Monthly Archives: January 2018

Mistakes to Avoid on 1099s

More Americans today are performing contract work either on a full-time or part-time basis. If you were an independent contractor in 2017, then it’s your responsibility to track that income individually. This is where 1099 forms come into play. Unfortunately, there are a number of mistakes contractors make with 1099 income. Keep reading as we dive into the five most common ones and how you can avoid being audited by the Internal Revenue Service.

  1. Misunderstanding the form altogether – There are several different 1099 forms, from 1099-MISC and 1099-INT to 1099-DIV and 1099-R. Each has specific tax reporting requirements. Take 1099-INT, for example. This is an IRS tax form that’s used to report interest income paid to individuals. Essentially, 1099-INT reports the total amount paid by the financial institution to an individual during the course of a year. Contractors often ask, “Well I never got a paper form, so I don’t have to do anything, right?” Not true. It’s imperative that you self-report the income on your taxes in this case. Those who fail to do so could be subject to an audit, which could result in paying back taxes plus costly interest and penalties. Our best piece of advice here is to make sure you educate yourself on 1099 forms and what they entail.

  2. Not writing off all business expenses – Are you looking to save money as a contractor? Then writing off all business expenses is a must. Let’s look at a hypothetical to provide some clarity for this. You work primarily from home and rarely venture outside of your residence for business matters. On occasion, though, you must commute to client offices. That mileage qualifies as a business expense. So be sure to account for that during tax season. The last thing you want is to overpay hundreds or thousands of dollars in taxes.

  3. Not keeping adequate records – The IRS requires you to keep proof of all business receipts, mileage, and other documentation to prove that the transactions actually happened. Should you be unable to provide this information for whatever reason, you may be on the hook for back taxes and penalties.

  4. Writing off personal expenses – Plenty of independent contractors and self-employed folks use the same phone for personal and business use. The same goes for contractors and vehicles. Obviously, the IRS won’t be happy if you choose to write off both personal and business expenses. So you must estimate what percentage of the cost is related to personal versus business use. It may seem like an inconvenience at first, but it’s certainly better than the alternative.

  5. Counting expenses more than once – In the QuickBooks Resource Center, it’s explained that most people use the Standard Mileage Rate when figuring out car expenses to write off. Be aware that the Standard Mileage Rate includes things such as gas, repairs, maintenance, lease payments, insurance, depreciation, and registration. As aforementioned, avoid counting the expense a second time with personal transactions.

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How to Handle Your First Business Tax Return

You will always remember 2017 as the year you started your own business. But now tax time has arrived. It’s your responsibility to get those returns filed accurately, timely, and in a way that achieves the maximum refund possible. Of course, you also have a business to run at the same time. Here are a handful of things to consider when filing a business tax return for the first time:

  1. Review the forms in totality – It’s important to do your due diligence in seeing which line items need to be filled out. You will be asked things such as the nature of your business, the year of the business, and of course, its location. Lastly, be sure that your accounts have the correct categories of expenses and income. This will allow you to get off on the right foot in terms of filing those returns properly.

  2. Determine the right depreciation method – As explained by The Balance, the Internal Revenue Service allows a first-year deduction of up to $100,000 for the majority of furniture and equipment, as opposed to writing off the cost over a number of years. It’s your choice, therefore, if you’d like to take the first year write-off. If your business is still relatively young, then it may be best to go with a slower depreciation. This ensures that most of the deductions will be available when your business has more income and is in a higher tax bracket.

  3. Understand home office deductions – Do you have a home-based business? Then it’s important to consider the ability to deduct a portion of your residence as a deduction. To do this right the first time, deduct the percentage of the real estate taxes and mortgage interest that would be otherwise taken as an itemized deduction. If there are any profits remaining, then other home expenses would be allocated to the business and personal portion.

  4. Calculate self-employment tax – Believe it or not, self-employment tax may be a significant part of this process. Make it a point to calculate these taxes as part of your total when paying quarterly estimates. Not to mention, the first quarter installment of your 2018 taxes are also due April 15. It’s crucial that you have these funds readily available.

  5. Get the necessary forms to employees – Remember that your employees receive a printable W-2 form to identify their income and withholding tax. Then there’s the 1099-MISC reporting for contractors who make at least $600 as of the 2017 tax year. If you haven’t done so already, have your contractors complete form W-9 to give you the required information. The more time you allow yourself and your team to do this, the better. The last thing you want is to wait until the last second to get everyone their tax forms.

