On February 22, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012 (HR 3630). This law extends the 2% reduction in employment taxes and a like adjustment in SE taxes through December 2012.
The new law also repeals the 2% recapture tax included in the December legislation that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut. As a result, the now-repealed recapture tax does not apply.
The lower rate will have no effect on workers’ future Social Security benefits. The reduction in revenues to the Social Security Trust Fund will be made up by transfers from the General Fund.
The IRS has also released revised Form 941
enabling employers to properly report the newly extended payroll tax cut.
**Disclaimer – Informational purposes and may not be appropriate for your situation etc. need to discuss with a CPA before acting on any information in this blog.
to be aware of several facts relating to your federal income taxes:
Tips are taxable – Tips are subject to federal income, social security, and Medicare taxes. The value of non-cash tips, such as tickets, passes, or other items of value, is also income and subject to taxation.
Include tips on your tax return – You must include in gross income all cash tips received directly from customers, tips added to credit cards, and your share of any tips received under a tip-splitting arrangement with fellow employees.
Tip-splitting and cover charges – Tips given to others under the tip-splitting arrangement are not subject to the reporting requirement by the employee who initially receives them. That employee should report to the employer only the net tips received.
Service (cover) charges, which are arbitrarily added by the business establishment, are excluded from the tip reporting requirements. The employer should add each employee’s share of service charges to each employee’s wages.
Report tips to your employer – If you receive $20 or more in tips in any month, you should report all of your tips to your employer. Your employer is required to withhold federal income, social security, and Medicare taxes. If the tips received are less than $20 in any month, they need not be reported to the employer. However, these tips are still taxable and must be reported on your tax return as they are subject to income and social security taxes.
Employer allocation of tips – Tip allocation is applicable to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport.” Underreporting occurs if an employee reports tips that are less than 8% of the employee’s applicable share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8%. The allocation amount is noted on the employee’s W-2, but it does not have to be reported as additional income if the employee has adequate records to show that the amount is incorrect. Note that these allocated tips are not included in the total wages shown on the employee’s W-2. The IRS frequently issues inquiries where the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return.
Keep a running daily log of tip income Tips are a frequently audited item and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee’s Daily Record of Tips and a Report to Employer for recording your tip income.
**Disclaimer – Informational purposes and may not be appropriate for your situation etc. need to discuss with a CPA before acting on any information in this blog.
One of the earliest lessons in life is that actions have consequences, and approaching retirement age without a substantial nest egg is one of those consequences. But if you are in this situation, you are not alone, as millions of other Americans are faced with the same need to save enough to retire comfortably.
Our priorities shift throughout our lives. Early in the life cycle, home ownership is a priority; that is usually followed by raising and educating children. However, as retirement approaches, the focus needs to shift toward retirement funding. By the time most people are 45 or 50, their children are on their own, the mortgage is close to being paid off, and there is more discretionary income to set aside for retirement.
If you are starting to think about retirement, there are three pitfalls you need to avoid: (1) retiring on your birthday instead of your bank account, (2) not properly managing your risk and (3) retiring with too much debt.
One way to get your retirement funding started is by making tax-advantaged IRA contributions. Self-employed individuals can make tax-advantaged Simplified Employee Pension (SEP) plan contributions. You still have time to make an IRA and/or SEP contribution for 2011.
Generally, after the close of the year you can no longer take steps to alter the outcome of your tax return. However, both IRA contributions and SEP contributions can be made for 12 months after the year has closed, and if you converted a traditional IRA into a Roth IRA, you can undo that conversion after the close of the year. Here are the details:
IRA Contributions – IRA contributions (tax-deductible and non-deductible) for 2011 can be made up to and including the un-extended filing due date for your 2011 tax return, which is April 17, 2012. The maximum contribution allowed is $5,000 ($6,000 if age 50 or over) for each taxpayer. The annual maximum must be allocated between traditional and Roth IRA contributions.
If you are an active participant in an employer-sponsored plan, the IRA contributions are phased out for higher-income taxpayers. Roth IRA contributions are also phased out. The traditional IRA AGI phase-outs for 2011 are between $90,000 and $110,000 for married individuals filing jointly and individuals qualifying as a surviving spouse, $56,000 and $66,000 for unmarried individuals, and $0 to $10,000 for married individuals filing separately.
Where one spouse participates in an employer plan but the other does not, the non-participating spouse’s phase-out is between $169,000 and $179,000 for 2011.
SEP Plan Contributions – SEP plans are tax-deductible retirement plans for self-employed individuals. Contributions can be made up to and including the extended due date, which for the 2011 tax return is October 15, 2012. The maximum annual contribution to a SEP plan is the lesser of “25% of compensation” (20% of net profit after deducting the SEP contribution for the self-employed proprietor’s contribution) or $49,000. SEP plans have no AGI phase-out limitations and no catch-up contributions for older individuals.
Other Plans – Other plans such as Simple Plans and Keogh plans also permit contributions in 2012 for 2011.
For additional information related to making retirement plan contributions after the close of the tax year, please give this office a call.
In a recent study, the IRS determined that over half of all under-reporting is attributable to Schedule C, the form used by self-employed individuals to report their profits or losses for the year. It is no wonder that the audit rate for Schedule C returns has increased substantially and is among the highest of all rates. Based on 2010 IRS figures, Schedule Cs have a 300% higher chance of being audited than either a partnership or an S-Corporation. Of the Schedule Cs audited in 2010, the average adjustment exceeded $9,000.
Among the areas of underreporting are:
Personal Expenses – Over-deductions attributable to the inclusion of non-deductible personal expenses and the failure to allocate for personal use of a vehicle.
Underreporting Income – Failure to include all income. To counter this problem, the IRS has initiated merchant card and third-party reporting that will provide the IRS with all income from credit card sales.
