Business Taxes

Collecting Income from Online Payment Apps? $600 is the New Reporting Threshold

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If you use P2P (Peer-to-Peer) payment apps, such as Venmo, Square Cash or PayPal, you may be surprised early next year when you find an IRS 1099-K form in your mailbox.

Under the American Rescue Plan, a new law requires P2P providers to send you and the IRS a 1099-K if the gross amount of your business income is more than $600.

Previous guidelines required P2P providers to only send 1099-Ks when you had 200 transactions and $20,000 or more in income.

This new law decreases the income threshold by more than $19,000 and lowers the transaction threshold from 200 to one transaction! So whether you’re accepting payments for personal or business income, many more taxpayers will be receiving the 1099-K in early 2023.

How it works

If you sell items online for extra cash and earn more than $600, you’ll be getting a 1099-K. If you occasionally rent a property that you own and charge more than $600, a 1099-K will be sent to you. Or if a client asks to remit payment through PayPal, $600 or more will trigger a 1099-K.

Each year, hundreds of billions of dollars flow through third party apps like Venmo, CashApp and SnapCash. This new, tougher tax law is designed to make it harder for individuals to fail to report income on lower-cost transactions.

Suggestions for good record-keeping

Here are some ideas to keep a close eye on the tax implications of your P2P transactions:

  • Confirm the numbers. Mistakes happen, so check 1099-Ks against your payment receipt records.
  • Report the information correctly on your tax return. Include the numbers from each 1099-K you receive and ensure you report all income from all types of payments received.
  • Maintain detailed records. This can help demonstrate support for your income and deductions.

Also keep in mind the 1099-K does not account for fees, chargebacks or other costs and refunded amounts. The gross amount is unadjusted and, according to the IRS, is not to be adjusted.

What if the amount on your 1099-K is wrong?

Contact your P2P provider to request a corrected form. The name of the P2P and a phone number will be located in the upper left corner on the form.

If you are unable to get a corrected 1099-K, the IRS will allow an explanation to be attached to your tax return, along with the corrected amount of your income on the return.

Remember, if you use Venmo and several other P2P providers to accept payments, you could receive 1099-Ks from all of them, depending on which ones meet the $600 threshold.

Reach out to the experts

For more information on protecting your side hustle or small business from unexpected tax liabilities, give us a call at (973) 301-2300 to see if a tax planning session may be right for you.

Could a State Tax Nexus Study Put Millions Back in Your Company’s Pocket?

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The broad variations in state tax requirements — what’s taxable and what’s not, the threshold for collecting sales tax or paying income tax, how and where to register and file — make it difficult for companies doing business across multiple states to remain compliant with economic nexus rules.

You may be underpaying (in which case get ready for penalties) or worse, overpaying. It’s a costly problem either way — and although not a new issue, changing laws have put a different spin on nexus.

Before 2018, for example, a company was only required to collect a state’s sales and use tax if it had a physical presence in that state. The result? Millions in revenue lost by states as ecommerce started to gain traction.

A Supreme Court decision (South Dakota v. Wayfair, Inc.) reversed the physical presence requirement, required every business with $100,000 in sales or 200 transactions in the state to collect and remit South Dakota sales tax. Other states quickly followed the South Dakota precedent, causing businesses to have nexus in many more locations than before.

Companies doing business in multiple U.S. jurisdictions also need to be aware of a second type of economic nexus beyond sales tax. If your company’s gross sales in particular states exceed a certain threshold, those sales would be subject to the state’s income tax.

The value of a state tax nexus study
As the laws changed, Magone & Company quickly went to work conducting state tax nexus studies to protect our clients. Word spread, and we began to receive inquiries from companies worldwide for the same service. Here are two examples of the results:

Health & beauty products wholesaler
A European company established a wholly-owned subsidiary in New York state with offices in New York City. The parent company approached our firm to find ways to mitigate the subsidiary’s tax burden, despite being told by its tax advisor that the U.S. tax filings were correct and appropriate.

After a comprehensive review of existing state and city laws and the subsidiary’s tax and financial records, Magone & Company amended the company’s tax filings to secure a refund of nearly $1.4 million in income taxes paid. We continue to serve as the company’s tax advisor.

