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Alert: Look for New 1099 NEC- Your 1099's are coming soon

Virtually every small business, including sole-proprietors, must issue at least one 1099 each year. And this year there is a new one called the 1099 NEC. Here is a summary of the most common of these informational tax forms that you will need to file your tax return this year.

The Form 1099

The Form 1099 is an informational tax form that captures economic activity that is then reported to you and the tax authorities. The primary purpose of the form is to ensure you are reporting your taxable income. The forms are typically required to be sent to you on or before January 31st each year. The same information is due to the IRS on or before February 28th (March 30th if the form is filed electronically).

The 1099 NEC

Beginning this year, nonemployee compensation will be reported to you on 1099 NEC. In prior years, this income was reported in box 7 of form 1099 MISC. So if you are a consultant or work for Uber or any other gig economy job, you will need to look for this form.

Common 1099 Forms

To help navigate the numerous forms here is a list of what you can expect to receive.

1099 INT: This is the form you receive for interest earned. You should expect one of these for every bank account that pays interest, no matter the dollar amount of interest.

1099 DIV: This form captures dividends paid to you. Correct classification of dividends on this form is crucial. Tax rates are lower for qualified ordinary dividends versus other types of dividend payments.

1099 B: You will receive this form if you sell stocks or mutual funds. This tells the IRS to look for possible taxable investment sales.

1099 MISC: This is the default catch all 1099 for income earned when you are not an employee. This form is provided to independent contractors and attorneys for gross compensation. If you are a sole proprietor, each of your customers that are billed over $600 should be sending you one of these forms.

1099 R: You will receive this form if you have distributions from a qualified retirement account during the year.

1099 G: This form captures governmental payments to you. You may receive one of these if you receive a state tax refund.

1099 SA: This form captures distributions from health reimbursement accounts like HSA’s and MSA’s.

What you need to know

  • Use the information in this tip to ensure you are receiving the necessary 1099’s to file your tax return.
  • To be sure, create a list to confirm receipt of the necessary 1099’s. Missing 1099’s is a common reason for a delay in filing your tax return.
  • There are other types of 1099’s. If you receive a 1099 and are not sure what the form is, ask for clarification.
  • When you receive the form, double check the accuracy of the form. If there are errors, try to get them corrected as soon as possible.

Remember, the IRS receives these forms. Their computers will run a cross-check against your return to ensure you have not omitted any of them.



IRS Identity Theft Season Begins Now

Each year thieves try to steal billions in federal withholdings by stealing your identity. As the IRS focuses more attention on this quickly growing problem, now is the time of year to be extra vigilant.

Early tax filing season is the worst time

Your federal tax account at the IRS has plenty of money in it from all the taxes withheld from your paycheck during the course of the year. Until you file your tax return, the IRS does not know whether you need to pay more in or they need to refund you the excess amounts withheld.

Thieves know this too, and will try to file a fraudulent tax return before you have time to submit your own. By doing this, they can steal some of your withholdings and be long gone by the time you file your own tax return. So what can you do?

  1. File early. The sooner you file your tax return, the less likely a thief will beat you to your refund.
  2. Get an Identity Protection PIN. All taxpayers who can verify their identity can get an Identity Protection PIN (IP PIN) from the IRS. The IP PIN is a six-digit code known only to you and the IRS that helps prevent identity thieves from filing fraudulent tax returns. If you want an IP PIN, visit irs.gov/IPPIN.
  3. Check your credit reports. See if there is any suspicious activity on your accounts and on your credit reports.
  4. Protect your ID. Be suspicious. Never give out your Social Security Number, do not leave your credit card unattended, never give ID information to someone who called you, use the password function on your phone, be aware of strange mail, and shred important documents. Your best defense to IRS ID theft is to use best practices to protect your information.

The IRS is becoming a better spotter

If the IRS suspects something is wrong with your filed tax return they will send you a notice. If this happens to you:

  • Respond immediately. Get the direct contact information from the IRS website and let them know that you have a possible identity theft problem.
  • File an Identity Theft Affidavit (IRS Form 14039). This will record your problem with the IRS and they will take extra steps to ensure your account activity is coming from you and not the ID thief.
  • File a police report.
  • Contact the credit bureaus.