Worker Misclassification – Misclassifying workers as independent contractors instead of treating them as W-2 employees, thereby avoiding the employer’s share of payroll, unemployment, and other taxes. The IRS currently has a Voluntary Classification Settlement Program in effect that allows eligible taxpayers to voluntarily reclassify their workers for federal employment tax purposes. Voluntary programs usually precede more aggressive compliance measures.
Failing to Issue Information Returns – Generally, businesses are required to issue 1099s for fees they pay to individuals other than employees or to corporations. This is a huge area of non-compliance that denies the IRS the ability to ensure that payees are properly reporting their income. In an audit in which a 1099 should have been issued and was not, the IRS will generally disallow the deduction for those services. The 2011 Schedule C asks two catch-22 questions: “Did you make payments that would require you to
file a Form 1099?” and “If yes, did you or will you file all required Forms 1099?”
Hobby Losses – Some businesses are actually hobbies, where there is no real intention of ever making a profit. Businesses deemed to be hobbies have special rules that limit the expense deductions to the income and require the deductions to be taken as itemized deductions on Schedule A. Watch for a future article on hobby losses that will appear in the March newsletter.
If you have questions related to your Schedule C or any of the issues in this article, please give this office a call.
Now that tax season is upon us, so are the e-mail scammers pretending to be the IRS. Most of these scams fraudulently use the IRS name, logo, and/or website header as a lure to make the communication appear more authentic and enticing. They lead you to believe you had a refund of some sort coming and request personal information. The goal of these scams – known as phishing – is to trick you into revealing your personal and financial information. The scammers can then use your information – like your Social Security number, bank account, or credit card numbers – to commit identity theft or steal your money.
DON’T BE A VICTIM – THE IRS DOES NOT INITIATE E-MAIL CORRESPONDENCE
The Internal Revenue
Service receives thousands of reports each year from taxpayers who receive suspicious e-mails, phone calls, faxes, or notices claiming to be from the IRS. If you find something suspicious, you should immediately call this office before responding. In fact, it is a good policy to check with this office before responding to any inquiry from the IRS or state or local tax agencies.
Here are some tips you should know about phishing scams.
1. The IRS never asks for detailed personal and financial information like PIN numbers, passwords, or similar secret access information for credit card, bank, or other financial accounts.
2. The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. If you receive an e-mail from someone claiming to be a representative of the IRS or directing you to an IRS site:
Do not reply to the message.
Do not open any attachments. Attachments may contain malicious code that will infect your computer.
Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, you may have compromised your financial information. If you entered your credit card number, contact the credit card company for guidance. If you entered your banking information, contact the bank for the appropriate steps to take. The IRS website provides additional resources that can help. Visit the IRS website and enter the search term “identity theft” for additional information.
3. The address of the official IRS website is www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site.
4. If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS but you suspect he or she is not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious e-mail to firstname.lastname@example.org.
If you have any questions or doubts related to a letter, phone call, or e-mail from the IRS or other taxing authorities, please call this office before responding or providing any financial or personal information. Better safe than sorry!
Online or virtual bookkeeping is conceptually similar to on-site bookkeeping.
Virtual bookkeeping: The only difference from on-site or traditional bookkeeping is that we don’t come to your physical location or office. This makes it virtual.
does this mean? Somehow we have to get your source documents or transactions – i.e. bills/invoices/receipts etc. How do we do this? Electronically, over the internet. We then update the transactions online. This updating of information and keeping of your books makes it online bookkeeping.
Get it? Bookkeeping is done online. Your books are updated by a virtual bookkeeper.
Really, virtual or online bookkeeping are the same thing, describing the new paperless wave of bookkeeping. Some people prefer the word online, others prefer the term virtual. Still others use the term remote bookkeeping.
Learn more at MyOnlineBookkeeper.com
Did you know My Online Bookkeeper offers a risk free trial? Call or email us today for this great
Call us. (415) 480-5204 Email us: Info@MyOnlineBookkeeper.com
Here are the details:
1 hour of initial consultation – Free.
Once you sign up, we will enter 1 month of current transactions for you. If you are not completely satisfied, just let us know. We will not charge you for a month of transactions and cancel your agreement. It’s that simple.
Applies to clients who sign up for monthly bookkeeping services only.
1. Initial Consultation
When you call we will set up an initial consultation with you. This is free for you. We will understand your business, your industry and your processes. We will determine your bookkeeping needs and tailor a specific plan for you. Based on your requirements we will assign a trained bookkeeper to you. This is the person who will work on your books month after month.
2. Tailoring a Solution
At this stage, we will tailor a specific solution that meets your needs. We will also design a process that makes sense for you and make your life easier.
If you need, we will set up a chart of accounts for you. This requires creating and mapping a chart of accounts that is specific to your industry and your business. This allows you and your accountant to easily recognize income, expense, assets and liabilities. Your transactions will be classified according to the categories that have been set up in the chart of accounts.
3. Transfer of Information
You can send us your source documentation via a number of ways. We prefer electronic documentation. If you don’t have your documents in electronic format – don’t worry – in a lot of cases we can show you how to get them electronically. Use our secure client portal – our Lockbox – for all confidential and sensitive information.
a) Email (not recommended for confidential and sensitive information – use our Lockbox instead)
c) Regular Mail: We will send you pre-paid envelopes and you simply mail it in.
d) Courier Pick Up
(Additional charges apply for mail and courier pick up service)
e) Upload directly to our bookkeeping client portal – we recommend this for all confidential documents.
4. Updating Your Books
Your bookkeeper updates your books via
a) Online software (eg. Quick books online)
b) Remote login to your computer (only if authorized)
c) Hosted software on our secure Servers
5. Your Reports
We will prepare customized reports for you that you can access anytime.
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