Latest Headlines

Backup withholding can catch taxpayers and businesses unaware. My colleague William Perez, Guide to Tax Planning, has a comprehensive article on backup withholding, from the taxpayer’s viewpoint. But if your business pays a contractor or other business, you need to know about backup withholding.

What’s Backup Withholding?

Before you begin paying a contractor or freelancer or other business, you must get a W-9 form. The W-9 is a request for taxpayer ID and certification (if the person is exempt from backup withholding). If you don’t have an ID or if the ID is not valid, the IRS requires that you withhold federal income tax from that payee at the rate of 28%. You don’t have to withhold FICA taxes (Social Security/Medicare), because the contractor is supposed to pay those, through self-employment taxes.

How Do I Know if I’m Supposed to Implement Backup Withholding?

You will receive a notice from the IRS telling you to start withholding, because the taxpayer’s ID is missing or invalid. Here’s more about IRS notices and backup withholding.

Backup withholding is deposited through the EFPTS system, the same as other payroll taxes and on the same schedule. Employers must also file a Form 945 each year to report backup withholding.

More about Hiring and Paying an Independent Contractor

I was told a number of years ago that Harvard Kennedy School professor Rob Stavins is always very careful to point out to his students that a job created is a cost, not a direct benefit. (Of course, the benefits to the company of hiring another worker may outweigh this cost, but that doesn’t make the cost not exist.) It shouldn’t be surprising, then, that many of the so-called “job creators” in our society aren’t so down with that label unless it’s politically convenient.

Recently, entrepreneur Nick Hanauer got the chance to essentially say as much to the U.S. Senate. A few points in the remarks are worth noting:

• I’m not sure that I entirely buy the supposed direct relationship between taxes and hiring, if for no other reason than labor costs are an expense to a business and thus not part of its taxable income. It is, however, possible that higher corporate taxes make it less attractive to produce on the margin and therefore companies might not expand as much, but even this argument is challenging since the taxes wold affect all businesses that people put their resources into. (This isn’t even considering the fact that much of the “job creators” talk focuses on personal rather than business taxes.)
• The argument that Hanauer makes perfectly characterizes the demand versus supply debate that exists in macroeconomics. Clearly, an economy needs both demand and supply to function, but which comes first? This is basically the macroeconomic equivalent of the chicken and egg problem. (On the other side of the argument from Hanauer you have Say’s law, which was sarcastically co-opted by John Maynard Keynes as “supply creates its own demand.”) I’m inclined to take Hanauer seriously on this point, since he is clearly speaking from experience.
• I think the statement “the goal of every business–profit– is largely a measure of our relative ability to not create jobs compared to our competitors” is one of the best parts of the speech. Really, how many companies can you think of that will certainly try everything to get more work out of existing employees (and existing salaries) before bringing in new people?
• From a policy perspective, fiscal stimulus (read, tax cuts that increase the deficit) are attractive because they get people to consume more. Like Hanauer, I’ve often wondered if policy makers realize that rich guys often don’t use but a small portion of their money for consumption. (Talking to you, Waren Buffett. Also, I think the term Hanauer is looking for is “low marginal propensity to consume.”) In some cases, there could still be aggregate demand benefits to tax cuts for rich people if they put their extra income into savings, since savings ultimately funds investment. At the present time, however, interest rates (i.e. the cost of borrowing to invest) are already so low that these effects would be greatly muted.
• It’s important to understand that the lower tax rate on capital gains as opposed to income is at least partially a result of the fact that the profits causing the capital gains are already taxed at the corporate level whereas labor is a pre-tax expense for companies. (In other words, just because somebody’s not physically writing a check doesn’t mean that he’s not paying a tax.)

You can take or leave Hanauer’s normative statements on inequality, but, either way, the guy makes some decent and realistic economic points and highlights some areas that require more nuanced thinking.

America’s highest and lowest income groups benefit the most from federal income tax breaks and credits — the middle class, not so much – according to the non-partisan Congressional Budget Office (CBO).

