If you are in business you probably got a notice from the IRS recently telling you that you must pay your taxes electronically. This new rule takes effect January 1, 2011.
Up to now, businesses could pay most of their taxes by completing Form 8109 and paying their taxes at their bank. This system has been in effect for decades and worked well. The Internet has changed all that. It is now easier, and cheaper, for the government to have you use the Electronic Federal Tax Payment System (EFTPS) than to have you go to your bank to make the payments.
Use of the EFTPS system is required for business taxes. So if you must remit payroll taxes, income taxes, and various excise taxes, this system must be used starting January 1, 2011. Individuals may use the system to pay their federal income taxes and estimates.
Here is a link to some basic information about the system:
https://www.eftps.gov/eftps/direct/HelpAboutMain.page
The system is fairly easy to sign up for and to use. Here is the link to sign up:
https://www.eftps.gov/eftps/enrollment/new-enrollment-flow?execution=e1s1
You can always go to the IRS website at http://www.irs.ustreas.gov/ and search for information.
Massachusetts has required businesses to remit taxes electronically for several years. Information can be found at:
https://wfb.dor.state.ma.us/webfile/business/Public/Webforms/Login/Login.aspx
These systems are reasonably easy to use and will save you the time of driving off to the bank when you have to make these payments.
Friday, December 17, 2010
Sunday, December 12, 2010
Health Insurance and Our S Corporation
Health insurance is a benefit that most companies offer. It is a great way to attract and keep good employees, and it provides some tax benefits as well. Even the share of the premiums that the employee pays can be treated as a pre-tax deduction and save the employee and the company significant money. What becomes a little more complicated is if you are the owner of an S Corporation and you participate in the health insurance program.
IRS regulations require that you report the company paid portion of health insurance as compensation for anyone who owns more than 2% of the company stock. This is the case for more than 99% of owners of S Corporations. Massachusetts also follows this rule.
Here is an example: Suppose your salary is $50,000 and you also paid $10,000 for your health insurance. (I know, you wish it were only $10,000.) Your W-2 should show federal taxable wages of $60,000. It also should show this amount as state wages in Massachusetts and probably others states as well. The Social Security and Medicare wages should only be $50,000. This add back to your income is not subject to Social Security or Medicare taxes.
You might be about to panic because you think you will be paying more in income taxes because of this adjustment. I have good news. It is true that you will report $60,000 on line 7 of your personal tax return. But you will get to deduct the $10,000 on line 29 of your return and thus pay tax only on the $50,000 of salary.
If it does not have any impact, why do it? Reason one: The IRS requires it. Why challenge them? Reason two: If you do not put the health insurance on your W-2, you will have to report it as income anyway and then you can deduct it as a medical expense on Schedule A of your return. Medical expenses are subject to a 7.5% of income floor and you may lose some or all of the deduction. It could cost as much as 40% of the cost of the health insurance in additional taxes. Now that’s a great reason to do it.
I’d be happy to talk with anyone who has any questions about this.
IRS regulations require that you report the company paid portion of health insurance as compensation for anyone who owns more than 2% of the company stock. This is the case for more than 99% of owners of S Corporations. Massachusetts also follows this rule.
Here is an example: Suppose your salary is $50,000 and you also paid $10,000 for your health insurance. (I know, you wish it were only $10,000.) Your W-2 should show federal taxable wages of $60,000. It also should show this amount as state wages in Massachusetts and probably others states as well. The Social Security and Medicare wages should only be $50,000. This add back to your income is not subject to Social Security or Medicare taxes.
You might be about to panic because you think you will be paying more in income taxes because of this adjustment. I have good news. It is true that you will report $60,000 on line 7 of your personal tax return. But you will get to deduct the $10,000 on line 29 of your return and thus pay tax only on the $50,000 of salary.
If it does not have any impact, why do it? Reason one: The IRS requires it. Why challenge them? Reason two: If you do not put the health insurance on your W-2, you will have to report it as income anyway and then you can deduct it as a medical expense on Schedule A of your return. Medical expenses are subject to a 7.5% of income floor and you may lose some or all of the deduction. It could cost as much as 40% of the cost of the health insurance in additional taxes. Now that’s a great reason to do it.
I’d be happy to talk with anyone who has any questions about this.
Tuesday, October 12, 2010
IRS Scams
My spam filter intercepted three emails allegedly from the IRS telling me that a payment to them had been rejected because of a problem with my employer identification number. I also have been receiving calls and emails from my clients on the same topic.
The IRS does not use email to make initial contacts with taxpayers. These emails are a phishing scam trying to get information from you that can be used to steal your money. Do not respond and do not open any links. You will regret it if you do.
