Author: Jan Roberg

Posted on by Jan Roberg

Can I Deduct My Work Clothes as a Business Expense?

Locker room with lonely lab coat

Photo by Jean-Etienne Minh-Duy Poirrier on flickr.com

Now, if you’re a regular reader of my blog then you already know I’m going to say, “It depends.” But for about 90% of the people asking that question, the answer’s going to be, “No.” If you have to wear a suit and tie to work, or ladies, if you have to wear hose with your dress – that doesn’t count as a deductible work clothing expense. A lot of offices have dress codes, but adhering to a dress code does not qualify those clothes for a business deduction.

Okay then, so what does? A uniform, like for a police officer or a mail carrier. Clothing that’s not a necessarily a uniform but is required for the job – for example, a chef jacket or doctor’s scrubs. Or logo clothing that could also be considered a work uniform – like the shirt’s they wear at McDonald’s or the cleaning company that takes care of my office building.

What about Macy’s, where all the employees have to wear black? That’s a good example because wearing black at Macy’s is a requirement and I’ve heard Macy’s workers refer to that as their “uniform,” but unfortunately, that doesn’t meet the IRS test of a uniform. Although everyone has to wear black, there is no “standard” Macy’s uniform and the clothing has no Macy’s logo, so in a situation like that, there would be no tax deduction.

So let’s go back to the McDonald’s example again. Let’s say you have to wear the uniform shirt, but you can wear any pants you want to as long as they’re black, can you deduct the pants? No, because you can wear any pants as long as they’re black. If McDonald’s has special pants with a Mickey D’s logo on it, or something special to go with their uniform shirts, then that would be a deductible expense, but plain black pants are not.

Any kind of safety clothing would count as deductible: safety goggles, reflective vests, work gloves, and steel toe boots all come to mind there. If you’re in a job that requires protective gear, I count the gear as a deductible business expense.

If you’re self-employed, these expenses go right onto your Schedule C and it’s a direct offset against your income. If you’re working for someone else, then your clothing expenses would go on your form 2106 – Employee Business Expenses. They’re subject to the 2% limitation rule (meaning you have to spend more than 2% of your total income on work stuff before you qualify for a deduction).

Remember, if your clothing does qualify as deductible, then cleaning it is also deductible. I actually sat and worked this out with some med students that I was doing taxes for: scrubs only – one load a week. Scrubs and lab coats: two loads. For one load a week, take a $250 deduction; two loads, double it. If you have to dry clean your uniforms, save those receipts because that really adds up. Since most people do their laundry at home (and the laundromat doesn’t give out receipts), you do not need receipts for doing your laundry. Of course, cleaning of a regular business suit or laundering of regular business shirts does not count as a deductible expense.

Posted on by Jan Roberg

How To Get an Individual Tax Identification Number

Welcome to the US, you will need an ITIN number to file your taxes.

If you don’t have a Social Security number, but you need to file a US tax return, you need to obtain an ITIN number.

An Individual Tax Identification Number (ITIN) is for people who live in the United States but do not qualify for a Social Security Number. If you’re here working in the US, you should have been issued a Social Security Number, but your spouse and children weren’t. In order to claim them on your US income tax return, you’ll need to obtain ITINs. Here are my instructions for the best way to do it.

First, you’ll have to fill out the right form. It’s called a W7 and here’s a link to the IRS website to download it: http://www.irs.gov/pub/irs-pdf/fw7.pdf

Each person needing an ITIN will have to complete a separate form. For example: if you want to claim your wife and your daughter on your US tax return, then you’ll need two separate forms.
In the section of the form where they ask for identifying documents, if you’ve got a passport, that’s your document. Don’t even consider the other documents if a passport is available; it can be a headache using them.

You will apply for the ITIN at the same time that you file your income tax return. You will attach the W7 form (or forms) to the front of your tax return. You will list your dependents’ names on the return and in the section that says “Social Security Number” you will write “applied for.” Note: you’re not applying for a Social Security Number, it’s an ITIN number and that’s understood because you’re submitting the W7 with the form. ITIN numbers are different from Social Security Numbers and the IRS computers recognize that; you’re not being dishonest in any way.

