The Self-Employment Tax. What is It and How Does it Effect You?

    If you’re just beginning business (or even if you have an existing business) as a sole proprietor, a partner in a partnership or a member of an LLC (limited liability company), it’s very important you understand the self-employment tax. Failure to take the tax into account when making your estimated tax payments could result in a substantial penalty. At the very least, you’ll have a big surprise when you file your 1040 in April. If you’re familiar with this tax, you should still read this article. There are plenty of pointers that many taxpayers overlook.

    So let’s start off with: What the heck is the Self-Employment Tax? If you’re a sole proprietor or a partner or an LLC member, you are not considered to be an employee. You will receive no W-2 and nothing is withheld from your pay for FICA (Federal Insurance Contributions Act) or medicare taxes. (If you’re an employee, 7.65% is withheld from your pay and your employer matches that amount, paying a total of 15.3% to the government). In order to collect a similar amount for social security and medicare, a sole proprietor has to pay 15.3% of his self-employment income. The tax is sometimes called SECA (Self-Employment Contributions Act). It’s actually more complicated than that; I’ll get into the details shortly.

    Employers will make regular deposits of FICA and other withheld taxes to the IRS. Individual taxpayers who owe the self-employment tax are responsible for paying the FICA and medicare taxes directly to the IRS. That’s done through quarterly estimated tax payments. For most taxpayers that’s April 15, June 15, September 15, and January 15. There’s no separate tax return. Instead, when you file your individual income tax return you must complete Schedule SE (Self-Employment Tax) to compute the tax and report the liability on the back of Form 1040. The self-employment tax is reported separately and added to your individual income tax on Form 1040. Estimated tax payments and withholdings are credited against your total tax liability.

    Example: Sue Smith has self-employment income during 2016. The associated self-employment tax is $4,500. Her regular income tax liability for the year will be $3,250. In addition, she withdrew money from an IRA and owes a penalty of $500. She worked a regular job for part of the year and had $1,500 in income tax withholdings. She made estimated tax payments of $3,000. Here’s a computation to show what she owes with the tax return.

    	Income tax liability                         $3,250
    	Self-employment tax                           4,500
    	Early withdrawal excise tax			500
    	 Total liability                              8,250
    	Less: Withholdings                           (1,500)
    	Estimated tax payments                       (3,000)
             Net tax due with return                      3,750
    

    Sue owes $3,750 with her tax return. Even though it’s paid to the IRS, the self-employment tax portion will end up with the Social Security Administration. However, when it comes time to compute the penalty due for tax underpayments during the year, no distinction is made. If you’re in the 15% bracket or the lower portion of the 25% bracket, the self-employment tax can easily be more than your income tax. For example,  lets say that you’re married, no children, take the standard deduction, have $40,000 of net income on your Schedule C and have $3,000 of other income. For 2016 your income tax liability would be about $1,990 (after accounting for a deduction for one-half of the self-employment tax on your income taxes); your self-employment tax would be $5,652.

    Detailed computation. While all you need do is complete Schedule SE to figure your tax liability, you should know that the computations aren’t as simple as portrayed above. Keep in mind that the total FICA tax is really made up of two pieces. The first portion is the 12.4% OASDI (Old Age, Survivors, and Disability Insurance). The tax only applies to earnings of $127,200 or less (2017 amount; it’s indexed for inflation). The second portion is for medicare. That’s 2.9% of all your self-employment income or wages. There’s no upper limit on that portion. Beginning in 2013 an additional 0.9% medicare tax is assessed on self-employment income in excess of $200,000 (single) or $250,000 (married filing joint). In an effort to equalize the tax burden of individuals and corporations (who get to deduct their half of the FICA taxes), the calculations involve several steps. Assume in the steps below your net self-employment income is $140,000.

    Step 1. The tax isn’t on all of your net earnings. The base is only 92.35% of net earnings. Thus, the base using our $140,000 of self-employment income is $129,290.

    Step 2. Only the first $127,200 (2017 amount) is subject to the full 15.3% tax. Thus, multiply $127,200 by 15.3%; the result is $19,461.60. The difference between $129,290 and $127,200 is $2,090. That amount is taxed at only 2.9%, so the tax is $60.61. The total tax is $19,522.21 ($19,461.60 + $60.61).

    If your self-employment income was only, say $60,000, you would only have to first multiply by 92.35%, then by the full tax rate, 15.3%.

    Step 3. If, during the year, you also received wages or a salary as an employee and your employer withheld FICA, the computations are more complex. Those wages will count toward meeting the wage base. Use the ‘long-form’ on Schedule SE to compute the tax. Thus, if you’ve already had a salary of $127.200 or more, the earnings from your sole proprietorship (or partnership, etc.) would only be subject to the 2.9% medicare tax and the 0.9% additional Medicare tax (when applicable).

    Step 4. You can deduct one-half of the self-employment tax on the front page of Form 1040. Using the numbers from our example, that would be $9,761.11. Since this amount reduces your adjusted gross income (AGI), the deduction is worth more than if it were simply an itemized deduction.