The IRS does not use email to make initial contacts with taxpayers. These emails are a phishing scam trying to get information from you that can be used to steal your money. Do not respond and do not open any links. You will regret it if you do.
Saturday, September 25, 2010
Where’s My Refund?
Right about now I get a lot of calls from clients who have not received their federal refunds. There is an easy way to find out where it is.
First, go to this link
https://sa2.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp
You will need to enter the following information
* Your Social Security Number (or Individual Taxpayer Identification Number)
* Your Filing Status
* The exact whole dollar amount of your refund
And VOILA you will get information on what is happening with your refund.
Just remember, if the IRS says they mailed the check last Friday, it probably means that it actually got to the post office next Friday. This is a great argument for having the IRS do a direct deposit your refund.
First, go to this link
https://sa2.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp
You will need to enter the following information
* Your Social Security Number (or Individual Taxpayer Identification Number)
* Your Filing Status
* The exact whole dollar amount of your refund
And VOILA you will get information on what is happening with your refund.
Just remember, if the IRS says they mailed the check last Friday, it probably means that it actually got to the post office next Friday. This is a great argument for having the IRS do a direct deposit your refund.
Tuesday, September 21, 2010
Take Your Business Electronic
For years the Commonwealth of Massachusetts has required businesses to pay their taxes electronically. The Department of Revenue has a web site designed to accomplish this. And the web site is actually fairly easy to use. Here is the website:
https://wfb.dor.state.ma.us/webfile/business/Public/Webforms/Login/Login.aspx
You take a few minutes to register and then it goes live a couple of days later. Then you can use its full capabilities.
You would use this to pay essentially any tax that you owe to the Commonwealth. The most common ones would be state tax withholdings, sales and meals taxes collected, and corporate excise taxes. You are required to pay even the more obscure taxes electronically.
The Massachusetts unemployment office has set up the QUEST system for employers to file and pay returns and process unemployment claims. It is located at
https://wfb.dor.state.ma.us/webfile/business/Public/Webforms/Login/Login.aspx
Again you need to register with them and this can be a difficult process. You need a user name and password and can call 617-626-5075 for assistance. Expect a wait.
The QUEST system is not as user friendly as other government sites.
The IRS is getting into the game of requiring direct payments rather than using paper checks. The system is relatively easy to use and it is required for all but the smallest business starting in 2011.
Here is the registration site
https://www.eftps.gov/eftps/
Good luck.
https://wfb.dor.state.ma.us/webfile/business/Public/Webforms/Login/Login.aspx
You take a few minutes to register and then it goes live a couple of days later. Then you can use its full capabilities.
You would use this to pay essentially any tax that you owe to the Commonwealth. The most common ones would be state tax withholdings, sales and meals taxes collected, and corporate excise taxes. You are required to pay even the more obscure taxes electronically.
The Massachusetts unemployment office has set up the QUEST system for employers to file and pay returns and process unemployment claims. It is located at
https://wfb.dor.state.ma.us/webfile/business/Public/Webforms/Login/Login.aspx
Again you need to register with them and this can be a difficult process. You need a user name and password and can call 617-626-5075 for assistance. Expect a wait.
The QUEST system is not as user friendly as other government sites.
The IRS is getting into the game of requiring direct payments rather than using paper checks. The system is relatively easy to use and it is required for all but the smallest business starting in 2011.
Here is the registration site
https://www.eftps.gov/eftps/
Good luck.
Why Have a Mortgage?
Most people have a mortgage because that is the only way they can afford to own a home. Although the real estate market is having a very tough time right now, over the long run your house is often your biggest asset and will help fund your retirement. Plus you get a tax benefit from paying the interest on the mortgage.
Some people are fortunate to have significant financial assets. One of the more important questions for these lucky people is “Why do you have a mortgage?” The answer often is “Its my only tax deduction.”
That’s nice but is it worth it? If you have a $200,000 mortgage at 4% you are paying the bank interest of $8,000. The IRS will give you back about $2,000 in reduced taxes so $6,000 is coming out of your pocket. That is not a very good result for your pocket.
Investment advisors argue that you can invest the money and earn more than 4% but they are hesitant to guarantee that you will earn more than the interest rate on your mortgage. My suggestion is to pay off your mortgage and then invest the monthly payment with your investment advisor. You will be amazed how quickly that money will pile up.
You can’t pay it off? Add a little extra to the principle you pay every month so that you will pay your mortgage off in a shorter time period. This will save you a lot of money.
Some people are fortunate to have significant financial assets. One of the more important questions for these lucky people is “Why do you have a mortgage?” The answer often is “Its my only tax deduction.”
