UPDATE: New 1099 Requirements Repealed!
On Groundhog Day, the Senate passed an amendment to repeal the crazy new 1099 requirements set to go into effect next year.
While several amendment attempts have been made by Senator Mike Johanns of Nebraska, the winning amendment was introducted by Senator Debbie Stabenow of Michigan. Virtually identical to the Johanns amendment, the approved amendment will be attached to a widely-supported piece of legislation to re-authorize the Federal Aviation Administration.
It should be noted that the repeal enjoyed broad bipartisan support, passing with a vote of 81-to-17.
Of course, it’s not officially passed into law yet, but this new amendment is the first real hope that we’ve had that the crazy-making expansion of 1099 reporting might be repealed before it even takes effect. Stay tuned!
Closing out the Books? Follow This Checklist
As you’re cleaning up your books for year-end, there’s some steps you can take now to make tax-time easier and start the New Year off right:
- Verify that you have W-9 forms for each of your independent contractors or at least have their Tax Identification Number on file. You will need this information in order to prepare 1099 forms in January. Going forward, it’s a good practice to obtain a completed W-9 form from each new vendor before you pay them.
- Review your Accounts Receivable. Are all of them collectible? If you have any bona fide bad debts on your hands, it’s time to write them off before year-end. You should also review your receivables to reconcile them against your customer accounts, confirming the balance of each.
- Review your Accounts Payable. Wherever possible, you should reconcile your vendor accounts against a statement from that vendor.
- Reconcile all of your bank accounts using the year-end bank statements. Did you know that you can reconcile any asset or liability account in QuickBooks? Take this opportunity to reconcile all of your credit card accounts, lines of credit and outstanding loans. When reconciling your bank account, be careful to review any “Uncleared” transactions, as they may be duplicate entries, checks that were lost in the mail, or simply entries that should have been deleted.
- If you carry inventory, it’s time to do a physical count of your inventory and reconcile it against the inventory reported on your balance sheet. Take this opportunity to adjust your inventory for shrinkage, spoilage, or obsolescence.
- Make a list of all new equipment and other fixed assets acquired during the year, including the purchase date, amount and description. Your tax preparer will hug you for it! If you’ve disposed of any old equipment, whether by selling it or by putting it in the dumpster out back, make a note of that, too.
- Review your payroll liability balances and adjust if necessary. Also double-check that all payroll tax forms have been filed as necessary.
- Similarly, review your sales tax liability balance and confirm that your sales tax filings are up-to-date.
- For paper records, prepare to archive any records that you need to retain. For any records considered vital, make a copy that can be kept off-site.
- Finally, make a backup of your QuickBooks file, also to be kept off-site, if possible.
Following these steps will help you start the New Year off right and will reduce your workload when getting ready for tax time!
A new report by the Treasury Inspector General for Tax Administration has recommended that the IRS take a closer look in sole proprietorship audits to find any unreported income.
IRS auditors already do a number of checks to look for unreported income, such as examining the “cost” of the sole proprietor’s lifestyle to see if his/her reported income would be able to support it. If you’re driving a brand-new BMW but reporting $20,000 in net business profit as your sole source of income, you should expect a lot of tough questions!
The new test being recommended includes a more sophisticated analysis of tax return data and the proprietor’s reported personal expenses to determine if they are roughly equal. With these new tests, the IRS stated they would have collected an additional $8 million in taxes from sole proprietors in 2008! This new focus on sole proprietors follows the IRS’s National Research Program estimate that sole proprietors are cheating the government of $68 billion each year.
If you operate your business as a sole proprietorship, your best defense against an audit is thorough documentation of both your gross revenue and your business deductions. The following posts can help you get started:
Most entrepreneurs start out doing everything themselves, earning their “Chief Cook & Bottlewasher” title by generating all the income, handling all the office paperwork and emptying the trash cans, too. At some point, you’ll realize that one person can only do so much. Particularly if your background wasn’t in business accounting, one of the first functions you should consider outsourcing is your bookkeeping.
Does this sound like you?
- You frequently feel overwhelmed by your bookkeeping, invoicing or tracking vendor payments.
- You’ve begun to get “love letters” from the bank, such as late fees, bounced check notices or even tax penalties.
- You’ve lost touch with where your money is going and whether you could trim expenses.
- Cash flow? What cash flow? I just keep my fingers crossed that a payment will come in!
It’s hard to let go and trust someone else with your books. And you shouldn’t divorce yourself from the process completely, either. But by letting someone else stay on top of bill due dates, invoicing and collecting client payments, you can focus on your billable hours, business development and the client relationships that made you a successful entrepreneur to begin with!
Every year I run into a couple brand-new business owners who really, truly don’t understand the importance of recordkeeping and retaining documentation of business deductions. Quick as I can, I straighten them out and teach them the basics of what they can deduct, what receipts to keep and so forth.
