Posts Tagged ‘irs regulations’

It is important not to disregard a wage levy from the IRS or you may find your company liable for the employee’s delinquent taxes. Recently, a corporation that failed to obey an IRS wage levy on one of its employees was liable for the employee’s delinquent taxes and for a penalty under Code Sec. 6332(c)(2).

On April 5, the Senate approved H.R. 4 by a vote of 87-12.  The new law will effectively revert reporting  to the requirements in place before enactment of PPACA and the Small Business Jobs Act of 2010.

H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011” was previously passed by the House on March 3 by a vote of 314-112 and will retroactively repeal the new and unpopular Form 1099 information reporting rules. The White House has indicated that the President will sign H.R. 4 into law. A press release dated April 5 declares that “Small businesses are the engine of our economy and eliminating the 1099 reporting requirement is the right thing to do.”

Before amendment by the Small Business Jobs Act of 2010 (P.L. 111-240) and the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), Code Sec. 6041 generally required payments totaling at least $600 in a single calendar year to a single recipient to be reported to IRS.

Reporting on Form 1099 was required for payments by businesses in connection with that trade or business. The type of payment that most commonly required to be reported was payment for services. The most notable exception from Code Sec. 6041’s reporting requirements under prior law was payments to corporations (which were exempt under Reg. §1.6041-3(p)(1)).

In the prior legislation scheduled to begin in 2012, Sec. 9006 of PPACA added payments of amounts in consideration for any type of  goods or services—to the list of payments subject to information reporting.

Sec. 9006 of PPACA further provided that payments to non-tax-exempt corporations—which had previously been exempt from the reporting requirement—would be subject to information reporting.

Additionally, for payments made after 2010, the Small Business Jobs Act of 2010 provided that, subject to limited exceptions, a person receiving rental income from real estate would be treated as engaged in the trade or business of renting property for information reporting purposes. In particular, rental income recipients making payments of $600 or more to a service provider (for example, a painter or plumber) in the course of earning rental income would have to provide an information return to the service provider and IRS.

For payments made after Dec. 31, 2011, the new law will repeal the provisions in Sec. 9006 that impose a reporting requirement for payments to corporations and payments for goods or other property. (Code Sec. 6041(a), Code Sec. 6041(i), and Code Sec. 6041(j), as amended by Act Sec. 2)  For payments made after Dec. 31, 2010, the Act also repeals application of the information reporting requirements to recipients of rental income from real estate who are not otherwise considered to be engaged in the trade or business of renting property. (Code Sec. 6041(h), as repealed by Act Sec. 3)

FICA stands for the Federal Insurance Contributions Act.  It is a federal employment tax paid by both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, the disabled, and children of deceased workers.

Social Security benefits include old-age, survivors, and disability insurance. Medicare provides hospital insurance benefits. The amount that a person pays in taxes throughout that person’s working career is indirectly tied to the social security benefits annuity received as a retiree.

Unless the worker is an independent contractor, the answer is always!

There are specific criteria to determine if a worker is an employee or an independent contractor. The key word in that sentence is “independent.”  The most important factor is who is in control.  This is covered in more detail in our March 2010 article Employee or Independent Contractor?

But there are several other issues that can also trip you up.

If you are a small business owner there could be many financial benefits to hiring your child. If your business is a sole proprietorship, you pay no payroll taxes on your child’s wages if that child is under age 18.  Your child could pay no payroll taxes and no federal income taxes if wages do not exceed the 2010 standard deduction of $5,700 for a single taxpayer.

Record keeping is crucial. You need accurate records showing hours works and tasks performed.  The wages must be reasonable – what would you pay someone else? Keep records showing the wages were actually paid to your child.

Be sure to check with your CPA before hiring your child to understand the implications for all federal and state taxes you and your child may incur. Other rules govern corporations, partnerships and limited liability companies (LLCs).