Archive

Archive for the ‘About Information Returns’ Category

Can a Company Have All 1099 Workers?

March 2nd, 2013 No comments

Independent contracting has increased in popularity lately due to the potential flexibility and freedom it provides both the employers and the contractor. There are some businesses that prefer to only work with 1099 contractors, due to some of the complexities and higher costs of hiring W-2 employees. Employees can cost up to 30 percent more to hire than independent contractors due to the employer’s legal requirement to match Social Security, unemployment insurance, liability insurance, and more.

Many modern businesses run with less overhead and prefer working mainly or exclusively with 1099 contractors. If a business hires only 1099 workers it does not mean that laws have been broken. If all of a company’s workers pass the common-law test for an independent contractor then there should be no issues of legality. The IRS provides form SS-8 to make the determination for employers who aren’t sure.

Employees are protected by federal and state laws that are designed to protect workers from unsafe or unfair workplace environments, however independent contractors are generally not protected by these same laws. There are some unscrupulous employers that purposely classify their employees as independent contractors in order to save money on taxes or minimize overhead. These businesses risk substantial penalties if they are audited. Regardless of the reduced tax burden and administrative costs of hiring an employee, an employer should never misclassify a worker as an independent contractor.

It is estimated that 20% of businesses misclassify some of their employees as independent contractors. One study by the US Treasury estimated that approximately $70 billion is lost annually due to employee misclassification. Some of this misclassification is due to ignorance of employment law and the IRS 20 factor test. However some of it is intentional tax evasion.

Whether a misclassification is intentional or unintentional, there are significant penalties for misclassification. In the cases where an employer was honestly mistaken, and filed 1099 forms on time for the misclassified employees, the penalty is 1.5% of the employee’s wages, 20% of the amount that should have been withheld from the employee, and 100% of the employer’s share. If the mistake was unintentional and 1099 forms were not filed, the penalty of 1.5% and 20% is doubled. Intentional misclassification has an even more severe penalty, and additional fines may be included.

The IRS offers a 20 factor test to help businesses classify their workers. Due to the variety of different employment circumstances, these rules may not fully clarify the status of a worker. If there is further confusion after this 20 factor test, then Form SS-8 should be filled out by the employer. This form is used to request a worker’s status by the IRS. A determination from the IRS may take up to 6 months.

Once a determination has been made by the IRS, it is much safer to use that determination for tax purposes.  If a worker is classified as a 1099 contractor and the IRS suspects that there was a misclassification for some reason, they may audit the company. This is because the IRS heavily relies on revenue from tax withholding. Thus, it is much safer to file form SS-8 if there is any doubt whatsoever, and rely on the IRS’s response for tax purposes.

VN:F [1.9.22_1171]
Rating: 0.0/5 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)
Categories: About Information Returns Tags:

About the Voluntary Classification Settlement Program (VCSP)

March 2nd, 2013 No comments

The Voluntary Classification Settlement Program (VCSP) is a tax relief program intended to improve compliance with tax law and reduce the burden of penalties on taxpayers who voluntarily want to change the status of independent contractors to employees. The VCSP offers an option for taxpayers to significantly reduce their potential tax penalties and gain immunity from being audited in regards to worker classification.

Under the program, taxpayers who have consistently treated their workers as independent contractors from the start, and who have filed their 1099 forms on time for the past three years may be eligible for the program. The taxpayer cannot be under audit by a state government agency or the IRS.  If the taxpayer was audited in the past, the taxpayer must be compliance with the previous audit.

The VCSP allows the taxpayer to pay 10 percent of the liability that would normally have been due, only for the most recent tax year for any workers who are reclassified as employees. Interest and penalties on the amount are both waived as a part of the program. The taxpayer will also gain immunity from being audited for past years in regards to worker classification. In exchange for this relief, the taxpayer must treat the workers as W-2 employees on all future tax returns.