If you read the instructions to the form W7, it will tell you about mailing the return and getting your documents notarized, etc. Don’t do that! The best and fastest way to process getting your ITIN numbers is for you to go in person, with your documents and your dependents, to the nearest IRS office to file your taxes in person. The IRS agent at the desk will examine your documents right there, stamp what needs to be stamped, and will send your return off to the correct processing house from there. If there’s anything wrong with the paperwork, you’ll find out right then, and not three months later when they ask you to resubmit everything.  Be sure to call before you go!  Not all offices process W7s, you want to make sure you go to an IRS office that can help you.

Because your tax return is being submitted by paper, there will be the additional delay associated with the ITIN, and your tax refund will be very slow. Do not be surprised if it takes 12 weeks for them to process your return. Once the ITINs are processed, you’ll receive paperwork in the mail. You’ll use those numbers on future tax returns and you won’t have to go through the process again. You’ll even be able to e-file which gives you a much faster refund.

Extra stuff to know: An ITIN number allows you to file an income tax return and claim a spouse or a dependent. There are some tax benefits (most notably the Earned Income Credit) that are not allowed with an ITIN, but only with a Social Security Number. If your family’s status changes and you later obtain Social Security Numbers for them, you are allowed to amend your prior year’s tax returns (up to three years) to claim any tax benefits that you missed earlier because you used an ITIN number.

Heads up about tax software: Some software programs can’t process a tax return correctly if there isn’t a number in the social security box. They will generate a “fake” number to create the return and then it has to be deleted at the end. Make sure that your return says “applied for” in the social security box before you submit it and that there’s no fake number in there. It will delay the processing of your return by months.

Posted on by Jan Roberg

What All Those Boxes on Your W2 Mean

Income and Taxes

Photo from 401Kcalculator.org via flickr.com

Did you get your W2 from your job and it looks like some foreign language? All the little boxes have some letter or number attached, but what does it all mean? Let me walk you through it.

The two most important parts are: ‘How much did you make?’ and ‘How much tax did Uncle Sam take out?’

Box 1: Wages, tips and other compensation. That’s how much you made; it’s going to go on line 7 of your 1040 or 1040A federal income tax return (line 1 on the 1040EZ).

Box 2: Federal income tax withheld. That’s the tax you paid. It goes on line 62 of the 1040 (line 7 on the EZ and line 36 on the 1040A).

The other numbers aren’t quite so important, but if you’re curious, I’ll explain the rest for you just so you know.

Box a: Employee’s social security number. That’s your social security number. If you don’t have a social security number, they’ll use your ITIN number. It’s important that your social security number is listed correctly. If there’s a mistake here, you should ask your employer for a corrected W2.

Box b: Employer identification number (EIN). That’s the ID number for the company you work for. It’s kind of like a business social security number. If you’re preparing your own tax return online, you’ll have to type that in correctly. A mistake here will get your tax return rejected.

Box c: Employer’s name, address, and ZIP code. Although this seems pretty obvious, this can really confuse people. Let’s say you work at a McDonald’s in St. Louis but when you get your W2, it says you work for Fred Jones LLC with an address in Kansas. A lot of times companies have their “legal” names, and their “doing business as” names. Usually, it will say the DBA name also, but not everyone does that. Don’t die of shock if you see a funky name, it’s pretty normal and legal.

Box d: Control number. Often, that’s blank. If there is something there, you don’t have to worry about it. That’s more of a code for bookkeeping purposes. I have one employee and I had to give him a code for my payroll program. I didn’t know what to do; 7-11 was the first thing that popped into my head (because I had stopped for a Slurpee.) Hopefully, if you have a control number, more thinking went into it than with my company.

Box e: That’s your name. Check, make sure you got the right W2. I was just working on a tax return and the person had been given someone else’s W2. Weird stuff happens.

Box f: That’s your address. If it’s wrong, you can hand write the correct address. Unlike an incorrect social security number which really needs to be fixed by your employer, an incorrect address is not that big of a deal.

We’ve already talked about boxes 1 and 2 being wages and federal income tax withholding. Now let’s talk about those other numbers.

Box 3: Social security wages. Usually, this will match box 1. There are a couple of things that will make those boxes not match.

  1. You’ve made contributions to a 401(k) or 403(b) retirement plan. You’ll know if you did that by looking at box 12 and finding a code D there. Generally, if you take the amount of money in box 12 and add it to box one, you’ll get box 3.
  2. If you made over $106,800 your box 1 and box 3 numbers will also be different. It’s called the “wage base limit.” Basically, once your income goes over $106,800 you don’t pay any more social security tax. So the number in box 3 won’t go over $106,800. If you had two jobs and your combined income goes over that number, you can get a refund of your excess social security withholding.

