Business Taxes, General Information, Self Employed, Small Business, Uncategorized

Do You Make This Big Mistake with Your Independent Contractors?

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I often deal with Chicago small business owner taxes, and the one thing that I see often is a big mistake being made with independent contractors. Do you hire 1099 contractors? Are they really 1099 contractors? If so, have you done the one thing you need to do to protect their 1099 status so you don’t get hit with payroll taxes and penalties?

If you failed this one thing, the IRS can reclassify your 1099 contractors as W-2 employees even when you have a good case for their 1099 contractor status. This should scare you. Let’s review the Kurek tax court case (UNITED STATES TAX COURT MIECZYSLAW KUREK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE)to see why.

Mieczyslaw Kurek operated a construction business that made improvements to the interiors of homes, including kitchens, bathrooms, and floors, where he and his workers installed tile, sheetrock, doors, and windows and did carpentry and painting. During the year before the court, Mr. Kurek had 29 contractors, of which only seven did some work in all four quarters of the calendar year.
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Relationship with Workers

Mr. Kurek had the following relationships with the workers:

  • He told the workers what work needed to be done and set deadlines for the jobs.
  • The workers worked on projects. No one worked full time for Mr. Kurek.
  • Mr. Kurek negotiated a flat fee and timeline with each worker for the work to be done on the project.
  • He paid each worker every week according to the percentage of the work the worker completed.
  • He paid the workers by checks made out to them personally.

How the Work Was Done

  • The workers set their own hours and work schedules.
  • Mr. Kurek came to the worksite every day or two.
  • Mr. Kurek did not tell the workers how to do their jobs, but he replaced workers who missed deadlines.
  • If he thought a worker was doing the work improperly, he would order the worker to repair the problem or redo the work.
  • Mr. Kurek allowed the workers to work simultaneously on other projects with him or with other independent construction groups.
  • The workers brought their own sets of small tools to the work-sites, worth around $1,000.
  • Mr. Kurek bought or rented the larger tools and he left them at the work sites for use by the workers.

No Office or Benefits

Mr. Kurek did not provide an office or any other facility for the workers. He did not:

  • Train the workers.
  • Offer them any employee benefits such as sick or vacation pay, medical insurance, or pension plans.
  • Carry unemployment insurance, severance pay, or workers’ compensation insurance on the workers.
  • Require the workers to have any type of insurance or license.

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Your Opinion

Based on what you know from what you have read above, are the workers 1099 independent contractors or W-2 employees?

What Did You Pick: Employee or Contractor?

Interestingly, you could be right with either choice. Because Mr. Kurek failed the one test that could have saved independent contractor status for his workers, the court used the seven common-law factors to evaluate employee status and it ruled that the workers were W-2 employees.

The IRS has a 20-factor test to determine if a worker is a 1099 independent contractor or a W-2 employee. But if Mr. Kurek does this one thing, he does not have to face the 20 factors, just as he doesn’t have to suffer the court’s seven-factor test.

Escape
IRS Publication 1976, Do You Qualify for Relief under Section 530, says that Mr. Kurek could have treated his workers as 1099 independent contractors if he had:

  1. A reasonable basis for treating the workers as independent contractors, such as showing that a significant segment of home improvement businesses treated their workers as independent contractors or relying on the advice of a lawyer or accountant who knew the facts about his business.
  2. Consistently treated the workers and all similar workers as independent contractors.
  3. Filed the 1099s for those independent contractor workers to whom he had paid $600 or more.

Failure
Mr. Kurek failed to file the 1099s. With this failure, he simply said

  • Hello IRS,
  • Goodbye Section 530 statutory relief,
  • Goodbye 1099 worker status, and
  • Hello payroll taxes and penalties.

Because Mr. Kurek failed to file the required 1099s, the court could not grant relief under Section 530 and had no choice but to examine the seven common-law factors. Sadly, the court’s application of the seven factors to Mr. Kurek’s workers caused the court to reclassify the workers from independent contractor status to W-2 employees.

What You Need to Do
Make your life easy. Avoid the big hurdles of the tax court’s seven-factor common-law tests or the IRS’s 20-factor common-law tests. You want to qualify for Section 530 relief. To ensure that relief: File the 1099s—period.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have tax debt help questions, need Chicago business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

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Fact check me: T.C. Memo. 2013-64 UNITED STATES TAX COURT MIECZYSLAW KUREK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 5459-11. Filed February 28, 2013.

Section 530 Tax Relief: IRS publication 1976 Section 530.

General Tax Topics, Self Employed, Small Business, Tax Deductions, Tax Reduction, Uncategorized, Vehicles

2018 Last-Minute Vehicle Purchases to Save on Taxes

Long jump.

At our Chicago tax preparation office, we work with a lot of Business owners in the South Loop of Chicago that need business tax preparation. As the year ends, many business owners are looking for tips for year end tax deductions, more commonly referred to as  tax write- offs. For business owners looking for tax deductions, I have two questions: Two questions:

  • Do you need a replacement business car, SUV, van, or pickup truck?
  • Do you need tax deductions this year?