Form 8952 is the application for the VCSP, and the IRS recommends that the application should be filed a minimum of 60 days prior to the date that the taxpayer wants to reclassify its worker(s). The IRS will attempt to have the application processed as quickly as possible.  Once the application has been approved the IRS will enter a closing agreement with the taxpayer. If there is a balance due, then payment would be due at the time that the closing agreement is signed.

On December 17, 2012 the IRS announced an expansion of the VCSP called the VCSP TEE (Temporary Eligibility Extension) which offers a modified version of the VCSP to taxpayers who have not filed all of their 1099 forms for the past 3 years on time. There are eligibility requirements that must be met, and the application to the program must be completed by June 30, 2013. Once a taxpayer has been accepted into the program, all 1099 forms that have not been filed must be correctly issued to the contractors and the IRS.

The program does not require the taxpayer to classify all of its workers as employees, only the ones that pass the common law test. Exempt organizations are eligible for the program if they meet the requirements. The IRS will contact taxpayers who are rejected from the program, and rejection does not mean that the taxpayer will be audited.

If a taxpayer has already been contacted by the IRS in regard to an SS-8 determination, they are still eligible for the VCSP since the SS-8 determination process is not an audit. VCSP application information is not shared with state agencies or the Department of Labor.   The VCSP offers a convenient option for taxpayers to change independent contractor status to employees on future tax returns and avoid costly potential penalties and interest.

VN:F [1.9.22_1171]
Rating: 0.0/5 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)
Categories: About Information Returns Tags:

About Form 1098-E

February 1st, 2011 No comments

Form 1098-E

Form 1098-E must be filed by any financial or government institution, individual, or other entity who receives over $600 in student loan interest from one person during a year. If one entity is receiving interest payments on behalf of another, as in the case of a collection agency, it is the first entity to handle the payment that must report it on form 1098-E.

To qualify as a student loan for tax purposes, a loan must be financed or regulated under Federal, State or local government programs dealing with higher education. The student must officially certify that the loan is used only to pay postsecondary school expenses at an accredited college, university, vocational school or vocational school. The student cannot have used loan money to pay for medical or insurance expenses, room and board, or sports or other hobbies. Mixed-use loans are not reported on form 1098-E.

A copy of form 1098-E is sent to the borrower, who can then use it to claim a Student Loan Interest Deduction. This reduces the amount of income subject to tax by up to $2,500 Per Return, as long as the borrowers are not claimed as dependents on anyone else’s tax return and have a modified adjusted gross income (MAGI) not more than $50,000 for single taxpayers, or $100,000 for married taxpayers.

Box 1 of Form 1098-E lists the total student interest received by the lender, while Box 2 is checked if loan origination fees or capitalized interest are part of the figure listed in part one. (Origination fees or capitalized interest do not have to be included as part of the Box 1 total if the loan was taken out before 2005.)  Other information on the form includes the account numbers, mailing addresses and telephone numbers of the recipients and lenders.

VN:F [1.9.22_1171]
Rating: 0.0/5 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Tax Requirements for Barter Exchanges

January 31st, 2011 No comments

Bartering, the oldest known form of economic activity, involves the trading of one item or service for another, often on an informal basis. Barters can be negotiated at any time, any place, and between any two (or more) parties or their intermediaries. However, they often occur in pre-arranged, contract-mediated marketplaces, known as barter exchanges. Barter exchange companies facilitate the fair transfer of goods between their members, often charging a percentage of the transaction.

The IRS requires barter exchanges to file a Form 1099-B to list proceeds from their brokerage of member trades. Certain exempt foreign individuals, and barter exchanges reporting fewer than 100 transactions per year, or those whose goods and services are worth less than $1.00, are not required to file. Those bartering their goods on exchanges will receive a Form 1099-B listing their profits, which they then must report as income on a Federal tax return.

The Form 1099-B list such items as the dates of sale or exchanged, the dollar amount and classes of stocks, bonds and other financial instruments exchanged, total dollar value of bartered items or services, the Profit or (loss) realized in the previous calendar year, unrealized profit (or loss) on open contracts, and aggregate profit or loss. The name, address, and taxpayer identification number of each member or client providing property or services in the exchange must also be listed.

