• April 2017 Individual Due Dates

    31 March 2017
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    April is an important month for many as tax season comes to a close. If you have not filed your tax returns, please reach out to Dagley & Co. and we can set up a one-on-one appointment before Tax Day on April 18th. Here are all your important individual due dates for the month of April:

    April 1 – Last Day to Withdraw Required Minimum Distribution

    Last day to withdraw 2016’s required minimum distribution from Traditional or SEP IRAs for taxpayers who turned 70½ in 2016. Failing to make a timely withdrawal may result in a penalty equal to 50% of the amount that should have been withdrawn. Taxpayers who became 70½ before 2016 were required to make their 2016 IRA withdrawal by December 31, 2016.

    April 10 –  Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during March, you are required to report them to your employer on IRS Form 4070 no later than April 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.

    April 15 – Taxpayers with Foreign Financial Interests

    A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114. The form must be filed electronically; paper forms are not allowed. The form must be filed with the Treasury Department (not the IRS) no later than April 15, 2017 for 2016. An extension of time to file of up to 6 months may be requested This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2016. Contact our office for additional information and assistance filing the form or requesting an extension.

    April 18 –  Individual Tax Returns Due

    File a 2016 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call this office.

    Caution: The extension gives you until October 16, 2017 to file your 2016 1040 return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call this office to discuss your individual situation if you are unable to file by the April 18 due date.

    Note: the normal April 15 due date is a Saturday, and the following Monday is a federal holiday in the District of Columbia, so for almost all individuals their 2016 Form 1040 returns aren’t due until the next business day, which is Tuesday, April 18.

    April 18 – Household Employer Return Due

    If you paid cash wages of $2,000 or more in 2016 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2015 or 2016 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.

    April 18 – Estimated Tax Payment Due (Individuals)

    It’s time to make your first quarter estimated tax installment payment for the 2017 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include:

    • Payroll withholding for employees;
    • Pension withholding for retirees; and
    • Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

    When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

    Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:

    • The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
    • The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

    Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

    However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

    This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.

    CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.

    April 18 – Last Day to Make Contributions

    Last day to make contributions to Traditional and Roth IRAs for tax year 2016.

     

     

     

     

     

     

     

     

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  • Don’t Be Scammed By Fake Charities

    20 March 2017
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    Each year, the IRS publishes its list of the “dirty dozen” tax scams. This list is a variety of common scams that taxpayers may encounter anytime. Don’t fall prey!

    Urgent appeals for aid – whether in person, over the phone, by mail, via e-mail, on a website, or through a social networking site – may not be on the up-and-up. Fraudsters pop up after natural disasters such as earthquakes and floods to try to coax people into making donations that will go into the fraudsters’ pockets – not to help victims of the disaster.

    Unfortunately, legitimate charities face competition from fraudsters, so if you are thinking about giving to a charity with which you are not familiar, do your research so that you can avoid the swindlers who are trying to take advantage of your generosity. Here are tips to help make sure that your charitable contributions actually go to the cause that you support:

    • Donate to charities that you know and trust. Be alert for charities that seem to have sprung up overnight in connection with current events.
    • Ask if a caller is a paid fundraiser, who he/she works for, and what percentages of your donation go to the charity and to the fundraiser. If you don’t get clear answers – or if you don’t like the answers you get – consider donating to a different organization.
    • Don’t give out personal or financial information — such as your credit card or bank account number – unless you know for sure that the charity is reputable.
    • Never send cash. You can’t be sure that the organization will receive your donation, and you won’t have a record for tax purposes.
    • Never wire money to someone who claims to be from a charity. Scammers often request donations to be wired because wiring money is like sending cash: Once you send it, you can’t get it back.
    • If a donation request comes from a charity that claims to help a local community group (for example, police or firefighters), ask members of that group if they have heard of the charity and if it is actually providing financial support.
    • Check out the charity’s reputation using the Better Business Bureau’s (BBB) Wise Giving Alliance, Charity Navigator, or Charity Watch.