    When computing your earnings subject to the tax, you’ve got to net your profits and losses from all your business activities that would be subject to the tax. For example, you have $60,000 of self-employment income as a partner and a $35,000 loss from your auto repair shop you run as a sole proprietorship. Your net earnings subject to the tax are $25,000. If you have a net loss, you’re not liable for the tax.

    Beginning in 2013 there’s an Additional Medicare Tax of 0.9% on self-employment income (as well as regular wages) on income over $200,000 ($250,000 for a married couple filing jointly; $125,000 married filing separate). For a single individual, computation is easy since there’s only one income. For a married couple the threshold applies to the couple. For example, Wilma has a job in Manhattan and makes $175,000 a year. Fred works in Middletown and makes $50,000. Fred has a side business and made $45,000 in 2014. The couple has a total of $270,000 in earned income and pays tax an additional tax of 0.9% on the $20,000 ($270,000 less the threshold amount of $250,000).

    Persons Subject to the Self-Employment Tax. You’re subject to the tax if you were self-employed and your net earnings from that source were $400 or more. (You’re considered self-employed if you carry on a trade or business either as a sole proprietor or partner in a partnership). You don’t have to be in business on a full-time basis. Part-time work also qualifies.

    A trade or business is generally an activity carried on for a livelihood or in a good faith attempt to make a profit. While this depends heavily on the facts and circumstances, the IRS wins most of the cases on this issue. There have been a few situations where a taxpayer was able to show he wasn’t in a trade or business, but don’t count on being able to do so. You might be able to show that, for example, you grow fruit for your own consumption. You’ve done so for a number of years and never sold any. Because of crop losses by others in your area, you can sell enough one year to show a small profit. In subsequent years you don’t sell any of your crop. You might be exempt. Get good advice if you’re going to make such a claim.

    Special Situations:

    • Inactive partners are subject to the self-employment tax.
    • Limited partners are only subject to the tax on guaranteed payments such as salary and professional fees received for services performed.
    • Retired partners are not subject to the tax on retirement income. However, the amounts received must be under a written plan that meets certain requirements.
    • The income from a single member LLC (treated as a sole proprietorship for federal tax purposes) is self-employment income.
    • The law is not entirely clear on LLC members where the LLC is treated as a partnership. However, guaranteed payments to a member should be considered self-employment income. An LLC member who is active in the LLC should also be considered liable for the self-employment tax on his or her distributive share.
    • Resident aliens are generally subject to the same rules as U.S. citizens. Nonresident aliens generally do not pay the self-employment tax.
    • Executors and administrators of estates may or may not be liable for the tax. You are liable if you’re a professional fiduciary, an attorney, or a nonprofessional fiduciary and your duties require extensive managerial activities on your part for an extended period of time or your fees are related to the operation of the business and you actively participate in the business. If your duties are limited to handling an ordinary estate where any business management is small or nonexistent, then the income is not subject to the self-employment tax.
    • Fishing crew members come under some special rules. Generally, they’re considered self employed if they take a share in the catch.
    • Newspaper carriers and distributors are generally considered independent contractors and subject to the tax. Carriers or distributors and vendors under the age of 18 are not subject to the self-employment tax.
    • Notary public fees are not subject to the tax.
    • Trailer park owners may or may be liable for the tax. The outcome here depends on the amount of services provided to the tenants. Minimal services such as sewerage, water, electrical connections, etc. won’t result in the income being subject to the tax. Substantial services beyond those required for occupancy (such as maintaining a recreational hall, operating a laundry facility, etc.) will make the earnings self-employment income.
    • Director’s fees received in performing services as a director of a corporation are self-employment income.
    • S corporation income distributed to you is not subject to the self-employment tax. However, you can’t avoid the FICA taxes by not taking a salary. If you take no, or too low a salary, the IRS can recharacterize some of the earnings as salary that’s subject to FICA taxes.
    • Your spouse is subject to the self-employment tax if he or she is a partner in your business. You may want to put him or her on the payroll as an employee. That way you withhold FICA taxes and your business pays its portion, just as you would for a regular employee. Talk to your tax advisor about this approach. You may be able to make higher contributions to your pension plan and deduct health insurance premiums.
    • Income subject to the tax. Finding your self-employment income is generally straight forward. It’s the bottom line on your Schedule C. If you’re a partner, you should be able to get the info from your K-1.

    Even though associated with the business, some income is not considered self-employment income. For example, gains and losses on the following types of property are not included:

          1. Investment property.
          2. Depreciable property or other fixed assets used in the business.
          3. Livestock held for draft, diary, breeding, or sporting purposes and not held primarily for sale, regardless of how long the livestock were held or whether they were raised or purchased.
          4. Standing crops sold with land held more than one year.
          5. Timber, coal, or iron ore held for more than one year, if an economic interest was retained.

     

        • Income from the sale of property that is stock in trade or held primarily for sale to customers is subject to the self-employment tax.

    Example: Middletown Lawns, a sole proprietorship, sells small tractors, lawn mowers, etc. At the end of 2017 it sells some old inventory at a substantial loss. The loss reduces the owner’s self-employment income (the loss is taken on Schedule C).

    Example: The facts are the same as in the example above, but Middletown Lawns also owns some equipment that is used only for rentals. Middletown Lawns sells this equipment at a loss. The loss doesn’t reduce the owner’s self-employment income. Similarly, if the equipment were sold for a gain, it wouldn’t increase the owner’s self-employment income.