Services and goods transferred by corporate members on exchanges are reported in aggregate at the end of every year. By contrast, each transaction by a non-corporate member is reported on an individual basis, leading to a potential required filing of multiple 1099-B Forms per year.

Failure to file 1099-B forms can lead to considerable IRS penalties, up to the amount of $250,000 per year in which returns are not filed, filed late, or filed incorrectly. Small businesses, which are defined for the purposes of the tax code as business with annual gross receipts of less than $3 million for the three previous years, are subject to smaller maximum penalties.

VN:F [1.9.22_1171]
Rating: 0.0/5 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

About Form W-3

December 17th, 2010 No comments

IRS W-3 form is a relative of the more commonly known W-2 form, which reports wages and withholding for each individual employee in January. The W-3 form by contrast, is a single filing by the employer (in March) that lists all wages and compensation paid out to its employees. The W-3 totals up wages paid and taxes withheld. Household employers with even one employee must file a W-3 form.

Essentially, the W-3 contains the sum of all information reported on all W-2’s forms. This includes such items total wages tips and other compensation, total security wages, total social security tax withheld, total Medicare wages and tips, total Social Security tips, total allocated tips, total advance earned income tax credit payments, total dependent care benefits, total non-qualified plans, total deferred compensation, and totals of third party sick pay, and more. It’s important to gather this information from employees throughout the year to avoid a crunch around filing time.

Form W-3’s also list the Employer’s name, address and ZIP code, the employer identification number (EIN), any other EIN’s used in the same year, the kind of payer (whether Military, Medicare Government Exempt etc.) control number (allocated by Payroll software. It must report the total number of W-2’s aggregated, and should completed only when copy A of W-2 forms are being submitted.

Usually employers sign the W-3 form. However, it can also be signed by a transmitter or sender, such as a service bureau, reporting agent, paying agent, or disbursing agent, if the sender is authorized to sign by an agency agreement.

To order scannable paper W-3 forms, one should call 1-800 IRS TAX-FORM. W-3 forms can be filled out electronically with our W-3 software that can be found at http://www.1099fire.com

VN:F [1.9.22_1171]
Rating: 5.0/5 (1 vote cast)
VN:F [1.9.22_1171]
Rating: +1 (from 1 vote)

About Form 5498

December 16th, 2010 No comments

An IRS Form 5498 must be filed for any individual retirement arrangement (IRA) engaged or maintained during the previous calendar year. An exception is made if no contributions, of any kind, whether rollovers, re-characterizations or conversions were made that year.

Direct rollovers from qualified plans must be included on the form. On the other hand, direct trustee-to-trustee transfers from a traditional IRA to another traditional IRA, or a simplified employee pension, do not. Individuals with IRAs will receive a 5498 form every year from their financial institution sometime in late April or May. They have an option to make contributions throughout the year, ending on April 15th Spousal IRAs have to be filed on their separate form.

Recharacterizations of IRA contributions must be reported. A participant in an IRA has the option after one year, to recharacterize or, in essence, transfer a contribution to a second IRA. In this case the trustee of the first IRA must report the amount contributed before re-characterizing.

Catch-up contributions, made by participants who are 50 years or older (for whom the contribution limit is raised from $5000 to $6000) may be made under salary reduction or a SIMPLE IRA plan. It is necessary to report any conversion of an IRA into a Roth IRA. In the case of any revocation of a traditional, Roth, or SIMPLE IRA after seven days, or its closure for at any time, a Form 5498 must be filed to report the various forms of contribution to the IRA, whether regular, rollover or conversion. Individual IRA conversions, either 60-day rollovers or direct trustee-to-trustee transfers are not considered contributions. One is still allowed to make the maximum allowable IRA contribution after rolling over an IRA.

