Make sure your independent contractors submit a Form W-9 before working with them. Image by Dagley & Co.
If you use independent contractors to perform services for your business and you paid them more than $600 in 2014, you are required to issue them a Form 1099-MISC after the end of the year to avoid facing the loss of the deduction for their labor and expenses. The 1099s for 2014 must be provided to the independent contractor no later than January 31, 2015.
It is not uncommon to have a repairman out early in the year, pay him less than $600, and then use his services again later, and have the total for the year exceed the $600 limit. As a result, you may overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time that you use their services. Having properly completed – and signed – Form W-9s for all independent contractors and service providers eliminates any oversights, and protects you against IRS penalties and conflicts.
IRS Form W-9: Request for Taxpayer Identification Number and Certification is provided by the government as a means for you to obtain the data required to file the 1099s from your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 before engaging in business with them. The form can either be printed out, or filled out onscreen and then printed out. The W-9 is for your use only and is not submitted to the IRS. If you don’t have a W-9 for a vendor you used in 2014 and paid $600 or more, you should make every attempt to obtain one.
In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2015. The 1099s must be submitted on magnetic media or on optically scannable forms (OCR forms). Dagley & Co. prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides recipient and file copies for your records.
Please attempt to have the information to us by January 20, 2015, in order that the 1099s can be provided to the service providers by the January 31st due date.
If you need assistance or have questions, please get in touch with us at Dagley & Co.
Five days is enough time to take last minute steps for 2014 tax deductions before the new year. Public domain image.
Now that the holidays are wrapping up, it’s time to wrap up your year before it’s too late. The last day you may make a tax deductible purchase, pay a tax deductible expense, or make tax deductible charitable contributions for 2014 is Wednesday, Dec. 31.
That’s only five days away!
The good news is: five days is enough time to make charitable contributions, pay deductible taxes, and make business acquisitions before year-end. If you are making last minute purchases of business equipment, you also must place that equipment into service before year’s end. Thus do not expect a deduction on your 2014 return if you take delivery after the end of the year, even if you paid for the item in 2014.
A charitable contribution to a qualified organization is considered made at the time of its unconditional delivery, which, for donations made by check, is the date you mail it. If you use a pay-by-phone account, the date the financial institution pays the amount is considered the date you made the contribution.
If you are short of cash, keep in mind that purchases or contributions charged to your credit card are deemed purchased when the charge is made.
All of us at Dagley & Co. wish you a happy New Year and look forward to assisting you with your tax preparation needs during the coming tax season.
Bitcoin, Litecoin, Primecoin, Ripple and more: 2014 was a big year for virtual and digital currency, and the industry shows no signs of slowing up in 2015. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency of any country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance. However virtual currency does not have legal tender status in any jurisdiction.
Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. It can be digitally traded between users and purchased for, or exchanged into, U.S. dollars, euros, and other real or virtual currencies.
Virtual currency is treated as property, not currency, for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:
- A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the virtual currency’s fair market value.
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
- When a virtual currency is sold, it is treated as property.
- If the property is a capital asset like stocks or bonds or other investment property, gains or losses are realized as capital gains or losses.
- If the property is inventory or other property mainly for sale to customers in a trade or business, then ordinary gains or losses are generally incurred.
Virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.
For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers must determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, reasonably and consistently.
If you have transactions using virtual currency and have questions on how that might affect your taxes, please get in touch with us at Dagley & Co for assistance.
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There are special rules for companies with seasonal employees. Public domain image.
There are new rules coming into play for large employers – that is, companies with over 100 employees. Except for some exceptions, beginning January 1, 2015, employers with at least 100 full-time and full-time-equivalent employees must offer affordable health coverage that provides minimum value to at least 95% of their full-time employees and their dependents or they may be subject to an employer shared responsibility payment. This payment applies only if at least one of the employer’s full-time employees qualifies for a premium tax credit through enrollment in a government Health Insurance Marketplace.
Generally, an employer is subject to the requirement to provide affordable health coverage in 2015 if the employer has 100 or more full-time employees. When determining the number of full-time employees, there are certain classes of employees that are excluded from the count — the most notable being certain seasonal employees. Although an employee is considered full-time if he or she works 30 or more hours per week, to determine if the employer has reached the 100 full-time employee threshold, part-time employee hours for a month are totaled and divided by 120, and the result is added to the full-time count. Thus, an employer with fewer than 100 full-time employees may be required to provide an insurance plan to the employer’s full-time employees if the combination of full-time employees and the hours of part-time employees equal the equivalent of 100 full-time employees.