    • Dividends and interest received on securities are generally not self-employment income. However, interest you receive in your business (e.g., interest on overdue accounts receivable) is part of your self-employment income and subject to the tax. Payments for lost income, such as insurance payments after a casualty to your business, are subject to the tax.
    • Real estate rental income and personal property leased with the real estate is generally not self-employment income. However, if you receive rent as a real estate dealer, the income is included in your self-employment income.
    • Renting personal property (e.g., equipment) generates self-employment income.
    • Hotel or motel income is generally subject to the tax. Whether or not income from a real estate rental or hotel is subject to the tax depends on the facts and circumstances. If you provide substantial services for the convenience of the occupants, not normally provided with the rental of rooms for occupancy only, the income is subject to the self-employment tax. For example, providing maid service for individual rooms would make the income subject to the tax. On the other hand, the cleaning of stairways and lobbies would not.

    Optional methods. If your gross income is $2,400 or less you may be able to use an optional method of computing the self-employment tax. You’ve got to meet a number of tests. I won’t go into the details here, because so few people normally qualify. However, you should be aware the method exists. It allows you to pay the self-employment tax if your profit for the year is small or if you have a loss. Why pay more taxes than you have to? Using the method allows you to qualify for social security coverage when you normally wouldn’t. That increases your quarters of coverage. It may also allow you to claim a larger credit for dependent care expenses and the earned income credit.

    Estimated tax payments. As discussed, you pay the self-employment tax along with your estimated individual income taxes during the year. The law doesn’t make a distinction. That is, your income tax and self-employment tax are added together and treated as one. The same rules apply. That is, you can usually avoid a penalty if you pay in at least as much as your prior years’ liability. You may be able to reduce your estimated payments by annualizing your income and making payments based on your actual income during the year.

     

    So, in closing this particular blog post, let me say that this presentation was an overview of (and primer about) the Self-Employment Tax.

    Keep in mind that each business (and the form of ownership that each business takes) is different and has its own Self-Employment Tax ‘details‘.

    Solid Tax Solutions (SolidTaxSolutions.com) can help you with ‘Self-Employment Tax’ issues or any other issues concerning your existing business, new business, or business that you are considering.

    You can reach us (year-round) at: (845) 344-1040.

    __________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    A New Presidential Administration Will Soon Be Upon Us. What Tax Changes Can We Expect???

    Effects on Businesses

    What do the election results mean to your business? Your taxes? There’s no one answer to that. As far as the effect on your business, with small exceptions, it should be positive. Most experts believe they’ll be a move away from regulations that have negatively impacted many businesses. But the actual impact will vary widely. The plumber working on his own faces regulation on the local, county, and town level. Federal rules probably have little, if any, effect. Some health care businesses will do much better, as evidenced by the surge in prices for drug companies. Some will do worse as many hospitals believe the demise of Obamacare will hurt their business.

    Donald J. Trump
    Donald J. Trump

    It can get far more complicated. Will home prices rise? It depends. If immigration (legal and illegal) is severely restricted, new home prices will rise because smaller contractors often use immigrant labor. Higher interest rates, which some professionals predict, would also have an effect on home prices. On the other hand, reduced regulation of banks could ease lending rules which could offset higher interest rates. And a lower tax rate would increase available income.

    From a business standpoint, the best advice is to analyze the situation, listen to any trade organizations, and don’t overreact in either direction. While it seems fairly certain Obamacare will be attacked rather quickly, many other changes could take much more time.

    Effect on Taxes

    What will happen to taxes? Some changes are fairly predictable, some aren’t. Here’s my brief rundown of the most predictable ones. These are based on President-Elect Trump’s proposals.

    Individual Tax Rates: They’re heading lower, at least the top rates. The proposed rates are 12 percent, 25% and 33%. The lowest rate would apply to the first $75,300 for those married folks filing jointly ($37,650 for single); 25% on taxable income up to $231,450 ($190,150 single). Everything above those levels would be taxed at 33%. The 3.8% tax on net investment income would be eliminated. The head-of-household filing status would be eliminated.

    NoteThe income breakpoints indicated are based on a House of Representatives proposal.

    Capital Gains: The capital gain rates might be unchanged, with the exception of eliminating the 3.8% tax on investment income. The same rates would apply to qualified dividends.

    Deductions: The standard deduction would increase to $30,000 for married filing jointly ($15,000 for single). There would be a $200,000/$100,000 cap on itemized deductions. No personal exemptions.

    Childcare: An above the line deduction for child and elder care expenses limited by a taxpayer’s income.

    Alternative Minimum Tax: Trump’s proposal would be to eliminate the tax.

    Corporate Tax Rates: The corporate rate would drop to 15% under Trump’s proposal. That may be unrealistically low. Passthrough entities would be taxed at 15%, but taxed again on distributions. Good news for businesses that retain a substantial share of their income.

    Section 179 Expensing: The limitation would increase from $500,000 to $1 million per year.

    Estate Taxes: The estate tax would be eliminated. But so could the stepped up basis on assets at death, at least on assets above the current estate tax threshold.