Special rules for filing apply to certain citizens, such as U.S. military personnel stationed in combat zones or qualified hazardous duty areas. Such personnel have an additional period after the normal contribution due date (April 15th) to make contributions, equal to the time they were in the combat or hazardous area, plus 180 days. Special rules for filing may also apply for individuals living in areas deemed disaster zones by the U.S. president.

VN:F [1.9.22_1171]
Rating: 0.0/5 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

About Form W-2

December 15th, 2010 No comments

The IRS Form W-2 is among the most familiar tax forms. It must be filed by employers for every wage or salary-earning employee from whom taxes have been withheld or who have claimed appropriate exemptions in the previous calendar year. The employer must provide the W-2 form to employees before January 31st. Six copies of the W-2 form must be filled out. One goes to the Social Security administration, one is retained by the employee for their own records, one is filed by the employee with their federal tax returns, one is retained by the employer, one is submitted by the employer to the employee’s state taxing authority, and one is filed with the employee’s local or state income tax returns.

The W-2 has boxes to report Medicare wages and tips, other forms of wages and tips, social security tips, state income tax, Nonqualified plans (tax deferred plans and retirement accounts.), social security wages, allocated tips, advance EIC payments, nonqualified plans and dependent care benefits (the amount deducted from wages for care for dependents, such as nannies, babysitters, daycare, et cetera). The amount to be filled in for wages and tips is to equal to total yearly compensation minus deferred compensation. Wages and tips are taxed for Social security up to the amount of $97,500. Witholdings are entered for Federal income tax, social security tax, and local and state taxes.

Other boxes on the form list the Employer’s name, address and ZIP code, the employee’s social security number, the employer identification number, and the control number, which is determined by payroll software, and the Employer’s State ID number.

W-2 forms can be filed in paper or electronic form. There are three ways to file electronically. A wage report can be created through software that formats the form in accordance with Social Security’s specifications, allowing crosschecking for correctness. Otherwise one can use W-2 Online, to complete forms on a home computer and submit them through the web with no software required, or use W-2c online, which in much the same way can be used to complete forms W-2c. All options are available through Business Services online, which offers Internet tax services for businesses and employers, and can be accessed through the social security website.

VN:F [1.9.22_1171]
Rating: 0.0/5 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

About Information Returns

December 13th, 2010 No comments

An information return is a document that must be filed to update the IRS about wage and non-wage related business transactions and income for individuals, businesses, families, estates, partnerships and trusts. It does not specifically determine a tax liability, but allows for the assessment of earnings that might be relevant to such a liability.

Information listed on the return could include such earnings as interest payments and dividends, payments to subcontractors and changes in tax status, such as alterations in the makeup of a household (a marriage, the addition of new dependents, etc.). Copies of the return must be sent to the recipient of the income. Failure to file an information return can result in penalties and a higher tax liability down the road.

Information returns are necessary for a wide variety of additional transactions and earnings, including accelerated death benefits, broker transactions, advance earned income credit, fish purchases, agriculture payments, golden parachutes, allocated tips, annuities, attorney fees, employee awards, bonuses, awards, barter exchange income, employee car expenses, charitable gift annuities, crop insurance proceeds, education loan interest, insurance services, and many more.

Forms must be filed to report contributions of motor vehicles, boats, and airplanes, tuition related expenses reimbursements and government payments such as unemployment compensation, and tax refunds. Changes in corporate control and capital tax structure for a company also bears filing an information return.

IRS rules for information returns stipulate minimum proceeds necessary to mandate filing for a variety of transactions. For example, mortgage interest, student loan interest, and cancellation must be filed at a rate of $600 or more. Dividends and distributions, interest income, unemployment insurance and payments must be filed at $10 or more. Death benefits, health coverage tax credit payments, exercise of stock options, acquisition of abandoned property, and cancellation of debt, must be filed at all amounts.

