSES OUT OF MY BUSINESS BANK ACCOUNT. SHOULD I INCLUDE THE MONEY USED FOR PERSONAL EXPENSES AS A PART OF MY BUSINESS INCOME? CAN I WRITE THESE EXPENSES OFF?

30) FOR BUSINESS TRAVEL, ARE THERE LIMITS ON THE AMOUNTS DEDUCTIBLE FOR MEALS?

31) AS AN EMPLOYER, DO I HAVE ANY LIABILITY FOR SOCIAL SECURITY AND MEDICARE TAXES IF MY EMPLOYEES RECEIVE TIPS BUT DON’T REPORT THEM TO ME?

 

INDIVIDUAL:

 

1) WHAT ARE THE TAX IMPLICATIONS OF MARRIAGE?
Once you are married you are entitled to file a joint income tax return. While this simplifies the filing process, you may find your tax bill either higher or lower than if each of you had remained single. Where it's higher it's because when you file jointly more of your income is taxed in the higher tax brackets. This is frequently referred to as the "marriage tax penalty." Tax law changes in the form of marriage penalty relief were made permanent by the American Taxpayer Relief

Act of 2012, but don't eliminate the penalty for taxpayers in the higher brackets.
You cannot avoid the marriage penalty by filing separate returns after you're married. In fact filing as "married filing separately" can actually increase your taxes. Consult your tax advisor if you have questions about the best filing status for your situation.

Note: Under a joint IRS and U.S. Department of the Treasury ruling issued in 2013, same-sex couples, legally married in jurisdictions that recognize their marriages, are treated as married for federal tax purposes, including income and gift and estate taxes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

In addition, the ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country is covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

 

2) SHOULD I PAY OFF MY MORTGAGE?
The rule of thumb is to pay off your mortgage if there aren't any better uses for your money. As far as loans go, mortgages have moderate interest rates, and interest payments are tax deductible. However, any investment that yields substantially more than the interest rate on your mortgage (such as tax-deferred retirement plans) is probably a good alternative. Paying off credit card balances is also a better use of your money than paying off a mortgage, but if you know you will just spend the money otherwise, paying off your mortgage is a good idea.

Before you make any extra payments, make sure that your loan has no prepayment penalty. If so, then you can make an extra payment once a year, pay every two weeks instead of every month, or just send in whatever you can afford above your normal monthly mortgage payment. The larger the extra payment and the sooner you make it, the faster your mortgage will be paid off--and the more you will save in interest. Contact your lender to make sure your payments will be credited toward principal rather than future payments. There is no need to pay a third party to arrange extra mortgage payments.

 

3) IF I SELL MY HOME AND USE THE MONEY I RECEIVE TO PAY OFF THE MORTGAGE, DO I HAVE TO PAY TAXES ON THAT MONEY?
The amount of the proceeds from the sale of your home that you use to pay off the mortgage is not a factor in figuring your taxable amount for the sale. Instead, the amount you realize on the sale of your home and the adjusted basis of your home are important in determining whether you are subject to tax on the sale.

If the amount you realize, which generally includes any cash or other property you receive plus any of your indebtedness the buyer assumes or is otherwise paid off as part of the sale, less your selling expenses, is more than your adjusted basis in your home, you have a gain on the sale.

Your adjusted basis is generally your cost in acquiring your home plus the cost of any capital improvements you made, less casualty loss amounts and other decreases.  If you financed the purchase of the house by obtaining a mortgage, include the mortgage proceeds in determining your cost basis in your residence.  

You may be able to exclude from income all or a portion of the gain on your home sale – up to $500,000 for Married Filing Joint couples, and $250,000 for a single person.  If you can exclude all of the gain, you do not need to report the sale on your tax return, unless you received a Form 1099-S, Proceeds From Real Estate Transactions.

