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Specific Instructions for Form 1099-MISC
File Form 1099-MISC, Miscellaneous Income, for each person in the course of your business to whom you have paid the following during the year:
You must also file Form 1099-MISC for each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.
For COMPLETE IRS details
Visit the IRS
For additional help with 1099 preparation….Call our office
As a business owner, you should be aware that you can save family income and payroll taxes by putting junior family members on the payroll. You may be able to turn high-taxed income into tax-free or low-taxed income, achieve social security tax savings (depending on how your business is organized), and even make retirement plan contributions for your child.
Turning high-taxed income into tax-free or low-taxed income. You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some of your business earnings to a child as wages for services performed by him or her. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.
For example: Suppose a business owner operating as a sole proprietor is in the 37% tax bracket. He hires his 17-year-old daughter to help with office work full-time during the summer and part-time into the fall. She earns $10,000 during the year (and doesn’t have any other earnings). The business owner saves $3,700 (37% of $10,000) in income taxes at no tax cost to his daughter, who can use her $12,400 standard deduction for 2020 to completely shelter her earnings. Family taxes are cut even if the child’s earnings exceed his or her standard deduction. That’s because the unsheltered earnings will be taxed to the child beginning at a rate of 10%, instead of being taxed at the parent’s higher rate.
Your business probably will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year, and expects to have none for this year. However, exemption from withholding can’t be claimed if (1) the employee’s income exceeds $1,100 for 2020 (and includes more than $350 of unearned income (such as dividends) for 2020), and (2) the employee can be claimed as a dependent on someone else’s return. Keep in mind that your child probably will get a refund for part or all of the withheld tax when he or she files a return for the year.
Social security tax savings, too.
If your business isn’t incorporated, you can also save some self-employment (i.e., social security) tax dollars by shifting some of your earnings to a child. That’s because services performed by a child under the age of 18 while employed by a parent isn’t considered employment for FICA tax purposes.
For example: Let’s say a sole proprietor who usually takes $120,000 of earnings from the business pays $5,700 to her 17-year-old child. The sole proprietor’s self-employment income would be reduced by $5,700, saving her $165.30 (the 2.9% HI portion of the self-employment tax she would have paid on the $5,700 shifted to her daughter). This doesn’t take into account a sole proprietor’s income tax deduction for one-half of his or her own social security taxes.
A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents.
Note that there’s no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do, anyway.
Retirement benefits. Your business also may be able to provide your child with retirement benefits, depending on the type of plan it has and how it defines qualifying employees.
For example: If it has a simplified employee pension (SEP), a contribution can be made for the child up to 25% of his or her earnings but the contribution can’t exceed $57,000 for 2020. The child’s participation in the SEP won’t prevent the child from making tax-deductible IRA contributions as long as adjusted gross income (computed in a special way) is below the level at which deductions for IRA contributions begin to be disallowed. For 2020, that figure is $65,000 for a single individual.
If you have any questions about how these rules apply to your particular situation, please don’t hesitate to call. Also keep in mind that some of the rules about employing children (such as the maximum amount they can earn tax-free) change from year to year, and may require your income-shifting strategy to change, too.
Very truly yours,
Michael E. Rink
Do you really want to donate your hard earned money to the IRS?
…………………………..But if you are trying to do your own taxes online, you may be missing a lot of tax deductions. This is where we come into the picture. Call our office from now to January 1st and we will see if you need our services. No reason to come in until we have a quick chat to see if our services fit your situation. You will be speaking directly with Michael Rink, CPA.
Don’t Delay…it cost you nothing to call ~ except your time.
Who qualifies for the Child Tax Credit???
News from the Internal Revenue Service: Taxpayers who claim at least one child as their dependent on their tax return may be eligible to benefit from the child tax credit.
It’s important for people who might qualify for this credit to review the eligibility rules to make sure they still qualify. Taxpayers who haven’t qualified in the past should also check because they may now be able to claim the credit.