Each year, employers will determine, based on their current number of employees, whether they will be considered an applicable large employer for the next year. For example, if an employer has at least 100 full-time employees (including full-time equivalents) for 2014, it will be considered an applicable large employer for 2015. Employers average their number of employees across the months of the year to see whether they will be an applicable large employer for the next year. This averaging can take into account fluctuations that many employers may experience in their work force across the year.
Even though an employer determines whether it is subject to the mandate based upon the number of employees during the prior year, the penalty is based upon the current year’s employees and is determined on a monthly basis.
Example: John has 90 full-time employees, plus he has 40 part-time employees. His part-time employees for the month of January worked 1,920 hours. That is the equivalent of 16 (1,920 / 120) full-time employees. Thus, the number of John’s full-time employees for the month of January is 106 (90 + 16). As a result, John will have to provide his 90 full-time employees and their dependents with affordable health coverage for January or be subject to the shared responsibility payment (penalty) for that month, but only if at least one full-time employee receives a premium tax credit. The penalty is determined on a monthly basis.
Affordable health care coverage is minimum essential coverage where the employee’s share of the cost is no more than 9.5% of the employee’s household income.
Employers with 50 or more full-time employees are also subject to the shared responsibility payment (penalty), but not until 2016, and again only if one or more full-time employees claim a premium tax credit.
The foregoing is an abbreviated overview of the employer insurance mandate. The rules are complex. If you are unsure whether or not your business is subject to the penalty for 2015, please get in touch with Dagley & Co. Do not delay: the penalties are substantial and in some cases may be higher than the cost of the insurance.
We’re waist high in the holiday season, which means we’re all busy with family get-togethers, holiday gift sharing and parties. But don’t overlook what comes right after the holidays: tax season. And don’t overlook a couple of things you can do now to avoid or reduce potential penalties on your 2014 tax return.
Under-Distribution Penalty – If you are over 70-1/2 years of age, don’t forget to take your required minimum distribution (RMD) from your IRA account; otherwise you could face a penalty equal to 50% of what you should have taken as a distribution in 2014. The RMD is based on your age and the balance of the IRA account on December 31, 2013. Please call this office for the distribution percentage for your age.
If you just turned 70-1/2 in 2014, you can delay your first RMD until 2015 (but you must take it by April 1). However, that means you will have to double up your distributions in 2015, taking the one for 2014 and the one for 2015. This may or may not be beneficial taxwise, depending on your tax brackets in each year. If 2014 was your retirement year, your income tax bracket may be higher than it will be for 2015, so it may be advantageous taxwise to delay the 2014 distribution until 2015.
Underpayment Penalty – If you are a wage earner and have not been having enough income tax withheld from your paycheck to meet your tax liability for 2014, or if you also have taxable income from other sources, you may be facing the possibility of underpayment penalties. If your advance payments toward your 2014 tax liability, through withholding and estimated tax payments, are less than 90% of your 2014 tax liability or 100% (110% for high-income taxpayers) of your prior year tax liability, you will be hit with an underpayment penalty. There is no penalty if your tax liability is less than $1,000. The underpayment penalty is figured on a quarterly basis, so making an estimated tax payment late in the year will not reduce the penalties from earlier in the year. However, wage withholding is deemed paid evenly throughout the year, allowing you to mitigate underpayments earlier in the year by increasing your withholding late in the year. If your state has a state income tax, be sure to consider whether you also need to adjust your state income tax withholding to offset under-withholding earlier in the year to avoid or reduce a state underpayment penalty.
If you have questions related to either of these issues, please get in touch with us at Dagley & Co for help. We assist businesses all over the globe with their tax and accounting needs.
An many business owners and entrepreneurs know, there are a lot of expenses with running a business – and sometimes, you have to reimburse your employees for these expenses along the way. This is done in many different ways. Individuals can deduct as miscellaneous itemized deductions certain expenses that they incur in the course of their employment. Generally, qualified business expenses are un-reimbursed expenses that are both ordinary (common and accepted in your industry) and necessary and do not include personal expenses.