Having your identity stolen is one thing. Having your tax withholding stolen and then needing to unravel this problem within the IRS is a major hassle. Try to stay vigilant and know that there are steps to help protect your tax records. Is there good news in all this? If the IRS pays out a refund to someone stealing your identity, they are on the hook for this loss, not you.



Are You a Contractor or Employee?- Knowing the difference is very important

Are you an independent contractor or an employee? As the pandemic continues, many long-time employees are now picking up jobs as contractors. In the meantime, states like California are trying to force the definition of employees upon companies. Getting it wrong could cost you plenty in the way of Social Security, Medicare taxes, and other employment related taxes. Here is what you need to know.

The basics

As a contractor. If you are the worker and you are not considered an employee you must;

  • pay self-employment taxes (Social Security and Medicare related taxes)
  • make estimated federal and state tax payments
  • handle your own benefits, insurance, and bookkeeping

As an employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to;

  • payment and penalties related to Social Security and Medicare taxes
  • payment of possible overtime including penalties for a contractor reclassified as an employee
  • legal obligation to pay for benefits

Determining the answer: things to consider

Usually in determining whether you are an independent contractor or an employee, state and federal authorities look at the business relationship between the employer and you, the worker. The IRS focuses on the degree of control exercised by the business over the work done and they will assess your level of independence. Here are some tips.

  • The more the employer has the right to control your work, when the work is done, how the work is done, and where the work is done, the more likely you are an employee.
  • The more the financial relationship is controlled by the employer the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a business-like manner.
  • The more business-like the arrangement the more likely you have an independent contractor relationship.

Don’t forget your obligations

With so many workers now in the contractor ranks, it is important to stay on top of your tax filing obligations. With 15.3 percent of your income due for FICA (Social Security and Medicare), forgetting to pay this can quickly become a financial nightmare.

While there are no hard set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged. But beware, states are trying to constantly move contractors into the ranks of employees, all of which can cause havoc as companies and workers try to understand the changes these initiatives create.



2021 Mileage Rates are Here!- New mileage rates announced by the IRS

Here are the standard mileage rates for 2021.



Your Home. A Bundle of Tax Benefits.

Are you capturing all the tax benefits built into homeownership? Here are the most common.



Gone Phishing?

Each year the IRS publishes the top dozen tax scams it encounters over the prior year. One of them that makes an all too common appearance on their list is the phishing scam. Here is what you need to know.

Phishing requires bait

Phishing is the act of creating a fake e-mail or website that looks like the real thing. This “bait” is then used to bring you into the scam by asking for private information. This includes your name, address, or phone number. It could also include potentially dangerous ID theft information like your Social Security number, a credit card number or banking information. The bait is often very real looking – just like correspondence from the IRS or the IRS web site.

How to avoid the lure

How do you know the phishing is fake? Here are some tips.

  1. The IRS never initiates contact via email. If you get an unsolicited e-mail from the IRS requesting a response, do not reply! Instead forward the email to phishing@irs.gov.
  2. Never click or download. Perhaps even more important, never click on a link or open a file on a suspicious email. This is true even if the email comes from someone you know. Too often phishing comes from someone impersonating someone you know.
  3. Know the web site. This includes the appearance, but more importantly the address. The valid address for the IRS is www.irs.gov. For Social Security, the address is www.ssa.gov.
  4. They may already have info about you. Good phishers already have parts of your identity, so just because they know things like your middle name and birth date does not make them legitimate.
  5. Phishing over the phone. Phishing can also take place over the phone. If you receive an unsolicited phone call, get the person’s name and ID, then hang up. Then go to the IRS (or vendor) web site, take down their phone number and call them back using this phone number. Most fake calls are ended quickly when taking this approach.
  6. Don’t forget social media. Phishing can also happen via social media and texting. Virtually every digital resource has the potential to be used as a tool for theft.

What do phishers do?