Much more surprising, however, is the number of small business owners that I meet that think they’re keeping great records, but aren’t. See if this scenario sounds familiar:
A self-employed business owner deducted his expenses on Schedule C (of the Form 1040). His proof for many of the write-offs was his American Express credit card statements, which listed the payee, date and amount of the transaction. The IRS denied many of his expenses for lack of documentation.
The U.S. Tax Court ruled in favor of the IRS, leaving the business owner with a significant tax due bill. They held that the credit card statement is not proof of the business purpose of an expense. The business owner should have had receipts or other evidence to prove the exact items purchased. Just showing that a payee is an office supply store like Staples is not enough. [Fessey v. Commissioner, T.C. Memo. 2010-191]
Sound familiar? I’ve had clients who thought a PayPal statement was adequate documentation. Other clients swear that the Visa statement proves that the money was spent at Staples, so it has to be business-related. Not according to the IRS!
Each business expense deduction should be backed up by a receipt or other documentation that shows the payee, date, amount and details of the items or services purchased.
Worried about all the space those receipts are going to take up? Check out my earlier post on digital receipts.
As part of the Small Business Jobs Act of 2010 (full text here – see section 2042), the nation’s self-employed small business owners finally got a tax break they can use. Previously, those health insurance premiums were not considered a business deduction when calculating self-employment tax, the self-employed person’s version of Social Security and Medicare, even though they could deduct the premiums when calculating income tax. This was a significant difference from how regular employees were taxed and put the self-employed at a significant disadvantage.
Now, for the year 2010 only, self-employed business owners who pay for their own health insurance can fully deduct those health insurance premiums when calculating self-employment tax. For every $100 of premiums, this represents a tax savings of $15. It’s not a windfall, but we’ll take whatever we can get!
As with everything deduction-related, save that paperwork! Be able to prove the amount paid for health insurance premiums with a bill or policy from the insurance provider and proof of payment on your end, such as canceled checks. And keep saving those receipts in 2011, as I’m keeping my fingers crossed that the deduction might be renewed for next year, as well!
UPDATE: New 1099 Requirements Repealed!
Two separate attempts to repeal the new 1099 reporting requirements failed this week as the two political parties continued their endless bickering:
- The Johanns amendment sponsored by Mike Johanns of Nebraska (a Republican) would have repealed the new requirements outright. This amendment was defeated 46-52 because it would have “paid for” the repeal by exempting more people from the new health insurance mandate by lowering the affordability exemption for individuals.
- The Nelson amendment sponsored by Bill Nelson of Florida (a Democrat) would have “fixed” the problem by raising the reporting threshold from $600 to $5,000 and exempting businesses with 25 or fewer employees from the new requirement. How all the poor bookkeepers of this country would have kept track of all that is still a question in my mind! Thankfully, this “fix” was defeated 56-42, as it failed to reach the 60-vote threshold.
Meanwhile, Treasury Secretary Timothy Geithner and Health and Human Services Secretary Kathleen Sebelius have joined the IRS’s own Taxpayer Advocate, Nina Olsen, in calling for Congress to scale back the new 1099 requirements. Thankfully, Senator Johanns isn’t giving up, stating “It is wrong to have paid for the president’s health care plan on the backs of small businesses. My amendment would have truly helped small businesses and I am committed to continuing this fight until this provision is appealed.”
Good luck, Senator! I’m keeping my fingers crossed for you … and all of us!
It never ceases to amaze me how many small business owners are unclear on the rules regarding independent contractors. Just this past month, I discovered two of my new clients are paying “assistants” as independent contractors and another client was planning on hiring one! Sure, freelancers are great because they save you the cost and hassle of employees. You can add them as your business activity demands it and cut back when necessary. But if you are treating freelancers too much like employees, watch out for the IRS to penalize you for “worker misclassification.”
Just this past February, the IRS announced a new initiative targeting worker misclassification in small businesses. For the first three years, they’ve already randomly selected 6,000 businesses for audits! These National Research Program (NRP) audits will stretch across all industries and company sizes. The Treasury Department is anticipating additional employer tax revenues of $14 billion annually. President Obama is also anticipating additional revenues from this effort, as his 2011 budget proposal includes additional funding for 100 new Department of Labor employees to chase down cases of employee misclassification.
What happens if your “freelancer” is deemed to be a misclassified employee? The IRS will go after all of the employer taxes that you should have been paying, including Social Security, Medicare and Unemployment Insurance. These retroactive changes can go back several years and include significant penalties and interest. Once the IRS raises the red flag, the Department of Labor can jump in and assess minimum wage penalties and determine if you complied with overtime rules.
The audits are likely to focus on those industries most likely to engage in misclassification, including restaurants, construction, trucking, business services, child care services, landscaping and janitorial businesses. But if your business submits a large number of 1099 forms each year, you could well be on that audit list.