Box 4: Social security tax withheld: For 2011 that number is .042 times whatever is in box 3 – plain math. If you have something in box 7 (tips) then it should be .042 times the wages plus the tips.

Box 5: Medicare wages and tips: Usually, this matches box 3. If you earned tips, that gets added in; also if you took money out for retirement, that’s added in too. Also, there’s no cap on the amount of money you pay medicare tax on, so if you made over $106,800 then you pay tax on your entire wage.

Box 6: Medicare tax withheld: plain math, .0145 times whatever is in box 5.

Box 7: Social security tips: unless you’re wait-staff at a restaurant, you probably will have nothing listed there. This box is for tips you reported to your employer. Usually, it’s the tips that you got on credit card receipts.

Box 8: Allocated tips: This is one to watch out for. Once again, for most people, it’s blank. If you work in a restaurant and you have a number in this box you want to look hard at this number. That means that your boss decided that you didn’t report enough tips and so he “allocated” tip money to you. You have to pay tax on that. Now if you really did earn that in tips, then it’s no problem. But if you’re working at a place with lousy tips and there’s a big number in box 8, you’ve got some issues. The only way to fight this is to keep a really good log of your tip income. Most people don’t keep a log, and then when they get the “allocated tip” item on their W2 it’s too late.

Box 9: Nothing’s there.

Box 10: Dependent care benefits: That’s for when your company pays for your day care. If there’s something in this box, your tax return must have a form 2441 for child care expenses attached to it.

Box 11: Non-qualified plans. For most people this is blank. A non-qualified plan is retirement money that you don’t get to deduct.

Box 12: This is where all the extra goodies go. It could be a whole other blog post. Bottom line, the most common item is coded D or E for retirement funds. For the full list, you can look at the IRS website: http://www.irs.gov/pub/irs-pdf/fw2.pdf. It starts on page 7 and finishes on page 9. Some of those codes require you to file extra forms—for example a code V means you must file a Schedule D (employee stock options) and a code L means you must file a form 2106 (employee business expenses.) If you’re seeing codes in box 12, it’s at least worth a phone call to a professional just to double check what you need.

Box 13: Those are check boxes for statutory employee (means you’ll need a schedule C), retirement plan (which may limit how much you can contribute to an IRA), and third-party sick pay.

Box 14: Other. Usually that’s blank. Sometimes it lists things like union dues or United Way contributions. A lot of times I find the stuff that should have gone into box 12 in box 14, so always look at it if there are numbers in there.

Boxes 15 and up contain your state and local income tax information. 15 has the state and the employer’s state ID number. That’s important to have if you’re e-filing your return.

Box 16: State wages. This usually matches box 1, the federal.

Box 17: State income tax withholding. You’ll need this information to file your state tax return.
If you live or work in an area with a local tax, like St. Louis City, your local tax information will also be listed.

And that’s what’s in your W2.

Posted on by Jan Roberg

More Tax Tips for People Who Pay Alternative Minimum Tax

Pot of Gold

Photo by Jeremy Schultz on flickr.com

If you’ve done your taxes and there’s an amount in box 45 for Alternative Minimum Tax (AMT), then you should read this because it might help. If the box is blank, you don’t have to bother with this post.

Also, this post is going to be a little more geeky and technical. If you’d like a basic introduction to AMT then you might want to check out my AMT for Dummies post first: http://robergtaxsolutions.com/2011/03/the-alternative-minimum-tax-for-dummies/

Now for the geeky part:

AMT is a pretty sneaky little tax. A lot of the issues with AMT revolve around what goes on your Schedule A-Itemized Deductions form. If you do your own taxes you can go in and play with the numbers to see what I mean. Let’s say that your real estate taxes were $4000. If you go into your tax software and change that number to $2000 or $6000, your final tax bill will probably stay the same. The AMT will rise and fall to adjust to the regular tax change. (Make sure you put your real estate tax number back to where it belongs.)