    Remember that, to deduct a charitable contribution on your tax return, the donation must be to a legitimate charity. Contributions may only be deducted if they are to religious, charitable, scientific, educational, literary, or other institutions that are incorporated or recognized as organizations by the IRS. Sometimes, these organizations are referred to as 501(c)(3) organizations (after the code section that allows them to be tax-exempt). Gifts to federal, state, or local government, qualifying veterans’ or fraternal organizations, and certain nonprofit cemetery companies also may be deductible. Gifts to other kinds of nonprofits, such as business leagues, social clubs, and homeowner’s associations, as well as gifts to individuals, cannot be deducted.

    To claim a cash contribution, you must be able to document that contribution with a bank record, receipt, or a written communication from the qualified organization; this record must include the name of the qualified organization, the date of the contribution, and the amount of the contribution. Valid types of bank records include canceled checks, bank or credit union statements, and credit card statements. In addition, to deduct a contribution of $250 or more, you must have certain payroll deduction records or an acknowledgment of your contribution from the qualified organization.

    Be aware that, to claim a charitable contribution, you must also itemize your deductions. It may also be beneficial for you to group your deductions in a single year and then to skip deductions in the next year. Please contact Dagley & Co. if you have questions related to the tax benefits associated with charitable giving for your particular tax situation.

     

     

     

     

     

     

     

     

     

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  • January 2017 Business Due Dates

    5 January 2017
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    Are you a business owner, or is it your job to take control of your company’s accounting department? Don’t be overwhelmed by the new year! We’ve compiled a list of important due dates for you to remember. We advise you to write these down or add them to your phone/computer calendar! The due dates are as follows:

    January 17 – Employer’s Monthly Deposit Due –

    If you are an employer and the monthly deposit rules apply, January 17 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for December 2016. This is also the due date for the non-payroll withholding deposit for December 2016 if the monthly deposit rule applies. Employment tax deposits must be made electronically (no paper coupons), except employers with a deposit liability under $2,500 for a return period may remit payments quarterly or annually with the return.

    January 31 – 1099-MISCs Due to Service Providers & the IRS –

    If you are a business or rental property owner and paid $600 or more to individuals (other than employees) as non-employee compensation during 2016, you are required to provide Form 1099 to those workers by January 31. “Non-employee compensation” can mean payments for services performed for your business or rental by an individual who is not your employee, commissions, professional fees and materials, prizes and awards for services provided, fish purchases for cash, and payments for an oil and gas working interest. In order to avoid a penalty, copies of the 1099s also need to be sent to the IRS by January 31, 2017*. The 1099s must be submitted on optically scan-able (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. Please call this office for preparation assistance.

    *This due date for the IRS’ copy is one or two months earlier than in prior years and applies when you have paid non-employee compensation that is being reported in box 7 of the 1099-MISC.

    January 31 – Form 1098 and Other 1099s Due to Recipients – 

    Form 1098 (Mortgage Interest Statement) and Forms 1099, other than 1099-MISC, are also due to recipients by January 31. The IRS’ copy is not due until February 28, 2017, or March 31, 2017 if electronically filed. These 1099s may be reporting the following types of income:

    • Dividends and other corporate distributions
    • Interest
    • Amounts paid in real estate transactions
    • Rent
    • Royalties
    • Amounts paid in broker and barter exchange transactions
    • Payments to attorneys
    • Payments of Indian gaming profits to tribal members
    • Profit-sharing distributions
    • Retirement plan distributions
    • Original issue discount
    • Prizes and awards
    • Medical and health care payments
    • Debt cancellation (treated as payment to debtor)

     

    January 31 – Employers – W-2s Due to All Employees & the Government –

    All employers need to give copies of the W-2 form for 2016 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting. NEW DATE: W-2 Copy A and Transmittal Form W-3, whether filed electronically or by paper, are due January 31 to the Social Security Administration. This is a month earlier than in the past.

    January 31 –  File Form 941 and Deposit Any Un-Deposited Tax –

    File Form 941 for the fourth quarter of 2016. Deposit any un-deposited Social Security, Medicare and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.

    January 31 – File Form 943 – 

    All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2016. Deposit any un-deposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

    January 31 – W-2G Due from Payers of Gambling Winnings –

    If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2016.

    January 31 – File 2016 Return to Avoid Penalty for Not Making 4th Quarter Estimated Payment –

    If you file your prior year’s return and pay any tax due by this date, you need not make the 4th Quarter Estimated Tax Payment that was otherwise due earlier in January.