There are two major barriers to deducting employee business expenses. The most commonly encountered is the 2%-of-income (AGI) deduction floor that applies to most (Tier II) miscellaneous deductions, which besides employee business expenses also includes investment expenses, certain legal expenses, home office and other expenses. The amount deductible as miscellaneous expenses is the total of those expenses reduced by 2% of the taxpayer’s adjusted gross income for the year. Depending upon the taxpayer’s income, this reduction can substantially lessen or eliminate the deductible amount. The second major barrier is the alternative minimum tax (AMT), in which the Tier II miscellaneous expenses are not deductible at all. Thus, to the extent that the taxpayer is affected by the AMT, there is no benefit derived from these deductions. There are, however, some planning strategies that can be applied to overcome these barriers, such as the following:
- Employer Accountable Plan – This is a plan under which your employer reimburses you for your employment-related expenses, but requires you to “adequately account” for the expenses. Expenses reimbursed by the employer under an “accountable plan” are excluded from income, thus essentially allowing 100% of the expenses to be deducted, while avoiding the 2%-of-income and AMT limitations. If the employer does not wish to add a reimbursement plan on top of the employee’s existing income, a salary reduction replaced with an accountable plan might be negotiated.
- Bunch Deductions – With proper planning, employee business expenses for more than one year can be deferred or accelerated into one year, thus producing a larger deduction in that one year to overcome the 2% floor for miscellaneous deductions.
- Education Expenses – Although certain employment-related education expenses can be taken as an employee business expense, there are other ways to gain a tax benefit and avoid the 2%-of-AGI and AMT limitations. These include income-limited education tax credits, and if your employer has an educational assistance plan, your employer can reimburse you up to $5,250 for most education expenses other than those associated with education travel.
- Utilize the Section 179 Deduction – Generally, business assets with a useful life of more than one year must be deducted (depreciated) over several years. However, most business assets, other than real estate, qualify for the Code Section 179 expense deduction that allows the entire cost (up to $25,000 for 2014) to be deducted in one year. While vehicles used for business are eligible for Section 179 expensing, other limitations cap the deduction at lower amounts. The depreciation or Section 179 deduction of an employee’s business assets is part of employee business expenses subject to the 2%-of-AGI floor. However, by claiming the Section 179 deduction in the year the asset is purchased rather than deducting a lower depreciation amount over several years, there is a greater chance that the total miscellaneous deductions will be more than the 2%-of-AGI floor, thus allowing part of the expense to be deducted.
If you would like to explore any of these techniques, please get in touch with Dagley & Co.
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Figuring out a health plan for your employees can be tough, and it’s best to examine all of your options instead of taking it lightly. The IRS earlier this year cautioned employers of the consequences of reimbursing employees for the cost of premiums the employees pay to purchase qualified health plans, either through a health insurance marketplace or outside the marketplace, rather than establishing a health insurance plan for its own employees.
Employers may think they can use this strategy to avoid the employer insurance mandate required by the Affordable Care Act that applies to mid- and large-size firms, as well as shift some of the expense of providing employee health care away from the employer. Not so, says the IRS, which refers to this method of avoiding the employer insurance mandate as a “dumping” strategy.
This type of arrangement, termed an “employer payment plan,” is considered a group health plan by the IRS, and as such, is subject to the reform provisions of the Affordable Care Act (ACA) and the penalty that applies for failing to meet those provisions. These reforms include a prohibition on the annual limits for essential health benefits and a requirement to provide certain no-cost-sharing preventive care. Employer payment plans can’t be integrated with individual policies to achieve the market reform requirements, and therefore they fail to satisfy the market reform requirements. As a result, the employer may be subject to a $100/day per employee excise tax penalty amounting to $36,500 per year per employee for failure to meet the ACA provisions.
However, an employer payment plan does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage. Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan.
The employer group insurance mandate takes effect in 2015 for larger employers (those with 100 or more full-time employees) and in 2016 for employers with 50 to 99 full-time employees that meet certain conditions. Employers with fewer than 50 full-time employees are not required to provide health insurance coverage for their employees.
One last item: because an employer payment plan is considered a group health plan, the employees participating in such an arrangement who purchase their health coverage through a marketplace cannot claim the premium assistance credit because employees who have an employer plan are not eligible for the credit.
If you have further questions related to this issue, please get in touch with us at Dagley & Co.
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It’s the end of the year, and many high net worth individuals are looking to stretch the dollar while there’s still time. With that said, taxpayers frequently think that gifts of cash, securities or other assets they give to other individuals are tax deductible. In turn, the gift recipient sometimes thinks income tax must be paid on the gift received.
Nothing is further from the truth.
To fully understand the ramifications of gifting, one needs to realize that gift tax laws are interrelated with estate tax laws, and Uncle Sam does not want you giving away your wealth before you pass away to avoid inheritance taxes. As a result, what you give away prior to death will reduce the amount that can pass to your beneficiaries free of inheritance taxes after your death. For 2014, the lifetime exemption from inheritance tax is $5.34 million ($5.43 million for 2015). The following amounts do not reduce the lifetime exemption:
• $14,000 each to any number of recipients during every tax year. The amount is periodically adjusted for inflation, but the amount for 2014 and 2015 remains at $14,000.
