Form 1099 Tax Filing Deadline

It’s barely the middle of January and the first tax filing deadline is already upon us at the end of this month. Businesses, nonprofits, and other entities may make payments that must be reported on IRS Form 1099. In general, Form 1099 must be completed and filed for each person to whom $600 or more was paid during the year for rents, non-employee income payments, prizes and awards, and other payments defined by the IRS at https://www.irs.gov/forms-pubs/about-form-1099-misc

Here are four tips to meet the Form 1099 Tax Filing Deadline:

  • Payments are reported on either Form 1099-MISC (miscellaneous), or on the new Form 1099-NEC (non-employee compensation) that was implemented beginning with the 2020 tax year. Which form to use depends on the type of payment recipient. For more information about Forms 1099-MISC and 1099-NEC and their instructions, go to IRS.gov/Form1099MISC or IRS.gov/Form1099NEC.
  • The due date for filing Form 1099 1099-MISC and 1099-NEC is January 31st for the calendar year ending December 31st. The former 30-day automated extended filing deadline was eliminated in 2016.
  • Form 1099 reporting does not apply to personal payments, only payments made as part of a business, nonprofit, trusts of qualified pension or profit-sharing plans of employers. One exception to this is payments of legal fees to attorneys. 
  • Some payments do not have to be reported on Form 1099, although they may be taxable to the recipient. For example, in general, payments to a C or S corporation, payments of rent to real estate agents or property managers, and business travel allowances paid to employees are not reportable on Form 1099. 

If you make payments as part of your business, nonprofit, trusts of qualified pension or profit-sharing plans of employers, your first tax filing deadline for 2021 could be coming up. Use these four tips to see if payments that you made in 2020 need to be reported to the IRS by January 31st. Need more details? The IRS has them for you at https://www.irs.gov/businesses/small-businesses-self-employed/am-i-required-to-file-a-form-1099-or-other-information-return

Unintended Consequences of Working from Home

Working from home quickly became the “norm” back in March or April for many workers who had traditionally worked from their employer’s location. In some cases, working from home means working from a different state than the employer. This situation could result in the unintended consequence of an unwelcome “surprise” at tax-filing time. While this could be an unusual situation, it won’t seem so rare if it happens to you.

In general, a state imposes income tax on the worldwide income of its residents, regardless of where the income is earned. Each state has its own rules to define a resident, but it’s usually someone who is lives in that state. If a worker earns income in a state other than where she or he lives, the worker files a Nonresident Tax Return and is taxed only on her or his income earned in that state. The worker would then claim a tax credit on her or his home state’s Resident Tax Return for taxes paid to the nonresident state. 

It can get even more complicated, depending on the states involved. For instance, in addition to the credit for taxes paid to another state, many states also have a Second Residency rule. In that case, taxpayers who are a resident in one state, owns a home in another state, and are physically present in that other state for 183 days or more, are considered a resident and subject to income tax in that state. This could result in some income being taxed in more than one state.

Confused? I am, and I’m writing this! An example might help:

Brad is a resident of Wisconsin, living just across the border with Minnesota. He normally commutes daily into St. Paul for work and pays state income tax to Minnesota on his W-2 wages that are earned at his employer’s location. He then claims a tax credit on his Wisconsin income tax return for income taxes paid to Minnesota. That prevents Brad from paying state tax in two different jurisdictions.

Brad also owns a second home on a lake near Bemidji, Minnesota, where he and his family vacation for several weeks each year. In March 2020, Brad’s employer required him to telecommute rather than drive to his St. Paul office because of COVID-19 stay-at-home orders. Brad and his family decide to head up to his lake home to live and work during the pandemic. Brad spends most of the rest of the year living and telecommuting from Bemidji. 

In this example, Brad is physically present in his secondary home in Bemidji for at least 183 days during 2020. Therefore, Minnesota will consider Brad to be a resident and tax him on his worldwide income. Wisconsin will also tax Brad on his world-wide income because he owns a home and considered to be domiciled (aka a resident)) of Wisconsin. That’s the unwelcome “surprise” at tax filing time.