You can’t lie about what you put on your tax return, but sometimes you can choose which deductions you want to take. You may take a deduction for the state income tax that you pay on your wages, or you can take a deduction for the state sales tax that you pay. In most cases, the state sales tax is a smaller deduction, but if you’re using a computer program the computer will always choose the bigger deduction for you. The AMT can make your bigger deduction worthless, so in this case you want to take the smaller one. Why? First, if you claim sales tax instead of income tax as a deduction, you won’t have to pay income tax on your state tax refund next year. Second, in some states, like here in Missouri, although you can’t claim a deduction for your income taxes paid, you can claim a deduction for your sales tax that you paid.

So, the bottom line is you’re not changing what your total federal tax is. You are preventing taxable income on next year’s return and potentially reducing state income tax. For some people, this will do nothing at all because it depends upon your state.

The other category that has room for movement is your miscellaneous deductions; they wind up on line 27 of your Schedule A. For the most part, this includes your Form 2106 Employee Business Expenses. If you’re in the AMT category, you’ve already been dinged pretty hard by the 2% rule, because to claim a deduction here your expenses have to be more than 2% of your adjusted gross income. The AMT is like a double shot – first you lose part of the deduction due to the 2% AGI rule, and then the AMT takes the rest of the deduction away. A lot of people with AMT don’t even bother claiming their employee business expenses because of it. But don’t forget your state income tax return. Here in Missouri, your Schedule A deductions still carry through to the state tax return so you really should include your deductions even if they don’t help your federal return.

A suggestion for AMT payers with employee business expenses: If you’re in a sales position, or any job that has high employee business expenses, and you’re in a position to negotiate a salary increase. You might want to toss in having your business expenses reimbursed. Let’s say for example that you make an annual salary plus commissions of $200,000 a year and you average $10,000 a year in employee business expenses. You put those expenses on form 2106 and after the AGI limitation you only get a $6,000 deduction for it. (200,000 x 2% = 4,000. $10,000 – 4,000 = 6,000) But once you add AMT in there, your $6,000 is worth nothing.

So, by having your employer reimburse your business expenses on an “accountable plan” (that means you submit expense reports for your mileage and meals and stuff) then that money comes to you tax free. It’s a win/win for you and your boss: $10,000 tax free income to you and a $10,000 business expense write off for your employer.

Think about it, what would you rather have; a $10,000 pay raise that you have to pay state and federal income tax on or a $10,000 tax free reimbursement on money that you already spend anyway? I thought so.

AMT is a hard tax to manage. These little tips barely make a dent, but there’s not much there to work with. Hopefully it’s been some help to you.

Posted on by Jan Roberg

Can I Claim My Indian Parents on My US Tax Return?

 

It's difficult to claim foreign parents on a US tax return.

Make sure you meet all of the requirements before you try to claim your parents as dependents on your U.S. income tax return.

 

Claiming parents is difficult, but it can be done if you pass the “Qualifying Relative” tests. But first, here are the two biggies that tend to get in the way:

  1. You cannot claim a married person who files a joint return with his or her spouse. So if your parents file a joint tax return in the United States, then you won’t be able to claim them. (I’m guessing they don’t, but I wanted to make sure that I told you about that.)
  2. To claim someone as a dependent, the person must be a US citizen, US resident alien, US national or resident of Canada or Mexico. Where my clients have had trouble before is when their parents visit the US, but their visas are only for 6 months, no longer. Then they don’t qualify as US residents. I just wanted to make sure you knew about the 6 month rule because that’s the issue most likely to cause Indian families trouble with claiming their parents.  After that, the rules are the same for anyone else in America who wants to claim their parents on their US income tax return.  You need to pass the qualifying relative test.

 

 

The Qualifying Relative Test has 4 parts:

  1. They cannot be considered a qualifying child of anyone else. No problem! As your parents, I’m guessing they’re both over the age of 24. Easy pass.
  2. Member of household or relationship test. As your parents, they do not have to live with you. Also, since they are your parents, they automatically pass the relationship test. Easy pass.
  3. Gross income test. This one is harder. They cannot have more than than $4,050 in gross income for the year. If they are retired, they might qualify, but if they are receiving a taxable pension, that could kick them out of being a dependent. In the US, for example, my mother in law receives Social Security income which isn’t taxable and it doesn’t count as gross income. Her other income is less than $4,050 so she would pass the gross income test for me to claim her as a dependent. Remember, once your parents become US residents, they will be taxed on their “world wide income.”
  4. Support Test. In order to claim your parents as dependents, you must provide more than 1/2 of their support. Let’s say that your parents each earn $3,000 a year in some type of pension. For you to be able to claim them as dependents, you would have to pay more than $3,000 for support for each of them. For example, if they live with you, then you would consider part of your rent or mortgage to be towards their support. Also food, clothing, medical expenses, etc. If they don’t live with you, who is paying for their rent, food, clothing, etc.? Using my mother-in-law as an example again: although I pay some of her bills, I definitely don’t pay over 1/2 of her support. She pays for her food and rent with her Social Security money so I don’t come close to the 50% of her support.

