What exactly can be done if you receive a 1099-MISC as a subcontractor when you think you should receive a W-2 as an employee? Receiving a 1099-MISC is not always a negative, but as my discussion of last week pointed out, we just have to say the tax implications are immense. But, regardless of the tax consequences, does the Internal Revenue Service have a procedure to follow if you are convinced that you should have received a W-2? The answer is yes. It is a common problem, because it is almost always advantageous to a payer to report payments made to someone as a subcontractor instead of an employee. Why is it more advantageous to call a recipient a subcontractor and not an employee? First, payments to an employee are subject to a matching Social Security and Medicare tax of 7.65%. Payments to a subcontractor are not subject to this 7.65%, so the payer instantly adds 7.65% to his bottom line. Second, payments to an employee are subject to federal and state unemployment tax. The federal unemployment tax rate is normally 0.8% of the first $7,000 of wages, or $56 per person. Since Michigan owes the federal government billions of dollars, there is a 0.3% surcharge, or $21, added for the year of 2009. Michigan unemployment rates are variable, but a new business will pay 2.7% of the first $9,000, or $256. The maximum rate is 11%, so $256 could be very low. Payments to subcontractors are not subject to these two taxes. This adds a few more hundred dollars to the bottom line. Third, payments to subcontractors are not subject to workman’s compensation insurance. For construction employers, that rate of insurance could be as high as $30 per thousand of payroll. Fourth, employees are quite often covered by those items called fringe benefits. They might be covered by health insurance, receive paid vacation and personal time off, receive time-and-a-half pay for hours worked over 40, be paid a premium amount for working on weekends and holidays, receive an automobile as part of their compensation package, and be paid for continuing training, etc., etc. A subcontractor receives none of these benefits. Fifth, the employer might have some type of retirement plan set up. An employee […]
Useful tax tips and information from Jerry Coon of Action Tax Service.
What to do if errors on your W-2 or 1099 Since deer season is over, the Lions are mercifully finished for the year, I’m too busy to go ice fishing, NASCAR doesn’t start until Daytona next month, and why watch golf without Tiger, I will get my cup of Herman’s Boy Pantlind Blend coffee and write an article for this week’s Squire. A few weeks ago, I wrote about not receiving a W-2 or 1099. This week, I will expand on what happens if the W-2 or 1099 is received, but it is incorrect or is the wrong form altogether. Do you have any recourse if the W-2 or 1099 has the wrong information on it when you receive it? Yes, you do. Remember that the original set of forms doesn’t have to be sent in to the appropriate agency, either the Social Security Administration or the Internal Revenue Service, until February 28. Since you normally receive the form in January, the employer has plenty of time to correct administrative errors such as an incorrect street address or wrong zip code. Those types of errors are easy to correct and most employers are quite accommodating. However, what can you do if the error is of the dollar amount variety, i.e. gross wages is wrong or the federal or state withholding is wrong? Can these errors be fixed? These errors are a horse of a different color. In the federal payroll reporting system within which all employers operate, the dollar amounts that are summarized on your W-2 have been reported quarterly to the Internal Revenue Service. The amounts withheld from your paycheck for federal withholding, Social Security, and Medicare taxes have been paid over to the IRS throughout the year. When you receive your W-2, it is a summary of the activity that occurred under your Social Security number throughout the entire year. If you believe there is an error in the gross wages reported or in the amount of federal tax withheld from your wages and you are correct, this can be a total nightmare for the employer. The company has already paid in the amounts withheld from your checks as well as the amounts it had to match for Social Security and Medicare […]
How to choose a tax preparer The big news last week was that the Internal Revenue Service was going to start regulating currently “unregulated” tax preparers. “Unregulated” tax preparers are defined as all tax preparers that are not enrolled agents (EAs), certified public accountants (CPAs), or attorneys. Those three classes of preparers are allowed to call themselves “practitioners,” as opposed to preparers. For that privilege, they have always been highly regulated and are held to a high standard of conduct. According to the IRS findings, there are currently 42,896 EAs, 646,520 CPAs, and 1,180,386 attorneys who actually prepare and sign tax returns. The IRS has a good handle on who these people are and the type of work they do. But according to the IRS, there are between 900,000 and 1,200,000 “unregulated” tax preparers preparing and signing tax returns. Conversely, they don’t really have a good picture of who these people are and if they are competent enough to actually be preparing tax returns. We are talking about some large numbers of tax returns here. About 61,800,000 tax returns