Here are some ideas for you to consider:

  1. Buy a New or Used SUV, Crossover Vehicle, or Van with a GVWR Greater than 6,000 Pounds

Let’s say that on or before December 31, 2018, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four big benefits:

  • Bonus depreciation of 100 percent (new, thanks to the TCJA)
  • Section 179 expensing of up to $25,000
  • MACRS depreciation using the five-year table
  • No luxury limits on vehicle depreciation deductions
  1. Buy a New or Used Pickup with a GVWR Greater than 6,000 Pounds

If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2018, then this newly purchased vehicle gives you four big benefits:

  • Bonus depreciation of 100 percent
  • Section 179 expensing of up to $1,000,000
  • MACRS depreciation using the five-year table
  • No luxury limits on vehicle depreciation deductions

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To qualify for full Section 179 expensing, the pickup truck must have

  • a GVWR of more than 6,000 pounds, and
  • a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Short bed. If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. It’s still eligible for expensing of up to the $25,000 SUV expensing limit plus 100 percent bonus depreciation. See Section 1 above for how this works.

  1. Buy a New or Used Qualifying Cargo or Passenger Van with a GVWR Greater than 6,000 Pounds

A new or used cargo or passenger van bought and placed in service on or before December 31, 2018, can qualify for four big tax benefits:

  • Bonus depreciation of 100 percent
  • Section 179 expensing of up to $1,000,000
  • MACRS depreciation using the five-year table
  • No luxury limits on vehicle depreciation deductions

Cargo van. To qualify for full Section 179 expensing, the cargo van must

  • have a GVWR of more than 6,000 pounds,
  • fully enclose the driver compartment and load-carrying area,
  • not have seating behind the driver’s seat, and
  • have no body section that protrudes more than 30 inches ahead of the leading edge of the windshield.

If the van passes the GVWR test but fails one of the other qualifying tests listed above, the law deems it an SUV.
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Passenger van. If the van has a GVWR of greater than 6,000 pounds and seats more than nine people behind the driver’s seat, it is a tax law–defined passenger van, not an SUV, and it qualifies for full Section 179 expensing of up to $1,000,000 and 100 percent bonus depreciation.

  1. Buy a Depreciation-Limited New or Used Car, SUV, Truck, or Van

If you or your corporation buys and places in service a new or used passenger vehicle such as a car (or a pickup, SUV, or van with a GVWR of 6,000 pounds or less) on or before December 31, 2018, then you or your corporation may claim up to $8,000 in bonus depreciation.

Tax reform increased the 2018 luxury passenger vehicle depreciation limits to

  • $10,000 for the first taxable year in the recovery period,
  • $16,000 for the second taxable year in the recovery period,
  • $9,600 for the third taxable year in the recovery period, and
  • $5,760 for each succeeding year in the taxable period.

Here’s how this works: Say you buy a car. You add the $8,000 in bonus depreciation to the $10,000 car limit, for a 2018 limit of $18,000. To get to this limit, you can use a combination of bonus depreciation and regular depreciation. You reduce the $18,000 limit by any personal use.

The vehicle tax rules can be confusing. Although we’ve given you the basics, this is not an all-inclusive article. Should you have tax debt help questions, need Chicago business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

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Self Employed, Small Business, Tax Reduction, Uncategorized

Lower Your Self Employment Taxes. Little known secret…

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Author Trudy M. Howard

Become A S-Corp To Save On Taxes

Howard Tax Prep often works with Chicago residents that have to pay self-employment taxes. Although we are a nationwide tax firm, because our office is located in the South Loop of Chicago, we attract more Chicago tax preparation clients.

If you’re a sole proprietor, a 1 member LLC (SMLLC), or a general partner in a business, you know that the 15.3 percent self-employment tax can eat up your profits in a hurry. For example, let’s assume you operate a sole proprietorship and you earn $100,000 of net income. You must report your income on Schedule C of your tax return, which creates a self-employment tax liability of $14,129.55 in ADDITION to your personal income tax! In order to lower self-employment taxes some self-employed Chicago residents have our firm apply their business for the IRS Subchapter S taxation status.

What Is an S Corporation?

The Subchapter S Corporation is a special IRS election that has to be requested during a very narrow 75-day window of time that begins on the day the business owner forms the corporation or LLC. Many of our self-employed Chicago tax clients choose to keep their legal entity as a corporation or a LLC, but have their taxable entity become an S corporation.

For federal tax purposes, your S corporation is a pass-through entity, meaning that the corporation’s income, deductions, and tax credit items are passed through to you, the shareholder, on a Schedule K-1. For some business owners, this is the best of both worlds: liability protection with personal taxation.