Here are some details about this credit:
The maximum amount of the credit is $2,000 per qualifying child.
Taxpayers who are eligible to claim this credit must list the name and Social Security number for each dependent on their tax return.
The child must be younger than 17 on the last day of the tax year, generally Dec 31.
The child must be the taxpayer’s son, daughter, stepchild, foster or adopted child, brother, sister, stepbrother, stepsister, half-brother or half-sister. An adopted child includes a child lawfully placed with them for legal adoption. They can also include grandchildren, nieces or nephews.
The child must have not provided more than half of their own support for the year.
The taxpayer must claim the child as their dependent on their federal tax return.
The child cannot file a tax return for the same year with the status married filing jointly, unless the only reason they are filing is to claim a refund.
The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
In most cases, the child must have lived with the taxpayer for more than half of 2019.
The IRS Interactive Tax Assistant tool Is My Child a Qualifying Child for the Child Tax Credit? helps taxpayers determine if a child qualifies for this credit.
In some cases, a taxpayer qualifies and gets less than the full credit. These taxpayers must have earned income of at least $2,500 to receive a refund, even if they owe no tax, with the additional child tax credit.
The credit begins to phase out at $200,000 of modified adjusted gross income. This amount is $400,000 for married couples filing jointly.
Taxpayers can use the worksheet on page 6 of Publication 972, Child Tax Credit, to determine if they can claim this credit.
If you have any questions or would like us to review your options with you please feel free to call us, (828) 322-5813.
This is your reminder countdown to Tax Day! Your personal tax return is due in about one month or less. It’s NOT too late to have a CPA file your personal taxes. In cases where one or both can’t be filed in time, you can get an extension and file later.
As you are considering what to do, if you have not filed already, don’t rush through doing your own taxes. You will likely save money by having a professional like a Certified Public Accountant prepare your paperwork and filing electronically or sending it by mail BUT DO NOT DELAY!
There is a difference between having all your receipts collected in a shoe box and filing the most advantageous tax return. Your maximized return will include all allowable deductions. That way you can get the heftiest refund or pay the lowest taxes. Using a professional for taxes is a wise decision. You can use your time more productively because even with software, you may miss significant deductions you can take or mistakenly record those you are not entitled to take. In either case, it can lead to pricey errors which may cost you time and money later. Call Rink & Robinson, PLLC for all of your tax questions. 828-322-5813
Handling a Sales and Use Tax Audit
You didn’t ask for it, but you have been selected for and notified of a sales tax audit! What should I do?Most companies are not regularly audited by the state for sales and use tax purposes, so it is unlikely you have previously handled an audit. While the requested lists of records and documents that will be reviewed appear straightforward, there is much more to handling a sales tax audit. Warning, there are a lot of potential pitfalls during the interaction with auditors that may occur as you address the questions they typically ask.
What You Don’t Know May Hurt You
Importance of getting the facts correct. Addressing the facts seems like a pretty easy task to handle. However, some auditors are good at asking leading questions which support their position. Some state auditors look only for underpayments. Their directive is to get in and out of the field as quickly as possible, and their priority is looking for under-reported sales and use taxes. Therefore, few auditors will inform taxpayers about potential over-payments since they assume you determined internally that tax was due on a transaction. For example, for issues like IT services, some vendors may be conservative and charge sales tax because they are unsure of the proper taxation.
Benefits of Hiring a Tax Professional
Experience with auditor or industry issues. External representatives or sales tax experts are typically involved in many sales tax audits and might have already worked with your assigned auditor. In addition, from an industry perspective, ‘gray’ issues with respect to certain areas or unpublished rulings by the state may exist. An experienced external representative or sales tax expert will be aware of these.
Understanding the transactions in question.