• Directly pay medical expenses. This applies to amounts paid by one individual on behalf of another individual directly to a provider of medical care as payment for that medical care. Payments for medical insurance qualify for this exclusion.
• Directly pay education expenses. This applies to amounts paid by one individual on behalf of another individual directly to a qualifying educational organization as tuition for that other individual. Costs of room and board aren’t eligible as direct payments.
If the gift giver is married and both spouses are in agreement, gifts to recipients made during a year can be treated as split between the husband and wife, even if the cash or property gift was made by only one of them. Thus, by using this technique, a married couple can give $28,000 a year to each recipient under the annual limitation discussed previously.
Dagley & Company Gifting Techniques:
High-Wealth Individuals – If you are a high-wealth individual who would like to pass as much on to your heirs as possible while living, without reducing the lifetime exemption, you could pay directly your heirs’ medical expenses and higher education expenses in addition to annual gifts of cash or property of $14,000. You may want to do this, even if you are not a high-worth individual, to avoid having to file a gift tax return.
Medical Expenses – Except in rare circumstances, you cannot deduct the medical expenses you pay for another person, and they cannot deduct the expenses either since they did not pay them. Thus careful consideration should be given regarding whether you make the gift directly to the individual subject to the $14,000 annual limit, which would allow him or her to pay the medical expenses and claim the medical deduction on his or her tax return, or you pay the medical expenses directly. If the medical expenses you want to pay are greater than $14,000, then you could always gift $14,000 to the individual and pay the balance directly to the care provider(s), and thereby avoid reducing the lifetime exemption. Under rare circumstances, the recipient who will benefit from your gifts may qualify as your medical dependent, under which circumstance you would be able to deduct the medical expenses if they had been paid directly to the doctor, hospital or other provider.
Education Expenses – When you pay the qualified post-secondary education tuition for another individual, it does not mean – as is the case for medical expenses – that someone cannot benefit tax-wise. Tax law says that whoever claims the exemption for the student is entitled to the American opportunity credit or lifetime learning credit for higher education expenses if they otherwise qualify.
Gifts of Appreciated Property – Consider replacing your cash gifts with gifts of appreciated property, such as stock for which you have a “paper gain.” When you gift an appreciated asset, the potential gain on the asset transfers to the recipient. This works for individuals, except for children who are subject to the kiddie tax, which requires the child’s income to be taxed at the parent’s tax rate if it is higher than the child’s rate. It also works great for contributions to charitable organizations. Although not subject to the gift tax rules, an appreciated asset gifted to a charity not only gets you out of reporting any gain from the appreciation, but you also get a charitable tax deduction equal to the fair market value (FMV) of the asset. The deduction for these gifts is generally limited to 30% of your adjusted gross income (AGI), but the excess carries over for up to five years of future returns.
Please get in touch with us at Dagley & Co. if you need assistance with planning your gifting strategies.
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We’ve compiled a list of some of the necessary tax deadlines for individuals. Since it’s the end of the year, it’s especially important that you tie up all loose ends on time. If you are worried that you may miss these deadlines, contact us, Dagley & Co., for help. (Find our phone number at the bottom of this webpage.)
December – Time for Year-End Tax Planning
December is the month to take final actions that can affect your tax result for 2014. Taxpayers with substantial increases or decreases in income, changes in marital status or dependent status, and those who sold property during 2014 should call for a tax planning consultation appointment. If you feel overwhelmed, consider hiring a professional like our founder, Dan Dagley, to make sure everything is done smoothly.
December 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during November, you are required to report them to your employer on IRS Form 4070 no later than December 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
December 31 – Last Day to Make Mandatory IRA Withdrawals
Last day to withdraw funds from a Traditional IRA Account and avoid a penalty if you turned age 70½ before 2014. If the institution holding your IRA will not be open on December 31, you will need to arrange for withdrawal before that date.
December 31 – Last Day to Pay Deductible Expenses for 2014
Last day to pay deductible expenses for the 2014 return (doesn’t apply to IRA, SEP or Keogh contributions, all of which can be made after December 31, 2014). Taxpayers who are making state estimated payments may find it advantageous to prepay the January state estimated tax payment in December (Please call the office for more information).
December 31 – Caution! Last Day of the Year
If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.
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