 

4) IS INTEREST ON A HOME EQUITY LINE OF CREDIT DEDUCTIBLE AS A SECOND MORTGAGE?
You may deduct home equity debt interest as an itemized deduction if all the following conditions apply:
    •    You pay the interest in the tax year
    •    The debt is secured with your home
    •    The home equity debt is limited to the fair market value of the home reduced by home acquisition debt, up to a total of $100,000 ($50,000 if filing as married filing separately).
    •    

 

5) IS THE MORTGAGE INTEREST AND PROPERTY TAX ON A SECOND RESIDENCE DEDUCTIBLE?
The mortgage interest on a second home, which you do not rent out during the taxable year, is generally deductible if the interest satisfies the same requirements as interest deductible on a primary residence. If you rent out the residence, you must use it for more than 14 days or more than 10% of the number of days you rent it out, whichever is longer.

    •    The combined limitation for mortgage interest on your primary and secondary residence for a married couple filing a joint return, or an unmarried taxpayer is $1,000,000 for acquisition indebtedness and $100,000 for home equity indebtedness.
    •    Real estate taxes paid on your primary and second residence are generally deductible.
    •    Deductible real estate taxes include any state, local, or foreign taxes based on the value of the real property levied for the general public welfare.
    •    Deductible real estate taxes do not include taxes charged for local benefits and improvements that increase the value of the property, such as assessments for sidewalks, water mains, sewer lines, parking lots, and similar improvements.

 

6) IS THE LOSS ON THE SALE OF MY HOME DEDUCIBLE?
A loss on the sale or exchange of personal use property, including a loss on the sale of your home used by you as your personal residence at the time of sale, is not deductible. Only losses associated with property used in a trade or business and investment property (for example, stocks) are deductible.

 

7) WHO CAN I CLAIM AS A DEPENDENT? 

This question has stumped taxpayers for years and is one of the most frequently asked questions during tax season. Most of us know you can deduct your children on your tax return, but many people forget they might be able to deduct elderly parents, significant others or other relatives who also qualify as a dependent. Do you have a relative or significant other you’ve been supporting or a friend who’s been sleeping on your couch? They may turn out to be a tax deduction if they can be claimed as a “qualifying relative.” They’ll have to meet certain requirements to qualify, but for each dependent you can deduct $3,900, which is likely to reduce your taxes.

 

8) IS THERE AN AGE LIMIT ON CLAIMING MY CHILD AS A DEPENDENT?
To claim your child as your dependent, your child must meet the qualifying child test or the qualifying relative test.
To meet the qualifying child test, your child must be younger than you and as of the end of the calendar year, either be younger than 19 years old or be a student and younger than 24 years old, or any age if permanently and totally disabled.

There is no age limit on claiming your child as a dependent if the child meets the qualifying relative test.
In addition to meeting the qualifying child or qualifying relative test, you may claim a dependency exemption for your child as long as all of the following tests are met:
    •    Dependent taxpayer test
    •    Citizen or resident test, and
    •    Joint return test

 

9) WHY SHOULD  I PARTICIPATE IN MY EMPLOYER’S CAFETERIA PLAN OR FSA?
In 2015, medical and dental expenses are deductible to the extent they exceed 10 percent in 2015 (same as 2014) of your adjusted gross income (AGI). As such, many people are not able to take advantage of them. There is however, a way to get around this if your employer offers a Flexible Spending Account (FSA), Health Savings Account or cafeteria plan. These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars.

 

10) HOW MUCH CAN I CONTRIBUTE TO A RETIREMENT PLAN IN 2015?
Taxpayers age 50 and older may contribute a higher amount to retirement plans to "catch up," regardless of whether or they had contributed the maximum amounts earlier in life.

retirement


 

11) WHAT IS THE STANDARD DEDUCTION FOR 2015?
The IRS excludes from your taxable income a specified amount of expenses, called a "standard deduction." If your actual expenses in the allowed categories total more than the standard deduction amount, you may deduct those actual expenses, which is called "itemizing." If your itemized deductions are less than the standard amount, you are better off to use the standard deduction.

deduction


 

12) WHAT TAX BENEFITS ARE AVAILABLE FOR COLLEGE STUDENTS? 

