Tuesday, January 25, 2011

Advice for the Self Employed from our friends at the IRS

Here are the latest tips from the IRS for the self-employed (see Tax Tips below).  If you've been self-employed and filed an income tax return with a Schedule C (Profit or Loss From Business - Sole Proprietorship), then there is probably nothing new here.  But if you are considering going into business for yourself, such as consulting, hanging our your shingle, or starting a business as a sole proprietorship, then these are the handful of basic issues the IRS wants you to be aware of:


Issue Number:    IRS Tax Tip 2011-16

Inside This Issue


Tax Tips for Self-employed Individuals
If you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed and you would file IRS Schedule C, Profit or Loss From Business or Schedule C-EZ, Net Profit From Business with your Form 1040.

Here are six things the IRS wants you to know about self-employment:
  1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
  2. If you are self-employed you generally have to pay Self-employment Tax. Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. You figure SE tax yourself using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income. [NOTE:  SELF EMPLOYMENT TAX IS IN ADDITION TO THE INCOME TAX ON THE INCOME YOU SHOW ON SCHEDULE C.  Ed.]
  3. If you are self-employed you generally have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you don’t make quarterly payments you may be penalized for underpayment at the end of the tax year.
  4. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
  5. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
  6. For more information see IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at http://www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).
IRS Links:
  • Publication 334, Tax Guide for Small Business (PDF)
  • Publication 535, Business Expenses (PDF)
  • Publication 505, Tax Withholding and Estimated Tax (PDF)  
Other Resources (suggested by me, and not the IRS!):

Thursday, January 20, 2011

Obamacare and Extended Coverage for Young Adults

While the Obamacare debate is reopened, here's a tip: don't take for granted that your existing health insurance coverages will automatically cover your recently graduated young adult. 


Prior to the passage of Obamacare on March 23, 2010, a child on a parent's policy was typically  dropped from coverage at either the 19th birthday, or graduation from college.  Obamacare permits the extension of certain coverage for your recent college graduates up to their 26th birthday, but with certain important exceptions.


1.  If the parents have coverage with an employer that existed as of March 23, 2010 when the health law was enacted (so-called “grandfathered” coverage), then their dependent coverage is only extended to young adults without other access to employer-sponsored coverage.  In other words, if the child can get coverage through a current employer, then the child cannot go back on the parent's policy.  This limitation remains in effect until 2014.


2.  If the parent's existing policy does not have "dependent coverage", then the employer will not be required to provide it.  


3. The change applies to plan years beginning on or after September 23, 2010.  So, if the plan year is a calendar year, then the change applies as of January 1, 2011.   Some insurers may implement the change sooner.  


4.  The employer cannot charge a higher premium for a young adult than what it had charged in the same circumstance for a child with coverage.  However, if under the existing plan, the carrier could charge an additional premium for each additional dependent, then that continues.  A premium can be charged for each young adult.  


5.  The change in law applies for basic medical care coverage. It may not apply to dental coverage and vision coverage. It depends on the employer's particular plan.  An employer may obtain a plan that permits this extended coverage for dental and vision, but these coverages are not required under the recent law changes.  


6.  Children (under age 19) can't be denied coverage for pre-existing conditions.  Beginning in 2014, when many of the new law's more sweeping provisions take effect, no one can be denied coverage based on pre-existing conditions.  But for that young adult who wants to go back on his parents policy, if they have a pre-existing condition, then according to a U.S.A. Today article:


"Some young adults joining their parents' employer-sponsored health plans can face a pre-existing condition exclusion for up to 12 months in which care for the existing illness is not covered. The rules vary by state. Once the exclusion period expires, the young adult will be covered for the illness."  


I have not been able to find the black letter law on this particular topic in the thousands of pages of law, regulations, and commentary about the changes to the law.  


So, before sending your young adults off to the doctor, or dentist or optometrist, call your employer's benefits expert (or call the coverage carrier directly), explain that your child is no longer a full time student, and specifically ask whether they continue to be covered for medical, dental, vision or any other additional coverages. If they confirm that the coverage is available, then take the name of the person you spoke with, or ask for written confirmation.  Don't rely on the fact that the child's name still appears on an insurance card or on a website as a dependent.  When the claim comes in, the carrier may challenge the coverage and deny the claim.  Then you may find yourself fighting a claim denial.  In that circumstance, the adult child, and not the parent,  may find themselves without the coverage they thought they had, and owing thousands of dollars for services that they received and that they thought would be covered.  This is a true pitfall - a hole covered by brush that you may unexpectedly fall into.  And it is a deep hole for a 20-something to find themselves in. 

Monday, January 3, 2011

Top 10 Tax Time Tips (courtesy of IRS)

Here are some tax reminders and ideas from our friends at the IRS:
It’s that time of the year again, the income tax filing season has begun and important tax documents should be arriving in the mail. Even though your return is not due until April, getting an early start will make filing easier. Here are the Internal Revenue Service’s top 10 tips that will help your tax filing process run smoother than ever this year.
  1. Start gathering your records:   Round up any documents or forms you’ll need when filing your taxes: receipts, canceled checks and other documents that support income or deductions you’re claiming on your return.
  2. Be on the lookout W-2s and 1099s will be coming soon; you’ll need these to file your tax return.
  3. Use Free File:   Let Free File do the hard work for you with brand-name tax software or online fillable forms. It's available exclusively at http://www.irs.gov. Everyone can find an option to prepare their tax return and e-file it for free. If you made $58,000 or less, you qualify for free tax software that is offered through a private-public partnership with manufacturers. If you made more or are comfortable preparing your own tax return, there's Free File Fillable Forms, the electronic versions of IRS paper forms. Visit www.irs.gov/freefile to review your options.
  4. Try IRS e-file:   After 21 years, IRS e-file has become the safe, easy and most common way to file a tax return. Last year, 70 percent of taxpayers - 99 million people - used IRS e-file. Starting in 2011, many tax preparers will be required to use e-file and will explain your filing options to you. This is your chance to give it a try. IRS e-file is approaching 1 billion returns processed safely and securely. If you owe taxes, you have payment options to file immediately and pay by the tax deadline. Best of all, combine e-file with direct deposit and you get your refund in as few as 10 days.
  5. Consider other filing options:  There are many different options for filing your tax return.You can prepare it yourself or go to a tax preparer.You may be eligible for free face-to-face help at an IRS office or volunteer site.Give yourself time to weigh all the different options and find the one that best suits your needs.
  6. Consider Direct Deposit   If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check. 
  7. Visit the IRS website again and again   The official IRS website is a great place to find everything you’ll need to file your tax return: forms, publications, tips, answers to frequently asked questions and updates on tax law changes.
  8. Remember this number: 17   Check out IRS Publication 17, Your Federal Income Tax on the IRS website. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return.
  9. Review! Review! Review!  Don’t rush. We all make mistakes when we rush.Mistakes will slow down the processing of your return. Be sure to double-check all the Social Security Numbers and math calculations on your return as these are the most common errors made by taxpayers.
  10. Don’t panic!   If you run into a problem, remember the IRS is here to help. Try http://www.irs.gov or call toll-free at 800-829-1040.