were prepared by paid preparers last year. If the EAs, CPAs, and attorneys prepared half of those returns, that leaves 30,900,000 tax returns that the IRS has less control over. All of that will begin to change on January 1, 2011, when these new regulations take effect in earnest. With that 2011 date in mind, remember that the same old rules apply this year. Some preparers are regulated and some preparers are not regulated; 61,800,000 taxpayers are going to choose a tax preparer in the near future to prepare their return. What are the factors they should use to make that choice? My personal list goes like this: 1. Will the preparer sign the return? By law, anyone who is paid to prepare a return has to sign that return. If the preparer hedges on that point, there is something drastically wrong. As the saying goes, “Run, don’t walk; get away as fast as possible.” If the preparer won’t sign the return, that doesn’t absolve the taxpayers from what is on the return. 2. Is the preparer available year around? The tax business has grown into a year-round business, because our tax system is so complicated. […]
My intent this week was to continue writing on what a taxpayer should do if he or she receives an incorrect W-2 or 1099. However, the Internal Revenue Service has interrupted my plans. Since the first day I entered the tax business in 1978, the IRS has, off and on, announced plans to formulate a plan to regulate all tax preparers. In the past year or two, under the direction of current IRS Commissioner Douglas Shulman, these plans have finally moved to the implementation stage. Since approximately 80 percent of taxpayers employ either a tax preparer or use commercial software to prepare their return, this is a very good thing for all taxpayers. Shulman said, “Our proposals will help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation’s tax system.” These regulations will raise the competency of all tax preparers and will allow the IRS to better regulate all tax preparers. This means that, in theory at least, taxpayers will receive a better product when they pay a tax preparer to prepare their return. Three classes of tax preparers have always been regulated. Enrolled agents (EAs), certified public accountants (CPAs), and attorneys have been required to take competency exams, to take yearly Continuing Professional Education (CPE), to register with the IRS, and to abide by a professional code of conduct as laid out in IRS Publication, Circular 230. Oddly enough, other non-regulated preparers were not subject to any of these requirements. All of that changed on January 4, 2010, when the IRS issued News Release IR-2010-1, Fact Sheet FS-2010-1, Fact Sheet FS-2010-2, and the 57-page Return Preparer Final Report. Now, anyone who signs a tax return as a paid preparer will be subject to a full set of regulations similar to EAs, CPAs and attorneys. First, they will be required to register with the IRS and obtain a Preparer Taxpayer Identification Number (PTIN). As part of this registration process, the IRS does perform a background check and can refuse to issue a PTIN. The IRS is allowed to charge a “reasonable, non-refundable fee” for issuing a PTIN. The registration must be renewed every three years. The IRS retains the privilege and is considering expanding this registration process to […]
New tax season presents common situations It’s finally the beginning of the tax season. I say “finally” because those of us in the tax business have been building toward this date since September. That’s when we started going to seminars and learning how all of the new laws would interact with the tax returns we will be preparing in the next few months. That’s also when we started ordering the supplies and the various software packages that we use to prepare not only the many types of tax returns we file but also the various business reports we file such as W-2s and 1099s. A tax preparation firm like Action Tax Service uses technology to the fullest extent possible in an attempt to ensure that clients get the absolute best product that we can give them. However, all of the technology in the world won’t help us prepare a return if we don’t have the needed information at our fingertips. For the most part, employed taxpayers can’t file a tax return until a W-2 is received. Most retired taxpayers can’t file a tax return until a 1099-R or a Social Security SSA-GOV is received. We can use a last check stub to create an estimated tax return, but we are not able to finalize and actually file a return without those official documents. Let’s look at three common but troublesome situations. First, the majority of all W-2s and 1099s will be received by January 31, but what happens if a taxpayer does not receive that statement by January 31 or February 10 or even February 28? Second, what happens if the statement received is wrong? Third, and even worse, what can be done if the wrong type of statement, such as a 1099, is received instead of a W-2? What’s a taxpayer to do in these situations? Let’s discuss the first situation in which the W-2 or 1099 is not received. The reporting procedures for W-2s are different than those that regulate the reporting of 1099s. It is important to remember that even though employees are required to have their W-2s available by January 31, the employer is not required to submit these documents to the Social Security Administration (SSA) until February 28. Note that I […]