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S Corporation Special Rules

To elect S corporation status, the LLC or corporation must be: To qualify for S corporation status, the corporation must meet the following requirements:

· Be a domestic corporation

· Have only allowable shareholders

· May be individuals, certain trusts, and estates and

· May not be partnerships, corporations or non-resident alien shareholders

· Have no more than 100 shareholders

· Have only one class of stock

· Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

Is Sub Chapter S A Good Fit For Your Business?

No matter how they make look the same, every tax situation is different. S Corporations are great for businesses that:

· Provide services (insurance agents, consultants, etc.);

· Do not have large start-up costs;

· Won’t be making any major equipment purchases before operations begin;

· Generate lots of revenue with minimal effort and expense.

S Corps are typically not recommended for holding real estate due to debt basis issues, transferring of real estate, and unfriendly tax treatment upon death.

If you want to know how much you can save on taxes by lowering your self-employment taxes, call our office today. Howard Tax Prep can provide you with tax reduction strategies for your business taxes, in addition to your personal tax return.

Learn More

Schedule A FREE 15 MINUTE CONSULTATION NOW! Simply click the button below, and get answers to your questions.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 1-855-743-5765 Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

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Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!
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Business Taxes, Family Taxes, General Information, General Tax Topics, Self Employed, Small Business, Tax Deductions, Uncategorized

12 Things You Must Ask Your Tax Preparer!

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Author Trudy Howard

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1.) Can I pay my fees out of my return?

This one question will give you insight into whether or not your preparer has passed the IRS & BANK CRIMINAL & CREDIT BACKGROUND CHECKS! If your tax return preparer only accepts cash (or cash equivalents such as PayPal, cash app, or even credit/debit cards), 9 times out of 10 you’re dealing with an unauthorized E-file provider. In order to offer clients, refund advances, and the ability to have their tax preparation fees deducted from their tax refund, a tax preparer (or the agency they work for) has to be approved by the IRS as an ERO (electronic return originator) that is authorized to send the IRS E-files. ERO providers have to pass background checks, credit checks, and suitability checks in order to become an authorized E-file provider.

2.) Do you screen your tax return preparers and assistants to see if they’ve ever been arrested for (or charged with) bank fraud, theft, identity theft, or any other criminal charges?

This is HUGE. During tax season I always see an increase in social media post referencing bank accounts that have been compromised, and identity theft issues. While your preparer may not be committing fraudulent acts, your preparer may have unknowingly hired a data entry assistant that is using/selling your information. Ask questions about the assistant, and find out if they’ve been background checked.

3.) Will my preparer sign my return, and do all of the preparers have a paid tax identification number?

I’ve seen HUNDREDS of tax returns in which consumers paid someone to prepare their returns, only to have the “tax return preparer” use Turbo Tax or some other software, and submit the tax return as a SELF PREPARED return without the return preparers signature. THIS IS A HUGE RED FLAG! Whenever you pay someone to prepare your tax return, that preparer needs to sign your return.  Also, although YOU ARE RESPONSIBLE for what is on your tax return, some penalties can be waived if you can prove that you relied on the advice of a tax professional. **

4.) What safety measures do you have in place to protect my data (locked file cabinets, encrypted file sharing, etc.)?

This is self-explanatory.

5.) What are the minimum education and experience requirements for your preparers?

You don’t necessarily need a CPA, but you also don’t want someone that dropped out of the 8th grade.

6.) Do you have a special concentration (small business, truck drivers, realtors, salespeople etc.)?

Have you ever heard the term jack of all trades, master of none? Make sure that you get a tax preparer familiar with your industry as tax law, and deductions can vary based on profession. For example, a salesperson can’t take per diem, but an owner operator truck driver can.

7.) Do your preparers have any accounting experience?

There are 2 words that come to mind when thinking of why you want your tax preparer to have accounting knowledge/experience. Those two words are: depreciation, and basis.

8.) How many continuing education hours are your tax preparers required to meet? How often must they complete these continuing education requirements (yearly, every 3 years, etc.)?

Tax law changes often, so you want an agent that stays abreast of the new Federal, State, and county tax law changes.

9.) Are you and your agents listed on the IRS website under the
Directory of Federal Tax Return Preparers with Credentials and Select Qualifications?

The IRS has an online directory that will let you know if the person you are dealing with is credentialed; use it.

10.) If I get audited can you represent me before the IRS?

Make sure that your preparer can represent you in front of IRS employees, and the tax payor advocate service.

11.) Are you open year round? What if I need help after April 15th?

You want to work with a tax firm that is open year round, and not just during tax season. Many “fly by night” operations come into town for tax season, submit fraudulent tax returns, and then disappear into the night just as quickly as they appeared.

12.) Do you offer tax planning services?

Tax preparation is the method of recording facts & reporting the facts to the IRS in proper format. Tax planning is the act of analyzing data & creating a plan of action to reduce tax liability. Tax planning requires that your tax preparer not only knows tax law, but also understands how to apply tax law.

*See Whitsett, T.C. Memo. 2017-100. Also see United States v. Boyle, 469 U.S. 241, 250 (1985))
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