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Debunking Tax Myths About IRS Audits

Few Americans actually enjoy doing their taxes. It’s why so many taxpayers tend to wait until the last possible second to file. Then there’s the fear of the Internal Revenue Service. Unfortunately, the IRS is often portrayed as “out to get us.” Nobody wants to be audited. With that in mind, here are myths about IRS audits that you shouldn’t believe, as referenced from

  1. You’re more likely to be audited if you e-file – Thanks to innovative software, gone are the days when you had to spend days (or even weeks) filing your taxes. The fact is that nearly 90 percent of all returns today are submitted electronically. Plus, the IRS confirms that returns done by hand are 20 times more likely to have mistakes on them compared to ones completed online. This means you shouldn’t have to fret over taking the convenient route this tax season.

  2. IRS agents will come to your home – Mistakes occasionally happen when filing online. For whatever reason, things just don’t match up accordingly. As a result, an agent is required to conduct an audit if for no other reason than to get a few items clarified. So should you have to be concerned about an intimidating IRS agent knocking on your door at dinner time? The short answer is ‘no.’ Nearly 70 percent of audits take place by mail. Be aware that scammers are trying to take advantage of taxpayers via email or phone more so than ever before.

  3. Filing late raises the risk of being audited – Do you consider yourself a procrastinator with taxes? Some taxpayers mistakenly think that using an extension to file late increases their chance of getting audited. This just isn’t accurate, though. There are certainly a number of factors that warrant an extra look by the IRS. But the timeframe in which you filed isn’t necessarily one of them.

  4. Audits are a terrible experience – It used to be that the IRS was a frightening agency that took over your house and went through every record imaginable. You can feel comfortable knowing that isn’t the case anymore. Agents are required to focus more on taxpayer rights and customer service. Ultimately, you’re working with the IRS agent to resolve something on your return.

  5. Only the wealthy get audited – There’s no question that the rich have a higher chance of being audited by the IRS. Those who make less than $200,000 in a year get audited 1 percent of the time. Not surprisingly, the more income you report, the greater the chance of being audited. However, just because you may not make six figures doesn’t mean the IRS won’t take a closer look. For example, families earning less than $100,000 a year saw their audit risk go up by 17 percent in the last seven years. Meanwhile, Americans making more than $100,000 per year have seen their audit risk decrease by 8 percent.

  6. More deductions mean more audits – There are plenty of deductions for taxpayers to take advantage of over the course of a year. It’s not as though a long list of deductions will raise a red flag with the IRS. Now, if charitable deductions amount to more than your income, you’re going to be in some trouble.

  7. The audit risk is over after you get your refund – You waited months to get that refund check and it finally arrives. No longer do you have to worry about audited, right? Not exactly. It’s important to know that the IRS can go back up to three years to audit someone, or up to six years if they find a major discrepancy.

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Tips for Filing 1099-R

Form 1099-R is a U.S. Internal Revenue Service form that’s used to report distributions from pensions, annuities, retirement/profit-sharing plans, IRAs, and insurance contractors for each person to whom you have made a designated distribution or are treated as having made a distribution of $10 or more from profit-sharing or retirement plans. This could also include any individual arrangements, annuities, pensions, insurance contractors, survivor income benefit plans, permanent and total disability payments under life insurance contractors, charitable gift annuities, etc. Keep reading for 1099-R filing tips from

  1. Your taxable amount may not be fully ‘taxable-focus’ on Box 2a – Usually, your plan administrator must reflect the taxable amount of your distribution in Box 2a. Be aware that the following are non-taxable transactions, which would be reported in Box 1, but not Box 2a:

    1. Direct rollovers between qualified plans, 403(b) plans, 457(b) plans, traditional IRAs, and simple IRAs
    2. The principal on a return of excess contribution from an IRA that’s removed by the deadline (the excess amount and earnings are reported in Box 1, but only the earnings are reported in Box 2a)
    3. Any recharacterized IRA contributions or Roth conversions
    4. Distributions of after-tax amounts from qualified plan
  2. You will need to apply the non-taxable treatment on your return if an amount is reported in Box 2a – Let’s look at an example of this. You receive a rollover eligible distribution and you rolled over the amount within two months. The IRS requires that you report such amount on Lines 15a and 15b if the distribution was made from an IRA or Lines 16a and 16b if the distribution was made from a qualified savings plan. Maybe you receive a distribution of $15,000 from your traditional IRA last year, but you rolled over the amount within the allocated 60 days. The issuer of your 1099-R must report the amount as taxable. When you file your return, be sure to do the following:

    1. Enter $15,000 on Line 15a

    2. Enter ‘rollover’ next to Line 15b

    3. Enter ‘0’ on Line 15b

  3. Non-taxable amounts are attributed to after-tax contributions made to your qualified plan – Here’s the thing: If the distributions were made from a qualified plan or 403(b) plan, then there’s a good chance the 1099-R correctly shows the non-taxable amount. Just know that you may have to file Form 8606 with your return in this case. Form 8606 includes a formula that helps you determine the taxable portion of your distribution. Filing this additional form will help the IRS understand how you got to the current figure.

  4. Stay accurate with any recharacterization – Let’s say that you converted an amount that water recharacterized down the road. If a conversion for last year is recharacterized this year, the 1099-R for recharacterization will not be issued until January of next year. Not only that, but the tax reporting for the recharacterization will likely not correspond to the tax reporting for the conversion. Consider the hypothetical in which you converted $200,000 last year and, due to market losses, the account was valued at $150,000 when it was recharacterized. You should expect to receive a 1099-R form and a 5498 showing $150,000 for the recharacterization. Still, you would treat the entire $200,000 as non-taxable because the entire amount was recharacterized for tax purposes. In the event that you characterize less than 100 percent of the conversion, you will need to file IRS Form 8606.

Unless the form shows that you had taxes withheld, it’s not required that a 1099-R be filed with your return. It’s a good idea, however, to keep a copy of your account statement that includes the transaction for which the form was generated. This way, you have what you need should a transaction review come up down the road.

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Tips for Filing 1099-DIV

You have plenty of tasks on your to-do list as a business owner. From paying employees to keeping customers happy, you will do whatever is necessary to keep things running smoothly. When it comes to taxes, though, you may be anything but an expert. Let’s say you rely on independent contractors for certain projects. If that’s the case, you must send out 1099 forms for tax-filing purposes. Be aware that such forms are only sent to sole proprietorships and partnerships. Most importantly, it’s your responsibility to do your own bookkeeping. Tax season will be here before we know it, which is why it’s imperative to get those forms straightened out now. Keep reading for 1099-DIV filing tips.

About Form 1099-DIV

Form 1099 Dividends and Distributions is used to report dividends and other distributions payments to investors. What’s a dividend, you may ask? Well, dividends reported on 1099-DIV forms can include dividends paid, capital gains, dividends, and exempt-interest dividends. Form 1099-DIV reports the total amount paid by the bank or financial institution to an investor during the course of a year. The form is also used to report tax items such as Section 1250 Gain, Section 1202 Gain, investment expenses, foreign tax paid, as well as federal tax withheld.

Keep in mind that financial institutions must file this form with the IRS for each investor to whom they have paid dividends during the year, whether electronically or on paper. The bank is also required to provide a statement to the recipient to whom the dividend is paid. In terms of logistics, 1099-DIV forms will be reported on Schedule B of your personal return. Should the form be issued to a partnership or S corporation, it will be listed separately on the Schedule K-1 and end up on your personal Schedule B.

Who Should File Form 1099-DIV?

The IRS requires most payments of dividends and distributions to be reported on 1099-DIV forms by the person or entity that makes the payments. As aforementioned, most financial institutions or government agencies making dividend payments are the ones needing this form.

When is Form 1099-DIV Filed?

An organization must file this form if they:

  • Paid dividends (including capital gain dividends and exempt-interest dividends) and other distributions on stocks of $10 or more

  • Paid at least $600 as part of a liquidation

  • Paid or withheld any foreign tax on dividends and other distributions on stock

  • Withheld any federal income tax on dividends under the backup withholding rules

Are There Penalties For Not Filing Form 1099-DIV?

If you weren’t already aware, the deadline to file 1099-DIV forms is the end of February if filing on paper. Electronic files must be submitted by the end of March. That said, the deadline to provide recipient copies is the end of January. It’s important to know that the IRS imposes heavy penalties if a business fails to file in general or fails to file correct information with these forms. For example, expect to get penalized for not providing recipient copies. Not surprisingly, the penalty increases with time. That’s why it’s a good idea to file as soon as possible.

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Why Use OnlineFileTaxes.Com?

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  • Supports uploading Excel files instead of manually filling out forms

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