Vitamin products wholesaler
The NJ-based subsidiary of an Asian manufacturer requested our help filing U.S. tax returns for a prior year as well as the current year.When we obtained the tax and financial records of the company, our review uncovered numerous discrepancies in previous tax filings related to carryover computations. In addition to amending previously filed returns, we also recommended changing the reporting of sales for the current year.

The total tax savings resulting from the work performed by Magone & Company was approximately $1.3 million, and the company has now retained Magone & Company as its auditor and tax advisor.

Who can benefit from a tax nexus study?
U.S. companies that conduct business in multiple states, as well as U.S. subsidiaries of foreign entities, generally have the most to save by conducting a tax nexus study. For more information, please reach out to the Magone & Company team.

The Tax Considerations of Working Remotely: What You Don’t Know May Cost You

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Millions of employees went remote when the pandemic first hit in 2020. Many never returned to the office — and more and more workers continue to make the transition. According to a Future Workforce Report, the number of remote workers is expected to nearly double from pre-pandemic level in the next five years.

If you’re currently telecommuting, it’s important to get up to speed with the latest tax developments that can impact your 2021 tax return, especially if you’ve been working in a different state from your usual workplace. Consider the following questions:

  1. Did you change your state of residency? If you relocated to a new state while maintaining your remote employment, be sure to update HR with your new address ASAP, as this can change your tax withholdings. An employer can be penalized for not withholding when they should have. And depending on where you live, some states offer withholding credits if taxes are paid or withheld in other states.
  2. Where are you paying income tax? If you’re working from a different state than where your company is licensed, your state taxes may or may not be affected. Each state has its own set of rules. For example, states like New York and Connecticut tax remote workers based on the location of their employer’s office, regardless of where the work is completed. On the other hand, if your office is in New York, but you move to California while telecommuting, you risk both states taxing your income.
  3. Are you eligible for home office deductions? For tax years 2018 to 2025, the Tax Cuts and Jobs Act (TCJA) excluded W-2 employees from the home office deduction. The deduction is reserved for self-employed remote workers who use their home regularly and exclusively for business during the tax year. Your home office could be a single room, a portion of a room or a separate building on your property that’s solely used to conduct business. If you qualify, there are two methods for calculating the deduction. Under the actual method, calculate the potential deductible amount by prorating your expenses with your business use. If you prefer not to keep track of your home office expenses, you can deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

It’s a hot topic — and we can help you navigate it

Remote work offers many benefits, but also the responsibility to evaluate your new tax situation. As always, be sure to consult a trusted advisor for specifics on your individual circumstances before you file your 2021 return. Don’t hesitate to reach out to the professionals at Magone & Company for tax assistance. Give us a call today at (973) 301-2300.

 

Bigger Tax Savings in 2021: 4 Tips for the Self-Employed

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Being self-employed has its benefits, for sure. You can enjoy the freedom and flexibility of working from where you want, when you want. Plus, you can build your own client list and reap the profits from your hard work.

But there’s also a downside — and it has to do with self-employment taxes. If you had a rude awakening filing your 2020 return, here are some strategies that can help keep more hard-earned cash in your pocket next year.

  • Open a SEP-IRA. This is one of the simplest ways to shelter your self-employment income and save for the future. The SEP-IRA works just like a traditional IRA; the main difference is that this program is designed specifically for the self-employed.
  • Invest in a solo 401(k). The solo 401(k) is basically the self-employment equivalent of a traditional 401(k), but you control the money and how it’s invested. Best of all, the contribution limits for solo 401(k) plans are even higher than those for traditional 401(k) plans, and maxing it out could help reduce your taxable income.
  • Contribute to a health savings account (HSA). Many self-employed workers save on health insurance by purchasing a high-deductible plan. With such a plan, you may be able to reduce your taxes by pairing it with a health savings account, or HSA. An HSA lets you set aside some money, tax-free, to spend on care or care-related costs.
  • Push payments into the following year. If your clients are willing to go along with it, deferring payments until the next calendar year is one more way to reduce your taxable income. You will need to settle up with the IRS eventually, but this strategy can work well if you anticipate next year’s income to be significantly lower.

Achieve the best of both worlds
Working for yourself can be great, but it can also be quite taxing. That’s where tax planning comes into play. Ask your tax advisor or reach out to us for assistance.

The above information is provided for general education purposes and should not be considered financial or tax advice. Please consult your accountant or financial advisor for advice specific to your situation.