The government calls tax “breaks,” tax “expenditures,” because they reduce the total revenue collected from taxes, and in its report, The Distribution of Major Tax Expenditures in the Individual Income Tax System, the CBO found that they are “generally distributed unevenly across the income scale.”

Specifically, the CBO found that tax breaks and credits make a larger percentage of after-tax income for households in the highest- and lowest-income groups than for middle-income households.

According to the CBO, there are now over 200 federal tax breaks for individuals and corporations. In its analysis, the CBO examined 10 individual tax breaks in four categories: exclusions from taxable income; allowed itemized deductions; preferential tax rates on capital gains and dividends; and tax credits, like the earned income tax credit, and the child tax credit.

Among the 10 largest federal tax breaks and credits for individuals examined by the CBO were income exclusions for employer-sponsored health insurance, tax deductions for home mortgage interest, and tax credits for families with children.

The CBO estimates that for 2013, the combined individual tax benefits will make up nearly 12% of after-tax income for the lowest-income households, 9% for the highest-income households, but less than 8% for middle-income households.

Also See: Top Federal Benefit and Assistance Programs

As you might expect, the CBO found that more than 90% of the benefits from reduced tax rates on capital gains and dividends will go to the highest-income households, while about 50% of the benefits from the earned income tax credit will go to the lowest-income households.

Basically, CBO’s analysis indicates a lack of federal tax breaks specifically intended to benefit middle class families and individuals.

One reason for this may be the federal government’s apparent inability to clearly define “middle class.” In a November 2012 report, the Congressional Research Service concluded that being classified as a member of the middle class could simply be a “state of mind,” based more on politics and ideology than on income.

“Most people likely have decided views as to whether they are middle class, and those who refer to the middle class have a rough idea of whom they have in mind,” the report stated. “How closely these definitions correspond is another matter.”

Also See:
Middle Class was Decade’s Biggest Loser
Most Americans Feel They Pay More Taxes Than Trump

The IRS will not be targeting – or helping – anybody on four weekdays spread out during June, July and August, as all of the agency’s offices and services will be closed due to the cost-cutting federal budget sequestration.

According to the IRS, all of its offices, toll-free telephone lines and taxpayer assistance offices nationwide will be close on June 14, July 5, July 22 and August 30.

Also See: IRS Not Really Helping Taxpayers, GAO Reports

All IRS employees – including the ones who answer questions — will be furloughed without pay, and no tax returns will be processed on those dates. On the other hand, no tax compliance activities – audits, targeting and such – will take place, either.

But hold on there taxpayers. The IRS warns that you should, as in had better, continue to file your required returns and pay your taxes as usual on those dates.

“Because none of the furlough days are considered federal holidays, the shutdown will have no impact on any tax-filing deadlines,” said the IRS in a press release. “The IRS will be unable to accept or acknowledge receipt of electronically-filed returns on any day the agency is shut down.”

So, if you have a tax return or tax payment due soon after one of the furlough dates, you need to take those dates into account. For example, returns from taxpayers living abroad and second-quarter estimated tax payments are due on June 17, and highway use tax returns for commercial truckers are due on September 3.

Also See: How Bad is This ‘Sequestration’ Thing?

Tax payments made through the Treasury Department’s online Electronic Federal Tax Payment System (EFTPS) on the furlough days will be processed normally.

The IRS says is will give taxpayers extra time comply with requests to provide them with documents like administrative summonses, requests for records in connection with an audit, review or compliance check, or documents related to a collection matter.

When the last day for responding to an IRS request for documents or records falls on a furlough day, the taxpayer will have until the next business day.

Don’t feel too bad about not being able to call the IRS on their four furlough days, because according to the U.S. Taxpayer Advocate Service, the IRS is only able to answer about 7 of every 10 calls it gets from taxpayers. In addition, taxpayers spend an average of 12 minutes on hold waiting for the IRS to answer their questions… or not.

