How do I know if a worker is an Independent Contractor or an Employee?

Income Tax Service For Small Businesses – The IRS distinguishes between an independent contractor and an employee. Basically, an independent contractor is an independent business person who runs his or her own business but who does work for another business. An employee is hired by a company to perform specific work at the direction of the employer.

The distinction between employees and independent contractors is important, because an employer must deduct Social Security/Medicare taxes from employees and must pay an equivalent amount to the Social Security Administration. If an individual is working as an independent contractor, the “employer” does not make Social Security/Medicare deductions, and the independent contractor must pay his or her own “self-employment taxes” along with income tax on earnings.

To help distinguish between employees and independent contractors, the IRS has set up three general criteria:
• Behavioral Control – If an employer trains and directs work, including hours of work, what tools or equipment to be used, specific tasks to be performed and how the work is to be done; the worker is likely an employee. If the worker can set his or her own hours and works with little or no direction or training, he or she is probably an independent contractor.
• Financial Control – This factor includes how the worker is paid, whether the worker may work for others at the same time, and whether the worker can incur a profit or loss. A worker, who is paid a salary, is restricted from working for others, and who does not participate in company profits or losses, is probably an employee.
• Type of Relationship – The presence of a specific contract may indicate an independent contractor, but this factor alone is not controlling. If the worker is entitled to benefits, this would indicate an employment relationship. Another factor would be the type of work the person does; if it is directly related to the company’s core work, he or she is probably an employee. For example, a maintenance worker would not be doing ‘company’ work if he or she were working for a bank.

It is important to note that the IRS assumes that a worker is an employee. It is sometimes difficult to determine the status of a worker. If you are unsure whether to classify a worker as an independent contractor or employee, you can file a Form SS-8 to request a determination.
See the IRS website for more details on this subject.

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What Factors Does the IRS Look at in Determining Independent Contractor Status?

Income Tax Service For Small Businesses – In the past, a “20 Factor Test” was used to evaluate workers to determine whether they were independent contractors or employees. These factors have been compressed into three general categories: Behavioral Control, Financial Control, and Relationship of the Parties. As you look at the factors below, you should be aware that the IRS does not look specifically at any one factor, but one factor can be enough to cause the IRS to determine that a worker is an employee. There is no “magic number” of factors which determines status. It is also important to remember that the IRS presumes.

To give you more guidance on the issues relating to independent contractors vs. employees, here is a discussion of these factors:
1. Actual instruction or direction of worker – A worker who is required to comply with instructions about when, where and how to work is ordinarily an employee. The instructions may be in the form of manuals or written procedures that show how the desired result is to be accomplished.
2. Training – Training of a worker by an experienced employee working with him by correspondence, by required attendance at meetings and by other methods is a factor indicating control by the employer over the particular method of performance.
3. Integration of Services – Integration of the person’s services in the business operations generally shows that he or she is subject to direction and control.
4. Personal Nature of Services – If the services must be rendered personally, it indicates an interest in the methods, as well as the results. Lack of control may be indicated when the person has the right to hire a substitute with the permission or knowledge of the employer.
5. Similar workers – Hiring, supervising, and payments to assistants on the same job as the worker generally show employer control over the job.
6. Continuing Relationship – The existence of a continuing relationship between an individual and the person for whom he or she performs services tends to indicate an employer-employee relationship.
7. Hours of work – The establishment of set hours of work by the employer bars the worker from being master of his own time, which is the right of the independent contractor.
8. Full-time Work – Full-time work required for the business indicates control by the employer since it restricts the worker from doing other gainful work.
9. Work on Premises – If the worker is required to do the work on the employer’s premises, employer control is implied, especially where the work is of such a nature that it could be done elsewhere.
10. Order of Performance – If the order of the performance of services is, or may be, set by the employer, control by the employer may be indicated.
11. Submitting Reports – The submission of regular oral or written reports indicates control since the worker must account for his or her actions.
12. Method of Payment – If the manner of payment is by the hour, week or month, an employer-employee relationship probably exists; whereas, payment on a commission or job basis is customary where the worker is an independent contractor.
13. Payment of Expenses – Payment of the worker’s business expenses by the employer indicates control of the worker.
14. Tools and Materials – The furnishing of tools, materials, etc., by the employer indicates control over the worker.
15. Investment – A significant investment by the worker in facilities used in performing services for another tends to show an independent status.
16. Profit or Loss – The possibility of a profit or loss for the worker as a result of services rendered generally shows independent contractor status.
17. Exclusivity of Work – Work for a number of persons at the same time often indicates independent contractor status because the worker is usually free, in such cases, from control by any of the firms.
18. Available to General Public – The availability of services to the general public usually indicates independent contractor status.
19. Right of Discharge – The right of discharge is that of an employer. An independent contractor, on the other hand, cannot be “fired” without incurring liability if he or she is producing a result that measures up to his contract specifications.
20. Right to Quit – The right to quit at any time without incurring liability indicates an employer-employee relationship.

