Plan Ahead: New 1099 rules
The new health insurance legislation imposes significant new tax reporting requirements. In essence, you will have to report most annual payments for goods and services exceeding $600 — including payments to corporations — on Form 1099. Fortunately, the new 1099 rules will not be in effect until 2012. This gives you plenty of time to adjust your accounting procedures and prepare for the strike of new paperwork.
Under current law, a business must report on Form 1099 compensation (commissions, fees, etc.) paid to an individual, such as an independent contractor, if the annual amount exceeds $600. The same rule applies to interest, rent, royalties, annuities and income items paid to a single recipient.
Both the recipient and the IRS receive a copy of the 1099. It must include the annual amount of the payment, contact information about the recipient and the recipient’s Taxpayer Identification Number (TIN).
However, these reporting rules generally don’t apply to payments made to a corporation. Also, your business doesn’t have to issue 1099s when it purchases goods.
New law changes: Beginning in 2012, the new Patient Protection and Affordable Care Act of 2010 changes the current reporting rules in three ways.
1. Payments to corporations: The reporting exemption for corporations no longer applies.
2. Payments for goods: The reporting requirement is generally extended to payments for property such as merchandise, equipment, raw materials and the like.
3. Payments of gross proceeds: At this point, it’s not exactly clear what “gross proceeds” covers. The IRS is expected to issue guidance shortly.
These three new law requirements will likely affect you on both ends of the spectrum. As a payer, you may have to churn out significantly more 1099s and obtain the TINs of each recipient. As a recipient, you could be bombarded with forms and you must supply the payers with your own TIN.
Tax Specialist, Emil Estafanous, CPA can help modify your business accounting procedures to accommodate the new reporting rules. Do not wait until the last minute to implement changes. Get a head start by calling the Tax and Accounting office of Certified Public Accountant, Emil Estafanous for a consultation.
Should you pay off credit cards with a home equity loan?
One of Shakespeare’s oft-quoted lines — “Neither a borrower nor a lender be” — is sage advice, especially for many cash-strapped Americans. But perhaps you haven’t followed Shakespeare’s wise counsel. If credit card payments are taking a big chunk from your paycheck, you may wonder if it’s a good idea to use your home equity to consolidate high-interest credit cards into a more affordable monthly payment.
First, a little background. Home equity is the difference between what your home is worth and what you still owe. If your home could sell for $200,000 and your mortgage balance is $100,000, you have $100,000 in equity. Banks and other financial institutions will often grant loans or lines of credit based on that equity. A home equity loan is essentially a second mortgage. By pooling credit card balances into a single home equity loan, you’re not getting rid of debt — you’re trading one type of debt for another.
Is this kind of debt consolidation a good idea? It can be. For one thing, a lower monthly payment can free up cash. Also, trading variable rate credit cards for a lower fixed rate loan can help with financial planning and bookkeeping, and may save you interest in the long run. In addition, interest on a home equity loan or line of credit may be tax-deductible.
With your credit cards paid off, lots of available credit could soon be staring you in the face. As Hamlet put it, “There’s the rub.” If you fail to modify the spending habits that dragged you into debt in the first place, you may end up making payments on a home equity loan and credit cards.
Another thing to remember with this kind of debt consolidation scenario: your home is on the line. Why? Credit card debt is generally unsecured. That means it’s not collateralized by anything but your good name. If you don’t make credit card payments, you may be hounded by bill collectors, but they won’t foreclose on your home. Not so with home equity loans. They’re secured by your house. If you default, you may find yourself looking for new digs.
Shakespeare also said, “To thine own self be true.” In other words, don’t kid yourself. If you’re prone to impulse buying and likely to dive into debt again, think twice about taking out a home equity loan to pay off credit card balances.
Estimated Taxes
Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.
Who Must Pay Estimated Tax
If you had a tax liability for 2008, you may have to pay estimated tax for 2009.
General Rule
You must pay estimated tax for 2009 if both of the following apply.
- You expect to owe at least $1,000 in tax for 2009 after subtracting your withholding and credits.
- You expect your withholding and credits to be less than the smaller of;
- 90% of the tax to be shown on your 2009 tax return, or
- 100% of the tax shown on your 2008 tax return. Your 2008 tax return must cover all 12 months.
Sole proprietors, partners, and S corporation shareholders - You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax.
Corporations - You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. Use Form 1120-W, Estimated Tax for Corporations (PDF), to figure the estimated tax. You must deposit the payments.
Who Does Not Have To Pay Estimated Tax
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to take more tax out of your earnings. To do this, file a new Form W-4 (PDF) with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.
Estimated tax not required
You do not have to pay estimated tax for 2009 if you meet all three of the following conditions.
- You have no tax liability for 2008
- You were a US citizen or resident for the whole year
- Your 2008 tax year covered a 12 month period
You had no tax liability for 2008 if your total tax was zero or you did not have to file an income tax return.
Estimated tax requirements are different for farmers and fishermen.
How To Figure Estimated Tax
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
When figuring your 2009 estimated tax, it may be helpful to use your income, deductions, and credits for 2008 as a starting point. Use your 2008 federal tax return as a guide. You can use the worksheet in Form 1040-ES (PDF) to figure your estimated tax. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter. You want to estimate your income as close as you can to avoid penalties.
You must make adjustments both for changes in your own situation and for recent changes in the tax law.
When To Pay Estimated Taxes
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.
Using the EFTPS system is the easiest way to pay your federal taxes for individuals as well as businesses. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using Electronic Federal Tax Payment System (EFTPS). If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.
