This guest post is by Dagny Kight, author of “Lower Your IRS Debt”.

The Internal Revenue Service has announced another seemingly uncharacteristic new program befitting an ostensibly “kindler, gentler” tax collector. Last year it was the overhauled Offer in Compromise program which relaxed the requirements to lessen the liability for those deep in tax debt. (Read about the big changes in ebook, Lower Your IRS Debt) This year the IRS would like to kiss and make up with businesses that may be in violation of regulations governing the compensation of independent contractors. Dropping penalties to as low as 1% with an “amnesty” program, the IRS says all will be forgiven if employers step forward and come clean. Sounds like a good way to avoid a potentially complex problem. This is the IRS we’re talking about. Could amnesty be a deal with the devil?

Since 2008, businesses have struggled to find creative ways to cut labor costs and remain afloat. Replacing employees with independent contractors or converting full-timers into part-time contractors eliminates paying benefits and withholding taxes along with reducing payroll and tax reporting paperwork. There are benefits to both sides of the arrangement and for employees who find themselves converted into contractors, many are simply grateful to still have an income in the current economy.

Some employers might like to believe that as long as work is getting done, people are getting paid, and everybody’s happy with the arrangements, there’s nothing to worry about. Not in the IRS’s view! An employer can’t pay a worker like an independent contractor while treating them like an employee, even if the worker agrees to it. There are a lot of ways the IRS might get wise to what’s going on. A company risks audits and penalties if any worker’s tax forms raise a red flag. A disgruntled former employee could blow the whistle or a contractor’s legitimate inquiries for tax advice or unemployment benefits could have a business owner facing Federal tax scrutiny.

For employers who may have run afoul of tax regulations with independent contractors, wouldn’t taking the amnesty program be like dodging a bullet? If a business is found to have been in violation of tax laws, they’ll have to pay any back taxes that are owed. Amnesty will reduce penalties but from that day on, an employer’s business practices could remain under the IRS’s watchful eye for years to come. But this may be a bigger risk—A company might get a slap on the wrist from the Feds but state tax authorities will extend no special treatment. Audits and penalties at the state level could be severe.

A company’s best plan of action may be to bite that bullet instead. Invest the time and effort in getting compliant, as tough as that may be. The general rule is whether the worker is “under the direction and control” of the employer. An employee is; an independent contractor is not. The quickest route to legal status is to use workers provided by a placement agency. For existing workers, make sure no employee and contractor are doing the same job. Contractors may be given assignments but they choose how, when, even where they’ll get the work done. They just have to deliver it on time. No setting work hours, no training in company procedures, no instructions how to do the work, no requiring attendance at meetings. Payment is made on a commission or per project basis and a business should have an invoice from the contractor.

The IRS amnesty program looks tempting but be aware there are potential risks that can’t be mitigated once it’s determined that a company has violated Federal tax regulations. Confession may be good for the soul but a mea culpa to the Internal Revenue Service might not do much for the bottom line.

Do you often make purchases that are directly related to your job? If you do, you may be able to deduct certain work-related expenses that are not reimbursed by your employer. The following information can help you determine which expenses are deductible as an employee business expense. You must itemize your deductions on IRS Schedule A to in order to qualify.

Here are the expenses that generally qualify for an itemized deduction:
• Business travel away from home
• Business use of your car
• Business meals and entertainment
• Use of your home
• Education
• Tools
• Supplies
• Miscellaneous expenses

If you are going to record business expenses as deductions, you must keep records as proof.

For more information on keeping records for your tax filing, see IRS Publication 552, Recordkeeping for Individuals available on the IRS website at www.irs.gov, or call 1-800-TAX-FORM (800-829-3676).

You should report  expenses that are not reimbursed on IRS Form 2106 or IRS Form 2106-EZ and attach it to Form 1040. Deductible expenses are then reported on IRS Schedule A, as a miscellaneous itemized deduction subject to a rule that limits your employee business expenses deduction to the amount that exceeds 2 percent of your adjusted gross income.

For more information see IRS Publication 529, Miscellaneous Deductions, which is available on the IRS website at www.irs.gov, or by calling 1-800-TAX-FORM (800-829-3676).