 

If you do find that you qualify to claim your parents, then you would complete the W7 forms for them, so that they have an ITIN number, and submit them with your next tax return.  I find that the best way to handle the W7 form is to take your tax return in to the nearest IRS office with your supporting documents (like passports) and submit them there.  Although it might be inconvenient making the trip, it will save you a lot of hassle in the long run.

 

 

Posted on by Jan Roberg

5 Most Common Mistakes on E-filed Tax Returns

Work

Photo by Falk Lademann on flickr.com

I’m a big fan of using computer software to file your tax return. By using tax software, you eliminate many of the problems that are associated with paper filing. You can even access an online program right from my website, here’s a link: http://robergtaxsolutions.com/do-your-own-2011-taxes/. Yes, that was a blatant commercial plug, sorry.

But tax software is only as good as the information you put into it. If you know what you’re looking for, you’re less likely to make mistakes. Here’s a list of 5 of the most common problems that I’ve seen:

  1. Using decimal points. The IRS doesn’t want you to include the pennies when you do your tax return, they just want round numbers. Some software programs let you use pennies anyway, but most don’t. If you’re an anal retentive bean counter like me, you just can’t help yourself and you automatically type in the pennies anyway. So instead of rounding $99.78 to 100 like you should, you type in 99.78. Some software programs convert that to $9,978 and that messes up your tax return.
  2. Not proofreading before you hit send. Problems like the decimal point issue can be easily fixed if you proofread your return before you hit “Send.” One time I helped a woman who had gotten an IRS letter about her tax return – they wanted her to document the million dollars of mortgage interest she had claimed on her Schedule A. Well, of course she didn’t pay a million dollars; it was a case of the decimal point not working. She never bothered to look at the return before she sent it. She saw that she was getting a huge refund (million dollar deductions can do that for you) and was happy so she sent her return in. Here’s a good tax tip: if you’re getting an unusually large refund, or owe a whole lot more than you’ve ever paid before, there’s a good possibility that there’s a mistake that needs fixing.
  3. Missing a Schedule D – the form for sale of stock. “But I didn’t sell any stock,” you say. Think again. If you work for a company that issues stock options, and you benefited from those stock options, you need to do a Schedule D. Yes, the tax was paid through your withholding, but you’ve got to do the paperwork on your tax return to go with it. One local company here in St. Louis, famous for hiring smart people, issued stock options to almost all of their employees one year. I spent a good part of a summer amending returns for people who didn’t file their Schedule D. (They really were smart people, so they won’t make that same mistake again.)
  4. Missing a Schedule D – same form. This category is made up of senior citizens who take money out of their mutual funds as part of their retirement income. When you take money out of your mutual fund, you have to sell the shares to take the cash. It’s not like a regular savings account, it’s a stock investment and those sales must go on a schedule D.
  5. Leaving out required information about taxable income. I can’t stress this enough, if you get something in the mail that says, “Important Tax Information Enclosed”, then there’s probably a number in that envelope that needs to go on your tax return. Here’s some common misconceptions:
    • Just because you paid tax when you took money out of your 401(k) account, doesn’t mean you don’t have to report it on your tax return. It must be reported.
    • Most retirement income is taxable on your federal return. Even if your retirement money isn’t taxable, it still gets reported on your tax return.
    • The same holds true for tax exempt interest: you report it even if you don’t pay tax on it. And, a lot of federally tax exempt interest is taxable to your state. Don’t just leave that stuff off.
    • Social security: for many people, social security isn’t taxable so a lot of folks just leave their social security off of their returns altogether. But for many folks, part of their social security is taxable. If you don’t include it in the calculations, you won’t know you missed it. Trust me, the IRS won’t miss the calculation if you owe tax on your Social Security.
    • Along with reporting your social security, don’t forget to fill out all the boxes. In my state of Missouri, your medicare part B payment can actually reduce your taxes or qualify you for a larger property tax credit. Software programs are pretty good about making those things flow through to the pages they belong to. The key is that you have to input everything they ask you to.