To help alleviate the ever-increasing cost of a college education, the tax code provides some relief options, which are available via education tax credits and deductions. Knowing the types of items you can deduct can save you money on college expenses because you may be able to deduct things like tuition or fees, books and supplies for you, your spouse and your dependents. Some education deductions and credits include:
    •    The American Opportunity Tax Credit: Helps parents and students pay for college education by giving them a credit up to $2,500 per student for tuition and fees, books, supplies and equipment.
    •    Lifetime Learning Credit: Taxpayers may be able to claim a credit up to $2,000 per tax return for college tuition, fees and supplies paid directly to the educational institution.
    •    Tuition and fees deduction: An education benefit which allows you to deduct up to $4,000 from your taxable income for college expenses.

 

13) I DONATED A USED CAR TO A QUALIFIED CHARITY THAT THE CHARITY SOLD IMMEDIATELY AFTER I DONATED IT.  I ITEMIZE MY DEDUCTIONS AND WOULD LIKE TO TAKE A CHARITABLE DEDUCTION FOR THE DONATION.  DO I NEED TO ATTACH ANY SPECIAL FORMS TO MY RETURN?  WHAT RECORDS TO I NEED TO KEEP?
Your recordkeeping and filing requirements depend on the amount of your claimed deduction.

1) If you claim a deduction of at least $250 but not more than $500 for the car donation, you will need a written acknowledgment from the charity. You must obtain the acknowledgment by the earlier of the date you file your return for the year of the donation, or the due date of the return with extensions. The acknowledgment must include the following:
    •    A detailed description of the car.
    •    A statement as to whether or not the charity provided any goods or services in return for the car other than intangible religious benefits and if so, a description and good faith estimate of the value of the goods and services.
    •    If the charity provides solely intangible religious benefits, a statement to that effect.
Do not attach the written acknowledgment to your return. Instead, retain it with your records to substantiate your donation.

2) If you claim a deduction of more than $500 but not more than $5000 for the car donation, the written acknowledgment from the charity must be timely, must be attached to your return and must include all of the information listed in (1) above, plus the following additional information:
    •    Your name and taxpayer identification number (TIN).
    •    The vehicle identification number (VIN).
    •    The date of the contribution.
    •    A certification that the charity sold the car in an arm’s length transaction between unrelated parties.
    •    The date the car was sold by the charity.
    •    The gross proceeds of the sale.
    •    A statement that the deductible amount may not exceed the amount of such gross proceeds.

For this acknowledgement to be considered timely, you must generally receive it within 30 days of the sale of the car. In lieu of a written acknowledgment, the charity may provide you a completed Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, which contains the same information.
You must also complete Section A of Form 8283, Noncash Charitable Contributions, and attach both the written acknowledgment and the form to your return.

3) If you claim a deduction of more than $5,000 for the car donation, you must obtain a written acknowledgment with the information described in both (1) and (2) above. You must also complete Section B of Form 8283 and attach both the written acknowledgment and the form to your return. An appraisal is not required if your deduction is limited to the gross proceeds of the sale.

 

14) WHAT IS THE BEST WAY TO GIVE TO CHARITY?
If you're planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash avoids capital gains tax on the sale, and you can obtain a tax deduction for the full fair market value of the property.

 

15) DO YOU CONTRIBUTE TO CHARITY?
If you donate to a charity, you must have receipts to prove your donation.
Starting in 2007, contributions in cash or check aren't deductible-at all-unless substantiated by one of the following:
    •    A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a canceled check, a bank or credit union statement or a credit card statement.
    •    A receipt (or letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
    •    Payroll deduction records. The payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.
Besides deducting your cash and non-cash charitable donations, you can also deduct your mileage to and from charity work. If you deduct mileage for your charitable efforts, keep detailed records of how you figured your deduction.

 

16) I RETIRED LAST YEAR AND STARTED RECEIVING SOCIAL SECURITY PAYMENTS.  DO I HAVE TO PAY TAXES ON MY SOCIAL SECURITY BENEFITS?
Social Security benefits include monthly retirement, survivor and disability benefits. They do not include supplemental security income (SSI) payments, which are not taxable. The amount of Social Security benefits that must be included on your income tax return and used to calculate your income tax liability depends on the total amount of your income and benefits for the taxable year.
To find out whether any of your benefits may be taxable, compare the base amount for your filing status with the total of:
    •    One-half of your benefits.
    •    All of your other income, including tax-exempt interest.
The base amount for your filing status is:
    •    $25,000 if you are single, head of household or qualifying widow(er),
    •    $25,000 if you are married filing separately and lived apart from your spouse for the entire year,
    •    $32,000 if you are married filing jointly,
    •    $0 if you are married filing separately and lived with your spouse at any time during the tax year.
If you are married and file a joint return, you and your spouse must combine your incomes and Social Security benefits when figuring the taxable portion of your benefits. Even if your spouse did not receive any benefits, you must add your spouse's income to yours when figuring on a joint return if any of your benefits are taxable.

