Five Facts about the Making Work Pay Tax Credit

IRS Summertime Tax Tip 2010-06

1. This credit – still available for 2010 – equals 6.2 percent of a taxpayer’s earned income. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.

2. Eligible self-employed taxpayers can benefit from the credit by evaluating their expected income tax liability and, if they are eligible, by making the appropriate adjustments to the amounts of their estimated tax payments.

3. Taxpayers who fall into any of the following groups during 2010 should review their tax withholding to ensure enough tax is being withheld. Those who should pay particular attention to their withholding include:

• Married couples with two incomes
• Individuals with multiple jobs
• Dependents
• Pensioners
• Workers without valid Social Security numbers

Having too little tax withheld could result in potentially smaller refunds or – in limited instances –small balance due rather than an expected refund.

4. The Making Work Pay tax credit is reduced or unavailable for higher-income taxpayers. The reduction in the credit begins at $75,000 of income for single taxpayers and $150,000 for couples filing a joint return.

5. A quick withholding check using the IRS Withholding Calculator on IRS.gov may be helpful for anyone who believes their current withholding may not be right. Taxpayers can also check their withholding by using the worksheets in IRS Publication 919, How Do I Adjust My Tax Withholding?. Adjustments can be made by filing a revised Form W-4, Employee’s Withholding Allowance Certificate. Pensioners can adjust their withholding by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments.

Excess Social Security or Railroad Retirement Tax Withholding

Most employers must withhold social security tax from your wages. In some cases, however, the federal government and state and local governments do not have to withhold social security tax from their employees’ wages. If you work for a railroad employer, that employer must withhold tier 1 railroad retirement (RRTA) tax and tier 2 RRTA tax.

Two or more employers. If you worked for two or more employers in 2009, too much social security tax or tier 1 RRTA tax may have been withheld from your pay. You may be able to claim the excess as a credit against your income tax when you file your return. Table 3-2 shows the maximum amount that should have been withheld for any of these taxes for 2009. Figure the excess withholding on the appropriate worksheet on page 47.

Table 3-2.Maximum Social Security and RRTA Withholding for 2009

Type of tax Maximum wages subject  Tax rate Maximum tax to

to tax                                                           be withheld

Social security  . $106,800 6.2% $6,621.60

Tier 1 RRTA $106,800 6.2% $6,621.60

Tier 2 RRTA $79,200 3.9% $3,088.80

Joint returns. If you are filing a joint return, you cannot add any social security or tier 1 RRTA tax withheld from your spouse’s income to the amount withheld from your income. You must figure the excess separately for both you and your spouse to determine if either of you has excess withholding.

Note.

All wages are subject to Medicare tax withholding.

Employer’s error.   If you had only one employer and he or she withheld too much social security or tier 1 RRTA tax, ask the employer to refund the excess amount to you. If the employer refuses to refund the overcollection, ask for a statement indicating the amount of the overcollection to support your claim. File a claim for refund using Form 843, Claim for Refund and Request for Abatement.

Worksheet for Nonrailroad Employees

If you did not work for a railroad during 2009, figure the excess social security withholding on Worksheet 3-1 on the next page.

Note.

If you worked for both a railroad employer and a nonrailroad employer, use Worksheet 3-2 on the next page to figure excess social security and tier 1 RRTA tax.

Where to claim credit for excess social security withholding. If you file Form 1040, enter the excess on line 69.

If you file Form 1040A, include the excess in the total on line 44. Write “Excess SST” and show the amount of the credit in the space to the left of the line.

You cannot claim excess social security tax withholding on Form 1040EZ.

Example.

In 2009, Tom Martin earned $62,000 working for Company A and $47,200 working for Company B. Company A withheld $3,844 for social security tax. Company B withheld $2,926.40 for social security tax. Because he worked for two employers and earned more than $106,800, he had too much social security tax withheld. Tom figures his credit of $148.80, as shown on the illustrated Worksheet 3-1 below.

Worksheets for Railroad Employees

If you worked for a railroad during 2009, figure your excess withholding on Worksheet 3-2 and 3-3, as appropriate, on the next page.

Where to claim credit for excess tier 1 RRTA withholding. If you file Form 1040, enter the excess on line 69.

