Employee vs. Independent Contractor

Below is an article that offers good tips for the small business owner.

Employee vs. Independent Contractor – Ten Tips for Business Owners

If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

2. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

3. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.

4. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

6. If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.

7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

8. Workers can avoid higher tax bills and lost benefits if they know their proper status.

9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.

10. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).

Links:
Contractor vs. Employee
Publication 1779
Publication 15-A

As always, please don't hesitate to call us if we can assist you in any way.

(636) 916-1010 or mike@favazzacpa.com

10 Tips for Business Owners

Hello!

Here are some great tips for small business owners.
If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks.

Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

2. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

3. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.

4. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

6. If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.

7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

8. Workers can avoid higher tax bills and lost benefits if they know their proper status.

9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.

10. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).

Links:
Contractor vs. Employee
Publication 1779
Publication 15-A
As always, please don't hesitate to call us if we can assist you in any way.

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Now Is Time For Energy Tax Breaks

Labor Day has come and gone, and summer is unofficially over. Retailers are starting to dust off Christmas decorations, and colder weather will be here all too soon.

Energy costs are at historic highs, and the weak economy makes the problem even worse. Fortunately, the IRS is offering some relief in the form of tax credits. But you can't claim the credit for 2009 if you don't act soon, so this may be a great time to improve your home or business property.

For 2009 and 2010, you can claim a 30% credit, up to $1,500 total, for the cost of buying "qualified" energy efficiency improvements you install in your primary residence. These include:
qualifying exterior windows and skylights (meeting specific "U-factor" and "Solar Heat Gain Coefficient" ratings) qualifying exterior doors qualifying insulation certain metal and asphalt roofs (meeting specific ENERGY STAR requirements) qualifying heating and cooling systems
non-solar water heaters, and biomass stoves.

If you're slightly more ambitious, you can claim one credit equal to 30 percent of the qualified investment in a solar panel, and another equivalent credit for investing in a solar water heating system. (Sorry, there's no credit for systems you use to heat your swimming pool or hot tub!) That credit was limited to $2,000 for 2008, but is not capped for 2009 and beyond. You can also use this credit to offset the Alternative Minimum Tax.

Finally, if you own your own business, you can deduct up to $1.80 per square foot for investments you make in "energy efficient commercial building property," placed in service through December 31, 2016, and designed to save at least 50% of the building's heating, cooling, and water heating costs, and interior lighting costs. (Deductions for energy efficient lighting systems are limited to 60 cents per square foot.)

They say it's the thought that counts. Well, the thought here is simple. Energy is expensive, and fossil fuels are getting scarce. Uncle Sam wants us to conserve, so he's offering tax breaks for energy efficiency.

But the rules here can be tricky. What qualifies? When does it have to be installed to qualify? So don't hesitate to call us with questions before you renovate or improve.

8 Important Questions For Hobbiests

Do you have a hobby? Does your hobby result in a profit? Read the tips below to see if your activity is a hobby or a business.

Summer is a time many Americans take their fishing poles and gardening tools out of storage. Hobbies – such as woodworking, stamp collecting and scrapbooking – are often done for pleasure, but can result in a profit.

If your favorite activity does make a profit every year or so, there may be tax implications. You must report income to the IRS from almost all sources, including hobbies.

Here are eight questions that will help determine if your activity is a hobby or a business.

1. Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.

2. Do you participate in your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit.

3. Do you depend on income from the activity? If so, your activity is likely considered a business.

4. Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.

5. Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.

6. Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

7. Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.

8. Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.

More information about not-for-profit activities is available in Publication 535, Business Expenses, available on the IRS.gov Web site or by calling 800-TAX-FORM (800-829-3676).
IRS Publication 535, Business Expenses
As always, please don't hesitate to call us if we can assist you in any way.

Five Facts About The Home Office Deduction Email

If you have a home business, these tips may be helpful to you.
With technology making it easier than ever for people to operate a business out of their house, many taxpayers may be able to take a home office deduction when filing their 2009 federal tax return next year.

Here are five important things the IRS wants you to know about claiming the home office deduction.

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly: • As your principal place of business, or• As a place to meet or deal with patients, clients or customers in the normal course of your business, or• In the case of a separate structure which is not attached to your home, it must be used in connection with your trade or business

For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

2. Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

3. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

4. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure your home office deduction. Report the deduction on line 30 of Schedule C, Form 1040.

5. Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer.

For more information see IRS Publication 587, Business Use of Your Home, available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Link: Publication 587, Business Use of Your Home

As always, please don't hesitate to call us if we can assist you in any way.

Ten Tips for Taxpayers Making Charitable Donations

Ten Tips for Taxpayers Making Charitable Donations

Every year, millions of taxpayers itemize their deductions on their federal tax return. One of the most common itemized deductions is a donation made to a charitable organization.

Here are the top ten things the IRS wants every taxpayer to know before deducting charitable donations.

1. Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization and most will be able to tell you. You can also check IRS Publication 78, which lists most qualified organizations. IRS Publication 78 is available at IRS.gov.

2. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.

3. You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.

4. If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.

5. Be sure to keep good records of any contribution you make, regardless of the amount. For any contribution made in cash, you must maintain a record of the contribution such as a bank record – including a cancelled check or a bank or credit card statement – a written record from the charity containing the date and amount of the contribution and the donor’s name, or a payroll deduction record.

6. Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, your deduction would be $200.

7. Include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

8. For any contribution of $250 or more, you must have written acknowledgment from the organization to substantiate your donation. This written proof must include the amount of cash and a description of any property you contributed, and whether the organization provided any goods or services in exchange for the gift.

9. To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attached the form to your return.

10. An appraisal generally must be obtained if you claim a deduction for a contribution of noncash property worth more than $5,000. In that case, you must also fill out Section B of Form 8283 and attach the form to your return.

For more information see IRS Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property. These publications are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:
Form 8283, Noncash Charitable Contributions
Publication 526, Charitable Contributions

Coping With Recession, Amish-Style

This week's alert is a little different from our usual tax and finance discussion. But every once in awhile, it's worth taking a broader look at how our finances affect our lives.

Pick up any newspaper or turn on the television and you'll see reports of how this economy is affecting your fellow Americans. We're coming together to help each other in all sorts of ways. And it's especially instructive to see how one particular community is working to weather the storm.

When we think of Amish Americans, we picture horses pulling black buggies and plain-dressed farmers living and farming much like their ancestors. That stereotype belies a complicated reality. There are over 233,000 Amish living in 27 states and Canada. As their population has grown, many have taken jobs in modern factories and non-Amish businesses. In fact, some experts estimate that over half of the Amish earn their main income outside of farming.

The Amish have also become more sophisticated about technology. While few of them surf the internet as we do, the computers that have become an indispensable part of our lives have affected theirs as well. Back in 2006, a group of Amish writers for "The Budget," a weekly newspaper selling 20,000 paper copies by mail, threatened to strike if their articles were posted online!

Today's recession has pushed many Amish out of their jobs "among the English." When that happens, they don't sit back and wait for their job to return. They create their own job by starting businesses. Typically, these are home-based businesses that let them stay closer to their families. (Of course, the recession is hitting Amish-owned businesses as hard as any others.)

The recession has brought other changes to the Amish as well. In one vivid example, the affluent Amish teens who used to shop at Walmart and Target have returned to buying fabric and making their own clothing.

In the end, the Amish, like many of the rest of us, are rediscovering day-to-day pleasures of home and family. Their choice reminds us that as difficult as today's economic storm may be, we can weather it until sunnier skies reappear.

Having said that, we still want to make the smartest possible choices to minimize the brunt of the recession where we can. That means smart financial choices and smart tax moves. If you're wondering what's the right move, call us. And if your friends, family, and colleagues are wondering, have them call us too!

Cinderella's Carriage

We're all familiar with Cinderella's story. Her fairy godmother turned a pumpkin into a gorgeous carriage to take her to the ball -- with a strict warning to be home by midnight, lest the carriage turn back into a pumpkin! (Those of you with teenage drivers might wish that you could do the same with your children's cars!)

Tax planning works the same way. That's because at midnight on December 31, some of the most valuable tax breaks turn into pumpkins. In some cases, you miss the chance to take advantage of them this year. In others, they expire entirely and you lose them forever.
In recent years, Washington has made taxes even more complicated than usual. Strict budget rules mean that new breaks come and go. This year, there are 22 tax breaks expiring on or near December 31. Some of them may be renewed before the end of the year. But it still makes sense to look at them now to make sure you don't lose anything the law offers:

The deduction for sales tax you pay to buy a new car or truck

The "First-time Homebuyer" tax credit (this one actually expires November 30, although it may be extended)

The itemized deduction for state and local sales taxes (as opposed to income taxes)

The special deduction for state and local property taxes for clients who don't otherwise itemize

The $4,000 deduction for "qualified tuition and related expenses"

The increased exemptions for calculating the dreaded alternative minimum taxable income

The $100,000 exemption for IRA distributions paid by the trustee directly to a qualified charity
Several valuable business tax deductions also expire this year:

The 50% "bonus depreciation" for new business equipment

The expanded "first-year expensing" dollar limit of $250,000 (which drops to $125,000 in 2010)
Accelerated depreciation benefits for certain tangible assets (including "qualified leasehold property," restaurant property, retail space improvement property, and "qualified machinery and equipment" used in farming businesses)

Expanded first-year depreciation benefits for business vehicles

Special credits for "COBRA" continuation subsidies for laid-off employees

None of us want to miss any of these breaks. But the only way you can be sure not to is to ask! If you're worried about missing valuable deductions -- especially if you own your own business -- call us. And if your friends, family, and colleagues are worried, have them call us too!