    Those are the highlights, the ones that affect the most taxpayers, and the ones that have the best prospect of passing.

    But the devil is in the details. Here are some points to consider.

    Congress: The Republicans do have a majority in both houses, but the Senate for one, is thin and not all members vote the party line. That means some compromise might be necessary. In addition, the Trump plan isn’t the only one. The House has its own plan. And many individual members have their own thoughts.

    Paying for the Cuts: The cuts have to be paid for in some way. Some estimates put the 10-year deficit increase at $9 trillion. There is some sleight-of-hand that can be used to ignore at least part of the problem currently, but it’ll show up quickly. That’s happened in the past. The economy will have to grow faster than it has in some time to solve the problem. If not, tax rates could creep higher after the initial cuts. That’s happened in the past. It might be avoided with significant spending cuts, but that approach has proved elusive in the past. And at some point spending cuts will be felt at the voting booth.

    Fewer People will Itemize: That’s definitely true. And for a number of taxpayers, taxes will be simpler. But having three tax rates rather than seven won’t help much. Most tax returns are prepared by professionals on computer. Few people actually use the tax tables to compute their tax liability. And for many taxpayers, itemizing isn’t the problem. It’s dealing with capital gains, education expenses, rental properties, a sole proprietorship, etc. and that will continue to cause headaches.

    State Taxes: Most states use federal taxable income as a starting basis for their tax. Many states use the same itemized deductions, some with modifications. Unless they change their approach, you still could be itemizing.

    Retirement Plans: Look for additional benefits for contributions to retirement plans.

    Other Changes: It’s more than likely that Trump’s proposals will be incorporated into a host of other changes. Where this will end up is hard to predict. Overall tax liabilities are almost sure to be lower, but deductions for individuals reduced. There could be cutbacks in certain credits and other deductions for particular industries or taxpayer benefits. Thus, some taxpayers may benefit less than others. Once more information is available, you should discuss your situation with your tax advisor.

    Timing of Changes: Clearly nothing will happen in 2016 to affect 2016 returns. Any changes will be in 2017 although the actual timing is difficult to predict. At this point many experts predict early attention to taxes, but it may be far enough along in the year that some of the changes will not be retroactive to the beginning of 2017.

    Tax Planning: The safe bet now is to defer income into 2017 and take deductions this year. For a more detailed discussion of tax planning and to see how any upcoming tax changes will affect you, contact Solid Tax Solutions (SolidTaxSolutions.com). We can be reached, all year-long, at (845) 344-1040.

    ___________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Considerations for Small Business Owners in Voting for a New U.S. President.

    After a long, contentious, and heavily covered race to the U.S. presidency, the 2016 campaign cycle is coming to end in only a few weeks. Chances are you’ve been overloaded with news and commentary and—whichever candidate you support—you’ll be somewhat relieved after the results are announced on November 8th.

    A side-by-side picture of Hillary Clinton and Donald Trump

    But that doesn’t mean you should tune out until then. Between the candidates’ platforms, tax plans, and stances on topics such as healthcare, immigration, and consumer protection, there are important issues at stake that may directly affect your business and industry.

    Which Election Issues Matter Most to Entrepreneurs?

    As a business owner, you have several political agenda items to consider before you vote on Election Day:

    What Will the Proposed Healthcare Reform Mean for Your Small Business?

    The Affordable Care Act, signed into law in 2010 and commonly referred to as “Obamacare,” made healthcare a focal point of political discourse—in large part because of its effects on America’s businesses. Some business owners support the Affordable Care Act for providing employees with mandatory insurance coverage, while others complain that the law places an excessive financial burden on employers.

    Have You Analyzed Each Candidate’s Tax Plan?

    Although virtually every presidential candidate in recent history has pledged to make taxes more advantageous to small businesses, tax plans vary wildly by administration when it comes down to the details. A business owner would be wise to scrutinize each candidate’s proposals to determine:

    • The tax breaks and incentives for business owners
    • Which types of taxes will be increased
    • Whether income brackets and business categories are changing, and if so, to what extent

    How Will Federal Regulations Impact Your Industry?

    From safeguarding consumer privacy to providing accommodations for disabled employees, companies are subject to all kinds of federal regulations, though some industries are more regulated than others. The two major parties fundamentally disagree about the scope and authority of these regulations and the agencies in charge.

    The Consumer Financial Protection Bureau (CFPB), which lawmakers established in 2010 as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Republicans believe the CFPB has too much unchecked power over financial institutions, while Democrats argue for the agency’s necessity and seek to sustain it—if not expand its influence.

    Where Do You Stand With Minimum Wage?

    Several states have recently passed legislation increasing state minimum wage, and the subject is a hotly debated one in Washington as well. A federal minimum wage hike is not simply an issue of cost versus savings, but large-scale economics and government intervention.

    Some business owners advocate for raising the minimum wage, citing that better pay increases productivity and reduces turnover. Others contend that a $12–15 minimum wage would put their organizations out of business or cause them to lose their competitive edge domestically and globally.

    What About Federal Loan Availability for Rising Entrepreneurs?