When the phishers have your information, they can file false tax returns requesting refunds, steal bank information, set up fake credit cards, establish false IDs, plus much more. Remember, if it smells like a phish, it probably is.



Plan Your 2021 Retirement Contributions

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15 Year-End Tax Tips

Here are 15 ideas that may reduce your tax bite for this year. But act soon as the year-end is fast approaching.



Age (not death!) and Taxes- Age does matter, when it comes to tax obligations

One of the elements that make our Federal Tax Code so hard to follow is that different laws apply to you based on you or your dependents’ age. To help you navigate through some of this maze here is a chart that outlines key ages and how it applies to your tax obligation.

Please note: These age triggers outline some of the major tax events that relate to your age. In most cases the impacted year is the year you turn the age on this chart. Example: If your qualified dependent turns 17 any time during the year, they no longer qualify for the Child Tax Credit. This chart is not meant to be all-inclusive and there are exceptions to some of these age qualifications. Use this information to know when to ask for help.

Action step. When you or anyone in your family approaches any of the ages in this chart it is a sure sign you need to spend some time understanding the tax implications of the age event. Call if this impacts you!



Lower Your Taxes THIS YEAR!- Here are 6 ideas that most people can use

While 2020 winds down, there is still time to reduce your tax burden. Here are six ideas that can save money for most of us.

1. Leverage pre-tax savings. Take advantage of opportunities to set aside income on a pre-tax basis. This includes;

  • Participation in your employer’s retirement savings program.
  • Fully funding Health Savings Accounts (HSA), and “Flex Benefits” accounts that allow using pre-tax earnings to pay for childcare and out-of-pocket medical costs. Remember, however, unlike HSAs it is important to use up any funds in your Flex health care accounts and dependent care accounts prior to the end of the plan year as any unused funds will be forfeited.
  • Take full advantage of employee benefits like pre-tax child care, parking reimbursements, and any tuition reimbursement programs.
  • Paying any health care costs with pre-tax dollars.

2. Defer Income and Accelerate Deductions (or vice versa!). When possible think about whether it is better to reduce taxable income in this year or next year. By understanding which tax year will be more advantageous to you, you can act to defer income into a subsequent tax year and accelerate deductible expenses into the current tax year. On the other hand you may believe tax rates will be higher next year. If this is the case you will want to move as much income into the current year and defer expenses. Here are some ideas if your strategy is to minimize taxable income this year:

  • Delay receipt of a bonus check
  • Make an extra house payment
  • Make extra charitable contributions (that you would make anyway)*
  • Make next year’s church donations this year.*
  • Make extra trips to donate non-cash items prior to January 1st*
  • Review your investments to book gains and/or losses

*Note: With higher standard deductions, many of you will not be itemizing deductions each year. If this is you, consider bundling two or three years of deductions into one year. This is especially beneficial with charitable contributions.

3. Harvest gains and losses. Each year up to $3,000 in investment losses can be used to offset ordinary income. This is done after using the tax code’s netting rules. Furthermore, any donation of appreciated stock can avoid paying tax on the capital gains of the donation. Make full use of this knowledge to make tax efficient moves with any investment gains and losses.

4. Maximize tax-exempt and tax-deferred Investments. The higher your tax bracket the more tax savings you’ll realize with tax exempt and tax deferred contributions such as employer sponsored 401(k)s, IRA’s, tax-free municipal bonds, and Section 529 College Savings Plans.

5. Make full use of your marginal tax. The U.S. ordinary income tax has seven different tax rates with a maximum rate of 37%. The higher rates are like stairs, you go to the next highest rate instantly, when you pass a dollar amount. Knowing this, make full use of a lower rate until you step up to the next level. Those that are taking money out of retirement accounts should make full use of this idea.

6. Avoid Penalties. The IRS has become penalty crazy, as our tax system slowly migrates from a voluntary compliance system to a punitive one. For instance the minimum failure to file penalty has increased from $100 in 2009 to $435 in 2020. So avoid costly penalties and interest charges getting your tax records in order now. That way filing on time will be a breeze.