Doing your homework before filing your 2020 state tax return is more important than ever, thanks to the COVID-19 pandemic. Depending upon the states involved and their respective state tax laws, as well as your work situation, now is the time to do all that you can to avoid any unintended consequence of working at home.

Deductible Donations for Non-Itemizers in 2020

A tax deduction is not the only reason to donate to the charity of your choice. Many people are happy to give to charity, even if no tax savings is involved. Donating to charity and paying less in taxes would make those people extra happy. So, the special provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act for non-itemizers to make deductible charitable donations of up to $300 will make those generous people ecstatic.

Non-itemizers are taxpayers who take the standard deduction instead of itemizing deductions on their federal income tax return. Nearly nine in ten taxpayers take the standard deduction because it results in lower taxable income and lower income tax. However, only taxpayers who itemize their deductions can typically deduct donations to a qualified charity.

Under one of the CARES Act provisions, individual taxpayers who take the standard deduction can claim a deduction of up to $300 for cash donations made to a qualified charity during 2020. Unless it’s extended, the deduction disappears in 2021. “Cash donations” means those made by check, credit card or debit card. Donations of securities, household items, or other property are not included.

Not all donations to organizations that do good work in the community are tax deductible. The organization must be considered a qualified tax-exempt entity by the IRS. Before making a donation, check the Tax Exempt Organization Search (TEOS) tool on IRS.gov to make sure that the organization is a qualified tax-exempt entity, and that donations are eligible for a tax deduction.

Check Publication 526, Charitable Contributions, and the TEOS tool for more information about qualified charities, donation limits, and how to report donations on your federal income tax return. More information about the special tax deduction for cash donations up to $300 in 2020 is at https://www.irs.gov/newsroom/special-300-tax-deduction-helps-most-people-give-to-charity-this-year-even-if-they-dont-itemize. That site also has the special recordkeeping rules for claiming a tax deduction for a charitable donation.

The CARES Act, passed by Congress last spring, included several temporary tax provisions that may not be well known. One was designed especially for people who do not itemize deductions on their income tax return and who donate to a qualified charity. The deduction of up to $300 for cash donations made to a qualified charity is only available during 2020, unless extended by Congress. Non-itemizers will want to jump on this one-time opportunity to donate to charity and pay less in taxes.

Taxes are Part of Getting Married

Taxes are not romantic, even to me. However, taxes are part of getting married. A conversation about income taxes should be part of every engaged couples’ wedding plans. Marriage, like many other life events, impacts how a person’s income taxes are filed. 

Before marriage, taxes are usually filed under the “single” filing status. After those wedding bells chime and the “I Dos” are said, each spouse’s income tax filing status changes to “married.” Engaged couples who are newly married, or about to get married, should be aware of these four points before filing their next income tax return:

  • Taxpayers are required to file income tax returns based on their marital status on December 31st, the last day of the tax year. Couples who get married on New Year’s Eve are considered married for the entire year for tax purposes.
  • Married couples can select the “married filing jointly” (MFJ) or “married filing separately” (MFS) filing status, depending on which option means a lower tax bill. Couples can assess their tax situation annually to select the filing status that results in the lower overall tax liability.
  • Filing MFJ or MFS is a choice. However, it’s important to be aware that different tax rules apply for couples selecting the MFS option. Examples include rules related to itemized deductions, the standard deduction, the capital loss limit, and some refundable and non-refundable tax credits.
  • To plan for filing next year’s income tax return, couples can refer to information from their prior-year tax returns to help determine whether using the MFJ or MFS filing status might result in a lower overall tax liability. Hint – MFJ often results in a lower overall income tax bill.

Newly-married couples can reduce tax stress by learning about how the filing status rules apply to them before filing their next income tax return. Want to know more? Check out the IRS’ webpage with the details about income tax filing status and links to more information https://www.irs.gov/newsroom/correct-filing-status

Taxes aren’t romantic, but they are part of getting married. And the IRS has the perfect wedding gift, a helpful checklist for newly married couples – https://www.irs.gov/newsroom/a-tax-checklist-for-newly-married-couples. No thank you note required.

Your Chances of an IRS Audit

Few words strike fear in the hearts of taxpayers like “IRS audit.” People would rather do almost anything other than get an audit notice from the IRS. But what does an IRS audit really mean? What are your chances of an IRS audit? What happens after you are selected for an audit?