We are always available to assist you. For no obligation free consultation contact us today!
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2013 TAX CHANGES FOR BUSINESSES

Income Tax Service For Small Businesses – Whether you file as a corporation or sole proprietor here’s what business owners need to know about tax changes in 2013.

Standard Mileage Rates
The standard mileage rate in 2013 is 56.5 cents per business mile driven, 24 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.

Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000. The credit can be claimed in tax years 2010 through 2013 and for any two years after that. The maximum credit that can be claimed is an amount equal to 35% of premiums paid by eligible small businesses.

Credit for Hiring Qualified Veterans
The maximum credit that employers can take for hiring qualified veterans in 2013 is $9,600 per worker for employers that operate for-profit businesses, or $6,240 per worker for tax-exempt organizations.

Section 179 Expensing
In 2013 the maximum Section 179 expense deduction for equipment purchases is $500,000 of the first $2,000,000 of certain business property placed in service during the year. The bonus depreciation is 50% for qualified property that exceeds the threshold amount.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.
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RETIREMENT – 2013 TAX CHANGES FOR INDIVIDUALS

Contribution Limits
Income Tax Service For Small Businesses – For 2013, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $17,500. For persons age 50 or older in 2013, the limit is $23,000 ($5,500 catch-up contribution). Contribution limits for SIMPLE plans remain at $12,000 for persons under age 50 and $14,500 for persons age 50 or older in 2013. The maximum compensation used to determine contributions increases to $255,000.

Saver’s Credit
In 2013, the AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $59,000 for married couples filing jointly, $44,250 for heads of household, and $29,500 for married individuals filing separately and for singles.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.
ABA Tax Accounting
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2013 TAX CHANGES FOR INDIVIDUALS – TAX CREDITS

ABA Tax Accounting | Income Tax Service for Individuals

Adoption Credit
In 2013 a nonrefundable (i.e. only those with a tax liability will benefit) credit of up to $12,970 is available for qualified adoption expenses for each eligible child.

Child and Dependent Care Credit
The child and dependent care tax credit was permanently extended for taxable years starting in 2013. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit
For tax year 2013, the child tax credit is $1,000. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.

Earned Income Tax Credit (EITC)
For tax year 2013, the maximum earned income tax credit (EIC) for low and moderate income workers and working families rises to $6,044, up from $5,891 in 2012. The maximum income limit for the EITC rises to $51, 567 (up from $50,270 in 2012) for married filing jointly. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.
ABA Tax Accounting
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Three Year-End Tax Tips to Help You Save

Payroll Service for Small Businesses – Although the year is almost over, you still have time to take steps that can lower your 2013 taxes. Now is a good time to prepare for the upcoming tax filing season. Taking these steps can help you save time and tax dollars. They can also help you save for retirement. Here are three year-end tips from the IRS for you to consider:

1. Start a filing system. If you don’t have a filing system for your tax records, you should start one. It can be as simple as saving receipts in a shoebox, or more complex like creating folders or spreadsheets. It’s always a good idea to save tax-related receipts and records. Keeping good records now will save time and help you file a complete and accurate tax return next year.

2. Make Charitable Contributions. If you plan to give to charity, consider donating before the year ends. That way you can claim your contribution as an itemized deduction for 2013. This includes donations you charge to a credit card by Dec. 31, even if you don’t pay the bill until 2014. A gift by check also counts for 2013 as long as you mail it in December. Remember that you must give to a qualified charity to claim a tax deduction.
Make sure to save your receipts. You must have a written record for all donations of money in order to claim a deduction. Special rules apply to several types of property, including clothing or household items, cars and boats. For more about these rules see Publication 526, Charitable Contributions.

If you are age 70½ or over, the qualified charitable distribution allows you to make tax-free transfers from your IRAs to charity. You can give up to $100,000 per year from your IRA to an eligible charity, and exclude the amount from gross income. You can use the excluded amount to satisfy any required minimum distributions that you must otherwise receive from your IRAs in 2013. This benefit is available even if you do not itemize deductions. This special provision is set to expire at the end of 2013.

3. Contribute to Retirement Accounts. You need to contribute to your 401(k) or similar retirement plan by Dec. 31 to count for 2013. On the other hand, you have until April 15, 2014, to set up a new IRA or add money to an existing IRA and still have it count for 2013.