Daniel Stoica Accounting Professional

Are you a small business owner or are you self-employed?  If you are, you probably have questions about taxes for your particular situation.  You can check out the IRS’s Small Business and Self-Employed Tax Center on the IRS website.

The IRS’s one-stop shop offers a variety of resources and online tools to help small businesses and self-employed individuals by providing resources such as:

• A-Z Index for Business, a fast way to find information
• Small business forms and publications
• Online applications for an Employer Identification Number
• Employment tax information – federal income tax, Social Security and Medicare taxes, FUTA and self-employment tax
• Tax-related news that could affect your business
• Small business educational events
• IRS videos for small businesses

Did you know that there is also a Tax Calendar for Small Business Taxpayers?  The Tax Calendar for Small Businesses and Self-Employed – Publication 1518 – is available online or as a printable PDF file. This 12-month calendar containts information on general business taxes, IRS and Social Security Administration customer assistance, electronic filing and paying options, retirement plans, business publications and forms, and common tax filing dates. Each page highlights different tax issues and tips that may be relevant to small-business owners, with room on each month to add notes, state tax dates or business appointments.  You can also download the tax events into your calendar or subscribe to the tax calendar events.  The calendar provides the small business owner with a ready resource for meeting their tax obligations.

If you have other questions about your tax obligations, you might want to contact a tax professional.

Daniel Stoica Accounting Professional

Are you self-employed? Do you work as an independent contractor, or are you a sole proprietor of a business?

Self-employed individuals generally must pay self-employment taxes. Here are some facts that you should know about self-employment and the IRS:

1. Self-employment can be full-time or part-time. You may even have a regular full-time job and still be considered self-employed for the purposes of self-employment taxes.

2. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves, and you generally have to pay self-employment tax as well as income tax when you are self-employed.. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. When you file your Form 1040, you also file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business (also known as business expenses). These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. Business expenses must be both ordinary and necessary to be deductible. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

For more information check out the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov. You can also call the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

Daniel Stoica Accounting Professional

Take advantage of the Small Business Health Care Tax Credit

If you are a small business owner with employees who pays at least half of your employee health insurance premiums, you may qualify for a tax credit of up to 35% of the premiums paid. Employers with fewer than 25 full-time employees who pays an average wage of less than $50,000 a year may qualify.

The maximum credit for tax years 2010 to 2013 is 35% for small business employers and 25% for small tax-exempt employers such as charities. On Jan. 1, 2014, this rate will increase to 50% and 35%, respectively.

You can carry the credit back or forward to other tax years even if you did not owe tax during the year. And since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.

Eligibility

To be eligible, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs). Those employees must have average wages of less than $50,000 a year.

The amount of the credit you receive works on a sliding scale. The smaller the business or charity, the bigger the credit. So if you have more than 10 full-time equivalent employees, or if the average wage is more than $25,000, the amount of the credit you receive will be less.

Claiming the Credit

In order to calculate the credit, you must use Form 8941, Credit for Small Employer Health Insurance Premiums.

If you are a small business, include the amount as part of the general business credit on your income tax return.

If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don’t usually do so.

Remember… If you are a small business employer you may be able to carry the credit back or forward. And if you are a tax-exempt employer, you may be eligible for a refundable credit.

For more information, check out the Small Business Health Care Tax Credit page on IRS.gov.

Daniel Stoica Accounting Professional

On November 28, 2011, the IRS announced that interest rates will remain the same beginning Jan. 1, 2012 for the calendar quarter. According to the IRS website, the interest rates will be:

• 3% for overpayments; 2% in the case of a corporation
• 3% for underpayments
• 5% for large corporate underpayments
• 1/2% for the portion of a corporate overpayment that exceeds $10,000

The 3% interest rate also applies to estimated tax underpayments for the first calendar quarter in 2012 as well as the first 15 days in April 2012.

The rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. In the case of a corporation, the underpayment rate generally is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point. Further, the federal short-term rate that applies during the third month following the taxable year also applies during the first 15 days of the fourth month following the taxable year.

