1099 Rules - How to Report 1099 Income

With the increase in bloggers, affiliate marketers, eBay sellers and other online business owners, the topic of reporting miscellaneous income and 1099 forms has been coming up a lot lately.

While most people are aware they must report wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don't realize that they must also report other income, such as:

* cash earned from side jobs,
* barter exchanges of goods or services,
* awards, prizes, contest winnings and
* gambling winnings

Basically, you have to report all income from any source (and any country) unless it is explicitly exempt under the U.S. tax code.

That means if you earn money from ads on your blog, selling items on eBay, selling products for a commission, or providing a service to another person (even if that service is all done via the Internet), then you must report that income.

If you work as an independent contractor and earn $600 or more (from one company or individual), you should receive a Form 1099-MISC reporting your income. Even if you don't receive a Form 1099, your income is still reportable.

It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income.

Independent contractors must report all income as taxable, even if it is less than $600. Even if the client does not issue a Form 1099-MISC, the income, whatever the amount, is still reportable by the taxpayer.

The good news is that as an independent contractor, or as a self employed business owner, you get to deduct ordinary and reasonable business expenses against your income.

To report your income and expenses from your online business, use Schedule C: Profit or Loss From Business, which is then attached to your Form 1040 (your personal tax return). You must also complete Schedule SE to calculate your self employment taxes if your net profits from your business exceed $400 for the year.

Five Tips For a Smoother, More Efficient Tax Time

1. Organize your processes. Lost productivity and mistakes will often come from misunderstanding authority and responsibility. A tax season will be smoother when everyone knows the proper work flow, what their jobs are, and exactly how much authority they have to make decisions. You can make all of these things clear by designing organized processes, bookkeeping procedures and systems that your team can follow.

2. Prioritize. When you begin to feel overwhelmed, get systemized. Prioritize a to-do list and work on one thing at a time. As you cross a task off, celebrate! Make sure your team is clear on the priorities too.

3. Remember why you're there to begin with. Business can be a very detail-oriented affair, and it's really easy to get caught up in the moment especially when your dealing with your daily bookkeeping tasks. If you ever feel like you're drowning in details, stop and take a deep breath. Now look at the big picture. Just think about what your business goals are and remind yourself that you can obtain them. This exercise can help you to get back in tune with what's really important to you and will help you put everything back in the right perspective.

4. Communicate Clearly. Without clear communication it will be hard to get through the tax season. Your CPA is going to have a lot of questions for you and you will need to be able to answer them appropriately. Make sure you are not overtired and have plenty of energy to get you through. Be appreciative of all of the work that your accountant is doing for you. Gratitude is one of the fastest ways to change your perspective for the positive.

5. Model Leadership. Emotions are contagious. So is stress. If you are in a bad mood, everyone around you will feel it and may not be far behind. But if you come in cheery and ready to tackle the task before you, you can influence everyone in a more positive manner. It's a lot more fun to be around cheerful people.

Home Business Taxes - What You Should Know

As we all know, the government of the place we live demands, rather asks us politely (who am I kidding) to pay taxes. As a review, there are taxes placed on almost everything with financial value, which includes our financial income. The amount in which we pay is dependent on the governing body which runs the "town" we're residing in. When it comes down to our income, usually, a certain percentage is taken from it as "tribute" to the guys running the show. Many (it should be all) hate the fact that sometimes they charge a little too much, or simply too much for that matter.

Moving forward, having a business in your very house is becoming more and more popular (this is related our topic of taxes, just you wait). There are many reasons behind that, like you get to decide when you want to go to work. There'll be no need for you to rush in the morning so you don't get late. The need for traveling will be completely eliminated, which means you save gas or money on public transportation. There won't be a boss shouting at you, telling you how stupid and useless you are, that you're doing everything wrong, nor any need for kissing up to the prick.

You'll also get to pick the clothes you want to wear, unlike the company which you work for requiring you to dress sharp and fancy. The best part is, that your income (that is if you're doing some online business gig) is passive and has the potential to grow exponentially, granting you lots of freedom. You won't have to be busting your chops to meet deadlines as set by your employer, because basically, you're the employer here. So how is all of this related to our subject of taxes? Simple - this whole day dream which I've cleverly constructed into your mind does come with tax.

