Payroll Tax Cut Temporarily Extended

The Temporary Payroll Tax Cut Continuation Act of 2011 was enacted late last year. It temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2% to 4.2% of wages paid through Feb. 29, 2012.

Shortly after its passage, the IRS instructed employers to implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. The law also includes a “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (i.e., two-twelfths of the 2012 wage base of $110,100).

This provision imposes an additional income tax on these higher-income employees in an amount equal to 2% of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

In addition, under the new law, the social security tax rate for a self-employed individual remains at 10.4%, for self-employment income of up to $18,350 (reduced by wages subject to the lower rate for 2012).

Congress is going to try to negotiate a deal to extend the payroll tax cut for all of 2012. If a deal is struck to extend it for the full year, the recapture provision for employees would not apply.

Backup Withholding and Form 1099-MISC

Click below to watch video.

If a business pays a non-employee, such as an independent contractor, $600 or more in a year, that business must file Form 1099 Miscellaneous, and the payments may be subject to backup withholding.

The total for the calendar year goes in Box 7. The payer must provide the 1099 to both the independent contractor and the IRS. The 1099 Miscellaneous must be provided to the independent contractor by January 31st. If it’s filed on paper, it’s due to the IRS by February 28th. If it’s filed electronically, it’s due later — on March 31st.

There usually are not any withholding requirements for these reportable payments. However, there are two conditions where backup withholding applies.

First, if the independent contractor fails to provide a TIN — or Taxpayer Identification Number — or provides one that is obviously incorrect — for example, it has the wrong number of digits or includes an alpha character — the business should withhold tax.

The second condition involves the IRS’ notifying the business that the TIN the independent contractor provided is incorrect. The payer would then have to send a notice to the independent contractor to try to obtain a corrected TIN and may have to backup withhold on future payments.

The payer reports any backup withholding on the 1099-MISC Form in Box 4.

If a business does not backup withhold when required, the payer, or business, may be liable for the tax he was required to withhold from the payee, whether or not he actually withheld it.

Businesses that file information returns with the IRS after the due date, or with incorrect or incomplete information, may be subject to a penalty of $100 per incorrect or incomplete 1099 Miscellaneous, up to a maximum of $1.5 million.

Details are in the instructions for Form 1099 and Form W-9, Request for Taxpayer Identification Number and Certification.

These forms and more information about backup withholding are on the IRS website at www.IRS.gov.

2012 FSA Cheat Sheet

Everything you need to know about flexible spending accounts in 2012

Flexible Spending Accounts

What are they?

• Also known as a flexible spending arrangement, a flexible spending account is a tax-advantaged account that allows an employee to set aside a portion of earnings to pay for qualified medical expenses.
• Unlike health savings accounts or health reimbursement accounts, FSAs are more commonly offered with traditional medical plans.
• Unlike health savings accounts, funds in the account that are unused when the plan year is over are lost and cannot be carried over to the following year.
• Paper forms or a debit card may be used to access account funds.
• The flex spending account allows you to contribute money to the FSA for costs not covered by insurance: deductibles, copays, and coinsurance. In addition, you can use your FSA to pay for health care costs that health insurance doesn’t cover.

What’s new for 2012?

Contribution limits

2012 is the last year that there are no limits. Although there is no limit as mandated by law, the plan must prescribe either a maximum dollar amount or maximum percentage of compensation that can be contributed to the FSA.

What changed in 2011?

Beginning in 2011, FSA funds cannot be used for over-the-counter medicines unless specifically prescribed by a doctor.

What to expect for 2013:

FSA contributions will be limited to $2,500 each year with annual inflation increases.

Schedule C: Who Needs to File It and How to Do It

Schedule C is the federal tax form filed by most sole proprietors. It’s used to report both income and losses.

Many times, Schedule C filers are self-employed taxpayers who are just getting their business started. In addition to those who do well at the start, this group can also include new business owners who make very little or no profits, or even lose money. There is also a shorter form, Schedule C-EZ, Net Profit for Business. This is for self-employed individuals with less complex situations including business expenses of less than $5,000, no net losses, and no employees.

The process for filing a Schedule C actually starts when the business does with good recordkeeping. That will ensure the business owner has everything he or she needs when it comes time to file a tax return. Schedule C is filed annually as an attachment to Form 1040, the individual tax return. The quickest, safest, and most accurate way to file is by using IRS e-file, either online or through a tax professional who is an authorized IRS e-file provider.

If you’re a Schedule C filer, start making quarterly, estimated payments to cover your income tax and social security self employment tax. You can make deposits electronically, using the Electronic Federal Tax Payment System, EFTPS.

If you have workers, classify them properly as employees or independent contractors. This is determined by law not the choice of the worker or the business owner.

Be sure to deposit your federal employment taxes on time. Put a plan in place to protect your financial and tax records and help you recover quickly in the event of a disaster. And steer clear of abusive tax avoidance schemes.