    Do you believe it should be easier for business owners to borrow credit? A “yes” or “no” answer places you firmly on one side or the other of the political spectrum. The parties’ stances on banking regulations and Wall Street reform tell you a lot about what the availability of loans under their administrations would look like, but there’s more to the story than that.

    Aside from the candidates’ promises to promote small business growth, the various outcomes of the election could have significant repercussions on the economy, as consumer attitudes shift and lenders become more or less confident as a result.

    Does Your Small Business Depend on International Trade?

    Speaking of broad economic impact, each candidate’s attitudes on international trade could weaken or strengthen U.S. businesses, depending on your perspective. It may be easier or more difficult during the next few years to establish overseas corporate partnerships, reach consumers in different countries, and sell products and services all over the world.

    What’s Your Take on Immigration & the Startup Visa Proposal?

    According to the Partnership for a New American Economy, over 40% of Fortune 500 companies were founded by immigrants or children of immigrants. America’s policies on immigration fuel innovation and competition, which aren’t necessarily net-positive or net-negative effects for each and every company.

    So, while border control is a deeply personal issue for many on all sides of the debate, there’s a business case to be made either way—so long as you can differentiate the facts from the rhetoric.

    Where Can You Go for Detailed Information About Each Candidate?

    In the next few weeks, take the time to educate yourself on each candidate’s positions. Here are a few resources that will help you start researching before you cast your vote:

    If at any point during your research you wonder how certain regulations and tax codes will affect your specific business don’t hesitate to contact us.

    So, what other small business issues would you like the candidates to talk about?

    _______________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Uh-Oh! The IRS is Riding the Debt Collector Train. Again!

    Sooooooo, the IRS has recently announced (on September 26) that it plans to begin a private collection program (authorized by the Fixing America’s Surface Transportation Act) for certain overdue federal tax debts next spring and has selected four contractors to implement the new program.

    A 1040 tax return with the word 'Overdue' stamped on it.
    The IRS Has Hired Private Debt Collectors to Collect Back Tax Debt.

    The IRS has attempted to use private contractors twice in the past, both times finding it not cost effective. Now, under the law, the IRS is required to use qualified contractors to collect inactive receivables. An inactive receivable is one that meets one of the following requirements:

    1. At any time after assessment, the Internal Revenue Service removes such receivable from the active inventory for lack of resources or inability to locate the taxpayer,
    2. More than 1/3 of the period of the applicable statute of limitation has lapsed and such receivable has not been assigned for collection to any employee of the Internal Revenue Service, or
    3. In the case of a receivable which has been assigned for collection, more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection of such receivable.

    Certain receivables are not eligible for collection using private collectors. They include:

    • Those subject to a pending or active offer-in-compromise or installment agreement,
    • Those classified as an innocent spouse case,
    • Those involving a taxpayer identified by the IRS as being:
      1. Deceased,
      2. Under the age of 18,
      3. In a designated combat zone,
      4. A victim of tax-related identity theft,
      5. Currently under examination, litigation, criminal investigation, or levy,
      6. Subject to pending or active offers in compromise,
      7. Subject to a right of appeal, or
      8. In a presidentially declared disaster areas and requesting relief from collection,
    • those currently under examination, litigation, criminal investigation, or levy, or
    • those currently subject to a proper exercise of a right of appeal under this title.

    The new program, authorized under a federal law enacted by Congress last December, enables these designated contractors to collect, on the government’s behalf, outstanding inactive tax receivables. As a condition of receiving a contract, these agencies must respect taxpayer rights including, among other things, abiding by the consumer protection provisions of the Fair Debt Collection Practices Act. The IRS has selected the following contractors to carry out this program:

      • CBE Group 1309 Technology Pkwy Cedar Falls, IA 50613
      • Conserve 200 CrossKeys Office park Fairport, NY 14450
      • Performant 333 N Canyons Pkwy Livermore, CA 94551
      • Pioneer 325 Daniel Zenker Dr Horseheads, NY 14845

    These private collection agencies will work on accounts where taxpayers owe money, but the IRS is no longer actively working their accounts. Several factors contribute to the IRS assigning these accounts to private collection agencies, including older, overdue tax accounts or lack of resources preventing the IRS from working the cases.

    The IRS will give each taxpayer and their representative written notice that their account is being transferred to a private collection agency. The agency will then send a second, separate letter to the taxpayer and their representative confirming this transfer. Private collection agencies will be able to identify themselves as contractors of the IRS collecting taxes. Employees of these collection agencies must follow the provisions of the Fair Debt Collection Practices Act and must be courteous and respect taxpayer rights.

    The IRS will do everything it can to help taxpayers avoid confusion and understand their rights and tax responsibilities, particularly in light of continual phone scams where callers impersonate IRS agents and request immediate payment.

    Private collection agencies will not ask for payment on a prepaid debit card. Taxpayers will be informed about electronic payment options for taxpayers on IRS.gov/Pay Your Tax Bill. Payment by check should be payable to the U.S. Treasury and sent directly to IRS, not the private collection agency.

    If you owe back taxes to the IRS, give Solid Tax Solutions a call (we are open year-round) at: (845) 344-1040.

    We are also on the web at: SolidTaxSolutions.com.