The government terms it as home business tax. Everything good does come with a price, and in this case, it's the fact that the governing body wants a "piece of the action". They want in with what you make, so there's nothing you can do about it. Now you're probably thinking of getting sneaky, by operating without their knowledge, maybe. "hey, I'll operate this gig of mine without them knowing, that way I won't be worrying about those pests deducting anything from me" - please don't be this beefheaded. No matter how hard or clever you play the "sneaky card", you're gonna end up getting caught in the end anyway, which could mean trouble for you.

Let's keep things legit, shall we? So if you want to know more about how home business tax works, try checking out the net. There's tons of information out there, it'll even tell you about the forms you should be filling out, and how to go about the entire process. The form especially for the home business guys like you works like this: it helps them in determining the loss or profit of your biz, then it's reflected on your form 1040. There is good new about the whole thing though which is: IRS permits plenty of tax breaks and deductions for the people engaged in this kind of biz.

Taking advantage of them would be a sound strategy for saving you lots of money for your home business to grow, giving you lesser financial problems to worry about.

Are You Waiting For Your Tax Refund?

There are millions upon millions of Americans that are owed money via tax refunds. Are you one of them? The thing is, people who make little money do not file for tax refunds thinking they don't deserve much, but the truth is, there are billions of dollars now that the US government owes Americans, and you might just be one of them.

Once you get your money back, you have to think about how you are going to spend it. Our economy as a nation always improves around tax time because of the influx of cash into the system. You can buy a new car, pay down your mortgage, pay off some credit card debt.

Since credit card interest rates are sky high, you'll free yourself from that amount that you'll be owing for a long, long time. Paying off the minimums is never a good idea, your money is just being paid as interest, not really making a focus on the main principle.

Another thing people do with their tax refund is they save it. They will save for the future. If there is one thing Americans can do better, it's save. Save for a rainy day. Learn that now, so that when there is not enough money to go around, you'll be set.

So make sure that you have received all the money that the US government owes you. You earned it, you made it happen and you certainly paid taxes on it. I can't tell you how many Americans have money owed to them and they have no idea about it. Like I said, you might be one of them. Find out for sure.

How Does the Government Recover the VAT Rate Change Shortfall?

Obviously, in reducing the VAT rate from 17.5% to 15% for a year will create a shortfall in the government's finances for the year. There are a variety of predictions on exactly how much this will be, however, most agree that it will be somewhere in the region of 12.5 billion. The government will have to make this up in some way or another:

One option the Treasury has considered, but is now denying is to INCREASE the tax rate as the economy recovers. The plans seen on an Revenue and Customs website suggested that

"The proposed changes will reduce this [the VAT rate] to 15% from December 1 2008 until the end of 2009. The standard rate will then return to 17.5% from January 1 2010, and subsequently increase to 18.5% in 2011-12."

However, they are now claiming that this was only one option that had been discussed, that has since been rejected. It is estimated that this 1% VAT increase could net the Government around 5 billion.

The current plan is to increase the rate of income tax on high earners to 45%. Unlike the estimated 5 billion above, this is expected to recover just 1.5 billion - plus it is likely that many high earners will find ways to avoid paying the extra tax.

The other, as of yet less mentioned part of the plan is the increase in Petrol, Tobacco and Alcohol duty of 2.5%, so these products will continue to cost the same. However, this duty hike will remain in place even after the VAT rate returns to 17.5% at the end of next year, meaning Petrol, Tobacco and Alcohol will actually be more expensive in the long run.

Unlimited Source of Income

How would you like to have an unlimited source of income? How would you like to be able to get money from any person or business you wanted to? How would you like to be able to borrow all the money you wanted? How would you like to have a printing press in your basement so you could print all the money you wanted?

That's what our Government does.

They can force people and businesses to pay them money through taxes. They can borrow all they want by selling government securities. They can print all the money they want with their printing presses.

Must be nice to have that kind of power, but it's also fiscal madness when not handled properly.

When the government forces people and businesses to pay them money for big government projects, it takes money away from those who would rather spend that money on goods and services, which creates jobs, which brings in money to the Government through taxes.