If you file Form 1040A, include the excess in the total on line 44. Write “Excess SST” and show the amount of the credit in the space to the left of the line.

You cannot claim excess tier 1 RRTA withholding on Form 1040EZ.

How to claim refund of excess tier 2 RRTA. To claim a refund of tier 2 tax, use Form 843. Be sure to attach a copy of all of your Forms W-2.

See Worksheet 3-3  and the Instructions for Form 843, line 3, for more details.

Worksheet 3-1.Excess Social Security—Nonrailroad Employees —Illustrated (Tom Martin)

1. Add all social security tax withheld (but not more than $6,621.60 for each employer). This tax should be shown

in box 4 of your Forms W-2. Enter the total here 1. $6,770.40

2. Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 60, identified by “UT” 2. -0-

3. Add lines 1 and 2. If $6,621.60 or less, stop here. You cannot claim the credit 3. 6,770.40

4. Social security limit 4. $6,621.60

5. Excess. Subtract line 4 from line 3 5. $148.80

Worksheet 3-1.Excess Social Security—Nonrailroad Employees

1. Add all social security tax withheld (but not more than

$6,621.60 for each employer). This tax should be shown

in box 4 of your Forms W-2. Enter the total here 1.

2. Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 60, identified by “UT” 2.

3. Add lines 1 and 2. If $6,621,60 or less, stop here. You cannot claim the credit 3.

4. Social security limit 4. $6,621.60

5. Excess. Subtract line 4 from line 3 5.

Worksheet 3-2.Excess Social Security and Tier 1 RRTA—Railroad Employees

1. Add all social security and tier 1 RRTA tax withheld (but not more than $6,621.60 for each employer). Social security tax should be shown in box 4 and tier 1 RRTA should be shown

in box 14 of your Forms W-2. Enter the total here 1.

2. Enter any uncollected social security and tier 1 RRTA tax on tips or group-term life insurance included in the total on Form 1040, line 60, identified by “UT” 2.

3. Add lines 1 and 2. If $6,621.60 or less, stop here. You cannot claim the credit 3.

4. Social security and tier 1 RRTA tax limit 4. $6,621.60

5. Excess. Subtract line 4 from line 3 5.

Worksheet 3-3.Excess Tier 2 RRTA—Railroad Employees

1. Add all tier 2 RRTA tax withheld (but not more than $3,088.80 for each employer). Box 14 of your Forms W-2 should show

tier 2 RRTA tax. Enter the total here 1.

2. Enter any uncollected tier 2 RRTA tax on tips or group-term life insurance included in the total on Form 1040, line 60, identified by “UT” 2.

3. Add lines 1 and 2. If $3,088.80 or less, stop here. You cannot claim the credit. 3.

4. Tier 2 RRTA tax limit 4. $3,088.80

5. Excess. Subtract line 4 from line 3.

A Guide to Information Returns

Introduction

The Information Reporting Program Website is designed to help you meet your Information Reporting Requirements. Included are help-line telephone numbers and direct links to aid you in reporting information returns. You will also find information about how to file returns electronically.

What is an Information Return?

An information return is a tax document businesses are required to file to report certain business transactions to the Internal Revenue Service (IRS). The requirement to file Information Returns is mandated by the Internal Revenue Service and associated regulations.

Who must file Information Returns?

Any person, including a corporation, partnership, individual, estate, and trust, who make reportable transactions during the calendar year must file information returns to report those transactions to the IRS. Persons required to file Information Returns to the IRS must also furnish statements to the recipients of the income. Filers who have 250 or more must file these returns electronically.

Types of Payments

Below is an alphabetical list of some payments and the forms to file and report them. However, it is not a complete list of all payments, and the absence of a payment from the list does not indicate that the payment is not reportable. For information on a specific type of payment, see the separate instructions for the form(s) listed.