    January 31 – File Form 940 – Federal Unemployment Tax – 

    File Form 940 (or 940-EZ) for 2016. If your un-deposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.

    January 31 – File Form 945 –

    File Form 945 to report income tax withheld for 20152016 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any un-deposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

     

    As always, if you have any questions about the due dates above, please give Dagley & Co. a call at (202) 417-6640.

     

     

     

     

     

     

     

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  • W-2 and 1099-MISC Filing Dates Moved Up

    19 December 2016
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    Dagley & Co. is here to give you up-to-date tax and tax requirement details and due dates. Please read the following regarding a delay in a tax return due date:

    The IRS, in an effort to combat rampant tax filing fraud, has introduced what they hope will be two new fraud-prevention measures for the upcoming filing season. The first will purposely delay until February 15 the issuance of refunds for tax returns where there is an earned income tax credit (EITC) and/or a refundable child tax credit (CTC), giving the IRS more time to match the income reported on these returns to the income reported by employers. These two tax credits have been the favorite target of scammers who have been filing fraudulent returns with stolen IDs and fabricated income before the IRS is able to verify the income and withholding claimed on the returns.

    The second preventive measure is to require earlier filing of W-2 and 1099-MISC forms, which will enable the IRS to ferret out returns that report phony income and withholding. This measure will have a significant impact on employers by moving up the filing due date of the government’s copy of 2016 W-2s and 1099-MISCs to January 31, 2017 (the previous due date was February 28, or March 31 if filed electronically). January 31 has been and continues to be the date the forms are required to be provided to the employees (W-2s) or independent contractors (1099-MISCs).

    The 30-day automatic extension to file W-2s is no longer automatic. The IRS anticipates that it will grant the non-automatic extension of time to file only in limited cases where the filer or transmitter’s explanation demonstrates that an extension of time to file is needed as a result of extraordinary circumstances.

    With regard to the government’s copy of 1099-MISC forms, the earlier filing due date only applies to those 1099-MISC forms reporting non-employee compensation.

    If you have questions related to W-2 or 1099-MISC requirements, please give Dagley & Co. a call at (202) 417-6640.

     

     

     

     

     

     

     

     

     

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  • Ringing Out 2016 in QuickBooks

    29 November 2016
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    It’s that time again! One year is coming to an end, and a new year is quickly approaching. At Dagley & Co., we urge you to start your end-of-year QuickBook tasks now, before time runs out. We have 4 things we suggest you fit into your busy schedule sometime this month:

    1) Create and send year-end statements.

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    As your customers wrap up 2016, too, it’s good to send statements to past-due accounts.
    In an ideal world, all of the invoices that are currently due would be paid off by the end of the year. We all know that that’s not usually the reality. Two reports can help you here: the A/R Aging Summary and Open Invoices.

    Give everyone a chance to clear their accounts before December 31 by sending statements. Click Statements on the Home page (or Customers | Create Statements) to open the window pictured above.

    You have multiple options here that are fairly self-explanatory. The screen above is set up to create statements for all customers who have an open balance as of the date you select, but not for inactive customers or those with a zero balance or no account activity. That way, no one who’s paid in full to date will receive a statement. Of course, if you didn’t want statements created for anyone who’s less than 30 days past due, you’d click in the box in front of Include only transactions over and enter a “30” in the following field. Questions about all of this? Give us a call.

    Tip: You can also find out who’s overdue by clicking on the Customers tab in the left vertical pane to open the Customer Information screen. Click on the down arrow to the right of the field just below Customers & Jobs. QuickBooks provides several filters for your list.

    2) Reduce your inventory.

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    Want to discount all or selected items in your inventory by the same percentage or amount? Open the Customers menu and click Change Item Prices. Dagley & Co. can work with you on the whole item pricing process.
    The week between Christmas and New Year’s Day might be a good time to sell excess inventory by having a sale. If you only sell a few products, you probably know what hasn’t sold well in 2016. If your stable of products is larger, you can run QuickBooks reports like Inventory Stock Status by Item and Sales by Item Detail to identify your slow-sellers and discount them. You may need to filter your reports to see the right data. Talk to us about customization options if you’re unsure of this.

    3) Clean up your contact lists.