So the smartest thing a government can do, is reduce taxes as much as possible so as to increase employment, so that their primary source of income is from taxes. This would reduce the borrowing and printing of money.

What tax cuts do:

1. When the government reduces taxes to the public, that causes the budget deficit to get worse, because less money is collected in taxes.

2. Then the public takes that money and spends it.

3. This causes the stores to run low on stock.

4. Then the stores have to reorder from their wholesalers and suppliers.

5. This causes the wholesalers and suppliers to run low on stock and they have to reorder more stuff from factories.

6. Then the factories have to hire people to make more stuff.

7. This allows people to go back to work and make money and pay taxes.

8. With that money coming in to the government, this reduces the budget deficit.

A budget deficit means that the government spends more money than it collects in taxes, so the government has to borrow money to make up the difference. They do this by selling treasuries called bonds.

How would you feel if you had to borrower to pay your bills?

When they borrow all that money, this increases the national debt. Then people and businesses must pay that back through taxes eventually.

When they print money, it puts more money into circulation but that reduces the spending power of money because of inflation.

Big government is also caused by the people, when they want more and more benefits from the government, which the people have to pay for in taxes anyway. The more that people depend on the government, the worse it gets, until we end up in some sort of socialist form of government where the government is like parents taking care of their children.

The more that people depend on the government, the less they depend on themselves, which weakens the whole nation. The more that people get from a government, the more they want.

The more that people depend on their own abilities, the stronger the nation becomes. Which kind of government would you rather have?

Six Types Government (Source)

Socialism: You have two cows. You keep one and give one to your neighbor.

Communism: You have two cows. The state takes both and gives you some milk.

Fascism: You have two cows. The state takes both and sells you some milk.

Nazism: You have two cows. The state takes both and shoots you.

Bureaucratism: You have two cows. The state takes both, shoots one, milks the other then throws the milk away.

Capitalism: You have two cows. You milk one and sell the milk. You sell the other cow and buy a bull.

How to Avoid an IRS Income Tax Audit

What is an audit and why do individuals cringe at the word? The Internal Revenue Service issues audits as a regulatory measure to ensure that society is completing accurate tax returns. Sometimes they are issued simply to check on something that seems awkward or you might get picked for an audit simply because your number was picked. Avoiding an audit or decreasing your chance for an audit is quite easy.

First to avoid tax deductions, claim tax deductions that you are legally entitled to. If there are items that you are not sure about consult a tax attorney or tax professional - get legal advice about what specific deductions you are able to claim. If you do not have documentation to verify the claim of a deduction it is probably not a grand idea to go ahead and make the claim. Submitting documentation along with your return will assist in preventing red flags and avoiding tax audits.

The discrimination index function is a computer ran program that aids the Internal Revenue Service. Basically, your tax return is compared to the tax returns in the same income bracket. If any deductions or claims seem outrageous compared to others in your tax bracket - your tax return might be flagged for an audit. To help in avoiding a tax audit keep honest on your tax return and do not exaggerate any numbers. When ran through the discrimination index function you want your return to show up normal comparisons.

There are many things you can do to avoid tax audits. For example, first and foremost, keep track of all of your income. Keep copies of your W2's and 1099 forms, all receipts and any financial information that is relevant to the information submitted on the tax return. Keep all of this information organized, categorized and separated into specific years. Also, if you had help in preparing your return keep track of the contact information of the preparer that assisted you on the tax return. All of these above mentioned tips might not completely help you to avoid a tax audit but would surely be of help if you were chosen for an audit.

If you claim deductions instead of taking the standard deduction, any itemized listings that are exceptionally high for your income range might alert your return for an audit. To avoid a tax audit, keep honest and accurate with all of your charitable contributions especially. For example, please do not state that you have contributed $15,000 to a special organization if your annual income is only $35,000. This is not an action that someone would take it they are trying to avoid a tax audit.

It you are an owner or partner in a small business it would be in your best interest to try and avoid a tax audit. Filing a schedule C, which is required of small businesses, is tricky and complicated. If you are unfamiliar with taxes you should consult a tax attorney or tax professional. Avoiding a tax audit if you are a small business is almost next to impossible. The Internal Revenue Service is fairly certain mainly self-employed individuals try to hide or not report some of their income - this makes small business owners a target for tax audits.

