All Posts by azling-marketing

Independent Contractor

By azling-marketing | Uncategorized

The classification of Independent Contractor (“IC”) is an assertion by a company that an individual performing the work meets the criteria established by the tax authorities to be so classified.  This classification has serious implications for both the company and individual.

Why it matters:

This is a very hot topic with both the IRS and EDD in California.  While this issue has been an audit topic for years it has risen near the top of audit reasons.  Government agencies want their share of the money collected through payroll and they want workers to be covered by both unemployment and disability insurance.

A worker classified as an IC must file a business tax return and is subject to Self-Employment Tax (16.75% of taxable income is a basic guide).

Additionally, the worker is not covered by unemployment or disability insurance.  This really means an IC in business for themselves regardless of their intent.  This classification also has implications in other areas such as general liability insurance, auto insurance coverage, and city business license requirements.

Do you want to be in business for yourself?  Self-employment is not for the faint of heart!

The primary issue is control (a nod to Janet Jackson).  If the company has control over the individual then the worker should be classified as an employee.  The tax agencies begin with the assumption the company has control and the burden of proof is on the company, not the worker.

Salient issues to consider pertaining to the work:

• Who controls when and where the work is performed?
• Does the company supervise the work?
• Who determines the procedures to follow to complete the work?
• Who provides the equipment and tools required?
• Is the worker prohibited from providing services to other companies?

Assuming the worker is being treated as an IC:

• Does the IC provide services to additional companies?
• Does the IC have a business license?
• Does the IC carry appropriate insurance for a business?
• Does the IC have an investment in their company?
• Does the IC have a risk of loss?

Here’s how we can help:

Our experience can help you navigate this complex area.

While we cannot prevent an audit, we can assist with establishing appropriate procedures and documentation.

An audit on this topic will typically cover three years which is a costly process.

Don’t expose your business to unnecessary risk with inappropriately classified workers!

Give us a call at (714) 998-9244 if you’d like to find out more.

 

Warning on Tax Scams

By azling-marketing | Uncategorized

Unscrupulous thieves continue to attempt to deceive taxpayers. The scammers are spreading their attempts beyond federal income tax to other areas such as state income tax and property taxes.

One area that is complicating this topic is the IRS is beginning to use third-party collection agencies to collect back taxes.

Here are a few tips to thwart scammers:

• Keep your tax records current. Have a copy of your tax returns that were filed for the last four years. Make certain you have these easily accessible so you can see the results of the tax returns (amounts of refunds or tax due). Knowing that your returns were filed timely and processed assures you that there is no additional tax due.
• Keep your banking records documenting the receipt of refunds or payment of taxes due for the last four years.
• The tax agencies will communicate through US Mail, not phone calls. The only exception would be if a tax return is under audit and you’re not working with a tax professional to represent you. Most taxpayers are not familiar with their taxpayer rights. If a return is being audited I strongly suggest you have proper representation.
• When sending correspondence to ANY tax agency ALWAYS send using certified mail with return receipt. The burden of proof of delivery is always on the taxpayer. Keep the card that is returned with your tax records.
• Keep your address current with the tax agencies. If you have moved be sure to file the appropriate form with the various tax agencies or call them to provide your current address.
• Immediately open all mail from tax agencies. No likes receiving such correspondence, however, ignoring will not help! Scammers have been known to send certified mail to make it look more official. The tax agencies rarely do this and it will be regarding a known matter such as an audit or tax levy.
• Protect your loved ones! Discuss these scams with parents, grandparents and young adults. Scammers succeed using fear and preying on ignorance. Have your family members contact you if they are hit by such attempts.

Please feel free to contact my office if we can be of assistance with this issue or any other tax matter.

Jim

Email: jazling@azling.com
Office: 714-998-9244

S Corporations Explained

By azling-marketing | Uncategorized

An S-Corporation is a regular corporation that has made an election (via Form 2553) to be taxed as a flow through entity – the corporation itself does not pay federal taxes.  In California, S-Corporations pay 1.5% of taxable income with an $800 minimum annual tax.

The corporation tax return is reported on Form 1120S for federal and 100S for California which reports the business activity for the year.  Income earned, expenses incurred, nondeductible items, items affecting shareholder basis (below) and a Balance Sheet are included.

S-Corporations can be owned by one individual and that individual can hold all three required corporate officer positions in California (President, Treasurer and Secretary).  An annual report of officers is due on the anniversary of the incorporation date.  A requirement worthy of highlighting is a corporation must pay wages to those operating the business.  In some cases, the only employee is the shareholder.  When this is the case the compensation must be “reasonable” as defined by the Internal Revenue Code.  Payroll is reported to employees annually on Form W-2.

Shareholders of S-Corporations receive a K-1 for their respective share of the taxable income or loss.  Additional information reported on the K-1 will include, as appropriate, accelerated depreciation under Internal Revenue Code Section 179, non-deductable amounts (such as non-business related expenditures and the non-deductible portion of meals and entertainment), distributions of cash and property to the shareholder, etc.

The K-1 income for the shareholders is reported on Schedule E page 2 of their 1040 return.  The taxpayer pays income tax on their respective share of taxable earnings as reported on the K-1.  The payment of tax on S-Corporation profits generates “Basis” in the S-Corporation stock.  Distributions from an S-Corporation are not taxable as dividends if the shareholder has stock Basis greater than zero.

S- Corporation Stock Basis:

A shareholder’s net investment is called Basis.  Basis begins with the shareholder’s initial investment in the corporation.  There is activity that increases and decreases Basis each year.  Activity increasing basis include, but not limited to, additional investment from the shareholder and paying income tax on S-Corporation earnings.  Activity decreasing basis include, but not limited to, distributions of assets to the shareholder, Section 179 depreciation, net losses of the S-Corporation and nondeductible expenses (e.g. 50% meals and entertainment).

When Stock Basis is positive, there are no significant tax issues.  When a shareholder’s Stock Basis becomes negative S-Corporation losses are “suspended” (i.e. not deductible by the shareholder) until the basis is restored.  Additionally, distributions are taxed as dividends to the shareholder and reported on Form 1099-DIV.

There are other topics within the scope of Basis, such as Debt Basis, which is beyond the scope of this overview.

Fees Related to S-Corporation Ownership:

There is no question the Internal Revenue Code benefits business owners in exchange for the risk taken to create taxable income and jobs.  However, there are costs incurred to own and operate a business.  Here’s a list of some of the fees that are pertinent to owning a corporation:

Cost to create entity

Cost to set up accounting system, Bookkeeping fees, and Payroll processing fees

Annual minimum franchise tax (CA is $800)

Tax preparation cost

Our goal is to protect the investment an owner makes in their business while maintaining compliance with federal and state laws.

This document is for tax purposes only and is not intended to be legal advice.  Please consult an attorney regarding legal matters.