Type of Payment  Report on Form

Abandonment 1099-A

Accelerated death benefits 1099-LTC

Acquisition 1099-A

Advance earned income credit W-2

Agriculture payments 1099-G

Allocated tips W-2

Annuities 1099-R

Attorneys, fees and gross proceeds 1099-MISC

Auto reimbursements: Employee W-2

Auto reimbursements: Nonemployee 1099-MISC

Awards: Employee W-2

Awards: Nonemployee 1099-MISC

Barter exchange income 1099-B

Bonuses: Employee W-2

Bonuses: Nonemployee 1099-MISC

Broker transactions 1099-B

Cancellation of debt 1099-C

Capital gain distributions 1099-DIV

Car expense: Employee W-2

Car expense: Nonemployee 1099-MISC

Charitable gift annuities 1099-R

Commissions: Employee W-2

Commissions: Nonemployee 1099-MISC

Commodities transactions 1099-B

Compensation: Employee W-2

Compensation: Nonemployee 1099-MISC

Crop insurance proceeds 1099-MISC

Damages 1099-MISC

Death benefits 1099-R

Death benefits:Accelerated 1099-LTC

Debt cancellation 1099-C

Dependent care payments W-2

Direct rollovers 1099-R, 5498

Direct sales of consumer products for resale 1099-MISC

Directors fees 1099-MISC

Discharge of indebtedness 1099-C

Dividends 1099-DIV

Education IRA contributions 5498

Education IRA distributions 1099-R

Education loan interest 1098-E

Employee business expense Reimbursement W-2

Employee compensation W-2

Excess deferrals, excess contributions, distributions of 1099-R

Fees: Employee W-2

Fees: Nonemployee 1099-MISC

Fishing boat crew members proceeds 1099-MISC

Fish purchases for cash 1099-MISC

Foreclosures 1099-A

Foreign persons U.S source income 1042-S

401(k) contributions W-2

404(k) dividend 1099-DIV

Gambling winnings W-2G

Golden parachute: Employee W-2

Golden parachute: Nonemployee 1099-MISC

Grants, taxable 1099-G

Health care services 1099-MISC

Income tax refunds, state and local 1099-G

Indian gaming profits paid to tribal members 1099-MISC

Interest income 1099-INT

Interest, mortgage 1098

IRA contributions 5498

IRA distributions 1099-R

Life insurance contract distributions 1099-R, 1099-LTC

Liquidation, distributions in 1099-DIV

Loans, distribution from pension plan 1099-R

Long-term care benefits 1099-LTC

Medical savings accounts: Contributions 5498-MSA

Medical savings accounts: Distributions 1099-MSA

Medicare+Choice Medical Savings Accounts: Contributions 5498-MSA

Medicare+Choice Medical Savings Accounts: Distributions 1099-MSA

Medical services 1099-MISC

Mileage: Employee W-2

Mileage: Nonemployee 1099-MISC

Military retirement 1099-R

Mortgage interest 1098

Moving expense W-2

Nonemployee compensation 1099-MISC

Nonqualified plan distribution W-2

Nonqualified plan distribution: Beneficiaries 1099-R

Original issue discount (OID) 1099-OID

Patronage dividends 1099-PATR

Pensions 1099-R

Points 1098

Prizes: Employee W-2

Prizes: Nonemployee 1099-MISC

Profit-sharing plan 1099-R

PS 58 costs 1099-R

Punitive damages 1099-MISC

Qualified plan distributions 1099-R

Qualified state tuition program payments 1099-G

Real estate transactions 1099-S

Recharacterized IRA contributions 1099-R, 5498

Refunds, state and local tax 1099-G

Rents 1099-MISC

Retirement 1099-R

Roth conversion IRA contributions 5498

Roth conversion IRA distributions 1099-R

Roth IRA contributions 5498

Roth IRA distributions 1099-R

Royalties 1099-MISC

Timber, pay-as-cut contract 1099-S

Sales: Real estate 1099-S

Sales: Securities 1099-B

Section 1035 exchange 1099-R

SEP contributions W-2, 5498

SEP distributions 1099-R

Severance pay W-2

Sick pay W-2

SIMPLE contributions W-2, 5498

SIMPLE distributions 1099-R

Student loan interest 1098-E

Substitute payments in lieu of dividends or tax-exempt interest 1099-MISC

Supplemental unemployment W-2

Tax refunds, state and local 1099-G

Tips W-2

Tuition 1098-T

Unemployment benefits 1099-G

Vacation allowance: Employee W-2

Vacation allowance: Nonemployee 1099-MISC

Wages W-2

Six Tax Tips for New Business Owners

IRS Summertime Tax Tip 2010-05

Are you opening a new business this summer? The IRS has many resources available for individuals that are opening a new business. Here are six tax tips the IRS wants new business owners to know.