    __________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Categories: Tax Debt

    The IRS Has Proposed Increases in Installment Agreement Fees.

    The IRS is proposing a revised schedule of user fees that would take effect on Jan. 1, 2017, and apply to any taxpayer who enters into an installment agreement.

    The proposal, which is one of several user fee changes made this year, reflects the law that federal agencies are required to charge a user fee to recover the cost of providing certain services to the public that provides a special benefit to the recipient. Although some installment agreement fees are increasing, the IRS will continue providing reduced-fee or no-cost services to low-income taxpayers.

    Installment Agreement Fees

    The revised installment agreement fees of up to $225 would be higher for some taxpayers than those currently in effect, which can be up to $120. However, under the revised schedule any affected taxpayer could qualify for a reduced fee by making their request online using the Online Payment Agreement application on IRS.gov website. In addition, there would be no change to the current $43 rate that applies to the approximately one in three taxpayer requests that qualify under low-income guidelines. These guidelines, which change with family size, would enable a family of four with total income of around $60,000 or less to qualify for the lower fee. Also, for the first time, any taxpayer regardless of income would qualify for a new low $31 rate by requesting an installment agreement online and choosing to pay what they owe through direct debit.

    The top rate of $225 applies to taxpayers who enter into an installment agreement in person, over the phone, by mail or by filing Form 9465 with the IRS. But a taxpayer who establishes an agreement in this manner can substantially cut the fee to just $107 by choosing to make their monthly payments by direct debit from their bank account.
    Alternatively, a taxpayer who chooses to set up an installment agreement using the agency’s Online Payment Agreement application will pay a fee of $149. Similarly, they can cut this amount to just $31 by also choosing direct debit.

    Proposed Fees

    Here is the proposed schedule of user fees:

    • Regular installment agreement: $225
    • Regular direct debit installment agreement: $107
    • Online payment agreement: $149
    • Direct debit online payment agreement: $31
    • Restructured or reinstated installment agreement: $89
    • Low-income rate: $43

    Further details on these proposed changes can be found in proposed regulations (REG-108792-16 in case you were wondering), now available in the Federal Register. The IRS welcomes comment on these changes, and a public hearing on the regulations will take place in Washington, D.C. For details on submitting comments, just take a look at the proposed regulations.

    By law, federal agencies are required to charge a user fee to recover the cost of providing certain services to the public that confer a special benefit to the recipient. Installment agreements are an example of a service that confers a special benefit to eligible taxpayers. Agencies must review these fees every two years to determine whether they are recovering the costs of providing these services.

    In the past, the IRS often charged less than the full cost for many services in an effort to make them accessible to a broader range of taxpayers. But given current constraints on agency resources, the IRS can no longer continue this practice in most cases.

    Nevertheless, the IRS intends to continue providing reduced-fee or no-cost services to low-income taxpayers. For that reason, the IRS will continue subsidizing part of the cost of providing installment agreements to low-income taxpayers.

    You can find out more information, on the IRS’ website, about the IRS User Fee Program.

    If you are contemplating an Installment Agreement or have other issues regarding back taxes owed the IRS, give us a call at (845) 344-1040. We are here year-round to help you.

    You can find out more about us on our website => SolidTaxSolutions.com.

    __________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Categories: Tax Debt, Uncategorized

    The House Has Passed Legislation Regarding the Itemization of Medical Expenses!

    Hello Everyone! I just wanted to share some good news with you about a possible change regarding itemizing medical expenses.

    The U.S. House of Representatives Voted on a Bill That Could Affect Your Taxes.
    The U.S. House of Representatives Voted on a Bill That Could Affect Your Taxes.

    So, last week (September 13 to be exact), the U.S. House of Representatives passed a bill titled ‘Halt Tax Increases on the Middle Class and Seniors Act’ (the bill is H.R. 3590 which you can view right here => H.R. 3590), by a vote of 261 to 147, that would lower the Adjusted Gross Income (AGI) threshold for an itemized deduction for unreimbursed medical expenses—from 10% to 7.5%—for all taxpayers, regardless of age under the Affordable Care Act (ACA).

    Under the ACA, taxpayers may deduct from their AGI, to reach their taxable income, the cost of unreimbursed medical expenses that exceed a certain percentage of their AGI. Following a law change in 2013, individual taxpayers under the age of 65 could only deduct medical expenses when they totaled at least 10% of their AGI – the value of expenses above this 10% threshold can be deducted.

    The Bill passed by the House of Representatives would prevent a change to the threshold for those over 65 years of age, which from the end of this year (2016) would have increased the threshold applying to this category of taxpayers from the current 7.5% to 10%.

    The House Ways and Means Committee Chairman Kevin Brady (R – Texas) welcomed the Bill, he said: “Before Obamacare, Americans could find some relief in their ability to deduct high-cost, out-of-pocket medical expenses on their taxes. … This Obamacare provision is a tax hike, plain and simple. It makes paying for care even more difficult for individuals, families, and seniors who may already be struggling to afford the care they need.”

    The National Taxpayers Union added that the Bill would “have an enormous impact on the budgets of American families. … Over 10 million taxpayers every year use this deduction to cushion the burden of medical expenses and this tax increase would cause an undue financial burden to seniors and those struggling with chronic medical conditions.”