Also See:
Can IRS Employees be Fired for Targeting?
Taxpayer Advocate Tells Congress, ‘It’s Still Complicated’

Before you set out that “Yard Sale” sign, you need to check on:

• City ordinances. You may need a permit from your city or town for your yard sale or garage sale.
• State sales taxes. Some states have requirements that sales taxes be paid on sales that are more than just “casual sales.” Check with your state’s taxing authority.
• Income taxes. Yes, the IRS wants to be sure you aren’t turning a once-a-year event into a full-time business or that you are avoiding capital gains taxes.

One tip: Check with your local newspaper to see if they have a Garage Sale Package, with signs and ideas for newspaper ads. They may also include information about local ordinances or permits you need to comply with.

In general, it’s up to you to do the research, if you plan on having a garage sale more than once a year. When the city inspector pulls up to your house, you need to know what’s legal.

More on Garage Sales, Yard Sales: Taxes, Licenses, Permits

Keep up to date with the latest on legal and tax issues affecting your business  – subscribe to my newsletter or Twitter feed or check out my Facebook page.

If we made a list of all the annoying barriers to budget travel, it would be a lengthy and discouraging enterprise.

Most of us aren’t thrilled about new airline fees, rising taxes and increased airfares, more expensive gasoline, and anything else you’d like to put near the top of the list. Yet ever so slowly, we accept these setbacks and move forward with new strategies.

But in recent months, there have been 5 annoying developments that some budget travelers might not have noticed. Nonetheless, these trends will make it more difficult to redeem loyalty awards and practice budget travel.

It’s time to recognize these new trends and start spending your frequent-flier miles or loyalty points.

Does it sounds like fun to grow produce or make crafts or baked goods and sell them at a local farmers market? It’s not quite that simple. Seasonal businesses like booths at flea markets, farmers markets, and craft fairs must also pay taxes. Although each locality and state has different regulations, if you have a business where you sell to customers, you probably are going to have to pay taxes.

Flea Market and Farmers Market Booths are Businesses

If you have a booth at a farmers market you are creating or growing something, and you expect to sell it for a profit. And profits are taxable. If you are selling at a flea market booth, for example, you may be selling collectibles you picked up at garage sales for a low price, and you want to sell for a higher price and make a profit (otherwise, why would you bother?). Those profits are taxable.

What Taxes Must a Seasonal Business Pay?

A seasonal business must pay, at minimum:

• Income taxes on profits of the business, depending on your business type
• Sales taxes on sales of taxable items
• Self-employment taxes (social security and Medicare) for yourself as a business owner
• Employment taxes, if you have employees

Many localities charge other taxes, and your state may charge franchise taxes or other types of business taxes. As you start out, keep it simple, but do make sure you pay those taxes. Ask a CPA or tax advisor for help.

And don’t forget that a cash business like a booth must verify income and expenses to avoid IRS audit. CPA Gail Rosen has some tips to help cash businesses.

More about Flea Market or Farmer’s Market Booths – Taxes and other Issues

Read More About

How to sign up for sales taxes (then collect, report, and pay)

Keep up to date with the latest on legal and tax issues affecting your business  – subscribe to my newsletter or Twitter feed or check out my Facebook page.

Before you hire children as employees this summer, here are some laws and regulations you need to know about:

1. Check the child’s age, using a driver’s license or birth certificate. Don’t rely on the child to give you this information. Check on work permits, depending on your state’s requirements.

2. Understand restrictions on hours and types of work for young workers, both Federal (FLSA child labor laws) and your state laws).

3. Clearly define the child’s status – part-time, summer worker, etc. – for wages and benefits purposes. For example, if you have a classification of “summer worker,” you don’t have to pay for holidays and vacations.

4. Make sure all new hire paperwork is completed, just as for all other employees.

5. Treat the child worker the same as other employees in the classification – same benefits and time off.

6. You must pay minimum wage, but there is a special minimum wage (currently $4.25) for summer workers for up to 90 days.