1. First, you must decide what type of business entity you are going to establish. The type of business entity will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.
2. The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
3. An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.
4. Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.
6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

IRS Offers One-Time Special Filing Relief Program for Small Charities; Oct. 15 Due Date to Preserve Tax-Exempt Status

IR-2010-87, July 26, 2010

WASHINGTON — Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file required returns for 2007, 2008 and 2009 can preserve their status by filing returns by Oct. 15, 2010, under a one-time relief program, the Internal Revenue Service announced today.

The IRS today posted on a special page of IRS.gov the names and last-known addresses of these at-risk organizations, along with guidance about how to come back into compliance. The organizations on the list have return due dates between May 17 and Oct. 15, 2010, but the IRS has no record that they filed the required returns for any of the past three years.

“We are doing everything we can to help organizations comply with the law and keep their valuable tax exemption,” IRS Commissioner Doug Shulman said. “So if you do not have your filings up to date, now’s the time to take action and get back on track.”

Two types of relief are available for small exempt organizations — a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice (e-Postcard) , and a voluntary compliance program (VCP) for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.

Small organizations required to file Form 990-N simply need to go to the IRS website [link], supply the eight information items called for on the form, and electronically file it by Oct. 15. That will bring them back into compliance.

Under the VCP, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by Oct. 15 and pay a compliance fee. Details about the VCP are on the IRS website, along with frequently asked questions.

The relief announced today is not available to larger organizations required to file the Form 990 or to private foundations that file the Form 990-PF.

The IRS will keep today’s list of at-risk organizations on IRS.gov until Oct. 15, 2010. Organizations that have not filed the required information returns by that date will have their tax-exempt status revoked, and the IRS will publish a list of these revoked organizations in early 2011. Donors who contribute to at-risk organizations are protected until the final revocation list is published.

The Pension Protection Act of 2006 made two important changes affecting tax-exempt organizations, effective the beginning of 2007. First, it mandated that all tax-exempt organizations, other than churches and church-related organizations, must file an annual return with the IRS. The Form 990-N was created for small tax-exempt organizations that had not previously had a filing requirement. Second, the law also required that any tax-exempt organization that fails to file for three consecutive years automatically loses its federal tax-exempt status. The IRS conducted an extensive outreach effort about this new legal requirement but, even so, many organizations have not filed returns on time.

If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.

Six Tax Benefits for Job Seekers

IRS Summertime Tax Tip 2010-04

Did you know that you may be able to deduct some of your job search expenses on your tax return?

Many taxpayers spend time during the summer months updating their résumé and attending career fairs. If you are searching for a job this summer, you may be able to deduct some of your expenses on your tax return. Here are six things the IRS wants you to know about deducting costs related to your job search.

1. To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses incurred while looking for a job in a new occupation.
2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.
3. You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.
4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
6. You cannot deduct job search expenses if you are looking for a job for the first time.

IRS Releases Proposed Regulations Related to Fees for Preparer Tax Identification Numbers

IR-2010-86, July 22, 2010

WASHINGTON — The Internal Revenue Service today released proposed regulations that would establish a fee for individuals who apply for a preparer tax identification number (PTIN). Proposed regulations that were issued in March would require certain tax return preparers to obtain a PTIN. The IRS is working to finalize those proposed regulations, which are the first of a series of steps planned to increase oversight of federal tax return preparation.

The proposed regulations (REG-139343-08) would establish a fee of $50, payable to the IRS, to cover technology costs, as well as compliance and outreach efforts associated with the new PTIN program. The proposed regulations would also provide for an additional fee (expected to be substantially lower than $50) to be charged by the third-party vendor chosen to operate the new online system. That fee amount is expected to be announced soon, as well as additional details about the launch of a new online application system. These fees could change in future years as program costs are reevaluated.