 

17) MY FATHER IS IN A NURSING HOME AND I PAY FOR THE ENTIRE COST.  CAN I DEDUCT THESE EXPENSES ON MY TAX RETURN?
Nursing home expenses are allowable as medical expenses in certain instances.
    •    If you, your spouse or your dependent is in a nursing home and the primary reason for being there is for medical care, the entire cost including meals and lodging is a deductible medical expense.
    •    If the individual is in the home mainly for personal reasons, then only the cost of the actual medical care is a deductible medical expense, and the cost of the meals and lodging is not deductible.
    •    You deduct medical expenses on Schedule A, Itemized Deductions.
    •    The total of all allowable medical expenses must be reduced by 10% of your adjusted gross income, 7.5% if either you or your spouse is age 65 or older.

 

18) WHAT TYPE OF RECORDS DO I NEED TO KEEP?
Keep records of all your current year income and deductible expenses. These are the records that an auditor will ask for if the IRS selects you for an audit.
Here's a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:
    •    Income (wages, interest/dividends, etc.)
    •    Exemptions (cost of support)
    •    Medical expenses
    •    Taxes
    •    Interest
    •    Charitable contributions
    •    Child care
    •    Business expenses
    •    Professional and union dues
    •    Uniforms and job supplies
    •    Education, if it is deductible for income taxes
    •    Automobile, if you use your automobile for deductible activities, such as business or charity
    •    Travel, if you travel for business and are able to deduct the costs on your tax return
While you're storing your current year's income and expense records, be sure to keep your bank account and loan records too, even though you don't report them on your tax return. If the IRS believes you've underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be just the thing to save you.

 

19) HOW LONG SHOULD I KEEP THESE RECORDS?
Keep the records of your current year's income and expenses for as long as you may be called upon to prove the income or deduction if you're audited.

For federal tax purposes, this is generally three years from the date you file your return (or the date it's due, if that's later), or two years from the date you actually pay the tax that's due, if the date you pay the tax is later than the due date. IRS requirements for record keeping are as follows:
    •    You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
    •    You do not report income that you should report, and it is more than 25 percent of the gross income shown on your return; keep records for 6 years.
    •    You file a fraudulent return; keep records indefinitely.
    •    You do not file a return; keep records indefinitely.
    •    You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
    •    You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
    •    Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Because the state can also audit you after the IRS audits you, please keep your important records for 7 years.  

 

20) ARE THERE ANY NON-TAX RECORDS I SHOULD KEEP?
There are other records you should keep, even though they don't appear to have any use for your tax returns. Here are a few examples:
    •    Insurance policies, to show whether you were to be reimbursed in case you suffer a casualty or theft loss, have medical expenses, or have certain business losses.
    •    Records of major purchases, in case you suffer a casualty or theft loss, contribute something of value to a charity, or sell it.
    •    Family records, such as marriage licenses, birth certificates, adoption papers, divorce agreements, in case you need to prove change in filing status or dependency exemption claims.
    •    Certain records that give a history of your health and any medical procedures, in case you need to prove that a certain medical expense was necessary.

 

21) SHOULD I KEEP MY OLD TAX RETURNS?  IF SO, FOR HOW LONG?
Yes, keep your old tax returns.

You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous six or seven years is sufficient.
One of the benefits of keeping your tax returns from year to year is that you can look at last year's return while preparing this year's. It's a handy reference and reminds you of deductions you may have forgotten.
Another reason to keep your old tax returns is that there may be information in an old return that you need later.