    If you don’t maintain your customer and vendor lists, you’ll eventually start wasting time scrolling through them when you enter transactions. So this would be a good time to designate those contacts that you’ve not dealt with in 2016 as Inactive (you can delete their records entirely, but we advise against that). Simply open a Customer record, for example, and click the small pencil icon in the upper right to edit it. Click on the box in front of Customer is inactive.

    4) Run advanced reports.

    Here’s where we come in. If we’re not already creating and analyzing QuickBooks’ advanced financial reports (found in the Accountant & Taxes submenu of Reports) monthly or quarterly, talk to us about it. They’re important, and they give you insight that you can’t get on your own. This is another activity that can spill into January.

     

    We hope these few things help to get you started with your year-end QuickBook tasks. Give Dagley & Co. a call at 202-417-664 if you have any questions, or would like us to go through these steps with you one-on-one. Remember: even though we are located in Washington, D.C. are clients are around the country!

     

     

     

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  • October 2016 Individual Due Dates

    30 September 2016
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    October 11 – Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during September, you are required to report them to your employer on IRS Form 4070 no later than October 11. 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.

    October 17 – Individuals

    If you have an automatic 6-month extension to file your income tax return for 2015, file Form 1040, 1040A, or 1040EZ and pay any tax, interest, and penalties due.

    October 17 –  SEP IRA & Keogh Contributions

    Last day to contribute to SEP or Keogh retirement plan for calendar year 2015 if tax return is on extension through October 15.

     

    The October 2016 Business Due Dates:

    October 17 –  Electing Large Partnerships

    File a 2015 calendar year return (Form 1065-B). This due date applies only if you were given an additional 6-month extension. March 15 was the due date for furnishing Schedules K-1 or substitute Schedule K-1 to the partners.

    October 17 – Social Security, Medicare and withheld income tax

    If the monthly deposit rule applies, deposit the tax for payments in September.

    October 17 - Nonpayroll Withholding

    If the monthly deposit rule applies, deposit the tax for payments in September.

    October 31 – Social Security, Medicare and Withheld Income Tax

    File Form 941 for the third quarter of 2016. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until November 10 to file the return.
    October 31 –  Certain Small Employers

    Deposit any undeposited tax if your tax liability is $2,500 or more for 2016 but less than $2,500 for the third quarter.

    October 31 – Federal Unemployment Tax

    Deposit the tax owed through September if more than $500.

     

     

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  • Time Is Running Out! Extended Tax Due Date Just Around the Corner

    26 September 2016
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    Couldn’t file your 2015 return by the normal April due date? Requested an extension? Be aware that the final due date for your return is October 17, 2016. The date is normally October 15, but that falls on a weekend this year, giving you two extra days to meet your individual tax-filing obligation. This is it! There are no additional extensions.

    Even though you have until October 17, you need to be thinking about getting the return completed in advance of the actual due date. Preparing a return takes time, and last-minute issues may need to be resolved before the return is ready to file. In addition, between 10% and 15% of all tax returns are on extension, so, contact us ASAP to set up your appointment before the rush.

    If you are self-employed, October 17 is also the final date when you can fund your existing self-employed retirement plan or establish a new one; without completing your return, there is no way to determine how much you can (or want to) contribute to that retirement plan.

    The extended deadline for K-1s from partnerships, S-corporations, or fiduciary returns to be sent out was September 15, so if you have not received that information yet, you should make inquiries.

    Extended individual federal returns are subject to a penalty of 5% of the tax due for each month (or part of a month) for which the return is not filed by the October 17 due date, with a maximum penalty of 25% of the tax due. In addition, if you end up owing taxes, the IRS will charge you interest on any tax due, going all the way back to the original April due date. If do not file a required state return and do owe state taxes, the state will also charge a late filing penalty and interest.

    Dagley & Co. is waiting for you to supply missing information to complete your return, we will need that information at least a week before the October 17 due date. Please us immediately at (202) 417-6640 if you anticipate complications related to providing the needed information so that we can determine a course of action for avoiding potential penalties.

     

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  • Preparing Your Own Tax Return? That May Not Be a Wise Decision.

    14 September 2016
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    At Dagley & Co. we hear a lot about the complexity of the tax code, as well as a lot of rhetoric from Washington about simplifying it. Tax codes were originally written to bring in money (taxes) to pay for government costs. But over the years, Congress has used tax codes more as a tool to manage social reform. As a result, the code has become very complex.

