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

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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!):

Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants

Self-employed Tax Solutions, 2nd: Quick, Simple, Money-Saving, Audit-Proof Tax and Recordkeeping Basics for the Independent Professional (Self-Employed Tax Solutions: Quick, Simple, Money-Saving,)

TurboTax Home & Business Federal + e-File + State 2010 [Download]

JK Lasser's Small Business Taxes 2010: Your Complete Guide to a Better Bottom Line

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. 

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. 

Ten Things Tax-Exempt Organizations Need to Know About the Oct. 15 Due Date

[This is reprinted verbatim from the IRS Tax Tips of September 30, 2010 issued by the IRS.  No use in trying to re-phrase what is already short and sweet and right on point.]


A crucial filing deadline of Oct. 15 is looming for many tax-exempt organizations that are required by law to file their Form 990 with the Internal Revenue Service or risk having their federal tax-exempt status revoked.  Nonprofit organizations that are at risk can preserve their status by filing returns by Oct. 15, 2010, under a one-time relief program.

The Pension Protection Act of 2006 mandates that most tax-exempt organizations must file an annual return or submit an electronic notice, with the IRS and it also requires that any tax-exempt organization that fails to file for three consecutive years automatically loses its federal tax-exempt status.
Here are 10 facts to help nonprofit organizations maintain their tax-exempt status.

1. Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file required returns for 2007, 2008 and 2009 can preserve their status by filing returns by Oct. 15, 2010.
2. Among the organizations that could lose their tax-exempt status are local sports associations and community support groups, volunteer fire and ambulance associations and their auxiliaries, social clubs, educational societies, veterans groups, church-affiliated groups, groups designed to assist those with special needs and a variety of others.
3. A list of the organizations that were at-risk as of the end of July is posted at IRS.gov along with instructions on how to comply with the new law.
4. Two types of relief are available for small exempt organizations — a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice and a voluntary compliance program for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.
5. Small tax-exempt organizations with annual receipts of $25,000 or less can file an electronic notice Form 990-N also known as the e-Postcard. To file the e-Postcard go to the IRS website and supply the eight information items called for on the form.
6. Under the voluntary compliance program, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by Oct. 15 and pay a compliance fee.
7. The relief is not available to larger organizations required to file the Form 990 or to private foundations that file the Form 990-PF.
8. Organizations that have not filed the required information return by the extended Oct. 15 due date will have their tax-exempt status revoked.
9. If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status and any income received between the revocation date and renewed exemption may be taxable.
10. Donors who contribute to at-risk organizations are protected until the final revocation list is published by the IRS. 

If you are involved with a Tax Exempt organization and have any questions, I welcome you to contact ...

Very truly yours!

Doug Humes

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice at an old Main Line mansion in Bryn Mawr, Millridge Manor House.  Doug is also a Pennsylvania notary public and offers that service as an accommodation to clients and Millridge residents.  You can contact him at Tel: 610-525-7150, or via email at humeslaw@verizon.net.

Rate Jacking - Fight Back

(first published 11-25-2009)

Tis the season … when we are all spending money on the holidays - gifts, entertaining, travel, perhaps year-end charitable donations, etc.  And when the outflow is going faster that the inflow, we have what businesses call a "liquidity crunch".   I don't know what all of you do when you are being crunched like that, but I will take advantage of the credit card offers that fill my mailbox - the ones with the promotional teaser rates - 0% through August, 2010; 1.99% through 12-31-10.  Yes, I have learned to read the fine print - and have noticed the "transaction fee" has climbed in recent years from a minimum dollar amount to between 2-4% per transaction.  But paying even 4% for the money for a year is better than paying whatever the "regular rate" is.  Right? 