SMALL BUSINESSES:

 

22) WHAT SPECIAL DEDUCTIONS CAN I GET IF I’M SELF-EMPLOYED?
Self-employed individuals can deduct 100 percent of their health insurance premiums. You may also be able to establish a Keogh, SEP or SIMPLE IRA plan and deduct your contributions (investments).

 

23) WHICH KINDS OF BUSINESS ORGANIZATION OR BUSINESS ENTITY WILL LIMIT MY LIABILITY TO BUSINESS CREDITORS?
S Corporations, limited liability companies (LLCs), limited partnerships, and limited liability partnerships (LLPs) are the three most common business entities that limit liability. General partnerships and sole proprietorships don't limit owners' liability. Limited partnerships limit the liability of some partners (limited partners) and not others (general partners).

 

24) WHICH TYPES OF BUSINESS ENTITY ARE BEST FOR TAX PURPOSES?
It depends. Generally speaking, the "pass-through" type of entity saves tax overall by eliminating tax at the entity level. pass-through entity owners are taxed directly on their share of entity profits. Another pass-through advantage is that owners can take tax deductions for startup or operating losses, against their income from investments or other businesses.

 

25) WHAT KIND OF RECORDS DO I NEED TO KEEP IN MY BUSINESS?
Complete and accurate financial record keeping is crucial to your business success. Good records provide the financial data that help you operate more efficiently. Accurate and complete records enable you to identify all your business assets, liabilities, income and expenses. That information helps you pinpoint both the strong and weak phases of your business operations.

Moreover, good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. Finally, good records help you avoid underpaying or overpaying your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS.

To assure your success, your financial records should show how much income you are generating now and project how much income you can expect to generate in the future. They should inform you of the amount of cash tied up in accounts receivable. Records also need to indicate what you owe for merchandise, rent, utilities, and equipment, as well as such expenses as payroll, payroll taxes, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees. Records will tell you how much cash is on hand and how much is tied-up in inventory. They should reveal which of your product lines, departments, or services are making a profit, as well as your gross and net profit.

 

26) WHAT STEPS CAN I TAKE TO IMPROVE MY BUSINESS CASH FLOW?
To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:
    •    Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm's collection policies are not aggressive.
    •    Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services.
    •    Manipulating price of products: Many small businesses fail to make a profit because they erroneously price their products or services. Before setting your prices, you must understand your product's market, distribution costs, and competition. Monitor all factors that affect pricing on a regular basis and adjust as necessary.
    •    Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.
    •    Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm's cash reserves.

 

27) HOW DO YOU DETERMINE IF A WORKER IS AN EMPLOYEE OR AN INDEPENDENT CONTRACTOR?
The determination can be complex and depends on the facts and circumstances of each case. The determination is based on whether the person for whom the services are performed has the right to control how the worker performs the services. It is not based merely on how the worker is paid, how often the worker is paid, or whether the work is part-time or full-time.

There are three basic categories of factors that are relevant to determining a worker's classification:
    •    Behavioral control (whether there is a right to direct or control how the worker does the work),
    •    Financial control (whether there is a right to direct or control the business part of the work), and
    •    Relationship of the parties (how the business and worker perceive the relationship).

Generally, if you are an independent contractor you are considered self-employed and should report your income (nonemployee compensation) on Schedule C, Profit or Loss From Business (Sole Proprietorship), or Schedule C-EZ, Net Profit From Business (Sole Proprietorship). Most self-employed individuals will need to pay self-employment tax (comprised of Social Security and Medicare taxes) if their income (net earnings from self-employment) is $400 or more. 

Use Schedule SE, Self-Employment Tax, to figure the tax due.

Generally, there is no tax withholding on income you receive as a self-employed individual as long as you provide your taxpayer identification number (TIN) to the payer. However, you may be subject to the requirement to make quarterly estimated tax payments. If you do not make timely estimated tax payments, the IRS may assess a penalty for an underpayment of estimated tax.  Unlike independent contractors, employees generally pay income tax and their share of Social Security and Medicare taxes through payroll deductions (withholding).

