Category Archives: Business Taxes

Self-employment tax is not always inevitable

When you receive a  Miscellaneous Income Form 1099-MISC with an amount in box 7, normally you must pay self-employment (SE) tax on this income.  The current self-employment tax rate is 15.3 percent. The rate is divided into two parts: 12.4 percent for social security and 2.9 percent for Medicare.

However it is not a foregone conclusion that this tax is always owed on this type of income.  As this article points out, the SE tax only applies to “net profit (unless it’s under $400) in a tax year, derived from a trade or business carried on by an individual as a sole proprietor or partner of a partnership (IRC § 1402(a), Treas. Reg. § 1.1401-1(c)).”

So when is self-employment not subject to the SE tax?  An example best illustrates this:

I am a Certified Public Accountant.  My primary line of work is performing tax compliance services.  My neighbor sees me painting my house one day, comes over and asks if I will paint his house also for a $2000 fee.  I have never received a fee for painting anyone’s house.  I agree to paint his house and he pays me the $2000.   My neighbor is required to issue a Form 1099-MISC with $2000 in box 7.

I am required to report this as income.  However I am not required to assess and pay the 15.3 percent SE tax on this income.  This is because I do not intend to paint anyone else’s house, I do not hold myself out as being in the painting business, painting is not related to my  line of work and I have not painted other houses in the past for a fee.

If an activity is unrelated to your regular line of work and “sporadic”, it is not subject to SE tax.  So what happens if I paint 2 houses instead of one?  How about three?

Unfortunately there is no clear line in the sand here.  Each situation requires analyzing the facts and determining whether sufficient evidence exists to classify an activity not as a business but rather as a sideline activity not subject to self-employment tax.

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S Corp Owners Salaries and Avoiding IRS Recharacterization

 


This Journal of Accountancy article on reasonable salaries with regard to S corporation owners provides some concise information on the subject.

This is a complex topic requiring analysis of many factors as outlined in the article.

S corporation owners are well-advised to evaluate and document their compensation policies at least annually to minimize their audit risk in this area.

Hiring Your Spouse & the Shellito Case

IRS Issues Tax Tip Video About Tax Scams

Related articles

‎”We’re not going to let the middle class carry the whole burden.”

The key word here is “whole”.   No way taxes are going up on the top 2% without dramatic increases on what is left of the middle class. And Biden’s use of “we” here is shameful. I am not a part of his “we”.   Here is the link to the article with his quote.  http://fb.me/13FioDKLZ

WASHINGTON - JANUARY 25:   U.S. Vice President...

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IRS Announces Higher Standard Mileage Rate 2nd Half of 2011

IRS has revised upwards the standard mileage rates due to the higher gas prices   Beginning this July 1st, the standard mileage rates will be 55.5 cents per mile for business travel and  23.5 cents per mile for medical travel.  Charitable mileage rate always remains at 14 cents under statute.  The rates for the first half of 2011 are 51 cents and 19 cents respectively.   Keep in mind these rates are optional and the actual out-of-pocket costs can be used in lieu of the standard rates.

Announcement 2011-40 advises the public that the Internal Revenue Service is revising the optional standard mileage rates for computing the deductible costs of operating an automobile for business, medical, or moving expense purposes and for determining the reimbursed amount of these expenses that is deemed substantiated.  This modification results from recent increases in the price of fuel.  The revised standard mileage rates are 55.5 cents per mile for business use of an automobile and 23.5 cents for use of an automobile as a medical or moving expense. The mileage rate for use of an automobile as a charitable contribution is fixed by statute and remains 14 cents.  The revised standard mileage rates apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes on or after July 1, 2011, and to mileage allowances that are paid both (1) to an employee on or after July 1, 2011, and (2) for transportation expenses an employee pays or incurs on or after July 1, 2011.

IRS-Announcement_2011-40

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Ho Hum. Business as usual.

Seal of the United States bankruptcy court. Ch...

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Ho Hum. Business as usual. All they need is big lenders who are willing to risk going to the Federal government to get bailed out if their loans go bad.

Jackson Hewitt Tax Service Inc, the second largest U.S. tax preparer, petitioned for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware on May 24. The Company submitted a pre-packaged plan along with its bankruptcy filing that contains the necessary approvals from its secured lenders, and has asked the Court to approve the plan on an expedited basis.

A prepackaged arrangement permits companies to move through the court process more rapidly. Jackson Hewitt announced that it expects to emerge from bankruptcy in 45-60 days and sees no disruption in its day-to-day operations.

Jackson Hewitt earns most of its revenue through its franchises and tax preparation agreement with Wal-Mart Stores.

This is just a paper shuffle that injures the small shareholders and enriches the big lenders, that is if they ever actually get repaid.  And if not, there is always the Fed bailout.

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There is a Lot of Misinformation About Taxes

There is a lot of misinformation about taxes. One of those misconceptions is the recently bantered about fact that 51% of Americans pay no Federal income taxes. Unfortunately life is complicated and so is tax policy. This article explains the “why” of this 51% figure and how it should not be used to raise taxes on middle and lower income taxpayers.. http://fb.me/Hwbfe7p7