Whether you’ve been in business for a while or are just getting started, the IRS website has a wealth of information. Go to IRS.gov/smallbiz (with a “z”) for starters. You can browse through the information online, order free tax publications and products, or take a small business tax workshop.

2012 HSA Cheat Sheet

Everything you need to know about health savings accounts in 2012

Health Savings Accounts

What are they? HSAs are tax-advantaged medical savings accounts available to taxpayers who are enrolled in an HSA-qualified high-deductible health plan. The funds contributed to the account are not subject to federal income tax at the time of deposit. Unused amounts in one year can be carried over to following years and added to subsequent contributions.

What’s new for 2012? HSA contribution limits and HDHP out-of-pocket maximums will increase slightly, while the HDHP minimum required deductibles remain unchanged.

HSA Contribution Limits:

• Individual (self-only HDHP): $3,100 ($50 increase from 2011)
• Family: $6,250 ($100 increase from 2011)

Limits for catch-up contributions (for persons over age 55): $1,000 (unchanged from 2011)

HDHP Minimum Required Deductibles:

• Self-only: $1,200
• Family: $2,400

HDHP Out-of-Pocket Maximum:

• Self-only: $6,050 (a $100 increase from 2011)
• Family: $12,100 (a $200 increase from 2011)

What changed in 2011?

Effective Jan. 1, 2011, expenses incurred for over-the-counter medicines, with the exception of insulin, will not be eligible for reimbursement under a health FSA, HRA or HSA without a prescription. The penalty for using HSA funds for ineligible expenses increased from 10 percent to 20 percent.

Good Recordkeeping Helps Avoid Headaches at Tax Time

Whether you are an individual taxpayer or a business owner, you can avoid headaches at tax time by keeping good records during the year.

Keeping well-organized records helps you answer questions if your return is selected for examination or prepare a response if you’re billed for additional tax.

In most cases, the IRS does not require you to keep records in any special manner, but you should keep any and all documents that may have an impact on your federal tax return.

You should usually keep the records supporting items on your tax returns for at least three years.

This includes records to support deductions or credits you claim on your returns, such as invoices, receipts, mileage logs, and cancelled checks, or any other proof of payment.

So, what records should you keep if you’re a small-business owner?

You must keep all employment tax records for at least four years after the tax becomes due or is paid, whichever is later.

Other important documents you should keep include records for gross receipts, such as cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips, and forms 1099 miscellaneous.

Proof of purchases — for instance, cancelled checks, cash register tape receipts, credit card sales slips, and invoices.

Expense documents, which include invoices, cancelled checks, cash register tapes, account statements, credit card sales slips, and petty cash slips for small payments.

Documents to verify your assets like purchase and sales invoices, real estate closing statements, and cancelled checks.

Also, you should normally keep records relating to your business assets until at least three years after you sell or otherwise dispose of the property.

Examples of these assets include building, machinery, equipment, and office furniture or fixtures purchased and used in your business.

You need these records to determine the annual depreciation in gain or loss when you sell the assets.

For more information about record keeping, check out IRS Publication 552, Recordkeeping for Individuals; Publication 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses.

These publications are available on our Website at www.irs.gov.

Also available is a new audio file explaining record-keeping requirements in detail, located on the IRS video portal at www.irsvideos.gov.

2012 IRA Contribution Cheat Sheet

Ready for 2012? The IRS changed many of the IRA contribution limits allowed for every type of account. Keep track of all the tax, income, and contribution limits with this handy chart below.

The good news is that limits are rising across the board for all types of individual retirement accounts. This includes both Roth and Traditional IRAs, as well as Simple and SEP plans. (Pssst… don’t forget your contribution deadlines.)

Created for Greene IRA by Shepard Design

 

When I Grow Up, I Want to be a Tax Accountant

Enjoy a few chuckles with this kids’-eye view of what being an accountant is all about!

QuickBooks 2012 Cheat Sheet

From QuickBooks 2012 All-in-One For Dummies by Stephen L. Nelson

QuickBooks 2012 makes life easier for small business owners and accountants everywhere. But that doesn’t mean you want to spend any more time working with QuickBooks 2012 than you have to.

These handy QuickBooks keyboard shortcuts will save you time, and the list of common accounting and bookkeeping tasks shows you how to become even more efficient in QuickBooks.

Shortcuts from Your Keyboard to QuickBooks Actions

QuickBooks 2012 provides a bunch of handy shortcuts you can use to accomplish important accounting tasks. Click here to see some of the best and most useful QuickBooks shortcuts.

How to Perform Common QuickBooks Tasks

To perform a common accounting or bookkeeping task in QuickBooks, use these commands. When QuickBooks displays the commands window, you just fill in the boxes and press Enter.

David Letterman’s Top 10 Ways to Annoy an IRS Agent

Ever feel like doing any of these during an audit?