The Saver’s Credit, also known as the Retirement Savings Contribution Credit, helps low- and moderate-income workers in two ways. It helps people save for retirement and earn a special tax credit. Eligible workers who contribute to IRAs, 401(k)s or similar workplace retirement plans can get a tax credit on their federal tax return. The maximum credit is up to $1,000, $2,000 for married couples. Other deductions and credits may reduce or eliminate the amount you can claim. We are always available to assist you.
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2013 TAX CHANGES FOR INDIVIDUALS

Income Tax Service For Individuals – From personal deductions to tax credits and educational expenses, many of the tax changes affecting individuals were related to the signing of the American Taxpayer Relief Act (ATRA), which modified, made permanent, or extended a number of tax provisions that expired in 2010 and 2011. With that in mind, here’s what individuals and families need to know about tax changes that took effect in 2013.

Personal Exemptions
The personal and dependent exemption for tax year 2013 is $3,900.

Standard Deductions
In 2013 the standard deduction for married couples filing a joint return is $12,200. For singles and married individuals filing separately, it’s $6,100, and for heads of household the deduction is $8,950.

The additional standard deduction for blind people and senior citizens increases in 2013 to $1,200 for married individuals and $1,500 for singles and heads of household.

Income Tax Rates
Beginning in tax year 2013, a new tax rate of 39.6 percent has been added for individuals whose income exceeds $400,000 ($450,000 for married taxpayers filing a joint return). The other marginal rates–10, 15, 25, 28, 33 and 35 percent–remain the same as in prior years.

Due to inflation, tax-bracket thresholds increased for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $72,500 for a married couple filing a joint return.

Estate and Gift Taxes
The recent overhaul of estate and gift taxes means that there is an exemption of $5.25 million per individual for estate, gift and generation-skipping taxes, with a top rate of 40%. The annual exclusion for gifts is $14,000.

Alternative Minimum Tax (AMT)
AMT exemption amounts were made permanent and indexed for inflation retroactive to 2012. In addition, non-refundable personal credits can now be used against the AMT. For 2013 exemption amounts are $51,900 for single and head of household filers, $80,800 for married people filing jointly and for qualifying widows or widowers, and $40,400 for married people filing separately.

Marriage Penalty Relief
For 2013, the basic standard deduction for a married couple filing jointly is $12,200.

Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations were made permanent by ATRA and affect taxpayers with income at or above $250,000 (single filers) and $300,000 for married filing jointly starting with tax year 2013.

Flexible Spending Accounts (FSA)
Flexible Spending Accounts are limited to $2,500 per year starting in 2013 (indexed to inflation) and apply only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.

Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.

Further, the IRS is providing relief for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.

Long Term Capital Gains
In 2013 tax rates on capital gains and dividends for taxpayers whose income is at or below $400,000 ($450,000 married filing jointly) remains at 2012 rates. For taxpayers in the lower tax brackets (10% and 15%), the rate remains at 0%, (the same as in 2012). For taxpayers in the middle tax brackets however, the rate increases to 15%. For taxpayers whose income is at or above $400,000 ($450,000 married filing jointly), the rate for both capital gains and dividends is capped at 20% (up from 15% in 2012).

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.
ABA Tax Accounting
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10 TAX BREAKS SET TO EXPIRE IN 2013

Income Tax Service For Small Businesses – Federal tax breaks come and go, and this year is no exception. Unless Congress takes action, 55 of them are set to expire on December 31, 2013. Let’s take a look at the ones that are most likely to affect taxpayers like you. 

1. Teachers’ Deduction for Certain Expenses

Primary and secondary school teachers buying school supplies out-of-pocket may be able to take an above-the-line deduction of up to $250 for unreimbursed expenses. An above the line deduction means that it can be taken before calculating adjusted gross income.

2. State and Local Sales Taxes

Taxpayers that pay state and local sales tax can deduct the amounts paid on their federal tax returns (instead of state and local income taxes)–as long as they itemize. In other words, if you’re thinking of buying a big ticket item such as a boat or car and live in a state with sales tax, you might want to think about buying it this year.

3. Mortgage Insurance Premiums

Mortgage insurance premiums (PMI) are paid by homeowners with less than 20% equity in their homes. These premiums were deductible in tax years 2012 and 2013; however, this tax break is scheduled to end on December 31, 2013. Mortgage interest deductions for taxpayers who itemize are not affected.

4. Exclusion of Discharge of Principal Residence Indebtedness

Typically, forgiven debt is considered taxable income in the eyes of the IRS; however, this tax provision, which expires at the end of this year, allows homeowners whose homes have been foreclosed on or subjected to short sale to exclude up to $2 million of cancelled mortgage debt. Also included are taxpayers seeking debt modification on their home.