An IRS audit can indicate a problem, or not. Basically, an IRS audit is a review of a taxpayer’s tax return and financial documents to determine that income and deductions are reported correctly according to the tax laws. The IRS Deputy Commissioner for Services and Enforcement recently issued the full report of audit actions by income levels. If you’re not up for all the details, here are a few basics about your chances of an IRS audit and what happens if you are selected: 

  • Why is a taxpayer selected for an audit?

Selection for an audit does not always suggest a problem. It can mean that something on a return does not fit a “norm” for similar returns. The IRS also audits returns where information on a return does not match what is reported by a third party, such as interest from a bank account. The IRS could also select a return when performing a “related examination” of business partners or investors whose returns were selected for audit.

  • How does the IRS notify taxpayers of an audit?

Taxpayers are contacted initially by regular mail from the IRS that she or he has been selected for an audit. The IRS notice provides all contact information and instructions, as well as an explanation of the items on the return that do not match or that require additional documentation. All IRS notices include a deadline to reply. Opening and replying on time is an important part of the audit process.

  • How does the IRS conduct an audit?

The IRS manages audits either by mail or through an in-person interview to review the related financial records. In-person interviews could be virtual during COVID-19. Usually, interviews are conducted at an IRS office or at the taxpayer’s home, place of business, or accountant’s office. Mail audit notices will request additional information about certain items shown on the tax return such as income, expenses, and itemized deductions.

  • How far back can the IRS go to audit my return?

Generally, the IRS can include returns filed within the last three years in an audit. If they identify a substantial error, they could add additional years, but not usually more than the last six years. The IRS tries to audit tax returns as soon as possible after they are filed. Accordingly, most audits will be of returns filed within the last two years.

Your chances of an IRS audit are not easy to determine. An IRS audit can indicate a problem, or not. Either way, it’s good to know why you were selected, what could happen next, and how the audit is conducted. No matter what, make sure that you open the IRS notice when it arrives, read all the instructions, and reply by the due date. 

Tax “To Do” List for Closing a Business

Data from Yelp Inc., the online reviewer, shows that more than 80,000 businesses permanently closed from March 1st to July 25th of this year. About 800 small businesses filed for Chapter 11 bankruptcy from mid-February to July 31st, according to the American Bankruptcy Institute. They estimate that total bankruptcies in 2020 could be up 36% from last year.

Closing a business is a tough decision. It’s painful. It also creates a long “To Do” List, including final tax responsibilities. Figuring out everything that needs to be done can be confusing. Fortunately, the IRS recently launched a redesigned webpage to help business owners and self-employed individuals navigate federal tax steps when closing a business.

The IRS’ “Closing a Business” webpage has explanations, instructions, links, and forms for:

  • Filing a Final Return and Related Forms

You must file a final return for the year you close your business. The type of return you file and related forms you need will depend on the type of business you have (e.g., sole proprietor or partnership). 

  • Take Care of Your Employees

If you have employees, you must pay them any final wages owed, make final federal tax deposits, and report employment taxes. You must also provide an IRS Form W-2, Wage and Tax Statement, to each employee. 

  1. Pay the Tax You Owe

Whether it’s by check or online, all taxes must be paid in full. 

  • Report Payments to Contract Workers

If you have paid any unincorporated contractors at least $600 during the calendar year in which you close your business, you must report those payments.

  • Cancel Your EIN and Close Your IRS Business Account

The employer identification number (EIN) assigned to your business is the permanent federal taxpayer identification number for that business. The IRS will not close your business account until you have filed all necessary returns and paid all taxes.

  • Keep Your Records

How long you need to keep your business records, such as employment tax records, depends on the document. Generally, tax records should be kept for four years and copies of tax returns should be kept permanently.

The IRS’ “Closing a Business” webpage outlines the steps needed to close a business and help take care of any employees. No matter the business type, information on this page https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business helps business owners and self-employed individuals understand what to do after making the tough decision to shut down.

Taxes and the Growing Gig Economy

Smartphones and apps have made it easier for people to find work, or “gigs”, through new online marketplaces. But gig workers may not understand all the tax obligations of their work situation. For example, companies will probably classify them as independent contractors instead of employees, making them responsible for taxes, insurance, and other financial obligations that employers usually take care of. 