These interest rates are computed from the federal short-term rate during October 2011 to take effect Nov. 1, 2011, based on daily compounding.

Daniel Stoica Accounting Professional

Are you closing your business?  If you are, here are some things you’ll need to do in order to stay out of trouble with the IRS.

First, make sure you file the right tax returns for the year in which you close the business. If you have employees, you must also deposit payroll taxes.

You will need to file a different form depending on whether you are a corporation, an ‘S’ corporation, a partnership, or a sole proprietor.  Talk to a tax professional to determine the correct form.

Make sure you report tips if you sell food and/or beverages. Also, you’ll need to mark “final return” in the correct space on the form.

Your employees will still need their W-2s for the year the business closed so they can file individual returns.

If you have an employer identification number (EIN), correspond by mail with the IRS to close the account. The EIN will still belong to the business, so you can use it again later. You should also make sure the business has met all its state and local tax responsibilities.

For more information, including a checklist, go to irs.gov and type the words “closing a business” in the search box.

Daniel Stoica Accounting Professional

Yesterday, Congress passed a portion of President Obama’s jobs plan that provides tax credits for companies who hire veterans.  Two bills, call the Wounded Warriors Tax Credit and the Returning Heroes Tax Credit, contain the following benefits:

• Give up to a $2,400 credit to companies that hire vets who have been unemployed for more than four weeks
• Give tax credits of up to $5,600 for employers hiring veterans who have been searching for work for at least six months
• Give tax credits of up to $9,600 for companies that hire disabled veterans who have job hunting for more than six months
• Give benefits to aging veterans for continued education
• Give troops the ability to apply for jobs before their military service is over

The bill will be moving on to the House of Representatives next week.  It is expected to pass without any problems.

According to the Labor Department, 12.1 percent of Iraq and Afghanistan veterans were unemployed in October, 2011.  This unemployment rate is 3 points higher than the overall national rate.

Daniel Stoica Accounting Professional

If you have a small business with employees, and you owe up to $25,000 in taxes, you may qualify for an In-Business Trust Fund Express Installment Agreement (IBTF-Express IA). In February, 2011, the IRS created an initiative to create easier access to installment agreements for small businesses that are struggling with tax debt. Generally, these installment agreements do not require financial statements or financial verification with the installment agreement application.

In order to qualify for an IBTF-Express IA, you must meet the following criteria:

• You must owe less than $25,000 at the time the agreement is established. If you owe more than $25,000, you will need to reduce your liability before entering into the agreement in order to qualify.
• The debt must be paid in full within 24 months- or prior to the Collection Statute Expiration Date (CSED), whichever is earlier.
• If the amount you owe is between $10,000 and $25,000, you must enroll in a Direct Debit installment agreement (DDIA)
• You must be compliant with all filing and payment requirements.

In order to request an In-Business Trust Fund Express Installment Agreement:

-Call 1-800-829-4933 or the number listed on your tax bill
-Visit your local IRS office
-Complete IRS Form 9465, Installment Agreement Request (PDF), and send it to the address on your bill. If you do not have a bill, send the form to the address on page 2 of Form 9465.

If you have questions about your business and overdue tax bills, you may also want to seek the advice of a tax professional.

Daniel Stoica Accounting Professional

Lawyers who specialize in tax law and handle legal and technical tax law issues are also called tax attorneys.

The following are reasons why you would probably want to work with a tax attorney:

• You are being investigated by the IRS for criminal activity
• You have claimed false deductions and credits (tax fraud) and need representation
• You have a case pending before the US Tax Court and want your case reviewed by an independent party
• You are planning to sue the IRS
• You have a taxable estate and you need help with estate planning strategies or an estate tax return
• You are starting a business and want legal advice about your company’s structure and tax treatment
• Your business deals internationally and you want legal advice about contracts or other legal matters

A good tax attorney should have advanced training in tax law.  Many also have degrees in taxation and even accounting.

If you have a legal tax issue but do not have the means to pay for a tax attorney, you can also check out free or low-cost tax clinics.  A complete list of tax clinics is available from the IRS.  More information about tax clinics is available on this post as well.

Daniel Stoica Accounting Professional