Despite this list of common mistakes, you’re still much better off e-filing your return than preparing your taxes by hand. I did a separate post on common mistakes on paper filed tax returns: http://robergtaxsolutions.com/2012/02/four-most-common-mistakes-in-a-paper-tax-return/ – those mistakes are impossible to make when e-filing so you’re already ahead of the game. Besides, you now know what these common mistakes are so you’re not going to make them.

Posted on by Jan Roberg

Four Most Common Mistakes in a Paper Tax Return

F***in' taxes

Photo by Beatrice Murch on flickr.com

First, let me mention that you’re reading this on the internet. That means that you have access to a computer and can probably navigate your way around some computer software. Because you can, I highly recommend preparing your taxes on the computer and e-filing the return. But if you really want to do it “by hand”, be aware of these mistakes.

  1. Not putting your name on the return. This sounds totally idiotic but it actually happens quite a lot. Back in the stone age when I was learning how to prepare returns professionally, the instructor made a big stink about putting the name, address, and social security number on every practice return we ever did. If you missed those items, you got a zero on the test. How can anyone miss that? It’s easy. You worry about doing your numbers right, you do a draft copy first and then write it neatly on a new form later. Nobody puts their name on the draft copy, but then they forget to put the name on the clean one too. This can’t happen with a computerized return because you can’t e-file without a name. I usually handle about one call a year because someone didn’t put his name on the tax return.
  2. Not sending all the pages that need to be attached. In my experience, the most common missing form seems to be the Schedule EIC. That’s the page that says your child’s name, birth date, social security number and relationship to you. It doesn’t really look like a real tax form so I think it’s easy to miss. http://www.irs.gov/pub/irs-pdf/f1040sei.pdf Once again, if you e-file a return with EIC on it, the Schedule EIC is automatically submitted for you.
  3. Math errors. Ever have one of those days when you add 2 plus 2 and then you write down 5 even though you know its 4? The IRS will just correct those for you and they do understand that it’s just an adding mistake, not tax fraud – you’re not going to jail for that. It’s really just an embarrassment factor and that official looking letter on the IRS letterhead can give you the willies. Once again, computer software will take care of the math for you.
  4. Getting the income tax or EIC figure out of the wrong column or row. Lots of numbers and small print – it’s easy to make a mistake. Once again, if you make a mistake here, the IRS will correct it for you. And also, a computer tax program won’t have that problem.

If you’re paper filing your tax return, here’s a really important piece of information you need to know: The number of e-filed returns that get audited is ½ of 1%. The number of paper returns that get audited is 25%. Which category do you want to be in? If you want to try out some tax software, you can go to my site and do it online. You don’t pay unless you actually file and it’s pretty inexpensive. Here’s a link: http://robergtaxsolutions.com/do-your-own-2011-taxes/

Posted on by Jan Roberg

1099K – What To Do With It

Credit card companieS!

Photo by Eliazar Parra Cardenas on flickr.com

Did you get a 1099K form in the mail? Are you wondering what to do with it? I was a little confused when I saw the first one because I was told they weren’t going to be happening. Oops. Somebody didn’t get the memo.

Anyway, if you’ve gotten a 1099K – that’s the form from your credit card company that says how much money was charged on credit cards to your business – you’re probably wondering how to report it. If you’ve been looking for information, you may have noticed that there’s conflicting information out there. It’s because there isn’t a definitive “this is what you’ve got to do” answer from the IRS. So here’s how I will be doing it on my returns; I think it makes sense and will be good with the IRS.

You’ll note that the line that says 1099K income doesn’t work when you try to input it into your software. That’s because the IRS won’t be using that line. Your computer’s not broken, the software isn’t broken. The change came sometime in August and the new line was already put into the forms. The IRS decided that since the line was coming back for 2012, they’d leave it there but just blank it out for now. You’re not crazy, it’s the way it was set up.

Even though you don’t get to use that line, you still want to report that income. This is how I say you should do it:

Make a worksheet for your income line. Show the 1099K income reported as one number. Show your other income reported as another. The total should read as the total income for your business.