Well, with online payments, with direct payments from banks, with paperless bills, there are times when I have simply lost track of my due date, and have not paid the minimum payment on time.  And of course part of the fine print in the original teaser promotion cautions you that if you have any late payments, then that wonderful deal that you signed up for, that promotional rate good through some time into the distant future, is no longer going to be honored.  If you don't keep your end of the bargain - by paying on time and not going over your credit limit - then the credit card company does not have to keep their end of the bargain.  In fact, they have already pointed out to you what happens in this event - in the smaller print at the bottom of the promotional letter, where it says: "However, all of your APR's (including this offer and any other promotional APR's) may increase as permitted by law up to the 29.99% variable default rate if you pay us late, go over the credit line, or make a payment to us that is not honored."  That's certainly not what you expected if you signed on for one of these rates.  But unfortunately, that is what you bargained for.  You made the deal with the Devil, and now he is knocking on your door for payment.  I have seen this practice referred to as "rate jacking", and it is a colorfully descriptive term for what has occurred.  Your credit card interest rate is jacked way up because you have made a simple mistake.  One day late, and your holiday goose is cooked. 

However, all is not lost.  Under the terms of the Credit Card Act of 2009 which took effect on Aug. 20, 2009, the credit card issuer must now give you 45 days advance notice that they are going to jack your rate up due to a delinquency or default or as a penalty.  Also, effective in February 2010, the issuer cannot apply a penalty rate until the consumer is more than 60 days delinquent on the account.  So, if you make that late payment just one time, they cannot then change the deal and jack the rate up.  They must send you that 45 day notice, with language in it disclosing the proposed changes; the "effective date, and, a notice that you have the right to reject the changes.  They must also disclose if they are will suspend or terminate any future use of your account as a result of your rejection of the change.  The notice will give instructions—and a toll-free number—for rejecting the change or rate increase.   Follow the instructions carefully, and if you are successful in jumping through their hoops, the telephone voice tells you that you were successful, and gives you a confirmation number.  Now get caught up on your delinquent payment.  And then go and sin no more. 

The new 45 day notice does not apply to an APR increase upon the expiration of a specified period of time, as long as the creditor disclosed clearly and conspicuously in writing the length of the period and the APR that would apply after that period.  In other words, if the original offer said "good through August, 2010, with a rate increase in August, 2010", then your credit card company does not have to give you a new 45 day notice.  Similarly, if you have a variable rate that was disclosed at the outset, then you will not be receiving a new 45 day notice each time the index fluctuates.  In addition to the 45 day notice provision, there is another beneficial (to consumers!) new requirement:  the credit card issuer must adopt reasonable procedures designed to ensure that your statements are mailed or delivered at least 21 days before the payment due date.  That gives you plenty of time to make sure that next payment is on time. 

In summary - don't pay late; if you do, don't ever pay 60 days late if you can help it.  If you get the 45 day notice telling you that you are going to be rate-jacked, then don't make any new charges on that card until you have decided whether you want to reject the change.  Read on in the notice until you get to the part about rejecting the changes.  Follow the instructions for rejecting the changes, and note the confirmation number.  If you have any doubt about the consequences of rejecting the change, first call your credit card customer service number, speak to the rep and ask the question - "if I reject this change, and pay the delinquency, am I still allowed to use the card in the future?"   Write down the date of the phone call, the customer service rep's name, and the advice that you are given.  Then make an informed decision.  The rules are changing, and you as the credit card consumer have more rights as a result of the recent changes in the law.  Don’t be afraid to use them.  That will make for a happier holiday!

©2009  Douglas P. Humes

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice in an old Main Line mansion in Bryn Mawr.  Doug is also a Pennsylvania notary public and offers that service as an accommodation to clients.  You can contact him at Suite 210,  Tel: 610-525-7150, or via email at humeslaw@verizon.net).

