IRS Tax Tips

IRS Tax Tip Advice

Sage Tax IRS Tax Tip Advice For Filers – Timeless Advice For Any Year!

Are your ducks in a row?

IRS Tax Tip:

Take time to regularly check the IRS.gov website for updated and new information.  Staying current on tax information is important for business owners.

Since the fall of 2010, the IRS has been actively pursuing their strategic plan to conduct more audits.  A promise was made for more IRS audits.  These audits come under the guise of – “enforcement initiatives.”

IRS Tax Tip:  The highest percentage of these (enforcement initiatives) audits are targeted at small business.

IRS Tax Tip:  Four specific areas were identified by the IRS as being their main focus.

1. Misclassification of workers as Independent Contractors, or ‘ICs’.

Employment taxes Can cripple a small business.

In Oregon alone, there are seven taxes related to workers – four of which are separate from the matching taxes of social security and Medicare.

Many small business owners try to find ways to cut costs by reducing their number of employees.

One way to reduce employees is to use a higher percentage of IC’s who work in that business.  IC’s are a legitimate way to use workers.  They must be legitimate IC’s, though – and NOT considered ’employees’ according to the IRS tax tip information.

IRS Tax Tip:

Too many small business owners don’t look into the correct way to use this independent Contractor opportunity – Using IC’s is a legitimate business tactic.
But if this tactic is implemented incorrectly, it can cost a business owner thousands of dollars. There are significant taxes involved that include penalties and interest if you use IC’s without first learning the rules of what constitutes an IC versus a full-time or part-time employee.

You can find a list of rules at the IRS here.

IRS Tax tip

IRS Tax tip from the IRS.gov website – “Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services.

The person performing the services may be –

  • An independent contractor
  • An employee (common-law employee)
  • A statutory employee
  • A statutory non-employee

IRS Tax Tip:

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.”
Employment taxes are a prosperous source of revenue for the government, so based on a study from the Government Accountability Office, showing where workers were misclassified as IC’s, the IRS is randomly performing an estimated (low end number) 6,000 audits of small businesses. Robin Arnold, a senior IRS program manager and field specialist, made this announcement on April 22:

“The random audit project is a method being used by the IRS to develop their audit program. There are plans to expand the program and increase audits for small business owners. The IRS is hiring over 2,000 agents this year alone to develop and monitor this plan.

Audit results will be given to corresponding states for any additional state taxes owed on misclassifications of workers.”

It is NOT illegal to use independent contractors.  The IRS provides enough information on their website to literally drown in.  IRS Tax Tip information can be found everywhere.  It only takes a few minutes to know whether you are using the IRS Tax Tip guidelines correctly – Or not.  Any bookkeeper or accountant will tell you that their information is based on their knowledge and that, “In the event of an audit,” you are pretty much on your own.

IRS Tax Tip:

There are guidelines you must follow in using IC’s to be in compliance.

For instance, your office secretary is not an IC.  

Your in-house bookkeeper may (or may not) be an IC.

IRS Tax Tip:  Make sure you understand what an independent contractor is and if you have any doubts then compare what the duties are for the independent contractor to the guidelines for an independent contractor and it becomes clear.

2. Non-filers of Employment tax returns

The IRS is increasing enforcement for businesses that don’t file their employment tax returns or pay employment taxes on time.

IRS Tax Tip:

Make sure you get copies that your taxes were filed correctly from your bookkeeper or payroll agency. When an employer doesn’t file the correct paperwork they are considered in violation. If you don’t want to be held personally responsible for taxes – know your rights.  And if you are having financial problems, call the IRS and state agencies to see what arrangements can be made for payment. Taxes, interest and penalties can shut a business down.

IRS Tax Tip:

The IRS is performing random audits to confirm small businesses is in compliance for employment taxes. For best results, make sure your business complies with the rules.  File all monthly, quarterly, and end of year tax paperwork.  If you don’t know what forms should be filed you need to find out and get a list with the corresponding filing date requirements.

IRS Tax Tip:

IRS.gov has that posted on their website.  Ignorance will not be considered an excuse, although you may get leniency because of it, but the government needs money right now and that is simply the bottom line.  $10,000 fines for not filing W-2/W-3 end of year forms are not uncommon.

3. Fringe benefits Paid to Employees

IRS Tax Tip:

Not all fringe benefits are excluded, but if those benefits are payment of money, property or services of any kind as compensation for services then it is a taxable income. If a person receives goods in exchange for services, those goods are taxed at the fair market value. For instance, if you want a website built and trade the website builder software for their services instead of money . . .

Exclusions are limited and are expressly defined. When a benefits exceed those limits, they are taxable. Be aware of those limits.

IRS Tax Tip:

Audits targeted at small businesses will also focus on employee fringe benefit payments.

IRS Tax tip

4. Corporate Officer Payments

The tax code states that corporate officers who provide services to a corporation must be compensated by the corporation. A “reasonable salary,” guideline is used based on fair market value of the services rendered.

Often, corporate officers don’t take salary. Complete compensation is often taken as a dividend at the end of the year.

A dividend is generally not subject to social security tax.

IRS Tax Tip:

Salaries are subject to taxes.  Sadly, many tax return professionals will calculate reasonable compensation on a lesser scale than the IRS and the IRS will challenge that compensation package. Being caught unaware might cost you.

IRS Tax Tip:

True to form you can look for the IRS to work on taxing every possible benefit that’s paid – and they can go backwards through the years.

What’s new is the aggressive tactics used to audit and monitor small business owners. What’s old is tax code.

IRS Tax Tip:  Develop your Business Plan and keep it current.  

Best IRS Tax Tip:  Be aware-Knowledge is power.

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