The gig economy was growing before COVID-19. Now that work is booming because of even more gigs that are lined up via apps or websites, also called digital platforms. Examples are:

  • Driving a car for booked rides or deliveries, such as Uber and Uber Eats;
  • Renting out property or part of it, such as on Airbnb;
  • Running errands or complete tasks, such as TaskRabbit; or
  • Selling goods online, like on eBay. 

Digital platforms are businesses that match workers’ services or goods with customers. Instead of the customer directly paying the worker, the customer pays the platform, and the platform pays the worker. Platforms are supposed to issue a year-end income report to workers (i.e., on IRS Form 1099-K or 1099-NEC/MISC). Workers that earn income via a digital platform are required to maintain financial records and report all income on her or his income tax return, just like any other freelance worker. 

Knowing about the tax obligations for gig workers is vital because many don’t receive a year-end tax report, like a 1099, for all their work. Income from gig work is generally taxable, regardless of whether workers receive information returns or not. Gig workers also need to know about the business expenses they can deduct to reduce their taxable business income. 

Keeping up with the tax rules is a growing issue as the gig economy grows. The IRS recently launched its Gig Economy Tax Center to help gig workers navigate through what they need to know. Check it out here –  https://www.irs.gov/businesses/gig-economy-tax-center

The Gig Economy Tax Center is designed to make it easier for taxpayers to find information about a variety of topics including filing requirements, quarterly estimated income tax payments, and deductible business expenses. They even produced a video to break it down for you –  https://www.irsvideos.gov/Individual/PayingTaxes/UnderstandingTheGigEconomy.

The gig economy is growing. Gig workers who educate themselves on all the tax rules for reporting income and allowable business expenses can get it all done correctly and quickly, leaving more time for earning income with more gigs.

Need a Tax Payment Plan?

Many people are suffering financial hardship because of the COVID-19 economic downturn. 

Some of those people owed more money to the IRS when they filed their 2019 income tax return, but they didn’t have the funds to pay. Interest and penalties on unpaid tax balances keep adding to your tax debt, whether you have money or not. 

So, what do you do if you owe the IRS? Here is what you need to know:

  • Extended Payment Options – The IRS offers two ways for taxpayers to extend their tax payments over time:
  1. Short-term Payment Plan – If you can pay within 120 days, this option charges no fees and makes it easy to apply online. You’ll get an immediate notification of whether your application is approved. Interest and penalties continue to accrue until the tax is paid in full.
  2. Installment Agreement – Used when you need more than 120 days to pay, this option requires a set-up fee (e.g., $31-149 online and $107-225 via phone). Installment Agreements may require more information from you, depending on the balance due. Payments can be debited from your bank account, paid online, or by check. Credit card payments cost additional fees.

More details and a link to apply are at https://www.irs.gov/payments/payment-plans-installment-agreements#costs.

  • Tax Debt Amount Matters – Payment plan applications are generally easier to get approved for lower tax liabilities due than for large balances. Applications for $10,000 or less are automatically approved as a guaranteed Installment Agreement. For applications of amounts from $10-25,000, the approval is not guaranteed, and full payment must be made within six years. Tax debt payment plan applications for $25,000 up to $50,000 require information about your income, assets, and monthly expenses. Over $50,000 means a more thorough asset review to determine if anything can be liquidated to pay the tax due.
  • Offer in Compromise – A growing number of taxpayer households are suffering from long-term job loss, eviction, and medical issues with no insurance coverage. The IRS wants to collect all tax due but does not want to create an undue burden on taxpayers’ ability to provide for their basic needs. An Offer in Compromise allows you to settle your tax debt for less than the full amount owed if paying your full tax liability would create a financial hardship based on your assets, income, and expenses. See if you qualify at https://www.irs.gov/payments/offer-in-compromise.

Taxpayers who cannot pay their taxes due to the IRS in full have options to catch up. Depending on the amount due and your ability to pay, the IRS has extended payment plans and other mechanisms to avoid placing additional undue burdens on taxpayers who have already suffered financial hardship.