Pennsylvania Home Improvement Consumer Protection Act

Over the weekend I overheard a conversation about home contractors:  “I found a way to get my contractor to call me back.  I told him I had his deposit check ready to pick up.”  That snatch of conversation highlights one of the complaints that people may have about some home contractors – they are not good at returning calls.  Personally, I have had that experience, but I have had many more positive experiences with good professional contractors who return their calls at the end of the day, and do the work that they say they are going to do, and meet me when they say they are going to meet me.  However, for the bad apples, the Pennsylvania legislature is trying to be proactive, and in 2008 passed a new law relating to home contractors.  The law took effect in 2009, and the state attorney general is beginning to enforce the law this year. 

The Pennsylvania Home Improvement Consumer Protection Act requires virtually all contractors who do “home improvements” (generally any work done at a person’s home with a contract price of more than $500) to register with the State Attorney General.  The registration seems fairly simple.  It requires some basic contact information on the contractor, but also asks them to report (among other things) on whether they have ever been convicted of a crime relating to home improvement fraud, whether they have been bankrupt, and whether in the last ten years they have had a judgment entered against them related to a home improvement transaction.  The act also requires them to show proof of insurance.  The contractor is issued a registration number, and then must use that number in all of its advertisements, contracts, estimates and proposals.  The law also provides certain minimum requirements for what must be in a contractor’s contract.  If any of the items are missing, then the contract is not enforceable.  The consumer is allowed to rescind the contract within three business days of signing it.  If the contract requires mandatory arbitration of disputes, the arbitration clause must meet certain requirements.  If the contract contains certain clauses (generally various waivers, hold harmless clauses and one sided clauses in favor of contractor), then the whole contract can be voided by the home owner.  If the contractor does not start work in a certain amount of time, you can cancel the contract.  The Act also defines certain actions as felonies or misdemeanors, and permits enforcement at the county level, and at the state level for those contractors working in more than one county.  A violation of this Act is also considered a violation of the state’s Unfair Trade Practices and Consumer Protection Law, which permits the consumer to sue the contractor for triple damages plus attorneys fees. 

So how does this affect you, as a home owner asking a contractor to do work at your home?  You should check to see if your particular contractor is registered by going to the AG’s website at:  http://www.attorneygeneral.gov/hicsearch/, or by calling the Home Improvement Registration Hotline at 1-888-520-6680.  You have a three day right of rescission if you change your mind.  If during the course of the work, you become unhappy with the work, the law has so many different requirements that a lawyer may be able to find deficiencies in the contract that may permit you to terminate it.  If there are clear violations of the law, you have a variety of civil and criminal remedies.  It is a very consumer oriented law.  

The website for the Attorney General states that they are starting to staff up to enforce the law, noting that lawsuits have recently been filed “against seven contractors accused of failing to start work, collecting excessive down-payments, not finishing projects, performing work in a shoddy manner, failing to pay refunds, not honoring warranties and other violations of the state's Home Improvement Consumer Protection Act.”  More information is available at their website.

The law cannot resolve all disputes among owners and contractors, and cannot force them to communicate well and return phone calls, but it may well scare away some of the worst past violators from registering, and it provides powerful remedies for consumers.  When considering a contractor, it is always a good practice to get quotes from several of them.  Check on their registration.  Ask to see their insurance coverages.  Request references and then check on them.  And as with any pitch, if something sounds too good to be true, it probably is.  Don’t get swindled by special offers and high pressure sales tactics.  Professional contractors want your business, but they want you to be happy with the work they do as well.  They want you to be a good reference for them.  The best way to have a good working relationship with your contractor is to hire a good one from the start. 

©2010  Douglas P. Humes

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  You can contact him at  Tel: 610-525-7150, or via email at humeslaw@verizon.net.