Agencies are directed by the Office of Management and Budget (OMB) to charge user fees to recover the cost of services that convey special benefits beyond those available to the general public, such as the authority to prepare federal tax returns for compensation.

Tax professionals and other interested parties have until Aug. 23, 2010, to submit comments regarding the proposed regulations. The official publication date of these proposed regulations is July 23.

In January, IRS Commissioner Doug Shulman announced the results of a comprehensive six-month study of the tax return preparer industry, which proposed new registration, testing, and continuing education of tax return preparers. With more than 80 percent of American households using a tax preparer or tax software to help them prepare and file their taxes, higher standards for the tax return preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term.

How to Learn More

The IRS recently broadcast the topic “New Requirements for Tax Return Preparers – Learn the Who, What, When and How” on the webinar IRS Live, an educational program for tax professionals. View the archive on IRS.gov.

Tax professionals can also learn more by attending one of six tax forums this summer around the country hosted by the IRS.  The IRS Nationwide Tax Forums are three-day events that provide tax professionals with the most up-to-date information on federal and state tax issues.

Four Tips on Preparing for a Disaster

IRS Summertime Tax Tip 2010-03

Planning what to do in case of a disaster is an important part of being prepared. The Internal Revenue Service encourages taxpayers to safeguard their records. Some simple steps can help taxpayers protect financial and tax records in case of disasters.

Listed below are tips for individuals on preparing for a disaster.

1. Recordkeeping Take advantage of paperless recordkeeping for financial and tax records. Many people receive bank statements and documents by e-mail. This method is an outstanding way to secure financial records. Important tax records such as W-2s, tax returns and other paper documents can be scanned onto an electronic format. You can copy them onto a ‘key’ or ‘jump drive’ periodically and then keep the electronic records in a safe place.
2. Document Valuables The IRS has disaster loss workbooks for individuals that can help you compile a room-by-room list of your belongings. One option is to photograph or videotape the contents of your home, especially items of greater value. You should store the photos in a safe place away from the geographic area at risk. This will help you recall and prove the market value of items for insurance and casualty loss claims.
3. Update Emergency Plans Emergency plans should be reviewed annually. Individual taxpayers should make sure they are saving documents everybody should keep including such things as W-2s, home closing statements and insurance records. Make sure you have a means of receiving severe weather information; if you have a NOAA Weather Radio, put fresh batteries in it. Make sure you know what you should do if threatening weather approaches.
4. Count on the IRS In the event of a disaster, the IRS stands ready to help. The IRS has valuable information you can request if your records are destroyed. If you have been impacted by a federally declared disaster, you may receive copies or transcripts of previously filed tax returns free of charge by submitting Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, clearly identified as a disaster related request.

Six Tips for Students with a Summer Job

IRS Summertime Tax Tip 2010-02

School’s out and many students now have a summer job. Some students may not realize they have to pay taxes on their summer income. Here are the six things the IRS wants everyone to know about income earned while working a summer job.

1. All employees fill out a W-4, Employee’s Withholding Allowance Certificate,   when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. If you have multiple summer jobs you will want to make sure all your employers are withholding an adequate amount of taxes to cover your total income tax liability. To make sure your withholding is correct, use the Withholding Calculator on IRS.gov.
2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.
3. Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.
4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.
5. Food and lodging allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.
6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:

• You are in the business of delivering newspapers.
• All your pay for these services directly relates to sales rather than to the number of hours worked.
• You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

Summertime Child Care Expenses May Qualify for a Tax Credit

IRS Summertime Tax Tip 2010-01

Did you know that your summer day care expenses may qualify for an income tax credit? Many parents who work or are looking for work must arrange for care of their children under 13 years of age during the school vacation. Those expenses may help you get a credit on next year’s tax return.

Here are five facts the IRS wants you to know about a tax credit available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year.

1. The cost of day camp may count as an expense towards the child and dependent care credit.
2. Expenses for overnight camps do not qualify.
3. If your childcare provider is a sitter at your home or a daycare facility outside the home, you’ll get some tax benefit if you qualify for the credit.
4. The actual credit can be up to 35 percent of your qualifying expenses, depending upon your income.
5. You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.