Accounting and Tax Tips and Information

written by Lauren Bakken, owner of Bakken CPA PC and co-author of the book, One-Income Household

Bakken CPA PC is dedicated to providing timely, professional, personalized service to businesses and individuals.

Monthly Archives: June 2012

Missed the Deadline? Here’s what you may have to pay…

Most taxpayers assume that filing an extension gives them an extension of time to pay their taxes that are due. This is a big misconception! Filing an extension with the IRS, using a Form 4868, does exactly what the name of the form says it does; it is an “Application for Automatic Extension of Time to File US Individual Tax Return”. If you have tax due, you will still have to pay that amount due before the deadline or you will be assessed interest and penalties.

There are two very different penalties that can be imposed and they depend on what part of the return was not done timely.

Failure-To-File Penalty:

  • This penalty is assessed when you do not file your tax return on time and do not file an extension with Form 4868 by the deadline.
  • Filing late can usually bring a penalty of 5% of the unpaid taxes for each month or part of a month that a return is late. The maximum of this penalty will not exceed 25 percent of the unpaid taxes.
  • This penalty is usually higher than a failure-to-pay penalty. So it is generally recommended to at least file your tax return if you are able, which can help you avoid one of the two penalties.
  • If you do not file your return within 60 days of the due date (original or extended), you will be charged a minimum penalty for failing to file. This amounts to the smaller of $135 or 100% of your unpaid taxes.

Failure-To-Pay Penalty:

  • This penalty is imposed when you do not pay your taxes by the due date. Even if you file an extension with Form 4868, you are still required to your tax due by the deadline.
  • Paying your tax late assesses you 0.50% (one half of 1%) penalty of the unpaid tax for each month (or partial month) that the tax remains unpaid. This penalty cannot be more than 25% of the unpaid tax.
  • If you pay at least 90% of the tax due by the deadline along with filing an extension, you will not face a failure-to-pay penalty.

If you do not file your tax return timely and do not pay timely, the IRS will not charge you double the penalties. Actually, they combine them, so the 5% failure-to-file penalty is reduced by the failure-to-pay penalty. But, the minimum for filing more than 60 days late still stays the same at either $135 or 100% of the unpaid taxes. The IRS will allow you to be exempt from these penalties if you are able to show there is a reasonable explanation for being late and that it was not because you willfully neglected to file or pay. To see if you may face these penalties, contact your accountant’s office today.

What job loss may mean for you

The loss of a job changes your tax situation drastically. This may mean that you have less income, collect unemployment, you may have to withdraw funds early from a retirement plan, you need to start a new job search, or you could have to relocate for a new job. All of these scenarios have a very different effect on your tax return.

Types of Income

  • Your regular paycheck may have stopped, but you could receive payments of severance, or accumulated vacation and sick time. You can apply to receive state funded unemployment compensation after losing a job also. It is important to request having taxes withheld from these sources as they are all taxable types of income.
  • Usually, taking funds from a pension plan is a taxable event. If you have the funds directed rolled into another retirement plan, this is exempt. However, if you are not older than 59½ and do not have documented medical reason to withdraw these funds early, you can also be subject to an early withdrawal tax.
  • Receiving Public Assistance such as food stamps is not taxable to you. Also, any gifts given to you (that are less than the maximum allowed for that year) are tax free.

Types of Deductions

  • You are able to deduct the costs of looking for a job on your Schedule A (subject to the 2% of adjusted gross income limit). These expenses can be the cost to travel to a job interview, any employment agency fees, and costs to mail your resume to prospective employers.
  • Moving can be a costly event; you are allowed to deduct a portion of your moving expenses if you must relocate because of your new job. In order to use this deduction, you must also meet the IRS time and distance requirements.
  • You may now be eligible for the Earned Income Credit. This is a credit that was created to help taxpayers in the lower income brackets. The credit amount varies depending on your tax situation, the amount of income you earned, your age, and if you have qualifying dependents.

Job loss can modify the amount of taxable income on your return or change the amount of deductions and credits as well. Any big financial changes that occur throughout the year should be discussed with your accountant. This will help ensure that you are fully prepared for any tax consequences that may arise from those events!

What is a 1099-K and will it impact your small business?

There is a new form that came out this tax season that had a lot of small business owners confused; this is the new 1099-K Form. It is something that has not been seen before and is not fully in effect yet, but will be for the 2012 tax season.

This form will be used by payment settlement entities in place of a 1099-MISC, and therefore you must be sure you are not getting two different forms from the same company, or they may unintentionally be reporting your income to the IRS twice. Independent contractors should still be receiving a 1099-MISC as it was done previously.

 

So what exactly is on this form?

 

At first glance it looks similar to a 1099-MISC Form, giving all the basic information

  • Filer’s contact information, this would be business that is paying you on behalf of your clients
  • Your business’s contact information, including your tax identification number
  • Box 1: The amount that was paid to your business throughout the applicable tax year

And here is where the form varies from other 1099s

  • Box 2: Merchant category code, this is a code classifying your business according to a system that the payment card industry uses.
  • Boxes 5a -5l: January – December payments reported as being received by your business from this Filer. Listing the receipts by month is meant to make it easier to confirm the amounts and verify that your books agree. It is important to note that they do not report if any funds were returned to your customers, and you are responsible for your own system of tracking returns.

There is an exception for de minimis payments, which would be from third party network transactions that total under $20,000 or are less than 200 transactions total for the year; in such cases you may not receive a 1099-K from this entity (but you could still receive a 1099-MISC).

This exception does not apply to payment card transactions. Any amount reported as being paid to your business as a merchant card transaction (such as a debit or credit card) will be reported on a 1099-K form for the year.

With these new regulations, it is even more important than ever to be sure your books are being kept correctly and accurately! If you aren’t tracking your income and expenses properly, how are you going to confirm that others are reporting it to the IRS truthfully? Contact your accountant to verify you are doing everything you need to do to stay informed about your business.