UPDATE ON FEDERAL ESTATE TAX

Before the battle of the Little Big Horn, Crazy Horse reportedly said to his men, “It’s a good day to die”.  Estate tax pundits have been saying the same thing this year – it’s a good year to die.  Why?  Because the federal estate tax on the estate of a person who dies in 2010 has been repealed.  If a person dies this year, then there is no federal estate tax due on what he or she leaves to his heirs.  In an economy where the government is looking for every cent it can collect, this is an unusual situation.  If we look behind the curtain at how we got to this point, we find the answer:  Politics.  In 2001, the federal estate tax (the tax at death on what a person owned) levied a 55% maximum tax on estates above $1 million.  Estates below that amount did not pay a federal estate tax (though most states have some form of death tax).  In May of 2001, Congress passed sweeping legislation that among other things gradually reduced and then eliminated the estate tax.  By 2009, the highest rate had been reduced to 45%, and it applied only to estates over $3.5 million.  Under the same 2001 law, in 2010, the estate tax is entirely repealed.  But then in 2011, we wake up from this wonderful dream and find that the rates and exemptions have returned to the same levels that were in effect in 2001:  a 55% maximum rate and a tax that applies to any estate over $1 million.  That brings a lot of taxpayers back into the net. 

I believe the thought at the time was that after the 2008 election cycle, the new Congress and new President would deal in some way with the issue.  During the 2008 election, each candidate promoted a form of change that basically said “let’s leave things as they were in 2009” and “let’s move the exemption amount up a little higher”.  However, since the 2008 election there have been other legislative priorities, and a divided Congress, and so no meaningful legislation has been advanced in this area.  Because the 2001 law lapses, without any vote required, while the government forgoes the revenue that would have resulted from an estate tax in 2010, they then begin to collect higher revenues in 2011 and onward, because the rate is higher and applies to more estates.  It is effectively a tax increase that no Congressman needs to vote on and defend in the Fall election. 

So where does that leave us?  The lame duck Congress or the next Congress could enact a new estate tax law – and conceivably could make it retroactive to cover deaths in 2010.  Most commentators believe that at this date a retroactive law is unlikely.  The estates of George Steinbrenner and the other wealthy people who die this year will likely go untaxed (at the federal level).  A new law could implement the range of past proposals – adjusting the highest rate, and raising the dollar value of the exemption.  Or, in a down economy, with declining revenues, the Congress can simply leave the law alone, collect the higher revenues, and blame the politicians of the past.  No one thought we would get to this point, and so there is no certainty about what will happen next. 

One of the inadvertent results of the elimination of the estate tax in 2010 is that certain assets in the estates of people who died this year will generate increased capital gains taxes for the government.  Under previous law, if you had a highly appreciated asset – a stock that you bought for $10 and is now worth $100, if you sold it, you would pay tax on the gain – the difference between the sales price and the original purchase price (or “basis”).  But if you died owning that stock, then at death the basis would “step up” to its value at date of death, $100, and if the stock was then distributed to the heir, who immediately sold it, the heir would pay no capital gain – he sold it at the same price as his basis in the stock, and so there would be no “gain” for income tax purposes.  But with the elimination of the estate tax, there is no step up of basis, so the heir now acquires the asset at the previous $10 basis, and if he then sells it, he pays a capital gains tax on the $90 gain.  This is another result that benefits the government, as the taxes resulting from this result to some extent ameliorate the loss of income in 2010 from the estate tax.  Presumably when the estate tax goes back into effect in 2011, the step up basis rule is also restored, and so this is just a one year anomaly. 

So how do you plan in this environment?  It is very difficult to do so.  If you thought your estate was well under the $3.5 million exemption amount, then you did not need to pay too much attention to estate tax planning.  If the estate tax exemption falls to $1 million in 2011, then you may want to look at how this may affect you, and may want to consider some planning devices to minimize the federal estate taxes you may now have to pay. 

©2010  Douglas P. Humes

Doug Humes has been a practicing attorney in Pennsylvania since 1980.  He has experience in real estate, community, corporate and small business law, and estate planning.  In 2003, he opened his private general practice in Bryn Mawr, Pennsylvania.  You can contact him at Tel: 610-525-7150, or via email at humeslaw@verizon.net).