The Proposed Tax Hike’s Effect on Families: Even Those Not Considered “Rich”

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President Joe Biden’s address earlier this week confirmed many of the plans that were being laid out in the preceding months; specifically, as they relate to real estate, capital gains and estate taxes.

Although the proposals have a long way to go before becoming law, a Democratic majority in the House and a tie-breaking vote in the Senate held by Vice President Harris creates a scenario in which the proposal will pass — provided the Democrats are able to hold their members in line.

There are three provisions which affect real estate in the Biden administration’s tax proposal.

The first, which has been talked about extensively, is the increase in the capital gains rate from 20% to 39.6%. This proposal is directed toward households making over one million dollars.

In the northeast, it doesn’t take a lot to push households to this level given residential and commercial real estate prices. This could mean an individual could pay as much as 43.4% in federal taxes alone and possibly over 50% when factoring in state taxes.

The second is the proposed elimination of the 1031 tax-free exchange when gain on a property is greater than $500,000.

This tax break allows owners of investment and business real estate to defer the gain by enabling them to purchase like-kind property within 180 days of the sale of the original property. This has been an often used technique to allow property owners to defer the entire gain on the sale of their property.

Finally, included in the tax proposal is the elimination of the “step-up“ in cost basis for inherited property.

Although we’re speaking about real estate, this applies to all property such as stocks, bonds, etc. The concept of stepping up the original cost to the fair market value at the date of the death of the owner has been in the tax law for decades, and ensured that beneficiaries who sold inherited property paid little if any capital gains tax on the immediate sale of the inherited property. This substantially reduced the tax burden for beneficiaries upon sale of the property.

Based on the likely passing of the above in some form, if you are contemplating a sale of investment or business property, careful examination should be given to the tax effect.

In prior administrations, when the capital gains rate was changed there was a cut-off date established for gains subject to the new and old rules when passed in the same year. More importantly, review your current will to ensure it is tax efficient, and consider further planning to take advantage of current estate and gift laws prior to potential changes.

Now is not the time to delay sales of property you may have been considered selling, especially real estate with a 1031 exchange.

The above is not tax advice. Please consult with your tax professional for guidance specific to your particular financial circumstances.

Self-Employed? Here’s What You Need to Know About Taxes

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The gig economy is booming. The COVID-19 pandemic has created a demand and an opportunity for workers to profit off their skillsets outside from traditional employment. In fact, country music star Dolly Parton even updated her classic hit “9 to 5” to speak to the growing number of entrepreneurs who are getting their side hustle on after clocking out of their day job. Now more than ever, people are working “5 to 9” and building a business from their own know-how.

Anyone who earns income directly from clients — as a contractor, freelancer or small business owner — and doesn’t have an employer that withholds money from their pay for tax purposes, is generally classified as a self-employed worker by the IRS. If you’re self-employed, it’s important to understand how taxes work, so you can avoid owing more than your fair share to the government. Being in business for yourself can lead to higher taxes and more complex tax returns than you bargained for.

The self-employed and tax withholdings
Self-employed workers are responsible for paying taxes through estimated tax payments. These estimated payments must be sent directly to the IRS on a quarterly basis — by April 15, June 15, September 15 and January 15 — if you expect to owe at least $1,000 in income tax at the end of the year. Failure to plan properly and pay enough estimated taxes during the year can result in a tax penalty and a large surprise tax bill. By paying at least 90% of the tax you owe or 100% of the total tax owed from the previous year, the IRS will typically not assess a penalty.

If your hustle isn’t very lucrative (yet), a net income of $400 or more from self-employment means you can expect to pay up on those earnings — even if you’re already paying taxes through your traditional job. For example, if you work as an employee year-round, but you take on small contract jobs on the side to make extra cash, that revenue must be reported as self-employment income when you file your tax return.

Traditional W-2 employees split the cost of paying into Social Security and Medicare with their employers, but self-employed workers must pay the full amount themselves. As a self-employed worker, you’re on the hook to pay the self-employment tax, which goes toward Social Security and Medicare, in addition to normal income tax. 

There’s no avoiding Uncle Sam
Preparing your annual return and calculating quarterly taxes as a self-employed worker can be tricky. That’s why the experienced CPAs at NJ accounting firm Magone & Company can help you navigate tax laws and ensure tax compliance. We’ll also help you maximize your return, saving on any tax write-offs you may be entitled to as an independent worker. Send us a message or call 973-301-2300.