Each type of transaction has its own form associated with it, and they are due at different times. This makes organizing and tracking information return filings a complex task. Most companies use an automated system to arrange returns and, where possible, file electronically. This can be done using our software at http://www.1099fire.com

VN:F [1.9.22_1171]
Rating: 2.0/5 (1 vote cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

FAQs About Information Returns

September 30th, 2010 No comments

What is an information return?

Information returns are documents with tax or other information that are required to be filed with the IRS. They are intended to report specific business transactions. Information returns are not considered to be tax returns and they are used for informational purposes alone.

Who must file information returns?

Any business, corporation, individual, estate, or other organization that takes part in a reportable transaction during the calender year must file an appropriate information return. In most cases, statements must also be sent to the other parties involved in the transaction. Those who are filing more than 250 information returns are required to file them electronically, although lower numbers of information returns are also more convenient to file electronically.

Which transactions are reportable?

The IRS lists 120 transactions that are reportable, and the list is by no means complete. If a transaction is not listed on the IRS’s website it does not mean that the transaction does not need to be reported.

The minimum amount of the transaction which necessitates reporting depends on the type of transaction and is determined by the IRS.

How do you file information returns?

Information returns can be filed in paper form by mailing the form to the appropriate address as directed by the form. There are also some information returns that can be filed with magnetic media. Forms 1099, 1098, 1042-S, 3921, 3922, 5498, W-2 and W-2G and others can be filed electronically via FIRE software (File Information Returns Electronically) with an internet connection.

Our website provides software for these and other information returns and you can file them electronically through our site as well. Electronic filing is better for the speed and accuracy of the information return and it is recommended to file electronically over paper filing when possible.

What is the deadline to file information returns?

Although the deadline varies, many information returns have to be provided to those involved in the reportable transaction by January 31st.  The information returns are usually required to be filed to the IRS by February 28, but this deadline varies and the exact date for the particular information return can be found on the form itself.

What if I need more time?

If you need more time, the IRS offers the option of applying for an extension with Form 8809. You are automatically approved and granted 30 more days to send your information returns to the IRS.

VN:F [1.9.22_1171]
Rating: 0.0/5 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

About Form 1098-T

September 29th, 2010 4 comments

Form 1098-T is used by eligible educational institutions and is filed for each student for which a reportable transaction is made. Form 1098-T does not have to be filed in the case that the student does not obtain academic credit from their course. If the student is a non-resident alien the form also does not need to be filed unless the student requests it. Students who have their tuition and other expenses waived or who have their education completely paid for with scholarships and grants do not need to have a 1098-T form filed as well.

Form 1098-T reports amounts billed for tuition and related expenses by educational institutions.The form must be filed by eligible educational institutions for qualified students that the institution bills for tuition and related expenses. Institutions that are a part of a governmental unit are also required to file the form. The same reporting method is expected to be used for all calendar years except in the case that the IRS offers the institution the ability to change their reporting method. Insurers that are in the business of reimbursing or offering refunds for qualified tuition and related expenses are also required to fill a Form 1098-T for each student.

Eligible educational institutions are classified by Section 481 of the the Higher Education Act of 1965 that went into effect on August 5th 1997. Institutions include vocational schools, colleges, universities, or other postsecondary institutions. Most public, private, and non-profit institutions meet the classification of eligible educational institutions.

Qualified tuition and related expenses include any amount paid for a course. It does not include amounts paid for education relating to sports, hobbies, and games except in the circumstance that the course is a part of the student’s degree program or a part of his or her vocational training. Also, room, board, medical expenses, insurance, transportation, living expenses, and family expenses are not included.

Academic credit is defined by the IRS as the credit that is awarded to a student after the completion of a course that leads to a postsecondary degree or other type of educational credential. One Form 1098-T is required to be filled for every student enrolled in an institution for an academic period. Academic periods include semesters, trimesters, and quarters, or whichever particular type of period that the institution uses.

VN:F [1.9.22_1171]
Rating: 0.0/5 (0 votes cast)
VN:F [1.9.22_1171]
Rating: +1 (from 1 vote)