That’s nice but is it worth it? If you have a $200,000 mortgage at 4% you are paying the bank interest of $8,000. The IRS will give you back about $2,000 in reduced taxes so $6,000 is coming out of your pocket. That is not a very good result for your pocket.
Investment advisors argue that you can invest the money and earn more than 4% but they are hesitant to guarantee that you will earn more than the interest rate on your mortgage. My suggestion is to pay off your mortgage and then invest the monthly payment with your investment advisor. You will be amazed how quickly that money will pile up.
You can’t pay it off? Add a little extra to the principle you pay every month so that you will pay your mortgage off in a shorter time period. This will save you a lot of money.
Convertin Your IRA to a Roth
A lot of clients have asked about converting regular IRAs to Roth IRAs. This is a complicated question.
Let’s start with the basics. You usually get to deduct the money you contribute to your regular IRA while there is no deduction for contributions to a Roth IRA. You pay taxes on the money you take out of your regular IRA. There may be some adjustments but the distributions are a taxable event. If you meet the requirements for a Roth IRA you do not pay tax on money you take out of it. So Roth distributions generally are tax-free.
You are allowed to convert a regular IRA to a Roth IRA. Here is the problem: you pay taxes on the amount you move from your regular IRA to a Roth IRA. You need to pay these taxes out of money that is not in the IRA. So if you have a $10,000 tax liability for making one of these conversions, it must come out of other investments or savings account. If you use the IRA money to pay the taxes you might end up paying some penalties and taxes.
Why do a conversion? You do not have to pay taxes on future earnings in the Roth IRA assuming you meet the requirements of having it in the account for five years and being over 59-1/2. There are some exceptions to these rules.
You are paying current taxes to save future taxes. If you left the money in the regular IRA you would eventually pay taxes on all the earnings when you withdrew it from the account. You do not pay these taxes on the Roth.
Here is the big problem. You can pay as much as 40% in taxes on the value of the IRA that you convert to a Roth. This happens if you are in a high tax bracket. Even if your income were about $100,000 you would pay about 33% in taxes on the conversion. That’s a lot of money.
I have analyzed this conversion for several clients. The results have consistently come in that doing the conversion does not result in significant savings for the client. After taxes were considered the clients would end up with the same amount of money whether or not they did the conversion.
The one kicker that investment advisors keep throwing on the table is that tax rates are probably going up so pay the taxes now. I have a problem with paying a lot of taxes now based on what Congress might do in the future.
A conversion like this could benefit a low-income taxpayer, perhaps someone who lost a job and had very low income this year but expects to re-enter the workforce soon. This could result in some future benefit. Analyze your situation carefully if you are thinking about doing this type of transaction.
Let’s start with the basics. You usually get to deduct the money you contribute to your regular IRA while there is no deduction for contributions to a Roth IRA. You pay taxes on the money you take out of your regular IRA. There may be some adjustments but the distributions are a taxable event. If you meet the requirements for a Roth IRA you do not pay tax on money you take out of it. So Roth distributions generally are tax-free.
You are allowed to convert a regular IRA to a Roth IRA. Here is the problem: you pay taxes on the amount you move from your regular IRA to a Roth IRA. You need to pay these taxes out of money that is not in the IRA. So if you have a $10,000 tax liability for making one of these conversions, it must come out of other investments or savings account. If you use the IRA money to pay the taxes you might end up paying some penalties and taxes.
Why do a conversion? You do not have to pay taxes on future earnings in the Roth IRA assuming you meet the requirements of having it in the account for five years and being over 59-1/2. There are some exceptions to these rules.
You are paying current taxes to save future taxes. If you left the money in the regular IRA you would eventually pay taxes on all the earnings when you withdrew it from the account. You do not pay these taxes on the Roth.
Here is the big problem. You can pay as much as 40% in taxes on the value of the IRA that you convert to a Roth. This happens if you are in a high tax bracket. Even if your income were about $100,000 you would pay about 33% in taxes on the conversion. That’s a lot of money.
I have analyzed this conversion for several clients. The results have consistently come in that doing the conversion does not result in significant savings for the client. After taxes were considered the clients would end up with the same amount of money whether or not they did the conversion.
The one kicker that investment advisors keep throwing on the table is that tax rates are probably going up so pay the taxes now. I have a problem with paying a lot of taxes now based on what Congress might do in the future.
A conversion like this could benefit a low-income taxpayer, perhaps someone who lost a job and had very low income this year but expects to re-enter the workforce soon. This could result in some future benefit. Analyze your situation carefully if you are thinking about doing this type of transaction.
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