    However, the Center on Budget and Policy Priorities noted that “Congress has already delayed the medical device tax, the health insurance tax, and the excise tax on high-cost health plans (the so-called Cadillac tax). Repealing the increase in the medical expense deduction threshold would encourage efforts to scale back still other revenue provisions of health reform.”

    Ways and Means Committee Ranking Member Sander Levin (D – Michigan) also criticized the unfunded nature of the legislation, and pointed out that it would reduce revenues by $32.7 billion over 10 years, according to the Joint Committee on Taxation. He went on to say, “approximately two-thirds of the tax benefit from [the bill] will accrue to taxpayers earning $100,000 or more.”

    Mr. Levin noted that the White House has issued a Statement of Administration Policy that “strongly opposes” the Bill and confirmed that it would be vetoed if presented to President Obama for his signature. The Statement added that the Bill “would repeal a provision of the Affordable Care Act that limits a regressive, poorly targeted tax break for health care spending.

    If you would like to see the results of the final House vote for this bill you can view them here.

    Do you think this has any chance of actually becoming law?

    __________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Politics! You’ve Got to Love It.

    Running for office presents candidates with a number of opportunities to slip up. This is particularly a problem when the issue is a complicated one. As an example, let us take a look at taxation (surprise. surprise, surprise). Taxation can present traps for unwary candidates who are not careful with how they articulate their position.

    Recently, there has been a call for exempting the value of Olympic medals from gross income. Some people think it’s wrong to require winning athletes to pay taxes on pieces of metal symbolizing their achievements. I will stay neutral on this, but the point of this post isn’t whether an Olympic medal exemption makes sense. It’s to point out what happens when that issue becomes campaign fodder.

    Senator Charles Schumer of New York, a Democrat, has introduced legislation that would add an Olympic medal exemption to the Internal Revenue Code. According to this news story, his Republican opponent, Wendy Long, has criticized both Schumer and the proposal. She called the proposal “another example of cronyism in the tax code.” She went on to say, “It makes no sense. My contention is that giving tax breaks as he does to his favored ones – the Broadway stars, the Olympic medalists, the hedge funders – means that a greater burden is placed on the average New Yorkers who toil in obscurity but work just as hard and are as deserving of a tax break.” She made mention of members of the military, asking “Where’s the tax break for them? Even if they come home victorious and have won a war, instead of the 400 meter freestyle, no tax break for winning?”

    So, three thoughts ran across my mind when I read that article. All three, thoughts, kind of “didn’t make sense”.

    First, the Broadway tax break to which Long apparently was referring is not a tax break for Broadway stars. It is a tax break for those who invest in live theater productions, making available to them the same tax break already in existence for television and movie productions. On top of that the measure in question was the extension of the tax break, which had been enacted previously with an expiration date. I’m not necessarily a fan of this particular tax break, but I’m even less of a fan of a tax break that treats television and movie productions more favorably than live theater. What matters is that this tax break accelerates tax deductions for investors who, Ms. Long states, are not members of “….the middle class that Schumer pretends to champion.” Therefore it is a tax break pretty much for the wealthy among us, a tax break in line with many others supported by the political party under whose flag Long is running. It would be great if she made it clear that she opposes the long-standing pattern of Republican tax breaks for the wealthy, but if she is elected she might find herself at odds with at least some of her political colleagues in the Senate. But still, describing the tax break as one for the actors casts the issue in the wrong spotlight.

    Second, the tax break for hedge funds has been attacked primarily by Democrats and although some Republicans have joined in the criticism, perhaps seeking something that dresses them in populism, most Republicans and their supporters have opposed any attempt to change the tax break. Some even demand lower taxes for carried interest, as described in this article. Again, it is great to see another tax break for the wealthy coming under attack from a Republican, but what happens to Long’s Senatorial career if she is elected? And what happens to Schumer, a Democrat, who breaks ranks with his party and opposes elimination of the tax break for carried interests? Politics is a strange, wacko world and, in this instance, the two candidates are taking positions contrary to their labels. Perhaps they should switch parties? Hmm!

    Third, there exists a variety of tax breaks for members of the military. Long is playing on emotions when she suggests there are no tax breaks for them. Internal Revenue Code (IRC) Section 112 excludes from gross income compensation paid to members of the Armed Forces for serving in a combat zone, or was hospitalized on account of injuries incurred while serving in a combat zone. IRC Section 122 excludes from gross income certain portions of retirement pay way too complex to describe in one sentence. IRC Section 134 excludes from gross income the value of most allowances or in-kind benefits provided to a member or former member of the Armed Forces. I am not aware of any instance in which the IRS has required a member of the Armed Forces to include in gross income the value of any military honor, medal, badge, bar, or ribbon awarded to that person. Making it appear as though there are no federal tax breaks for members of the military does not nurture confidence in a candidate’s tax policy prowess.

    So, I feel that there are far better ways to criticize an exclusion for Olympic medals than to confuse the issue with references to tax breaks for Broadway stars, hedge funds, and members of the military. The merits, or lack thereof, of an Olympic medal exclusion are, and should be, a separate matter.

    Just my 2 cents.

    What do you think?