Here’s an example: let’s say you took in $50,000 in revenue for 2011. You know your total revenue figure. You receive a 1099K that says you were paid $20,000 with credit cards. On your income worksheet you list:

  • Credit card income reported on 1099K – $20,000
  • Other revenue not on 1099K – $30,000

Easy enough, right? That’s my recommendation. In fairness, the CPA down the hall says to just ignore the 1099K and report the $50,000 straight. Here’s why I disagree. I do audit work for a living. If this comes back to bite you in the butt, you’re going to be glad you listed the 1099K as a separate line item. It’s not that the CPA dude is wrong, it’s just a covering your behind kind of thing.

If your credit card company is sending you an IRS reporting form, it’s highly likely that they’re sending that same form to the IRS. If the IRS pulls your return up for audit, don’t you think they’re going to ask about the $20,000 on the 1099K? If you’ve already listed it separately, well, that’s an audit letter they might not need to send.

Here’s some other issues you may have with the 1099K:

  1. The credit card company reports the full amount of the charge, not the amount less fees withheld. For example: lets say you charge your customer $300. The credit card company withholds their fees and only sends you $292.50. You’ll have to think about how you’ve been reporting that. Lots of businesses record their revenues as the actual income that comes into the bank – charge less the fees. Your 1099K will report the income as $300–you’ll need to make sure that you expense those fees out.
  2. Same issue with sales tax. Many retailers just record sales and keep the tax separate. Your 1099K will give the whole dollar amount charged – you’ll need to remember to back out your sales tax.
  3. Restaurant owners, beauty salons, anyplace that accepts tips: if a customer charged a tip, you’re going to have to back out the tips paid to your workers. The entire charge is being reported on the 1099K.

Are you starting to see how this could be a bit difficult? Don’t forget places that give “cash back” to customers, that’s going to be another expense you’ll have to remember.

Bottom line – there will be a lot of forgiveness this year in the reporting of your 1099K income. People are going to be confused and the IRS is fully aware of it. But if you’re already getting 1099K statements, you’ll want to do your best to report it correctly now. It’s so much easier to do it right the first time than to be “forgiven” for doing it wrong.

Posted on by Jan Roberg

EIC Help Page

EIC help - questions and answers

 

It’s that time of year and we’re getting bombarded with questions about the Earned Income Tax Credit. Here’s some of the most popular questions and where to get the answers you need.

 

My ex has custody of my kids, but the divorce decree says that I get to claim the exemption. My ex says that she gets to because she has custody. I don’t get it, what should we do?

 

You’re in a situation where you “split” the exemption. Here’s information about how to do that legally:

Split Exemptions

 

According to my divorce decree, I’m supposed to claim the exemption for my child but my ex claimed her anyway. Should I send a copy of the decree to the IRS or the judge?

 

I’m not an attorney so I can’t give legal advice, but this post has information on IRS rules and court ordered exemptions:  Court Ordered Exemptions

 

My child’s daddy is out of the picture. My boyfriend has been living with us for three years now and he’s the primary support for my child. Can my boyfriend claim may child on his tax return because it will give us a bigger refund?

 

No. And here’s all the reasons why:  Boyfriend Can’t Claim Exemptions

 

I went to file my taxes and they got rejected. The IRS says that somebody else used my children’s social security numbers on their tax return. What do I do now?

 

Basically, you’re going to paper file your tax return. Here’s more information:  My Ex Claimed My Kid

 

What do I need to do to qualify for the Earned Income Credit?

 

There are some basic rules that anybody claiming EIC will have to meet, like having a valid Social Security number for one thing. Here’s a list of the rules:  Rules For Qualifying for EIC

 

What if I need more information?

 

The IRS has the EITC home page. (EIC and EITC are the same thing; earned income credit = earned income tax credit.) They have lots of worksheets to help you determine if you qualify for EIC if your children qualify, and where to get help preparing your return. Here’s the link:  EIC Help

 

Now if you can’t find the answer you’re looking for, you can always call the IRS – their phone number is 1 (800) 829-1040. Their phones have been slammed lately so you may be on hold for awhile. A few tips: call early in the morning – like 7 am, or later in the day – like after 6pm. And it’s better to call later in the week; Monday’s the worst day to call the IRS. Please be patient and kind to the IRS agent that is answering your question – they have special rules and procedures they are required to follow.