Along the same lines of being self-employed, many individuals that receive a portion or all of their money in cash profits are a target for tax audits as well. To help avoid tax audits, be sure to keep all records of income either in a log book or computer program. Remember to report all income to the Internal Revenue Service and if your income is not currently taxed be sure to pay estimated taxes. These are also easy ways to avoid a tax audit.

If you are divorced both parties of the divorces wave a red flag for a tax audit the first few years. Be sure that you and your ex-spouse know which individual is claiming any dependent/s in the relationship. A child can only be claimed by one parent or the other. Many divorced couples work out a situation as to where the claiming years alternate. Also, if you are not in constant contact with your ex-spouse - be sure around tax season each individual knows who is claiming the dependent/s.

If you hold money or investments in off-shore or foreign accounts it is your responsibility to report the money produced and pay the appropriate taxes required for the funds. Holding off-shore accounts is legal but the taxes must be paid on them. If an individual does not report this off-shore income for any reason at all, criminal punishment can result.

The bottom line in avoiding a tax audit is simply being honest, accurate and filing in a timely manner. Keep organized and consult professional assistance whenever needed, especially if you have a specifically difficult filing situation.

The Technique of the Valuation Discount For Family Limited Partnerships

The Family Limited Partnership ("FLP") is often used to transfer interests to family members on a "discounted" basis, thereby lowering or sometimes even eliminating transfer taxes. The idea is to use a "discount" so that the value of the property appears to appraisers -- and therefore on your tax form -- to be much less than the underlying asset actually is.

Here is an example: Suppose you have 10,000 shares of IBM, and you wanted to give it to your children. If the stock is now worth $10 per share, and if you have no lifetime gift tax exemption left (which is currently $1 million for your life) and if you are single (i.e., you could not split gifts with your spouse), the amount subject to taxes would be $88,000 because you also have available an annual gift tax exclusion of $12,000. Therefore, the $100,000 gift minus the $12,000 yearly exemption equals $88,000. You would use this $88,000 figure as our taxable base in figuring out the tax.

Assume that you form a FLP and then transfer the $100,000 into that partnership. Ultimately it is your desire to give away $100,000 in limited partnership interests to your children instead of the stock. Clearly, a willing buyer might want to purchase the stock directly from you for the $100,000. But the FLP interest is a different story.

In fact, no one would ever pay $100,000 for the FLP interests from your children. First, because it is a limited partnership interest, FLP interests are not controlling interests. A limited partner (by definition) cannot exercise authority in changing investments, buying, selling, etc. Lack of control is an aspect of being a "limited" partner.

Second, there is no market for an FLP interest. Sure, there is a BIG market for the underlying shares of IBM - it is called the New York Stock Exchange. But, there is absolutely no market for the FLP shares. Therefore, an appraiser would discount the value of the FLP interests for lack of control (i.e., a "control discount") and for lack of marketability (i.e., a "marketability discount") to an amount less than the $100,000. In fact, the discount would probably be substantial.

An appraiser might say, for example, that the FLP interests have a fair market value of $60,000 even though the underlying stock is worth $100,000 - a 40% discount. The reasoning is simple: A willing buyer would be willing to pay only that smaller amount to purchase the FLP interest, even though the underlying stock is worth more. Consequently if you gave away the FLP interest instead of the stock, the gift would be substantially smaller because the fair market value of the FLP interest is smaller. Assuming that the FLP interest has a fair market value of $60,000, subtracting the the annual $12,000 exclusion would mean that the taxable base is now $48,000 instead of the sum of $88,000 if you just gave away the stock.

That's pretty cute, isn't it? But as you can imagine the IRS doesn't think so, and has been fighting this technique "tooth and nail" in the Tax Court, sometimes successfully using Internal Revenue Code 2036 to try to keep the money in the donor's estate as a retained interest. Despite the position of the IRS, however, a properly structured FLP is still an effective tool to reduce transfer taxes which would otherwise be owed by those wanting to gift part of their estate to their families.

Disclaimer: The information in this article is not legal advice, and the use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any links from this article is expressly disclaimed. This article is not to be acted upon as if it were legal advice, and is subject to change without notice, or may include obsolete or dated information, or information not relevant to your jurisdiction. If you require legal services, you should consult with an attorney.