 

28) WE HIRED A NANNY TO LOOK AFTER OUR BABY WHILE WE WORK.  HOW DO WE PAY HER SOCIAL SECURITY TAXES AND PROPERLY REPORT HER INCOME?
Your nanny is considered your household employee and you are her household employer:
    •    As a household employer, you only withhold and pay Social Security and Medicare taxes if the cash wages you paid her exceed the threshold amount for the year. See Publication 926, Household Employer's Tax Guide.
    •    If the amount paid is less than the threshold, you do not owe Social Security or Medicare taxes.
    •    If the amount paid is more than the threshold, you must withhold your employee's share of Social Security and Medicare taxes unless you choose to pay both her share and your share. The taxes are 15.3% of cash wages. Your share is 7.65% and her share is 7.65%.
    •    You may also be responsible for paying federal unemployment tax. Federal unemployment tax is not withheld from employees' wages.
    •    You are not required to withhold income tax from her wages. However, you and your nanny may agree for you to withhold income tax from her wages.
    •    If you must pay Social Security and Medicare taxes or federal unemployment taxes, or if you withhold income tax, you will need to file Schedule H, Household Employment Taxes. You may also need to file a Form W-2, Wage and Tax Statement, and furnish a copy of the form to your nanny.
    •    If you choose to pay your household employment taxes with your business or farm employment taxes, you must include your household employment taxes with those other employment taxes on Form 941, Employer’s QUARTERLY Federal Tax Return, Form 944, Employer’s ANNUAL Federal Tax Return, or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, and on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.

 

29) I AM A SOLE PROPIETOR AND PAY PERSONAL EXPENSES OUT OF MY BUSINESS BANK ACCOUNT.  SHOULD I INCLUDE THE MONEY USED FOR PERSONAL EXPENSES AS A PART OF MY BUSINESS INCOME?  CAN I WRITE THESE EXPENSES OFF?
    •    You would include the money used to pay personal expenses in your business income when your business earned it.
    •    You would not write off these expenses as business expenses because they are not ordinary and necessary costs of carrying on your trade or business.
    •    Personal, living or family expenses are generally not deductible.
    •    It is a good idea to keep separate business and personal accounts as this makes it easier to keep records.

 

30) FOR BUSINESS TRAVEL, ARE THERE LIMITS ON THE AMOUNTS DEDUCTIBLE FOR MEALS?
    •    Meal expenses are deductible if your business trip is overnight or long enough that you need to stop for substantial sleep or rest to properly perform your duties.  Meal expenses are also deductible if the meal is business-related entertainment. You can figure all your travel meal expenses using either of the following methods:
    •    Actual cost. If you use this method, you must keep records of your actual cost.
    •    The standard meal allowance, which is the federal meals and incidental expense (M&IE) per diem rate. The GSA website lists these rates by location. Note that lower rates apply for the first and last days of travel.
    •    The deduction for unreimbursed business meals is generally subject to a 50% limitation.

 

31) AS AN EMPLOYER, DO I HAVE ANY LIABILITY FOR SOCIAL SECURITY AND MEDICARE TAXES IF MY EMPLOYEES RECEIVE TIPS BUT DON’T REPORT THEM TO ME?
Yes. Employers in industries where tipping is common know that they must report and pay taxes on tips employees report to them. However, many employers do not realize that they are liable for the employer share of Social Security and Medicare taxes on tips employees do not report to them.
    •    Tipped employees are required to report their tips to their employers by the 10th of the following month if they receive cash tips of $20 or more in the month. Cash tips include tips they receive directly from customers, charged tips (e.g., credit and debit card charges) you distribute to them, and tips they receive from other employees under any tip-sharing arrangement. Thus, both directly and indirectly tipped employees must report tips received to their employer.
    •    You, as an employer, must withhold and pay the employee share of Social Security and Medicare taxes on tips your employee reports to you to the extent the employee’s non-tip wages or funds the employee provides you are available. You must also pay the employer share of Social Security and Medicare taxes on all reported tips.
    •    For unreported tips, your liability for the employer share of Social Security and Medicare taxes does not arise until the Service issues you a Section 3121(q) Notice and Demand. The tax due shown on the notice and demand may be based on tip audits, data from Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, or Form 4137, Social Security and Medicare Tax on Unreported Tip Income. The employer is not liable to withhold and pay the employee share of Social Security and Medicare taxes on unreported tips.