5. Distributions from IRAs for Charitable Contributions

Taxpayers who are age 70 ½ or older can donate up to $100,000 in distributions from their IRA to charity. Some people do not want to take the mandatory minimum distributions (which are counted as income) upon reaching this age and instead can contribute it to charity, using it as a strategy to lower income enough to take advantage of other tax provisions with phaseout limits.

6. Mass Transit Fringe Benefits

In 2013, commuters using mass transit can exclude from income up to $245 per month on transit benefits paid by their employers such as monthly rail or subway passes, making it on par with parking benefits (also up to $245 pre-tax). This provision is set to expire at the end of the year, however and in 2014, pre-tax benefits for mass transit commuters drop to a maximum of $130 per month, while parking benefits remain the same.

7. Energy Efficient Appliances

This tax break has been around for a while, but if you’re still thinking about making your home more energy efficient, now is the time to take advantage of this tax credit, which reduces your taxes (as opposed to a deduction that reduces your taxable income). The credit is 10% of the cost of building materials for items such as insulation, new water heaters, or a wood pellet stove.

Note: This tax is cumulative, so if you’ve taken the credit in any tax year since 2006, you will not be able to take the full $500 tax credit this year. If, for example, you took a credit of $300 in 2011, the maximum credit you could take this year is $200.

8. Electric Vehicles

Buy a four-wheel electric vehicle such as a Ford Focus Electric (Model years 2012-2014), BMW i3 Sedan (Model year 2014), Fiat 500e (Model year 2013), and Nissan Leaf (Model years 2011-2013) and take a tax credit of $7,500. Other vehicles, such as a 2014 Accord Plug-In Hybrid and the Toyota Prius Plug-in Electric Drive Vehicle (Model years 2012-2014) are eligible for a lesser tax credit. Call us for additional information on tax credits for electric vehicles.

Note: The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States.

9. Donation of Conservation Property

Also expiring this year is a tax provision that allows taxpayers to donate property or easements to a local land trust or other conservation organization and receive a tax break in return.

10. Small Business Stock

If you’ve been thinking about investing in a small business such as a start-up C-corporation, consider doing it this year because this tax provision expires on December 31. If you hold onto this stock for five years, you can exclude 100% of the capital gains–in other words, you won’t be paying any capital gains. If you wait until January, you will only be able to exclude 50% of the capital gains.

To learn more about whether you should be taking advantage of these and other tax credits and deduction set to expire at the end of 2013, please give us a call today. We’re here to help. For no obligation free consultation contact us today!

ABA Tax Accounting

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10 THINGS TO KNOW ABOUT CAPITAL GAINS

Accounting Services For Small Businesses – Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account.

When you sell a capital asset, the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss. Here are 10 facts you should know about how gains and losses can affect your federal income tax return.
1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
2. When you sell a capital asset, the difference between the amount you sell it for and your basis — which is usually what you paid for it — is a capital gain or a capital loss.
3. You must report all capital gains.
4. You may only deduct capital losses on investment property, not on personal-use property.
5. Capital gains and losses are classified as long-term or short-term. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
6. If you have long-term gains in excess of your long-term losses, the difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.
7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2013, the maximum capital gains rate is 20 percent; however that rate only applies to taxpayers in the highest tax bracket (39.6%) whose income exceeds $400,000 (single filers) or $450,000 (joint filers). Taxpayers in the middle tax brackets pay a maximum of 15 percent. For taxpayers in the lowest tax brackets (under 15%) the rate may be 0 percent on some or all of the net capital gain. Rates of 25 or 28 percent may apply to special types of net capital gain.
8. If your capital losses exceed your capital gains, you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
10. A new form (Form 8949, Sales and Other Dispositions of Capital Assets) was introduced in 2011 to calculate capital gains and losses and list all capital gain and loss transactions. Subtotals are then carried over to Schedule D (Form 1040), where gain or loss is calculated.

Give us a call us if you need more information about reporting capital gains and losses. We’re here to help. For no obligation free consultation contact us today!
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RETIREMENT CONTRIBUTIONS LIMITS ANNOUNCED FOR 2014

Income Tax Service For Small Businesses – The Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2014.

In general, some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment. However, other pension plan limitations will increase for 2014.

Here are the highlights:
• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $17,500.

• The catch-up contribution limit for employees age 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $5,500.

• Contribution limits for SIMPLE retirement accounts remains at $12,000.

• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000, up from $59,000 and $69,000 in 2013. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $181,000 and $191,000, up from $178,000 and $188,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

• The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.

Questions? Give us a call. We’re here to help. For no obligation free consultation contact us today!
ABA Tax Accounting
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