1099 Rules - How to Report 1099 Income

With the increase in bloggers, affiliate marketers, eBay sellers and other online business owners, the topic of reporting miscellaneous income and 1099 forms has been coming up a lot lately.

While most people are aware they must report wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don't realize that they must also report other income, such as:

* cash earned from side jobs,
* barter exchanges of goods or services,
* awards, prizes, contest winnings and
* gambling winnings

Basically, you have to report all income from any source (and any country) unless it is explicitly exempt under the U.S. tax code.

That means if you earn money from ads on your blog, selling items on eBay, selling products for a commission, or providing a service to another person (even if that service is all done via the Internet), then you must report that income.

If you work as an independent contractor and earn $600 or more (from one company or individual), you should receive a Form 1099-MISC reporting your income. Even if you don't receive a Form 1099, your income is still reportable.

It is a common misconception that if a taxpayer does not receive a Form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income.

Independent contractors must report all income as taxable, even if it is less than $600. Even if the client does not issue a Form 1099-MISC, the income, whatever the amount, is still reportable by the taxpayer.

The good news is that as an independent contractor, or as a self employed business owner, you get to deduct ordinary and reasonable business expenses against your income.

To report your income and expenses from your online business, use Schedule C: Profit or Loss From Business, which is then attached to your Form 1040 (your personal tax return). You must also complete Schedule SE to calculate your self employment taxes if your net profits from your business exceed $400 for the year.

Undergoing an IRS Audit

When the IRS questions the contents of your return, they can audit it. While a tax audit is by definition a review of the information included on your return, the only "successful" audit (to the IRS) is one that creates a larger tax due.

How Does an IRS Audit Happen?

If the changes to your income do not exceed 25% of the total, the IRS has three years to audit if the return was filed on time. This span is increased to six years for changes greater than 25% to income surface. In cases where they deem your return fraudulent, there is no expiration for an audit.

Returns are chosen to be audited at random by computer algorithms. Your chances of being selected are about 1 in 200. The presence of these factors can increase the likelihood that a return will be audited:

• Excessive expenses with self employment income
• A business operating at a loss for more than one year
• Filing your return electronically (simpler to compare against prior years' records)
• Omitting data that is reported to the IRS from other sources

Types of Audit

There are three types of tax audit with the IRS:

• Correspondence Audit
• Office Audit
• IRS Field Audit

Correspondence Audit

The correspondence audit is by letter, which can be a CP2000, substitute returns letter, or late filing. The IRS audit letter proposes changes, to which the tax payer can respond by either refuting or accepting them.

Office Audit

The office audit is assigned to a tax examiner. This person will review bank deposits, income, and proof of deductions. A tax payer will be notified of the proposed changes.

Field Audit

Field audits are the most serious, involving an IRS revenue agent visiting the tax payer or business and conducting an investigation. The goal of these audits is often a fraud referral. What the field agent will explore is much more extensive than the prior two audit types.

So You're Under Audit...What Now?

Once the IRS has started the audit, you have a few options. If you lack the documentation to refute the changes they've proposed, you can simply let the audit happen and begin negotiations after the balance is assessed. If, on the other hand, you feel the audit is unjustified or that you can prove the validity of the original information now being questioned, you can contact your auditor. It is always wise to obtain experienced representation, as details presented in the wrong way can be harmful.

If no resolution can be met with the auditor, the tax payer can either bring it up with the auditor's supervisor or contact the Taxpayer Advocate's Office.

Your Rights Under An IRS Audit

The IRS must make you aware you are being audited. Any banks, neighbors, friends, family, or coworkers contacted during exam must be disclosed. You have the right to see this list.

For any financial info they ask for, you have the right to know the purpose and how it will be used. This data must also be kept discrete and dealt with professionally. If you do not feel your audit was handled professionally, you can contact the office's supervisor or the District Director. You also have the right to representation under audit. This person can speak on your behalf and appear in your place.

You can challenge the audit if they've questioned the same items before within the last two years' returns. The former audit must not have resulted in changes to your tax bill. If you can show this is the case, you may avoid the audit entirely.