    So with taxes becoming more complex with each passing year, why do people think they can prepare their own returns? We use software-costing thousands of dollars, so why do individuals, not educated in tax law and using low-cost computer software, think they can get their tax result right? Well, they may not, and they may miss deductions, credits, income exclusions, retirement benefits, and even more beneficial filing options just to save a few bucks on tax preparation costs.

    However, paying a little more in tax than they need to should not be their biggest concern. A more troublesome situation is getting more tax refund than they are entitled to, and then a year or two later getting a letter from the IRS wanting the excess back. This is especially devastating to lower-income individuals and families that spend what they bring in just making ends meet and have no savings to fall back on when the IRS comes calling, leaving them with even a bigger financial hole.

    To make matters worse, they may not even understand the IRS letter or the issue it is dealing with, and since they did their own return, they have no one to call for help in getting the tax assessment reduced or knowing how to get penalties abated.

    Professional tax preparation offers more than just entering numbers into a computer program. If you usually file your own tax returns, perhaps you should consider a firm that can not only prepare your taxes properly, but also provide tax, financial and retirement guidance. We are also here to help plan for the future. Give Dagley & Co., CPA’s a call this year, we are here to help.

     

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  • September 2016 Business Due Dates

    6 September 2016
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    September 15 –  Corporations

    File a 2015 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest and penalties due (due date applies only if you timely requested an automatic 6-month extension).

    September 15 – S Corporations

    File a 2015 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension.

    September 15 – Corporations

    Deposit the third installment of estimated income tax for 2016 for calendar year corporations.

    September 15 –  Social Security, Medicare and withheld income tax

    If the monthly deposit rule applies, deposit the tax for payments in August.

    September 15 – Nonpayroll Withholding

    If the monthly deposit rule applies, deposit the tax for payments in August.

    September 15 – Partnerships 

    File a 2015 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.

    September 15 – Fiduciaries of Estates and Trusts

    File a 2015 calendar year return (Form 1041). This due date applies only if you were given an additional 5-month extension (If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1).

    Give Dagley & Co. a call for more details on taxes and your businesses September due dates.

     

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  • Employing a Family Member

    25 August 2016
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    Employing family members in your business is one way to reduce the overall family tax bite. Doing so will allow you to shift income and possibly provide them with employment benefits.

    Strategy – Employing a Child - By employing a child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child and reducing the self-employment income and tax of the parents (business owners) by shifting income to the child. Since the salary paid to a child is considered earned income, it is not subject to the “Kiddie Tax” rules that apply to children through age 18 and full-time students ages 19 through 23. The Kiddie Tax won’t apply at all to the 19- through 23-year-old student if his or her earned income exceeds one-half of total support, another incentive to employ a child in some situations.

    The maximum standard deduction available to the child in 2015 is $6,300. Therefore, the standard deduction eliminates all tax on that amount of income if the child is paid $6,300* in compensation. If the business is unincorporated, wages paid to the child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing the child, but the parent-employer may provide him or her with fringe benefits, such as group-term life insurance and qualified pension plan contributions.

    The child may also make deductible contributions to an IRA for 2015 of the lesser of earned income or $5,500. By combining the standard deduction and the maximum deductible IRA contribution, a child could earn $11,800 of wages and pay no income tax. If the child balks at contributing his or her hard-earned money to an IRA, the parent might consider giving the child part or all of the IRA contribution as a gift.

    *Actually only $5,950 needs to be paid to the child for the child to be able to claim the full $6,300 standard deduction for 2015 because a dependent may claim the sum of their earned income + $350, but no more than $6,300, as the standard deduction.

    Strategy – Employing a Spouse - Reasonable wages paid to a spouse entitles the employer-spouse to a business deduction. The wages are subject to FICA taxes, and the spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, the spouse may also be eligible to receive coverage under the business’ qualified retirement plan, and the employer-spouse may obtain a business deduction for health insurance premium payments made on behalf of the employed spouse. While maintaining the same family coverage, the business deductions could be increased by providing the spouse with family health insurance coverage as an employee. These wages are subject to income tax. Always remember, when a family member is employed in a family business, wages should equal the work performed, and that the services performed are completely necessary for the business.

    If you need more information, contact Dagley & Co., CPA at (202) 417-6640.

     

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