    ___________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Categories: General 'Thoughts'

    How Often Should Business Income Be Taxed?

    A recent post (August 26, 2016) on the Tax Justice website was titled:  Why We Must Close the Pass-Through Loophole? Well that ‘kinda’ caught my attention as I was trying to think what the “loophole” might be?  A loophole is a provision that can be used beyond its intended purpose because the rule is not written specifically enough. When a rule is being used as intended, it is not a loophole. So, for example, sometimes the mortgage interest deduction is called a loophole, but it is not. People deducting interest on the mortgages on their primary and vacation homes are using the rule as intended.

    A figurine struggling to hoist a barbell with the word tax written on each end of the barbell.
    Double Taxation! Is It Necessary?

    The “loophole” that was the subject of that blog post is large businesses operating as partnerships rather than as corporations. Partnerships, S-Corporations and Sole Proprietors do not pay corporate income tax. Instead, the income is taxed directly to the owners and only one level of income tax is paid at the federal level (and state level). In contrast, C corporations pay the corporate income tax AND when they distribute earnings (dividends) to shareholders, the shareholders pay income tax. Therefore, C corporation income is taxed twice.

    That just happens to be the way it works in our (i.e., the United States for readers abroad) tax system. It doesn’t have to work that way and not all countries double tax corporate income. In the U.S., there is some relief in that ‘qualified dividends’ received by individuals are subject to the lower capital gains tax rate.

    Over the years, there have been numerous studies by the government and various organizations on how to ‘integrate’ the corporate tax. In other words to have corporate income taxed only once.  There are numerous ways this can be done.  Two easy ones would be to not have a corporate tax (only tax dividends) or not tax dividends (only tax corporate income at that level when earned).  Neither is ideal because not all corporations pay dividends and not all corporate shareholders are taxable (a lot of corporate stock is owned by tax-exempt organizations).

    The Tax Reform Act of 1986 called for the United States Treasury to study corporate taxation. This resulted in two reports issued in 1992 on corporate integration (January 1992 and December 1992).  Most recently, Senator Orrin Hatch, chair of the Senate Finance Committee (SFC) reported that he is working on a plan for corporate ‘integration’ and the SFC held two hearings on an approach called the ‘Dividends Paid Deduction’ model (May 17, 2016 and May 24, 2016. You can also see the Joint Committee on Taxation report prepared for the hearings right here.

    Some of the advantages of corporate ‘integration’ include:

    • Treats all business entities similarly (although this also depends on the corporate versus individual tax rates applicable to business income).
    • Removes or lessens a corporation’s tax preference for debt over equity.

    So, I will ask the question a bit differently from the The Tax Nook blog post: why not eliminate double taxation of corporate income and find a way to tax all business entities similarly?

    So, what do you think?

    _________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Categories: Business, Income Tax

    Employment-Related Identity Theft and the IRS!

    Identity theft has so many ways to rear it’s ugly head and and it has, over the years, found its way into the employment sector.

    A shadowed person wearing a hooded sweatshirt.
    Do You Have an Employment Clone That You Don’t Know About?

    Having known people who have fallen victim to this type of debilitating scam I decided to look to see how that can affect a person’s taxes and what the IRS either has done or is doing to counter or at least make the victim aware.

    Well I found that the IRS does not currently notify taxpayers it identifies as victims of employment-related identity theft, nor has it established an effective process to ensure that it sends the required notice to the Social Security Administration (SSA) to alert the SSA of earnings not associated with a victim of employment-related identity theft.

    These are two significant findings in an audit report by the Treasury Inspector General for Tax Administration (TIGTA). Employment-related identity theft occurs when someone uses the identity of another person to gain employment. So, taxpayers may first realize that they are victims of this type of crime when they receive an IRS notice of a discrepancy in the income they reported on their tax return. The IRS’s Automated Underreporter (AUR) program identifies such discrepancies when it matches taxpayer income reported on third-party information returns (e.g., Form W-2, Wage and Income Statement) to amounts that taxpayers report on their individual income tax returns.

    The TIGTA conducted this audit to evaluate the IRS’s AUR processes to identify and assist victims of identity theft. During the period February 2011 to December 2015, the IRS identified almost 1.1 million taxpayers who were victims of employment-related identity theft. In April 2014, the IRS started a pilot initiative to begin notifying taxpayers that they may be a victim of employment-related identity theft. The TIGTA’s review of the pilot notification initiative found that the IRS did not sufficiently design the pilot to include a representative sample of employment-related identity theft victims. Furthermore, the TIGTA found that the IRS has not established an effective process to ensure that it sends the required notice to alert the SSA of earnings not associated with a victim of employment-related identity theft.

    If you would like to read the full report you can access it here => www.treasury.gov/tigta/auditreports/2016reports/201640065fr.pdf.

    Do you think that budget cutting of the IRS has made this agency laggard in being pro-active in this ongoing fight?

    If you ever receive a notice from the IRS (or even the State) don’t go it alone. Don’t wait….Time is of the Essence. Give Solid Tax Solutions a call at (845) 344-1040. We are available year-round.

    You can also find out more about us through our website: SolidTaxSolutions.com.

    __________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Categories: Identity Fraud