7. State child labor laws may be different from federal laws; the more protective law must be followed.

8. If you hire your own children in “necessary and essential jobs,” and your business is not a corporation, some of the age restrictions don’t apply, the child may not have to pay taxes, and you may receive some tax benefits.

For more information: Hiring Children as Employees

Read more about Federal and State Child Labor Laws

Read more about Youth and Labor, from the Department of Labor

Keep up to date with the latest on legal and tax issues affecting your business  – subscribe to my newsletter or Twitter feed or check out my Facebook page.

The IRS has agreed that it was “absolutely inappropriate” for its employees to target conservative groups it considered critical of the government, and those dedicated to educating Americans about the Constitution and Bill of Rights, but can those IRS employees be fired for doing it?

Speaking at a May 10 American Bar Association conference, Lois Lerner, head of the IRS’ tax-exempt organization division, stated that from 2010 and 2012, unnamed low-level IRS “line people in Cincinnati” had improperly targeted about 75 nonprofit groups with “tea party” or “patriot” in their names for extra screening of their tax-exempt status.

“That was absolutely incorrect, it was insensitive and it was inappropriate. That’s not how we go about selecting cases for further review,” Lerner said. “The IRS would like to apologize for that.” (full transcript)

Lerner stressed that the responsible IRS agents did not act out of “political bias,” but were attempting to “streamline” the way in which they reviewed the cases.

While Lerner alluded to internal actions the IRS had taken to deal with the situation, she did not say whether any IRS employees had been disciplined or fired for their actions.

At a May 13 press conference, President Obama stated that if IRS personnel were found to be intentionally targeting conservative groups, “They have to be held fully accountable.”

But Does That Mean ‘Fired?’

Under the Internal Revenue Service Restructuring and Reform Act of 1998, there are 10 prohibited actions for which an IRS employee not only might, but must be fired. The law clearly states that the commissioner of the IRS “shall terminate the employment of any employee” in the event of “a final administrative or judicial determination” of the prohibited action. These are:

1. Willful failure to obtain the required approval signatures on documents authorizing the seizure of a taxpayer’s home, personal belongings, or business assets.

2. Providing a false statement under oath with respect to a material matter involving a taxpayer or taxpayer representative.

3. Violating the constitutional or civil rights of any taxpayer, taxpayer representative, or other employee of the IRS.

4. Falsifying or destroying documents to conceal mistakes made by any employee with respect to a matter involving a taxpayer or taxpayer representative.

5. Criminal conviction or civil judgment for assault or battery on a taxpayer, taxpayer representative, or other employee of the Internal Revenue Service.

6. Violations of the Internal Revenue Code of 1986, Department of Treasury regulations, or policies of the Internal Revenue Service (including the Internal Revenue Manual) for the purpose of retaliating against, or harassing, a taxpayer, taxpayer representative, or other employee of the Internal Revenue Service.

7. Willful misuse of the provisions of section 6103 of the Internal Revenue Code of 1986 for the purpose of concealing information from a congressional inquiry.

8. Willful failure to file any return of tax required under the Internal Revenue Code of 1986 on or before the date prescribed therefor (including any extensions), unless such failure is due to reasonable cause and not to willful neglect.

9. Willful understatement of Federal tax liability, unless such understatement is due to reasonable cause and not to willful neglect.

10. Threatening to audit a taxpayer for the purpose of extracting personal gain or benefit.

Targeting individual taxpayers or organizations for special enforcement based on their political positions or message could violate provisions 3 and 6, thus requiring the termination of the IRS employees involved.

It is possible that no disciplinary action will be taken until the Treasury Department’s inspector general issues his final report on the conservative group targeting incident.

Also still unknown is the exact intent of the IRS and its employees in targeting these conservative groups. Was, for example, their intent to shut down or silence the targeted groups or simply to collect taxes owed? Or was it all, as Lois Lerner suggested, simply a misdirected attempt by the IRS to streamline its procedures?

Also See: IRS Abusing Use of Tax Liens