Are your freelancers really employees? The IRS has some standard guidelines on the subject on their Web site. The basic determining factor, though, is control:
- Do you tell your worker where, when and how to do their work? Do you provide training for your worker? Do you require them to use your tools or computers? These are all behavioral guidelines that identify a worker as an employee. An independent contractor will generally supply their own tools and equipment, manage their own training, and do the work in the manner that they see fit.
- Do your contractors have an investment in their freelance business? Do they advertise for other customers and make their services available to the public? An independent contractor will have a profit motive in accepting work from you and will be able to make a profit — or lose money — on the job they perform.
- Do you have a contract with your contractor? Do they work at your place of business or off-site? If your worker is performing routine work in your business, at your business location, and expects an ongoing relationship, then you have an employee on your hands, not an independent contractor.
Are you unsure whether your worker is an employee or an independent contractor? First visit the IRS web site and review their information; it really does explain the issue quite well. To help tip the balance towards an independent contractor classification, be sure your freelancer:
- Invoices you, instead of turning in a time card.
- Has other customers or is actively pursuing other customers.
- Has invested in their freelance business by buying business cards, advertising their business, buying liability insurance or paying for their own training.
- If possible, works off-site and is paid by the project rather than by the hour. You may not dictate work schedules, though requesting reports on project milestones are appropriate. The independent contractor is to determine how the work will be accomplished.
- Signs a written agreement. The agreement should include the tasks to be performed and the expected results, consistently identify the worker as an independent contractor, and specify the project’s duration without an automatic rollover.
If you realize that your worker best fits the “employee” description, then it is in your best interest to find a new freelancer who truly operates as an independent contractor or put your existing worker on payroll … pronto!
Online invoicing can be a fantastic time saver for small business owners. I personally use several services and have come to rely heavily upon them to send out monthly invoices without any effort or intervention on my part. Most of the online invoicing services provide a free trial or even a limited version of the service that is free on an ongoing basis. Depending upon your needs, the free options may fit the bill or you may find that the paid versions provide just the bells and whistles that you need. Why not try a free trial of one of the following services to see if they can help you run your business smarter?
FreshBooks — In my mind, this is the premier online invoicing service, offering many features that you won’t find with the free services. They have a free version that is limited to 3 clients per month while the Solo package allows you to have 25 clients for $19.95 per month.
Free services generally limit the number of clients you can have in the system or the number of invoices you can send per month. A few of the free versions have “branded” invoices showing the name of the service. Completely free services include (in alphabetical order):
Billing Boss
BillingOnClick – free version limited to 1 user
CannyBill – free version limited to 3 active clients
CurdBee – free version has CurdBee branding on the invoices
Intuit Billing Manager
InvoiceJournal
InvoiceMachine – free version limited to 3 invoices per month
InvoiceMore – free version limited to 3 clients
InvoicePlace – free version limited to 5 invoices per month
Invoicera – free version limited to 3 clients
LiteAccounting – free version limited to 5 invoices per month
Nett30 – free version limited to 5 clients
Ronin – free version limited to 2 clients
SimplyBill – free version limited to 3 invoices per month
SimplyInvoices – free version has SimplyInvoices branding on the invoices
WinkBill – free version limited to 3 invoices per month
WorkingPoint – free version limited to 5 clients
ZohoInvoice – free version limited to 5 invoices per month
Paid services, each with their own bells & whistles, include (in alphabetical order):
AcceptPay
Ballpark
BillingOrchard
Blinksale
Cashboard
Invoices Made Easy
Invotrak
PaySimple
SimplifyThis
Of course prices may change at any time. I encourage you to try out some of these services, especially if you have recurring invoices such as retainers or monthly fees. I personally use and can recommend FreshBooks, ZohoInvoice and Intuit BillingManager. I’d be interested in what you try and how you like it!
UPDATE: New 1099 Reporting Requirements Repealed!
Recently passed legislation requiring a massive overhaul in the 1099 reporting system has met with passionate opposition from small business owners, the accounting community and even the IRS Taxpayer Advocate. In response, two efforts are underway in Washington to reduce the requirement or repeal it outright.
The least likely effort was put forward by Senator Mike Johanns of Nebraska, proposing an outright repeal of the new reporting rules. Unfortunately, the Democratic support is unlikely because the proposal would also repeal a preventative medical care fund for the uninsured.
By mid-September, debate should begin on a Democratic proposal put forward by Senator Bill Nelson of Florida. This version would add several exemptions to the new reporting requirements, including an outright exemption for businesses with fewer than 25 employees. Furthermore, the Treasury Department would be authorized to exempt payments for common purchases such as airline tickets and office supplies.
Everyone keep your fingers crossed that the two parties can come together to save our nation’s small business owners from this crazy new reporting requirement!!