Sometimes auditors will ask taxpayers to gather unnecessary exemption certificates or other documentation. This may cause the company to invest internal resources to secure the information, which might have been avoided based on an external representatives experience and knowledge. Other times, the state might have already audited the other party to the transaction (the customer on the sales side or the vendor on the purchases side). A company may not know internally what should be pursued and how to secure correct documentation.
A company may not be aware of internal policies establishing the amount of tax that can be conceded by the auditor or the supervisor to secure a fully agreed case.
Handling Proposed Adjustments
Tips to Manage Your Sales and Use Tax Audit
Following are some best practices to consider:
1. Communicate with your CPA, a sales tax expert, or other external representative when you are identified for audit. They can discuss the audit process with you, provide some background on various sampling methods, and provide insights on specific industry issues targeted by the state.
2. Even if you are handling the initial audit preparation internally, communicate with the external representative as schedules are shared so he or she is aware of the initial schedules vs. revised schedules.
3. Evaluate whether it is appropriate to perform a refund study/ reverse audit at the same time to identify potential opportunities for refunds.
4. If you opt to use a third party for the preparation and actual audit, make sure you understand the scope of their work and how they will be compensated.
5. Do not engage in contingent fee arrangements on questioned items by the auditor unless you have already made the first pass. Otherwise, you may be paying them on reductions for errors made by the auditor or obvious exempt transactions.
6. If they are doing a refund study/reverse audit, their fee should not be based on savings in periods outside the audit period.
7. Their fee should always be based on offsets actually granted by the state. Payment should be made at the end of the audit, or a provision should be included to reverse any offsets not allowed.
8. Understand whether their services are included only at the audit level or whether services related to appeals or tax court are included.
9. Understand their specific experience with your specific state and your industry.
Ask for references.
A sales tax audit is not an ordinary occurrence. Therefore, you need to invest the proper efforts internally or with external assistance. While you most likely work with an accounting firm that handles your financial audit or tax compliance, they may not have dedicated professionals who specialize in state and local tax matters. Inquire about their experience with sales tax and audit defense issues for your industry in your state being audited. If they do not have the experience, then actively seek out experts through your business contacts at other companies, trade associations, and/or Internet research.
1. Your Income Is Cash Based
Do you usually deal with cash? Are you in a service industry or perhaps the restaurant business where you often get tips? You might find yourself in an audit of your tax return. The tax office will make sure you calculated all your tips and other cash funds correctly. This will lead to your NC state refund status undergoing a delay.
2. You Claimed Business Deductions
Your state tax office will be more likely to check your return for an audit if you claim business deductions. Every year businesses around the country try to squeeze in various deductions that don’t make sense. The tax office will most likely want to check your return. This can delay your NC state refund status funds.
3. Your Business Deductions Aren’t Reasonable
Like stated above, if you try and put in business deductions that are unreasonable, you’re going to run into problems. It could lead to an audit and a delay on your NC state refund status funds. If you review your calculations and they seem awfully high, you’re probably going to get noticed.
4. You Missed Receipts
Speaking of deductions, make sure you have all the paperwork that goes with them in case of a double check from your state’s tax office. States are cracking down on deductions and such, now more than ever. If you don’t recheck your receipts, you may find yourself in the middle of an audit and a delay in your NC state refund status money.
5. You Miscalculated
Did you check all your calculations on the tax return? Any errors can lead to a big audit from your tax office. This can lead to a huge delay with your NC state refund status funds. Make sure everything is up to speed on your tax return. Check it at least once, preferably twice.
6. Your Refund is Delayed
If you keep looking for the money from your NC state refund status and it never arrives, then you might have been hit with an audit. This isn’t always the case, as North Carolina has had budget problems the past few years. This may be the cause of your delay. However, this could be a warning sign your return is getting a look over.
7. You Owe Back Taxes
Owing taxes to your tax office can flag you for an audit as well. Anything that makes you stand out as a taxpayer can be a problem. This includes owing the office money. They may check all your tax return information and lead to a delay in your NC state refund status.